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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JULY 31, 2003
COMMISSION FILE NUMBER 0-20008
FORGENT NETWORKS, INC.
(f.k.a. VTEL Corporation)
A DELAWARE CORPORATION IRS EMPLOYER ID NO. 74-2415696
108 WILD BASIN ROAD
AUSTIN, TEXAS 78746
(512) 437-2700
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act).
Yes [ ] No [X]
Indicate by check mark if disclosure of delinquent filings pursuant to
Item 405 of Regulation S-K is not contained herein and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K, or any
amendment to this Form 10-K. [X]
The aggregate market value of the 18,981,324 shares of the registrant's
Common Stock held by nonaffiliates on January 31, 2003 was approximately
$30,749,744. For purposes of this computation all officers, directors and 5%
beneficial owners of the registrant are deemed to be affiliates. Such
determination should not be deemed an admission that such officers, directors
and beneficial owners are, in fact, affiliates of the registrant.
At October 21, 2003 there were 24,637,547 shares of the registrant's
Common Stock, $.01 par value, issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be delivered to
stockholders in connection with the 2003 Annual Meeting are incorporated by
reference into Part III.
PART I
ITEM 1. BUSINESS
GENERAL
Forgent Networks, Inc. ("Forgent" or "Company") is a provider of
enterprise software solutions that enable organizations to schedule and manage
their meeting environment effectively and efficiently. The Company has two main
businesses - enterprise meeting automation software and professional services
and intellectual property licensing.
Forgent's ALLIANCE software suite is the industry's first enterprise
meeting automation software that is a complete integration of powerful
scheduling with rich media automation, driven from a common user interface, and
consists of two main products: ALLIANCE SCHEDULER(TM) and ALLIANCE MEDIA
MANAGER(TM). ALLIANCE SCHEDULER(TM) is a state-of-the-art scheduling application
that extends the popular corporate calendaring tools, Microsoft Outlook(R) or
Lotus Notes(R), to enable the scheduling of all aspects of a meeting - - adding
facilities, rich media communications and other meeting services to their
current scheduling capabilities. ALLIANCE MEDIA MANAGER(TM) automates rich media
meetings by configuring and scheduling all media components of a conference with
a single meeting request and provides continued monitoring of the media (audio,
video and/or web conferencing) to detect and recover if problems occur.
Combining these two functions into Forgent ALLIANCE creates a powerful
self-contained suite for managing all aspects of a company's meeting
environment. In addition to software license sales, the Company also offers
software-related professional services to assist customers with software
installation, deployment and any required customizations to tailor the software
for a particular environment.
In October 2003, Forgent acquired certain assets and the operations of
Network Simplicity Software Inc. ("Network Simplicity"), a privately held
provider of web-based scheduling solutions for the small to medium business
market. Network Simplicity's flagship product, Meeting Room Manager (TM), is a
scheduling application designed for the ease of use and rapid deployment across
small to medium sized businesses and complements Forgent's current ALLIANCE
software suite, which is focused on the high-end enterprises. This acquisition
allows the Company to extend its current enterprise software product offerings
and to expand its market opportunities into the small to medium business market.
Forgent's intellectual property licensing business is derived from the
Company's Patent Licensing Program. The Company's Patent Licensing Program is
currently focused on generating license revenues related to the Company's data
compression technology embodied in U.S. Patent No. 4,698,672 and its foreign
counterparts. The Company's aggregate intellectual property licensing revenues,
which were generated by the licensing of these patents, totaled over $80.0
million as of July 31, 2003. Other patents are currently being investigated for
additional licensing opportunities, although none have been identified at this
time.
The Company was founded in 1985 as an early pioneer of manufacturing
videoconferencing equipment. The Company sold its manufacturing products
business in January 2002, shifting its focus from hardware manufacturing to
enterprise software and services. Also during fiscal year 2002, Forgent sold its
integration business, which designed and installed custom integrated visual
communication systems primarily in meeting spaces of large corporations.
During fiscal year 2003, the Company completed the divestiture of its
videoconferencing hardware services business, devoting itself entirely to its
enterprise meeting automation software and professional services business, as
well as its intellectual property licensing business. As the Company has
evolved, it has focused its efforts on managing the meeting environment, adding
audio and web conferencing management to its deep understanding and expertise in
videoconferencing. With its refocused efforts and resources, Forgent believes it
is poised to provide the greatest opportunity for long-term success for the
Company and its stockholders.
In fiscal year 2003, Forgent succeeded in transforming the Company into
an enterprise meeting automation software and professional services provider and
a licensor of intellectual property. Forgent achieved several goals
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including: (1) grew total revenues by over 61%, (2) doubled its software and
professional services revenue, (3) continued the success of its Patent Licensing
Program, (4) launched its new flagship ALLIANCE software suite, (5) completed
the divestiture of its videoconferencing hardware services business, and (6)
strengthened its cash balances and working capital. Despite the current
difficult economic business environment in which companies continue to minimize
capital expenditures, these significant milestones are evidence that Forgent is
executing its business strategy. Forgent's management team is focused on
listening to its customers' needs and striving for excellent execution in
satisfying those needs with creative products and solutions in order to advance
the Company's financial results towards growth and continued profitability.
However, uncertainties and challenges remain, and there can be no assurance that
the Company can successfully grow its revenues or maintain profitability.
INDUSTRY BACKGROUND
The need for meeting management was born out of the need for companies
to communicate in real-time. Meetings are a part of the fabric of an
organization, and planning, executing and following up on meetings are often
burdened with inefficiencies. In addition to making significant investments in
technologies and human resources, organizations often have cobbled point
solutions and/or manual processes together in order to schedule the various
logistics required to have a meeting and ultimately to make a decision. As a
result of these inefficiencies and piecemealed solutions, companies have
introduced an array of products and services into the market that strive for
collaboration among workers regardless of geographical location. Thus, the
meeting environment has grown in complexity while the ability to assemble the
key components required to meet has progressively deteriorated.
In addition to these inefficiencies, rich media is increasingly being
used to ease and enhance collaboration and is becoming significantly widespread
in all types of organizations. The increased use of a variety of electronic and
web-based technologies is being driven by the current economic climate, which is
forcing companies to dramatically reduce administrative and operating expenses,
such as travel, facilities costs, and other overhead expenses.
Due to competitive pressures compelling companies to improve their
critical business processes, the marketplace is witnessing a movement in which
companies are re-examining opportunities for fundamental business improvement
through the exploitation of technology in order to achieve a "real-time
enterprise" status. According to Gartner, Inc., an industry analyst and research
firm, a real-time enterprise is an enterprise that competes by using up-to-date
information to remove delays in the management and execution of its critical
business processes. Management believes that a significant portion of an
organization's critical and costly business resources is tied up in planning,
executing, or following-up on meetings. The related inefficiencies have a
significant negative business impact, including decreased productivity, diffused
communications, delayed decisions, and dampened momentum, thus ultimately
undermining the organization's competitiveness.
Leveraging off this movement in the marketplace, Forgent and its
ALLIANCE software suite offer organizations a solution that provides significant
benefits in improving their business meeting process in their pursuit of
becoming a real-time enterprise. Forgent provides software solutions to enable
companies to easily assemble all components of a meeting and automate the
meeting technology, regardless of the medium chosen--audio, video, or a
combination thereof and web conferencing in the near future. By streamlining the
planning, execution and follow-up of the meeting process, Forgent helps reduce
costs associated with the meeting environment, maximize return on investment in
meeting technology, and increase productivity of those involved with meetings.
CORPORATE STRATEGY
Forgent's focus is on providing software and services that enable
enterprises to meet effectively and efficiently and the Company's goal is to
become the market leader in the meeting management industry. With more than 11
million meetings occurring daily in the U.S. alone, companies spend vast amounts
of resources and money to make these meetings happen. Unfortunately, the meeting
environment is often burdened with inefficiencies in each phase of the meeting
lifecycle--from planning to execution to follow-up.
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Forgent's mission with its enterprise software solutions is to increase
the productivity and reduce the costs associated with organizations' meeting
environments. The Company's enterprise meeting automation software products
streamline the planning and execution of meetings such that people can work
together and drive to decisions faster with increased efficiency. Forgent has
emerged as a leading provider of meeting management solutions and plans to
continue to enhance these products to extend its offerings beyond audio and
video conferencing to include the management of other key media such as web
conferencing. As the Company evolves and enhances its product offerings, it will
continue to adhere to the following strategies:
- remain vendor neutral such that regardless of the hardware or software
brands, on-premise or service-based solutions that comprise an
environment, Forgent supports the customers' environment of choice
- develop industry-leading technology that improves the efficiency of the
meeting environment
- design software solutions that promote the ease of use, manageability
and reliability of rich media
- design increasing levels of automation into its software solutions
- partner with leading software and services providers to offer
best-of-breed solutions
Forgent's initial foray into the enterprise software space was focused
on videoconferencing. This starting point was driven by the needs of the
industry to have videoconferencing be more manageable, reliable and easier to
use. Forgent has expanded this strategy beyond videoconferencing into management
and automation of other rich media, including audio conferencing and soon to be
web conferencing, with the same goals in mind -- to make the user's experience
seamless in terms of planning, executing, and following up on the meeting.
In addition to the Company's focus on enabling rich media to be used
easily and reliably in any meeting, Forgent's strategy is to provide this
capability through commonly used calendaring applications already proliferated
in the enterprise. These platforms are typically Microsoft Outlook(R) and Lotus
Notes(R). By building its capabilities into existing calendaring platforms,
Forgent enables users the ability to self-service schedule and eliminates the
need for costly and inefficient scheduling approaches.
As the Company evolves its enterprise meeting automation solutions, it
will look at all phases of the meeting lifecycle - planning, execution and
follow-up - to determine potential areas for expansion of its software
portfolio. Such expansion may be derived through further internal development of
the Company's existing software products or through strategic acquisitions of
companies with software products, which complement and further enhance Forgent's
existing software portfolio.
Forgent plans to continue efforts to grow its network consulting and
software deployment and customization services. The Network Consulting Services
include a wide range of planning activities, deployment services and post
installation support from the Company's H.320 and H.323 videoconferencing
experts who provide customers with operational, tactical and strategic options
for their video networks. Forgent has developed its Software Deployment Services
offering to assist customers who have licensed Forgent's software products, and
need assistance installing and fully deploying the software. The Company intends
to also continue its efforts to generate revenue from its world-class
interoperability testing lab, which allows for real-world testing of video
networking technology, regardless of brand. Forgent is the independent
verification testing center for the Cisco Architecture for Voice and Video
Integrated Data ("AVVID") Partner Program. Companies that want to be AVVID
certified must go through Forgent's interoperability testing lab to gain that
certification.
In addition, Forgent intends to continue its efforts to derive revenue
from its intellectual property licensing business in order to provide stability
and serve as an internal source of funding for the Company's future growth. The
Company's Patent Licensing Program is currently focused on generating license
revenues related to the Company's data compression technology embodied in U.S.
Patent No. 4,698,672 and its foreign counterparts. Manufacturers, software
product providers, and media services providers in various industries worldwide
use data compression technology in their products, including digital cameras,
certain video cameras, personal computers, printing devices, scanners, certain
cell phones, rendering devices, and wireless devices. The licensing revenues
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generated by the `672 patent thus far relate to one-time intellectual property
licensing agreements and the Company does not anticipate any additional
intellectual property revenue from these companies. However, Forgent continues
to actively seek new licenses and put more companies on notice by extending the
`672 patent's global reach and broadening its field of use. Additionally,
Forgent's Patent Licensing Program is currently investigating other patents for
additional licensing opportunities, although none have been identified at this
time.
Management believes its in-depth and broad-scoped experience in
providing enterprise meeting automation software and professional services
strategically positions the Company to address the past limitations with rich
media meeting environments in order to generate additional revenue. Management
also believes its Patent Licensing Program has gained certain credibility based
on the program's achievements during the 2002 and 2003 fiscal years and will
continue to provide stability and increased growth in stockholder value.
However, there can be no assurances that Forgent's strategy will be successful.
Furthermore, if this strategy is successful, it is likely that other companies
will attempt to duplicate this business model.
ENTERPRISE MEETING AUTOMATION SOFTWARE & PROFESSIONAL SERVICES
Conferencing and collaboration has moved from unmanaged isolated
devices in an unconnected world to a world of connected, monitored, scheduled
and managed network of devices. As such, scheduling of meetings and conferences
is a critical component of an enterprise software solution that facilitates
collaboration. Businesses, government and educational institutions are
recognizing the need to schedule capital resources such as audio, video and web
events and meeting rooms. To address those requirements, organizations have
begun to either create their own homegrown systems, adapt existing software
applications to schedule rooms and equipment, or purchase stand-alone scheduling
software applications. Understanding the meeting management industry's need for
enterprise meeting automation software that provides increased levels of
flexibility, robustness, and functionality for increasingly complex meeting
environments due to the exponential growth of rich media, Forgent developed
Forgent ALLIANCE ("ALLIANCE"), which was launched in July 2003. The ALLIANCE
suite consists of two main products: ALLIANCE SCHEDULER(TM) and ALLIANCE MEDIA
MANAGER(TM), each with optional add-on modules.
ALLIANCE SCHEDULER(TM) ("SCHEDULER"), the enhanced product based on
Forgent's Global Scheduling System or GSS, streamlines conference scheduling,
reduces conflicts associated with complex meetings and empowers users to
schedule meetings quickly, easily and without significant investment in
additional training. SCHEDULER schedules rooms and all associated services such
as equipment, facilities, technician support and catering. This robust
scheduling capability augments existing calendaring applications such as
Microsoft Outlook(R) and Lotus Notes(R) that are designed primarily to schedule
people, as opposed to scheduling rooms and services. The organization benefits
by augmenting a calendaring function that is already familiar to its employees,
thus reducing timely and costly training efforts. Additionally, SCHEDULER is
also accessible via the Internet to support remote users and meeting
environments without access to Microsoft Outlook(R) or Lotus Notes(R). By
providing employees with the ability to self-service schedule all aspects of a
meeting, SCHEDULER reduces the dependence on centralized, and sometimes costly,
scheduling resources.
In addition to SCHEDULER, Forgent leveraged its long history in video
network management to develop ALLIANCE MEDIA MANAGER(TM) ("MEDIA MANAGER"), its
multi-vendor, multi-protocol media management platform based on Forgent's Video
Network Platform or VNP. Ensuring interoperability, MEDIA MANAGER monitors and
manages rich media communications and network devices from multiple vendors
through a Common Operating Environment, and overcomes the ease-of-use,
reliability and manageability problems that have plagued rich media
communications. Its intuitive graphical user interface enables call
administrators to easily configure calls, as well as constantly manage
companies' audio and video devices, ensuring that the technologies work as
required. MEDIA MANAGER further enhances the quality of service via real-time
notifications and diagnostics of faults, and events and network alarms to alert
network administrators before critical problems impact users. In addition, both
SCHEDULER and MEDIA MANAGER offer robust reporting capabilities to allow
companies to report on the cost of their meeting environments and monitor the
return on their conferencing technologies.
When used as an entire solution, ALLIANCE allows a user to schedule
highly complex multi-participant, multi-time zone meetings and conferences,
which are automatically launched on time and with quality, thus
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eliminating the need for administrative oversight of the conference. By
combining the power of SCHEDULER, which allows corporations to schedule
conflict-free meetings, with MEDIA MANAGER, which configures and launches
conferences automatically, ALLIANCE saves a corporation valuable time and money
by maximizing uptime and avoiding the costs of manually scheduling and managing
meetings and conferences.
As an extension of its enterprise software product offerings, Forgent
also provides professional services including network consulting, customization,
installation, training and comprehensive related services to support its
software products throughout the planning, preparation, configuration and
deployment processes. Helping companies meet the challenges of deploying new
technologies across the enterprise, the Company's Network Consulting Services
offer expert assistance in evaluating current and evolving network requirements
including baseline audits, preparation of capacity plans, development of
time-saving migration and implementation plans, and customized integration of
Forgent's software with existing third-party applications or with customers'
proprietary in-house applications. Forgent's Software Deployment Services
provide dedicated engineers to oversee and manage the installation,
configuration, and roll-out to assure the application is up and running
optimally to maximize the customer's return on their investment. Additionally,
Forgent offers its customers maintenance and support contracts that provide
ready access to qualified support staff on a 24-hour, 7 days a week basis,
software patches as necessary and upgrades to the Company's next software
version without any additional costs.
Forgent has developed and actively pursues strategic partnerships with
various types of organizations throughout the information technology
marketplace. Forgent has created both business and technology partnerships with
systems integration companies, network design and deployment services companies,
as well as rich media conferencing players, including Cisco. In addition to
being an independent verification testing center for the Cisco AVVID Partner
Program, Forgent joined the program as an IP Video Conferencing Solutions member
in July 2003. The Cisco AVVID Partner Program sets criteria for interoperability
testing by independent third parties and is a co-marketing program enabling
leading product and services firms to deploy innovative e-business solutions.
The program provides enterprise customers with information regarding Cisco AVVID
Partner products and services that an independent testing facility has tested,
verified and found to interoperate with Cisco networking technology. Since
Forgent and Cisco support open, standards-based architecture and share a
commitment to interoperable solutions, this partnership allows Forgent to extend
customers' investment in their current Cisco network to work with Forgent's
software solutions in order to drive rapid adoption of business-critical
technologies. Forgent will continue to develop partnerships with other
best-of-breed software and services companies to meet the wide-ranging needs of
its customers.
While management believes it has made substantial progress to date in
introducing and deploying its software products and services, the Company's
results to date have been limited, and there can be no assurance that Forgent
will be successful in building a business around its enterprise meeting
automation software and professional services. The Company has devoted, and will
continue to devote, significant resources and infrastructure to support the
development of this line of business. These costs have been and will continue to
be incurred, regardless of whether the software products and services are
accepted in the marketplace. If these software products and services are not
accepted as anticipated, the Company's results from operations will be adversely
affected.
INTELLECTUAL PROPERTY LICENSING
The Company's Patent Licensing Program is currently focused on
generating license revenues related to the Company's data compression technology
embodied in U.S. Patent No. 4,698,672 and its foreign counterparts.
Manufacturers, software product providers, and media services providers in
various industries worldwide use data compression technology in their products,
including digital cameras, certain video cameras, personal computers, printing
devices, scanners, certain cell phones, rendering devices, and wireless devices.
Since the end of fiscal year 2003, Forgent has obtained additional license
revenues and the Company is continuing to actively seek licenses with other
users of its technology. Forgent's licensing program involves risks inherent in
technology licensing, including risks of protracted delays, possible legal
challenges that would lead to disruption or curtailment of the licensing
program, increasing expenditures associated with pursuit of the program, and
other risks that could adversely affect the Company's licensing program.
Additionally, the U.S. patent, which has generated the licensing revenues,
expires in October 2006 and its foreign counterparts expire in September 2007.
Thus, there can be no assurance that the Company will be able to continue to
effectively license its technology to other companies.
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PRODUCT DEVELOPMENT
Forgent's future success depends largely on its ability to develop
innovative enterprise software solutions, enhance its current enterprise
software products, and maintain technological competitiveness in order to remove
the complexity in meeting environments and to satisfy an evolving range of
customer requirements and needs. The Company's development team of skilled
software developers, testers, and technical writers, all with significant
experience, work closely with Forgent's sales and marketing departments to build
products based on market requirements, customer feedback, and technical support
needs. Additionally, the development team is responsible for exploring new
applications and directions of its core technologies, as well as incorporating
emerging technologies, to develop additional features for the Company's software
products.
During fiscal year 2003, the development team consolidated its
operations at the Company's headquarters in Austin, Texas in order to increase
efficiencies in design, coding, testing and support. An efficient and responsive
software development process that relied on traditional and proven development
methods, while avoiding unnecessary and time-consuming formalities was used. The
technical staff was hired, trained and organized to build and deploy
enterprise-class software of the highest quality, placing emphasis on issues
related to reliability, scalability, performance and security.
Fiscal year 2003 was a period of substantial accomplishment for Forgent
as the development team created a unified platform for enterprise meeting
automation management. Over twenty major and minor software releases were
completed. The year culminated with the release of Forgent ALLIANCE, an
integrated suite of products that provides unified scheduling, rich media
automation, and management of meeting logistics to eliminate inefficiencies
associated with the planning and execution of meetings, thus reducing meeting
time and costs as well as potentially increasing productivity and expediting the
decision making process.
Forgent's research and development strategy is to continue to enhance
ALLIANCE's functionality through new releases and new feature development to
satisfy the meeting management requirements of its customers, including:
- insuring that ALLIANCE meets the expectations of enterprise customers
for quality, reliability, scalability and performance;
- reducing the complexity and the resulting administrative costs through
the use of automation and other ease-of-use features;
- eliminating barriers to customer acceptance by integrating ALLIANCE
with existing enterprise toolsets, such as Microsoft Outlook(R), IBM
Lotus Notes(R), and Internet Explorer; and
- maximizing customer investments in rich media by supporting emerging
and legacy video, audio and web conferencing technologies.
Despite the Company's best efforts, there can be no assurance that
Forgent will complete its existing and future development efforts within the
anticipated schedule or that new and enhanced software products will adequately
meet the requirements of the marketplace and achieve market acceptance.
Additionally, Forgent may experience difficulties that could delay or prevent
the successful development or introduction of new or enhanced software products.
In the case of acquiring new or complementary software products or technologies,
the Company may not be able to unify the acquisitions into its current product
line. Furthermore, despite extensive testing, errors may be found in the
Company's new software products or releases after shipment, resulting in a
diversion of development resources, increased service costs, loss of revenue
and/or delay in market acceptance.
SALES AND DISTRIBUTION
Forgent sells its enterprise meeting automation software and
professional services principally through a direct sales force. The Company's
software sales organization includes telemarketing, inside sales, pre-sales
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engineers and territory managers. This structure enables Forgent to have all
critical functions aligned by territory to support the end-to-end selling
process -- from prospecting, pre-sale, close, and post-sale customer account
management. The Company supplements the efforts of its direct sales force with
its Partner Program. By working with these partners, Forgent expands the reach
of its direct sales force and gains access to key opportunities in major market
segments.
The Company has two distinct levels of partners in its Partner Program.
The first level is the Premier Reseller Partner. Partners in this level are
typically large firms specializing in total video integration projects. They
contract to completely install the hardware, infrastructure and management
software required for a complete videoconferencing system in a large company or
government agency. The Company's contract with them allows the Premier Reseller
Partner to resell the Company's products to the partner's end user customer as a
part of a larger integration project. The Premier Reseller Partner commits to a
minimum level of business per year with the Company, and for that commitment
they receive a channel discount. The Company trains the Premier Reseller
Partners to deal with all aspects of the sale and installation of the Company's
software, which results in minimal costs of sales associated with these
transactions. Currently, Forgent has the following active partners in its
Premier Reseller Program - AVS, Inc., Dimension Data, Impact Europe,
International Video Conferencing Incorporated, Planet Gov Inc., Pierce
Technology Services, SPL, Inc., SYMETRIA, Technology Services, Inc., Utility
Resource Association, Interactive Solutions, Inc., and York Telecommunications,
Inc.
The second level in the Company's Partner Program is the Preferred
Referral Partner. From time to time, as a by-product of the Preferred Referral
Partners' normal business activities, they become aware of customer needs where
the Company's products may provide value. A Preferred Referral Partner provides
the Company with the name and particular information about this type of customer
and their needs as a sales lead. If the Company accepts the sales lead,
registers it for a particular Preferred Referral Partner, and subsequently
closes a deal as a direct result of such a lead, the Company will pay the
Preferred Referral Partner a sales lead referral fee. The Preferred Referral
Partners make minimal best-efforts commitments to business volumes. These
partners receive minimal sales training to familiarize them with the Company's
products, which results in only a negligible reduction in the Company's cost of
sales. Currently Forgent has the following active partners in its Preferred
Referral Partner Program - ISI, Signet, Spectel, Swiderski Electronics, TKO,
Inc., and The Selerity Group, all of which have experience in selling and
supporting videoconferencing and communications solutions in commercial,
educational and/or government accounts.
COMPETITION
As the Company has refined its offerings to focus on solving the
enterprise meeting automation problems within the meeting management space, the
competitive landscape in which Forgent finds itself has further evolved in the
last year. Forgent now evaluates its software products against a range of
individual products that provide some portion of the enterprise meeting
automation solution. Forgent's strength is its ability to provide a complete
vendor-neutral enterprise software solution for scheduling and managing all the
physical resources such as rooms, equipment, technicians, etc. as well as rich
media resources including audio conferences, videoconferences, and eventually
web conferences from a single scheduling interface across large corporate
meeting environments. Corporations can choose from Microsoft Outlook(R), Lotus
Notes(R), a browser-based web interface or a combination of these.
A category of competitors is personal calendaring applications such as
Microsoft Outlook(R) and Lotus Notes(R). Though these products reside on over
80% of corporate desktops, they only solve the problems of sending meeting
invitations via email, creating personal calendars and to some degree reserving
rooms, which are modeled as mailboxes, for meetings at a rudimentary level.
While effective in smaller, localized organizations, global companies find the
lack of scheduling rules, organizational views, and security to be critical
deficits.
Another category of competitors is point schedulers that include vendor
specific and homegrown tools that corporations have purchased or created to
solve each individual scheduling problem in isolation of other problems. There
are a number of room schedulers, audio conference schedulers, equipment tracking
tools, and videoconference scheduling tools, each with its unique interface,
training needs and requirement to know which devices or services are being
requested to function effectively. These tools provide a rich set of detailed
diagnostics but offer little in
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the way of end-to-end scheduling and management of true multi-vendor equipment
environments, particularly across audio, video and web technologies.
Forgent has effectively delivered a unified scheduling and rich media
platform that ties all these tools and technologies into a single powerful
enterprise meeting automation solution. Management believes that no other
product in the market schedules meetings through the two market leading desktop
calendaring interfaces and spans the market leading video vendors and audio
vendors, with leading web conferencing vendors to be added soon. As a result,
the control, reporting, and conference utilization details available through
ALLIANCE are unparalleled in the marketplace. Corporations value the unification
of all the individual tools and applications into single enterprise solution for
managing their most important assets - their meeting workforce and the
decisions resulting from successful meetings.
MARKETING
Forgent has developed a comprehensive integrated marketing plan for
promoting its enterprise meeting automation software and professional services
throughout the United States and Europe. The integrated elements include a mix
of demand generation, public relations, industry analyst relations, investor
relations and other corporate communications activities to ensure a consistent
and accurate flow of information to and from the Company's key stakeholders and
target audiences.
Particular diligence has been paid to the marketing efforts building up
to, and surrounding, the launch of Forgent's ALLIANCE software suite. Enterprise
meeting automation is an emerging space and particular attention has been paid
to educating the appropriate audiences regarding these solutions. Focus has been
placed on developing and communicating clear and concise messages regarding
Forgent's enterprise meeting automation software to shareholders, customers,
prospects, and targeted technical and business media. The messages reinforce the
fundamental aspect of the Company's strategy, which is to build a software
business while generating revenue from its intellectual property to provide
stability and support the growth of the software business.
Marketing efforts are targeted at Fortune 2000 and Global 1000
enterprises for which meetings are a critical part of the business process
either due to a large meeting workforce, a geographically diverse workforce
(i.e. many corporate offices), and/or organizations that drive revenue as a
result of meetings. Some key industries that closely fit this description
include the Banking and Financial Services, Pharmaceutical, Legal, and
Government sectors. In addition, target prospects are those that have or intend
to have a decentralized scheduling business model and use the standard
calendaring applications Microsoft Outlook(R) or Lotus Notes(R).
The Company revamped the look and feel of its corporate web site and
collateral to reflect the focus on its ALLIANCE software suite and streamlined
information for readers. In particular, the web site plays an important role in
providing audiences with the most up-to-date and accurate information available
on the Company's business, its products and services, successes, trends and
issues the Company faces.
PATENTS AND TRADEMARKS
The United States Patent and Trademark Office has issued the Company 42
patents related to enterprise meeting automation, videoconferencing, data
compression, video mail, and other technologies developed or acquired by
Forgent. These patents comprise Forgent's intellectual property portfolio.
Forgent currently has 44 patent applications filed with the U.S. Patent and
Trademark Office. Forgent anticipates filing several additional patent
applications during fiscal 2004 to protect its intellectual property.
To date, the Company has signed several license agreements with
international consumer and commercial electronics firms, including Sony
Corporation. The license agreements relate to the Company's data compression
technology embodied in U.S. Patent No. 4,698,672 that will expire in October
2006 and its foreign counterparts that will expire in September 2007.
Manufacturers, software product providers, and media services providers in
various industries worldwide use data compression technology in their products,
including digital cameras, certain video cameras, personal computers, printing
devices, scanners, certain cell phones, rendering devices, and wireless devices.
The Company's aggregate intellectual property licensing revenues, which were
generated by the licensing
9
of these patents, totaled over $80.0 million as of July 31, 2003. Since the end
of fiscal 2003, Forgent has obtained additional license revenues and the Company
is continuing to actively seek to license other users of its technology.
Although management anticipates signing more patent license agreements with
other companies from various industries, there can be no assurance the
additional licenses can be obtained or, if obtained, that any new license
agreements will be on similar or favorable terms.
There can be no assurance that the pending patents will be issued or
that issued patents can be defended successfully. However, other than with
respect to U.S. Patent No. 4,698,672 and its foreign counterparts, Forgent does
not consider patent protection crucial to its success. Management believes that,
due to the rapid pace of technological change in the industry, legal protection
for its products is less significant than factors such as Forgent's use of an
open architecture, the success of its distribution strategy, the ongoing product
innovation and the knowledge, ability and experience of its employees. Forgent
retained all patents related to its discontinued products, integration and
videoconferencing hardware services businesses sold during fiscal years 2002 and
2003.
Most recently, the United States Patent and Trademark Office awarded
Forgent patents for its System and Method for Video Call Configuration and
Scheduling, System and Method for Managing Streaming Data, and System and Method
for Routing Video Calls. These patents are technologies that automatically
program and launch resources necessary for videoconferencing, economically
broadcast the contents of significant video calls to viewers on an internal
network or via the Internet, and automatically configure the most reliable and
efficient routes available for video calls. Forgent's recently issued patents
provide further evidence of Forgent's commitment to delivering leading edge
technologies to satisfy the needs of the meeting management industry.
Registrations for the "ALLIANCE SCHEDULER," and "ALLIANCE MEDIA
MANAGER" trademarks are currently pending in the United States. Management plans
to re-register for the trademark "Forgent" under its current business practices
in the United States as well as abroad. The Company was issued trademarks and
service marks by the U.S. Patent and Trademark Office and by certain foreign
countries and entities covering the "VTEL" mark and the "VTEL" logo. These
trademarks and service marks were sold to VTEL Products Corporation as part of
the sale of the products business segment.
EMPLOYEES
As of July 31, 2003, Forgent had 98 employees in the following
departments:
NUMBER OF
FUNCTION EMPLOYEES
-------- ---------
Sales and marketing ................................. 38
Research and development ............................ 39
Finance, human resources and administration ......... 21
---------
TOTAL ............................................... 98
=========
As the Company continues to evolve its business strategy, Forgent's
workforce is continually evaluated and adjusted accordingly - both in number and
composition. Forgent believes it retains the appropriate management team and
employees to fully implement its business strategy. None of the Company's
employees are represented by a collective bargaining agreement. Forgent has not
experienced any work stoppages and considers its relations with its employees to
be good.
On October 6, 2003, Forgent acquired certain assets and the operations
of Network Simplicity Software Inc. ("Network Simplicity"), a privately held
provider of web-based scheduling solutions for the small to medium business
market. As a result of this acquisition, Forgent's workforce grew by 10
employees: five employees are in sales and marketing, three employees are in
research and development; and two employees are in administration. The founder
of Network Simplicity now serves as Forgent's Vice-President - Network
Simplicity, and the Network Simplicity workforce will remain based in Richmond,
British Columbia, Canada.
10
The future performance of the Company depends largely on its continuing
ability to attract, train and retain highly qualified technical, sales, service,
marketing and managerial personnel. Forgent's development, management of its
growth and other activities depend on the efforts of key management and
technical employees. Competition for such personnel is intense. The Company uses
incentives, including competitive compensation and stock option plans, to
attract and retain well-qualified employees and generally does not have
employment agreements with key management personnel or technical employees.
Forgent's future success is dependent upon its ability to effectively attract,
retain, train, motivate and manage its employees. However, there can be no
assurance that the Company will continue to attract and retain personnel with
the requisite capabilities and experience. The loss of one or more of Forgent's
key management or technical personnel could have a material and adverse effect
on its business and operating results.
EXECUTIVE OFFICERS
Forgent's executive officers are as follows:
Richard N. Snyder, age 59, joined the Company's Board of Directors in
December of 1997 and became Chairman of the Board in March 2000. In June 2001
Mr. Snyder was named Forgent's President and Chief Executive Officer. Mr. Snyder
has over 27 years of senior management experience, including Founder and Chief
Executive Officer at Corum Cove Consulting, LLC, Senior Vice President of
Worldwide Sales, Marketing, Service and Support at Compaq Computer Corporation,
and Group General Manager at Hewlett-Packard. Mr. Snyder received a Masters in
Business Administration from Saint Mary's College and a Bachelor of Science from
Southern Illinois University.
Jay C. Peterson, age 46, joined the Company in September 1995 as
Manager of Corporate Planning and has served as Chief Financial Officer and Vice
President of Finance since May 2000. Prior to joining the Company, Mr. Peterson
performed as Assistant Controller with the Dell Direct Channel that generated $1
billion in annual sales at Dell Computer Corporation and held various financial
positions during 11 years with IBM Corporation. Mr. Peterson holds a Masters in
Business Administration and a Bachelor of Arts in Economics from the University
of Wisconsin.
Kenneth A. Kalinoski, age 43, joined the Company in February 2001 as
Vice-President - Development, currently serves as Chief Technology Officer, and
is responsible for all aspects of technology for the Company. Mr. Kalinoski's
previous 19-year career focused on client/server and communications technology.
He was the founder, company officer, and Vice-President of Development at
Netpliance from February 1999 to January 2001 and was responsible for delivering
the first information appliance to the consumer marketplace. Prior to that, Mr.
Kalinoski spent 17 years at IBM and held multiple management positions,
including director of IBM PC Systems and Licensing (1998), program director of
AIX Development from January 1993 to 1995, and program director of IBM
Multimedia Systems 1995-1997. Mr. Kalinoski received a Masters in Computer
Engineering from State University of New York, and a Bachelor of Science from
Wilkes University and currently holds five patents.
H. Russell Caccamisi, age 54, joined the Company in September 2002 as
Senior Vice President of Sales, responsible for worldwide sales of all software
and software-related services. Mr. Caccamisi has over 31 years of experience in
sales, marketing, and management, including Executive Vice President at
productmarketing.com from June 1999 to February 2001, President and Chief
Executive Officer at Reliant Data Systems from June 1996 to February 1999, Vice
President of Marketing at Tivoli Systems, Vice President of Worldwide Marketing
at BMC Software, Vice President of Sales and Marketing at System One
Corporation, and numerous sales and management positions at IBM Corporation. Mr.
Caccamisi received a Bachelor of Arts from Mississippi State University.
11
ITEM 2. PROPERTIES
Forgent's headquarters, product development, and sales and marketing
facility lease approximately 137,000 square feet in Austin, Texas under a lease
that expires in March 2013. As a result of the sale of the products business
segment during fiscal year 2002, 52,000 square feet of this space was vacated by
the VTEL group. Additionally, Forgent had existing unoccupied leased space
inventory due to the downsizing of the Company on account of past
restructurings. Therefore, during the 2002 fiscal year, Forgent actively engaged
in subleasing its available area but incurred a charge of $2.0 million related
to these lease impairments. During fiscal year 2003, Forgent was able to
sublease the vacated space quicker than originally anticipated; however, the
rates on the subleases were considerably less than originally anticipated due to
current depressed market rates. Therefore, management calculated the economic
value of the lost sublease rental income and recorded an additional charge of
$0.5 million. As of July 31, 2003, Forgent had $0.9 million recorded as a
liability on the Consolidated Balance Sheet related to its Wild Basin property.
Currently, the Company occupies approximately 49,000 square feet, subleases
approximately 81,000 square feet and anticipates continuing to sublease the
remaining under-utilized space.
Forgent's discontinued integration and videoconferencing hardware
services businesses occupy a facility of approximately 41,000 square feet in the
King of Prussia, Pennsylvania, which is leased through June 2006. As a result of
the sale of Forgent's integration business during fiscal year 2002,
approximately 19% of the total lease space was subleased to SPL Integrated
Solutions ("SPL"). As a result of the sale of Forgent's videoconferencing
hardware services business to an affiliate of Gores Technology Group ("Gores")
in fiscal year 2003, approximately 37% of the total lease space was subleased to
Gores. SPL, Gores, and another subtenant sublease 100% of the total lease space.
However, in October 2003, SPL's sublease terminated and the subtenant vacated
its leased space. Therefore, management calculated the economic value of the
lost sublease rental income and recorded in discontinued operations a one-time
charge of $0.5 million for the lease impairment related to its Pennsylvania
facility. Management anticipates continuing to attempt to sublease the
under-utilized space vacated by SPL.
Related to the sale of the Company's videoconferencing hardware
services business, Forgent assigned its lease for approximately 6,000 square
feet of office space in Kennesaw, Georgia to Gores. This office space was
utilized as a sales office for the videoconferencing hardware services business.
Additionally, in November 2002, the GSS development operations in Atlanta,
Georgia, were relocated to Forgent's headquarters in Austin, Texas. Management
was unable to sublease the vacated space of approximately 1,000 square feet and
consequently, recorded an impairment charge of $21 thousand for the year ended
July 31, 2003.
The Company currently holds additional office space in Houston, Texas,
Melville, New York, McLean, Virginia, and London, England. With the acquisition
of Network Simplicity Software Inc. in October 2003, Forgent now holds office
space in Richmond, British Columbia, Canada. Management believes that the
facility in Austin, Texas is adequate to meet Forgent's current requirements and
can accommodate further physical expansion of corporate and development
operations, as well as additional sales and marketing offices.
ITEM 3. LEGAL PROCEEDINGS
The Company is the defendant or plaintiff in various actions that arose
in the normal course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse affect on the
Company's financial condition or results of operations. With the exception of
the proceedings described in the next paragraph, none of the pending legal
proceedings to which the Company is a party involves claims for damages in
excess of 10% of the Company's current assets for the period covered by this
report.
In late February 2003, the Company received a letter from legal counsel
for the independent executrix of the Estate of Gordon Matthews, asserting that
the Company was obligated to pay the independent executrix of the Estate of
Gordon Matthews for the asserted value of services claimed to have been rendered
by Mr. Matthews in connection with his alleged involvement in the Company's
Patent Licensing Program. In late February 2003, the Company initiated an action
in the 261st District Court in Travis County Texas, styled Forgent Networks,
Inc. v. Monika Matthews, et al, for the purposes of declaring that the Company
has no obligation to the defendant. In that action, the defendant has filed a
counter claim asserting that the independent executrix of the Estate of Gordon
Matthews is entitled to recover in quantum meruit for the reasonable value of
the work and services claimed to have
12
been provided by Gordon Matthews, a former member of the board of directors and
consultant to the Company, which the defendant asserts is at least $5.0 million.
The Company does not believe the counter claim has merit and intends to continue
to vigorously pursue declaratory relief from the court that no liability is due
to the independent executrix of the Estate of Gordon Matthews.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On July 3, 2003, an annual meeting of the stockholders was held in
Austin, Texas, whereby the shareholders voted on the following proposals:
1. Proposal to elect six directors to the board of directors to hold office
until the next annual meeting of stockholders or until their respective
successors are duly elected and qualified. The stockholders voted to
approve the proposal by the following vote:
NOMINEE FOR WITHHELD
Richard N. Snyder 23,825,260 291,427
Richard Agnich 23,843,906 272,781
Kathleen A. Cote 23,838,275 278,412
Lou Mazzuccheli 23,649,143 467,544
Ray Miles 23,843,506 273,181
James H. Wells 23,651,715 464,972
2. Proposal to approve the sale of substantially all of the assets used in the
operation of the Company's videoconferencing hardware services business.
The stockholders voted to approve the proposal by the following vote:
FOR AGAINST ABSTAIN BROKER NON-VOTES
12,796,885 270,258 99,333 10,950,211
3. Proposal to ratify the board of directors' appointment of Ernst & Young
LLP, independent accountants, as the Company's independent auditors for the
year ending July 31, 2003. The stockholders voted to approve the proposal
by the following vote:
FOR AGAINST ABSTAIN BROKER NON-VOTES
23,899,419 122,616 94,652 --
4. Proposal to approve an adjournment or postponement of the annual meeting,
in order to solicit additional proxies, to such time and place as
designated by the presiding officer of the meeting. The stockholders voted
to approve the proposal by the following vote:
FOR AGAINST ABSTAIN BROKER NON-VOTES
22,972,761 1,025,684 118,242 --
5. Proposal to transact such other business as may properly come before the
meeting or any adjournment thereof. The stockholders voted to approve the
proposal by the following vote:
FOR AGAINST ABSTAIN BROKER NON-VOTES
22,672,965 1,177,166 266,556 --
13
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET INFORMATION
Starting June 1, 2001, Forgent's common stock has been traded in the
NASDAQ-National Market System under the symbol "FORG." Previously, the Company's
common stock was traded under the symbol "VTEL." The following table sets forth
the range of high and low intra-day prices for each fiscal quarter of 2003 and
2002:
FISCAL YEAR FISCAL YEAR
2003 2002
----------------- -----------------
HIGH LOW HIGH LOW
1st Quarter $ 3.25 $ 1.62 $ 4.19 $ 0.80
2nd Quarter $ 1.90 $ 1.12 $ 4.70 $ 2.25
3rd Quarter $ 2.64 $ 1.35 $ 3.93 $ 1.76
4th Quarter $ 4.51 $ 1.02 $ 5.67 $ 2.65
The Company has not paid cash dividends on its common stock and
presently intends to continue a policy of retaining earnings for reinvestment in
its business.
On October 21, 2003, Forgent's common stock closed at $2.72 on the
NASDAQ. At that date there were approximately 12,682 stockholders of record of
the common stock.
14
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth consolidated financial data for Forgent
as of the dates and for the periods indicated. The selected consolidated balance
sheet data as of July 31, 2002 and 2003 and the selected consolidated operations
data for the years ended July 31, 2001, 2002, and 2003 have been derived from
the audited consolidated financial statements of Forgent included elsewhere in
this Report. The selected consolidated balance sheet data as of July 31, 1999,
2000 and 2001 and the selected consolidated operations data for the year ended
July 31, 1999 and 2000 have been derived from the audited consolidated financial
statements of Forgent not included in this Report.
The selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the consolidated financial statements of Forgent, and the notes to
those statements included elsewhere in this Report. The information set forth
below is not necessarily indicative of the results of future operations.
FOR THE YEARS ENDED JULY 31,
------------------------------------------------------------------
1999(a) 2000(b) 2001(c) 2002(d) 2003(e)
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA:
Network software & service revenues ....... $ -- $ -- $ -- $ 2,236 $ 4,363
Technology licensing revenues ............. -- -- -- 31,150 48,935
Other revenues ............................ -- -- 103 -- 566
Gross margin .............................. -- -- (273) 14,654 25,558
(Loss) income from continuing operations .. -- 27,236 (5,010) (3,247) 9,375
Loss from discontinued operations ......... (15,565) (24,939) (27,530) (2,856) (1,355)
Net (loss) income ......................... (15,565) 2,297 (32,540) (6,103) 8,020
INCOME (LOSS) PER COMMON SHARE:
Basic (loss) income from continuing
operations .............................. -- 1.11 (0.20) (0.13) 0.38
Diluted (loss) income from continuing
operations ............................. -- 1.09 (0.20) (0.13) 0.37
Basic (loss) income from discontinued
Operations .............................. (0.66) (1.02) (1.11) (0.12) (0.05)
Diluted (loss) income from
discontinued operations................. (0.66) (1.00) (1.11) (0.12) (0.05)
Basic net (loss) income ................... (0.66) .09 (1.31) (0.25) 0.33
Diluted net (loss) income ................. (0.66) .09 (1.31) (0.25) 0.32
BALANCE SHEET DATA:
Working capital ........................... $ 18,913 $ 45,142 $ 19,324 $ 13,286 $ 28,866
Total assets .............................. 107,427 106,436 56,205 42,578 47,249
Long-term liabilities ..................... 13,625 2,140 1,365 1,983 1,869
Stockholders' equity ...................... 68,019 82,661 41,622 32,278 39,254
(a) Net loss for the year ended July 31, 1999 includes expense for
restructuring totaling $3.1 million.
(b) Net income for the year ended July 31, 2000 includes a non-recurring
gain of $44.5 million and an expense for the write-down of impaired
assets of $14.1 million.
(c) Net loss for the year ended July 31, 2001 includes an expense of $4.0
million for the impairment of certain assets and transaction expenses
in anticipation of a segment sale and expenses for restructuring
totaling $1.7 million.
(d) Net loss for the year ended July 31, 2002 includes an expense of $6.0
million for the reserve of the notes receivable from VTEL Products
Corporation and an expense of $4.4 million for the impairment of
certain assets.
(e) Net income for the year ended July 31, 2003 includes an expense of $1.1
million for the impairment of certain assets and an expense of $2.0
million for transaction expenses and loss on the disposal of a segment.
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF THE COMPANY
RESULT OF OPERATIONS
The following table sets forth for the fiscal periods indicated the
percentage of total revenues represented by certain items in Forgent's
consolidated statements of operations:
FOR THE YEARS ENDED JULY 31,
2001 2002 2003
---- ---- ----
Software & professional services revenues....... --% 6.7% 8.1%
Intellectual property licensing revenues........ -- 93.3 (1) 90.8 (2)
Other revenues.................................. 100.0 -- 1.1
Gross margin.................................... (265.0) 43.9 47.4
Selling, general and administrative............. 2,732.0 25.5 20.4
Research and development........................ 7,222.3 9.6 7.2
Impairment of assets............................ 1,113.6 24.1 2.1
Amortization of intangible assets............... 141.7 -- --
Total operating expenses........................ 11,209.7 59.2 29.7
Other income (expenses), net.................... 6,315.5 5.0 (0.1)
(Loss) income from continuing operations........ (4,864.1) (9.7) 17.4
(Loss) from discontinued operations............. (26,728.2) (8.6) (2.5)
Net (loss) income............................... (31,592.2)% (18.3)% 14.9%
FOR THE YEARS ENDED JULY 31, 2001, 2002, AND 2003
REVENUES
Consolidated revenues were $0.1 million in fiscal year 2001, $33.4
million in fiscal year 2002, and $53.9 million in fiscal year 2003. The
increases were $33.3 million from 2001 to 2002 and $20.5 million from 2002 to
2003. The increases were 32,313.6% for 2002 and 61.3% for 2003. Consolidated
revenues represent the combined revenues including sale of Forgent's enterprise
meeting automation software, software customization, installation and training,
network consulting, hardware, software maintenance services, and other
comprehensive professional services as well as royalties received from licensing
the Company's intellectual property. Consolidated revenues do not include any
revenues from Forgent's discontinued products business, which manufactured and
sold videoconferencing endpoint systems, the Company's discontinued integration
business, which provided customized videoconferencing solutions, or the
Company's discontinued videoconferencing hardware services business, which
provided hardware maintenance, installation, technical support and resident
engineer services (see Note 3, in the accompanying financial statements).
Software and professional services revenues were $0.0 million in fiscal
year 2001, $2.2 million in fiscal year 2002, and $4.4 million in fiscal year
2003. The increases were $2.2 million from 2001 to 2002 and $2.2 million, or
95.1% from 2002 to 2003. Software and professional services revenues represent
0.0%, 6.7%, and 8.1% of total revenues for the years ended July 31, 2001, 2002
and 2003, respectively. Revenues from this line of business include sales of
Forgent's Video Network Platform ("VNP"), Global Scheduling System ("GSS"), and
VideoWorks, which is a bundling of Forgent's software products and may include
hardware, depending on customer preference. Also included are professional
services, software maintenance and royalties. VNP is an enterprise-class network
management software product designed to monitor and manage multi-protocol,
multi-vendor video networks from a central location, thus improving ease-of-use,
reliability, and manageability of video communications. GSS is a web-based
scheduling application that helps organizations plan, execute, and manage their
meeting environments effectively and efficiently. Forgent's professional
services include add-on software customization, installation and training, and
network consulting services to evaluate and analyze customers' networks as well
as to test networks for manageability, interoperability, and optimum
connectivity.
16
The increase in software and professional services revenues for the
year ended July 31, 2003, as compared to the year ended July 31, 2002, is due to
the Company gaining momentum with its software products in the marketplace. As
the 2003 fiscal year progressed, sales were focused on large enterprises in
certain industries, predominantly Banking and Financial Services,
Pharmaceutical, Legal, and Government and included customers such as Berkely
National Labs, BMW Group, Kent State University, Florida State Supreme Court,
U.S. Department of Energy ESnet, U.S. Department of Justice - - Bureau of
Prisons, and Wilson Sonsini Goodrich & Rosati. Based on customer feedback,
Forgent expanded the functionalities of its VNP and GSS software to develop its
new flagship product, Forgent ALLIANCE ("ALLIANCE"), which was introduced in
July 2003. In addition to existing customers upgrading their VNP and GSS
software and prospects using the software on a trial basis, several new
customers have installed approximately 20 installations of ALLIANCE in the
marketplace, representing hundreds of rooms and thousands of users. Furthermore,
in October 2003, Forgent acquired the assets and operations of Network
Simplicity Software Inc. ("Network Simplicity"), including its flagship product,
Meeting Room Manager(TM), which is a scheduling application for small to medium
sized businesses. Based on the initial success of ALLIANCE and the acquisition
of Network Simplicity, management anticipates software and professional services
revenues to increase during the 2004 fiscal year.
Intellectual property licensing revenues were $0.0 million in fiscal
year 2001, $31.2 million in fiscal year 2002, and $48.9 million in fiscal year
2003. The increases were $31.2 million from 2001 to 2002 and $17.7 million, or
57.1% from 2002 to 2003. Intellectual property licensing revenues represent
0.0%, 93.3%, and 90.8% of total revenues for the years ended July 31, 2001, 2002
and 2003, respectively. The Company began realizing revenue from its Patent
Licensing Program during fiscal year 2002 and over the past six consecutive
quarters has achieved over $80.0 million in aggregate revenues generated from
international consumer and commercial electronics firms in Japan, South Korea,
and the United States and cover several fields of use including printing
devices, scanners, personal computers, digital cameras, certain video cameras,
certain cell phones, rendering software and other technologies. These licensing
revenues relate to one-time intellectual property licensing agreements with
companies for Forgent's data compression technology embodied in U.S. Patent No.
4,698,672 and its foreign counterparts. The Company does not anticipate any
additional intellectual property revenue from these companies but it continues
to actively seek new licenses and put more companies on notice by extending the
`672 patent's global reach and broadening its field of use. As of July 31, 2003,
the Company had $8.3 million in accounts receivable related to its intellectual
property licensing revenues generated during the fourth fiscal quarter.
Management anticipates collecting these receivables during the first quarter of
fiscal year 2004.
Although there continues to be uncertainties and risks related to the
Company's Patent Licensing Program, management anticipates generating revenues
from its intellectual property licensing segment during fiscal year 2004 as well
as fiscal year 2005. Forgent's Patent Licensing Program involves risks inherent
in licensing intellectual property, including risks of protracted delays,
possible legal challenges that would lead to disruption or curtailment of the
licensing program, increasing expenditures associated with pursuit of the
program, and other risks that could adversely affect the Company's licensing
program. Additionally, the U.S. patent, which has generated the intellectual
property licensing revenues, expires in October 2006 and its foreign
counterparts expire in September 2007. Thus, there can be no assurance that the
Company will be able to continue to effectively license its technology to other
companies.
Other revenues were $0.1 million in fiscal year 2001, $0.0 million in
fiscal year 2002, and $0.6 million in fiscal year 2003. The decrease was $0.1
million, or 100.0% from 2001 to 2002 and the increase was $0.6 million from 2002
to 2003. Other revenues represent 100.0%, 0.0%, and 1.1% of total revenues for
the years ended July 31, 2001, 2002 and 2003, respectively. During the year
ended July 31, 2003, the Company subcontracted several integration projects to
SPL Integrated Solutions ("SPL"), which had purchased Forgent's integration
business during fiscal year 2002. As a result of these subcontracts, Forgent
recorded $0.6 million in other revenue during the 2003 fiscal year. During the
year ended July 31, 2001, ArticuLearn(TM), the Company's internet subsidiary
that provided e-learning portals in a web environment for commercial and
educational businesses, generated $0.1 million in other revenues. ArticuLearn's
operations were terminated as of June 30, 2001. Management does not anticipate
any further revenue streams from either sources in future periods.
17
GROSS MARGIN
Consolidated gross margins were ($0.3) million in fiscal year 2001,
$14.6 million in fiscal year 2002, and $25.5 million in fiscal year 2003. The
increases were $14.9 million from 2001 to 2002 and $10.9 million from 2002 to
2003. The increases were 5,467.8% for 2002 and 74.4% for 2003. Consolidated
gross margin percentages were (265.0%) for fiscal 2001, 43.9% for fiscal 2002,
and 47.4% for fiscal 2003.
The $10.9 million increase in gross margin, as well as the related
increase in gross margin as a percentage of total revenues, for the year ended
July 31, 2003, is due primarily to the $8.0 million increase in gross margin
resulting from the patent license agreements obtained during fiscal year 2003.
Similarly, the $14.9 million increase in gross margin, as well as the related
increase in gross margin as a percentage of total revenues, for the year ended
July 31, 2002, is due primarily to the $16.5 million gross margin resulting from
the patent license agreements obtained during fiscal year 2002. The cost of
sales on the intellectual property licensing business relates to the legal fees
incurred on successfully achieving licensing revenues. The contingent legal fees
are based on a percentage of the licensing revenues received on signed
agreements and are paid to Jenkens & Gilchrist, P.C. ("Jenkens & Gilchrist"), a
national law firm. The percentage payment to Jenkens & Gilchrist was set based
on a sliding scale that began during the quarter ended April 30, 2002 at 35% and
increased to 50% based on the aggregate recoveries achieved. Future percentage
payments will be 50% of license receipts per the agreement with Jenkens &
Gilchrist. Because of the inherent risks in technology licensing, including the
October 2006 expiration of the U.S. patent which has generated the licensing
revenues and the September 2007 expiration of the patent's foreign counterparts,
total gross margins could be adversely affected in the future if licensing
revenues decline.
The Company's OnScreen24(TM) operations, which were folded back into
Forgent's core operations in January 2001, developed a video streaming
technology, which is a server application with the abilities to create video
e-mail programs and to store streamed video for later non-real time playback.
Initially, management intended to leverage these efforts and further develop
this technology as an added feature to its VNP software. Based upon customer
feedback regarding the VNP software during fiscal year 2002, customers did not
need advanced features but desired fundamental network management applications
with more robust device level support and valued added network level
instrumentation for ISDN and IP networks to enable them to understand and
monitor how well their networks were performing. Therefore, management
determined the video streaming technology would not be used in the development
of VNP. As a result, the $2.4 million capitalized software development costs
associated with the video streaming technology was impaired during the year
ended July 31, 2002. This impairment represented 58.7% of the software and
professional services' cost of sales during fiscal 2002. Of the remaining $1.7
million cost of sales in fiscal 2002, 64.3% of the costs associated with the
software and professional services business resulted from the amortization of
the Company's capitalized software development costs and labor. Similarly,
approximately 61.7% of the software and professional services cost of sales
during the year ended July 31, 2003 resulted from the amortization of the
Company's capitalized software development costs and labor. Since the cost of
sales from this line of business is relatively fixed, decreases in software and
professional services revenues could adversely affect total gross margins.
The cost of sales associated with other revenues during the year ended
July 31, 2003 relate to the costs incurred to complete the Company's remaining
integration projects. The gross margin for the integration projects during
fiscal year 2003 was 12.2%. The cost of sales associated with other revenues
during the year ended July 31, 2001 relate to the costs incurred by
ArticuLearn(TM), which resulted in a negative gross margin of 265.0%. Since
Forgent no longer has any remaining integration projects as of July 31, 2003 and
since ArticuLearn's operations were terminated as of June 30, 2001, the low and
negative gross margins from these lines of business will not affect the
Company's financial results in future periods.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative ("SG&A") expenses were $2.8 million
in fiscal year 2001, $8.5 million in fiscal year 2002, and $11.0 million in
fiscal year 2003. The increases were $5.7 million from 2001 to 2002 and $2.5
million from 2002 to 2003. The increases were 202.7% for 2002 and 29.3% for
2003. SG&A expenses were 2,732.0%, 25.5% and 20.4% of total revenues for the
years ended July 31, 2001, 2002, and 2003, respectively.
During the year ended July 31, 2003, SG&A expenses increased $2.5
million. Approximately 69.1% of this increase is due to Forgent's Patent
Licensing Program incurring additional consulting expenses, national and
18
international travel expenses, and other associated expenses as compared to the
year ending July 31, 2002. In view of the expanded scope of the Patent License
Program and correspondingly, the increased effort involved to grow licensing
revenues, management anticipates additional expenses to be incurred related to
obtaining additional licensing revenues from the Patent Licensing Program.
Forgent's Patent Licensing Program involves risks inherent in licensing
intellectual property, including risks of protracted delays, possible legal
challenges that would lead to disruption or curtailment of the licensing
program, increasing expenditures associated with the pursuit of the program, and
other risks that could adversely affect the Company's licensing program.
Additionally, the U.S. patent, which has generated the intellectual property
licensing revenues, expires in October 2006 and its foreign counterparts expire
in September 2007. Thus, there can be no assurance that the Company will be able
to continue to effectively license its technology to other companies.
Additionally, Forgent increased spending related to the ramp-up efforts in the
sales organization and the launch of its new flagship Forgent ALLIANCE product.
These additional expenditures largely account for the remaining 30.9% of the
increase during the 2003 fiscal year.
During the year ended July 31, 2002, SG&A expenses increased $5.7
million. The $5.7 million increase is due to $8.5 million of SG&A expenses
incurred by the software and professional services and intellectual property
licensing businesses during the year ended July 31, 2002. This increase was
offset by a $2.8 million decrease in SG&A expenses incurred by the Company's
Internet ventures, which were terminated during fiscal year 2001. The SG&A
expenses incurred by Forgent's discontinued products, integration and
videoconferencing hardware services businesses during fiscal years 2001, 2002,
and 2003 were reported as part of the loss on discontinued operations on the
Company's Consolidated Statements of Operations.
With the introduction of Forgent ALLIANCE in July 2003 and the
acquisition of Network Simplicity in October 2003, management anticipates
increased marketing expenses in order to heighten market awareness of the
Company's enterprise meeting automation solutions. In order to focus on the
sales efforts, Forgent will segment its customers, improve its professional
direct sales force, and continue partnering with world-class companies.
Management will monitor expenses related to the Company's sales organization and
make adjustments, if necessary, to its sales capabilities to support the sale of
its software products. Forgent will continue, however, to endeavor to further
decrease any unnecessary SG&A expenses that do not directly support the
generation of revenues for the Company without impacting the Company's ability
to engage with its customers.
RESEARCH AND DEVELOPMENT
Research and development ("R&D") expenses were $7.4 million in fiscal
year 2001, $3.2 million in fiscal year 2002, and $3.8 million in fiscal year
2003. The decrease was $4.2 million from 2001 to 2002 and the increase was $0.6
million from 2002 to 2003. This was a decrease of 56.8% for 2002 and an increase
of 20.5% for 2003. R&D expenses were 7,222.3%, 9.6%, and 7.2% of total revenues
for the years ended July 31, 2001, 2002, and 2003, respectively.
The Company created two subsidiaries focused on the development and
delivery of visual communication products and services over the Internet.
OnScreen24(TM) was comprised primarily of Forgent research and development
engineers who developed visual communication delivery products for use over the
Internet. ArticuLearn(TM) created and managed custom e-learning portals that
enabled organizations to create, deliver and manage their learning content
directly online as well as offered various professional services to assist
organizations in the production of their web-based learning content. During the
year ended July 31, 2001, the Company's two Internet subsidiaries incurred $5.1
million in R&D expenses. In fiscal year 2001, management determined the products
and services provided by its Internet ventures were not critical to the
Company's corporate strategy and thus terminated these operations, which
primarily accounts for the decrease in the Company's total research and
development expenses between 2001 and 2002. The Company believes that this
reduction in research and development expenses has no material effect on its
competitive stature and new product and technology development in its core lines
of business. Without the effects of the Internet ventures, the Company incurred
$2.3 million, $3.2 million, and $3.9 million in R&D expenses during fiscal years
2001, 2002 and 2003, respectively, and these expenses are related to the
development of Forgent's enterprise meeting automation software.
Leveraging its expertise in videoconferencing, the Company developed an
enterprise software product for video network management. Forgent has since
evolved beyond this single focus to address management of meeting environments.
Based on customer feedback, Forgent expanded the functionalities of its
award-winning VNP and GSS products and developed its new flagship product,
Forgent ALLIANCE. ALLIANCE is an enterprise meeting
19
automation solution that provides unified scheduling, rich media automation, and
management of meeting logistics to eliminate inefficiencies associated with the
planning and execution of meetings, thus reducing meeting time and costs as well
as potentially increasing productivity and expediting the decision making
process. The ALLIANCE software suite consists of two main products, ALLIANCE
SCHEDULER(TM) ("SCHEDULER") and ALLIANCE MEDIA MANAGER(TM) ("MEDIA MANAGER"),
each with optional add-on modules. SCHEDULER replaces multiple point scheduling
tools and manual processes currently used and schedules facilities, rich media
communications, catering, equipment, technicians, and other meeting services via
a single request through interfaces such as corporate standards Microsoft
Outlook(R) and IBM Lotus Notes(R), or a web browser. MEDIA MANAGER configures
all media components of a conference also via a single meeting request by
interpreting user requests for rich-media resources, selecting and scheduling
the appropriate devices and services, automatically launching the audio and
video conferences as requested, and providing ongoing monitoring to detect and
recover if problems occur. The ALLIANCE software suite, which remains vendor
neutral and supports conferencing tools from all leading manufacturers, was made
available to the general public in July 2003. In the fall of 2003, added
functionality being designed for MEDIA MANAGER is anticipated to provide its
capabilities for web conferencing.
The R&D expenses were net of $0.6 million, $3.5 million, and $2.8
million capitalized during the years ended July 31, 2001, 2002, and 2003
respectively. Software development costs are capitalized after a product is
determined to be technologically feasible and is in the process of being
developed for market. At the time the product is released for sale, the
capitalized software is amortized over the estimated economic life of the
related projects, generally three years. The software development costs
capitalized during the 2001, 2002 and 2003 fiscal years were related to the
continued efforts on enhancing Forgent's GSS, renamed as ALLIANCE SCHEDULER(TM),
and Forgent's VNP, renamed as ALLIANCE MEDIA MANAGER(TM). As of July 31, 2003,
approximately 77.9% of the Company's net capitalized software development costs
related to efforts on developing MEDIA MANAGER and approximately 22.1% related
to efforts on developing SCHEDULER.
Total research and development expenditures from continuing operations,
including software development costs that were capitalized, were $2.9 million in
fiscal year 2001, $6.7 million in fiscal year 2002, and $6.7 million in fiscal
year 2003. The increase was $3.7 million, or 127.1% from 2001 to 2002 and the
decrease was $54.7 thousand, or 0.0% from 2002 to 2003. Although the total R&D
expenditures did not change significantly from 2002 to 2003, R&D expenses for
the year ended July 31, 2003 increased $0.7 million due primarily to solving
complications with the newly acquired GSS software during the first part of the
fiscal year and to more resources incurred in supporting the Company's
enterprise meeting automation software under the new brand name Forgent
ALLIANCE. This increase in expenses was offset by a corresponding $0.7 million
decrease in capitalized software development costs. The Company started
developing its enterprise meeting automation software during the third fiscal
quarter of 2002. Therefore, the $3.7 million increase in total R&D expenditures
from 2001 to 2002 is due primarily to the planned build-up of the Company's
development efforts.
Forgent's ability to successfully develop enterprise meeting automation
solutions to enable enterprise networks is a significant factor in the Company's
success. As Forgent's research and development strategy evolves further,
management anticipates additional costs associated with the recruiting and
retention of engineering professionals as well as costs associated with
accelerating product delivery schedules. Management will attempt to maintain
research and development expenses at reasonable levels in terms of percentage of
revenue.
IMPAIRMENT OF ASSETS
During the fiscal year ended July 31, 2003, Forgent recorded impairment
losses on the Consolidated Statement of Operations as follows:
FOR THE YEAR ENDED JULY 31, 2003
---------------------------------------------
(IN THOUSANDS)
---------------------------------------------
CONTINUING DISCONTINUED TOTAL
OPERATIONS OPERATIONS IMPAIRMENT
---------- ------------ ----------
Property leases........................... $ 502 $ 454 $ 956
Notes & interest receivables........... (693) (693)
Goodwill................................. 1,331 - 1,331
-------- -------- --------
TOTAL IMPAIRMENT....................... $ 1,140 $ 454 $ 1,594
======== ======== ========
20
In November 2002, the GSS development operations in Atlanta, Georgia,
were relocated to Forgent's headquarters in Austin, Texas. Management was unable
to sublease the vacated space and upon review of the future undiscounted cash
flows related to this lease, management recorded an impairment charge of $21
thousand. Additionally, management analyzed the discounted cash flows related to
its Wild Basin property lease and subleases over the remainder of the lease
term. Although Forgent was able to sublease the vacated space more quickly than
originally anticipated, the rates on the subleases were considerably less than
originally anticipated due to current depressed market rates. Therefore,
management calculated the economic value of the lost sublease rental income and
recorded an additional charge of $0.5 million. As of July 31, 2003, Forgent had
$0.9 million recorded as a liability on the Consolidated Balance Sheet related
to its Wild Basin property. Forgent remained obligated to make lease payments in
accordance with the original terms of both leases. Both the Atlanta and Wild
Basin lease impairments were recorded as part of continuing operations on the
Company's Consolidated Statement of Operations.
Forgent's discontinued integration and videoconferencing hardware
services businesses are located at its facilities in King of Prussia,
Pennsylvania, which leases approximately 41,000 square feet. As a result of the
sale of Forgent's integration business, approximately 19% of the total lease
space was subleased to SPL, based on then current market values. As a result of
the sale of Forgent's videoconferencing hardware services business to an
affiliate of Gores Technology Group ("Gores"), approximately 37% of the total
lease space was subleased to Gores, based on current market values. SPL, Gores,
and another subtenant sublease 100% of the total lease space. However, in
October 2003, SPL's sublease terminated and the subtenant vacated its leased
space. Therefore, management reviewed the undiscounted cash flows of this lease
and the related subleases, determined the economic value of the lost sublease
rental income and recorded a one-time charge of $0.5 million. Forgent remained
obligated to make lease payments in accordance with the original term of the
lease. Since Forgent fully discontinued its operations in King of Prussia, the
lease impairment for this facility was recorded as part of discontinued
operations on the Company's Consolidated Statement of Operations.
During the 2003 fiscal year, Forgent recorded $0.3 million in accrued
interest on both outstanding notes receivable from VTEL Products Corporation
("VTEL") and fully reserved the accrued interest. Management agreed with VTEL's
management during the first fiscal quarter of 2003 to offset Forgent's accounts
payable to VTEL with its accounts receivable, notes receivable, and interest
receivable from VTEL. The Forgent liability was fully offset with the accounts
receivable and the accrued interest and partially offset with the note in
default, thus relieving $0.7 million of the related reserves. Since the initial
$6.0 million charge to reserve the VTEL notes receivable were reported as part
of the asset impairment from continuing operations, the related reduction of the
reserves is also reported as part of the asset impairment from continuing
operations.
Additionally, the ongoing difficult economic environment and its
associated negative impact on the Company's software business during fiscal year
2003 represented an indicator of a possible impairment on the Company's software
business. Therefore, the Company was required to perform an impairment analysis
in accordance with Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets" to determine the fair value of the assets
and liabilities of its software business. As a result of this analysis, Forgent
recorded a $1.3 million impairment of its goodwill related to its acquisition of
GSS. This impairment was recorded as part of continuing operations on the
Company's Consolidated Statement of Operations.
During the fiscal year ended July 31, 2002, Forgent recorded impairment
losses on the Consolidated Statement of Operations as follows:
FOR THE YEAR ENDED JULY 31, 2002
-------------------------------------
(IN THOUSANDS)
CONTINUING DISCONTINUED TOTAL
OPERATIONS OPERATIONS IMPAIRMENT
---------- ------------ ----------
Property leases ............................. $ 2,063 $ - $ 2,063
Notes receivable ............................ 5,967 - 5,967
-------- ------ --------
IMPAIRMENT IN OPERATING EXPENSES ............ 8,030 - 8,030
Capitalized software ........................ 2,381 - 2,381
-------- ------ --------
TOTAL IMPAIRMENT ............................ $ 10,411 $ - $ 10,411
======== ====== ========
21
Due to the disposition of the products business segment in fiscal year
2002, the VTEL personnel relocated from Forgent's headquarters at 108 Wild Basin
Road in Austin, Texas to VTEL's headquarters at 9208 Waterford Centre Blvd. in
Austin, Texas. This relocation left a vacancy of approximately 52,000 rentable
square feet, or 38% of the total lease space. Additionally, Forgent had existing
unoccupied space inventory due to the downsizing of the Company relating to past
restructurings. In fiscal year 2002, Forgent was able to sublease some of the
vacated space, but was unable to fully sublease the space due to the economic
downturn during the year. Therefore, management analyzed the future undiscounted
cash flows related to the lease on the Wild Basin property and determined the
economic value of the lost sublease rental income. As a result, Forgent recorded
a $2.1 million impairment charge for the unleased space as of July 31, 2002.
However, Forgent remained obligated to make lease payments in accordance with
the original term of the lease. Additionally, Forgent received two subordinated
promissory notes from VTEL as a result of the sale of the products business.
VTEL did not remit payment on its first subordinated promissory note due in
April 2002, as stipulated in the sales agreement. As a result of this default
and due to the uncertainty in collecting both of the outstanding notes from
VTEL, the Company recorded a $6.0 million charge for the reserve of both notes
from VTEL for the year ended July 31, 2002. These impairments were reported as
part of continuing operations on the Consolidated Statement of Operations.
The Company's OnScreen24(TM) operations, which were folded back into
Forgent's core operations in January 2001, developed a video streaming
technology, which is a server application with the abilities to create video
e-mail programs and to store streamed video for later non-real time playback.
Initially, management intended to leverage these efforts and further develop
this technology as an added feature to its VNP software. Based upon customer
feedback regarding the VNP software during fiscal year 2002, customers did not
need advanced features but desired fundamental network management applications
with more robust device level support and valued added network level
instrumentation for ISDN and IP networks to enable them to understand and
monitor how well their networks were performing. Therefore, management
determined the video streaming technology would not be used in the development
of VNP. As a result, the $2.4 million capitalized software development costs
associated with this technology was impaired during the year ended July 31, 2002
and was reported as part of cost of sales.
During fiscal year 2001 management implemented a strategy to divest all
non-core operations to focus on returning to profitability. Therefore, the
Company folded its OnScreen24 subsidiary's operations back into the core
business. OnScreen24 operated primarily from Forgent's facilities in Sunnyvale,
California. During the third quarter of fiscal 2001, the Company sold its equity
interest in the real estate lease for $0.5 million and recorded a related $1.1
million impairment for the leasehold improvements at the Sunnyvale property. The
$1.1 million impairment in fiscal 2001 was all related to continuing operations.
AMORTIZATION OF INTANGIBLES
Amortization expenses were $0.1 million in fiscal year 2001. In March
1999, the Company acquired substantially all of the assets of Vosaic LLP, an
internet video software and technology company. The amortization expenses relate
to the amortization of goodwill resulting from this acquisition.
Effective August 1, 2001, the Company chose early adoption of SFAS No.
142, "Goodwill and Other Intangibles Assets," which recognizes that since
goodwill and certain intangible assets may have indefinite useful lives, these
assets are no longer required to be amortized but are to be evaluated at least
annually for impairment. In accordance with SFAS No. 142, the Company was
required to complete its transitional impairment test, with any resulting
impairment loss recorded as a cumulative effect of a change in accounting
principle. Subsequent impairment losses are reflected in operating income from
continuing operations on the Consolidated Statement of Operations. As a result
of adopting of SFAS No. 142, the Company did not record any goodwill
amortization expenses during the years ended July 31, 2002 and 2003.
Additionally, as a result of the transitional impairment test, the Company did
not record any impairment of its goodwill for the year ended July 31, 2002.
The ongoing difficult economic environment and its associated negative
impact on the Company's software business during fiscal year 2003 represented an
indicator of a possible impairment on the Company's software business.
Therefore, the Company was required to perform an impairment analysis in
accordance with SFAS No. 142 to determine the fair value of the assets and
liabilities of its software business. As a result of this analysis, Forgent
recorded a $1.3 million impairment of its goodwill related to its acquisition of
GSS. This impairment was
22
recorded and reported as part of the impairment of assets from continuing
operations on the Company's Consolidated Statement of Operations.
OTHER INCOME (EXPENSES)
Other income (expenses) were $6.5 million in fiscal year 2001, $1.7
million in fiscal year 2002, and ($35.0) thousand in fiscal year 2003. The
decreases were $4.8 million from 2001 to 2002 and $1.7 million from 2002 to
2003. The decreases were 74.2% for 2002 and 102.1% for 2003. Other income
(expenses) were 6,315.5%, 5.0% and (0.1%) of total revenues for the years ended
July 31, 2001, 2002, and 2003, respectively.
Changes in interest income are based on interest rates earned on
invested cash and cash equivalent balances available for investment. The
decrease in interest income during fiscal 2002, as compared to fiscal 2001, is
due to a lower average cash balance held for investment and a decline in the
average interest rates.
During the year ended July 31, 2001, the Company owned common stock
shares of Accord Networks ("Accord"), a networking equipment manufacturer, which
were converted to Polycom common stock shares as a result of Polycom's
acquisition of Accord. Accord and Polycom shares were sold during fiscal year
2001 and resulted in a $6.5 million realized gain. During the first fiscal
quarter of 2002, the remaining 76,625 shares of Polycom common stock were sold
under a cash flow hedge, resulting in a $1.7 million realized gain.
INCOME TAXES
At July 31, 2003, the Company had federal net operating loss
carryforwards of approximately $138.0 million, research and development credit
carryforwards of approximately $6.2 million, and alternative minimum tax credit
carryforwards of approximately $0.3 million. The net operating loss and credit
carryforwards will expire in varying amounts from 2004 through 2021, if not
utilized. Minimum tax credit carryforwards do not expire and carry forward
indefinitely. Net operating losses related to the Company's foreign subsidiaries
of $6.4 million are available to offset future foreign taxable income.
As a result of various acquisitions completed by the Company in prior
years, utilization of the net operating losses and credit carryforwards may be
subject to a substantial annual limitation due to the "change in ownership"
provisions of the Internal Revenue Code of 1986. The annual limitation may
result in the expiration of net operating losses before utilization.
Due to the uncertainty surrounding the timing of realizing the benefits
of its favorable tax attributes in future tax returns, the Company has placed a
valuation allowance against its net deferred tax asset. Accordingly, no deferred
tax benefits have been recorded for the tax years ended July 31, 2001, 2002, and
2003. The valuation allowance decreased by approximately $2.0 million during the
year ended July 31, 2003. Approximately $7.9 million of the valuation allowance
relates to tax benefits for stock option deductions included in the net
operating loss carryforward which, when realized, will be allocated directly to
contributed capital to the extent the benefits exceed amounts attributable to
book deferred compensation expense.
Undistributed earnings of the Company's foreign subsidiaries are
considered permanently reinvested and, accordingly, no provision for U.S.
federal or state income taxes has been provided thereon.
LOSS FROM DISCONTINUED OPERATIONS, NET OF INCOME TAXES
During the year ended July 31, 2002, the Company sold the operations
and substantially all of the assets of its VTEL products business, including the
VTEL name, to VTEL and the operations and assets of its integration business to
SPL. During the year ended July 31, 2003, the Company sold the operations and
assets of its videoconferencing hardware services business to Gores (see Note 3,
in the accompanying financial statements). Accordingly, the products,
integration and videoconferencing hardware service businesses have been
accounted for and presented as discontinued operations in the consolidated
financial statements. Loss from discontinued operations was $26.4 million in
fiscal year 2001, and $2.6 million in fiscal year 2002. Income from discontinued
operations was $0.6 million in fiscal year 2003. The increase was $23.8 million
from 2001 to 2002 and $3.2 million from 2002 to 2003. This was an increase of
90.2% for 2002 and 123.0% for 2003. (Loss) income from discontinued operations
was (26,728.2%), (7.8%), and 1.1% of total revenues for the years ended July 31,
2001, 2002, and 2003.
23
The $3.2 million increase during the year ended July 31, 2003 is due to
a $8.6 million decrease in losses from the products and integration businesses.
This loss reduction was offset by a $5.4 million decrease in income from the
videoconferencing hardware services business. The $23.8 million increase during
the year ended July 31, 2002 is due to decreases in losses from the products,
integration, and videoconferencing hardware services businesses during fiscal
year 2002 as compared to fiscal year 2001.
During the 2003 fiscal year, Forgent incurred $0.5 million in bad debt
expenses related to uncollectible accounts receivables. Approximately 88.9% of
this bad debt expense was recorded to discontinued operations as it related to
aged receivables from the videoconferencing hardware services business. The
remaining 11.1% of the bad debt expense was recorded to continuing operations.
LOSS ON DISPOSAL, NET OF INCOME TAXES
In July 2003, Forgent sold substantially all of the assets of its
videoconferencing hardware services business based in King of Prussia,
Pennsylvania, to Gores, a privately held international acquisition and
management firm. As consideration for the sale of the videoconferencing hardware
services business, the Company received $7.3 million in cash and incurred $1.9
million in loss on the disposal. The following table shows the amounts of the
assets sold and liabilities assumed, as well as the fees incurred, related to
this sale:
(in thousands)
Accounts receivable $ 3,746
Inventory 519
Fixed assets 2,683
Prepaid assets 385
Goodwill 8,939
--------
ASSETS SOLD 16,272
--------
Accounts payable 689
Deferred revenue 7,449
Capital lease 58
--------
LIABILITIES ASSUMED BY GORES 8,196
--------
Net assets sold 8,076
Cash received (7,350)
Related fees incurred 1,228
--------
NET LOSS ON DISPOSAL $ 1,954
========
As of July 31, 2001, the Company estimated the loss from the disposal
of the VTEL products business segment to be $1.1 million. During the fiscal year
2002, Forgent recorded an additional $0.2 million in expenses associated with
the completion of this sale. The assets related to the integration business were
sold for approximately their net book value and thus an immaterial amount of
gain was recorded during the third fiscal quarter of 2002.
NET INCOME (LOSS)
Net loss was $32.5 million in fiscal year 2001; net loss was $6.1
million in fiscal year 2002; and net income was $8.0 million in fiscal year
2003. The increases were $26.4 million from 2001 to 2002 and $14.1 million from
2002 to 2003. The increases were 81.2% for 2002 and 231.4% for 2003. Net income
(loss) was (31,592.2%), (18.3%), and 14.9% of total revenues for the years ended
July 31, 2001, 2002, and 2003, respectively.
During fiscal year 2003, Forgent succeeded in transforming the Company
into an enterprise meeting automation software and professional services
provider and a licensor of intellectual property. Forgent achieved several goals
including: (1) grew total revenues by over 61%, (2) doubled its software and
professional services
24
revenue, (3) continued the success of its Patent Licensing Program, (4) launched
its new flagship ALLIANCE software suite, (5) completed the divestiture of its
videoconferencing hardware services business, and (6) strengthened its cash
balances and working capital. Despite the current difficult economic business
environment in which companies continue to minimize capital expenditures, these
significant milestones are evidence that Forgent persists in progressing its
business strategy. Forgent's management team is focused on listening to its
customers' needs and striving for excellent execution in satisfying those needs
with creative products and solutions in order to advance the Company's financial
results towards growth and continued profitability. However, uncertainties and
challenges remain, and there can be no assurance that the Company can
successfully grow its revenues or maintain profitability.
OTHER FACTORS AFFECTING RESULTS OF OPERATIONS
Forgent's future results of operations and financial condition could be
impacted by many factors, including other competitors entering the same market,
technical problems in delivering enterprise meeting automation solutions, and
the current economic environment. Due to these factors and others noted
elsewhere in Management's Discussion and Analysis of Financial Condition and
Results of Operations, and Risk Factors contained elsewhere in this Report,
Forgent's past earnings and stock prices have been, and future earnings and
stock prices potentially may be, subject to significant volatility, particularly
on a quarterly basis. Past financial performance should not be considered a
reliable indicator of future performance and investors are cautioned in using
historical trends to anticipate results or trends in future periods. Any
shortfall in revenue or earnings from the levels anticipated by securities
analysts could have an immediate and significant effect on the trading price of
Forgent's common stock in any given period. Also, the Company participates in a
highly dynamic industry that often contributes to the volatility of Forgent's
common stock price.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities was $1.1 million in fiscal year
2001; cash provided by operating activities was $9.6 million in fiscal year
2002; and cash provided by operating activities was $2.2 million in fiscal year
2003. At July 31, 2003, Forgent had working capital of $28.9 million, including
$25.0 million in cash, cash equivalents and short-term investments. The $2.2
million in cash provided in fiscal year 2003 was due primarily to $9.4 million
in net income and $2.5 million of non-cash depreciation, amortization, and
impairment expenses, which were offset by a $8.4 million increase in accounts
receivable and a $1.4 million decrease in accrued expenses. During the year
ended July 31, 2003, the Company collected $16.2 million from its intellectual
property licensing business. The $9.6 million cash provided in fiscal year 2002
was due primarily to $3.2 million in net loss, $12.5 million of non-cash
depreciation, amortization, and impairment expenses, and a $7.8 million decrease
in accounts receivable, which were offset by a $7.8 million decrease in accounts
payable and accrued expenses. During fiscal year 2002, the Company sold $9.3
million of its outstanding accounts receivable, without any recourse, in efforts
to recapture approximately $7.0 million in cash lost due to an unanticipated
significant drop in sales from discontinued operations and approximately $2.1
million in payments of the remaining outstanding payables related to the
discontinued operations. Silicon Valley Bank purchased the assets at face value,
less a fee of approximately 1.8% of the value of the accounts receivable sold
and a one-time set-up fee of $13 thousand. The Company received proceeds from
Silicon Valley Bank of $9.1 million. As a result of the sale of the accounts
receivable, the Company excluded the related receivables from the Consolidated
Balance Sheet and recorded related expenses of $178 thousand for the year ended
July 31, 2002. Additionally, the Company collected $16.5 million from its
intellectual property licensing business during the year ended July 31, 2002.
The liquidation of the Internet ventures, which historically required
significant funding for operations, as well as the completion of the
restructuring efforts and the sale of its less profitable businesses, improved
the Company's cash flows from operations during the year ended July 31, 2002, as
compared to the year ended July 31, 2001. The cash provided by operating
activities during fiscal year 2001 was $1.1 million and was due primarily to
$5.0 million in net loss, $4.8 million of non-cash depreciation, amortization
and impairment expenses, and a $9.1 million decrease in accounts receivable,
which were offset by a $8.1 million decrease in accounts payable and accrued
expenses.
Cash provided by investing activities was $22.8 million in fiscal year
2001; cash used in investing activities was $7.3 million in fiscal year 2002;
and cash provided by investing activities was $3.2 million in fiscal year 2003.
The $3.2 million cash provided by investing activities during fiscal year 2003
was due primarily to $7.4 million in cash received from the sale of the
videoconferencing hardware business, $1.1 million in net purchases of short-term
investments and $2.8 million in the capitalization of software development
costs. Forgent's ability to successfully
25
develop enterprise meeting automation software solutions will be a significant
factor in the Company's future success and management will continue to
strategically invest in developing its software products. The $7.3 million cash
used in investing activities during fiscal year 2002 was largely the result of
the goodwill acquired among other assets from Global Scheduling Solutions, Inc.
and $3.5 million in the capitalization of software development costs. During the
year ended July 31, 2001, the Company owned common stock shares of Accord, a
networking equipment manufacturer, which were converted to Polycom common stock
shares as a result of Polycom's acquisition of Accord. The $22.8 million cash
provided by investing activities in fiscal year 2001 was primarily due to the
$25.2 million net proceeds received from the sale of the Polycom and Accord
shares and other short-term investments.
As of July 31, 2003, the Company leased computers, furniture,
equipment, and office space under non-cancelable operating leases that expire at
various dates through 2013. Certain leases obligate the Company to pay property
taxes, maintenance and insurance. The Company also has several capital leases
for computer and office equipment. Additionally, the Company used the proceeds
from its notes payable to purchase computers and various equipment. Amounts
payable under these leases and notes payable are as follows:
AMOUNTS PAYABLE
(in thousands)
OPERATING CAPITAL NOTES
FISCAL YEAR ENDING LEASES LEASES PAYABLE TOTAL
2004 $ 4,349 $ 49 $ 351 $ 4,749
2005 4,289 6 231 4,526
2006 4,156 -- 105 4,261
2007 3,447 -- -- 3,447
2008 3,370 -- -- 3,370
Thereafter 15,525 -- -- 15,525
------------------------------------------------
TOTAL $ 35,136 $ 55 $ 687 $ 35,878
================================================
Forgent may periodically make other commitments and thus become subject to other
contractual obligations. However, management believes these commitments and
contractual obligations are routine in nature and incidental to the Company's
operations. For fiscal year 2004, Forgent's capital budget is approximately $0.6
million and will be used principally to invest in development tools and video
testing equipment.
Cash used in financing activities was $0.6 million, $0.9 million, and
$1.1 million in fiscal years 2001, 2002, and 2003, respectively. The $1.1
million of cash used in financing activities during fiscal year 2003 was due
primarily to the $1.4 million purchase of treasury stock. The $0.9 million of
cash used in financing activities during fiscal year 2002 is due primarily to
the $2.7 million purchase of treasury stock, which was offset by the $1.3
million proceeds received from the issuance of its notes payable. The $0.6
million of cash used in financing activities during fiscal year 2001 primarily
relates to the Company paying $1.5 million to settle its notes payable, which
was offset by the $0.9 million proceeds received from the issuance of its notes
payable. In April 2001 Forgent announced a stock repurchase program to
repurchase up to two million shares of the Company's stock. During fiscal 2001
the Company repurchased 87,400 shares for approximately $0.1 million, including
fees. Forgent purchased an additional 787,700 shares for approximately $2.7
million, including fees, during the year ended July 31, 2002. In September 2002,
Forgent's board of directors approved the repurchase of an additional million
shares of the Company's stock under the current share repurchase program. During
fiscal 2003, Forgent purchased an additional 709,386 shares for approximately
$1.4 million, including fees. As of July 31, 2003, the Company had repurchased
1,584,486 shares for approximately $4.2 million. Management will periodically
assess repurchasing additional shares during fiscal year 2004, depending on the
Company's cash position, market conditions and other factors.
Forgent's principal sources of liquidity at July 31, 2003 consist of
$25.0 million of cash, cash equivalents and short-term investments, and the
ability to generate cash from its intellectual property licensing business. This
ability to generate cash is subject to certain risks as discussed under the
"Risk Factors - License Program" section of the "Management's Discussion and
Analysis of Financial Condition and Results of Operations of the Company." As
previously stated above, however, there remain risks and uncertainties as to the
timing of the receipts of license fees due, in part, to the inherent nature of a
patent licensing program. Management plans to strategically utilize this
positive cashflow to invest further in developing Forgent's enterprise meeting
automation software and to explore more opportunities for growing the business.
However, there is no assurance that the Company will be able to
26
continue to limit its cash consumption and preserve its cash balances, and it is
possible that the Company's business demands may lead to cash utilization at
levels greater than recently experienced due to investments in research and
development, increased expense levels and other factors.
LEGAL MATTERS
Forgent is the defendant or plaintiff in various actions that arose in
the normal course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse affect on its
financial condition or results of operations.
In late February 2003, the Company received a letter from legal counsel
for the independent executrix of the Estate of Gordon Matthews, asserting that
the Company was obligated to pay the independent executrix of the Estate of
Gordon Matthews for the asserted value of services claimed to have been rendered
by Mr. Matthews in connection with his alleged involvement in the Company's
Patent Licensing Program. In late February 2003, the Company initiated an action
in the 261st District Court in Travis County Texas, styled Forgent Networks,
Inc. v. Monika Matthews, et al, for the purposes of declaring that the Company
has no obligation to the defendant. In that action, the defendant has filed a
counter claim asserting that the independent executrix of the Estate of Gordon
Matthews is entitled to recover in quantum meruit for the reasonable value of
the work and services claimed to have been provided by Gordon Matthews, a former
member of the board of directors and consultant to the Company, which the
defendant asserts is at least $5.0 million. The Company does not believe the
counter claim has merit and intends to continue to vigorously pursue declaratory
relief from the court that no liability is due to the independent executrix of
the Estate of Gordon Matthews.
CRITICAL ACCOUNTING POLICIES
The consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States and include
the accounts of Forgent's wholly owned subsidiaries. All significant
intercompany transactions and balances have been eliminated in the
consolidation. Preparation of the consolidated financial statements in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the reported
amounts of the assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Management periodically
evaluates estimates used in the preparation of the financial statements for
continued reasonableness. Appropriate adjustments, if any, to the estimates used
are made prospectively based upon such periodic evaluation.
Management believes the following represent Forgent's critical
accounting policies:
REVENUE RECOGNITION
The Company recognizes revenue when persuasive evidence of an
arrangement exists, delivery has occurred, the fee is fixed or determinable, and
collectibility is probable. The Company recognizes revenue in accordance with
Statement of Position ("SOP") 97-2, Software Revenue Recognition, as amended by
SOP 98-4 and SOP 98-9, and Securities and Exchange Commission Staff Accounting
Bulletin 101, Revenue Recognition in Financial Statements.
The Company does not recognize revenue for agreements with rights of
return, refundable fees, cancellation rights or acceptance clauses until such
rights of return, refund or cancellation have expired or acceptance has
occurred. The Company's arrangements with resellers do not allow for any rights
of return.
Software and professional service revenue consists of license and
service fees. License fee revenue is earned through the licensing or right to
use the Company's software and from the sale of specific software products.
Service fee income is earned through the sale of maintenance and technical
support, training, installation, and other professional services related to the
sale of Forgent's enterprise software. The Company allocates the total fee to
the various elements based on the relative fair values of the elements specific
to the Company. The Company determines the fair value of each element in the
arrangement based on vendor-specific objective evidence ("VSOE") of fair value.
When VSOE of fair value for the license element is not available, license
revenue is recognized using the residual method. Under the residual method, the
contract value is first allocated to the undelivered elements
27
(maintenance and service elements) based upon their VSOE of fair value; the
remaining contract value, including any discount, is allocated to the delivered
element. For maintenance, VSOE of fair value is based upon the renewal rate
specified in each contract. For training and installation services, VSOE of fair
value is based upon the rates charged for these services when sold separately.
Revenue allocated to maintenance and technical support is recognized ratably
over the maintenance term (typically one year). Revenue allocated to
installation and training is recognized upon completion of these services due to
their short-term nature. The Company's training and installation services are
not essential to the functionality of its products as (1) such services are
available from other vendors and (2) the Company has sufficient experience in
providing such services. For instances in which VSOE cannot be determined for
undelivered elements, and these undelivered elements do not provide significant
customization or modification of its software product, Forgent recognizes the
entire contract amount ratably over the period during which the services are
expected to be performed.
Intellectual property licensing revenue is derived from the Company's
Patent Licensing Program, which is currently focused on generating license
revenues relating to the Company's data compression technology embodied in U.S.
Patent No. 4,698,672, and its foreign counterparts. Gross intellectual property
licensing revenue is recognized at the time a license agreement has been
executed and related costs are recorded as cost of sales. The cost of sales on
the intellectual property licensing business relates to the legal fees incurred
on successfully achieving signed agreements. The contingent legal fees are based
on a percentage of the licensing revenues received on signed agreements and are
paid to Jenkens & Gilchrist, a national law firm. The percentage payment to
Jenkens & Gilchrist was set based on a sliding scale that began during the
quarter ended April 30, 2002 at 35% and increased to 50% based on the aggregate
recoveries achieved. Future percentage payments will be 50% of license receipts
per the agreement with Jenkens & Gilchrist.
Other revenue consists of integration services. Integration revenues
consist of network consulting to assist customers with their video networking
requirements, including baseline audits, preparation of capacity plans,
development of time-saving migration and implementation plans, and customized
integration of the Company's software with existing third-party applications or
with customers' proprietary in-house applications. Integration revenues are
recognized after the customized systems have been tested, installed, and the
Company has no significant further obligations as evidenced by acceptance from
the customer.
Deferred revenue includes amounts received from customers in excess of
revenue recognized, and is comprised of deferred maintenance, service and other
revenue. Deferred revenues are recognized in the Consolidated Statement of
Operations over the terms of the arrangements, primarily ranging from one to
three years.
SOFTWARE DEVELOPMENT COSTS
Costs incurred in connection with the development of software products
are accounted for in accordance with Statement of Financial Accounting Standards
("SFAS") No. 86, "Accounting for the Costs of Computer Software to Be Sold,
Leased or Otherwise Marketed." Costs incurred prior to the establishment of
technological feasibility are charged to research and development expense.
Software development costs are capitalized after a product is determined to be
technologically feasible and is in the process of being developed for market.
Amortization of capitalized software begins upon initial product shipment.
Software development costs are amortized over the estimated life of the related
product (generally thirty-six months), using the straight-line method.
IMPAIRMENT OF GOODWILL AND INTANGIBLE ASSETS
The Company adopted SFAS No. 142, "Goodwill and Other Intangible
Assets" on August 1, 2001 and thus is required to review the carrying value of
its goodwill and other intangible assets annually. Forgent also reviews goodwill
and other intangibles for possible impairment whenever specific events warrant.
Events that may create an impairment review include, but are not limited to:
significant and sustained decline in the Company's stock price or market
capitalization; significant underperformance of operating units; significant
changes in market conditions and trends. If a review event has occurred, the
value of the goodwill or intangible asset is compared to the estimate of future
cash flows, and if required, an impairment is recorded.
28
RECENT ACCOUNTING PRONOUNCEMENTS
In April 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities." The Statement
amends and clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities
under SFAS No. 133 "Accounting for Derivative Instruments and Hedging
Activities." This Statement is effective for contracts entered into or modified
after June 30, 2003, for hedging relationships designated after June 30, 2003,
and to certain preexisting contracts. Forgent adopted the provisions of SFAS No.
149 effective the beginning of the fourth quarter of fiscal year 2003. Forgent
had no derivative instruments as of July 31, 2003 or any hedging activities
during the year ended July 31, 2003. Thus, the adoption of SFAS No. 149 had no
impact on the Company's financial position or results of operations.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities," in an effort to expand upon and strengthen
existing accounting guidance that addresses when a company should include in its
financial statements the assets, liabilities and activities of another entity.
Interpretation 46 requires the primary beneficiary, an entity that is subject to
a majority of the risk of loss from the variable interest entity's ("VIE")
activity or is entitled to receive a majority of the VIE's residual returns or
both, to consolidate that VIE. The interpretation also requires disclosure about
VIEs that a company is not required to consolidate but in which it has a
significant variable interest. Interpretation 46 is effective for all new VIEs
created or acquired after January 31, 2003. For VIEs created prior to February
1, 2003, the provisions of Interpretation 46 must be applied for the first
interim or annual period beginning after June 15, 2003. The Company did not have
a variable interest in any VIEs as of July 31, 2003 and therefore does not
expect the adoption of these provisions to have a material impact on its
financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation--Transition and Disclosure", which amends SFAS No. 123,
"Accounting for Stock-Based Compensation". SFAS No. 148 provides alternative
methods of transition for a voluntary change to a fair value based method of
accounting for stock-based compensation. SFAS No. 148 also amends the disclosure
requirements of SFAS No. 123 to require additional disclosures in both annual
and interim financial statements regarding the effects of stock-based
compensation. Forgent adopted the disclosure provisions of SFAS No. 148
effective the beginning of the third quarter of fiscal year 2003. The adoption
of SFAS No. 148 had no impact on the Company's financial position or results of
operations.
In November 2002, the FASB reached a consensus on EITF Issue No. 00-21,
"Accounting for Revenue Arrangements with Multiple Deliverables" ("Issue
00-21"). Issue 00-21 sets out criteria for whether revenue can be recognized
separately from other deliverables in a multiple deliverable arrangement. The
criteria consider whether the delivered item has stand-alone value to the
customer, whether the fair value of the delivered item can be reliably
determined and the rights of returns for the delivered item. Forgent adopted
Issue 00-21 on August 1, 2003 and the adoption had no significant impact on the
Company's results of operations, financial position or cash flows.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS 146 addresses accounting for
restructuring costs and supersedes previous accounting guidance, principally
Emerging Issues Task Force ("EITF") No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires that the
liability associated with exit or disposal activities be recognized when the
liability is incurred. As a contrast under EITF 94-3, a liability for an exit
cost is recognized when a Company commits to an exit plan. SFAS No. 146 also
establishes that a liability should initially be measured and recorded at fair
value. Accordingly, SFAS No. 146 may affect the timing and amount of recognizing
restructuring costs. The Company adopted the provisions of this statement for
any restructuring activities initiated after December 31, 2002. No such
activities were initiated during the year ended July 31, 2003.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supercedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," as well as the accounting and reporting provisions
relating to the disposal of a segment of a business as required by Accounting
Principles Board No. 30. Effective August 1, 2002, the Company adopted SFAS No.
144, which did not have a significant impact on its financial statements.
29
RISK FACTORS
There are many factors that affect the Company's business, prospects
and the results of its operations, some of which are beyond the control of the
Company. The following is a discussion of some, but not all, of these and other
important risk factors that may cause the actual results of the Company's
operations in future periods to differ materially from those currently expected
or desired.
GENERAL ECONOMIC AND INDUSTRY CONDITIONS
Any adverse change in general economic, business or industry conditions
could have a material adverse effect on the Company's business, prospects and
financial performance if those conditions cause customers or potential customers
to reduce or delay their investments in enterprise software and professional
services. Due to the current economic circumstances affecting U.S. businesses,
there has been a slow-down in capital spending, which adversely affects the
willingness of companies to purchase enterprise software products and
professional services. If this slow-down is prolonged, current economic
conditions could have a continued adverse effect on the demand for the Company's
products and services and could result in declining revenue and earnings growth
rates for the Company.
LICENSE PROGRAM
The Company's intellectual property licensing revenues are difficult to
predict. The Company's Patent Licensing Program involves risks inherent in
technology licensing, including risks of protracted delays, possible legal
challenges that would lead to disruption or curtailment of the program,
increasing expenditures associated with the pursuit of the program, and other
risks that could adversely affect the Company's licensing program. Thus, there
can be no assurance that the Company will be able to continue to license its
technology to others. If the Company fails to meet the expectations of public
market analysts or investors, the market price of Forgent's common stock may
decrease significantly. Quarterly operating results may fail to meet these
expectations for a number of reasons, including the inability of licensees to
pay for the license and other fees, a decline in the demand for the Company's
patented technology, higher than expected operating expenses, and license delays
due to legal and other factors.
ENTERPRISE SOFTWARE DEVELOPMENT
Forgent expects that its future financial performance will depend
significantly on revenue from its existing and future enterprise software
products and the related tools that the Company plans to develop, which is
subject to significant risks. There are significant risks inherent in a new
product introduction, such as its existing Forgent ALLIANCE software products.
Market acceptance of these and future products will depend on continued market
development for the meeting management market. Forgent cannot be certain that
its existing or future products offerings will meet customer performance needs
or expectations when shipped or that they will be free of significant software
defects or bugs. If the Company's products do not meet customer needs or
expectations, for whatever reason, the Company's sales would be adversely
affected and further, upgrading or enhancing the product could be costly and
time consuming.
TECHNOLOGICAL CHANGES AND PRODUCT TRANSITIONS
The technology industry is characterized by continuing improvements in
technology, which results in the frequent introduction of new products, short
product life cycles and continual improvement in product price/performance
characteristics. These improvements could render the Company's products
noncompetitive, if the Company fails to anticipate and respond effectively to
these improvements and new product introductions. While the Company believes
that its experience over the past few years as a provider of enterprise software
and professional services and its prior experience in the videoconferencing
industry affords it a competitive advantage over some of its competitors, rapid
changes in technology present some of the greatest challenges and risks for any
software and technology-based company.
SOFTWARE MARKETING AND SALES
Forgent's first enterprise software product was introduced in the fall
of 2001, and as such, it has limited market awareness and, to date, limited
sales. Since that time Forgent has enhanced this product through internal
30
development and acquisitions. The Company's future success will be dependent in
significant part on its ability to generate demand for its enterprise software
products and professional services. To this end, Forgent's direct and indirect
sales operations must increase market awareness of its products to generate
increased revenue. The Company's products and services require a sophisticated
sales effort targeted at the senior management of its prospective customers. All
new hires will require training and will take time to achieve full productivity.
Forgent cannot be certain that its new hires will become as productive as
necessary or that it will be able to hire enough qualified individuals or retain
existing employees in the future. The Company cannot be certain that it will be
successful in its efforts to market and sell its products, and if it is not
successful in building greater market awareness and generating increased sales,
future results of operations will be adversely affected.
SALES CYCLE
Forgent has a long sales cycle because it generally takes time to
educate potential customers regarding the use and benefits of enterprise meeting
automation software solutions. The long sales cycle makes it difficult to
predict the quarter in which sales may fall. Because the Company's expense
levels are relatively fixed, the shift of sales from one quarter to a later
quarter will adversely affect results of operations in an affected quarter,
since the Company would not be able to adjust its expense levels to match
fluctuations in revenues. If the Company failed to meet expectations by
shareholders, analysts or others as to software sales anticipated in any
particular quarter, the market price of the Company's stock may significantly
decrease.
LIMITED OPERATING HISTORY
Although founded in 1985, Forgent has a limited operating history in
its current lines of business because of the Company's recent transition to an
enterprise meeting automation software and professional services provider and a
licensor of intellectual property. As a result of this limited operating
history, Forgent cannot forecast revenue and operating expenses based on
historical results. The Company's ability to forecast quarterly revenue
accurately is limited because Forgent's software products have a long sales
cycle that makes it difficult to predict the quarter in which sales will occur
and because of the relative unpredictability of its intellectual property
licensing revenues. The Company's business, operating results and financial
condition will be materially adversely affected if revenues do not meet
projections and if results in a given quarter do not meet expectations.
COMPETITION AND NEW ENTRANTS
The Company may encounter new entrants or competition from competitors
in some or all aspects of its business. The Company competes on the basis of
price, technology, availability, performance, quality, reliability, service and
support. The Company believes that its experience and business model creates a
competitive advantage over its competitors. However, there can be no assurance
that the Company will be able to maintain this advantage. Many of the Company's
current and possibly future competitors have greater resources than the Company
and, therefore, may be able to compete more effectively on price and other
terms.
PATENTS AND TRADEMARKS
The Company's success and ability to compete are substantially
dependent on its proprietary technology and trademarks. The Company seeks to
protect these assets through a combination of patent, copyright, trade secret,
and trademark laws, as well as confidentiality procedures and contractual
provisions. These legal protections afford only limited protection and
enforcement of these rights may be time consuming and expensive. Furthermore,
despite best efforts, the Company may be unable to prevent third parties from
infringing upon or misappropriating its intellectual property. Also, competitors
may independently develop similar, but not infringing, technology, duplicate
products, or design around the Company's patents or other intellectual property.
Additionally, the Company's patent applications or trademark
registrations may not be approved. Moreover, even if approved, the resulting
patents or trademarks may not provide Forgent with any competitive advantage or
may be challenged by third parties. If challenged, patents might not be upheld
or claims could be narrowed. Any litigation surrounding the Company's rights
could force Forgent to divert important financial and other resources away from
business operations
31
NEW BUSINESS MODEL
The Company has transitioned its business and has realigned its
strategic focus towards two core business lines: enterprise meeting automation
software and professional services and intellectual property licensing. Many
factors may negatively impact the Company's ability to implement its strategic
focus, including the ability or possible inability to manage the development of
its enterprise meeting automation software, manage the development of its Patent
Licensing Program, sustain the productivity of Forgent's workforce, retain key
employees, and manage operating expenses. The Company may be required by market
conditions and other factors to undertake restructuring efforts in the future.
Forgent's business, results of operations or financial condition could be
materially adversely affected if it is unable to manage the development of its
business strategy, sustain the productivity of its workforce, retain key
employees, or manage its operating expenses.
ACQUISITION INTEGRATION
The Company has made, and may continue to evaluate and make, strategic
acquisitions in public and privately held technology companies. Since some of
these companies may be early-stage ventures with unproven business models,
products that are not yet fully developed or products that have not yet achieved
market acceptance, these acquisitions are inherently risky. Many factors outside
of the Company's control determine whether or not the Company's investments will
be successful. Such factors include the ability of a company to obtain
additional private equity financing, to access the public capital markets, to
affect a sale or merger, or to achieve commercial success with its products or
services. Additionally, the Company may encounter difficulties in integrating an
acquired company's workforce, technologies, or product lines. Accordingly, there
can be no assurances that any of the Company's investments will be successful or
that the Company will be able to recover the amounts invested.
DIVESTITURE TRANSACTIONS
As a result of Forgent's transition to an enterprise meeting automation
software and professional services provider and licensor of intellectual
property, the Company has substantially completed a program to divest certain
non-core operations, including a videoconferencing endpoint manufacturing
business, an integration business, and a videoconferencing hardware services
business. There can be no assurance that, having divested such non-core
operations, Forgent will be able to achieve greater or any profitability,
strengthen its core operations or compete more effectively in existing markets.
In addition, the Company continues to evaluate the profitability realized or
that is likely to be realized by its existing businesses and operations. Forgent
reviews from a strategic standpoint, which, if any, of its businesses or
operations should be divested. Entering into, evaluating or consummating
divestiture transactions may entail risks and uncertainties in addition to those
which may result from the divestiture-related change in the Company's business
operations, including but not limited to extraordinary transaction costs,
unknown indemnification liabilities and unforeseen administrative complications,
any of which could result in reduced revenues, increased charges, or
post-transaction administrative costs or could otherwise have a material adverse
effect on Forgent's business, financial condition or results of operations.
CAUTIONARY STATEMENTS REGARDING RISKS AND UNCERTAINTIES THAT MAY AFFECT FUTURE
RESULTS
Certain portions of this report contain forward-looking statements that
reflect the Company's current expectations regarding future results of
operations, economic performance, financial condition and achievements. Whenever
possible, Forgent attempted to identify these forward-looking statements with
the words "believes," "estimates," "plans," "expects," "anticipates" and other
similar expressions. These statements reflect management's current plans and
expectations that rely on a number of assumptions and estimates that are subject
to risks and uncertainties including, but not limited to, rapid changes in
technology, unexpected changes in customer order patterns, the intensity of
competition, economic conditions, pricing pressures, interest rates
fluctuations, changes in the capital markets, litigation involving intellectual
property, changes in tax and other laws and governmental rules applicable to
Forgent's business, the ability to integrate acquisitions and divest non-core
assets, and other risks indicated in Forgent's filings with the Securities and
Exchange Commission. These risks and uncertainties are beyond the Company's
control, and in many cases, management cannot predict all of the risks and
uncertainties that could cause actual results to differ materially from those
indicated by the forward-looking statements.
32
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
INTEREST RATE RISK
Forgent's interest income is sensitive to changes in U.S. interest
rates. However, due to the short-term nature of the Company's investments,
Forgent does not consider these risks to be significant. The Company previously
invested in Accord Networks ("Accord") an Israeli-based manufacturer of
networking equipment. In June of 2000, Accord filed an initial public offering
on the NASDAQ stock exchange in which the Company was apportioned 1.3 million
shares. In February 2001, Accord was acquired by Polycom and Forgent's
investment in Accord converted to 399,000 shares of Polycom. The Company sold
246,000 shares and then entered into a cash flow hedge to ensure a minimum level
of cash flow from the 153,000 remaining shares. The settlement of these hedges
and related shares of Polycom occurred in July and October 2001, resulting in
net cash flows of $1.8 and $1.8 million, respectively.
33
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Independent Auditors ..................................................... 35
Financial Statements:
Consolidated Balance Sheets as of July 31, 2002 and 2003.......................... 36
Consolidated Statements of Operations for the years ended
July 31, 2001, 2002 and 2003 .................................................. 37
Consolidated Statements of Changes in Stockholders' Equity
for the years ended July 31, 2001, 2002 and 2003 .............................. 38
Consolidated Statements of Cash Flows for the years ended July
31, 2001, 2002 and 2003 ....................................................... 39
Notes to Consolidated Financial Statements ....................................... 40
Financial Statement Schedule:
Schedule II -- Valuation and Qualifying Accounts ................................. 67
Schedules other than those listed above have been omitted since they are
either not required, not applicable or the information is otherwise included.
34
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and
Stockholders of Forgent Networks, Inc. (f.k.a. VTEL Corporation)
We have audited the accompanying consolidated balance sheets of Forgent
Networks, Inc. as of July 31, 2002 and 2003, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three fiscal years in the period ended July 31, 2003. Our audits also included
the financial statement schedule listed in Item 15. These financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards 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. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Forgent
Networks, Inc. at July 31, 2002 and 2003 and the consolidated results of their
operations and their cash flows for each of the three fiscal years in the period
ended July 31, 2003 in conformity with accounting principles generally accepted
in the United States. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
Austin, Texas
September 9, 2003 Ernst & Young LLP
35
FORGENT NETWORKS, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except per share data)
JULY 31,
-----------------------------
2002 2003
------------ ------------
ASSETS
Current assets:
Cash and equivalents, including restricted cash
of $683 and $730 at July 31, 2002 and
July 31, 2003, respectively $ 17,237 $ 21,201
Short-term investments 2,715 3,845
Accounts receivable, net of allowance for doubtful
accounts of $163 and $0 at July 31, 2002 and July
31, 2003, respectively 1,026 9,457
Notes receivable, net of reserve of $967 and $639 at
July 31, 2002 and July 31, 2003, respectively 189 74
Inventories 26 --
Prepaid expenses and other current assets 410 415
------------ ------------
Total current assets 21,603 34,992
Property and equipment, net 3,011 2,158
Intangible assets, net 6,894 5,042
Capitalized software 3,537 4,827
Other assets 415 230
Net assets from discontinued operations 7,118 --
------------ ------------
$ 42,578 $ 47,249
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,734 $ 3,178
Accrued compensation and benefits 1,264 683
Other accrued liabilities 1,980 1,661
Notes payable, current portion 899 323
Deferred revenue 440 281
------------ ------------
Total current liabilities 8,317 6,126
Long-term liabilities:
Deferred revenue -- 59
Other long-term obligations 1,983 1,810
------------ ------------
Total long-term liabilities 1,983 1,869
Stockholders' equity:
Preferred stock, $.01 par value; 10,000 authorized; none
issued or outstanding -- --
Common stock, $.01 par value; 40,000 authorized; 25,755
and 26,172 shares issued, 24,880 and 24,588 shares
outstanding at July 31, 2002 and July 31, 2003,
respectively 257 261
Treasury stock, 875 and 1,584 at July 31, 2002 and
July 31, 2003 (2,857) (4,231)
Additional paid-in capital 263,334 263,875
Accumulated deficit (228,011) (219,991)
Unearned compensation (227) (28)
Accumulated other comprehensive income (218) (632)
------------ ------------
Total stockholders' equity 32,278 39,254
------------ ------------
$ 42,578 $ 47,249
============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
36
FORGENT NETWORKS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
FOR THE YEARS ENDED JULY 31,
----------------------------
2001 2002 2003
---------- ---------- ----------
REVENUES:
Software & professional services $ -- $ 2,236 $ 4,363
Intellectual property licensing -- 31,150 48,935
Other 103 -- 566
---------- ---------- ----------
Total revenues 103 33,386 53,864
COST OF SALES:
Software & professional services -- 4,057 3,338
Intellectual property licensing -- 14,675 24,471
Other 376 -- 497
---------- ---------- ----------
Total cost of sales 376 18,732 28,306
GROSS MARGIN (273) 14,654 25,558
OPERATING EXPENSES:
Selling, general and administrative 2,814 8,517 11,013
Research and development 7,439 3,210 3,869
Impairment of assets 1,147 8,030 1,140
Amortization of intangible assets 146 -- --
---------- ---------- ----------
Total operating expenses 11,546 19,757 16,022
(LOSS) INCOME FROM OPERATIONS (11,819) (5,103) 9,536
OTHER INCOME (EXPENSES):
Interest income 1,222 123 160
Gain on investment 6,514 1,670 --
Loss on disposal of assets (1,453) -- --
Interest expense and other 222 (114) (195)
---------- ---------- ----------
Total other income (expenses) 6,505 1,679 (35)
(LOSS) INCOME FROM CONTINUING OPERATIONS,
BEFORE INCOME TAXES (5,314) (3,424) 9,501
Benefit (Provision) for income taxes 304 177 (126)
---------- ---------- ----------
(LOSS) INCOME FROM CONTINUING OPERATIONS (5,010) (3,247) 9,375
(Loss) Income from discontinued operations, net of income taxes of
$0, $0, and $21 for the years ended July 31, 2001, 2002, and 2003,
respectively (26,410) (2,601) 599
Loss on disposal, net of income taxes of $0, $0, and $42 for the
years ended July 31, 2001, 2002, and 2003, respectively (1,120) (255) (1,954)
---------- ---------- ----------
LOSS FROM DISCONTINUED OPERATIONS (27,530) (2,856) (1,355)
NET (LOSS) INCOME $ (32,540) $ (6,103) $ 8,020
---------- ---------- ----------
BASIC (LOSS) INCOME PER SHARE:
(Loss) Income from continuing operations $ (0.20) $ (0.13) $ 0.38
Loss from discontinued operations $ (1.11) $ (0.12) $ (0.05)
Net (loss) income $ (1.31) $ (0.25) $ 0.33
DILUTED (LOSS) INCOME PER SHARE:
(Loss) Income from continuing operations $ (0.20) $ (0.13) $ 0.37
Loss from discontinued operations $ (1.11) $ (0.12) $ (0.05)
Net (loss) income $ (1.31) $ (0.25) $ 0.32
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 24,878 24,814 24,660
Diluted 24,878 24,814 25,201
The accompanying notes are an integral part of these consolidated
financial statements.
37
FORGENT NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Amounts in thousands)
COMMON STOCK
NUMBER OF ADDITIONAL
SHARES PAID-IN TREASURY
OUTSTANDING AMOUNT CAPITAL STOCK
------------ ------------ ------------ ------------
BALANCE AT JULY 31, 2000 24,847 $ 248 $ 261,712 $ --
Proceeds from stock issued under
employee plans 131 1 174
Purchase of Treasury Stock (87) (108)
Net shares received in settlement (2) (173)
Amortization of unearned
Compensation
Net loss
Change in unrealized gain/loss on
available-for-sale securities
Foreign currency translation
Adjustment
Comprehensive Income
------------ ------------ ------------ ------------
BALANCE AT JULY 31, 2001 24,889 249 261,713 (108)
Proceeds from stock issued under
employee plans 779 8 1,288
Purchase of Treasury Stock (788) (2,749)
Issuance of restricted stock to
employees and consultants 333
Amortization of unearned
Compensation
Net loss
Change in unrealized gain/loss on
available-for-sale securities
Foreign currency translation
Adjustment
Comprehensive Income
------------ ------------ ------------ ------------
BALANCE AT JULY 31, 2002 24,880 257 263,334 (2,857)
Proceeds from stock issued under
employee plans 417 4 498
Purchase of Treasury Stock (709) (1,374)
Stock compensation for
employees and consultants 43
Amortization of unearned
Compensation
Net income
Comprehensive Income
------------ ------------ ------------ ------------
BALANCE AT JULY 31, 2003 24,588 $ 261 $ 263,875 $ (4,231)
ACCUMULATED OTHER TOTAL
ACCUMULATED UNEARNED COMPREHENSIVE STOCKHOLDERS'
DEFICIT COMPENSATION INCOME (LOSS) EQUITY
------------ ------------ ------------- -------------
BALANCE AT JULY 31, 2000 $ (189,368) $ (4) $ 10,073 $ 82,661
Proceeds from stock issued under
employee plans 175
Purchase of Treasury Stock (108)
Net shares received in settlement (173)
Amortization of unearned
Compensation 4 4
Net loss (32,540) --
Change in unrealized gain/loss on
available-for-sale securities (8,462)
Foreign currency translation
Adjustment 65
Comprehensive Income (40,937)
------------ ------------ ------------ ------------
BALANCE AT JULY 31, 2001 (221,908) -- 1,676 41,622
Proceeds from stock issued under
employee plans 1,296
Purchase of Treasury Stock (2,749)
Issuance of restricted stock to
employees and consultants (333) --
Amortization of unearned
Compensation 106 106
Net loss (6,103)
Change in unrealized gain/loss on
available-for-sale securities (1,541)
Foreign currency translation
Adjustment (353)
Comprehensive Income (7,997)
------------ ------------ ------------ ------------
BALANCE AT JULY 31, 2002 (228,011) (227) (218) 32,278
Proceeds from stock issued under
employee plans 502
Purchase of Treasury Stock (1,374)
Stock compensation for
employees and consultants (43) --
Amortization of unearned
Compensation 242 242
Net income 8,020
Comprehensive Income (414) 7,606
------------ ------------ ------------ ------------
BALANCE AT JULY 31, 2003 $ (219,991) $ (28) $ (632) $ 39,254
The accompanying notes are an integral part of these consolidated
financial statements.
38
FORGENT NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
FOR THE YEARS ENDED JULY 31,
------------------------------------------
2001 2002 2003
---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income from continuing operations $ (5,010) $ (3,247) $ 9,375
Adjustments to reconcile net (loss) income from continuing
operations to net cash provided by operating activities:
Depreciation and amortization 3,783 2,029 2,585
Amortization of leasehold advance and lease impairments (87) (87) (1,490)
Provision for doubtful accounts -- 16 105
Impairment of long-lived assets 1,147 10,411 1,140
Amortization of unearned compensation 4 106 242
Foreign currency translation loss (gain) 46 319 --
Loss on sale/disposal of fixed assets -- -- 92
Changes in operating assets and liabilities:
Accounts receivable 9,126 7,775 (8,374)
Notes receivable -- -- 148
Inventories -- (709) 26
Prepaid expenses and other current assets 477 528 (56)
Accounts payable (5,338) (3,265) (63)
Accrued expenses and other long term obligations (2,732) (4,546) (1,423)
Deferred revenue (269) 288 (79)
---------- ---------- ----------
Net cash provided by operating activities 1,147 9,618 2,228
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash received from sale of Services business -- -- 7,350
Purchases of short-term investments (98,510) (3,180) (3,859)
Sales and maturities of short-term investments 123,663 5,052 2,729
Purchases of property and equipment (1,848) (786) (136)
Sales of property and equipment 56 82 --
Purchase of business, net of cash acquired -- (4,000) --
(Issuance) collection of notes receivable (16) 243 --
Increase in capitalized software (617) (3,471) (2,814)
Decrease (increase) in other assets 81 (1,273) (54)
---------- ---------- ----------
Net cash provided by (used in) investing activities 22,809 (7,333) 3,216
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of stock 175 1,296 502
Purchase of treasury stock (108) (2,749) (1,374)
Payments on notes payable (1,500) (787) (753)
Proceeds from notes payable 852 1,353 464
---------- ---------- ----------
Net cash used in financing activities (581) (887) (1,161)
CASH FLOWS FROM DISCONTINUED OPERATIONS:
Net cash (used in) provided by discontinued operations (14,414) 662 (1,859)
Loss on sale of Services business -- -- 1,954
Effect of translation exchange rates on cash 19 (671) (414)
---------- ---------- ----------
Net increase in cash and equivalents 8,980 1,389 3,964
Cash and equivalents at beginning of period 6,868 15,848 17,237
---------- ---------- ----------
Cash and equivalents at end of period $ 15,848 $ 17,237 $ 21,201
========== ========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 134 $ 144 $ 74
Income taxes paid 129 -- --
Income taxes refunded -- 177 --
Contingent notes payable issued for acquired assets -- 700 --
Issuance of restricted stock to employees and consultants -- 333 --
Net shares received in settlement (173) -- --
Mark to market of investments 8,461 1,541 --
The accompanying notes are an integral part of these consolidated
financial statements.
39
FORGENT NETWORKS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA OR OTHERWISE NOTED)
1. THE COMPANY
Forgent Networks, Inc. ("Forgent" or "Company") is an enterprise
meeting automation software and professional services provider, which enables
organizations to schedule and manage their meeting environments effectively and
efficiently, and a licensor of intellectual property. Founded in 1985 and using
its expertise in the videoconferencing equipment industry, the Company
manufactured and installed videoconferencing endpoints. In January 2002, the
Company sold its manufacturing products business, shifting its focus from
hardware manufacturing to enterprise software and services. To further expedite
this shift, during fiscal year 2002, Forgent also sold its integration business,
which designed and installed custom integrated visual communication systems
primarily in meetings spaces of large corporations. During fiscal year 2003, the
Company completed the divestiture of its videoconferencing hardware services
business, devoting itself entirely to its enterprise meeting automation software
and professional services business, as well as its intellectual property
licensing business.
The Company's current flagship product, Forgent ALLIANCE, is the
industry's first enterprise meeting automation software that is a complete
integration of scheduling with rich media automation, driven from a common user
interface, and consists of two main products: ALLIANCE SCHEDULER(TM) and
ALLIANCE MEDIA MANAGER(TM). ALLIANCE SCHEDULER(TM), the enhanced product based
on Forgent's Global Scheduling System or GSS, streamlines conference scheduling,
reduces conflicts associated with complex meetings and empowers users to quickly
and easily schedule all aspects of a meeting - adding facilities, rich media
communications and other meeting services - through popular corporate
calendaring tools, Microsoft Outlook(R) or IBM Lotus Notes(R). ALLIANCE MEDIA
MANAGER(TM) is a multi-vendor, multi-protocol media management platform based on
Forgent's Video Network Platform, or VNP, that automates rich media enabled
meetings by configuring and managing all media components of a conference
through a Common Operating Environment and continues to monitor the media to
detect and recover if problems occur.
Forgent's intellectual property licensing business is derived from the
Company's Patent Licensing Program. The Company's Patent Licensing Program is
currently focused on generating license revenues relating to the Company's data
compression technology embodied in U.S. Patent No. 4,698,672 and its foreign
counterparts. Other patents are currently being investigated for additional
licensing opportunities, although none have been identified at this time.
As the Company has evolved, it has focused its efforts on managing the
meeting environment, adding audio and web capabilities to its deep understanding
and expertise in videoconferencing. With its refocused efforts and resources,
Forgent believes it is poised to provide the greatest opportunity for long-term
success for the Company and its stockholders.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States and include
the accounts of Forgent's wholly owned subsidiaries. All significant
intercompany transactions and balances have been eliminated in the
consolidation. Preparation of the consolidated financial statements in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the reported
amounts of the assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. The more significant
estimates made by management include the valuation allowance for the gross
deferred tax asset, capitalization of software development costs, contingency
reserves, useful lives of fixed assets, the determination of the fair value of
its long-lived assets, including its intangible assets, the loss from
discontinued operations, and the loss from its impairments. Actual amounts could
differ from the estimates made. Management periodically evaluates estimates used
in the preparation of the financial statements for continued reasonableness.
Appropriate adjustments, if any, to the estimates used are made prospectively
based upon such periodic evaluation.
40
FORGENT NETWORKS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA OR OTHERWISE NOTED)
REVENUE RECOGNITION
The Company recognizes revenue when persuasive evidence of an
arrangement exists, delivery has occurred, the fee is fixed or determinable, and
collectibility is probable. The Company recognizes revenue in accordance with
Statement of Position ("SOP") 97-2, Software Revenue Recognition, as amended by
SOP 98-4 and SOP 98-9, and Securities and Exchange Commission Staff Accounting
Bulletin 101, Revenue Recognition in Financial Statements.
The Company does not recognize revenue for agreements with rights of
return, refundable fees, cancellation rights or acceptance clauses until such
rights of return, refund or cancellation have expired or acceptance has
occurred. The Company's arrangements with resellers do not allow for any rights
of return.
Software and professional service revenue consists of license and
service fees. License fee revenue is earned through the licensing or right to
use the Company's software and from the sale of specific software products.
Service fee income is earned through the sale of maintenance and technical
support, training, installation, and other professional services related to the
sale of Forgent's enterprise software. The Company allocates the total fee to
the various elements based on the relative fair values of the elements specific
to the Company. The Company determines the fair value of each element in the
arrangement based on vendor-specific objective evidence ("VSOE") of fair value.
When VSOE of fair value for the license element is not available, license
revenue is recognized using the residual method. Under the residual method, the
contract value is first allocated to the undelivered elements (maintenance and
service elements) based upon their VSOE of fair value; the remaining contract
value, including any discount, is allocated to the delivered element. For
maintenance, VSOE of fair value is based upon the renewal rate specified in each
contract. For training and installation services, VSOE of fair value is based
upon the rates charged for these services when sold separately. Revenue
allocated to maintenance and technical support is recognized ratably over the
maintenance term (typically one year). Revenue allocated to installation and
training is recognized upon completion of these services due to their short-term
nature. The Company's training and installation services are not essential to
the functionality of its products as (1) such services are available from other
vendors and (2) the Company has sufficient experience in providing such
services. For instances in which VSOE cannot be determined for undelivered
elements, and these undelivered elements do not provide significant
customization or modification of its software product, Forgent recognizes the
entire contract amount ratably over the period during which the services are
expected to be performed.
Intellectual property licensing revenue is derived from the Company's
Patent Licensing Program, which is currently focused on generating license
revenues relating to the Company's data compression technology embodied in U.S.
Patent No. 4,698,672, and its foreign counterparts. Gross intellectual property
licensing revenue is recognized at the time a license agreement has been
executed and related costs are recorded as cost of sales. The cost of sales on
the intellectual property licensing business relates to the legal fees incurred
on successfully achieving signed agreements. The contingent legal fees are based
on a percentage of the licensing revenues received on signed agreements and are
paid to Jenkens & Gilchrist, a national law firm. The percentage payment to
Jenkens & Gilchrist was set based on a sliding scale that began during the
quarter ended April 30, 2002 at 35% and increased to 50% based on the aggregate
recoveries achieved. Future percentage payments will be 50% of license receipts
per the agreement with Jenkens & Gilchrist.
Other revenue consists of integration services. Integration revenues
consist of network consulting to assist customers with their video networking
requirements, including baseline audits, preparation of capacity plans,
development of time-saving migration and implementation plans, and customized
integration of the Company's software with existing third-party applications or
with customers' proprietary in-house applications. Integration revenues are
recognized after the customized systems have been tested, installed, and the
Company has no significant further obligations as evidenced by acceptance from
the customer.
Deferred revenue includes amounts received from customers in excess of
revenue recognized, and is comprised of deferred maintenance, service and other
revenue. Deferred revenues are recognized in the Consolidated Statement of
Operations over the terms of the arrangements, primarily ranging from one to
three years.
41
FORGENT NETWORKS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA OR OTHERWISE NOTED)
CREDIT POLICY
The Company reviews potential customers' credit ratings to evaluate
customers' ability to pay an obligation within the payment term, which is
usually net thirty days. When payment is reasonably assured, and no known
barriers exist to legally enforcing the payment, the Company extends credit to
customers, not to exceed 10% of their net worth. An account is placed on "Credit
Hold" if it is thirty days past due or if a placed order exceeds the credit
limit, and may be placed on "Credit Hold" sooner if circumstances warrant. The
Company follows its credit policy consistently and constantly monitors all of
its delinquent accounts for indications of uncollectibility.
SOFTWARE DEVELOPMENT COSTS
Costs incurred in connection with the development of software products
are accounted for in accordance with Statement of Financial Accounting Standards
("SFAS") No. 86, "Accounting for the Costs of Computer Software to Be Sold,
Leased or Otherwise Marketed." Costs incurred prior to the establishment of
technological feasibility are charged to research and development expense.
Software development costs are capitalized after a product is determined to be
technologically feasible and is in the process of being developed for market.
Amortization of capitalized software begins upon initial product shipment.
Software development costs are amortized over the estimated life of the related
product (generally thirty-six months), using the straight-line method.
The Company capitalized internal software development costs of $617,
$3,473, and $2,814 for the years ended July 31, 2001, 2002, and 2003,
respectively. No amortization of such costs was recorded for the year ended July
31, 2001. Amortization of capitalized software development costs for the years
ended July 31, 2002 and 2003 was $552 and $1,524, respectively. All the
amortization of capitalized software development costs was charged to cost of
sales for software and professional services.
During the year ended July 31, 2002, management made the decision to
discontinue further development efforts of a software project, and abandoned the
project previously capitalized. The resulting charge of $2,381 was included as a
component of cost of sales during the year ended July 31, 2002. No capitalized
software development costs were impaired for the years ended July 31, 2001 or
July 31, 2003.
CASH AND EQUIVALENTS
Cash and equivalents include cash and investments in highly liquid
investments with an original maturity of three months or less when purchased. As
of July 31, 2003, the Company holds $730 in certificates of deposit to secure
its note payable to Silicon Valley Bank and one capital lease.
SHORT-TERM INVESTMENTS
Short-term investments are carried at market value. Short-term
investments consist of funds primarily invested in mortgage-backed securities
guaranteed by the U.S. government, government securities, and commercial paper,
and all mature within one year of July 31, 2002 and 2003. The carrying amounts
of the Company's short-term investments at July 31, 2002 and 2003 are as
follows:
2002 2003
----------------------- ---------------------
MARKET MARKET
COST VALUE COST VALUE
-------- -------- ------- --------
Corporate obligations................. $ 722 $ 722 $ 1,644 $ 1,644
Other ............................. 1,993 1,993 2,201 2,201
-------- -------- ------- --------
$ 2,715 $ 2,715 $ 3,845 $ 3,845
======== ======== ======= ========
The Company accounts for investment securities under SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." SFAS No. 115
requires investment securities to be classified as held-to-maturity, trading or
available-for-sale based on the characteristics of the securities and the
activity in the investment
42
FORGENT NETWORKS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA OR OTHERWISE NOTED)
portfolio. At July 31, 2002 and July 31, 2003, all investment securities are
classified as available-for-sale. The Company specifically identifies its
short-term investments and uses the cost of the investments as the basis for
recording unrealized gains and losses as part of other comprehensive income on
the Consolidated Balance Sheet and for recording realized gains and losses as
part of other income and expenses on the Consolidated Statements of Operations.
As of July 31, 2002 and July 31, 2003, the Company did not have any unrealized
gains or losses on available-for-sale securities. The Company realized $6,514,
$1,670, and $0 in related gains during the years ended July 31, 2001, 2002, and
2003 respectively.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company maintains an allowance for doubtful accounts to estimate
losses from uncollectable customer accounts receivables. This estimate is based
in the aggregate, on historical collection experience, age of receivables and
general economic conditions. It also considers individual customers' payment
experience, credit-worthiness and age of receivable balances.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Internal support equipment
is video teleconferencing equipment used internally for purposes such as sales
and marketing demonstrations, Company meetings, testing, troubleshooting
customer problems, and engineering, and is recorded at manufactured cost, if the
Company manufactured the asset or is recorded at cost, if purchased.
Depreciation and amortization are recorded using the straight-line method over
the estimated economic useful lives of the assets, which range from two to eight
years, over the lease term, or over the life of the improvement of the
respective assets, as applicable. Repair and maintenance costs are expensed as
incurred. The Company periodically reviews the estimated economic useful lives
of its property and equipment and makes adjustments, if necessary, according to
the latest information available.
INTANGIBLE ASSETS
Intangible assets include the goodwill that resulted from various
acquisitions by the Company. Amortization periods for the intangible assets
associated with these acquisitions range from 8 to 15 years. In March 1999, the
Company acquired substantially all of the assets of Vosaic LLP, an Internet
video software and technology company. Amortization expenses were $0.1 million
in fiscal year 2001. The amortization expenses relate to the amortization of
goodwill resulting from this acquisition. Accumulated amortization of all
goodwill was $6,192 at July 31, 2001.
Effective August 1, 2001, the Company chose early adoption of SFAS No.
142, "Goodwill and Other Intangibles Assets," which recognizes that since
goodwill and certain intangible assets may have indefinite useful lives, these
assets are no longer required to be amortized but are to be evaluated at least
annually for impairment. In accordance with SFAS No. 142, the Company is
required to complete its transitional impairment test, with any resulting
impairment loss recorded as a cumulative effect of a change in accounting
principle. Subsequent impairment losses are reflected in operating income from
continuing operations on the Consolidated Statement of Operations. As a result
of adopting of SFAS No. 142, the Company did not record any goodwill
amortization expenses during the years ended July 31, 2002 and 2003.
Additionally, as a result of the transitional impairment test, the Company did
not record any impairment of its goodwill for the year ended July 31, 2002.
During the third fiscal quarter of 2003, Forgent believed that the
ongoing difficult economic environment and its associated negative impact on the
Company's software business represented an indicator of a possible impairment on
the Company's software business. Therefore, the Company was required to perform
an impairment analysis in accordance with SFAS No. 142 to determine the fair
value of the assets and liabilities of its software business. As a result of
this analysis, Forgent recorded a $1,331 impairment of its goodwill related to
its acquisition of GSS. This impairment was recorded as part of continuing
operations on the Company's Consolidated Statement of Operations.
43
FORGENT NETWORKS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA OR OTHERWISE NOTED)
FOREIGN CURRENCY TRANSLATION
The financial statements of the Company's foreign subsidiaries are
measured using the local currency as the functional currency. Accordingly, the
assets and liabilities of the subsidiaries are translated at current rates of
exchange at the balance sheet date. The resulting gains or losses from
translation are included in a separate component of stockholders' equity. Income
and expense from the subsidiaries are translated using monthly average exchange
rates.
INCOME TAXES
The Company accounts for income taxes under SFAS No. 109, "Accounting
for Income Taxes," which requires the liability method of accounting for income
taxes. Under the liability method, deferred taxes are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse.
CONCENTRATION OF CREDIT RISK
The Company sells its enterprise software and services to various
companies across several industries, including third-party resellers. The
Company performs ongoing credit evaluations of its customers and maintains
reserves for potential credit losses. The Company requires advanced payments or
secured transactions when deemed necessary.
Forgent's Patent Licensing Program involves risks inherent in licensing
intellectual property, including risks of protracted delays, possible legal
challenges that would lead to disruption or curtailment of the licensing
program, increasing expenditures associated with pursuit of the program, and
other risks that could adversely affect the Company's licensing program.
Additionally, the U.S. patent, which has generated the intellectual property
licensing revenues, expires in October 2006 and its foreign counterparts expire
in September 2007. Thus, there can be no assurance that the Company will be able
to continue to effectively license its technology to other companies.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of short-term investments and notes payable
approximates fair value because of the short maturity and nature of these
instruments. The Company places its cash investment in quality financial
instruments and limits the amount invested in any one institution or in any type
of instrument. The Company has not experienced any significant losses on its
investments.
LONG-LIVED ASSETS
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supercedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," as well as the accounting and reporting provisions
relating to the disposal of a segment of a business as required by Accounting
Principles Board No. 30. Effective August 1, 2002, the Company adopted SFAS No.
144, which did not have a significant impact on its financial statements.
EMPLOYEE STOCK PLANS
The Company determines the fair value of grants of stock, stock options
and other equity instruments issued to employees in accordance with SFAS No.
123, "Accounting and Disclosure of Stock-Based Compensation," which was amended
by SFAS No. 148, "Accounting for Stock-Based Compensation--Transition and
Disclosure." SFAS No. 123 encourages, but does not require, companies to
recognize compensation expense for grants of stock, stock options, and other
equity instruments to employees based on their estimated fair market value on
the date of grant. SFAS No. 148 provides alternative methods of transition for a
voluntary change to a fair value based method of accounting for stock-based
compensation. As allowed by SFAS No. 123, the Company has opted to continue to
apply the existing accounting rules contained in APB No. 25, "Accounting for
Stock Issued to
44
FORGENT NETWORKS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA OR OTHERWISE NOTED)
Employees." SFAS No. 123 and SFAS No. 148 have had no effect on the Company's
financial position or results of operations.
The Company records unearned compensation related to equity instruments
that are issued at prices which are below the fair market value of the
underlying stock on the measurement date. Such unearned compensation is
amortized ratably over the vesting period of the related equity instruments.
The Company applies APB No. 25 and related interpretations in
accounting for its stock option plans for grants to employees. Accordingly, no
compensation cost is recognized for its stock option plans unless options are
issued at exercise prices that are below the market price on the measurement
date. Had compensation cost for the Company's stock option plans been determined
based on the fair market value at the grant dates for awards under those plans
consistent with the fair value method, the Company's net (loss) income per share
would have been reflected by the following pro forma amounts for the years ended
July 31, 2001, 2002 and 2003:
2001 2002 2003
Net (loss) income
Net (loss) income as reported $ (32,540) $ (6,103) $ 8,020
Add: Stock-based employee compensation
expense included in reported net (loss)
income, net of related tax effects
$ - $ - $ 11
Deduct: Stock-based employee compensation
expense determined under fair value-based method
for all awards, net of related tax effects $ (2,931) $ (1,664) $ (2,178)
Pro forma (loss) income $ (35,471) $ (7,767) $ 5,853
Basic (loss) income per common share:
As reported $ (1.31) $ (0.25) $ 0.33
Pro forma (1.43) $ (0.31) $ 0.24
Diluted (loss) income per common share:
As reported $ (1.31) $ (0.25) $ 0.32
Pro forma $ (1.43) $ (0.31) $ 0.23
The pro forma effect on net (loss) income for 2001, 2002, and 2003 is
not representative of the pro forma effect on net (loss) income in future years
because it does not take into consideration pro forma compensation expense
related to grants issued prior to 1996.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants during the years ended July 31, 2001, 2002, and
2003:
2001 2002 2003
------------ ------------ ------------
Dividend yield............................................ -- -- --
Expected volatility....................................... 73.57% 78.87% 82.63%
Risk-free rate of return.................................. 4.95% 4.00% 3.27%
Expected life............................................. 7.41 years 5.84 years 6.60 years
45
FORGENT NETWORKS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA OR OTHERWISE NOTED)
RECENT ACCOUNTING PRONOUNCEMENTS
In April 2003, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities." The Statement amends and clarifies accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities under SFAS No. 133 "Accounting for
Derivative Instruments and Hedging Activities." This Statement is effective for
contracts entered into or modified after June 30, 2003, for hedging
relationships designated after June 30, 2003, and to certain preexisting
contracts. Forgent adopted the provisions of SFAS No. 149 effective the
beginning of the fourth quarter of fiscal year 2003. Forgent had no derivative
instruments as of July 31, 2003 or any hedging activities during the year ended
July 31, 2003. Thus, the adoption of SFAS No. 149 had no impact on the Company's
financial position or results of operations.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities," in an effort to expand upon and strengthen
existing accounting guidance that addresses when a company should include in its
financial statements the assets, liabilities and activities of another entity.
Interpretation 46 requires the primary beneficiary, an entity that is subject to
a majority of the risk of loss from the variable interest entity's ("VIE")
activity or is entitled to receive a majority of the VIE's residual returns or
both, to consolidate that VIE. The interpretation also requires disclosure about
VIEs that a company is not required to consolidate but in which it has a
significant variable interest. Interpretation 46 is effective for all new VIEs
created or acquired after January 31, 2003. For VIEs created prior to February
1, 2003, the provisions of Interpretation 46 must be applied for the first
interim or annual period beginning after June 15, 2003. The Company did not have
a variable interest in any VIEs as of July 31, 2003 and therefore does not
expect the adoption of these provisions to have a material impact on its
financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation--Transition and Disclosure", which amends SFAS No. 123,
"Accounting for Stock-Based Compensation". SFAS No. 148 provides alternative
methods of transition for a voluntary change to a fair value based method of
accounting for stock-based compensation. SFAS No. 148 also amends the disclosure
requirements of SFAS No. 123 to require additional disclosures in both annual
and interim financial statements regarding the effects of stock-based
compensation. Forgent adopted the disclosure provisions of SFAS No. 148
effective the beginning of the third quarter of fiscal year 2003. The adoption
of SFAS No. 148 had no impact on the Company's financial position or results of
operations.
In November 2002, the FASB reached a consensus on EITF Issue No. 00-21,
"Accounting for Revenue Arrangements with Multiple Deliverables" ("Issue
00-21"). Issue 00-21 sets out criteria for whether revenue can be recognized
separately from other deliverables in a multiple deliverable arrangement. The
criteria consider whether the delivered item has stand-alone value to the
customer, whether the fair value of the delivered item can be reliably
determined and the rights of returns for the delivered item. Forgent adopted
Issue 00-21 on August 1, 2003 and the adoption had no significant impact on the
Company's results of operations, financial position or cash flows.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS 146 addresses accounting for
restructuring costs and supersedes previous accounting guidance, principally
Emerging Issues Task Force ("EITF") No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires that the
liability associated with exit or disposal activities be recognized when the
liability is incurred. As a contrast under EITF 94-3, a liability for an exit
cost is recognized when a Company commits to an exit plan. SFAS No. 146 also
establishes that a liability should initially be measured and recorded at fair
value. Accordingly, SFAS No. 146 may affect the timing and amount of recognizing
restructuring costs. The Company adopted the provisions of this statement for
any restructuring activities initiated after December 31, 2002. No such
activities were initiated during the year ended July 31, 2003.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supercedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," as well as the accounting and reporting provisions
relating to the
46
FORGENT NETWORKS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA OR OTHERWISE NOTED)
disposal of a segment of a business as required by Accounting Principles Board
No. 30. Effective August 1, 2002, the Company adopted SFAS No. 144, which did
not have a significant impact on its financial statements.
3. DISCONTINUED OPERATIONS
On July 3, 2003, Forgent sold substantially all of the assets of its
videoconferencing hardware services business ("Services Business"), based in
King of Prussia, Pennsylvania, to an affiliate of Gores Technology Group
("Gores"), a privately held international acquisition and management firm. The
divestiture is a strategic move designed to enable Forgent to focus on growing
its enterprise software and professional services and its intellectual property
licensing businesses, increasing its cash balances, improving its overall gross
margin and reducing its operating expenses. The assets sold include accounts
receivable, inventory, fixed assets, certain prepaid assets, and goodwill. As
consideration for the sale of the Services Business, the Company received $7,350
in cash, which was net of a $400 transaction extension fee, and the assumption
of substantially all of the Services Business' liabilities, including deferred
maintenance revenue, identified accounts payable and capital lease obligations.
An additional $2,250 in cash has been held for possible purchase price
adjustments and indemnity claims. Funds held for purchase price adjustments
equal $1,250, $1,000 of which will remain in escrow for a period of 120 days
subsequent to July 3, 2003. These funds will be distributed to the Company
pursuant to the terms of the definitive purchase agreement and are adjusted if
the net assets transferred by the Company to Gores on July 3, 2003 are
determined to be less than $3,800 and/or the deferred revenue assumed by Gores
on July 3, 2003 is determined to be greater than $7,600. The indemnity escrow,
also consisting of $1,000, will remain in escrow for a period of 18 months
subsequent to July 3, 2003. Details of this transaction and other important
information are set forth in the Company's proxy statement for fiscal year 2002.
Although management does not anticipate any purchase price adjustments or
indemnity claims payable, Forgent cannot provide any assurances that it will
receive some or any of the held funds.
Forgent assigned its lease for approximately 6 thousand square feet of
office space in Kennesaw, Georgia to Gores, which was accepted by the landlord
with no further obligations by Forgent. This office space was utilized as a
sales office for the Services Business. Furthermore, Forgent did not remain
contingently liable for performance on existing contracts or future contracts
entered into by Gores. The Company does not have any continuing involvement in
the go-forward operations of the Services Business.
In connection with sale of the Services Business, Forgent and Gores
entered into a transition services agreement, whereby the Company will provide,
for a fee at actual cost, certain transition services for Gores related to the
assets acquired and liabilities assumed in the sale. Forgent and Gores also
entered into a reseller agreement, whereby Gores may resell the Company's
enterprise software products, and a co-marketing arrangement, whereby the
Company will receive a commission for referring videoconferencing related
service business to Gores. Gores retained approximately 70 employees employed by
the Services Business. Upon completion of the sale of the Services Business,
Forgent employed approximately 95 employees.
In April 2002, Forgent sold inventory and certain other assets related
to its integration business to SPL Integrated Solutions ("SPL"), a leading
nationwide integrator that designs and installs large-display videoconferencing
systems and fully integrated multimedia systems for corporations, educational
institutions and government agencies. As a result of the sale, Forgent received
$150 in cash and a $282 note receivable from SPL, which was fully paid as of
July 31, 2003. SPL absorbed 15 members of Forgent's Professional Services
Integration team and re-located to Forgent's videoconferencing hardware services
facility in King of Prussia, Pennsylvania, where the combined team of engineers
and technicians manage and execute the delivery of audio-video system
integration and support. The assets related to the integration business were
sold for approximately their net book value and thus an immaterial amount of
gain was recorded during the third quarter of fiscal 2002.
In January 2002, Forgent sold the operations and substantially all of
the assets of its products business segment, including the VTEL name, to VTEL
Products Corporation ("VTEL"), a privately held company created by the former
Vice-President of Manufacturing and two other senior management members of the
products business segment. As a result, the Company received cash of $500, a
90-day subordinated promissory note, bearing interest at an annual rate of five
percent, for $967, a 5-year subordinated promissory note, bearing interest at an
annual rate of
47
FORGENT NETWORKS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA OR OTHERWISE NOTED)
five percent, for $5,000 and 1,045 shares of common stock, par value $0.01 per
share, representing 19.9% of the new company's fully diluted equity.
Additionally, Forgent and VTEL entered into a general license agreement, in
which VTEL was granted certain non-exclusive rights in and to certain patents,
software, proprietary know-how, and information of the Company that was used in
the daily operations of the products business segment. The group of management
who purchased the products segment (now referred to as VTEL) put up $500 of
their own money at the closing. In addition, VTEL also received a $750 line of
credit from a bank, which was not guaranteed by Forgent. The facilities lease
was signed over to VTEL, which was accepted by the landlord with no further
obligations by Forgent. Furthermore, Forgent did not remain contingently liable
for performance on existing contracts or future contracts entered into by the
newly formed entity. The Company does not have any continuing involvement in the
go-forward operations of VTEL. It does not have veto power or any means to
exercise influence over the operations of that company. The Company has made no
guarantees with respect to any business matters as they relate to VTEL nor are
there any situations whereby the Company would be required to reassume any
obligations of VTEL.
Due to uncertainties regarding VTEL's future business, Forgent fully
reserved its equity interest in VTEL. VTEL did not remit payment on its first
subordinated promissory note due in April 2002, as stipulated in the sales
agreement. As a result of this default and due to the uncertainty in collecting
the two outstanding notes from VTEL, the Company recorded a $5,967 charge for
the reserve of both notes from VTEL for the year ended July 31, 2002. This
charge was accounted for as part of continuing operations on the Company's
Consolidated Statement of Operations. However, management is continuing its
efforts on collecting these outstanding notes receivables despite the low
probability of collection. Since the sale of the products business occurred
several months after it was originally anticipated to close, and since the
operations performed significantly worse than expected, an additional loss of
$8,171 was recorded to discontinued operations in fiscal year 2002. As of July
31, 2001, the Company estimated the loss from the disposal of the products
business segment to be $1,120. During the 2002 fiscal year, Forgent recorded an
additional $255 in expenses associated with the completion of the sale.
As a result of the sales of the videoconferencing hardware services,
integration and products businesses, the Company has presented these businesses
as discontinued operations on the accompanying consolidated financial
statements. The operating results of the videoconferencing hardware services,
integration and products businesses for the fiscal years ended July 31, 2001,
2002, and 2003 were as follows:
2001 2002 2003
--------- --------- ---------
Revenues from unaffiliated customers 85,488 41,548 14,824
(Loss) income from discontinued operations (26,410) (2,601) 599
The net assets from discontinued operations presented on the Consolidated
Balance Sheets were as follows:
2002 2003
------------ ------------
Current assets $ 5,100 $ -
Non-current assets 11,662 -
------------ ------------
16,762 -
------------ ------------
Current liabilities (8,629) -
Long-term liabilities (1,015) -
------------ ------------
(9,644) -
Total net assets from discontinued operations $ 7,118 $ -
============ ============
48
FORGENT NETWORKS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA OR OTHERWISE NOTED)
4. ASSET IMPAIRMENT
During the fiscal year ended July 31, 2003, Forgent recorded impairment
losses on the Consolidated Statement of Operations as follows:
FOR THE YEAR ENDED JULY 31, 2003
--------------------------------
(IN THOUSANDS)
CONTINUING DISCONTINUED TOTAL
OPERATIONS OPERATIONS IMPAIRMENT
---------- ---------- ----------
Property lease $ 502 $ 454 $ 956
Notes & interest receivables (693) (693)
Goodwill 1,331 - 1,331
---------- ---------- ----------
TOTAL IMPAIRMENT $ 1,140 $ 454 $ 1,594
========== ========== ==========
In November 2002, the GSS development operations in Atlanta, Georgia,
were relocated to Forgent's headquarters in Austin, Texas. Management was unable
to sublease the vacated space and upon review of the future undiscounted cash
flows related to this lease, management recorded an impairment charge of $21.
Additionally, management analyzed the discounted cash flows related to its Wild
Basin property lease and subleases over the remainder of the lease term.
Although Forgent was able to sublease the vacated space more quickly than
originally anticipated, the rates on the subleases were considerably less than
originally anticipated due to depressed current market rates. Therefore,
management calculated the economic value of the lost sublease rental income and
recorded an additional charge of $481. As of July 31, 2003, Forgent had $884
recorded as a liability on the Consolidated Balance Sheet related to its Wild
Basin property. Forgent remained obligated to make lease payments in accordance
with the original terms of both leases. Both the Atlanta and Wild Basin lease
impairments were recorded as part of continuing operations on the Company's
Consolidated Statement of Operations.
Forgent's discontinued integration and videoconferencing hardware
services businesses are located at its facilities in King of Prussia,
Pennsylvania, which leases approximately 41 thousand square feet. As a result of
the sale of Forgent's integration business, approximately 19% of the total lease
space was subleased to SPL, based on then current market values. As a result of
the sale of Forgent's videoconferencing hardware services business to Gores,
approximately 37% of the total lease space was subleased to Gores, based on
current market values. SPL, Gores, and another subtenant sublease 100% of the
total lease space. However, in October 2003, SPL's sublease terminated and the
subtenant vacated its leased space. Therefore, management reviewed the
undiscounted cash flows of this lease and the related subleases, determined the
economic value of the lost sublease rental income and recorded a one-time charge
of $454. Forgent remained obligated to make lease payments in accordance with
the original term of the lease. Since Forgent fully discontinued its operations
in King of Prussia, the lease impairment for this facility was recorded as part
of discontinued operations on the Company's Consolidated Statement of
Operations.
During the 2003 fiscal year, Forgent recorded $312 in accrued interest
on both outstanding notes receivable from VTEL Products Corporation ("VTEL") and
fully reserved the accrued interest. Management agreed with VTEL's management
during the first fiscal quarter of 2003 to offset Forgent's accounts payable to
VTEL with its accounts receivable, notes receivable, and interest receivable
from VTEL. The Forgent liability was fully offset with the accounts receivable
and the accrued interest and partially offset with the note in default, thus
relieving $693 of the related reserves. Since the initial $5,967 charge to
reserve the VTEL notes receivable were reported as part of the asset impairment
from continuing operations, the related reduction of the reserves is also
reported as part of the asset impairment from continuing operations. No cash was
exchanged with these transactions.
Additionally, the ongoing difficult economic environment and its
associated negative impact on the Company's software business during fiscal year
2003 represented an indicator of a possible impairment on the Company's software
business. Therefore, the Company was required to perform an impairment analysis
in accordance with Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" to determine the fair value of the assets
and liabilities of its software business. As a result of this analysis, Forgent
49
FORGENT NETWORKS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA OR OTHERWISE NOTED)
recorded a $1,331 impairment of its goodwill related to its acquisition of GSS.
This impairment was recorded as part of continuing operations on the Company's
Consolidated Statement of Operations.
During the fiscal year ended July 31, 2002, Forgent recorded impairment
losses on the Consolidated Statement of Operations as follows:
FOR THE YEAR ENDED JULY 31, 2002
--------------------------------
(IN THOUSANDS)
CONTINUING DISCONTINUED TOTAL
OPERATIONS OPERATIONS IMPAIRMENT
---------- ---------- ----------
Property lease $ 2,063 $ - $ 2,063
Notes receivable 5,967 - 5,967
---------- ---------- ----------
IMPAIRMENT IN OPERATING EXPENSES 8,030 - 8,030
========== ========== ==========
Capitalized software 2,381 - 2,381
---------- ---------- ----------
TOTAL IMPAIRMENT $ 10,411 $ - $ 10,411
========== ========== ==========
Due to the disposition of the Products business in fiscal year 2002,
the VTEL personnel relocated from Forgent's headquarters at 108 Wild Basin Road
in Austin, Texas to VTEL's headquarters at 9208 Waterford Centre Blvd. in
Austin, Texas. This relocation left a vacancy of approximately 52 thousand
rentable square feet, or 38% of the total lease space. Additionally, Forgent had
existing unoccupied space inventory due to the downsizing of the Company
relating to its restructurings. In fiscal year 2002, Forgent was able to
sublease some of the vacated space, but was unable to fully sublease the space
due to the economic downturn during the year. Therefore, management analyzed the
future undiscounted cash flows related to the lease on the Wild Basin property
and determined the economic value of the lost sublease rental income. As a
result, Forgent recorded a $2,063 impairment charge for the unleased space as of
July 31, 2002. However, Forgent remained obligated to make lease payments in
accordance with the original term of the lease. Additionally, Forgent received
two subordinated promissory notes from VTEL as a result of the sale of the
Products business. VTEL did not remit payment on its first subordinated
promissory note due in April 2002, as stipulated in the sales agreement. As a
result of this default and due to the uncertainty in collecting both of the
outstanding notes from VTEL, the Company recorded a $5,967 charge for the
reserve of both notes from VTEL for the year ended July 31, 2002. These
impairments were reported as part of continuing operations on the Consolidated
Statement of Operations.
The Company's OnScreen24(TM) operations, which were folded back into
Forgent's core operations in January 2001, developed a video streaming
technology, which is a server application with the abilities to create video
e-mail programs and to store streamed video for later non-real time playback.
Initially, management intended to leverage these efforts and further develop
this technology as an added feature to its VNP software. Based upon customer
feedback regarding the VNP software during fiscal year 2002, customers did not
need advanced features but desired fundamental network management applications
with more robust device level support and valued added network level
instrumentation for ISDN and IP networks to enable them to understand and
monitor how well their networks were performing. Therefore, management
determined the video streaming technology would not be used in the development
of VNP. As a result, the $2,381 capitalized software development costs
associated with this technology was impaired during the year ended July 31, 2002
and was reported as part of cost of sales.
During fiscal year 2001 management implemented a strategy to divest all
non-core operations to focus on returning to profitability. Therefore, the
Company folded its OnScreen24 subsidiary's operations back into the core
business. OnScreen24 primarily operated from Forgent's property in Sunnyvale,
California. During the third quarter of fiscal 2001, the Company sold its equity
interest in the real estate lease for $500 and recorded a related $1,147
impairment for the leasehold improvements at the Sunnyvale facility. The $1,147
impairment in fiscal 2001 was all related to continuing operations.
50
FORGENT NETWORKS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA OR OTHERWISE NOTED)
5. ACQUISITIONS
As approved by each company's board of directors, Forgent acquired
certain assets and liabilities in a purchase business combination structured as
an asset purchase of Global Scheduling Solutions, Inc., a global provider of
enterprise conference room scheduling and resource management solutions, on June
4, 2002. This business combination was completed in order for Forgent to expand
the quality and reach of its existing enterprise software sales and marketing
efforts and to acquire an enterprise scheduling software solution to complement
its Video Network Platform solution.
Forgent paid Global Scheduling Solutions, Inc. a combination of $3,750
in cash, $250 held in escrow for representations and warranties, $700 tied to
certain future contingent "earn-out" payments and the assumption of certain
liabilities. The $700 liability was dependent upon the purchased assets
generating a certain level of net revenue between April 2002 and September 2002.
The acquisition was accounted for as a purchase of assets. Accordingly, the
purchase price was allocated to the tangible and identifiable intangible assets
acquired based on their estimated fair values at the date of acquisition. Total
cost in excess of the tangible and intangible assets acquired of $5,229 was
recorded as goodwill. The following table shows the amounts assigned to each
major asset and liability class as of the date of acquisition:
Accounts Receivable $ 269
Software 100
Computers & Equipment 22
Goodwill 5,229
-------
TOTAL ASSETS $ 5,620
=======
Accounts Payable $ 577
Accrued Liabilities 92
Deferred Revenue 251
-------
TOTAL LIABILITIES $ 920
=======
During the 2003 fiscal year, management settled the $700 contingent
liability and paid Global Scheduling Solutions, Inc. $375. As part of the
settlement, the $250 held in escrow was relieved. Therefore, the related
goodwill was adjusted for the remaining contingent liability of $325 and the
$250 escrow. Additionally, the related goodwill was adjusted for $55 as a result
of finalizing the valuation of the assets acquired and liabilities assumed. As
of January 31, 2003, the Company no longer had any liabilities owed to Global
Scheduling Solutions, Inc.
6. RESTRUCTURING ACTIVITIES
In August 2001, the Company restructured its organization, which
involved the termination of 65 employees, or 17% of the workforce, who were
assisted with outplacement support and severance. The reduction affected 16
employees in Austin, Texas, 30 employees in King of Prussia, Pennsylvania, and
19 employees in remote and international locations. The restructuring was the
result of eliminating certain business elements that did not contribute to
Forgent's core competencies at that time as well as efforts to increase
efficiencies and to significantly reduce administrative costs. All of the
employees were terminated and the Company recorded a one-time charge of $818 in
the first quarter of fiscal 2002 for the restructuring. This charge is included
in the loss from discontinued operations on the Consolidated Statement of
Operations. As of July 31, 2002, all of the involuntary termination benefits had
been paid.
7. SALE OF ACCOUNTS RECEIVABLE
During fiscal 2002, the Company sold $9,279 of its outstanding accounts
receivable, without any recourse, in efforts to recapture cash balances lost due
primarily to an unanticipated significant drop in sales from discontinued
operations and the remaining payments of outstanding payables related to the
discontinued operations. Silicon Valley Bank purchased the assets at face value,
less a fee of approximately 1.8% of the value of the accounts receivable sold
and a one-time set-up fee of $13. The Company received proceeds from Silicon
Valley Bank of $9,100.
51
FORGENT NETWORKS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA OR OTHERWISE NOTED)
Under the provisions of SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," which Forgent
adopted as of January 31, 2002, a transfer of receivables may be accounted for
as a sale if the following three conditions are met: (1) the transferred assets
are isolated from the transferor, (2) the transferee has the right to pledge or
sell the transferred assets, and (3) the transferor does not maintain control
over the transferred assets. Accordingly, the Company recorded the transfer of
the accounts receivable as a sale of asset, excluded the related receivables
from the Consolidated Balance Sheet and recorded related expenses of $178 for
the year ended July 31, 2002. Excluding the accounts receivable sold as part of
the divestiture of the videoconferencing hardware services business (see Note
3), no other accounts receivable were sold during the year ended July 31, 2003.
8. INTANGIBLE ASSETS
Effective August 1, 2001, the Company chose early adoption of SFAS No.
142, "Goodwill and Other Intangibles Assets," which recognizes that since
goodwill and certain intangible assets may have indefinite useful lives, these
assets are no longer required to be amortized but are to be evaluated at least
annually for impairment. In accordance with SFAS No. 142, the Company was
required to complete its transitional impairment test, with any resulting
impairment loss recorded as a cumulative effect of a change in accounting
principle. Subsequent impairment losses are reflected in operating income from
continuing operations on the Consolidated Statement of Operations. As a result
of adopting of SFAS No. 142, the Company did not record any goodwill
amortization expenses during the years ended July 31, 2002 and 2003.
Amortization expenses were $146 in fiscal year 2001. In March 1999, the
Company acquired substantially all of the assets of Vosaic LLP, an Internet
video software and technology company. The amortization expenses relate to the
amortization of goodwill resulting from this acquisition. As required by SFAS
No. 142, the results for the prior year have not been restated. A reconciliation
of the previously reported net loss and earnings per share as if SFAS No. 142
had been adopted is presented as follows:
2001 2002 2003
Reported net (loss) income $ (32,540) $ (6,103) $ 8,020
Add back goodwill amortization 146 -- --
----------------------------------------
Adjusted net (loss) income $ (32,394) $ (6,103) $ 8,020
========================================
Basic earnings per share:
As reported $ (1.31) $ (0.25) $ 0.33
Goodwill amortization 0.01 -- --
----------------------------------------
Adjusted earnings per share $ (1.30) $ (0.25) $ 0.33
========================================
Diluted earnings per share:
As reported $ (1.31) $ (0.25) $ 0.32
Goodwill amortization 0.01 -- --
----------------------------------------
Adjusted earnings per share $ (1.30) $ (0.25) $ 0.32
========================================
52
FORGENT NETWORKS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA OR OTHERWISE NOTED)
9. PROPERTY AND EQUIPMENT
Property and equipment and related depreciable useful lives are
composed of the following:
JULY 31,
------------------------
2002 2003
--------- ----------
Furniture and equipment: 2-5 years $ 6,404 $ 3,070
Internal support equipment: 2-4 years 868 626
Capital leases: lease term or life of the asset 389 410
Leasehold improvements: lease term or life of the improvement 2,309 2,207
--------- ----------
9,970 6,313
Less accumulated depreciation (6,959) (4,155)
--------- ----------
$ 3,011 $ 2,158
========= ==========
The amortization of the capital leases is recorded as depreciation
expense on the Consolidated Statements of Operations. Depreciation and
amortization expense relating to property and equipment was approximately
$3,783, $1,477 and $1,061 for the years ended July 31, 2001, 2002 and 2003,
respectively.
10. NOTES PAYABLE
Notes payable at July 31, 2003 consist of the following:
2002 2003
-------- --------
Note payable to Silicon Valley Bank in monthly installments
through July 2006, bearing interest at prime plus 0.75% $ 499 $ 646
Note payable to Global Scheduling Solutions, Inc. subject to
"earn-out" provisions through October 31, 2002, bearing no
interest 700 --
-------- --------
1,199 646
Less: current maturities (899) (323)
-------- --------
Long-term notes payable $ 300 $ 323
======== ========
The note payable to Silicon Valley Bank is secured by a certificate of
deposit equal to the $646 balance due as of July 31, 2003.
11. STOCKHOLDERS' EQUITY
SHARE REPURCHASE PROGRAM
During fiscal years 2002 and 2003, the Company repurchased 788 and 709
shares of its Common Stock for $2,749 and $1,374, respectively. These purchased
shares remained in treasury as of the end of fiscal year 2003. The repurchase of
stock resulted in an increase in loss per share of $0.01 in fiscal year 2002 and
an increase in income per share of $0.02 in fiscal year 2003.
STOCK AND STOCK OPTION PLANS
Forgent has three stock option plans, the 1989 Stock Option Plan (the
"1989 Plan"), the 1996 Stock Option Plan (the "1996 Plan") and the 1992 Director
Stock Option Plan (the "1992 Plan"). The 1989 Plan and the 1996 Plan both
provide for the issuance of non-qualified and incentive stock options to
employees and consultants of the Company. Stock options are generally granted at
the fair market value at the time of grant, and the options generally vest
ratably over 48 months and are exercisable for a period of ten years beginning
with date of grant. Effective June 1999, the 1989 Plan expired whereby the
Company can no longer grant options under the 1989 Plan; however,
53
FORGENT NETWORKS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA OR OTHERWISE NOTED)
options previously granted remain outstanding. The 1992 Plan provides for the
issuance of stock options to non-employee directors at the fair market value at
the time of grant. Such options vest ratably over 36 months and are exercisable
for a period of ten years beginning with the date of the grant. Total
compensation expense recognized in the Consolidated Statements of Operations for
stock based awards was $4, $106, and $216 thousand for fiscal years ending July
31, 2001, 2002, and 2003.
As of July 31, 2003, Forgent had reserved shares of common stock for
future issuance under the 1989, 1992 and 1996 Plans as follows:
Options Outstanding 4,268
Options available for future grant 718
=====
Shares reserved 4,986
The following table summarizes activity under all Plans for the years
ended July 31, 2001, 2002, and 2003.
2001 2002 2003
-------- -------- --------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE
(000'S) PRICE (000'S) PRICE (000'S) PRICE
-------- ------- -------- ------- --------
Outstanding at the
beginning of the year......... 3,999 $ 5.39 3,613 $ 4.45 3,697 $ 3.95
Granted..................... 1,527 1.29 2,637 3.28 1,825 1.97
Exercised................... (3) 1.10 (593) 1.83 (169) 1.69
Canceled.................... (1,910) 3.88 (1,956) 4.63 (1,085) 5.69
-------- ------- ------- ------- ---------
Outstanding at the end of
the year 3,613 $ 4.45 3,701 $ 3.94 4,268 $ 2.76
====== ======= =======
Options exercisable at the
year end 3,563 $ 4.47 3,644 $ 3.95 4,184 $ 2.77
====== ======= =======
Weighted average fair value
of options granted during
the year $ 0.95 $ 2.19 $ 1.97
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- ---------------------------
WEIGHTED-
NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED-
OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
RANGE OF AT CONTRACTUAL EXERCISE AT EXERCISE
EXERCISE PRICES JULY 31, 2003 LIFE PRICE JULY 31, 2003 PRICE
- ----------------- ------------- ----------- --------- ------------- ---------
$ 0.88 -- $ 1.60 682 8.10 years $ 1.28 636 $ 1.28
1.61 -- 1.61 1,039 9.21 1.61 1,039 1.61
1.66 -- 3.04 1,150 8.61 2.74 1,125 2.77
3.10 -- 4.00 890 8.65 3.71 877 3.71
4.01 -- 20.56 507 6.27 5.44 507 5.44
- ----------------- ------------- ----------- --------- ------------- ---------
$ 0.88 -- $20.56 4,268 8.41 $ 2.76 4,184 $ 2.77
================= ============= =========== ========= ============= =========
54
FORGENT NETWORKS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA OR OTHERWISE NOTED)
Generally, options are exercisable immediately upon grant. However,
stock issued upon exercise of a stock option is subject to repurchase by the
Company at the exercise price until the option vesting period has elapsed. At
July 31, 2003, options to purchase 1,960 shares were vested. At July 31, 2003,
no unvested options had been exercised.
EMPLOYEE STOCK PURCHASE PLAN
On April 29, 1993, Forgent adopted an Employee Stock Purchase Plan
("Employee Plan"), which enables all employees to acquire Forgent stock under
the plan. The Employee Plan authorizes the issuance of up to 1,350 shares of
Forgent's Common Stock. The Employee Plan allows participants to purchase shares
of the Company's Common Stock at a price equal to the lesser of (a) 85% of the
fair market value of the Common Stock on the date of the grant of the option or
(b) 85% of the fair market value of the Common Stock at the time of exercise.
Common Stock issued under the Employee Plan totaled 103 shares, 99 shares, and
178 shares, respectively, for the years ended July 31, 2001, 2002, and 2003.
RESTRICTED STOCK PLAN
On December 17, 1998, the Company adopted a restricted stock plan (the
"1998 Plan"). The 1998 Plan authorizes the issuance of up to one million shares
of Forgent's Common Stock to be used to reward, incent and retain employees.
During fiscal year 2003 the Company issued 19 shares under the 1998 plan with a
weighted-average grant date fair market value of $1.94 and resulting in $36 of
expense during the year ended July 31, 2003. During fiscal year 2002 the Company
issued 115 shares under the 1998 plan with a weighted-average grant date fair
market value of $2.64 and resulting in $85 of expense during the year ended July
31, 2002. No shares were issued under the 1998 Plan in fiscal year 2001.
MODIFICATIONS TO OPTIONS
On July 18, 2002, the Company modified the change of control agreements
of certain officers of the Company. The original option agreements accelerated
the vesting schedule of the officers' unvested options three months for every
year of employment in the event of a change of control as defined in the plan.
The modified agreements vest all unvested options upon a change of control,
regardless of length of service. As of July 18, 2002, the potential charge
related to this modification was approximately $591 and will be recognized upon
a change of control. As there is no pending or anticipated change of control
event, the Company has not recognized a charge. In addition, the maximum
severance allowed under the agreements was reduced from 1.8 times annual salary
to 1.0 times annual salary.
12. DEFINED CONTRIBUTION PLAN
The Company sponsors a defined contribution 401(k) plan that is
available to substantially all employees. The plan may be amended or terminated
at any time by the Board of Directors. The Company, although not required to,
has provided matching contributions to the plan of $57, $135 and $83 for the
years ended July 31, 2003, July 31, 2002, and July 31, 2001, respectively. These
contributions were recorded as expense in the Consolidated Statement of
Operations.
13. REVENUE CONCENTRATION
Thirty-five percent of the Company's total revenue for the year ended
July 31, 2003 was generated by one-time intellectual property license agreements
with three companies. Fifty-three percent of the Company's total revenue for the
year ended July 31, 2002 was generated by one-time intellectual property license
agreements with two companies. While the Company does not anticipate any
additional intellectual property revenue from these companies, it continues to
actively seek licenses with other users of its technology. Additionally, the
U.S. patent, which has generated the licensing revenues, expires in October 2006
and its foreign counterparts expire in September 2007.
55
FORGENT NETWORKS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA OR OTHERWISE NOTED)
14. EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted
earnings (loss) per common share for the years ended July 31, 2001, 2002 and
2003. Approximately 2,613 options, 3,701 options and 2,596 options in fiscal
2001, 2002 and 2003, respectively were not included in the computation of the
dilutive stock options because the effect of such options would be
anti-dilutive.
2001 2002 2003
-------- -------- --------
Weighted average shares outstanding - basic 24,878 24,814 24,660
Effect of dilutive stock options -- -- 541
-------- -------- --------
Weighted average shares outstanding - diluted 24,878 24,814 25,201
======== ======== ========
Basic (loss) income earnings per share -- from continuing operations $ (0.20) $ (0.13) $ 0.38
Basic loss per share -- from discontinued operations (1.11) (0.12) (0.05)
-------- -------- --------
Basic (loss) income earnings per share - total $ (1.31) $ (0.25) $ 0.33
======== ======== ========
Diluted (loss) income earnings per share -- from continuing
operations $ (0.20) $ (0.13) $ 0.37
Diluted loss per share -- from discontinued operations (1.11) (0.12) (0.05)
-------- -------- --------
Diluted (loss) income earnings per share - total $ (1.31) $ (0.25) $ 0.32
======== ======== ========
15. FEDERAL INCOME TAXES
The components of the provision (benefit) for income taxes attributable
to continuing operations are as follows for the years ended July 31, 2001, 2002
and 2003:
2001 2002 2003
-------- --------- --------
CURRENT:
Federal $ (257) $ (177) $ 126
State (47) -- --
------- -------- --------
Total current (304) (177) 126
DEFERRED:
Federal -- -- --
State -- -- --
------- --------- --------
Total deferred -- -- --
------- --------- --------
$ (304) $ (177) $ 126
======= ========= ========
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
56
FORGENT NETWORKS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA OR OTHERWISE NOTED)
components of the Company's deferred taxes at July 31, 2002 and 2003 are as
follows:
2002 2003
----------- ----------
DEFERRED TAX ASSETS:
Net operating loss carryforwards $ 54,599 $ 51,012
Research and development credit carryforwards 6,089 6,174
Reserve on investment 2,208 2,087
Minimum tax credit carryforwards 110 280
Fixed assets -- 343
Inventory and warranty provisions 164 2
Charitable contributions 52 53
Compensation accruals 39 --
Deferred revenue 367 99
Allowance for receivables 239 --
Impaired assets 668 503
Other -- 248
----------- -----------
64,535 60,801
DEFERRED TAX LIABILITIES:
Capitalized software (1,499) (1,785)
Fixed assets (1,895) --
Other (111) --
----------- -----------
(3,505) (1,785)
----------- -----------
Net deferred tax assets 61,030 59,016
Valuation allowance (61,030) (59,016)
----------- -----------
Net deferred taxes $ -- $ --
=========== ===========
At July 31, 2003, the Company had federal net operating loss
carryforwards of approximately $138,000, research and development credit
carryforwards of approximately $6,173, and alternative minimum tax credit
carryforwards of approximately $280. The net operating loss and credit
carryforwards will expire in varying amounts from 2004 through 2021, if not
utilized. Minimum tax credit carryforwards do not expire and carry forward
indefinitely. Net operating losses related to the Company's foreign subsidiaries
of $6,384 are available to offset future foreign taxable income.
As a result of various acquisitions performed by the Company in prior
years, utilization of the net operating losses and credit carryforwards may be
subject to a substantial annual limitation due to the "change in ownership"
provisions of the Internal Revenue Code of 1986. The annual limitation may
result in the expiration of net operating losses before utilization.
Due to the uncertainty surrounding the timing of realizing the benefits
of its favorable tax attributes in future tax returns, the Company has placed a
valuation allowance against its net deferred tax asset. Accordingly, no deferred
tax benefits have been recorded for the tax years ended July 31, 2001, 2002, and
2003. The valuation allowance decreased by approximately $2,014 during the year
ended July 31, 2003. Approximately $7,858 of the valuation allowance relates to
tax benefits for stock option deductions included in the net operating loss
carryforward which, when realized, will be allocated directly to contributed
capital to the extent the benefits exceed amounts attributable to book deferred
compensation expense.
Undistributed earnings of the Company's foreign subsidiaries are
considered permanently reinvested and, accordingly, no provision for U.S.
federal or state income taxes has been provided thereon.
The Company's provision (benefit) for income taxes attributable to
continuing operations differs from the expected tax expense (benefit) amount
computed by applying the statutory federal income tax rate of 34% to income
before income taxes for the years ended July 31, 2001, 2002, and 2003 primarily
as a result of the following:
57
FORGENT NETWORKS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA OR OTHERWISE NOTED)
2001 2002 2003
---------- ---------- ----------
Computed at statuory rate $ (11,167) $ (2,221) $ 3,243
State taxes, net of federal benefit (824) (163) 257
Foreign losses not benefited 813 395 3
Permanent items 93 21 16
R&D and AMT credit generated (399) (287) (192)
Extraterritorial income benefit -- -- (340)
Tax carryforwards not previously benefited 11,180 2,078 (2,861)
---------- ---------- ----------
$ (304) $ (177) $ 126
========== ========== ==========
16. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
Forgent leases computers, furniture, equipment, and office space under
non-cancelable leases that expire at various dates through 2013. Certain leases
obligate Forgent to pay property taxes, maintenance and insurance. The Company
also has several capital leases for computer and office equipment. Additionally,
the Company used the proceeds from its notes payable to purchase computers and
various equipment.
Future minimum lease payments under all operating and capital leases,
and payments on its notes payable, as of July 31, 2003 are as follows:
OPERATING CAPITAL NOTES
LEASE LEASE PAYABLE
FISCAL YEAR ENDING: OBLIGATIONS OBLIGATIONS OBLIGATIONS
- -------------------------------------- ----------- ----------- -----------
2004 $ 4,349 $ 49 $ 351
2005 4,289 6 231
2006 4,156 -- 105
2007 3,447 -- --
2008 3,370 -- --
Thereafter 15,525 -- --
----------- ----------- -----------
TOTAL $ 35,136 $ 55 $ 687
=========== =========== ===========
Less amount representing interest (5) (41)
----------- -----------
Net present value of future minimum payments 50 646
Less current portion of obligations (44) (323)
----------- -----------
Long-term portion of obligations $ 6 $ 323
=========== ===========
The current portion of the capital lease obligations is included in
other accrued liabilities on the Consolidated Balance Sheet.
As part of the sale agreement of the products business segment, Forgent
assigned the lease for its former manufacturing facility in Austin, Texas to the
new company, VTEL Corporation, who assumed all obligations under the existing
lease. Therefore, these lease payments are excluded from the minimum operating
lease payments presented above. Similarly, the lease payments for the Company's
former service sales office in Kennesaw, Georgia are excluded from the minimum
operating lease payments since this lease was assigned to Gores as part of the
sale of the videoconferencing hardware services business. Gores assumed all
obligations under this existing lease. Forgent may periodically make other
commitments and thus become subject to other contractual obligations. However,
management believes these commitments and contractual obligations are routine in
nature and incidental to the Company's operations.
58
FORGENT NETWORKS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA OR OTHERWISE NOTED)
Total rent expense under all operating leases for the years ended July
31, 2001, 2002 and 2003 was $4,848, $3,497, and $1,399, respectively. During the
years ended July 31, 2001, 2002, and 2003, the Company received $920, $708, and
$585 respectively, in rental income under sub-leasing arrangements. These
amounts offset against rental expense in the Consolidated Statements of
Operations. At July 31, 2003, future minimum lease payments receivable under
non-cancelable sub-lease arrangements totaled $3,199 for all future years and
sub-tenant deposits totaled $141.
As of July 31, 2003, the Company had a $835 liability remaining on its
books related to a Tenant Improvement Allowance that was paid to the Company by
the landlord for its Wild Basin property in Austin, Texas. The liability is
amortized monthly as a reduction in rental expense over the life of the lease on
a straight-line basis. Approximately $748 of this liability is reported as part
of long-term liabilities on the Company's Consolidated Balance Sheet.
As of July 31, 2003, Forgent had a $1,360 liability related to
impairment charges for the economic value of the lost sublease rental income at
its properties in Austin, Texas, King of Prussia, Pennsylvania, and Atlanta,
Georgia. The liability is amortized monthly as a reduction in rental expense
based on the difference between the actual subtenant rental income and the
expected subtenant rental income. Approximately $593 of this liability is
reported as part of long-term liabilities on the Company's Consolidated Balance
Sheet.
CONTINGENCIES
The Company is the defendant or plaintiff in various actions that arose
in the normal course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse affect on the
Company's financial condition, results of operation or cash flows.
In late February 2003, the Company received a letter from legal counsel
for the independent executrix of the Estate of Gordon Matthews, asserting that
the Company was obligated to pay the independent executrix of the Estate of
Gordon Matthews for the asserted value of services claimed to have been rendered
by Mr. Matthews in connection with his alleged involvement in the Company's
Patent Licensing Program. In late February 2003, the Company initiated an action
in the 261st District Court in Travis County Texas, styled Forgent Networks,
Inc. v. Monika Matthews, et al, for the purposes of declaring that the Company
has no obligation to the defendant. In that action, the defendant has filed a
counter claim asserting that the independent executrix of the Estate of Gordon
Matthews is entitled to recover in quantum meruit for the reasonable value of
the work and services claimed to have been provided by Gordon Matthews, a former
member of the board of directors and consultant to the Company, which the
defendant asserts is at least $5.0 million. The Company does not believe the
counter claim has merit and intends to continue to vigorously pursue declaratory
relief from the court that no liability is due to the independent executrix of
the Estate of Gordon Matthews.
17. SEGMENT INFORMATION
In the past, Forgent managed its business primarily along the lines of
three reportable segments: Solutions, Products, and Internet Ventures. The
Solutions segment provided a wide variety of maintenance, network consulting and
support services to customers, and designed and installed custom integrated
visual communication systems primarily in meetings spaces of large corporations.
In April 2002, the Company sold its integration business within this segment and
in July 2003, the Company sold its videoconferencing hardware services business
within this segment. Thus, the entire Solutions segment is accounted for as
discontinued operations in the consolidated financial statements. The Products
segment designed, manufactured, and sold multi-media visual communication
products to customers primarily through a network of resellers, and to a lesser
extent directly to end-users. As a result of the sale of the Products segment in
January 2002, the Products segment is also accounted for as discontinued
operations in the consolidated financial statements. The Internet Ventures
included OnScreen24(TM), which delivered and marketed visual communication tools
for the Internet and ArticuLearn(TM), an e-learning portal provider for
commercial and educational businesses that delivered learning content in a web
environment. OnScreen24's operations were folded back into the core businesses
as of January 31, 2001 and ArticuLearn's operations were terminated as of June
30, 2001.
59
FORGENT NETWORKS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE DATA OR OTHERWISE NOTED)
Currently, the Company operates in two distinct segments: software and
professional services, and intellectual property licensing. Forgent's software
and professional services business provides customers with enterprise meeting
automation software as well as software customization, installation, training,
network consulting, hardware devices, and other comprehensive related services.
Forgent's intellectual property licensing business is currently focused on
generating licensing revenues relating to the Company's data compression
technology embodied in U.S. Patent No. 4,698,672 and its foreign counterparts.
The accounting policies of the segments are the same as those described in Note
2.
The Company evaluates the performance as well as the financial results
of its segments. Included in the segment operating income (loss) is an
allocation of certain corporate operating expenses. The prior years' segment
information has been restated to present the Company's reportable segments as
they are currently defined. The Company does not identify assets or capital
expenditures by reportable segments. Additionally, the Chief Executive Officer
and Chief Financial Officer do not evaluate the segments based on these
criteria.
Revenue and cost of sales for each of the reportable segments are
disclosed in the Consolidated Statements of Operations. Goodwill associated with
specific segments is as follows:
FOR THE YEARS JULY 31,
2002 2003
----------- -----------
Software and professional services $ 6,894 $ 5,042
Intellectual property licensing -- --
----------- -----------
Total $ 6,894 $ 5,042
=========== ===========
Revenue and long-lived assets related to operations in the United
States and foreign countries for the three fiscal years ended July 31, 2003 are
presented below. Revenues generated between foreign geographic locations have
historically been insignificant.
FOR THE YEARS ENDED JULY 31,
2001 2002 2003
-------- --------- ---------
Revenue from unaffiliated customers:
United States $ 103 $ 2,164 $ 5,894
Foreign -- 31,222 47,970
Long-lived assets at the end of year:
United States $ 9,745 $ 13,857 $ 12,257
Foreign -- -- --
60
FORGENT NETWORKS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA OR OTHERWISE NOTED)
18. QUARTERLY INFORMATION (UNAUDITED)
The following tables contain selected unaudited consolidated statements
of operations and earnings (loss) per share data for each quarter during fiscal
years 2003 and 2002.
FOR THE THREE MONTHS ENDED
OCT. 31, 2002 JAN. 31, 2003 APRIL 30, 2003 JULY 31, 2003
Total revenues, as reported $ 12,531 $ 12,501 $ 17,107 $ 24,301
Service revenue - discontinued operations in fourth
fiscal quarter of 2003 (4,723) (4,127) (3,726) -
-------- -------- -------- --------
Restated total revenues $ 7,808 $ 8,374 $ 13,381 $ 24,301
======== ======== ======== ========
Gross margin from continuing operations, as reported $ 5,186 $ 5,420 $ 7,297 $ 11,720
Service margin - discontinued operations in fourth
fiscal quarter of 2003 (1,600) (1,451) (1,014) -
-------- -------- -------- --------
Restated gross margin from continuing operations $ 3,586 $ 3,969 $ 6,283 $ 11,720
======== ======== ======== ========
Gross margin from discontinued operations 1,600 1,451 1,014 (195)
======== ======== ======== ========
Net income $ 925 $ 1,315 $ 1,723 $ 4,057
======== ======== ======== ========
Basic income per share $ 0.04 $ 0.05 $ 0.07 $ 0.17
======== ======== ======== ========
Diluted income per share $ 0.04 $ 0.05 $ 0.07 $ 0.16
======== ======== ======== ========
FOR THE THREE MONTHS ENDED
OCT. 31, 2001 JAN. 31, 2002 APRIL 30, 2002 JULY 31, 2002
Total revenues, as reported $ 6,668 $ 8,018 $ 22,317 $ 17,076
Service revenue - discontinued operations in fourth
fiscal quarter of 2003 (6,586) (7,643) (6,464) -
-------- -------- -------- --------
Restated total revenues $ 82 $ 375 $ 15,853 $ 17,076
======== ======== ======== ========
Gross margin from continuing operations, as reported $ 2,332 $ 762 $ 11,708 $ 8,350
Service margin - discontinued operations in fourth
fiscal quarter of 2003 (2,443) (3,189) (2,866) -
-------- -------- -------- --------
Restated gross margin from continuing operations $ (111) $ (2,427) $ 8,842 $ 8,350
======== ======== ======== ========
Gross margin from discontinued operations 6,114 4,364 2,887 1,181
======== ======== ======== ========
Net (loss) income $ (2,570) $ (8,553) $ 2,481 $ 2,539
======== ======== ======== ========
Basic (loss) income per share $ (0.10) $ (0.34) $ 0.10 $ 0.09
======== ======== ======== ========
Diluted (loss) income per share $ (0.10) $ (0.34) $ 0.10 $ 0.09
======== ======== ======== ========
19. SUBSEQUENT EVENT (UNAUDITED)
As approved by each company's board of directors and finalized on
October 6, 2003, Forgent acquired certain assets and the operations of Network
Simplicity Software Inc. ("Network Simplicity"), a privately held provider of
web-based scheduling solutions for the small to medium business market. Network
Simplicity's flagship product, Meeting Room Manager (TM), is a scheduling
application designed for the ease of use and rapid deployment across small to
medium sized businesses and complements Forgent's current ALLIANCE software
61
FORGENT NETWORKS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA OR OTHERWISE NOTED)
suite, which is focused on the high-end enterprises. Additionally, Network
Simplicity's distribution model is based on telesales and web-based sales, which
also complement ALLIANCE's direct distribution model. Forgent purchased Network
Simplicity for approximately $3,500, consisting of $1,800 in cash, $200 in
escrow for representations and warrants and $1,500 in payments tied to certain
future contingencies. Additionally, Forgent paid Network Simplicity
approximately $159 for its existing working capital as of October 6, 2003. This
acquisition allows the Company to extend its current enterprise software product
offerings and to expand its market opportunities into the small to medium
business market.
62
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company had no disagreements on accounting or financial disclosure
matters with its independent accountants to report under this Item 9.
ITEM 9A. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are
designed to ensure that information required to be disclosed in the reports it
files under the Securities and Exchange Act of 1934, as amended, is recorded,
processed, summarized, and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms. Such controls include
those designed to ensure that information for disclosure is communicated to
management, including the Chairman of the Board and the Chief Executive Officer
("CEO"), as appropriate to allow timely decisions regarding required disclosure.
The CEO and Chief Financial Officer, with the participation of
management, have evaluated the effectiveness of the Company's disclosure
controls and procedures as of July 31, 2003. Based on their evaluation, they
have concluded, to the best of their knowledge and belief, that the disclosure
controls and procedures are effective. No changes were made in the Company's
internal controls over financial reporting during the year ended July 31, 2003,
that have materially affected, or are reasonably likely to materially affect,
the Company's internal controls over financial reporting.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
63
Information contained under the caption "Election of Directors" in the
Proxy Statement is incorporated herein by reference in response to this Item 10.
See Item 1. "Business - Executive Officer" for information concerning executive
officers.
Information regarding Forgent's code of ethics contained under the
caption "Policies on Business Ethics and Conduct" in the Proxy Statement is
incorporated herein by reference in response to this Item 10.
Information regarding Forgent's Audit Committee Financial Expert is
contained under the caption "Report of the Audit Committee" in the Proxy
Statement is incorporated herein by reference in response to this Item 10.
ITEM 11. EXECUTIVE COMPENSATION
Information contained under the captions "Executive Compensation" and
"Election of Directors" in the Proxy Statement is incorporated herein by
reference in response to this Item 11.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information contained under the caption "Stock Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement is incorporated herein
by reference in response to this Item 12.
Information contained under the caption "Equity Compensation Plans" in
the Proxy Statement is incorporated herein by reference in response to this Item
12.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information contained under the caption "Certain Transactions" in the
Proxy Statement is incorporated herein by reference in response to this Item 13.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information contained under the caption "Fees" in the Proxy Statement
is incorporated herein by reference in response to this Item 14.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(1) The following Consolidated Financial Statements of the Company and
Report of Independent Accountants as set forth in Item 8 of this
report are filed herein.
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of July 31, 2002 and 2003.
Consolidated Statements of Operations for the years ended July 31,
2001, 2002, and 2003.
Consolidated Statements of Changes in Shareholders' Equity for the
years ended July 31, 2001, 2002, and 2003.
Consolidated Statements of Cash Flows for the years ended July 31,
2001, 2002, and 2003.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT AUDITORS
(2) All other schedules for which provision is made in the applicable
account regulation of the Securities and Exchange Commission are
either not required under the related instructions, are
inapplicable, or the required information is included elsewhere in
the Consolidated Financial Statements and incorporated herein by
reference.
(3) The exhibits filed in response to Item 601 of Regulations S-K are
listed in the Index to the Exhibits.
(4) The Company filed the following reports on Form 8-K:
64
On May 29, 2003, the registrant filed a report on Form 8-K
announcing its financial results for the quarter ended April
30, 2003.
On July 3, 2003 the registrant filed a report on Form 8-K
announcing the sale of its videoconferencing hardware services
business.
65
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.
FORGENT NETWORKS, INC.
October 29, 2003 By /s/ RICHARD N. SNYDER
----------------------------
Richard N. Snyder
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the Registrant
and in the capacities and on the date indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ RICHARD N. SNYDER Chief Executive Officer October 29, 2003
- -------------------------------- Chairman of the Board
Richard N. Snyder (Principal Executive Officer)
/s/ JAY C. PETERSON Chief Financial Officer October 29, 2003
- -------------------------------- Vice-President - Finance and Treasurer
Jay C. Peterson (Principal Financial Officer and
Principal Accounting Officer)
/s/ RICHARD AGNICH Director October 29, 2003
- --------------------------------
Richard Agnich
/s/ KATHLEEN A. COTE Director October 29, 2003
- --------------------------------
Kathleen A. Cote
/s/ LOU MAZZUCCHELI Director October 29, 2003
- --------------------------------
Lou Mazzuccheli
/s/ RAY MILES Director October 29, 2003
- --------------------------------
Ray Miles
/s/ JAMES H. WELLS Director October 29, 2003
- --------------------------------
James H. Wells
66
FORGENT NETWORKS, INC.
VALUATION AND QUALIFYING ACCOUNTS
SCHEDULE II
PROVISION
BALANCE FOR WRITE-OFF OF
AT DOUBTFUL UNCOLLECTIBLE BALANCE AT
BEGINNING ACCOUNTS ACCOUNTS END OF
OF YEAR RECEIVABLE RECEIVABLE YEAR
--------- ---------- ------------- -----------
(IN THOUSANDS)
Accounts receivable - Allowances for Doubtful accounts
Year ended July 31, 2001 888 468 (1) (267) (1) 1,089
Year ended July 31, 2002 1,089 1,355 (1) (1,629) (1) 815
Year ended July 31, 2003 815 460 (2) (1,275) (3) --
(1) All of the activity relates to Forgent's discontinued products, integration,
and videoconferencing hardware services operations.
(2) Approximately $51 of the provision for doubtful accounts receivable was
recorded as part of continuing operations and $409 of the provision for doubtful
accounts receivable was recorded as part of discontinued operations on the
Consolidated Statement of Operations.
(3) Approximately $703 of the write-offs relate to the Allowance for Doubtful
Accounts that was sold to Gores as part of the sale of the videoconferencing
hardware services business. None of the remaining $572 in write-offs relate to
Forgent's continuing software and professional services or intellectual property
operations.
INDEX TO EXHIBITS
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
- ------- -----------------------------------------------------------------------------------------------------------------
(a)(1) -- The financial statements filed as part of this Report at Item 8 are listed in the Index to Financial Statements
and Financial Statement Schedules on page 43 of this Report
(a)(2) -- The financial statement schedule filed as part of this Report at Item 8 is listed in the Index to Financial
Statements and Financial Statement Schedules on page 43 of this Report
(a)(3) -- The following exhibits are filed with this Annual Report on Form 10-K:
2.1 -- Agreement and Plan of Merger and Reorganization dated as of January 6, 1997 by and among VTEL, VTEL-Sub, Inc. and
CLI (incorporated by reference to the Exhibit 99.1 of VTEL's Report on Form 8-K dated January 6, 1997).
3.1 -- Fourth Amended Restated Certificate of Incorporation (incorporated by reference the Exhibit 3.1 to the Company's
quarterly report form 10-Q for the period ended June 30, 1993).
3.2 -- Amendment to Fourth Amended and Restated Certificate of Incorporation, as filed on May 27, 1997 with the Secretary
of State of Delaware (incorporated by reference the Exhibit 3.1 to the Company's Annual Report on form 10-K for
the period ended July 31, 1997).
3.3 -- Bylaws of the Company as adopted by the Board of Directors of the Company effective as of June 11, 1989
(incorporated by reference to Exhibit 3.3 to the Company's Registration Statement on Form S-1, File No. 33-45876,
as amended).
1
3.4 -- Amendment to Bylaws of the Company as adopted by the Board
of Directors of the Company effective as of April 28, 1992
(incorporated by reference to Exhibit 19.1 to the Company's
Quarterly Report on Form 10-Q for the three months ended March
31, 1992).
3.5 -- Amendment to the Bylaws of the Company as adopted by the
Board of Directors of the Company effective as of July 10,
1996 (incorporated by reference to Exhibit 4.5 to the
Company's Current Report on Form 8-K dated July 10, 1996).
4.1 -- Specimen Certificate for the Common Stock (incorporated by
reference to Exhibit 4.1 to the Company's Registration
Statement on Form S-1, File No. 33-45876, as amended).
4.2 -- Rights Agreement dated as of July 10, 1996 between VTEL
Corporation and First National Bank of Boston, which includes
the form of Certificate of Designations for Designating Series
A Preferred Stock, $.01 par value, the form of Rights
Certificate, and the Summary of Rights to Purchase Series A
Preferred Stock (incorporated by reference to Exhibit 4.1 to
the Company's Current Report on Form 8-K dated July 10, 1996).
10.1 -- License Agreement, dated as of November 7, 1990, between
Universite de Sherbrooke, as Licenser, and the Company, as
Licensee (incorporated by reference to Exhibit 10.5 to the
Company's Registration Statement on Form S-1, File No.
33-45876, as amended).
10.2 -- VideoTelecom Corp. 1989 Stock Option Plan, as amended
(incorporated by reference to Exhibit 4.1 to the Company's
Registration on Form S-8, File No. 33-51822).
10.3 -- Form of VideoTelecom Corp. Nonqualified Stock Option
Agreement (incorporated by reference to Exhibit 10.16 to the
Company's Registration Statement on Form S-1, File No.
33-45876, as amended).
10.4 -- Form of VideoTelecom Corp. Incentive Stock Option Agreement
(incorporated by reference to Exhibit 10.17 to the Company's
Registration Statement on Form S-1, File No. 33-45876, as
amended).
10.5 -- Distributor Agreement dated January 8, 1990, between US
WEST Communications Services, Inc. and the Company
(incorporated by reference to Exhibit 10.18 to the Company's
Registration Statement on Form S-1, File No. 33-45876, as
amended).
10.6 -- Purchase Agreement effective October 1, 1990, between GTE
Service Corporation and the Company, as amended July 1, 1991
(incorporated by reference to Exhibit 10.19 to the Company's
Registration Statement on Form S-1, File No. 33-45876, as
amended).
10.7 -- Distribution Agreement, made and entered into November 1,
1991, by and between Microsoft Corporation and the Company
(incorporated by reference to Exhibit 10.22 to the Company's
Registration Statement on Form S-1, File No. 33-45876, as
amended).
10.8 -- VideoTelecom Corp. 1992 Director Stock Option Plan
(incorporated by reference to Exhibit 4.1 to the Company's
Registration on Form S-8, File No. 33-51822).
10.9 -- VideoTelecom Corp. Employee Stock Purchase Plan
(incorporated by reference to Exhibit 4.1 to the Company's
Registration on Form S-8, File No. 33-51822).
10.10 -- Lease agreement, executed by Waterford HP, Ltd. on June 14,
1994, as Landlord, and the Company, as Tenant, together with
First Amendment of Lease Agreement between Waterford HP, Ltd.,
as Landlord, and the Company, as Tenant, dated November 2,
1994, Second Amendment of Lease Agreement between Waterford
HP, Ltd., as Landlord, and the Company, as Tenant, dated
February 1, 1995, and Net Profits Agreement, executed between
Waterford HP, Ltd. on June 14,
2
1994 and the Company (incorporated by reference to Exhibit
10.17 to the Company's 1994 Annual Report on Form 10-K).
10.11 -- Subscription Agreement dated June 14, 1995 by and between
VTEL Corporation, Accord Video Telecommunications, Ltd.,
Nizanim Fund (1993) Ltd., the "Star Entities", Manakin
Investments BV, Messrs. Gideon Rosenfeld and Sigi Gavish, and
Eduardo Shoval (incorporated by reference to Exhibit 10.19 to
the Company's 1995 Annual Report on Form 10-K. The schedules
referred to in the agreement have been omitted but will be
furnished to the Securities and Exchange Commission upon
request).
10.12 -- Amendment to the VideoTelecom Corp. 1989 Stock Option Plan
and the 1992 Director Stock Option Plan (the terms of which
are incorporated by reference to the Company's 1996 Definitive
Proxy Statement).
10.13 -- The VTEL Corporation 1996 Stock Option Plan (the terms of
which are incorporated by reference to the Company's 1995
Definitive Proxy Statement).
10.14 -- Amendment to the VTEL Corporation 1996 Stock Option Plan
(the terms of which are incorporated by reference to the
Company's Joint Proxy Statement filed on April 24, 1997).
10.15 -- Compression Labs, Incorporated 1980 Stock Option Plan - the
ISO Plan (incorporated by reference to the Annual Report on
Form 10-K of Compression Labs, Inc. for the year ended
December 31, 1994).
10.16 -- Revised forms of Incentive Stock Option and Early Exercise
Stock Purchase Agreement used in connection with the issuance
and exercise of options under the ISO Plan (incorporated by
reference to the Registration Statement on Form S-8 of
Compression Labs, Inc. filed on June 6, 1994).
10.17 -- Consulting and separation agreement between Compression
Labs, Incorporated and John E. Tyson dated February 16, 1996
(incorporated by reference to the Annual Report on Form 10-K
of Compression Labs, Inc. for the year ended December 31,
1995).
10.18 -- Lease Agreement, dated January 30, 1998, between 2800
Industrial, Inc., Lessor and VTEL Corporation, Lessee
(incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the three months ended April
30, 1998).
10.19 -- First Amendment, dated March 11, 1998, to Lease Agreement
dated January 30, 1998, between 2800 Industrial, Inc., Lessor
and VTEL Corporation, Lessee (incorporated by reference to
Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q
for the three months ended April 30, 1998).
10.20 -- The VTEL Corporation 1998 Restricted Stock Plan (the terms
of which are incorporated by reference to the Company's 1998
Definitive Proxy Statement).
10.21 -- Loan and Security Agreement, dated May 5, 1999, between
Silicon Valley Bank and Comerica Bank-Texas, as Creditors, and
the Company, as Borrower. (incorporated by reference to
Exhibit 10.21 to the Company's Annual Report on Form 10-K for
the fiscal year ended July 31, 1999)
10.22 -- Change-in-Control Agreements with members of senior
management of the Company (incorporated by reference to
Exhibit 10.21 to the Company's Annual Report on Form 10-K for
the year ended July 31, 1998)
10.22(a) -- Stephen L. Von Rump
10.22(b) -- Rodney S. Bond
3
10.22(c) -- Dennis M. Egan
10.22(d) -- Vinay Goel
10.22(e) -- Steve F. Keilen
10.22(f) -- F.H. (Dick) Moeller
10.22(g) -- Ly-Huong T. Pham
10.22(h) -- Michael J. Steigerwald
10.22(i) -- Bob R. Swem
10.22(j) -- Judy A. Wallace
10.23 -- Change-in Control Agreements with members of senior
management of the Company (incorporated by reference to
exhibit 10.1 to the Company's Annual Report on Form 10-Q for
the quarter ended January 31, 2000)
10.23(a) -- Brian C. Sullivan
10.23(b) -- Stephen Cox
10.23(c) -- Stephen Von Rump (amended)
10.24 Officer and Director Stock Loan Program (incorporated by
reference to Exhibit 10.24 to the Company's Annual Report on
Form 10-K/A for the year ended July 31, 2002)
21.1 -- List of Subsidiaries
23.1 -- Consent of Ernst & Young LLP
31.1 -- Certification pursuant to Section 302 of Sarbanes-Oxley Act
of 2002
31.2 -- Certification pursuant to Section 302 of Sarbanes-Oxley Act
of 2002
32.1 -- Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
32.2 -- Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
4