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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
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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 appro