UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10-Q
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x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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|
|
|
For the
quarterly period ended April 30, 2008
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|
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|
OR
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|
|
|
|
o
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TRANSITION
REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For the transition period from
to
Commission
file number: 0-20008
FORGENT NETWORKS, INC.
(Exact
Name of Registrant as Specified in its Charter)
Delaware
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74-2415696
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(State of other jurisdiction of
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(I.R.S. Employer
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incorporation or organization)
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Identification No.)
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108 Wild Basin Road
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Austin, Texas
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78746
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(Address of Principal Executive Offices)
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(Zip Code)
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(512) 437-2700
(Registrants Telephone Number, including Area Code)
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
o
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of large accelerated filer, accelerated filer, and
smaller reporting company in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer
o
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|
Accelerated
filer
o
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|
|
|
Non-accelerated
filer
x
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|
Smaller
reporting company
o
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(Do
not check if a smaller reporting company)
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|
|
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
Yes
o
No
x
On June 12, 2008, the registrant had outstanding 31,089,318 shares
of its Common Stock, $0.01 par value.
INDEX TO FINANCIAL STATEMENTS
2
FORGENT NETWORKS, INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except per share data)
|
|
APRIL 30,
2008
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JULY 31,
2007
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|
|
|
(UNAUDITED)
|
|
|
|
ASSETS
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|
|
|
|
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Current Assets:
|
|
|
|
|
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Cash and
cash equivalents
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$
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12,812
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$
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33,524
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Short-term investments
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3,310
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1,538
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Accounts receivable, net of allowance for
doubtful accounts of $39 and $21 at April 30, 2008 and July 31,
2007, respectively
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1,551
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1,040
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Prepaid expenses and other current assets
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213
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|
211
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Total Current
Assets
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17,886
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36,313
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Property and equipment, net
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1,025
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767
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Goodwill
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7,106
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|
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Intangible
assets, net
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4,923
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Other assets
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|
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212
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|
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$
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30,940
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$
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37,292
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LIABILITIES AND STOCKHOLDERS EQUITY
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Current Liabilities:
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|
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Accounts payable
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$
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3,821
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$
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10,970
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Accrued compensation and benefits
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405
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|
557
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Other accrued liabilities
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742
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|
855
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Deferred revenue
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1,469
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1,076
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Total Current Liabilities1
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6,437
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13,458
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Long-Term Liabilities:
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|
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Deferred revenue
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29
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|
28
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Other long-term obligations
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864
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1,186
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Total Long-Term Liabilities
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893
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1,214
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Stockholders Equity:
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Preferred stock, $.01 par value; 10,000
authorized; none issued or outstanding
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|
|
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Common stock, $.01 par value; 40,000
authorized; 32,879 and 27,388 shares issued; 31,089 and 25,598 shares
outstanding at April 30, 2008 and July 31, 2007, respectively
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325
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|
274
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Treasury stock at cost, 1,790 issued at
April 30, 2008 and July 31, 2007
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(4,815
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)
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(4,815
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)
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Additional paid-in capital
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270,618
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265,647
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Accumulated deficit
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(242,481
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)
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(238,506
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)
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Accumulated other comprehensive income
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(37
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)
|
20
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Total Stockholders Equity
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23,610
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22,620
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|
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$
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30,940
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$
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37,292
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|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
3
FORGENT
NETWORKS, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in
thousands, except per share data)
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|
FOR THE
THREE MONTHS ENDED
APRIL 30,
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FOR THE
NINE MONTHS ENDED
ARIL 30,
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2008
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2007
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2008
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2007
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(UNAUDITED)
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(UNAUDITED)
|
|
|
|
|
|
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REVENUES
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|
|
|
|
|
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Software & Services
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$
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2,707
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$
|
978
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$
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7,316
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|
$
|
2,957
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|
Intellectual Property Licensing
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|
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20,000
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|
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28,612
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Total Revenue
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2,707
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|
20,978
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|
7,316
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31,119
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|
|
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|
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COST OF SALES
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|
|
|
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Software & Services
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639
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196
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1,598
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698
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Intellectual Property Licensing
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|
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10,592
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14,135
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Total Cost of Sales
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639
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10,788
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1,598
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14,833
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|
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GROSS MARGIN
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2,068
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10,190
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5,718
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16,286
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OPERATING EXPENSES:
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Selling, general and
administrative
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2,951
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3,971
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|
8,353
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|
9,009
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Research and development
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616
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|
180
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|
1,547
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|
429
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Amortization of intangible assets
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149
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|
|
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340
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4
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Total operating expenses
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3,716
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|
4,151
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|
10,240
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9,442
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LOSS FROM OPERATIONS
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|
(1,648
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)
|
6,039
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|
(4,522
|
)
|
6,844
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|
|
|
|
|
|
|
|
|
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OTHER INCOME AND (EXPENSES):
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|
|
|
|
|
|
|
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Interest income
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|
109
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|
202
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|
641
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|
592
|
|
Gain on sale of assets
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|
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|
|
|
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2,896
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Interest expense and other
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(20
|
)
|
(25
|
)
|
(60
|
)
|
(68
|
)
|
Total other income and
(expenses)
|
|
89
|
|
177
|
|
581
|
|
3,420
|
|
|
|
|
|
|
|
|
|
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|
(LOSS) INCOME FROM OPERATIONS, BEFORE
INCOME TAXES
|
|
(1,559
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)
|
6,216
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|
(3,941
|
)
|
10,264
|
|
Provision for income taxes
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|
(14
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)
|
(170
|
)
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(34
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)
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(170
|
)
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NET (LOSS) INCOME
|
|
$
|
(1,573
|
)
|
$
|
6,046
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|
$
|
(3,975
|
)
|
$
|
10,094
|
|
|
|
|
|
|
|
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BASIC AND DILUTED INCOME
(LOSS) PER SHARE:
|
|
|
|
|
|
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Basic
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$
|
(0.05
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)
|
$
|
0.24
|
|
$
|
(0.13
|
)
|
$
|
0.40
|
|
Diluted
|
|
$
|
(0.05
|
)
|
$
|
0.23
|
|
$
|
(0.13
|
)
|
$
|
0.39
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE SHARES
OUTSTANDING:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
30,995
|
|
25,596
|
|
29,667
|
|
25,488
|
|
Diluted
|
|
30,995
|
|
26,202
|
|
29,667
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|
26,022
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|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
4
FORGENT NETWORKS, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
|
|
FOR THE NINE MONTHS
ENDED APRIL 30,
|
|
|
|
2008
|
|
2007
|
|
|
|
(UNAUDITED)
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
Net (loss) income from continuing operations
|
|
$
|
(3,975
|
)
|
$
|
10,094
|
|
Adjustments to reconcile net (loss) income
to net cash (used in) provided by operations:
|
|
|
|
|
|
Depreciation and amortization
|
|
808
|
|
423
|
|
Amortization of leasehold advance and lease
impairment
|
|
(298
|
)
|
(319
|
)
|
Provision for doubtful accounts
|
|
15
|
|
19
|
|
Share-based compensation
|
|
72
|
|
144
|
|
Foreign currency translation loss
|
|
1
|
|
13
|
|
Changes in operating assets and
liabilities:
|
|
|
|
|
|
Accounts receivable
|
|
249
|
|
(10,104
|
)
|
Prepaid expenses and other current assets
|
|
43
|
|
90
|
|
Accounts payable
|
|
(8,207
|
)
|
9,091
|
|
Accrued expenses and other long-term
obligations
|
|
(454
|
)
|
1,183
|
|
Deferred revenues
|
|
(180
|
)
|
220
|
|
Net cash (used in) provided by operating
activities
|
|
(11,926
|
)
|
10,854
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
Net (purchases) sales of short-term
investments
|
|
(1,273
|
)
|
(1,533
|
)
|
Net purchases of property and equipment
|
|
(284
|
)
|
(445
|
)
|
Change in other assets
|
|
164
|
|
|
|
Acquisition of iSarla, Inc., net of
cash acquired
|
|
(7,344
|
)
|
|
|
Net cash used in investing activities
|
|
(8,737
|
)
|
(1,978
|
)
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
Net proceeds from issuance of stock
|
|
14
|
|
86
|
|
Payments on notes payable and capital
leases
|
|
(1
|
)
|
(543
|
)
|
Net cash provided by (used in) financing
activities
|
|
13
|
|
(457
|
)
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and
cash equivalents
|
|
(62
|
)
|
(11
|
)
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
(20,712
|
)
|
8,408
|
|
Cash and cash equivalents at beginning of
period
|
|
33,524
|
|
16,206
|
|
Cash and cash equivalents at end of period
|
|
$
|
12,812
|
|
$
|
24,614
|
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOW
INFORMATION:
|
|
|
|
|
|
Issuance of stock for
acquisition of iSarla, Inc.
|
|
$
|
4,987
|
|
$
|
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
5
FORGENT NETWORKS, INC.
NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data
unless otherwise noted)
NOTE 1 - GENERAL AND BASIS OF FINANCIAL
STATEMENTS
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with the rules and regulations of the
Securities and Exchange Commission and accordingly, do not include all
information and footnotes required under U.S. generally accepted accounting
principles for complete financial statements. In the opinion of management,
these interim financial statements contain all adjustments, consisting of
normal, recurring adjustments, necessary for a fair presentation of the
financial position of Forgent Networks, Inc. (Forgent or the Company)
as of April 30, 2008 and July 31, 2007, the results of operations for
the three and nine months ended April 30, 2008 and January 31, 2007, and the cash flows for the nine months ended April 30,
2008 and January 31, 2007. These condensed consolidated financial
statements should be read in conjunction with the Companys audited
consolidated financial statements and notes thereto filed with the Securities
and Exchange Commission in the Companys annual report on Form 10-K/A for
the fiscal year ended July 31, 2007.
The results for the interim periods are not necessarily indicative of
results for a full fiscal year.
NOTE 2 - ACQUISITION
On
October 5, 2007, Forgent acquired all of the outstanding capital stock of
iSarla Inc., a Delaware corporation and application service provider that
offers on-demand workforce management solutions that help simplify the Human
Resource process and improve employee productivity by managing and
communicating human resources, employee benefits and payroll information.
iSarla Inc. conducted its business under the trade name iEmployee and
provided hosted application services, including Time & Attendance,
Timesheets, Human Resource Benefits, Expenses and other solutions. iEmployee is a profitable business with a
high percentage of recurring revenues and delivers its software as a service
under the SaaS model. The acquisition
expanded Forgents current target markets, significantly augmented the Companys
product and service offerings to customers, and increased revenues from its
operations considerably. Due to these
factors, the Company purchased the iEmployee business at a premium (i.e.
goodwill) over the fair value of the net assets acquired.
In consideration for the acquisition, Forgent paid approximately
$12,661, including $6,602
in cash,
5,095 shares of its Common Stock, valued at approximately $4,987 and
transaction cost of approximately $1,072.
The shares of Common Stock issued were valued based upon the price of
$0.98 when the number of shares to be issued became fixed. Upon closing, $990 in cash and 764 shares
totaling $748 of the purchase price were held in escrow for representations and
warranties. The purchase agreement did
not include provisions for any other contingent payments, options or commitments.
As a result of the acquisition,
iEmployees results of operations since October 5, 2007 have been included
in the Companys Consolidated Statement of Operations for the three and nine
months ended April 30, 2008.
The
business combination was accounted for under
Financial Accounting
Standard Board (FASB)
Statement
No. 141,
Business Combinations.
The application of purchase
accounting under Statement No. 141 requires the total purchase price to be
allocated to the fair value of assets acquired and liabilities assumed based on
their fair values at the acquisition date, with amounts exceeding fair value
being recorded as goodwill. The Company
continues to assess and finalize the fair value of the assets acquired and the
liabilities assumed. The following table
summarizes the estimated preliminary and adjusted fair values of the iEmployee
assets acquired and liabilities assumed:
6
FORGENT NETWORKS, INC.
NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data unless otherwise noted)
|
|
Initial
|
|
|
|
Updated
|
|
|
|
Allocation
|
|
Adjustments
|
|
Allocation
|
|
Assets
Acquired
|
|
|
|
|
|
|
|
Cash
|
|
$
|
460
|
|
|
|
$
|
460
|
|
Short-term investments
|
|
526
|
|
|
|
526
|
|
Accounts receivable, net
|
|
577
|
|
(19
|
)
|
558
|
|
Prepaid assets
|
|
96
|
|
|
|
96
|
|
Fixed assets
|
|
416
|
|
(77
|
)
|
339
|
|
Goodwill
|
|
6,993
|
|
145
|
|
7,138
|
|
Intangible assets
|
|
5,209
|
|
|
|
5,209
|
|
Other assets
|
|
22
|
|
(38
|
)
|
(16
|
)
|
Total assets acquired
|
|
14,299
|
|
11
|
|
14,310
|
|
|
|
|
|
|
|
|
|
Liabilities
assumed
|
|
|
|
|
|
|
|
Accounts payable
|
|
(1,099
|
)
|
(11
|
)
|
(1,110
|
)
|
Accrued compensation and benefits
|
|
(110
|
)
|
|
|
(110
|
)
|
Accrued other liabilities
|
|
(33
|
)
|
|
|
(33
|
)
|
Deferred revenue
|
|
(396
|
)
|
|
|
(396
|
)
|
Total liabilities assumed
|
|
(1,638
|
)
|
(11
|
)
|
(1,649
|
)
|
|
|
|
|
|
|
|
|
Net
assets acquired
|
|
$
|
12,661
|
|
$
|
|
|
$
|
12,661
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following summary presents unaudited pro forma consolidated financial
information for the three months ended April 30, 2007 and the nine months
ended April 30, 2008 and 2007, as if the iEmployee acquisition had
occurred as of August 1, 2006. The
pro forma consolidated financial information for the third fiscal quarter of
2008 is not presented since the iEmployee acquisition occurred prior to the
start of this fiscal quarter and the combined financial results are reported on
the Companys condensed consolidated statement of operations for the three
months ended April 30, 2008. The
pro forma information does not purport to be indicative of the actual results
which would have occurred had the acquisition been completed as of August 1,
2006, nor is it necessarily indicative of the results of operations which may
occur in the future.
|
|
For the Three Months
|
|
For the Nine Months
|
|
For the Nine Months
|
|
|
|
Ended April 30, 2007
|
|
Ended April 30, 2008
|
|
Ended April 30, 2007
|
|
|
|
As Reported
|
|
Pro Forma
|
|
As Reported
|
|
Pro Forma
|
|
As Reported
|
|
Pro Forma
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
20,978
|
|
$
|
22,288
|
|
$
|
7,316
|
|
$
|
8,329
|
|
$
|
31,119
|
|
$
|
35,236
|
|
Net (loss) income
|
|
6,046
|
|
6,223
|
|
(3,975
|
)
|
(3,830
|
)
|
10,094
|
|
10,676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.24
|
|
$
|
0.20
|
|
$
|
(0.13
|
)
|
$
|
(0.12
|
)
|
$
|
0.40
|
|
$
|
0.35
|
|
Diluted
|
|
0.23
|
|
0.20
|
|
(0.13
|
)
|
(0.12
|
)
|
0.39
|
|
0.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
25,596
|
|
30,691
|
|
29,667
|
|
32,776
|
|
25,488
|
|
30,582
|
|
Diluted
|
|
26,202
|
|
31,297
|
|
29,667
|
|
32,776
|
|
26,022
|
|
31,117
|
|
NOTE 3 SALE OF ASSETS
In November 2006, Forgent sold certain patents
and applications associated with videoconferencing and related fields and
technology, together with related goodwill, rights and documentation, to
Tandberg Telecom AS for $3,150. Upon closing, Forgent received $2,900 of
the purchase price, all of which was recorded as a gain on sale of assets. The remaining balance of $250 will be held in
escrow for two years for indemnity claims.
7
FORGENT NETWORKS, INC.
NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data unless otherwise noted)
NOTE 4 - COMPREHENSIVE INCOME (LOSS)
In accordance with the disclosure requirements of Statement of
Financial Accounting Standard No. 130,
Reporting
Comprehensive Income,
the Companys comprehensive income (loss) is
comprised of net income (loss), foreign currency translation adjustments and
unrealized gains and losses on short-term investments held as
available-for-sale securities. Comprehensive
loss for the three and nine months ended April 30, 2008 was $1,655 and
$4,032, respectively. Comprehensive income for the three and nine months ended April 30,
2007 was $6,060 and $10,096, respectively.
NOTE 5 - RECENT ACCOUNTING PRONOUNCEMENTS
In September 2006,
the Financial Accounting Standard Board (FASB) issued Statement No. 157,
Fair Value Measurements.
Statement
No. 157 defines fair value, establishes a framework for measuring fair
value in U.S. generally accepted accounting principles and expands disclosures
about fair value measurements. Statement No. 157 is effective for
fiscal years beginning after November 15, 2007 and interim periods within
those fiscal years. Forgent is currently evaluating the effect that the
adoption of Statement No. 157 will have on its financial position and
results of operations.
In February 2007,
the FASB issued Statement No. 159,
The
Fair Value Option for Financial Assets and Financial Liabilities.
Statement
No. 159 provides companies with an option to report selected financial
assets and liabilities at fair value. The standards objective is to reduce
both complexity in accounting for financial instruments and the volatility in
earnings caused by measuring related assets and liabilities differently. The standard requires companies to provide
additional information that will help investors and other users of financial
statements to more easily understand the effect of the companys choice to use
fair value on its earnings. It also requires companies to display the fair
value of those assets and liabilities for which the company has chosen to use
fair value on the face of the balance sheet. This new statement does not
eliminate disclosure requirements included in other accounting standards,
including requirements for disclosures about fair value measurements included
in Statement No. 157,
Fair Value
Measurements,
and Statement No. 107,
Disclosures about Fair Value of Financial
Instruments.
Statement No. 159 is effective as of the
beginning of fiscal years beginning after November 15, 2007. Forgent is
currently evaluating the effect that the adoption of Statement No. 159
will have on its financial position and results of operations.
In December 2007,
the FASB issued Statement No. 141(R),
Business Combinations.
Statement No. 141(R) establishes principles and requirements for how
an acquirer recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, any non-controlling
interest in the acquiree and the goodwill acquired in the business combination. The statement also establishes disclosure
requirements which will enable users to evaluate the nature and financial
effects of the business combination. Statement No. 141(R) is
effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008. As such, the Company will adopt
these provisions for any business combination after August 1, 2009. The adoption of Statement No. 141(R) may
have an impact on Forgents accounting for future business combinations once
adopted.
NOTE 6 SHARE BASED COMPENSATION
Share based compensation for the Companys
stock option, restricted stock and stock purchase plans for the three and nine
months ended April 30, 2008 was $0
and $72, respectively. Share
based compensation for the Companys stock option, restricted stock and stock
purchase plans for the three and nine months ended April 30, 2007 was $14 and $144, respectively. The Company issued 140 and 396 shares of common stock
related to its Stock Option, Restricted Stock, and Stock Purchase Plans for the
three and nine months ended April 30, 2008, respectively. The Company issued 2 and 224 shares of common stock related to its Stock Option,
Restricted Stock, and Stock Purchase Plans for the three and nine months ended April 30,
2007, respectively.
NOTE 7 INCOME TAXES
In
June 2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxesan
interpretation of FASB Statement No. 109
(FIN 48). FIN
48 clarifies the accounting for uncertainty in income taxes recognized in an
entitys financial statements in accordance with Statement No. 109,
Accounting for Income Taxes.
8
FORGENT NETWORKS, INC.
NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data
unless otherwise noted)
Forgent
adopted FIN 48 as of August 1, 2007. FIN 48 applies to all tax positions
accounted for under Statement No. 109. FIN 48 refers to tax positions as
positions taken in a previously filed tax return or positions expected to be
taken in a future tax return which are reflected in measuring current or
deferred income tax assets and liabilities reported in the financial
statements. FIN 48 further clarifies a tax position to include, but not be
limited to, the following:
·
An allocation or a shift of income between
taxing jurisdictions;
·
The characterization of income or a decision
to exclude reporting taxable income in a tax return;
·
A decision to classify a transaction, entity,
or other position in a tax return as tax exempt.
FIN
48 provides that a tax benefit may be reflected in the financial statements
only if it is more likely than not that a company will be able to sustain the
tax return position, based on its technical merits. If a tax benefit meets this
criterion, it should be measured and recognized based on the largest amount of
benefit that is cumulatively greater than 50% likely to be realized. This
approach is a change from previous practice under which a tax benefit could be
recognized only if it was probable a tax position could be sustained.
FIN
48 requires the Company to make qualitative and quantitative disclosures,
including a discussion of reasonably possible changes that might occur in
unrecognized tax benefits over the next twelve months, a description of open
tax years by major jurisdictions and a roll-forward of all unrecognized tax
benefits, presented as a reconciliation of the beginning and ending balances of
the unrecognized tax benefits on an aggregated basis.
Forgent
and certain of its subsidiaries file income tax returns in the U.S. federal
jurisdiction, various state jurisdictions, and certain foreign jurisdictions.
Generally, the Company is no longer subject to examinations for U.S. federal
income taxes for years prior to 2003 and for state income taxes for years prior
to 2002. Examinations for foreign income taxes for previous years remain open,
but tax considerations in those jurisdictions are not material to the Company.
The
adoption of FIN 48 did not have a material impact on the Companys financial
statements or disclosures. As of August 1, 2007 and April 30, 2008,
Forgent did not recognize any assets or liabilities for unrecognized tax
benefits relative to uncertain tax positions. Management does not anticipate
that a significant increase or decrease to gross unrecognized tax benefits will
be recorded during the next twelve months. Any interest or penalties resulting
from examinations will be recognized as a component of the income tax
provision. However, since there are no unrecognized tax benefits as a result of
tax positions taken, Forgent has no accrued interest and penalties.
NOTE 8 RELATED PARTY TRANSACTIONS
As a result
of the iEmployee acquisition, the Company leases
approximately 9,000 square feet of office
space in Mumbai, India for sales, marketing, development and support
efforts. The property is leased from a
foreign company that is controlled by stockholders of the Company. Under the lease agreement, the Company pays
monthly rent of approximately $13 until December 2007 and approximately
$10 thereafter. During the three and
nine months ended April 30, 2008, the Company incurred $30 and $79 in rent expenses related
to this lease, respectively.
NOTE 9 - SEGMENT INFORMATION
Currently,
the Company operates in two distinct segments: software and services and
intellectual property licensing. Forgents
software and services business provides customers with scheduling software,
asset management software, workforce management software as well as software maintenance
and support, installation and training services and hardware devices. Under Forgents intellectual property
licensing segment, the Company settled with the remaining defendants in the
litigations related to its technologies embodied in U.S. Patent No. 4,698,672
and its foreign counterparts, as well as in U.S. Patent No. 6,285,746
during fiscal year 2007. Going forward,
Forgent does not anticipate generating additional licensing revenues related to
these patents. In order to evaluate the
software and
9
FORGENT NETWORKS, INC.
NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data unless
otherwise noted)
services segment and the intellectual property licensing segment as
stand-alone businesses, the Company records all unallocated corporate operating
expenses in the Corporate segment.
The Company evaluates the performance as well
as the financial results of its segments. Included in the segment operating
income (loss) is an allocation of certain corporate operating expenses. The
Company does not identify assets or capital expenditures by reportable
segments, and the Companys Chief Executive Officer and Chief Financial Officer
do not evaluate the segments based on these criteria.
The table
below presents segment information about revenue from unaffiliated customers,
gross margins and operating income (loss) for the three and nine months ended April 30, 2008 and
2007:
|
|
Software &
Services
|
|
Intellectual
Property
Licensing
|
|
Corporate
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Month Period Ending
April 30, 2008
|
|
|
|
|
|
|
|
|
|
Revenues from unaffiliated customers
|
|
$
|
2,707
|
|
$
|
|
|
$
|
|
|
$
|
2,707
|
|
Gross margin
|
|
2,068
|
|
|
|
|
|
2,068
|
|
Operating income (loss)
|
|
(512
|
)
|
(61
|
)
|
(1,075
|
)
|
(1,648
|
)
|
|
|
|
|
|
|
|
|
|
|
For the Three Month Period Ending
April 30, 2007
|
|
|
|
|
|
|
|
|
|
Revenues from unaffiliated customers
|
|
$
|
978
|
|
$
|
20,000
|
|
$
|
|
|
$
|
20,978
|
|
Gross margin
|
|
782
|
|
9,408
|
|
|
|
10,190
|
|
Operating income (loss)
|
|
(500
|
)
|
7,229
|
|
(690
|
)
|
6,039
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Month Period Ending
April 30, 2008
|
|
|
|
|
|
|
|
|
|
Revenues from unaffiliated customers
|
|
$
|
7,316
|
|
$
|
|
|
$
|
|
|
$
|
7,316
|
|
Gross margin
|
|
5,718
|
|
|
|
|
|
5,718
|
|
Operating income (loss)
|
|
(1,014
|
)
|
(200
|
)
|
(3,308
|
)
|
(4,522
|
)
|
|
|
|
|
|
|
|
|
|
|
For the Nine Month Period Ending
April 30, 2007
|
|
|
|
|
|
|
|
|
|
Revenues from unaffiliated customers
|
|
$
|
2,957
|
|
$
|
28,162
|
|
$
|
|
|
$
|
31,119
|
|
Gross margin
|
|
2,259
|
|
14,027
|
|
|
|
16,286
|
|
Operating income (loss)
|
|
(941
|
)
|
10,118
|
|
(2,333
|
)
|
6,844
|
|
NOTE 10 - CONTINGENCIES
Forgent is the defendant or plaintiff in
various actions that arose in the normal course of business.
With the exception of the proceedings described below, none of the
pending legal proceedings to which the Company is a party are material to the
Company.
Litigation with Jenkens & Gilchrist, P.C.
On July 16, 2007, Jenkens &
Gilchrist, P.C. (Jenkens), Forgents former legal counsel, filed a complaint
against Forgent and Compressions Labs, Inc., in the District Court of
Dallas County, Texas. In its complaint,
Jenkens alleges a breach of contract and is seeking a declaratory
judgment. Forgent disputes Jenkens
claims and is seeking relief through the court system.
After Forgent terminated Jenkens, the Company
entered into a Resolution Agreement with Jenkens in December 2004. Under the Resolution Agreement, the Company
believes Jenkens is entitled to $1,400 for contingency fees and expenses
related to the settlements from the litigation regarding the Companys DVR patents. Jenkens interprets the Resolution Agreement
on broader terms and believes it is entitled to $3,400, including attorneys
fees and interest.
10
FORGENT NETWORKS, INC.
NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data unless otherwise noted)
On March 3, 2008, Forgent and Jenkens
appeared before the Court regarding a hearing on the motion for summary
judgment filed by Jenkens. On May 20,
2008, the Court granted Jenkens motion and ordered Forgent to pay Jenkens
$2,800 for recoveries related to the 746 patent and other amounts including
attorneys fees and interest. Forgent
disagrees with the Courts ruling and is currently pursuing efforts to appeal
this Court order.
The trial date for
this litigation is currently scheduled for October 6, 2008. However, m
anagement
currently cannot predict how long it ultimately will take to resolve the
Jenkens lawsuit. Until the Jenkens
litigation is finalized, the related contingency fees and expenses may be
adjusted in a future period and could have a material impact to the Companys
consolidated financial statements.
Litigation with Wild Basin
On September 6,
2007, Forgent filed a petition against Wild Basin One & Two, Ltd. (Wild
Basin) in the District Court of Travis County, Texas. The petition claims Wild Basin is in breach
of contract relating to Forgents lease agreement by unreasonably withholding
and delaying its consent to a pending lease assignment. On October 19, 2007, Forgent amended its
petition to include claims of fraud and breach of fiduciary duty against Wild
Basin. On June 2, 2008, Wild Basin
filed a counterclaim seeking a declaratory judgment that it had complied with
its obligations under the lease and was seeking the recovery of attorneys
fees. On June 5, 2008, Forgent
amended its petition to request the Court make declaratory judgments on several
issues in the case and to include as a breach of contract claim its claim for
withholding amounts that should have been distributed by Wild Basin in the past
pursuant to the lease. Forgent is
seeking to recover all damages as a result of the delay in closing its pending
assignment and amounts not distributed in the past, among other damages. The Company anticipates participating in
mediation with Wild Basin in July 2008. The trial date for this litigation
has been re-scheduled for July 21, 2008.
11
ITEM 2.
MANAGEMENTS DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following review of Forgents financial position as of April 30,
2008 and July 31, 2007, and for the three and nine months ended April 30,
2008 and 2007, should be read in conjunction with the Companys 2007 Annual
Report on Form 10-K/A filed with the Securities and Exchange
Commission. Forgents internet
website address is http://www.asuresoftware.com. The Companys annual
report on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934
are available through the investor relations page of the Companys
internet website free of charge as soon as reasonably practicable after they
are electronically filed, or furnished to, the Securities and Exchange
Commission. Forgents internet website and the information contained
therein or connected thereto are not intended to be incorporated into this
Quarterly Report on Form 10-Q.
In September 2007, the Company announced a change in the name under
which it does business by adopting the dba Asure Software to reflect the
Companys focus on its software and services segment for its future
growth.
Effective September 13,
2007, the Company now trades in the NASDAQ Global Market System under the
symbol ASUR.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain
statements in this Report represent forward-looking statements. These
statements involve known and unknown risks, uncertainties and other factors
that may cause actual results of operations, levels of activity, economic
performance, financial condition or achievements to be materially different
from future results of operations, levels of activity, economic performance,
financial condition or achievements as expressed or implied by such
forward-looking statements.
Forgent
has attempted to identify these forward-looking statements with the words believes,
estimates, plans, expects, anticipates, may, could and other
similar expressions. Although these forward-looking statements reflect
managements current plans and expectations, which are believed to be
reasonable as of the filing date of this Report, they inherently are subject to
certain risks and uncertainties. Such
risks and uncertainties include, but are not limited to, those described under Risk
Factors in this Report and other risks indicated in Forgents filings with the
Securities and Exchange Commission from time to time. Additionally, Forgent is under no obligation
to update any of the forward-looking statements after the date of this Form 10-Q
to conform such statements to actual results.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage
of total revenues represented by certain items in Forgents Consolidated
Statements of Operations:
|
|
FOR THE THREE
MONTHS ENDED
APRIL 30,
|
|
FOR THE NINE
MONTHS ENDED
APRIL 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Software & services revenues
|
|
100
|
%
|
5
|
%
|
100
|
%
|
10
|
%
|
Intellectual property licensing revenues
|
|
|
|
95
|
|
|
|
90
|
|
Gross margin
|
|
76
|
|
49
|
|
78
|
|
52
|
|
Selling, general and
administrative
|
|
109
|
|
19
|
|
114
|
|
29
|
|
Research and development
|
|
23
|
|
1
|
|
21
|
|
1
|
|
Amortization of intangible
assets
|
|
6
|
|
|
|
5
|
|
|
|
Total operating expenses
|
|
137
|
|
20
|
|
140
|
|
30
|
|
Other income, net
|
|
3
|
|
1
|
|
8
|
|
11
|
|
Net income (loss)
|
|
(58
|
)%
|
29
|
%
|
(54
|
)%
|
32
|
%
|
12
THREE AND NINE MONTHS ENDED APRIL 30, 2008
AND 2007
Revenues
Revenues for the three months ended April 30,
2008 were $2.7 million, a decrease of $18.3 million, or 87%, from the $21.0
million reported for the three months ended April 30, 2007. Revenues for
the nine months ended April 30, 2008 were $7.3 million, a decrease of
$23.8 million, or 76%, from the $31.1 million reported for the nine months
ended April 30, 2007.
Consolidated revenues represent the combined
revenues of the Company and its subsidiaries, including sales of the Companys scheduling software, asset management software,
workforce management software, software maintenance and support services,
professional services, installation and training services and hardware devices,
as well as royalties and settlements received from licensing the Companys
intellectual property.
Forgent did not generate
any intellectual property licensing revenues for the three and nine months
ended April 30, 2008, which led to a decrease of $20.0 million for the
three months ended April 30, 2008 and $28.2 million for the nine months
ended April 30, 2008. In prior
fiscal years, the Companys intellectual property licensing revenues were
derived from licensing
U.S. Patent No. 4,698,672 (the 672 patent) and
U.S. Patent No
6,285,746 (the 746 patent). However, the 672 patent has
expired and the 746 patent will be expiring in May 2011. Additionally, the litigations related to
these two patents were concluded in fiscal year 2007. Therefore, management
does not anticipate any additional licensing revenues from these patents.
Software and Services Business
Revenues for the three
months ended April 30, 2008 were $2.7 million, an increase of $1.7
million, or 177%, from the $1.0 million reported for the three months ended April 30,
2007. Revenues for the nine months ended April 30, 2008 were $7.3 million,
an increase of $4.3 million, or 147%, from the $3.0 million reported for the
nine months ended April 30, 2007. Software and services revenues as a percentage of
total revenues were 100% and 5% for the three months ended April 30, 2008
and 2007, respectively. Software and
services revenues as a percentage of total revenues were 100% and 10% for the
nine months ended April 30, 2008 and 2007, respectively.
Revenues from this line of business include sales
of Forgents NetSimplicity scheduling and asset management software, including Meeting Room Manager (MRM) and Visual
Asset Manager (VAM), and sales of the Companys iEmployee workforce
management software, including Time & Attendance, HR &
Benefits and Pay Stubs
.
Also included in this segments revenues are software maintenance and
support services, professional services, such as add-on software
customization, installation and training, and hardware devices.
During the three and nine months
ended April 30, 2008, increases in software subscription revenues,
software license revenues and maintenance revenues accounted for approximately
88% and 87%, of the $1.7 million and $4.3 million increases in revenues,
respectively. In October 2007, the
Company acquired the iEmployee workforce management software. The workforce management software, as well as
the Companys MRM On Demand software, are delivered to customers under the SaaS
model, which is software as a service on a subscription basis. The SaaS model
allows customers to use
Forgents software without installing or maintaining it on their own
servers. The acquisition of iEmployee
and the continued growth of MRM On Demand led to a $1.2 million and $2.8
million increase in service revenues for the three and nine months ended April 30,
2008, respectively. During the third
fiscal quarter, Forgent started bundling some of its more popular products to
match its customers buying patterns and simplify its product line.
Software license revenues
increased by $0.2 million and $0.6 million, for the three and nine months ended
April 30, 2008, respectively.
In
addition to the enhancements to the MRM Outlook® Scheduling interface and MRM
Active Directory released during the fourth fiscal quarter of 2007, Forgent
further enhanced the MRM Outlook® Scheduling functionality by introducing new
flexible and customizable fields during the third fiscal quarter of 2008. These enhanced features continue to attract
enterprise companies and Forgent continues to generate increased sales to this
market segment, which is driving sales with higher average sales prices during
the three and nine months ended April 30, 2008, as compared to the three
and nine months ended April 30, 2007.
Additionally, in January 2008, Forgent released MRM 7.6, which included
a new import capability with the SunGard Higher Education Banner®, a
collegiate course scheduling solution
widely used by higher education institutions which is one of Forgents more
significant vertical markets. These
product enhancements and Forgents expanded sales and marketing workforce have
generated the increases in software license revenues during fiscal 2008. The
increased sales in software license, as well as the continued pursuit of
maintenance renewals, led to additional sales of
13
maintenance and support
contracts, which increased maintenance revenues by $0.1 million and $0.4
million for the three and nine months ended April 30, 2008, respectively.
During fiscal 2008, the Company has generated more
sales from Fortune 500 companies than during fiscal 2007. As a result, Forgent generated approximately
35% and 35% of the Companys
revenues from the education, governmental, healthcare and legal sectors during
the three and nine months ended April 30, 2008, respectively, as compared
to 61% and 55% during the three and nine months ended April 30, 2007,
respectively. Forgent will continue to
target small and medium businesses and divisions of enterprises and utilize
marketing programs in certain vertical markets as appropriate. As the Company finalizes the integration of
the iEmployee operations, continues the development of its sales force to
increase sales performance, and releases new software updates and enhancements,
management believes its revenues will increase.
Gross Margin
Gross margin for the three months ended April 30, 2008 was $2.1
million, a decrease of $8.1 million, or 80%, from the $10.2 million reported
for the three months ended April 30, 2007. Gross margin for the nine months
ended April 30, 2008 was $5.7 million, a decrease of $10.6 million, or
65%, from the $16.3 million reported for the nine months ended April 30,
2007. Gross margin as a percentage of total
revenues were 76% and 49% for the three months ended April 30, 2008 and
2007, respectively. Gross margin as a percentage of total revenues were 78% and
52% for the nine months ended April 30, 2008 and 2007, respectively.
The
$8.1 million decrease in gross margin for the three months ended April 30,
2008, as compared to the three months ended April 30, 2007, is due
primarily to the $9.4 million decrease in gross margin resulting from the
intellectual property licensing segment.
Similarly, the $10.6 million decrease in gross margin for the nine
months ended April 30, 2008, as compared to the nine months ended April 30,
2007, is due primarily to the $14.0 million decrease in gross margin resulting
from the intellectual property licensing segment.
Since the litigations related to the 672
patent and the 746 patent were concluded during fiscal year 2007 and no
revenues were generated from the intellectual property licensing segment during
fiscal 2008, the decline in intellectual property licensing revenues has
adversely affected the Companys total gross margin. However, gross margin as a percentage of
total revenues has improved significantly from 49% to 76% during the three
months ended April 30, 2008 and from 52% to 78% during the nine months
ended April 30, 2008, as compared to the respective periods ending April 30,
2007. This improvement is due to the
higher margins achieved by the software and services segment, as compared to
the intellectual property licensing segment.
Software and Services Business
Gross margin for the three months ended April 30, 2008 was $2.1
million, an increase of $1.3 million, or 165%, from the $0.8 million reported
for the three months ended April 30, 2007. Gross margin for the nine
months ended April 30, 2008 was $5.7 million, an increase of $3.5 million,
or 153%, from the $2.2 million reported for the nine months ended April 30,
2007. Gross margin as a percentage of total
revenues were 76% and 4% for the three months ended April 30, 2008 and
2007, respectively. Gross margin as a percentage of total revenues were 78% and 7%
for the nine months ended April 30, 2008 and 2007, respectively.
The cost of sales for the
software and services segment is relatively fixed and results primarily from
compensation expenses and related overhead expenses and the amortization of the
Companys purchased intangible assets.
These expenses represent approximately 61% and 60% of the total cost of
sales during the three and nine months ended April 30, 2008,
respectively. In October 2007, the
Company acquired the iEmployee workforce management software. As a result of this acquisition, compensation
and related overhead expenses associated with the iEmployee operations
increased by $0.2 million and $0.6 million, which accounts for 55% and 64% of
the total increase in cost of sales for the three and nine months ended April 30,
2008, respectively. As part of the
iEmployee integration process, management continues to investigate ways to
maximize efficiencies within its company-wide operations in order to minimize
these fixed costs without negatively affecting customer services and support.
Despite the overall
increase in cost of sales, the stronger growth in revenues for the software and
services segment caused the gross margin to increase as stated above and the
gross margin as a percentage of revenues to increase from 76% for the nine
months ended April 30, 2007 to 78% for the nine months ended April 30,
2008. Although gross margin increased
for the three months ended April 30, 2008, gross margin as a percentage of
revenues decreased from 80% for the three months ended April 30, 2007 to
76% for the three months ended April
14
30, 2008. This decrease in gross margin as a percentage
of revenue is due primarily to the mix in gross margins contributed from the
NetSimplicity operations and the newly acquired iEmployee operations. As management implements strategies to
maximize efficiencies throughout the Company, Forgent expects to improve its
gross margin as a percentage of revenue from its iEmployee operations, which
will lead to an overall improvement in its gross margin as a percentage of
revenue. Additionally, s
ince Forgent expects to generate more sales, management expects gross margins
to improve during the next fiscal quarter, in terms of total dollars, and to
remain relatively consistent in terms of percentage of revenues.
Selling,
General and Administrative
Selling, general and administrative (SG&A) expenses for the three
months ended April 30, 2008 were $3.0 million, a decrease of $1.0 million,
or 26%, from the $4.0 million reported for the three months ended April 30,
2007. SG&A expenses for the nine months ended April 30, 2008 were $8.3
million, a decrease of $0.7 million, or 7%, from the $9.0 million reported for
the nine months ended April 30, 2007. SG&A expenses as a percentage of total revenues were 109% and
19% for the three months ended April 30, 2008 and 2007, respectively. SG&A expenses as a percentage of total revenues were 114% and
29% for the nine months ended April 30, 2008 and 2007, respectively.
SG&A expenses during the three months ended April 30, 2008
decreased $1.5 million due to the decrease in legal expenses generated from the
intellectual property licensing segment.
Since the litigations related to the 672 patent and the 746 patent
were concluded in fiscal year 2007, Forgent incurred minimal legal expenses
from its intellectual property licensing business during the three months ended
April 30, 2008, as compared to the three months ended April 30,
2007. The decrease in these legal
expenses was offset by a $0.4 million increase in SG&A expenses related to
the iEmployee operations. Since the
iEmployee operations were acquired in October 2007, no SG&A expenses
related to the iEmployee operations were incurred during the three months ended
April 30, 2007.
Similarly,
SG&A expenses during the nine months ended April 30, 2008 decreased
$2.2 million due to the decrease in legal expenses generated from the
intellectual property licensing segment.
The decrease in these legal expenses was offset by a $0.9 million
increase in SG&A expenses related to the acquired iEmployee operations and
a $0.7 million increase in compensation expenses related to sales and marketing
personnel. During fiscal 2008, Forgent
hired additional sales personnel such that each sales representative could
specialize in the Companys software and services and focus on certain
industries and/or smaller territories.
Forgents expanded sales force continues to operate through a low-cost
direct web and telesales model. Additionally,
Forgent hired a Director of Marketing and other marketing personnel to
concentrate on creating and expanding market awareness of the Companys
software and services. In addition to
the appealing features of its software products and services, management
believes the additional personnel have contributed to the increase in revenues
during the three and nine months ended April 30, 2008. Management anticipates further increases in
revenues as the Companys expanded sales and marketing workforce achieves its
full productivity potential in building greater market awareness and generating
increased sales.
Forgent will also continue
to evaluate and reduce any unnecessary
SG&A expenses that do not directly support the generation of revenues for
the Company.
Research and Development
Research and development (R&D) expenses for the three months
ended April 30, 2008 were $0.6 million, an increase of $0.4 million, or
242%, from the $0.2 million reported for the three months ended April 30,
2007. R&D expenses for the nine months ended April 30, 2008 were $1.5
million, an increase of $1.1 million, or 261%, from the $0.4 million reported
for the nine months ended April 30, 2007. R&D expenses as a percentage of total revenues were 23% and 1%
for the three months ended April 30, 2008 and 2007, respectively. R&D expenses as a percentage of total revenues were 21% and 1%
for the nine months ended April 30, 2008 and 2007, respectively.
Approximately 83% of the $0.4 million increase in R&D expenses
during the three months ended April 30, 2008 and approximately 78% of the
$1.1 million increase in R&D expenses during the nine months ended April 30,
2008 are due to the acquisition of the iEmployee R&D workforce and
operations in October 2007. As the
Company further integrates the iEmployee R&D workforce into the existing
R&D team, management is continuing to explore
15
opportunities to create synergies within the group and is investigating
all methods for managing its R&D efforts in the most cost-effective manner.
During the three months ended April 30, 2008, Forgent released an
improved version of iEmployees Time and Attendance product, which added an
interface to iClock Advanced, a web-based punch clock that provides new
capabilities and greater flexibility in order to serve a broader range of
customers and meet more complex customer requirements by allowing companies to
easily manage their employees schedules.
Additionally, Forgent announced the release of a new version of its
iEmployee HR & Benefits offering, which introduced new features to
help the HR or Benefits administrator exercise better control over the benefits
work flow through an easier interface, broadened capabilities to configure
various parts of the benefit plans and increased flexibility. During the third fiscal quarter, Forgent
also released MRM 7.7, which improved the MRM Enterprise Outlook® Scheduling
functionality by introducing new flexible and customizable fields. As Forgent continues to develop and improve
all of it products and services, management
will attempt to maintain R&D expenses at reasonable levels in terms of
percentage of revenue.
Other Income and Expenses
Other income and expenses for the three months ended April 30,
2008 were $0.1 million, a decrease of $0.1 million, or 50%, from the $0.2
million reported for the three months ended April 30, 2007. Other income
and expenses for the nine months ended April 30, 2008 were $0.6 million, a
decrease of $2.8 million, or 83%, from the $3.4 million reported for the nine
months ended April 30, 2007. Other income and expenses as a percentage of total revenues were 3% and 1%
for the three months ended April 30, 2008 and 2007, respectively. Other income and expenses as a percentage of total revenues were 8% and 11%
for the nine months ended April 30, 2008 and 2007, respectively.
The $2.8 million decrease for the nine months ended April 30,
2008 resulted from the sale of assets during the second fiscal quarter of
2007. In November 2006, Forgent
sold certain patents and applications associated with videoconferencing and
related fields and technology, together with related goodwill, rights and
documentation, to Tandberg Telecom AS for $3.2 million. Upon closing,
Forgent received $2.9 million of the purchase price, all of which was recorded
as a gain on sale of assets. The
remaining balance of $0.3 million is held in escrow for two years for indemnity
claims.
Net (Loss) Income
Forgent
incurred a net loss of $1.6 million, or $0.05
per share, during the three months ended April 30, 2008
compared to a net income of $6.0 million, or $0.23 per share, during the three
months ended April 30, 2007. Forgent incurred a net loss of $4.0 million,
or $0.14
per share, during the
nine months ended April 30, 2008 compared to a net income of $10.1
million, or $0.39 per share, during the nine months ended April 30, 2007.
Net (loss) income as a percentage of total revenues were (58%) and 29% for the
three months ended April 30, 2008 and 2007, respectively. Net (loss)
income as a percentage of total revenues were (54%) and 32% for the nine months
ended April 30, 2008 and 2007, respectively. The $7.6 million decrease in
the Companys net income during the three months ended April 30, 2008, as
compared to the three months ended April 30, 2007, is primarily
attributable to the $9.4 million decrease in gross margin from the intellectual
property licensing business. Similarly,
the $14.1 million decrease in the Companys net income during the nine months
ended April 30, 2008, as compared to the nine months ended April 30,
2007, is primarily attributable to the $14.0 million decrease in gross margin
from the intellectual property licensing business.
16
LIQUIDITY AND CAPITAL RESOURCES
|
|
FOR THE NINE
|
|
|
|
MONTHS ENDED
|
|
|
|
APRIL 30,
|
|
|
|
2008
|
|
2007
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
Working capital
|
|
$
|
11,449
|
|
$
|
20,951
|
|
Cash, cash equivalents and short-term
investments
|
|
16,122
|
|
26,147
|
|
Cash (used in) provided by operating
activities
|
|
(11,926
|
)
|
10,854
|
|
Cash used in investing activities
|
|
(8,737
|
)
|
(1,978
|
)
|
Cash provided by (used in) financing
activities
|
|
13
|
|
(457
|
)
|
|
|
|
|
|
|
|
|
Cash used in operating activities was $12.0
million for the nine months ended April 30, 2008 due primarily to a $4.0
million net loss and an $8.2 million decrease in accounts payables. Cash
provided by operating activities was $10.9 million for the nine months ended April 30,
2007 due primarily to the $10.1 million in net income and a $9.1 million
increase in accounts payables, which were offset by a $10.1 million increase in
accounts receivables. During the nine months ended April 30, 2008, Forgent
paid its legal counsel $7.4 million in contingency fees related to its 746
patents settlement and license agreements.
The Company will pay the related contingency fees to Jenkens &
Gilchrist, P.C. (Jenkens) in a future period, once the litigation with
Jenkens is finalized. Forgents average
days sales outstanding for its software and services segment was 39 days for
the third fiscal quarter of 2008, an improvement over the 46 days for the third
fiscal quarter of 2007.
Cash used in investing
activities was $8.7 million for the nine months ended April 30, 2008 due
primarily to $7.3 million
paid
in cash related to the iEmployee acquisition and $1.3 million purchase of
short-term investments. Cash used
in investing activities was $2.0 million for the nine months ended April 30,
2007 due primarily to $1.5 million in net purchases of short-term investments. Forgent manages its investments portfolio in
order to fulfill corporate liquidity requirements and maximize investment
returns while preserving the quality of the portfolio. During
the nine months ended April 30, 2008, Forgent shifted its investment
portfolio to investments with slightly longer maturities in order to maximize
its interest income. As a result of this
shift and the increase in the average cash equivalents and short-term
investment balances during the nine months ended April 30, 2008, Forgent
achieved an 8% increase in interest income during the nine months ended April 30,
2008, as compared to the nine months ended April 30, 2007.
Approximately 44% of
Forgents purchased fixed assets during the nine months ended April 30,
2008 related to leasehold improvements for the Companys expanded sales force
and for one subtenant.
In addressing all operational and facility
capital requirements, management continues to evaluate how best to manage
operations without expending significant additional resources and is maximizing
its existing office space to facilitate the growth of its software
business. Management does not anticipate
any significant capital expenditures during the fourth fiscal quarter of 2008.
The Company leases office space and equipment
under non-cancelable operating leases that expire at various dates through
2013. Certain leases obligate Forgent to pay property taxes, maintenance and
insurance and include escalation clauses.
The total
amount of base rentals over the term of the Companys leases is charged to
expense on a straight-line basis, with the amount of the rental expense in
excess of the lease payments recorded as a deferred rent liability. Forgent
may periodically make other commitments and thus become subject to other
contractual obligations. Forgents
future minimum lease payments under all operating and capital leases as of April 30, 2008 are as follows:
|
|
Payments Due By Period
|
|
|
|
(in thousands)
|
|
|
|
Total
|
|
Less than
1 year
|
|
1 - 3 years
|
|
3- 5 years
|
|
More than
5 years
|
|
Operating lease obligations
|
|
$
|
16,933
|
|
$
|
3,693
|
|
$
|
6,889
|
|
$
|
6,351
|
|
$
|
|
|
Capital lease obligations
|
|
60
|
|
34
|
|
26
|
|
|
|
|
|
Total
|
|
$
|
16,993
|
|
$
|
3,727
|
|
$
|
6,915
|
|
$
|
6,351
|
|
$
|
|
|
17
Approximately 98% of the Companys operating lease
obligations relates to its corporate office location at Wild Basin in Austin,
Texas. As of April 30, 2008,
Forgent had approximately $5.6
million
in future minimum lease payments receivable under non-cancelable sublease
arrangements. Additionally, Forgent had
a $0.5 million liability related to impairment charges for the economic value
of the lost sublease rental income related to its Austin property.
Cash
provided by financing activities was $13 thousand for the nine months ended April 30,
2008. Cash used in financing activities was $0.5 million for the nine months
ended April 30, 2007 due primarily to the repayment of Forgents
outstanding notes payable. A
lthough no debt was outstanding as of April 30,
2008, Forgent had $1.0 million available from a credit line from Silicon Valley Bank. This
credit line expired on May 1, 2008.
Forgent is currently working with Silicon Valley Bank to renew this
source of financing and management anticipates obtaining similar terms of
interest at prime plus 0.75% and monthly installments over a three year term
for the future credit line.
Forgents stock repurchase
program allows the Company to purchase up to three million shares of the
Companys common stock. No shares were repurchased during the nine months ended
April 30, 2008 or 2007. As of April 30,
2008, Forgent had repurchased 1,790,401 shares for approximately $4.8 million
and had the authority to repurchase approximately 1.2 million additional
shares. Management will periodically
assess repurchasing additional shares in fiscal year 2008, depending on the
Companys cash position, market conditions and other factors.
As of April 30, 2008, Forgents principal source of liquidity
consisted of $16.1 million in cash, cash equivalents and short-term
investments. Management currently plans
to utilize its cash balances to continue developing its software business by
making prudent investments when necessary, continue exploring potential opportunities
in acquiring a growing and profitable public or privately held technology
business or product line, and may repurchase outstanding shares.
There is no assurance that the Company will be able to limit its cash
consumption and preserve its cash balances, and it is possible that the Companys
future business demands may lead to cash utilization at levels greater than
recently experienced due to the iEmployee acquisition, potential other
acquisitions and other business factors. Management believes that the Company
has sufficient capital and liquidity to fund and cultivate the growth of its
current and future operations for the next 12 months and thereafter. However, due to uncertainties related to the
timing and costs of these efforts, Forgent may need to raise additional capital
in the future. Yet, there is no
assurance that the Company will be able to raise additional capital if and when
it is needed.
CRITICAL ACCOUNTING POLICIES
The
Companys condensed consolidated financial statements have been prepared in
accordance with U.S. generally accepted accounting principles and include the
accounts of Forgents wholly owned subsidiaries. All significant intercompany
transactions and balances have been eliminated in the consolidation.
Preparation of the condensed consolidated financial statements in conformity
with U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of the assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. The more significant estimates made by management
include the valuation allowance for the gross deferred tax asset, contingency
reserves, useful lives of fixed assets, the determination of the fair value of
its long-lived assets,
and the fair value of assets acquired and
liabilities assumed during the recent acquisition
. These estimates could be materially different under different
conditions and assumptions.
Additionally, the actual amounts could differ from the estimates made.
Management periodically evaluates estimates used in the preparation of the
financial statements for continued reasonableness. Appropriate adjustments, if
any, to the estimates used are made prospectively based upon such periodic
evaluation.
Management believes the following represent Forgents critical
accounting policies:
18
Revenue Recognition
The Company recognizes revenue when persuasive evidence of an
arrangement exists, delivery has occurred, the fee is fixed or determinable and
collectibility is probable. The Company
recognizes software license revenue in accordance with Statement of Position (SOP)
97-2,
Software Revenue Recognition,
as
amended by SOP 98-4,
Deferral of the Effective Date
of a Provision of SOP 97-2,
and SOP 98-9,
Modification
of SOP 97-2 With Respect to Certain Transactions,
Securities and Exchange Commission Staff Accounting Bulletin 104,
Revenue Recognition
and Emerging Issues
Task Force Issue No. 00-21,
Revenue
Arrangements with Multiple Deliverables.
The Company recognizes
software subscription revenue in accordance with EITF Issue No. 00-3,
Application of AICPA Statement of Position 97-2 to
Arrangements That Include the Right to Use Software Stored on Another Entitys
Hardware
and EITF Issue No. 00-21.
Revenue consists of software
license, software subscription and service fees. Revenue from the software element is earned
through the licensing or right to use the Companys software and from the sale
of specific software products. Service
fee income is earned through the sale of maintenance and technical support,
training and installation. Revenue from the sale of hardware devices is recognized
upon shipment of the hardware. Forgent
sells multiple elements within a single sale.
For software license arrangements, the Company allocates the total fee
to the various elements based on the relative fair values of the elements
specific to the Company. For software
subscription arrangements, the Company recognizes the total contract value
ratably over the contract term.
The Company determines
the fair value of each element in the arrangement based on vendor-specific
objective evidence (VSOE) of fair value.
VSOE of fair value for the software, maintenance, and training and
installation services are based on the prices charged for the software,
maintenance and services when sold separately.
Revenue allocated to maintenance and technical support is recognized
ratably over the maintenance term (typically one year). Revenue allocated to installation and
training is recognized upon completion of these services. The Companys training and installation
services are not essential to the functionality of its products as such
services can be provided by a third party or the customers themselves.
For
instances in which VSOE cannot be determined for undelivered elements, and
these undelivered elements do not provide significant customization or modification
of its software product, Forgent recognizes the entire contract amount ratably
over the period during which the services are expected to be performed.
The
Company does not recognize revenue for agreements with rights of return,
refundable fees, cancellation rights or acceptance clauses until such rights of
return, refund or cancellation have expired or acceptance has occurred. The Companys arrangements with resellers do
not allow for any rights of return.
Deferred revenue includes amounts received from customers in excess of
revenue recognized, and is comprised of deferred maintenance, service and other
revenue. Deferred revenues are
recognized in the Condensed Consolidated Statements of Operations when the service
is completed and over the terms of the arrangements, primarily ranging from one
to three years.
Impairment of Goodwill, Intangible Assets and
Long-Lived Assets
Goodwill
and other intangible assets
with indefinite lives
are not required to be amortized under
Financial Accounting Standard Board (FASB) Statement No. 142,
Goodwill and Other Intangible Assets,
and
accordingly, the Company reviews its
goodwill for possible impairment on an annual basis, or whenever specific
events warrant. Events that may create an impairment review include, but are
not limited to: significant and sustained decline in the Companys stock price
or market capitalization, significant underperformance of operating units and
significant changes in market conditions and trends. Forgent uses a two-step
process and a discounted cash flow model to evaluate its assets for impairment. If the carrying amount of
the goodwill or asset exceeds its implied fair value, an impairment loss is
recognized in an amount equal to the excess during that fiscal period. Intangible assets that are not deemed to have
indefinite lives are amortized over their useful lives and are tested for
impairment in accordance with FASB Statement No. 144,
Accounting for the Impairment or Disposal of
Long-Lived Assets.
In accordance with Statement No. 144, Forgent reviews and
evaluates its long-lived assets for impairment whenever events or changes in
circumstances indicate that their net book value may not be recoverable.
When such factors and circumstances exist, including those noted above, the
Company compares the assets carrying amounts against the estimated
undiscounted cash flows to be generated by those assets over their estimated
useful lives. If
19
the carrying amounts are greater than the undiscounted cash flows, the
fair values of those assets are estimated by discounting the projected cash
flows. Any excess of the carrying
amounts over the fair values are recorded as impairments in that fiscal period.
ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
The Companys
primary market risk exposure relates to interest rate risk. Forgents interest
income is sensitive to changes in U.S. interest rates. However, due to the relatively short-term
nature of the Companys investments, Forgent does not consider these risks to
be significant. For additional
Quantitative and Qualitative Disclosures about Market Risk, reference is made
to Part II, Item 7A, Quantitative and Qualitative Disclosures about Market
Risk, in the Companys Annual Report on Form 10-K/A for the year ended July 31,
2007.
ITEM 4. CONTROLS AND PROCEDURES
The Companys management is responsible for
establishing and maintaining adequate internal control over financial reporting
for the Company. The Company maintains
disclosure controls and procedures that are designed to ensure that information
required to be disclosed in the reports it files under the Securities and
Exchange Act of 1934, as amended, is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission. Such
controls include those designed to ensure that information for disclosure is
communicated to management, including the Chairman of the Board and the Chief
Executive Officer (CEO), as appropriate to allow timely decisions regarding
required disclosure.
The CEO and Chief Financial Officer, with the
participation of management, have evaluated the effectiveness of the Companys
disclosure controls and procedures as of April 30, 2008. Based on their evaluation, they have
concluded, to the best of their knowledge and belief, that the disclosure
controls and procedures are effective.
No changes were made in the Companys internal controls over financial
reporting during the quarter ended April 30, 2008, that have materially
affected, or are reasonably likely to materially affect, the Companys internal
controls over financial reporting. In
making this assessment, management used the criteria set forth in
Internal Control-Integrated Framework
issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
Due to the acquisition of iEmployee in October 2007, Forgent is
required to implement internal controls related to those operations. As of April 30,
2008, the Company has not tested the operating effectiveness of the internal
controls related to iEmployee or the integration of iEmployee. In compliance
with the Public Company Accounting Oversight Boards and the Securities and
Exchange Commissions regulations and guidance, Forgent will not report on the
effectiveness of iEmployees internal controls over financial reporting under
the Sarbanes-Oxley Act of 2002 until its Annual Report on Form 10-K for
fiscal 2008.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Forgent is the defendant or plaintiff in
various actions that arose in the normal course of business.
With the exception of the proceedings
described below, none of the pending legal proceedings to which the Company is
a party are material to the Company.
Litigation with Jenkens & Gilchrist, P.C.
On July 16, 2007, Jenkens &
Gilchrist, P.C. (Jenkens), Forgents former legal counsel, filed a complaint
against Forgent and Compressions Labs, Inc., in the District Court of
Dallas County, Texas. In its complaint,
Jenkens alleges a breach of contract and is seeking a declaratory
judgment. Forgent disputes Jenkens
claims and is seeking relief through the court system.
After Forgent terminated Jenkens, the Company
entered into a Resolution Agreement with Jenkens in December 2004. Under the Resolution Agreement, the Company
believes Jenkens is entitled to $1.4 million for contingency fees and expenses
related to the settlements from the litigation regarding the Companys DVR
patents. Jenkens interprets the
Resolution Agreement on broader terms and believes it is entitled to $3.4
million, including attorneys fees and interest.
20
On March 3, 2008, Forgent and Jenkens
appeared before the Court regarding a hearing on a motion for summary judgment
filed by Jenkens. On May 20, 2008,
the Court granted Jenkens motion and ordered Forgent to pay Jenkens $2.8
million for recoveries related to the 746 patent and other amounts including
attorneys fees and interest. Forgent
disagrees with the Courts ruling and is currently pursuing efforts to appeal
this Court order.
The trial date for
this litigation is currently scheduled for October 6, 2008. However, m
anagement
currently cannot predict how long it ultimately will take to resolve the
Jenkens lawsuit. Until the Jenkens
litigation is finalized, the related contingency fees and expenses may be
adjusted in a future period and could have a material impact to the Companys
consolidated financial statements.
Litigation with Wild Basin
On September 6,
2007, Forgent filed a petition against Wild Basin One & Two, Ltd. (Wild
Basin) in the District Court of Travis County, Texas. The petition claims Wild Basin is in breach
of contract relating to Forgents lease agreement by unreasonably withholding
and delaying its consent to a pending lease assignment. On October 19, 2007, Forgent amended its
petition to include claims of fraud and breach of fiduciary duty against Wild
Basin. On June 2, 2008, Wild Basin
filed a counterclaim seeking a declaratory judgment that it had complied with
its obligations under the lease and was seeking the recovery of attorneys
fees. On June 5, 2008, Forgent
amended its petition to request the Court make declaratory judgments on several
issues in the case and to include as a breach of contract claim its claim for
withholding amounts that should have been distributed by Wild Basin in the past
pursuant to the lease. Forgent is
seeking to recover all damages as a result of the delay in closing its pending
assignment and amounts not distributed in the past, among other damages. The Company anticipates participating in
mediation with Wild Basin in July 2008. The trial date for this litigation
has been re-scheduled for July 21, 2008.
Re-examination of United States Patent No. 6,285,746
On October 2, 2006, the United States Patent and Trademark Office
(the USPTO) ordered an
inter partes
re-examination of the 746
patent and issued its first office action related to this re-examination on October 30,
2006. This first action, which is not
the final conclusion of the re-examination, rejected the five claims in the 746
patent. Forgent responded to the USPTO,
but the USPTO has not issued any additional office actions related to this re-examination.
Re-examination of United States Patent No. 4,698,672
On
January 31, 2006, the USPTO granted a petition to re-examine the Companys
U.S. Patent No. 4,698,672 (the 672 patent) and subsequently issued its
first office action on May 25, 2006.
Forgent responded to this first office action, which confirmed 27 of the
46 claims in the 672 patent. On March 26,
2007, the USPTO issued its final office action, which affirmed its first office
action. Forgent responded to the USPTO
on May 11, 2007. On January 11,
2008, the Company received the USPTOs notice of intent to issue an Ex-Parte
Reexamination Certificate. On April 15,
2008 Forgent received the USPTOs Ex-Parte Reexamination Certificate, which
affirmed its previous office actions.
The Company currently has no plans to pursue this matter further.
ITEM 1A. RISK FACTORS
Many
factors affect Forgents business, prospects, liquidity and the results of
operations, some of which are beyond the Companys control. The following is a
discussion of important risk factors that may cause the actual results of the
Companys operations in future periods to differ materially from those
currently expected or desired. Additional risks not presently known to
management or risks that are currently believed to be immaterial, but which may
become material, may also affect the Companys business, prospects, liquidity
and results of operations.
SOFTWARE AND SERVICES BUSINESS
The Company may encounter problems related to
its acquisition of iEmployee, which could create business difficulties and
adversely affect operations.
The Company may have difficulties fully integrating the services,
technologies, personnel and operations of iEmployee into the Companys existing
software business. These difficulties could disrupt Forgents ongoing business,
distract management and other personnel, increase expenses and adversely affect
operating results. If
21
Forgent is unable to fully integrate iEmployee with its existing operations,
the Company may not achieve all the intended benefits of the acquisition.
If Forgent is unable to successfully market and sell its software
products and services, future revenues will decline.
The future success of the Company is dependent
on its ability to generate demand for its
scheduling, asset management, and workforce management
software
products and services. To this end, Forgents marketing and sales operations
must increase market awareness of the Companys products and services to generate
increased revenue. All new hires within the sales and marketing departments
will require training and may take time to achieve full productivity. Forgent
cannot be certain that its new hires will become as productive as necessary. The Company also cannot be certain that it
will be able to hire enough qualified individuals or retain existing employees
in the future, and therefore, cannot be certain that it will be successful in
its efforts to market and sell its products and services. If Forgent is not successful in building
greater market awareness and generating increased sales, future revenues will
decline.
Lack of new customers or additional sales
from current customers could negatively affect the Companys ability to grow
revenues.
Forgents future success and business model depends significantly on
its ability to expand the use of its software and services. The Company must execute on its growth
objectives by increasing its market share, maintaining and increasing recurring
revenues from new and existing customers, and selling additional products and
services to new and existing customers.
If the Company fails to grow its customer base or generate repeat and
expanded business from its current customers, Forgents revenues could be
adversely affected.
Since NetSimplicitys maintenance and other service fees depend largely
on the size and number of licenses that are sold, any downturn in NetSimplicitys
software license revenue would negatively impact the Companys deployment
services revenue and future maintenance revenue. Additionally, if customers
elect not to renew their maintenance agreements, NetSimplicitys maintenance
revenue could be adversely affected.
Increased competition may have an adverse effect on the Companys
operating results.
The Company may encounter new entrants or
competition from vendors in some or all aspects of its software business. The
Company currently competes on the basis of price, technology, availability,
performance, quality, reliability, service and support. However, there can be
no assurance that the Company will be able to maintain a competitive advantage
with respect to any of these factors. Some of Forgents competitors, both
current and future, may have greater financial, technical and marketing
resources than the Company and, therefore, may be able to respond quicker to
new or emerging technologies and changes in customer requirements. As a result, they may compete more
effectively on price and other terms.
Additionally, these competitors may devote greater resources in
developing products or in promoting and selling their products to achieve
greater market acceptance. Such
competition could adversely affect the Companys operating results.
Open source software may increase
competition, resulting in decreases in the prices of Forgents software
products.
Many
different formal and informal groups of software developers and individuals
have created a wide variety of software and have made that software available
for use, distribution and modification, often free of charge. Such open source
software has been gaining in popularity among business users, particularly
small to medium sized businesses, which are some of Forgents targeted
customers. Although management is currently unaware of any competing open source
software, if developers make scheduling, asset management or workforce
management software applications available to the open source community, and
that software has competitive features, Forgent may need to change its pricing
and distribution strategy in order to compete.
A systems
failure or any other service interruption could result in substantial expenses
to the Company, loss of customers and claims by customers for damages caused by
any losses they incur.
Forgents workforce management software, as
well as the Companys MRM On Demand software, are delivered to customers under
the SaaS model, which is software as a service on a subscription basis.
These hosting services, which
are supported by hardware, infrastructure, ongoing maintenance and back-up
services, must be operated reliably on a 24 hours per day, seven days per week
basis without interruption or data loss.
If Forgent cannot protect its infrastructure, equipment and customer
data files against damage from human error, power loss or telecommunication
failures, intentional acts of vandalism, or any other catastrophic occurrences,
services to its customers may be interrupted.
If services are interrupted,
22
·
Customers may
not be able to retrieve their data;
·
The Company
could incur significant expenses to replace existing equipment or purchase
services from an alternative data center;
·
Customers may
not renew their services or cancel their contracts;
·
Customers may
seek reimbursement for losses that they incur; and/or
·
The Companys
reputation may be impaired, making it difficult to attract new customers.
Although disaster recovery plans and strategies are in place, Forgent
may not be successful in mitigating the effects of any systems failure or other
service interruptions. Such failures or interruptions could significantly
impair the Companys operations and adversely affect the Companys financial
results.
If Forgents business, systems and/or IT
security is breached, the Companys businesses may be adversely affected.
A
security breach in the Companys business processes and/or systems has the
potential to impact the Companys customer information. Any issues of data privacy as they relate to
unauthorized access to or loss of customer information could result in the
potential loss of business, damage to the Companys reputation and
litigation. To prevent unauthorized
access to confidential information or attempts to breach the Companys
security, Forgent continues to invest in the security of its IT systems and
improve the controls within its IT systems and business processes. However,
there is no assurance that the Companys business and/or systems will not be
breached. If Forgents security is
breached or confidential information is accessed, the Companys business and
operating results may be adversely affected.
Claims of intellectual property infringement by third parties
may adversely affect Forgents business.
The
Company
may become subjected to claims of
intellectual property infringement by third parties as the number of
competitors and available software products continue to grow and the
functionality of such products increasingly overlaps. Any infringement claims,
with or without merit, could be time-consuming, result in costly litigation,
divert managements attention and financial resources, cause the loss or
deferral of sales or require the Company to enter into royalty or license
agreements. In the event of a successful claim of intellectual property
infringement against Forgent, the Companys business, operating results and
financial condition could be materially adversely affected, unless the Company
is able to either license the technology or similar technology or develop an
alternative technology on a timely basis.
Even if Forgent is able to license the technology, such royalty or
license agreements may not be available on terms acceptable to the Company.
If Forgent cannot
prevent piracy of its software products, revenues may decline.
Although the Company is unable to determine
the extent to which piracy of its software products occurs, software piracy
could be a problem. Since Forgent has
international resellers and customers, piracy may occur in foreign countries
where laws do not protect proprietary rights to the same extent as the laws in
the United States. Piracy may cause the Companys revenues to decline. Forgent seeks to protect its assets through a
combination of patent and trademark laws as well as confidentiality procedures
and contractual provisions. These legal protections afford only limited
protection and enforcement of these rights may be time consuming and
expensive. Furthermore, competitors may
also independently develop similar, but not infringing, technology or design
around the Companys products.
The
Companys software products functionality may be impaired if third-party
hardware devices associated with the software do not operate successfully.
In
addition to its software products, Forgent currently sells hardware devices
from partnered vendors to its customers.
The effective implementation of the Companys software products depends
upon the successful operation of these third-party hardware products. Any
undetected defects in these third-party products could prevent the
implementation of or impair the functionality of the Companys software or
blemish Forgents reputation.
If customers cease using Microsoft Outlook©
or if Microsoft changes its Outlook application significantly, revenues may
decline and/or the Company may incur significant expenses to update its MRM
Enterprise software.
The
Companys MRM Enterprise software is designed to operate with Microsoft
Outlook©. Although management believes
that Microsoft Outlook© is currently and widely utilized by businesses in the
Companys target markets, there are no assurances that businesses will continue
to use Microsoft Outlook© as anticipated, will
23
migrate from older versions to newer versions of Microsoft Outlook©, or
will not adopt alternative technologies that are incompatible with MRM
Enterprise. Forgent may not be timely in
updating its MRM Enterprise software to be compatible with Microsoft
Outlook©. As a result, software revenues
may decline. Additionally, the Company
may incur significant expenses updating its MRM Enterprise software to be
compatible with changes in Microsoft Outlook©.
If Forgent fails to introduce new versions
and releases of functional and scalable software products in a cost-effective
and timely manner, customers may license competing products and Forgents
revenues will decline.
The technology industry is characterized by
continuing improvements in technology, resulting in the frequent introduction
of new products, short product life cycles, changes in customer needs and
continual improvement in product performance characteristics. Forgent expects that its future financial
performance will depend, in part, on revenue generated from future software
products and enhancements as well as other software related products that the
Company plans to develop and/or acquire. To be successful, Forgent must be
cost-effective and timely in enhancing its existing software applications,
developing new software technology and solutions that address the increasingly
sophisticated and varied needs of its existing and prospective clients, and
anticipating technological advances and evolving industry standards and
practices.
Forgent
spends a large portion of its research and development resources on product
upgrades and may need to invest further in research and development in order to
keep its software applications and solutions viable in the rapidly changing
marketplace. This research and development effort, which may require
significant resources, could ultimately be unsuccessful if Forgent does not
achieve market acceptance for its new products or enhancements. Additionally, if the Company fails to
anticipate and respond effectively to technological improvements or if Forgents
competitors release new products that are superior to Forgents products in
performance and/or price, demand for the Companys software products may
decline and Forgent may lose sales and fail to achieve anticipated revenues.
Errors or defects in Forgents software could
reduce demand for its software and result in decreased revenues, decreased
market acceptance and injury to the Companys reputation.
Errors or defects in the Companys software, sometimes called bugs,
may be found from time-to-time, particularly when new versions or enhancements
are released. Any significant software errors or defects may result in loss of
sales, decreased revenues, delay in market acceptance and injury to the Companys
reputation. Despite extensive product testing during development, new versions
or enhancements of Forgents software may still have errors after commercial
shipments begin. Forgent corrects the bugs
and delivers the corrections in subsequent maintenance releases, patches and
on-going service. However, errors or
defects could put the Company at a competitive disadvantage and can be costly
and time-consuming to correct.
If Forgent is unable to develop or maintain
strategic relationships with its resellers and vendor partners who market and
sell the Companys products, revenues may decline.
Forgent supplements its direct sales force by
contracting with resellers and vendor partners to generate additional
sales. Forgents revenue growth will
depend, in part, on adding new resellers and partners to expand the Companys
sales channels, as well as leveraging the Companys relationships with existing
resellers and partners. If Forgent is unable to enter into successful new
strategic relationships in the future or if the Companys current relationships
with its resellers and partners deteriorate or terminate, Forgent may lose
sales and revenues may decline.
OTHER
Forgents stock may be de-listed from NASDAQ,
which may adversely affect its stockholders ability to sell their shares and
the Companys ability to raise capital.
On February 4, 2008, Forgent received a
Nasdaq
deficiency letter indicating that, for 30 consecutive business days, the bid
price per share of the Companys common stock closed below the minimum $1.00
per share requirement. Therefore, its
common stock is subject to potential delisting from the
Nasdaq
Global Market Exchange pursuant to Nasdaq Marketplace Rule 4450(a)(5). The
Company was provided 180 calendar days, or until August 4, 2008,
to regain compliance by maintaining a
share price in excess of $1.00 for ten consecutive business days. If the
Company cannot achieve compliance with the minimum share price requirement by August 4,
2008, Nasdaq will provide written notification that the Companys securities
will be de-listed from the Global Market Exchange.
24
The Company may pursue trading on the Nasdaq Capital Market. If NASDAQ approves, Forgent would be provided
an additional 180 calendar days to regain compliance with the minimum $1.00
share price requirement while trading on the Nasdaq Capital Market. If NASDAQ
does not approve the Company to trade on the Capital Market and the Company
cannot achieve compliance by any other means, Forgents common stock will be
de-listed from NASDAQ.
If
Forgents common stock is de-listed from NASDAQ, the market liquidity of
Companys common stock will be significantly limited, which would reduce
stockholders ability to sell their Company securities in the secondary
market. Additionally, any such
de-listing would harm Forgents ability to raise capital through alternative
financing sources on acceptable terms, if at all, and may result in the loss of
confidence in the Companys financial stability by suppliers, customers and
employees. Forgent cannot give investors in its common stock any assurance that
the Company will be able to regain and maintain compliance with the $1.00 per
share minimum price requirement for continued listing on NASDAQ or that its
stock will not be de-listed by NASDAQ in the future.
Forgent may face problems in connection with
future acquisitions, which could create business difficulties and adversely
affect operations.
As
part of the Companys business strategy, Forgent may acquire additional
businesses, products and technologies that could complement or expand its ongoing
business. However, the Company may be
unable to identify suitable acquisitions or investment candidates. Even if
Forgent identifies suitable candidates, there are no assurances that the
Company will be able to make the acquisitions or investments on favorable
terms. Negotiations of potential acquisitions could divert management time and
resources and the Company may incorrectly judge the value or worth of an
acquired business, product or technology. Additionally, Forgent may incur
significant debt or be required to issue equity securities to pay for such
future acquisitions or investments.
Historically, the Company has not
been profitable and Forgent may continue to incur losses, which may result in
decreases in revenues if customers raise viability concerns.
Although
Forgent generated net income for the year ended July 31, 2007, the Company
incurred losses during the prior fiscal years and during the nine months ended April 30,
2008. The net income during fiscal year
2007 was due to the income generated from the intellectual property licensing
segment, which is no longer generating revenue.
Additionally
as of April 30, 2008, Forgent had an
accumulated deficit of $242.4
million
and may incur additional losses in the future.
Continued losses may cause existing and new customers to question the
Companys viability and be reluctant to purchase from the Company. If Forgent is unable to increase its sales
due to such concerns, revenues will decline, which would further adversely
affect the Companys operating results. Therefore, there are no assurances that
the Company can achieve or generate sufficient revenues to realize
profitability.
Forgent may not be able to
protect or enforce its intellectual property rights, which could adversely
affect the Companys operations.
The
Company seeks to protect its assets through patent and trademark laws. Forgent currently has several patents and
trademarks, as well as patent applications and trademark registrations. However, the Companys patent applications or
trademark registrations may not be approved. Additionally, even if approved,
the resulting patents or trademarks may not provide the Company with any
competitive advantage or may be challenged by third parties. If challenged, patents and trademarks might
not be upheld or claims could be narrowed. Any challenges or litigation
surrounding the Companys rights could force Forgent to divert important
financial and other resources away from business operations.
If Forgent elects to raise
additional capital, funds may not be available or, if available, may not be on
favorable terms to the Company.
In the future, Forgent may elect to raise
additional capital to fund its operations and/or acquisitions. However, Forgent
cannot be certain that it will be able to obtain financing on favorable
terms. If Forgent takes out loans, the
Company may incur significant interest expense, which could adversely affect
operating results. If Forgent issues
equity securities, its stockholders percentage of ownership would be reduced
and the new equity securities may have rights, preferences or privileges senior
to those of existing stockholders of the Companys common stock. If Forgent is unable to raise funds on
acceptable terms, Forgent may not be able to acquire additional businesses,
products or technologies, develop or enhance its existing products, respond to
competitive pressures or unanticipated requirements, or take advantage of
future opportunities, all of which could adversely affect the Companys
business, operating results and financial condition.
25
Forgent may experience fluctuations in its
quarterly results and if the Companys future results are below expectations,
the price for the Companys common stock may decline.
In
the past, the Companys revenues and operating results have varied
significantly from quarter to quarter due to the various events primarily
experienced by the intellectual property licensing segment. Although management expects that revenues and
operating results may fluctuate less from quarter to quarter in the future, any
fluctuation from Forgents operations may lead to reduced prices for the
Companys common stock. Several factors
may cause the quarterly results to fluctuate, including:
·
market demand for the Companys software products and services;
·
timing of customers budget cycles;
·
timing of customer orders and deployment of the Companys software
products and services;
·
mix of software license and services revenues;
·
timing of introducing new products
and services or enhancements to existing products and services;
·
new product releases or pricing
policies by Forgents competitors;
·
seasonal fluctuations in capital spending;
·
changes in the rapidly evolving market for web-based applications;
·
managements ability to manage operating costs, a large portion of which
are relatively fixed in advance of any particular quarter;
·
timing and costs related to potential additional acquisitions of businesses,
products or technologies;
·
costs of attracting, retaining and training skilled personnel;
·
managements ability to manage future growth;
·
changes in U.S. generally accepted
accounting principles; and
·
general economic climate.
Some of these factors are within managements
control while others are not.
Accordingly, management believes that quarter-to-quarter comparisons of
the Companys revenues and operating results are not necessarily meaningful and
that market analysts and investors should not rely on the results of any
particular quarter as an indication of future performance.
The loss of key management and personnel could hinder the development
of Forgents technology and otherwise adversely affect the Companys business.
Forgent relies on the
continued contributions of its senior management, and its sales and marketing,
professional services and finance personnel.
Forgents success depends upon its
ability to attract, hire and retain
highly qualified and experienced personnel, especially software
developers and engineers who design and develop software applications in order to keep pace with client demand for
rapidly evolving technologies and varying client needs. The Companys operations are also dependent
on the continued efforts of its executive officers and senior management,
including iEmployees senior management and the senior management of any
business it may acquire in the future.
If any of the Companys key personnel or senior management is unable or
unwilling to continue in his or her present role, or if Forgent is unable to attract,
train, retain and manage its employees effectively,
Forgent could encounter
difficulties in developing new products and product enhancements,
generating revenue through increased sales efforts and/or providing high
quality customer service.
Although Forgent has executed a shareholders
rights plan, there are no assurances that a change of control will not occur.
In December 2005, the Companys
Board of Directors approved and executed a shareholder rights plan (Rights
Plan) whereby one preferred share purchase right was distributed for each
outstanding share of the Companys common stock for all stockholders of record
on December 31, 2005. The Rights
Plan, which was not adopted in response to any threat to the Company, was
designed to guard against any proposed takeover, partial tender offers, open
market accumulations and other tactics designed to gain control of the Company.
Under the Rights Plan, the preferred share purchase rights become exercisable
if a person or group thereafter acquires 15% or more of the Companys common
stock or announces a tender offer for 15% or more of the Companys common
stock. Such events, or if the Company is acquired in a merger or other business
combination transaction after a person or group acquires 15% or more of its
common stock, would entitle the right holder to purchase, at an exercise price
of $13.00 per share, a number of shares of common stock having a market value
at that time equal to twice the rights exercise price. The Rights Plan may
have the effect of discouraging, delaying or preventing unsolicited acquisition
proposals, but there are no assurances a change of control will not occur.
26
Due
to the risk factors noted above and elsewhere in
Managements Discussion and Analysis of Financial Condition and
Results of Operations,
Forgents past earnings and stock price have
been, and future earnings and stock price 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 market analysts and investors could have an immediate and
significant effect on the trading price of the Companys common stock.
ITEM 2. UNREGISTERED SALES OF EQUITY
SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
Exhibits:
|
|
|
|
2.2
|
|
Agreement
and Plan of Merger, dated as of September 11, 2007 by and among Forgent
Networks, Inc., Cheetah Acquisition Company, Inc. and iSarla Inc.
(incorporated by reference to Exhibit 2.2 to the Companys quarterly
report on Form 10-Q for the three months ended October 31, 2007).
|
|
|
|
3.1
|
|
Restated
Certificate of Incorporation (incorporated by reference to Exhibit 3.1
to the Companys quarterly report on Form 10-Q for the three months
ended October 31, 2004).
|
|
|
|
3.2
|
|
Restated
Bylaws (incorporated by reference to Exhibit 3.2 to the Companys
quarterly report on Form 10-Q for the three months ended October 31,
2004).
|
|
|
|
4.1
|
|
Specimen
Certificate for the Common Stock (incorporated by reference to
Exhibit 4.1 to the Companys Registration Statement on Form S-1,
File No. 33-45876, as amended).
|
|
|
|
4.2
|
|
Rights
Agreement, dated as of December 19, 2005, between Forgent
Networks, Inc. and American Stock Transfer & Trust Company,
which includes the form of Series A Preferred Stock, $0.01 par value,
the form of Rights Certificate, and the Summary of Rights
(incorporated by reference to
Exhibit 4.1 to the Companys Current Report on Form 8-K dated
December 19, 2005).
|
|
|
|
31.1*
|
|
Certification pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
|
|
|
|
31.2*
|
|
Certification pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
|
|
|
|
32.1*
|
|
Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
32.2*
|
|
Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
* Filed herewith
27
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
FORGENT NETWORKS, INC.
|
|
|
|
|
Date: June 16, 2008
|
By:
|
|
/s/ RICHARD N. SNYDER
|
|
|
|
Richard N. Snyder
|
|
|
|
Chief Executive Officer
|
|
|
Date: June 16, 2008
|
By:
|
|
/s/ JAY C. PETERSON
|
|
|
|
Jay C. Peterson
|
|
|
|
Chief Financial Officer
|
28
INDEX TO EXHIBITS
EXHIBIT
|
|
|
NUMBER
|
|
DESCRIPTION
|
|
|
|
2.2
|
|
Agreement
and Plan of Merger, dated as of September 11, 2007 by and among Forgent
Networks, Inc., Cheetah Acquisition Company, Inc. and iSarla Inc.
(incorporated by reference to Exhibit 2.2 to the Companys quarterly
report on Form 10-Q for the three months ended October 31, 2007).
|
|
|
|
3.1
|
|
Restated
Certificate of Incorporation (incorporated by reference to Exhibit 3.1
to the Companys quarterly report on Form 10-Q for the three months
ended October 31, 2004).
|
|
|
|
3.2
|
|
Restated
Bylaws (incorporated by reference to Exhibit 3.2 to the Companys
quarterly report on Form 10-Q for the three months ended
October 31, 2004).
|
|
|
|
4.1
|
|
Specimen
Certificate for the Common Stock (incorporated by reference to
Exhibit 4.1 to the Companys Registration Statement on Form S-1,
File No. 33-45876, as amended).
|
|
|
|
4.2
|
|
Rights
Agreement, dated as of December 19, 2005, between Forgent
Networks, Inc. and American Stock Transfer & Trust Company,
which includes the form of Series A Preferred Stock, $0.01 par value,
the form of Rights Certificate, and the Summary of Rights
(incorporated by reference to
Exhibit 4.1 to the Companys Current Report on Form 8-K dated
December 19, 2005).
|
|
|
|
31.1
|
|
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
31.2
|
|
Certification pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
|
|
|
|
32.1
|
|
Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
|
32.2
|
|
Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
29
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