Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
October 31, 2008
OR
o
TRANSITION REPORT
PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
Commission file number: 0-20008
FORGENT
NETWORKS, INC.
(Exact
Name of Registrant as Specified in its Charter)
Delaware
|
|
74-2415696
|
(State
of other jurisdiction of
|
|
(I.R.S.
Employer
|
incorporation
or organization)
|
|
Identification
No.)
|
|
|
|
108 Wild Basin Road
|
|
|
Austin, Texas
|
|
78746
|
(Address
of Principal Executive Offices)
|
|
(Zip
Code)
|
(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 or a non-accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Large accelerated filer
o
|
Accelerated filer
o
|
Non-accelerated filer
o
|
Smaller reporting company
x
|
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
At December 11, 2008, the
registrant had outstanding 31,108,839 shares
of its Common Stock, $0.01 par value.
Table of Contents
FORGENT NETWORKS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except per share data)
|
|
OCTOBER 31,
2008
|
|
JULY 31,
2008
|
|
|
|
(UNAUDITED)
|
|
|
|
ASSETS
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
Cash and equivalents
|
|
$
|
10,554
|
|
$
|
12,062
|
|
Short-term investments
|
|
3,289
|
|
2,627
|
|
Accounts receivable, net of allowance for
doubtful accounts of $47 and
$41 at October 31, 2008 and July 31, 2008, respectively
|
|
1,333
|
|
1,718
|
|
Inventory
|
|
58
|
|
74
|
|
Prepaid expenses and other current assets
|
|
217
|
|
191
|
|
Total Current Assets
|
|
15,451
|
|
16,672
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
775
|
|
907
|
|
Intangible assets, net
|
|
4,534
|
|
4,729
|
|
|
|
$
|
20,760
|
|
$
|
22,308
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
Accounts payable
|
|
$
|
4,054
|
|
$
|
3,778
|
|
Accrued compensation and benefits
|
|
192
|
|
203
|
|
Lease impairment and advance
|
|
355
|
|
373
|
|
Other accrued liabilities
|
|
335
|
|
384
|
|
Deferred revenue
|
|
1,874
|
|
1,844
|
|
Total Current Liabilities
|
|
6,810
|
|
6,582
|
|
|
|
|
|
|
|
Long-Term Liabilities:
|
|
|
|
|
|
Deferred revenue
|
|
27
|
|
25
|
|
Lease impairment and advance
|
|
455
|
|
564
|
|
Other long-term obligations
|
|
207
|
|
217
|
|
Total Long-Term Liabilities
|
|
689
|
|
806
|
|
|
|
|
|
|
|
Stockholders Equity:
|
|
|
|
|
|
Preferred stock, $.01 par value; 10,000
shares authorized; none issued or outstanding
|
|
|
|
|
|
Common stock, $.01 par value; 40,000 shares
authorized; 32,899 and 32,892 shares issued; 31,109 and 31,102 shares
outstanding at October 31, 2008 and July 31, 2008, respectively
|
|
329
|
|
329
|
|
Treasury stock at cost, 1,790 shares at
October 31, 2008 and July 31, 2008
|
|
(4,815
|
)
|
(4,815
|
)
|
Additional paid-in capital
|
|
270,695
|
|
270,657
|
|
Accumulated deficit
|
|
(252,753
|
)
|
(251,214
|
)
|
Accumulated other comprehensive income
|
|
(195
|
)
|
(37
|
)
|
Total Stockholders Equity
|
|
13,261
|
|
14,920
|
|
|
|
$
|
20,760
|
|
$
|
22,308
|
|
The accompanying notes are an integral part
of these condensed consolidated financial statements.
3
Table of Contents
FORGENT NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS
(Amounts in thousands, except per share data)
|
|
FOR THE THREE
MONTHS ENDED
OCTOBER 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(UNAUDITED)
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
2,792
|
|
$
|
1,875
|
|
Cost of Sales
|
|
(564
|
)
|
(330
|
)
|
Gross Margin
|
|
2,228
|
|
1,545
|
|
|
|
|
|
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
Selling, general and administrative
|
|
3,197
|
|
2,440
|
|
Research and development
|
|
561
|
|
291
|
|
Amortization of intangible assets
|
|
149
|
|
36
|
|
Total Operating Expenses
|
|
3,907
|
|
2,767
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS
|
|
(1,679
|
)
|
(1,222
|
)
|
|
|
|
|
|
|
OTHER INCOME AND (EXPENSES):
|
|
|
|
|
|
Interest income
|
|
55
|
|
338
|
|
Foreign currency translation
|
|
120
|
|
(7
|
)
|
Interest expense and other
|
|
(10
|
)
|
(13
|
)
|
Total Other Income
|
|
165
|
|
318
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS, BEFORE INCOME TAXES
|
|
(1,514
|
)
|
(904
|
)
|
Provision for income taxes
|
|
(25
|
)
|
(14
|
)
|
NET LOSS
|
|
$
|
(1,539
|
)
|
$
|
(918
|
)
|
|
|
|
|
|
|
BASIC AND DILUTED LOSS PER SHARE:
|
|
|
|
|
|
Net loss per share - basic and diluted
|
|
$
|
(0.05
|
)
|
$
|
(0.03
|
)
|
WEIGHTED AVERAGE SHARES OUTSTANDING:
|
|
|
|
|
|
Basic
|
|
31,104
|
|
27,094
|
|
Diluted
|
|
31,104
|
|
27,094
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
Table of Contents
FORGENT NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS
(Amounts in thousands)
|
|
FOR THE THREE
MONTHS ENDED
OCTOBER 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(UNAUDITED)
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
Loss from operations
|
|
$
|
(1,539
|
)
|
$
|
(918
|
)
|
Adjustments to reconcile net loss to net
cash used in operations:
|
|
|
|
|
|
Depreciation and amortization
|
|
327
|
|
141
|
|
Amortization of leasehold advance and lease
impairment
|
|
(96
|
)
|
(97
|
)
|
Provision for doubtful accounts
|
|
8
|
|
(2
|
)
|
Share-based compensation
|
|
36
|
|
5
|
|
Foreign currency translation (gain) loss
|
|
(120
|
)
|
7
|
|
Gain on sale of assets
|
|
(5
|
)
|
|
|
Changes in operating assets and
liabilities:
|
|
|
|
|
|
Accounts receivable
|
|
335
|
|
137
|
|
Inventory
|
|
16
|
|
|
|
Prepaid expenses and other current assets
|
|
(25
|
)
|
22
|
|
Accounts payable
|
|
243
|
|
(8,041
|
)
|
Accrued expenses and other long-term
obligations
|
|
(62
|
)
|
(248
|
)
|
Deferred revenue
|
|
74
|
|
(70
|
)
|
Net cash used in operating activities
|
|
(808
|
)
|
(9,064
|
)
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
Net purchases of short-term investments
|
|
(658
|
)
|
(1,483
|
)
|
Net purchases of property and equipment
|
|
(25
|
)
|
(18
|
)
|
Change in other assets
|
|
|
|
164
|
|
Acquisition of iSarla, Inc., net of
cash acquired
|
|
|
|
(7,213
|
)
|
Net cash used in by investing activities
|
|
(683
|
)
|
(8,550
|
)
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
Net proceeds from issuance of stock
|
|
2
|
|
2
|
|
Payments on capital leases
|
|
(7
|
)
|
(1
|
)
|
Net cash (used in) provided by financing
activities
|
|
(5
|
)
|
1
|
|
|
|
|
|
|
|
Effect of translation exchange rates
|
|
(12
|
)
|
14
|
|
|
|
|
|
|
|
Net decrease in cash and equivalents
|
|
(1,508
|
)
|
(17,599
|
)
|
Cash and equivalents at beginning of period
|
|
12,062
|
|
33,524
|
|
Cash and equivalents at end of period
|
|
$
|
10,554
|
|
$
|
15,925
|
|
|
|
|
|
|
|
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
Table of Contents
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 October 31,
2008 and July 31, 2008, and the results of operations and cash flows for
the three months ended October 31, 2008 and 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 for the fiscal year ended July 31, 2008. 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 software 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 was a profitable business with a
high percentage of recurring revenues and delivered 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 12 and 18 months 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.
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
following table summarizes the final adjusted fair values of the iEmployee
assets acquired and liabilities assumed:
|
|
Final
|
|
|
|
Allocation
|
|
Assets Acquired
|
|
|
|
Cash
|
|
$
|
460
|
|
Short-term investments
|
|
526
|
|
Accounts receivable, net
|
|
452
|
|
Prepaid assets
|
|
90
|
|
Fixed assets
|
|
340
|
|
Goodwill
|
|
7,391
|
|
Intangible assets
|
|
5,368
|
|
Other assets
|
|
11
|
|
Total assets acquired
|
|
14,638
|
|
|
|
|
|
Liabilities assumed
|
|
|
|
Accounts payable
|
|
(1,279
|
)
|
Accrued compensation and benefits
|
|
(134
|
)
|
Accrued other liabilities
|
|
(189
|
)
|
Deferred revenue
|
|
(375
|
)
|
Total liabilities assumed
|
|
(1,977
|
)
|
|
|
|
|
Net
assets acquired
|
|
$
|
12,661
|
|
6
Table of Contents
FORGENT NETWORKS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Amounts in thousands, except per share data unless otherwise noted)
Due to its continued
depressed stock price and the current market conditions during the fourth
fiscal quarter of 2008, Forgent determined that the decline in its market
capitalization may not be temporary. Due
to the decline in its market capitalization, the Company was required to perform an impairment analysis on
its goodwill. As a result of the
impairment analysis, Forgent recorded a non-cash $7,391 goodwill impairment
related to its acquisition of iEmployee to its Consolidated Statement of
Operations during the fourth quarter of fiscal 2008. This impairment had no impact to the
Companys tangible net book value or liquidity.
The following
summary presents unaudited pro forma consolidated financial information for the
three months ended October 31, 2007, as if the iEmployee acquisition had
occurred as of August 1, 2007. 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, 2007, nor is it necessarily indicative of the results of
operations which may occur in the future.
|
|
OCTOBER 31, 2007
|
|
|
|
AS
|
|
PRO
|
|
|
|
REPORTED
|
|
FORMA
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
1,875
|
|
$
|
2,888
|
|
Net (loss) income
|
|
(918
|
)
|
(773
|
)
|
|
|
|
|
|
|
Net (loss) income per common share:
|
|
|
|
|
|
Basic
|
|
$
|
(0.03
|
)
|
$
|
(0.03
|
)
|
Diluted
|
|
(0.03
|
)
|
(0.03
|
)
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
Basic
|
|
27,094
|
|
30,749
|
|
Diluted
|
|
27,094
|
|
30,749
|
|
3.
INTANGIBLE ASSETS
Forgent accounts for its
acquisitions in accordance with FASB Statement
No. 141,
Business
Combinations.
The Company records intangible assets apart
from goodwill if the assets have contractual or other legal rights or if the
assets can be separated and sold, transferred, licensed, rented or
exchanged. Forgents intangible assets
relate to its acquisition of iSarla Inc. and the iEmployee operations.
In accordance with FASB
Statement No. 144,
Accounting for the
Impairment or Disposal of Long-Lived Assets,
Forgent reviews and
evaluates its long-lived assets, including intangible assets with finite lives,
for impairment whenever events or changes in circumstances indicate that their
net book value may not be recoverable.
The gross carrying amount and accumulated amortization of the Companys
intangible assets as of October 31, 2008 and July 31, 2008 are as
follows:
7
Table of Contents
FORGENT NETWORKS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Amounts in thousands, except per share data unless otherwise noted)
|
|
|
|
October 31, 2008
|
|
|
|
Amortization
|
|
|
|
Accumulated
|
|
|
|
Intangible Asset
|
|
Period (in Years)
|
|
Gross
|
|
Amortization
|
|
Net
|
|
|
|
|
|
|
|
|
|
|
|
Developed Technology
|
|
5
|
|
$
|
915
|
|
$
|
(196
|
)
|
$
|
719
|
|
Customer Relationships
|
|
8
|
|
2,470
|
|
(330
|
)
|
2,140
|
|
Ceridian Contract
|
|
8
|
|
1,545
|
|
(206
|
)
|
1,339
|
|
Trade Names
|
|
5
|
|
288
|
|
(62
|
)
|
226
|
|
Covenant not-to-compete
|
|
4
|
|
150
|
|
(40
|
)
|
110
|
|
|
|
|
|
$
|
5,368
|
|
$
|
(834
|
)
|
$
|
4,534
|
|
|
|
|
|
July 31, 2008
|
|
|
|
Amortization
|
|
|
|
Accumulated
|
|
|
|
Intangible Asset
|
|
Period (in Years)
|
|
Gross
|
|
Amortization
|
|
Net
|
|
|
|
|
|
|
|
|
|
|
|
Developed Technology
|
|
5
|
|
$
|
915
|
|
$
|
(150
|
)
|
$
|
765
|
|
Customer Relationships
|
|
8
|
|
2,470
|
|
(253
|
)
|
2,217
|
|
Ceridian Contract
|
|
8
|
|
1,545
|
|
(158
|
)
|
1,387
|
|
Trade Names
|
|
5
|
|
288
|
|
(47
|
)
|
241
|
|
Covenant not-to-compete
|
|
4
|
|
150
|
|
(31
|
)
|
119
|
|
|
|
|
|
$
|
5,368
|
|
$
|
(639
|
)
|
$
|
4,729
|
|
Amortization expense is
recorded using the straight-line method over the estimated economic useful
lives of the intangible assets, as noted above.
Amortization expense for the three months ended October 31, 2008
and 2007 was $149 and $36, respectively.
The following table summarizes the estimated amortization expense
relating to the Companys intangible assets for the next five fiscal years and
thereafter as of October 31, 2008:
Fiscal Years
|
|
|
|
Remaining 2009
|
|
$
|
586
|
|
2010
|
|
780
|
|
2011
|
|
780
|
|
2012
|
|
749
|
|
2013
|
|
545
|
|
Thereafter
|
|
1,094
|
|
|
|
$
|
4,534
|
|
NOTE 4 FAIR VALUE MEASUREMENTS
Effective
August 1, 2008, Forgent adopted 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. The adoption of Statement No. 157 did
not have a material impact to the Companys consolidated financial statements.
Statement No. 157
establishes a three-tier fair value hierarchy, which are based on the
reliability of the inputs used in measuring fair values. These tiers include:
Level
1: Quoted prices in active markets for
identical
assets or liabilities;
8
Table of Contents
FORGENT NETWORKS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Amounts in thousands, except per share data unless otherwise noted)
Level 2: Quoted prices in active markets for
similar
assets or liabilities; quoted prices in markets that are not active for
identical or similar assets or liabilities; and model-driven valuations whose
significant inputs are observable; and
Level 3: Unobservable inputs that are supported by little or no market
activity and that are significant to the fair value of the assets or
liabilities.
The following
table presents the fair value hierarchy for the Companys financial assets
(cash equivalents and short-term investments) measured at fair value on a
recurring basis as of October 31, 2008:
|
|
|
|
Fair Value Measure at October 31, 2008
|
|
|
|
Total
|
|
Quoted
|
|
Significant
|
|
|
|
|
|
Carrying
|
|
Prices
|
|
Other
|
|
Significant
|
|
|
|
Value at
|
|
in Active
|
|
Observable
|
|
Unobservable
|
|
|
|
October 31,
|
|
Market
|
|
Inputs
|
|
Inputs
|
|
Description
|
|
2008
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
Cash Equivalents
|
|
$
|
10,554
|
|
$
|
10,554
|
|
$
|
|
|
$
|
|
|
Short-term investments available for sale
|
|
3,289
|
|
3,289
|
|
|
|
|
|
Total
|
|
$
|
13,843
|
|
$
|
13,843
|
|
$
|
|
|
$
|
|
|
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 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.
Forgent adopted Statement No. 159, effective August 1, 2008,
and elected not to measure any additional financial instruments at fair
value. Therefore, the adoption of
Statement No. 159 did not have a material impact to the Companys
consolidated financial statements.
NOTE 5 -
COMPREHENSIVE INCOME (LOSS)
In accordance
with the disclosure requirements of FASB Statement 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. The following table presents the Companys
comprehensive loss and its components for the three months ended
October 31, 2008 and 2007:
|
|
For the Three Months
|
|
|
|
Ended October 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(1,539
|
)
|
$
|
(918
|
)
|
Foreign currency (loss) gain
|
|
(162
|
)
|
22
|
|
Unrealized gain
|
|
4
|
|
3
|
|
Comprehensive Loss
|
|
$
|
(1,697
|
)
|
$
|
(893
|
)
|
9
Table of Contents
FORGENT NETWORKS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Amounts in thousands, except per share data unless otherwise noted)
NOTE 6 - RECENT ACCOUNTING PRONOUNCEMENTS
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 7
SHARE BASED COMPENSATION
Share based
compensation for the Companys stock option, restricted stock and stock
purchase plans for the three months ended October 31, 2008 and 2007 was
$36 and $5, respectively. The
Company issued 7
and 4 shares of
common stock related to exercises of stock options granted from its Stock
Option, Restricted Stock, and Stock Purchase Plans for the three months ended
October 31, 2008 and 2007, respectively.
NOTE 8 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.
Forgent adopted FIN 48 as of
August 1, 2007. FIN 48 applies to all tax positions accounted for under
SFAS 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 October 31, 2008 and 2007, 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
10
Table of Contents
FORGENT NETWORKS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Amounts in thousands, except per share data unless otherwise noted)
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 9
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 now
believes it is entitled to $3,400, including attorneys fees and interest.
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 appealed this Court
order and, on September 3, 2008, the Court granted Forgents Motion to
Reconsider Order. T
he
trial date for this litigation is currently scheduled for April 27, 2009.
Management
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 claimed Wild Basin was in breach of contract relating to
Forgents lease agreement by unreasonably withholding and delaying its consent
to Forgents lease assignment to a third party.
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 sought 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 trial for this litigation commenced on
September 22, 2008. Prior to the
conclusion of the trial, Forgent and Wild Basin reached a settlement agreement,
effective September 25, 2008. This
settlement agreement requires, among other terms, that Wild Basin consent to
Forgents lease assignment. In return, Forgent
paid Wild Basin $75 in November 2008.
Both parties agreed to mutually release claims against each other.
After Forgent
and Wild Basin participated in mediation on November 11, 2008 to finalize
the terms of the settlement agreement, Wild Basin consented to Forgents lease
assignment and the documents were submitted to Wild Basins lender for final
approval. As required by the settlement
agreement, Forgent expects to finalize the lease assignment by December 31,
2008. However, there is no assurance
that Forgent will finalize the lease assignment, or if finalized, that it will
occur by the December 31, 2008 deadline.
11
Table of Contents
ITEM 2.
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
|
The following
review of Forgents financial position as of October 31, 2008 and
July 31, 2008 and for the three months ended October 31, 2008 and 2007
should be read in conjunction with the Companys 2008 Annual Report on
Form 10-K filed with the Securities and Exchange Commission. Forgents internet website address is
http://www.asuresoftware.com. The Companys annual reports 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
re-branding its corporate name to Asure Software to reflect the Companys
focus on its software and services segment for its future growth.
Effective September 13, 2007, the
Company began trading in the Nasdaq Global Market System under the symbol
ASUR.
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, the Companys
common stock was 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 bid price in excess of $1.00 for ten consecutive business days. Forgent
worked to regain compliance through improving its operating results, but it was
unable to regain compliance with the minimum bid requirement. Consequently, Forgent applied for a transfer
listing on the Nasdaq Capital Market.
Nasdaq approved the application and transferred the Companys securities
to the Nasdaq Capital Market, effective September 19, 2008. As a result of this transfer, Forgent was
provided an additional 180 calendar days, beginning from the original
August 4, 2008 deadline, or until February 2, 2009, to regain
compliance with the minimum $1.00 share bid price requirement. The Companys trading symbol continues to be
ASUR and the trading of the Companys stock is unaffected by this change.
Due to current unprecedented
market conditions, on October 16, 2008, Nasdaq suspended the enforcement
of its rules requiring a minimum $1.00 share bid price for all Nasdaq-listed
companies. The rules will be
reinstated on January 19, 2009.
Consequently, on October 22, 2008, Forgent received a Nasdaq letter
extending the revised compliance deadline from February 2, 2009 to
May 5, 2009. If the Company cannot
achieve compliance with the minimum share price requirement by May 5,
2009, Nasdaq will provide written notification that the Companys securities
will be de-listed from the Capital Market Exchange.
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.
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.
12
Table of Contents
RESULTS OF OPERATIONS
The following
table sets forth for the fiscal periods indicated the percentage of total
revenues represented by certain items in Forgents Consolidated Statements of
Operations:
|
|
FOR THE THREE
MONTHS ENDED
OCTOBER 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Software and services revenues
|
|
100.0
|
%
|
100.0
|
%
|
Gross margin
|
|
79.8
|
|
82.4
|
|
Selling, general and administrative
|
|
114.5
|
|
130.2
|
|
Research and development
|
|
20.1
|
|
15.5
|
|
Amortization of intangible
assets
|
|
5.3
|
|
1.9
|
|
Total operating expenses
|
|
139.9
|
|
147.6
|
|
Other income, net
|
|
5.9
|
|
17.0
|
|
Net loss
|
|
(55.1
|
)%
|
(49.0
|
)%
|
THREE
MONTHS ENDED OCTOBER 31, 2008 AND 2007
Revenues
Revenues for
the three months ended October 31, 2008 were $2.8 million, an increase of
$0.9 million, or 48.9%, from the $1.9 million reported for the three months
ended October 31, 2007.
Consolidated revenues
represent the combined revenues of the Company and its subsidiaries, including
sales of the Companys scheduling
software, asset management software, human resource and time and attendance
software,
complementary hardware devices to enhances its software products, software
maintenance and support services, installation and training services and other
professional services.
During
the first fiscal quarter of 2009, an increase in software subscription revenues
accounted for approximately 97.4% of the $0.9 million increase in
revenues. In October 2007, the
Company acquired iEmployees human resource and time and attendance software
along with its operations
. This software, as well as the Companys
Meeting Room Manager (MRM) On Demand software, are delivered to
customers under the SaaS model, which is software as a service. The SaaS model, which is a subscription-based
offering, allows customers to use Forgents software without installing
or maintaining the software on their own servers. Since the iEmployee acquisition occurred in
October 2007, the Company did not benefit from having a full quarters
worth of revenues from the iEmployee operations during the three months ended
October 31, 2007. The increase in
software subscription revenues during the three months ended October 31,
2008 is due primarily to the Company generating revenues from the iEmployee
operations the entire quarter.
The Company continues to develop its
iEmployee sales force and web-based marketing model to increase sales
performance and will release new software updates and enhancements for certain
of its software products during the next twelve months. Forgent will continue to target small and
medium businesses and divisions of enterprises and will employ targeted
vertical marketing programs, as appropriate.
Although the Companys sales, particularly of MRM, have been
concentrated in certain verticals, including corporate, education,
governmental, healthcare, legal and non-profit entities, the Companys
customers are widely spread across industries as well as geographies. Forgent has recently experienced some
softness in the market due to the current depressed macroeconomic environment. However, the Company has not experienced a
significant reduction in sales from any particular industry or geographic
location that would indicate that Forgent is currently at risk of a material
decrease in revenues resulting from a concentrated customer base.
Gross
Margin
Gross margins
for the three months ended October 31, 2008 were $2.2 million, an increase
of $0.7 million, or 44.2%, from the $1.5 million reported for the three months
ended October 31, 2007. Gross margins as a percentage of revenues were
79.8% and 82.4% for the three months ended October 31, 2008 and 2007,
respectively.
The $0.7 million increase in
gross margin is driven by the increase in revenues resulting from the Company
generating a full quarters worth of revenues related to the iEmployee
operations during the three months ended October 31, 2008. Additionally
, cost of sales increased by $0.2 million during the first fiscal
quarter of 2009, 81.8% of which is due to
the Company
incurring cost
of sales related to the iEmployee operations for the entire quarter, as
compared to the 26 days during the first fiscal quarter of 2008. Forgents cost of sales relates
primarily to
13
Table of Contents
compensation expenses, hardware expenses and
the amortization of the Companys purchased software costs. These expenses represented approximately
60.7% and 63.4% of the total cost of sales for the three months ended
October 31, 2008 and 2007, respectively.
Changes in the product mix during
the first fiscal quarter of 2009 explain the decrease in the gross margin
percentage from 82.4% for the three months ended October 31, 2007 to 79.8%
for the three months ended October 31, 2008. Forgent expects gross margins to remain
relatively consistent with the gross margins for the three months ended
October 31, 2008, in terms of percentage of revenues for future periods.
Selling,
General and Administrative
Selling,
general and administrative expenses for the three months ended October 31,
2008 were $3.2 million, an increase of $0.8 million or 31.0%, from the $2.4
million reported for the three months ended October 31, 2007. Selling,
general and administrative (SG&A) expenses as a percentage of revenues
were 114.5% and 130.2% for the three months ended October 31, 2008 and
2007, respectively.
Approximately
80.9% of the $0.8 million increase in SG&A expenses during the three months
ended October 31, 2008 is due to increases in iEmployee SG&A expenses
and legal expenses. During the first fiscal quarter of 2009, the Company
incurred SG&A expenses related to the
iEmployee operations for the entire quarter, as compared to the 26 days during
the first fiscal quarter of 2008, thus increasing total SG&A expenses by
$0.4 million. Additionally, Forgents corporate legal
expenses increased by $0.3 million due primarily to the litigation with Wild
Basin One & Two, Ltd. (Wild Basin) during the three months ended October 31, 2008. Prior
to the conclusion of the trial with Wild Basin, Forgent and Wild Basin reached
a settlement agreement, effective September 25, 2008. This agreement was finalized during mediation on November 11, 2008. With the conclusion of the Wild Basin
litigation, management anticipates significant savings in rent expense after
the Wild Basin lease is assigned, which assignment should be finalized by
December 31, 2008. However, there
is no assurance that Forgent will finalize the lease assignment, or if
finalized, that it will occur by the December 31, 2008 deadline. Although the Wild Basin litigation is
completed, management does not expect corporate legal fees to decrease
significantly due to the escalating activity related to the lawsuit with
Jenkens & Gilchrist, P.C. (Jenkens).
The trial date for the Jenkens litigation is currently scheduled for
April 27, 2009.
Forgent will continue to
make modest investments in its sales team, as necessary, in order to grow its
operations and increase sales. Forgent will also continue to evaluate and
reduce any unnecessary SG&A expenses.
Research
and Development
Research and
development expenses for the three months ended October 31, 2008 were $0.6
million, an increase of $0.3 million, or 92.6%, from the $0.3 million reported
for the three months ended October 31, 2007. Research and development
(R&D) expenses as a percentage of revenues were 20.1% and 15.5% for the
three months ended October 31, 2008 and 2007, respectively.
Approximately 75.8% of the
$0.3 million increase in R&D expenses during the three months ended
October 31, 2008 resulted from the
Company incurring R&D expenses related to the iEmployee operations
for the entire quarter, as compared to the 26 days during the three months
ended October 31, 2007. During the first fiscal quarter of 2009,
Forgent concentrated its R&D efforts on improving its Time &
Attendance and MRM products. The
Time & Attendances enhancements ease the implementation and enforcement
of Paid Time-Off (PTO) policies by providing users more control over
administering their PTO programs. These
enhancements include an automated calculation of the time off accruals, greater
visibility to PTO details through new reporting, and improved calendaring options
for managers to easily track their employees time off requests in their
Microsoft Outlook® calendars. Forgent
continued developing MRM and released MRM 7.9 in November 2008. MRM 7.9 includes an enhanced MRM Outlook
interface that allows assigned delegates the ability to schedule meetings on
behalf of others, privacy features that hide meeting details as needed and more
sophisticated conflict resolution options for scheduling recurring meetings via
Microsoft Outlook®.
Forgent
continues to solicit and receive feedback regarding its products and services
from its existing and potential customers.
During the remainder of fiscal year 2009, the Company plans to continue investing modestly in its R&D
efforts as necessary, in order to enhance the functionality of its
software products through new releases and new feature developments and to
evaluate opportunities for developing new software. A
s the Company designs and further
improves its workforce management solutions, management will attempt to maintain R&D expenses at reasonable levels
in terms of percentage of revenue.
14
Table of Contents
Amortization
of intangible assets
Amortization
expenses
for the three months ended October 31,
2008 were $0.1 million, an increase of $0.1 million, or 315.5%, from the $36
thousand reported for the three months ended October 31, 2007.
Amortization
expenses
as a percentage of revenues were 5.3% and
1.9% for the three months ended October 31, 2008 and 2007,
respectively.
Upon acquiring the iEmployee business in October 2007, Forgent
recorded several intangible assets, which are being amortized over their
appropriate useful lives. The
amortization expenses during the three months ended October 31, 2008 and
2007 relate entirely to these acquired intangible assets.
Net Loss
Forgent
generated a net loss of $1.5 million, or $0.05 per share, during the three
months ended October 31, 2008, compared to a net loss of $0.9 million, or
$0.03 per share, during the three months ended October 31, 2007. Net loss as a percentage of total revenues
were 55.1% and 49.0% for the three months ended October 31, 2008 and 2007,
respectively. The $0.6 million increase in the Companys net loss during the
three months ended October 31, 2008 is primarily attributable to the $1.1
million increase in operating expenses, offset by the $0.7 million increase in
gross margin.
Forgent will continue to implement its
corporate strategy for growing its software and services business by modestly
investing in areas that directly generate revenue and positive cash flows for
the Company. However, uncertainties and
challenges remain, especially during this macroeconomic environment downturn,
and there can be no assurance that the Company can successfully grow its revenues
or achieve profitability during the remainder of fiscal year 2009.
LIQUIDITY AND CAPITAL RESOURCES
|
|
FOR THE THREE
MONTHS ENDED
OCTOBER 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
Working capital
|
|
$
|
8,641
|
|
$
|
14,423
|
|
Cash, cash equivalents and short-term
investments
|
|
13,844
|
|
19,476
|
|
Cash used in operating activities
|
|
(808
|
)
|
(9,064
|
)
|
Cash used in investing activities
|
|
(683
|
)
|
(8,550
|
)
|
Cash provided by (used in) financing
activities
|
|
(5
|
)
|
1
|
|
|
|
|
|
|
|
|
|
Cash used in operating
activities was $0.8 million for the three months ended October 31, 2008
due primarily to $1.5 million in net loss, offset by a $0.3 million decrease in
accounts receivable and a $0.2 million increase in accounts payable. Cash used in operating activities was $9.1
million for the three months ended October 31, 2007 due primarily to an
$8.0 million decrease in accounts payable and $0.9 million in net loss. Management continues to closely monitor all
of its cash sources and uses from its operations. During the three months ended October 31,
2008, Forgent increased its collection efforts related to its trade
receivables. As a result, Forgents
average days sales outstanding was 35 days for the first fiscal quarter of
2009, down from 49 days for the first fiscal quarter of 2008. As management continues to evaluate and reduce
any unnecessary expenditure, including specifically Forgents efforts to reduce
its rent expense by assigning its Wild Basin lease, management anticipates
significant cash savings which will decrease the cash used in the Companys
operating activities in future periods.
Cash used in
investing activities was $0.7 million for the three months ended October 31,
2008 due primarily to $0.7 million in net purchases of short-term investments.
Cash used in investing activities was $8.6 million for the three months ended October 31,
2007 due primarily to $7.2 million paid in cash related to the iEmployee
acquisition and $1.5 million in 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. Although the interest
rates have been decreasing, the Company continues to purchase investments with
slightly longer maturities in order to maximize its interest income. Forgent does not invest in any
mortgage-backed securities or other high-risk investments.
Forgents current operations are not capital
intensive and management does not anticipate any significant capital
expenditures during the remainder of fiscal year 2009.
15
Table of Contents
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. Despite the additional lease obligations acquired
with the iEmployee operations, approximately $14.9 million, or 97.1% of the
Companys total operating lease obligations, relate to its corporate office
facility at Wild Basin in Austin, Texas.
As of October 31, 2008, Forgent had $5.1 million in future minimum
lease payments receivable under non-cancelable sublease arrangements. Additionally, Forgent had a $0.4 million
liability related to impairment charges for the economic value of the lost
sublease rental income at its Austin property.
Once Forgent successfully assigns its Wild Basin lease, the
Companys operating lease obligations will significantly decrease. However,
there is no assurance that Forgent will finalize the lease assignment, or if
finalized, that it will occur by the December 31, 2008 deadline. Forgent may periodically make other
commitments and thus become subject to other contractual obligations.
Cash
used in financing activities was $5 thousand for the three months ended
October 31, 2008. Cash provided by financing activities was $1 thousand
for the three months ended October 31, 2007. Management believes it currently has sufficient
cash and short-term investments on hand to fund its operations during the next
twelve months and beyond without needing to obtain long-term financing. Therefore, the Company does not anticipate
that it will be affected by any credit shortage in the current economic
business environment. 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 three months
ended October 31, 2008 or 2007. As
of October 31, 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 during fiscal year 2009, depending on the Companys cash
position, market conditions and other factors.
As of October 31, 2008, Forgents
principal sources of liquidity consisted of $13.8 million of cash, cash
equivalents and short-term investments.
Management is focused on growing its existing software operations and
thus plans to utilize its cash balances to expand its operations by making
additional prudent investments as necessary and may repurchase outstanding
shares. Although Forgent is currently
not actively exploring prospects in acquiring a public or privately held
technology business or product line, the Company will consider a potential
opportunity if the right opportunity presents itself.
T
here 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. 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 POLICY
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. These estimates are subjective in nature and involve
judgments that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at fiscal quarter end and the
reported amounts of revenues and expenses during the fiscal quarter.
The more significant estimates made by
management include the valuation allowance for the gross deferred tax asset,
contingency legal reserves, lease impairment, 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 iEmployee acquisition. The Company bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the given circumstances.
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.
16
Table of Contents
Management
believes the following represent Forgents critical accounting policies:
Revenue
Recognition
The Company recognizes
revenue when persuasive evidence of an arrangement exists, delivery has
occurred, the fee is fixed or determinable and collectibility is probable. The Company recognizes 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,
beginning when the customer is able to utilize the software.
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 the Companys
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 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.
17
Table of Contents
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 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 Company is a smaller
reporting company as defined by Rule 12b-2 under the Exchange Act and is
not required to provide the information required under this item.
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 October 31, 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 October 31,
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.
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 now believes it is entitled to $3.4 million,
including attorneys fees and interest.
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 $2.8 million for recoveries
related to the 746 patent and other amounts including attorneys fees and
interest. Forgent appealed this Court
order, and on September 3, 2008, the Court granted Forgents Motion to
Reconsider Order. T
he
trial date for this litigation is currently scheduled for April 27, 2009.
18
Table of Contents
Management 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 claimed Wild Basin was in breach of contract relating to
Forgents lease agreement by unreasonably withholding and delaying its consent
to Forgents lease assignment to a third party.
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 sought 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 trial for this litigation commenced on September 22,
2008. Prior to the conclusion of the
trial, Forgent and Wild Basin reached a settlement agreement, effective September 25,
2008. This settlement agreement
requires, among other terms, that Wild Basin consent to Forgents lease
assignment. In return, Forgent paid Wild
Basin $75 thousand in November 2008.
Both parties agreed to mutually release claims against each other.
After Forgent
and Wild Basin participated in mediation on November 11, 2008 to finalize
the terms of the settlement agreement, Wild Basin consented to Forgents lease
assignment and the documents were submitted to Wild Basins lender for final
approval. As required by the settlement
agreement, Forgent expects to finalize the lease assignment by December 31,
2008. However, there is no assurance
that Forgent will finalize the lease assignment, or if finalized, that it will
occur by the December 31, 2008 deadline.
ITEM 1A. RISK FACTOR
S
The Company is a smaller
reporting company as defined by Rule 12b-2 of the Exchange Act and is not
required to provide the information required under this item.
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
19
Table of Contents
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, $.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
20
Table of Contents
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.
|
|
|
|
|
December 15, 2008
|
By:
|
/s/ RICHARD N. SNYDER
|
|
|
Richard N. Snyder
|
|
|
Chief Executive Officer
|
|
|
|
|
December 15, 2008
|
By:
|
/s/ JAY C. PETERSON
|
|
|
Jay C. Peterson
|
|
|
Chief Financial Officer
|
21
Table of Contents
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, $.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.
|
22
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