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SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549
 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 2004 Commission file number 0-20008 FORGENT NETWORKS, INC. A DELAWARE CORPORATION
    
    IRS EMPLOYER ID NO. 74-2415696
 108 WILD BASIN ROAD
AUSTIN, TEXAS 78746
(512) 437-2700 The registrant 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 has been subject to such filing requirements for the past 90 days. Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes o No þ At March 10, 2004 the registrant had outstanding 24,844,315 shares of its
Common Stock, $0.01 par value.




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INDEX TO FINANCIAL STATEMENTS  
 PageNumberPART
I - FINANCIAL INFORMATIONItem 1 -
    
    Unaudited Consolidated Financial StatementsConsolidated Balance Sheets as of January 31, 2004 (unaudited) and July 31, 2003
    
    
    3Unaudited Consolidated Statements of Operations for the Three and Six Months Ended January 31, 2004 and 2003
    
    
    4Unaudited Consolidated Statements of Cash Flows for the Six Months Ended January 31, 2004 and 2003
    
    
    5Notes to the Unaudited Consolidated Financial Statements
    
    
    6Item 2 -
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13Item 3 -
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    26Item 4 -
    
    Controls and Procedures
    
    
    26PART
II - OTHER INFORMATIONItem 1 -
    
    Legal Proceedings
    
    
    27Item 2 -
    
    Changes in Securities and Use of Proceeds
    
    
    27Item 3 -
    
    Defaults upon Senior Securities
    
    
    27Item 4 -
    
    Submission of Matters to a Vote of Security Holders
    
    
    27Item 5 -
    
    Other Information
    
    
    27Item 6 -
    
    Exhibits and Reports on Form 8-K
    
    
    27Signatures
    
    
    
    
    29Certification Pursuant to Section 302Certification Pursuant to Section 302Certification Pursuant to Section 906Certification Pursuant to Section 906
  2




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FORGENT NETWORKS, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except per share data) JANUARY 31,
    
    JULY 31,2004
    
    2003(UNAUDITED)ASSETSCurrent Assets:Cash and equivalents, including restricted cash of $650 and $730
at January 31, 2004 and July 31, 2003
    
    $
    18,497
    
    
    $
    21,201Short-term investments
    
    
    6,403
    
    
    
    3,845Accounts receivable, net of allowance for doubtful accounts
of $125 and $0 at January 31, 2004 and July 31, 2003
    
    
    1,720
    
    
    
    9,457Notes receivable, net of reserve of $780 and $639
at January 31, 2004 and July 31, 2003
    
    
    77
    
    
    
    74Prepaid expenses and other current assets
    
    
    451
    
    
    
    415Total Current Assets
    
    
    27,148
    
    
    
    34,992Property and equipment, net
    
    
    3,406
    
    
    
    2,158Intangible assets, net
    
    
    358
    
    
    
    5,042Capitalized software, net
    
    
    
    
    
    
    4,827Other assets
    
    
    265
    
    
    
    230$
    31,177
    
    
    $
    47,249LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    1,987
    
    
    $
    3,178Accrued compensation and benefits
    
    
    360
    
    
    
    683Other accrued liabilities
    
    
    1,392
    
    
    
    1,661Notes payable, current position
    
    
    362
    
    
    
    323Deferred revenue
    
    
    538
    
    
    
    281Total Current Liabilities
    
    
    4,639
    
    
    
    6,126Long-Term Liabilities:Deferred revenue
    
    
    56
    
    
    
    59Other long-term obligations
    
    
    2,673
    
    
    
    1,810Total Long-Term Liabilities
    
    
    2,729
    
    
    
    1,869Stockholders equity:Preferred stock, $.01 par value; 10,000 authorized;
none issued or outstanding
    
    
    
    
    
    
    Common stock, $.01 par value; 40,000 authorized; 26,383 and
26,172 shares issued; 24,662 and 24,588 shares
outstanding at January 31, 2004 and July 31, 2003,
respectively
    
    
    263
    
    
    
    261Treasury stock, 1,721 and 1,584 issued at January 31, 2004 and
July 31, 2003, respectively
    
    
    (4,685
    )
    
    
    (4,231
    )Additional paid-in capital
    
    
    264,346
    
    
    
    263,875Accumulated deficit
    
    
    (236,017
    )
    
    
    (219,991
    )Unearned compensation
    
    
    (102
    )
    
    
    (28
    )Accumulated other comprehensive income
    
    
    4
    
    
    
    (632
    )Total Stockholders Equity
    
    
    23,809
    
    
    
    39,254$
    31,177
    
    
    $
    47,249
 The accompanying notes are an integral part of these consolidated financial statements. 3




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FORGENT NETWORKS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data) FOR THE
    
    FOR THETHREE MONTHS ENDED
    
    SIX MONTHS ENDEDJANUARY 31,
    
    JANUARY 31,2004
    
    2003
    
    2004
    
    2003(UNAUDITED)
    
    (UNAUDITED)REVENUES:Software and professional services
    
    $
    793
    
    
    $
    1,031
    
    
    $
    1,792
    
    
    $
    2,245Intellectual property licensing
    
    
    5,820
    
    
    
    7,255
    
    
    
    8,670
    
    
    
    13,468Other
    
    
    
    
    
    
    88
    
    
    
    22
    
    
    
    469Total revenues
    
    
    6,613
    
    
    
    8,374
    
    
    
    10,484
    
    
    
    16,182COST OF SALES:Software and professional services
    
    
    5,600
    
    
    
    740
    
    
    
    6,450
    
    
    
    1,473Intellectual property licensing
    
    
    2,910
    
    
    
    3,628
    
    
    
    4,335
    
    
    
    6,734Other
    
    
    
    
    
    
    37
    
    
    
    24
    
    
    
    420Total cost of sales
    
    
    8,510
    
    
    
    4,405
    
    
    
    10,809
    
    
    
    8,627GROSS MARGIN
    
    
    (1,897
    )
    
    
    3,969
    
    
    
    (325
    )
    
    
    7,555OPERATING EXPENSES:Selling, general and administrative
    
    
    3,384
    
    
    
    2,524
    
    
    
    6,417
    
    
    
    5,567Research and development
    
    
    1,149
    
    
    
    711
    
    
    
    2,233
    
    
    
    1,883Amortization of intangible assets
    
    
    12
    
    
    
    
    
    
    
    17
    
    
    
    Impairment of assets
    
    
    6,989
    
    
    
    
    
    
    
    6,989
    
    
    
    (499
    )Total operating expenses
    
    
    11,534
    
    
    
    3,235
    
    
    
    15,656
    
    
    
    6,951(LOSS) INCOME FROM OPERATIONS
    
    
    (13,431
    )
    
    
    734
    
    
    
    (15,981
    )
    
    
    604OTHER (EXPENSES) INCOME:Interest income
    
    
    54
    
    
    
    28
    
    
    
    115
    
    
    
    86Foreign currency translation
    
    
    (633
    )
    
    
    
    
    
    
    (633
    )
    
    
    Interest expense and other
    
    
    (56
    )
    
    
    (37
    )
    
    
    (100
    )
    
    
    (38
    )Total other (expenses) income
    
    
    (635
    )
    
    
    (9
    )
    
    
    (618
    )
    
    
    48(LOSS) INCOME FROM CONTINUING
OPERATIONS, BEFORE INCOME TAXES
    
    
    (14,066
    )
    
    
    725
    
    
    
    (16,599
    )
    
    
    652Provision for income taxes
    
    
    
    
    
    
    (11
    )
    
    
    
    
    
    
    (10
    )(LOSS) INCOME FROM CONTINUING OPERATIONS
    
    
    (14,066
    )
    
    
    714
    
    
    
    (16,599
    )
    
    
    642Income from discontinued operations,
net of income taxes
    
    
    
    
    
    
    601
    
    
    
    
    
    
    
    1,598Income on disposal, net of income taxes
    
    
    563
    
    
    
    
    
    
    
    573
    
    
    
    INCOME FROM DISCONTINUED
OPERATIONS, NET OF INCOME TAXES
    
    
    563
    
    
    
    601
    
    
    
    573
    
    
    
    1,598NET (LOSS) INCOME
    
    $
    (13,503
    )
    
    $
    1,315
    
    
    $
    (16,026
    )
    
    $
    2,240BASIC AND DILUTED (LOSS) INCOME PER SHARE:(Loss) income from continuing operations
    
    $
    (0.57
    )
    
    $
    0.03
    
    
    $
    (0.67
    )
    
    $
    0.03Income from discontinued operations
    
    $
    0.02
    
    
    $
    0.02
    
    
    $
    0.02
    
    
    $
    0.06Net (loss) income
    
    $
    (0.55
    )
    
    $
    0.05
    
    
    $
    (0.65
    )
    
    $
    0.09WEIGHTED AVERAGE SHARES OUTSTANDING:Basic
    
    
    24,639
    
    
    
    24,638
    
    
    
    24,619
    
    
    
    24,725Diluted
    
    
    24,639
    
    
    
    25,030
    
    
    
    24,619
    
    
    
    25,272
 The accompanying notes are integral part of these consolidated financial statements. 4




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FORGENT NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands) FOR THE SIX MONTHSENDED JANUARY 31,2004
    
    2003(UNAUDITED)CASH FLOWS FROM OPERATING ACTIVITIES:(Loss) income from continuing operations
    
    $
    (16,599
    )
    
    $
    642Adjustments to reconcile net (loss) income to net cash provided by
(used in) operations:Depreciation and amortization
    
    
    1,619
    
    
    
    1,285Amortization of leasehold advance and lease impairment
    
    
    (508
    )
    
    
    (847
    )Provision for doubtful accounts
    
    
    125
    
    
    
    Impairment of assets
    
    
    11,827
    
    
    
    (499
    )Amortization of unearned compensation
    
    
    33
    
    
    
    180Foreign currency translation loss
    
    
    629
    
    
    
    Loss on disposal of fixed assets
    
    
    24
    
    
    
    Sale of accounts receivable
    
    
    1,746
    
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    6,058
    
    
    
    (179
    )Inventories
    
    
    
    
    
    
    (14
    )Prepaid expenses and other current assets
    
    
    (134
    )
    
    
    (168
    )Accounts payable
    
    
    (1,236
    )
    
    
    (1,075
    )Accrued expenses and other long-term obligations
    
    
    (740
    )
    
    
    349Deferred revenues
    
    
    221
    
    
    
    (33
    )Net cash provided by (used in) operating activities
    
    
    3,065
    
    
    
    (359
    )CASH FLOWS FROM INVESTING ACTIVITIES:Net (purchases) sales of short-term investments
    
    
    (2,558
    )
    
    
    1,499Net purchases of property and equipment
    
    
    (643
    )
    
    
    (109
    )Collection of notes receivable
    
    
    163
    
    
    
    174Increase in capitalized software
    
    
    (889
    )
    
    
    (1,644
    )Increase in other assets
    
    
    (200
    )
    
    
    (45
    )Purchase of Network Simplicity Software Inc.
    
    
    (1,965
    )
    
    
    Net cash used in investing activities
    
    
    (6,092
    )
    
    
    (125
    )CASH FLOWS FROM FINANCING ACTIVITIES:Net proceeds from issuance of stock
    
    
    366
    
    
    
    139Purchase of treasury stock
    
    
    (454
    )
    
    
    (651
    )Proceeds from notes payable
    
    
    172
    
    
    
    103Payments on notes payable and capital leases
    
    
    (341
    )
    
    
    (537
    )Net cash used in financing activities
    
    
    (257
    )
    
    
    (946
    )CASH FLOWS FROM DISCONTINUED OPERATIONS:Net cash provided by discontinued operations
    
    
    573
    
    
    
    1,559Effect of exchange rate changes on cash and equivalents
    
    
    7
    
    
    
    17Net change in cash and equivalents
    
    
    (2,704
    )
    
    
    146Cash and equivalents at beginning of period
    
    
    21,201
    
    
    
    17,237Cash and equivalents at end of period
    
    $
    18,497
    
    
    $
    17,383
 The accompanying notes are an integral part of these consolidated financial statements. 5




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FORGENT NETWORKS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share and employee data unless otherwise noted) NOTE 1  GENERAL AND BASIS OF FINANCIAL STATEMENTS The accompanying unaudited 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 accounting principles generally accepted in the United
States 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 January
31, 2004 and July 31, 2003, the results of operations for the three and six
months ended January 31, 2004 and January 31, 2003, and the cash flows for the
six months ended January 31, 2004 and January 31, 2003. The results for the
interim periods are not necessarily indicative of results for a full fiscal
year. Please note that for comparability purposes a reclassification was made on
the Companys originally filed Form 10-Q for the fiscal quarter ended January
31, 2003, which is reflected in the Companys Form 10-Q/A for the same fiscal
period. NOTE 2  ACQUISITIONS As approved by each companys board of directors and finalized on October
6, 2003, Forgent acquired certain assets and the operations of Network
Simplicity Software Inc. (Network Simplicity), a privately held provider of
web-based scheduling solutions for the small to medium sized business market.
Network Simplicitys flagship product, Meeting Room Manager, is an easy-to-use
web-based tool that schedules rooms, people, and resources globally. Another
Network Simplicity product, Visual Asset Manager, is a network and web-based
solution that allows businesses to effectively track and manage their assets,
including computers, printers, software, and employees. These acquired
software products are targeted for small to medium sized businesses and
departments or divisions of large enterprises. This strategic acquisition
allows the Company to extend its current software product offerings and to
expand its market opportunities into the small to medium sized business market. Forgent purchased Network Simplicity for approximately $3,315, consisting
of $2,115 in cash and assumed liabilities, and up to $1,200 in potential future
cash considerations. The $2,115 represents the amount currently recorded as
the purchase price of the acquisition, which was accounted for as a purchase of
assets. The additional $1,200 tied to future contingencies will be recorded as
additional purchase price when, and if, the amounts are paid. Accordingly, the
purchase price was allocated to the tangible and identifiable intangible assets
acquired based on their estimated fair values at the date of acquisition. The
following table shows the amounts assigned to each major asset and liability
class as of the date of acquisition: Cash
    
    $
    55Accounts receivable, net
    
    
    137Prepaid expenses
    
    
    3Fixed assets
    
    
    37Intangible assets
    
    
    425Acquired software
    
    
    1,570Total Assets
    
    $
    2,227Accounts payable
    
    $
    15Accrued liabilities
    
    
    64Deferred revenue
    
    
    33Total Liabilities
    
    $
    112
 As a result of the acquisition, Network Simplicitys results of operations
since October 6, 2003 have been included in the Companys Consolidated
Statement of Operations for the three and six months ended January 31, 2004. 6




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FORGENT NETWORKS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share and employee data unless otherwise noted) In acquiring Network Simplicity, Forgents workforce grew by ten
employees. The founder of Network Simplicity currently serves as Forgents
Vice-President  Network Simplicity, and the Network Simplicity workforce
remained based in Richmond, British Columbia, Canada. NOTE 3  ASSET IMPAIRMENT During the three months ended January 31, 2004, Forgent recorded
impairment losses on the Consolidated Statement of Operations as follows: IntellectualSoftware
    
    Property
    
    TotalSegment
    
    Segment
    
    ImpairmentPrepaid assets
    
    $
    90
    
    
    $
    
    
    
    $
    90Capitalized software
development costs
    
    
    4,748
    
    
    
    
    
    
    
    4,748Impairment in cost of sales
    
    
    4,838
    
    
    
    
    
    
    
    4,838Prepaid assets
    
    
    10
    
    
    
    
    
    
    
    10Equipment
    
    
    211
    
    
    
    
    
    
    
    211Goodwill
    
    
    5,043
    
    
    
    
    
    
    
    5,043Leasehold improvements
    
    
    21
    
    
    
    161
    
    
    
    182Leases
    
    
    420
    
    
    
    1,123
    
    
    
    1,543Impairment in operating expenses
    
    
    5,705
    
    
    
    1,284
    
    
    
    6,989Total impairment
    
    $
    10,543
    
    
    $
    1,284
    
    
    $
    11,827
 During the second fiscal quarter, Forgent faced declining revenues related
to its ALLIANCE software products and services. On the other hand, Forgent
experienced increasing revenues related to its Network Simplicity software
product and services. Additionally, management learned that while indicators
of demand existed for ALLIANCE, issues regarding price sensitivity, lengthy
sales cycle, and integration with enterprise infrastructures were preventing
ALLIANCE from achieving the revenues that management originally anticipated.
Starting in January 2004, management reviewed its software segment, the related
cash flows from its ALLIANCE and Network Simplicity product lines, and
re-evaluated its strategy regarding growing revenues from this segment. As a
result, Forgent repriced, repackaged, and repositioned ALLIANCE to be targeted
to small to medium sized businesses and departments or divisions of large
enterprises. Since Forgents ALLIANCE and Network Simplicity software products
are now both sold under similar models, management expects to experience
efficiencies in the sales efforts. Forgent will continue to market and sell
ALLIANCE and will continue to support all of its current ALLIANCE customers. Pursuant to Statement of Financial Accounting Standards (SFAS) No. 86,
Accounting for the Costs of Software to be Sold, Leased, or Otherwise
Marketed, and SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, Forgent evaluated the recoverability of its long-lived
assets, including the equipment and capitalized software development costs,
related to the ALLIANCE efforts. Based on the projected negative cash flows
related to ALLIANCE, Forgent fully impaired the $4,748 in net capitalized
software development costs and $211 in equipment related to ALLIANCE.
Additionally, Forgent impaired $100 of certain prepaid assets that specifically
supported ALLIANCE. Due to the decrease in software and professional services
revenues and Forgents shift in its go-forward strategy, the Company was also
required to perform an impairment analysis in accordance with SFAS No. 142,
Goodwill and Other Intangible Assets. As part of the impairment analysis,
Forgent determined the implied fair value of goodwill based on a discounted
cash flow model. As a result of this valuation, Forgent recorded a $5,043
impairment of its goodwill related to its acquisitions of Vosaic, LLC and
Global Scheduling Solutions, Inc. The technology obtained from these
acquisitions supported the development efforts on ALLIANCE and its
predecessor, Forgents Video Network Platform. The $10,102 impairment charge
related to ALLIANCE was recorded to the Consolidated Statement of Operations,
with $4,838 in cost of sales and $5,264 in operating expenses. 7




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FORGENT NETWORKS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share and employee data unless otherwise noted) In January 2004, the Company closed its sales office in Melville, New
York. Management was unable to sublease the vacated space and upon review of
the future discounted cash flows related to this lease, management recorded an
impairment charge of $78. Additionally, management analyzed the discounted
cash flows related to its Wild Basin property lease and subleases over the
remainder of the lease term. Although Forgent was able to sublease the vacated
space more quickly than originally anticipated, the rates on the subleases were
less than originally anticipated due to depressed current market rates.
Therefore, management calculated the economic value of the lost sublease rental
income and recorded an additional charge of $1,465. As of January 31, 2004,
Forgent had $2,025 recorded as a liability on the Consolidated Balance Sheet
related to its Wild Basin property. Forgent remained obligated to make lease
payments in accordance with the original terms of both leases. In addition,
Forgent analyzed its recorded leasehold improvements at its Wild Basin
property. Multiple leasehold improvements were made for the Companys
previously owned videoconferencing hardware products business and certain
subtenants, and this analysis indicated that certain leasehold improvements
were no longer of value. Therefore, management recorded an impairment charge
of $182 related to these leasehold improvements. The $1,726 impairment related
to the Wild Basin and New York leases and the leasehold improvements were
recorded as part of operating expenses in the Consolidated Statement of
Operations. When Forgent sold its products business segment during fiscal year 2002,
it received two subordinated promissory notes from VTEL Products Corporation
(VTEL). Due to the defaulted payment on the first subordinated promissory
note due in April 2002 and due to the uncertainty in collecting the two
outstanding notes from VTEL, the Company recorded a $5,967 charge for the
reserve of both notes from VTEL during fiscal year 2002. During the first
fiscal quarter of 2003, management agreed with VTELs management to offset
Forgents accounts payable to VTEL with its accounts receivable and notes
receivable from VTEL. Forgents liability was fully offset with the accounts
receivable and partially offset with the note in default, thus relieving $499
of the reserve on the notes receivable. Since the initial $5,967 charge to
reserve the VTEL notes receivable was reported as part of the asset impairment
from continuing operations, the related reduction of the reserves is also
reported as part of the asset impairment from continuing operations. No cash
was exchanged with this transaction. NOTE 4  DISCONTINUED OPERATIONS On July 3, 2003, Forgent sold substantially all of the assets of its
videoconferencing hardware services business (Services Business), based in
King of Prussia, Pennsylvania, to an affiliate of Gores Technology Group
(Gores), a privately held international acquisition and management firm. The
divestiture was a strategic move designed to enable Forgent to focus on growing
its software and professional services business, growing its intellectual
property licensing business, increasing its cash balances, improving its
overall gross margin, and reducing its operating expenses. The assets sold
included accounts receivable, inventory, fixed assets, certain prepaid assets,
and goodwill. As consideration for the sale of the Services Business, the
Company received $7,350 in cash, which was net of a $400 transaction extension
fee, and the assumption of substantially all of the Services Business
liabilities, including deferred maintenance revenue, identified accounts
payable, and capital lease obligations. An additional $2,250 in cash was held for possible purchase price
adjustments and indemnity claims. During the six months ended January 31,
2004, Forgent negotiated the final resolution of the purchase price adjustments
with Gores. As a result, Forgent received $575 in cash from Gores in January
2004. As of January 31, 2004, the remaining $1,000 in cash was held in escrow
for indemnity claims. Details of these escrowed funds and other important
information are set forth in the Companys proxy statement for fiscal year
2002. Forgent cannot provide any assurances that it will receive some or any
of the remaining funds still held in escrow. Forgent assigned its lease for approximately six thousand square feet of
office space in Kennesaw, Georgia to Gores, which was accepted by the landlord
with no further obligations by Forgent. This office space was utilized as a
sales office for the Services Business. Furthermore, Forgent did not remain
contingently liable for performance on existing contracts or future contracts
entered into by Gores. The Company does not have any continuing involvement in
the go-forward operations of the Services Business. 8




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FORGENT NETWORKS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share and employee data unless otherwise noted) In connection with the sale of the Services Business, Forgent and Gores
entered into a transition services agreement, whereby the Company will provide,
for a fee at actual cost, certain transition services for Gores related to the
assets acquired and liabilities assumed in the sale. Forgent and Gores also
entered into a reseller agreement, whereby Gores may resell the Companys
software products, and a co-marketing arrangement, whereby the Company will
receive a commission for referring videoconferencing related service business
to Gores. Gores retained approximately 70 employees employed by the Services
Business. As a result of the sale of the Services Business, the Company has
presented this business as discontinued operations on the accompanying
consolidated financial statements, and recorded $601 and $1,598 in income from
its discontinued operations for the three and six months ended January 31,
2003. The $563 and $573 in income recorded from discontinued operations during
the three and six months ended January 31, 2004 represent the $575 in cash
received from Gores in January 2004 for purchase price adjustments related to
the sale and the residual activity related to the $1,954 loss on disposal of
the Services Business recorded for the fiscal year ended July 31, 2003. The
Company did not conduct any business from this business line during the six
months ended January 31, 2004. NOTE 5  SALE OF ACCOUNTS RECEIVABLE During the first fiscal quarter of 2004, the Company sold $1,746 of its
outstanding accounts receivable, without any recourse. Silicon Valley Bank
purchased the assets at face value, less fees of approximately 1.2% of the face
value of the accounts receivable sold and a one-time annual set-up fee of $10.
The Company received proceeds from Silicon Valley Bank of $1,713. Under the provisions of SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, a transfer
of receivables may be accounted for as a sale if the following three conditions
are met: (1) the transferred assets are isolated from the transferor, (2) the
transferee has the right to pledge or sell the transferred assets, and (3) the
transferor does not maintain control over the transferred assets. Accordingly,
the Company recorded the transfer of the accounts receivable as a sale of
assets, excluded the related receivables from the Consolidated Balance Sheet
and recorded related expenses of $27 for the six months ended January 31, 2004. NOTE 6  COMPREHENSIVE INCOME (LOSS) In accordance with the disclosure requirements of SFAS No. 130, Reporting
Comprehensive Income, the Companys other 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 six months
ended January 31, 2004 was $12,869 and $15,390 respectively. Comprehensive
income for the three and six months ended January 31, 2003 was $1,303 and
$2,458, respectively. NOTE 7  RECENT ACCOUNTING PRONOUNCEMENTS In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46, Consolidation of Variable Interest Entities, in an
effort to expand upon and strengthen existing accounting guidance that
addresses when a company should include in its financial statements the assets,
liabilities, and activities of another entity. Interpretation No. 46 requires
the primary beneficiary, an entity that is subject to a majority of the risk of
loss from the variable interest entitys (VIE) activity or is entitled to
receive a majority of the VIEs residual returns or both, to consolidate that
VIE. The interpretation also requires disclosure about VIEs that a company is
not required to consolidate but in which it has a significant variable
interest. Interpretation No. 46 is effective for all new VIEs created or
acquired after January 31, 2003. In October 2003, the FASB issued Position No.
FIN46-6, which delayed the effective date of consolidation provisions of
Interpretation No. 46 for variable interest entities created before February 1,
2003. If the reporting entity had not yet issued financial statements reporting
the variable interest entities in accordance with the consolidation provisions
of Interpretation No. 46, the new effective date is for reporting periods
ending after December 15, 2003. The Company did not have a variable interest
in any VIEs as of January 31, 2004 and therefore the adoption of these
provisions has no material impact on Forgents financial position or results of
operations. 9




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FORGENT NETWORKS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share and employee data unless otherwise noted) In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity.
This Statement requires that certain financial instruments with characteristics
of both liabilities and equity be classified as a liability. This Statement is
effective for financial instruments entered into or modified after May 31,
2003, or otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. Forgent adopted the provisions of SFAS No. 150
effective August 1, 2003. Since August 1, 2003 and as of January 31, 2004, the
Company held no such financial instruments. Therefore, the adoption of SFAS
No. 150 had no impact on the Companys financial position or results of
operations. NOTE 8  STOCK BASED COMPENSATION The Company follows Accounting Principles Board Opinion 25, Accounting
for Stock Issued to Employees and related interpretations in accounting for
stock option grants. As required by SFAS No. 123 and SFAS No. 148, Forgent has
determined pro forma net income and net income per common share as if
compensation costs had been determined based on the fair value of the options
granted to employees and then recognized ratably over the vesting period. The
fair value of stock option grants has been estimated at the date of grant using
the Black-Scholes option pricing model. Had the compensation costs been
recognized as prescribed by SFAS No. 123, net income and basic and diluted
earnings per share would have changed to the pro forma amounts shown below: For the
    
    For theThree Months Ended
    
    Six Months EndedJanuary 31,
    
    January 31,2004
    
    2003
    
    2004
    
    2003Net (loss) earningsNet (loss) earnings, as reported
    
    $
    (13,503
    )
    
    $
    1,315
    
    
    $
    (16,026
    )
    
    $
    2,240Add: Stock-based employee compensation
expense included in reported net (loss)
earnings, net of related tax effects
    
    
    18
    
    
    
    58
    
    
    
    33
    
    
    
    152Deduct: Stock-based employee
compensation expense determined under fair
value-based method for all awards, net of
related tax effects
    
    
    (416
    )
    
    
    (573
    )
    
    
    (594
    )
    
    
    (792
    )Net (loss) earnings, pro forma
    
    $
    (13,901
    )
    
    $
    800
    
    
    $
    (16,587
    )
    
    $
    1,600Basic (loss) earnings per common share:As reported
    
    $
    (0.55
    )
    
    $
    0.05
    
    
    $
    (0.65
    )
    
    $
    0.09Pro forma
    
    $
    (0.56
    )
    
    $
    0.03
    
    
    $
    (0.67
    )
    
    $
    0.06Diluted (loss) earnings per common share:As reported
    
    $
    (0.55
    )
    
    $
    0.05
    
    
    $
    (0.65
    )
    
    $
    0.09Pro forma
    
    $
    (0.56
    )
    
    $
    0.03
    
    
    $
    (0.67
    )
    
    $
    0.06
 The assumptions used to calculate the fair value of options granted are
evaluated and revised, as necessary, to reflect market conditions and
experience. NOTE 9- SEGMENT INFORMATION Currently, the Company operates in two distinct segments: software and
professional services, and intellectual property licensing. Forgents software
and professional services business provides customers with scheduling software
as well as add-on software customization, installation and training, network
consulting, hardware, software maintenance services, and other comprehensive
related services. Forgents intellectual property licensing business is
currently focused on generating licensing revenues relating to the Companys
data compression technology embodied in U.S. Patent No. 4,698,672 and its
foreign counterparts. 10




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FORGENT NETWORKS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share and employee data unless otherwise noted) The Company evaluates the performance as well as the financial results of
its segments. Included in the segment operating income (loss) is an allocation
of certain corporate operating expenses. The prior years segment information
has been restated to present the Companys reportable segments as they are
currently defined. The Company does not identify assets or capital expenditures
by reportable segments. Additionally, the Chief Executive Officer and Chief
Financial Officer do not evaluate the segments based on these criteria. The table below presents segment information about revenue from
unaffiliated customers, gross margins, and operating (loss) income for the
three and six months ended January 31, 2004 and 2003: Software &
    
    IntellectualProfessional
    
    Property LicensingServices
    
    & Other
    
    TotalFor the Three Month Period Ending January 31, 2004Revenues from unaffiliated customers
    
    $
    793
    
    
    $
    5,820
    
    
    $
    6,613Gross margin
    
    
    (4,807
    )
    
    
    2,910
    
    
    
    (1,897
    )Operating (loss) income
    
    
    (14,209
    )
    
    
    778
    
    
    
    (13,431
    )For the Three Month Period Ending January 31, 2003Revenues from unaffiliated customers
    
    $
    1,031
    
    
    $
    7,343
    
    
    $
    8,374Gross margin
    
    
    291
    
    
    
    3,678
    
    
    
    3,969Operating (loss) income
    
    
    (2,501
    )
    
    
    3,235
    
    
    
    734For the Six Month Period Ending January 31, 2004Revenues from unaffiliated customers
    
    $
    1,792
    
    
    $
    8,692
    
    
    $
    10,484Gross margin
    
    
    (4,658
    )
    
    
    4,333
    
    
    
    (325
    )Operating (loss) income
    
    
    (17,367
    )
    
    
    1,386
    
    
    
    (15,981
    )For the Six Month Period Ending January 31, 2003Revenues from unaffiliated customers
    
    $
    2,245
    
    
    $
    13,937
    
    
    $
    16,182Gross margin
    
    
    772
    
    
    
    6,783
    
    
    
    7,555Operating (loss) income
    
    
    (5,284
    )
    
    
    5,888
    
    
    
    604
 NOTE 10  CONTINGENCIES The Company recently received notification from the Federal Trade
Commission (the FTC) that it is conducting a non-public investigation to
determine whether the Company may have engaged in violation of the Federal
Trade Commission Act by reason of the alleged involvement of Compression Labs,
Inc., (CLI), the Companys subsidiary, in the JPEG standard-setting process
during the 1980s and very early 1990s and its subsequent licensing of the
672 Patent, which the Company believes is infringed by the implementation of
that standard. If the FTC proceeds with an investigation and thereafter
determines that the Company acted improperly, further proceedings before the
FTC could ensue, which could result in a challenge to the Companys 672 patent
licensing program. The Company believes that CLI has not acted improperly and
has so advised the FTC. NOTE 11  SUBSEQUENT EVENT As part of its efforts to simplify and streamline its software operations
to be commensurate with its software revenue base, Forgent decided to implement
a leaner cost structure. This implementation included reducing headcount and
closing certain sales offices to conform to the Companys new operating
structure. Therefore, in February 2004, Forgent restructured its organization
and terminated 47 employees, or 44% of the workforce, which affected 22
employees in sales and marketing, 19 employees in research and development, and
six employees in general and administrative functions. All of the designated
employees were terminated upon the announcement of the reduction and were
assisted with outplacement support services and severance. Additionally, 11




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FORGENT NETWORKS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share and employee data unless otherwise noted) the Company closed its sales office in Melville, New York in January 2004. As
a result of the restructuring, Forgent also closed its sales offices in McLean,
Virginia and Houston, Texas and reduced its office space in Austin, Texas. In
accordance with SFAS No. 146, Accounting for Costs Associated with Exit or
Disposal Activities, the Company will record a one-time charge during the
third quarter of fiscal 2004 for the restructuring. 12




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ITEM 2.
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS The following review of Forgents financial position as of January 31,
2004 and July 31, 2003 and for the three and six months ended January 31, 2004
and 2003 should be read in conjunction with the Companys 2003 Annual Report on
Form 10-K and Form 10-K/A filed with the Securities and Exchange Commission. RESULTS OF OPERATIONS The following table sets forth for the periods indicated the percentage of
total revenues represented by certain items in Forgents Consolidated
Statements of Operations: FOR THE THREE
    
    FOR THE SIXMONTHS ENDED
    
    MONTHS ENDEDJANUARY 31,
    
    JANUARY 31,2004
    
    2003
    
    2004
    
    2003Software and professional services revenues
    
    
    12
    %
    
    
    12
    %
    
    
    17
    %
    
    
    14
    %Intellectual property licensing revenues
    
    
    88
    
    
    
    87
    
    
    
    83
    
    
    
    83Other revenues
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    3Gross margin
    
    
    (29
    )
    
    
    47
    
    
    
    (3
    )
    
    
    47Selling, general and administrative
    
    
    51
    
    
    
    30
    
    
    
    61
    
    
    
    34Research and development
    
    
    18
    
    
    
    9
    
    
    
    22
    
    
    
    12Impairment of assets
    
    
    105
    
    
    
    
    
    
    
    66
    
    
    
    (3
    )Total operating expenses
    
    
    174
    
    
    
    39
    
    
    
    149
    
    
    
    43Other income, net
    
    
    (10
    )
    
    
    
    
    
    
    (6
    )
    
    
    Income (loss) from continuing operations
    
    
    (213
    )
    
    
    9
    
    
    
    (158
    )
    
    
    4Income (loss) from discontinued operations
    
    
    9
    
    
    
    7
    
    
    
    5
    
    
    
    10Net income (loss)
    
    
    (204
    )%
    
    
    16
    %
    
    
    (153
    )%
    
    
    14
    %
 THREE AND SIX MONTHS ENDED JANUARY 31, 2004 AND 2003 REVENUES. Revenues for the three months ended January 31, 2004 were $6.6
million, a decrease of $1.8 million, or 21%, from the $8.4 million reported for
the three months ended January 31, 2003. Revenues for the six months ended
January 31, 2004 were $10.5 million, a decrease of $5.7 million, or 35%, from
the $16.2 million reported for the six months ended January 31, 2003.
Consolidated revenues represent the combined revenues, including sales of
Forgents scheduling software, add-on software customization, installation and
training, network consulting, hardware, software maintenance services, and
other comprehensive professional services as well as royalties received from
licensing the Companys intellectual property. Consolidated revenues do not
include any revenues from Forgents discontinued videoconferencing hardware
services business (Services Business), which provided hardware maintenance,
installation, technical support, and resident engineer services (see Note 4, in
the accompanying financial statements). Software and professional services revenues decreased by $0.2 million, or
23%, to $0.8 million for the three months ended January 31, 2004 from $1.0
million for the three months ended January 31, 2003. Software and professional
services revenues decreased by $0.4 million, or 20%, to $1.8 million for the
six months ended January 31, 2004 from $2.2 million for the six months ended
January 31, 2003. Software and professional services revenues as a percentage
of total revenues were 12% and 12% for the three months ended January 31, 2004
and 2003, respectively. Software and professional services revenues as a
percentage of total revenues were 17% and 14% for the six months ended January
31, 2004 and 2003, respectively. Revenues from this line of business include
sales of Forgents ALLIANCE software products (ALLIANCE), including ALLIANCE
SCHEDULER (SCHEDULER) and ALLIANCE MEDIA MANAGER (MEDIA MANAGER), and the
newly acquired software products from Network Simplicity, Meeting Room Manager
and Visual Asset Manager. Also included are professional services, software
maintenance, and royalties. SCHEDULER, the enhanced product based on Forgents Global Scheduling
System, streamlines meeting scheduling, reduces conflicts associated with
booking meetings, and empowers users to schedule meetings easily using
Microsoft Outlook® and Lotus Notes® platforms. MEDIA MANAGER is a
multi-vendor, multi-protocol media management platform, based on Forgents
Video Network Platform, that monitors and manages rich media 13




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communications and network devices from multiple vendors through a Common
Operating Environment, and overcomes the related ease-of-use, reliability, and
manageability problems of rich media technologies. Meeting Room Manager is an
easy-to-use web-based tool that schedules rooms, people, and resources
globally. Visual Asset Manager is a network and web-based solution that allows
businesses to effectively track and manage their assets, including computers,
printers, software, and employees. Forgents professional services offerings
include add-on software customization, installation and training, and network
consulting services. The $0.2 million decrease during the three months ended January 31, 2004
and the $0.4 million decrease during the six months ended January 31, 2004 as
compared to the related periods in fiscal year 2003 are due to decreases in
sales of software licenses and related professional services during fiscal year
2004, primarily as a result of less than anticipated sales of ALLIANCE. Midway
through the second fiscal quarter, management anticipated software revenues to
grow over the previous quarter based on multiple opportunities in which the
sales force received favorable responses from customers, indicating potential
purchasing commitments. However, starting in January 2004, customers began
altering their purchase intentions, leading to a 21% decline in software
revenues over the previous quarter. More disconcerting to management were the
reasons customers cited for their withdrawal. In the past, customers stated
that budget constraints were the primary reason that required them to delay
purchasing the Companys software. In January 2004, Forgent encountered more
customers citing changes in IT spending priorities and complexities of
implementation at the enterprise level as the basis for not purchasing
ALLIANCE. During January 2004, management reviewed its software segment, the
related cash flows from its ALLIANCE and Network Simplicity product lines, and
re-evaluated its strategy regarding growing revenues from this segment. As a
result, Forgent decreased its investment in ALLIANCE and repriced, repackaged,
and repositioned ALLIANCE to be targeted to small to medium sized businesses
and departments or divisions of large enterprises. Under a realigned software
sales strategy, Forgent will continue to market and sell ALLIANCE and will
continue to support all of its current ALLIANCE customers. During the second
fiscal quarter, Forgent obtained indications that it is gaining traction in
selling Meeting Room Manager and Visual Asset Manager. Since Forgents
ALLIANCE and Network Simplicity software products are now both sold under
similar distribution models, management expects to experience efficiencies in
the sales efforts for these products. In addition to repositioning ALLIANCE
and pursuing sales of Meeting Room Manager and Visual Asset Manager, Forgent
will continue to investigate potential acquisitions of companies with
scheduling products targeted at the small to medium sized business markets.
Management believes its redefined focus on scheduling software targeted at the
small to medium sized business markets will provide the opportunity for growing
the revenues of the Company. Intellectual property licensing revenues decreased by $1.5 million, or
20%, to $5.8 million for the three months ended January 31, 2004 from $7.3
million for the three months ended January 31, 2003. Intellectual property
licensing revenues decreased by $4.8 million, or 36%, to $8.7 million for the
six months ended January 31, 2004 from $13.5 million for the six months ended
January 31, 2003. Intellectual property licensing revenues as a percentage of
total revenues were 88% and 87% for the three months ended January 31, 2004 and
2003, respectively. Intellectual property licensing revenues as a percentage
of total revenues were 83% and 83% for the six months ended January 31, 2004
and 2003, respectively. These licensing revenues relate to one-time
intellectual property licensing agreements with companies for Forgents data
compression technology embodied in U.S. Patent No. 4,698,672 and its foreign
counterparts. The Company does not anticipate any additional intellectual
property revenue from these companies but it continues to actively seek new
licenses and put more companies on notice by broadening its field of use to
cover several fields including printing devices, scanners, DVD players,
personal computers, digital cameras, certain video cameras, cell phones,
rendering software and other technologies. As of January 31, 2004, the Company
had $0.8 million in accounts receivable related to its intellectual property
licensing revenues generated during the second fiscal quarter. This receivable
was collected during the third fiscal quarter. The second fiscal quarter of 2004 marks the eighth consecutive quarter
that Forgent has generated licensing revenues. As of January 31, 2004, the
Companys Patent Licensing Program has generated $88.8 million in aggregate
licensing revenues. Although the timing of signing the license agreements
continues to pose forecasting challenges, which inevitably causes peaks and
valleys in the program, management anticipates its Patent Licensing Program
will generate additional intellectual property licensing revenues in fiscal
year 2004 as well as in fiscal year 2005. However, Forgents licensing program
involves risks inherent in technology licensing, including risks of protracted
delays, possible legal challenges that would lead to the disruption or
curtailment of the licensing program, increasing expenditures associated with
pursuit of the program, and other risks that could adversely affect the
Companys licensing program. Additionally, the U.S. patent, which has generated
the licensing revenues, expires in October 2006 and its foreign counterparts
expire in September 2007. Thus, there can be no assurance that the Company will
be able to continue to effectively license its technology to others. 14




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Other revenues decreased by $0.1 million, or 100%, to $0.0 million for the
three months ended January 31, 2004 from $88 thousand for the three months
ended January 31, 2003. Other revenues decreased by $0.4 million, or 95%, to
$22 thousand for the six months ended January 31, 2004 from $0.5 million for
the six months ended January 31, 2003. Other revenues as a percentage of total
revenues were 0% and 1% for the three months ended January 31, 2004 and 2003,
respectively. Other revenues as a percentage of total revenues were 0% and 3%
for the six months ended January 31, 2004 and 2003, respectively. During the
three and six months ended January 31, 2003, the Company subcontracted several
integration projects to SPL Integrated Solutions (SPL), which had purchased
Forgents integration business during fiscal year 2002. As a result of these
subcontracts, Forgent recorded $0.1 million and $0.5 million in other revenues
during the three and six months ended January 31, 2003, respectively. During
the first fiscal quarter of 2004, Forgent completed its final integration
project and recorded $22 thousand in other revenues. As of October 31, 2003,
Forgent no longer subcontracted any integration projects to SPL and referred
all of its integration customers directly to SPL. GROSS MARGIN. Gross margin for the three months ended January 31, 2004 was
($1.9) million, a decrease of $5.9 million, or 148%, from the $4.0 million
reported for the three months ended January 31, 2003. Gross margin for the six
months ended January 31, 2004 was ($0.3) million, a decrease of $7.9 million,
or 104%, from the $7.6 million reported for the six months ended January 31,
2003. Gross margin as a percentage of total revenues were (29%) and 47% for the
three months ended January 31, 2004 and 2003, respectively. Gross margin as a
percentage of total revenues were (3%) and 47% for the six months ended January
31, 2004 and 2003, respectively. As a result of the second fiscal quarters financial results, as well as
the future outlook for the software business, the Company was required to
record an $11.8 million impairment charge, primarily related to certain
software assets. This impairment included a $4.8 million non-cash impairment
charge related to the capitalization of its ALLIANCE software development costs
and certain prepaid royalties, which was recorded as part of costs of sales.
This impairment charge caused the Companys gross margins to be negative.
Without the effects of the impairment charge, gross margins decreased by $1.0
million, or 26%, and $3.0 million, or 40%, for the three and six months ended
January 31, 2004, as compared to the three and six months ended January 31,
2003, respectively. The $1.0 million decrease in Forgents gross margin, prior to the effects
of the impairment charge, during the quarter ended January 31, 2004, as
compared to the quarter ended January 31, 2003, is due primarily to the $0.7
million decrease in gross margin from patent licensing agreements obtained
during the second fiscal quarter. The cost of sales on the intellectual
property licensing business relates to the legal fees incurred on successfully
achieving licensing revenues. The contingent legal fees are based on 50% of the
licensing revenues received on signed agreements and are paid to Jenkens &
Gilchrist, a national law firm, per the agreement with Jenkens & Gilchrist.
Therefore, intellectual property revenues generated during a fiscal period
directly and significantly affect total gross margin. Similarly, the $3.0
million decrease in Forgents gross margin, prior to the effects of the
impairment charge, during the six months ended January 31, 2004, as compared to
the six months ended January 31, 2003, is due primarily to the $2.4 million
decrease in gross margin from patent licensing agreements obtained. Because of
the inherent risks in technology licensing, including the October 2006
expiration of the U.S. patent which has generated the licensing revenues and
the September 2007 expiration of the patents foreign counterparts, total gross
margin could be adversely affected in the future if licensing revenues decline. The costs associated with the software and professional services business
result primarily from the amortization of the Companys capitalized and
purchased software development costs and compensation expenses. Thus, the cost
of sales from this line of business is relatively fixed. During the three and
six months ended January 31, 2004, the amortization of software development
costs and compensation expenses equaled $0.7 million and $1.5 million,
representing 94% and 94% of this segments total cost of sales, excluding the
impairment charge of $4.8 million, respectively. For the three and six months
ended January 31, 2003, the amortization of software development costs and
compensation expenses equaled $0.5 million and $0.9 million, representing 68%
and 63% of this segments total cost of sales, respectively. The increase in
costs is due to the additional amortization of previously capitalized software
development costs and the additional amortization of the purchased software
development costs resulting from the Network Simplicity and GSS acquisitions,
as well as additional personnel related expenses. As a result of the $4.8
million impairment charge for the remaining unamortized software development
costs and the restructuring of the Companys business in February 2004,
management anticipates its software segments cost of sales to be reduced since
it will no longer have expenses related to the amortization of 15




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the ALLIANCE software development costs and it will have reduced
compensation expenses, excluding severance charges. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
(SG&A) expenses for the three months ended January 31, 2004 were $3.4
million, an increase of $0.9 million, or 34%, from the $2.5 million reported
for the three months ended January 31, 2003. SG&A expenses for the six months
ended January 31, 2004 were $6.4 million, an increase of $0.8 million, or 15%,
from the $5.6 million reported for the six months ended January 31, 2003. SG&A
expenses as a percentage of total revenues were 51% and 30% for the three
months ended January 31, 2004 and 2003, respectively. SG&A expenses as a
percentage of total revenues were 61% and 34% for the six months ended January
31, 2004 and 2003, respectively. Approximately 70% of the $0.9 million increase in SG&A expenses during the
three months ended January 31, 2004 and approximately 96% of the $0.8 million
increase in SG&A expenses during the six months ended January 31, 2004 are
attributable to increases in corporate expenses, legal fees, sales and
marketing expenses, and bad debt expenses. Forgent allocates certain corporate
operating expenses to its segments. Since the Company sold its Services
Business during the fourth fiscal quarter of 2003, the Company had one less
segment to allocate corporate operating expenses to and thus, SG&A expenses
from continuing operations increased by an additional $0.3 million and $0.5
million in expenses during the three and six months ended January 31, 2004,
respectively. During the second fiscal quarter, Forgent also incurred
increased legal fees due primarily to efforts related to finalizing certain
aspects of the sale of the Services Business and to investigating potential
acquisitions. During the three and six months ended January 31, 2004, Forgents sales
and marketing expenses increased by $0.2 million and $0.1 million over the
comparable periods ended January 31, 2003, respectively. These increases are
due primarily to the sales expenses related to Network Simplicity, since
Forgent completed its acquisition of Network Simplicity in October 2003.
During the second fiscal quarter and during previous quarters, Forgent sold
ALLIANCE primarily through a direct distribution model, which resulted in long
sales cycles due to the time required to educate potential enterprise customers
regarding the use and benefits of ALLIANCE. As a result of the shift in the
Companys go-forward strategy, Forgent realigned its software sales strategy
for ALLIANCE to a more cost efficient distribution model, similar to the
Companys sales strategy for its Network Simplicity software products, in order
to simplify and streamline the overall sales process. Since Forgents ALLIANCE
and Network Simplicity software products are now both sold under similar
distribution models targeted at small to medium sized businesses and
departments or divisions of large enterprises through high volume,
telemarketing, and web-based sales, management expects to experience
efficiencies in its sales efforts. Management will continue to monitor
expenses related to the Companys sales organization and make adjustments, if
necessary, to its sales capabilities to support the sale of its software
products. Forgent reviews potential customers credit ratings to evaluate customers
ability to pay an obligation within the payment term before extending any new
or additional credit. The Company follows its credit policy consistently and
constantly monitors all of its accounts for indications of uncollectability.
During the second fiscal quarter, Forgent recorded $0.1 million in bad debt
expense. This bad debt expense is the result of fully reserving two customer
accounts as a result of a resellers current inability to pay timely and
unresponsiveness from a customer due to turnover within the customers
business. Management intends to continue pursuing collection from these two
customers, using legal action if necessary. Less than 2% of Forgents
remaining accounts receivable are aged past 90 days, and management does not
currently anticipate any collection issues with these receivables. RESEARCH AND DEVELOPMENT. Research and development (R&D) expenses for
the three months ended January 31, 2004 were $1.1 million, an increase of $0.4
million, or 62%, from the $0.7 million reported for the three months ended
January 31, 2003. R&D expenses for the six months ended January 31, 2004 were
$2.2 million, an increase of $0.3 million, or 19%, from the $1.9 million
reported for the six months ended January 31, 2003. R&D expenses as a
percentage of total revenues were 18% and 9% for the three months ended January
31, 2004 and 2003, respectively. R&D expenses as a percentage of total
revenues were 22% and 12% for the six months ended January 31, 2004 and 2003,
respectively. During the three months ended January 31, 2004, Forgent continued its
efforts on enhancing its ALLIANCE software suite, as well as enhancing its
Network Simplicity software products. In December 2003, Forgent released
ALLIANCE 4.2, which integrates WebEx web conferencing services into the
ALLIANCE meeting automation platform and includes support for video bridge
cascading in order to connect multiple participants who would otherwise not all
fit on one bridge or would be too costly to be serviced by one bridge. Forgent
also 16




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developed ALLIANCE 4.3, which extends the web conferencing capabilities to
support Lotus Web Conferencing in addition to the existing WebEx support.
ALLIANCE 4.3 was released in January 2004. In November 2003, Forgent released Meeting Room Manager 2004, which
significantly improved the web client by providing many of the administrative
functions, such as location management, filter management, options, etc. that
were previously only available in the network client. The Companys latest
version of its Network Simplicity product line provides virtual meetings from
users desktops across one or multiple offices and allows web client users to
create advanced recurring meetings. Additionally, the new MRM Assistant
performs automated functions such as sending meeting reminders to attendees,
generating web-based reports, periodically archiving reservations, and alerting
administrators of certain actions. Administrators can now track the status of
the equipment in inventory, customize any detail or search form in the web
client, as well as define rules based on reservation information, such as
limiting the number of people in certain meeting rooms and identifying selected
users with the ability to reserve equipment for a meeting room. The Company
is currently developing its next versions of Meeting Room Manager and Visual
Asset Manager. In doing so, management will attempt to maintain research and
development expenses at reasonable levels in terms of percentage of revenue. The R&D expenses are net of $0.4 million and $0.9 million capitalized
during the three and six months ended January 31, 2004, respectively, as
compared to $0.8 million and $1.6 million capitalized during the three and six
months ended January 31, 2003. Software development costs are capitalized
after a product is determined to be technologically feasible and is in the
process of being developed for market. At the time the product is released for
sale, the capitalized software is amortized over the estimated economic life of
the related project, generally three years. As part of its efforts to simplify
and streamline its software operations to be commensurate with its software
revenue base, management repriced, repackaged, and repositioned ALLIANCE to be
targeted to small to medium sized businesses and departments or divisions of
large enterprises. In connection with this realignment, Forgent impaired its
existing capitalized software development costs, all of which were related to
ALLIANCE, and recorded a $4.7 million non-cash charge. This impairment charge
was recorded as part of cost of sales on the Consolidated Statement of
Operations. During the six months ended January 31, 2004, Forgent continued to grow
its intellectual property portfolio by preparing new patent applications,
pursuing pending applications, and obtaining new patents. The United States
Patent and Trademark Office issued the Company two new patents during the
second fiscal quarter, bringing the Companys total issued patent count to
forty-six. These patents and pending applications, which comprise Forgents
intellectual property portfolio, relate to scheduling, meeting automation,
videoconferencing, data compression, video mail, and other technologies
developed or acquired by Forgent. AMORTIZATION OF INTANGIBLE ASSETS.Amortization expenses for the three
and six months ended January 31, 2004 were $12 thousand and $17 thousand,
respectively. The amortization expenses relate to the amortization of certain
identified intangible assets purchased from Network Simplicity in October 2003.
No amortization expenses were recorded for the three and six months ended
January 31, 2003. IMPAIRMENT OF ASSETS. During the three months ended January 31, 2004,
Forgent recorded impairment losses on the Consolidated Statement of Operations
as follows: IntellectualSoftware
    
    Property
    
    TotalSegment
    
    Segment
    
    Impairment(Amounts in thousands)Prepaid assets
    
    $
    90
    
    
    $
    
    
    
    $
    90Capitalized software
development costs
    
    
    4,748
    
    
    
    
    
    
    
    4,748Impairment in cost of sales
    
    
    4,838
    
    
    
    
    
    
    
    4,838Prepaid assets
    
    
    10
    
    
    
    
    
    
    
    10Equipment
    
    
    211
    
    
    
    
    
    
    
    211Goodwill
    
    
    5,043
    
    
    
    
    
    
    
    5,043Leasehold improvements
    
    
    21
    
    
    
    161
    
    
    
    182Leases
    
    
    420
    
    
    
    1,123
    
    
    
    1,543
 17




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IntellectualSoftware
    
    Property
    
    TotalSegment
    
    Segment
    
    Impairment(Amounts in thousands)Impairment in operating expenses
    
    
    5,705
    
    
    
    1,284
    
    
    
    6,989Total impairment
    
    $
    10,543
    
    
    $
    1,284
    
    
    $
    11,827
 During the second fiscal quarter, Forgent faced declining revenues related
to its ALLIANCE software products and services. On the other hand, Forgent
experienced increasing revenues related to its Network Simplicity software
product and services. Additionally, management learned that while indicators
of demand existed for ALLIANCE, issues regarding price sensitivity, lengthy
sales cycle, and integration with enterprise infrastructures were preventing
ALLIANCE from achieving the revenues that management originally anticipated.
Starting in January 2004, management reviewed its software segment, the related
cash flows from its ALLIANCE and Network Simplicity product lines, and
re-evaluated its strategy regarding growing revenues from this segment. As a
result, Forgent repriced, repackaged, and repositioned ALLIANCE to be targeted
to small to medium sized businesses and departments or divisions of large
enterprises. Since Forgents ALLIANCE and Network Simplicity software products
are now both sold under similar models, management expects to experience
efficiencies in the sales efforts. Forgent will continue to market and sell
ALLIANCE and will continue to support all of its current ALLIANCE customers. Pursuant to SFAS No. 86, Accounting for the Costs of Software to be Sold,
Leased, or Otherwise Marketed, and SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, Forgent evaluated the
recoverability of its long-lived assets, including the equipment and
capitalized software development costs, related to the ALLIANCE efforts. Based
on the projected negative cash flows related to ALLIANCE, Forgent fully
impaired the $4.7 million in net capitalized software development costs and
$0.2 million in equipment related to ALLIANCE. Additionally, Forgent impaired
$0.1 million of certain prepaid assets that specifically supported ALLIANCE.
Due to the decrease in software and professional services revenues and
Forgents shift in its go-forward strategy, the Company was also required to
perform an impairment analysis in accordance with SFAS No. 142, Goodwill and
Other Intangible Assets. As part of the impairment analysis, Forgent
determined the implied fair value of goodwill based on a discounted cash flow
model. As a result of this valuation, Forgent recorded a $5.0 million
impairment of its goodwill related to its acquisitions of Vosaic, LLC and
Global Scheduling Solutions, Inc. The technology obtained from these
acquisitions supported the development efforts on ALLIANCE and its predecessor,
Forgents Video Network Platform. The $10.1 million impairment charge related
to ALLIANCE was recorded to the Consolidated Statement of Operations, with $4.8
million in cost of sales and $5.3 million in operating expenses. In January 2004, the Company closed its sales office in Melville, New
York. Management was unable to sublease the vacated space and upon review of
the future discounted cash flows related to this lease, management recorded an
impairment charge of $78 thousand. Additionally, management analyzed the
discounted cash flows related to its Wild Basin property lease and subleases
over the remainder of the lease term. Although Forgent was able to sublease
the vacated space more quickly than originally anticipated, the rates on the
subleases were less than originally anticipated due to depressed current market
rates. Therefore, management calculated the economic value of the lost
sublease rental income and recorded an additional charge of $1.5 million. As
of January 31, 2004, Forgent had $2.0 million recorded as a liability on the
Consolidated Balance Sheet related to its Wild Basin property. Forgent
remained obligated to make lease payments in accordance with the original terms
of both leases. In addition, Forgent analyzed its recorded leasehold
improvements at its Wild Basin property. Multiple leasehold improvements were
made for the Companys previously owned videoconferencing hardware products
business and certain subtenants, and this analysis indicated that certain
leasehold improvements were no longer of value. Therefore, management recorded
an impairment charge of $0.2 million related to these leasehold improvements.
The $1.7 million impairment related to the Wild Basin and New York leases and
the leasehold improvements were recorded as part of operating expenses in the
Consolidated Statement of Operations. When Forgent sold its products business segment during fiscal year 2002,
it received two subordinated promissory notes from VTEL Products Corporation
(VTEL). Due to the defaulted payment on the first subordinated promissory
note due in April 2002 and due to the uncertainty in collecting the two
outstanding notes from VTEL, the Company recorded a $6.0 million charge for the
reserve of both notes from VTEL during fiscal year 2002. During the first
fiscal quarter of 2003, management agreed with VTELs management to offset
Forgents accounts payable to VTEL with its accounts receivable and notes
receivable from VTEL. Forgents liability was fully offset with the accounts
receivable and partially offset with the note in default, thus relieving $0.5
million of the reserve on the notes receivable. Since the initial $6.0 million
charge to reserve the VTEL notes receivable was 18




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reported as part of the asset impairment from continuing operations, the
related reduction of the reserves is also reported as part of the asset
impairment from continuing operations. No cash was exchanged with this
transaction. OTHER (EXPENSES) INCOME. Other expenses for the three months ended January
31, 2004 was $0.6 million, an increase of $0.6 million, or 6,956%, from the $9
thousand in other expenses reported for the three months ended January 31,
2003. Other expenses for the six months ended January 31, 2004 was $0.6
million, a decrease of $0.7 million, or 1,388%, from the $48 thousand in other
income reported for the six months ended January 31, 2003. Other expenses as a
percentage of total revenues were 10% and 0% for the three months ended January
31, 2004 and 2003, respectively. Other (expenses) income as a percentage of
total revenues were (6%) and 0% for the six months ended January 31, 2004 and
2003, respectively. The increase in other expenses for the three and six
months ended January 31, 2004 as compared to the three and six months ended
January 31, 2003 is due primarily to $0.6 million in foreign currency losses
associated with ceasing the operations of certain international entities that
were recorded during the second fiscal quarter. INCOME FROM DISCONTINUED OPERATIONS. Income from discontinued operations
for the three months ended January 31, 2004 was $0.6 million, a decrease of $38
thousand, or 6%, from the $0.6 million reported for the three months ended
January 31, 2003. Income from discontinued operations for the six months ended
January 31, 2004 was $0.6 million, a decrease of $1.0 million, or 64%, from the
$1.6 million reported for the six months ended January 31, 2003. Income from
discontinued operations as a percentage of total revenues were 9% and 7% for
the three months ended January 31, 2004 and 2003, respectively. Income from
discontinued operations as a percentage of total revenues were 5% and 10% for
the six months ended January 31, 2004 and 2003, respectively. During the fourth fiscal quarter of 2003, the Company sold the operations
and assets of its videoconferencing hardware services business to an affiliate
of Gores Technology Group (Gores). Accordingly, the videoconferencing
hardware service business has been accounted for and presented as discontinued
operations in the consolidated financial statements. Income from discontinued
operations were $0.6 million and $1.0 million for the three and six months
ended January 31, 2003. The $0.6 million in income recorded from discontinued
operations during the three and six months ended January 31, 2004 represents
the $0.6 million in cash received from Gores in January 2004 for purchase price
adjustments related to the sale of the Services Business and the residual
activity related to the disposal of the Services Business recorded for the
fiscal year ended July 31, 2003. The Company did not conduct any business from
this business line during the six months ended January 31, 2004. NET (LOSS) INCOME. Forgent incurred a net loss of $13.5 million, or $0.55
per share, during the three months ended January 31, 2004 compared to a net
income of $1.3 million, or $0.05 per share, during the three months ended
January 31, 2003. Forgent incurred a net loss of $16.0 million, or $0.65 per
share, during the six months ended January 31, 2004 compared to a net income of
$2.2 million, or $0.09 per share, during the six months ended January 31, 2003.
Net (loss) income as a percentage of total revenues were (204%) and 16% for the
three months ended January 31, 2004 and 2003, respectively. Net (loss) income
as a percentage of total revenues were (153%) and 14% for the six months ended
January 31, 2004 and 2003, respectively. The $14.8 million and $18.3 million
decrease in the Companys net income during the three and six months ended
January 31, 2004 as compared to the three and six months ended January 31, 2003
is primarily attributable to the $11.8 million in impairment charges recorded
during the second fiscal quarter of 2004. Due to the shift in sales strategy
for its software business and the difficulties in predicting the timing and
amounts of its intellectual property licensing revenues, uncertainties and
challenges remain. Thus, there can be no assurance that the Company can
successfully grow its revenues or return to profitability. LIQUIDITY AND CAPITAL RESOURCES On January 31, 2004, Forgent had working capital of $22.5 million,
including $24.9 million in cash, cash equivalents and short-term investments.
Cash provided by operating activities was $3.1 million for the six months ended
January 31, 2004 due primarily to a $6.1 million decrease in accounts
receivable and the sale of $1.7 million in accounts receivable, which were
offset by a loss of approximately $4.8 million, excluding the non-cash
impairment charges. Cash used in operating activities was $0.4 million for the
six months ended January 31, 2003 due primarily to a $1.1 million decrease in
accounts payable, which was offset by $0.6 million in income and $0.4 million
in depreciation and amortization expenses. During the six months ended January
31, 2004, the Company sold $1.7 million of its outstanding accounts receivable,
without any recourse, to Silicon Valley Bank. Silicon Valley Bank purchased the
accounts receivable at face value, less fees of approximately 1.2% of the face
value of the accounts receivable sold and a one-time annual set-up fee of $10
thousand. The Company received proceeds 19




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from Silicon Valley Bank of $1.7 million. As a result of the sale of the
accounts receivable, the Company excluded the related receivables from the
Consolidated Balance Sheet and recorded related expenses of $27 thousand for
the six months ended January 31, 2004. During the fiscal quarter ended January
31, 2004, Forgent collected $2.2 million in accounts receivable related to its
Patent Licensing Program. These collections and the diligent collection of the
Companys other accounts receivable led to the Companys days sales outstanding
to decrease further by six days over the previous quarter to 23 days. Forgent
continues to conscientiously collect all of its outstanding receivables. Cash used in investing activities was $6.1 million for the six months
ended January 31, 2004 due largely to $2.6 million in net purchases of
short-term investments and $2.0 million paid related to the purchase of Network
Simplicity. Cash used in investing activities was $0.1 million for the six
months ended January 31, 2003 due primarily to $1.6 million in capitalization
of software development costs, which was offset by $1.5 million in sales of
short-term investments. During the six months ended January 31, 2004, the
Company increased its purchases in short-term investments with maturities
greater than 90 days in order to increase returns on its cash balances. As of
January 31, 2004, approximately 87% of Forgents short-term investments mature
within six months and 13% of the short-term investments mature within one year. As of January 31, 2004, the Company leased computers, equipment, and
office space under non-cancelable operating leases that expire at various dates
through 2013. Certain leases obligate the Company to pay property taxes,
maintenance, and insurance. The Company also has several capital leases for
computer and office equipment. Additionally, the Company used the proceeds
from its notes payable to purchase computers and various equipment. Amounts
payable under these leases and notes payable are as follows: Amounts Payable
(in thousands) Operating
    
    Capital
    
    NotesFiscal Year Ending:
    
    Leases
    
    Leases
    
    Payable
    
    TotalRemaining 2004
    
    $
    2,135
    
    
    $
    19
    
    
    $
    207
    
    
    $
    2,3612005
    
    
    4,192
    
    
    
    6
    
    
    
    305
    
    
    
    4,5032006
    
    
    4,049
    
    
    
    
    
    
    
    167
    
    
    
    4,2162007
    
    
    3,340
    
    
    
    
    
    
    
    24
    
    
    
    3,3642008
    
    
    3,264
    
    
    
    
    
    
    
    
    
    
    
    3,264Thereafter
    
    
    15,011
    
    
    
    
    
    
    
    
    
    
    
    15,011Total
    
    $
    31,991
    
    
    $
    25
    
    
    $
    703
    
    
    $
    32,719
 Forgent may periodically make other commitments and thus become subject to
other contractual obligations. However, management believes these commitments
and contractual obligations are routine in nature and incidental to the
Companys operations. Cash used in financing activities was $0.3 million for the six months
ended January 31, 2004 due primarily to $0.5 million in purchases of treasury
stock, which was offset by $0.4 million in proceeds received from the issuance
of stock. Cash used in financing activities was $0.9 million for the six months
ended January 31, 2003 due primarily to $0.7 million in purchases of treasury
stock. Forgent currently maintains a stock repurchase program to purchase up to
three million shares of the Companys common stock. During the six months ended
January 31, 2004, the Company repurchased 137,085 shares for $0.5 million,
bringing the total number of shares repurchased to date to 1.7 million shares.
Management will continue to evaluate repurchasing additional shares in fiscal
2004, depending on the Companys cash position, market conditions, and other
factors. The Companys principal sources of liquidity at January 31, 2004 consisted
of $24.9 million of cash, cash equivalents, and short-term investments, and the
ability to generate cash from its intellectual property licensing business.
Forgents ability to generate cash is subject to certain risks as discussed
under Risk Factors  License Program below. As previously stated above,
however, there remain risks and uncertainties as to the timing of the receipts
of license fees due, in part, to the inherent nature of a patent licensing
program. Management plans to strategically utilize its cash balances to develop
Forgents software business and to explore opportunities for growing the
business, including through acquisitions. Therefore, there is no assurance
that the Company will be able to continue to limit its cash consumption and
preserve its cash balances, and it is possible that the Companys 20




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business demands may lead to cash utilization at levels greater than recently
experienced due to increased expense levels, potential acquisitions, and other
factors. CRITICAL ACCOUNTING POLICIES The consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States and include
the accounts of Forgents wholly owned subsidiaries. All significant
intercompany transactions and balances have been eliminated in the
consolidation. Preparation of the consolidated financial statements in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the reported
amounts of the assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Management periodically
evaluates estimates used in the preparation of the financial statements for
continued reasonableness. Appropriate adjustments, if any, to the estimates
used are made prospectively based upon such periodic evaluation. Management believes the following represent Forgents critical accounting
policies: Revenue Recognition The Company recognizes revenue when persuasive evidence of an arrangement
exists, delivery has occurred, the fee is fixed or determinable, and
collectibility is probable. The Company recognizes revenue in accordance with
Statement of Position (SOP) 97-2, Software Revenue Recognition, as amended
by SOP 98-4 and SOP 98-9, and Securities and Exchange Commission Staff
Accounting Bulletin 101, Revenue Recognition in Financial Statements. The Company does not recognize revenue for agreements with rights of
return, refundable fees, cancellation rights, or acceptance clauses until such
rights of return, refund, or cancellation have expired or acceptance has
occurred. The Companys arrangements with resellers do not allow for any
rights of return. Software and professional service revenue consists of license and service
fees. License fee revenue is earned through the licensing or right to use the
Companys software and from the sale of specific software products. Service
fee income is earned through the sale of maintenance and technical support,
training, installation, and other professional services related to the sale of
Forgents scheduling software. The Company allocates the total fee to the
various elements based on the relative fair values of the elements specific to
the Company. The Company determines the fair value of each element in the
arrangement based on vendor-specific objective evidence (VSOE) of fair value.
When VSOE of fair value for the license element is not available, license
revenue is recognized using the residual method. Under the residual method,
the contract value is first allocated to the undelivered elements (maintenance
and service elements) based upon their VSOE of fair value; the remaining
contract value, including any discount, is allocated to the delivered element.
For maintenance, VSOE of fair value is based upon the renewal rate specified in
each contract. For training and installation services, VSOE of fair value is
based upon the rates charged for these services when sold separately. Revenue
allocated to maintenance and technical support is recognized ratably over the
maintenance term (typically one year). Revenue allocated to installation and
training is recognized upon completion of these services due to their
short-term nature. The Companys training and installation services are not
essential to the functionality of its products as 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. Intellectual property licensing revenue is derived from the Companys
Patent Licensing Program, which is currently focused on generating license
revenues relating to the Companys data compression technology embodied in U.S.
Patent No. 4,698,672, and its foreign counterparts. Gross intellectual
property licensing revenue is recognized at the time a license agreement has
been executed and related costs are recorded as cost of sales. The cost of
sales on the intellectual property licensing business relates to the legal fees
incurred on successfully achieving signed agreements. The contingent legal
fees are based on a percentage of the licensing revenues received on signed
agreements and are paid to Jenkens & Gilchrist, a national law firm. The
percentage payment to Jenkens & Gilchrist was set based on a sliding scale that
began during the quarter ended April 30, 2002 at 35% and increased 21




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to 50% based on the aggregate recoveries achieved. Future percentage
payments will be 50% of license receipts per the agreement with Jenkens &
Gilchrist. Deferred revenue includes amounts received from customers in excess of
revenue recognized, and is comprised of deferred maintenance, service, and
other revenue. Deferred revenues are recognized in the Consolidated Statement
of Operations over the terms of the arrangements, primarily ranging from one to
three years. Software Development Costs Costs incurred in connection with the development of software products are
accounted for in accordance with SFAS No. 86, Accounting for the Costs of
Computer Software to Be Sold, Leased or Otherwise Marketed. Costs incurred
prior to the establishment of technological feasibility are charged to research
and development expense. Software development costs are capitalized after a
product is determined to be technologically feasible and is in the process of
being developed for market. Amortization of capitalized software development
costs begins upon initial product shipment. Software development costs are
amortized over the estimated life of the related product (generally thirty-six
months), using the straight-line method. Impairment of Goodwill and Intangible Assets The Company adopted SFAS No. 142, Goodwill and Other Intangible Assets
on August 1, 2001 and thus is required to review the carrying value of its
goodwill and other intangible assets annually. Forgent also reviews goodwill
and other intangibles for possible impairment whenever specific events warrant.
Events that may create an impairment review include, but are not limited to:
significant and sustained decline in the Companys stock price or market
capitalization; significant underperformance of operating units; and
significant changes in market conditions and trends. If a review event has
occurred, the value of the goodwill or intangible asset is compared to the
estimate of future cash flows, and if required, an impairment is recorded. Allowance for Doubtful Accounts The Company maintains an allowance for doubtful accounts to estimate
losses from uncollectable customer receivables. This estimate is based in the
aggregate, on historical collection experience, age of receivables, and general
economic conditions. It also considers individual customers payment
experience, credit-worthiness, and age of receivable balances. RISK FACTORS There are many factors that affect the Companys business, prospects,
liquidity, and the results of its operations, some of which are beyond the
control of the Company. The following is a discussion of some, but not all, of
these and other important risk factors that may cause the actual results of the
Companys operations in future periods to differ materially from those
currently expected or desired. Additional risks not presently known to
management or that are currently believed to be immaterial may also affect the
Companys business prospects and results of operations. General Economic and Industry Conditions Any adverse change in general economic, business, or industry conditions
could have a material adverse effect on the Companys business, prospects, and
financial performance if those conditions cause customers or potential
customers to reduce or delay their investments in scheduling software and
related professional services. Due to the current economic circumstances
affecting U.S. businesses, there has been a slow-down in capital spending,
which adversely affects the willingness of companies to purchase software
products and professional services. If this slow-down in capital spending
continues to prolong, economic conditions could have a continued adverse effect
on the demand for the Companys products and services and could result in
declining revenues and earnings for the Company. License Program The Companys intellectual property licensing revenues are difficult to
predict. The Companys Patent Licensing Program involves risks inherent in
technology licensing, including risks of protracted delays, possible 22




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legal challenges that would lead to disruption or curtailment of the program,
increasing expenditures associated with the pursuit of the program, and other
risks that could adversely affect the Companys licensing program. Thus, there
can be no assurance that the Company will be able to continue to license its
technology to others. In this regard, see Item 1  Legal Proceedings in Part
II of this report for information regarding the commencement by the Federal
Trade Commission of a non-public investigation associated with the Companys
Patent Licensing Program. If the Company fails to meet the expectations of
securities analysts or investors, the market price of Forgents common stock
may decrease significantly. Quarterly operating results may fail to meet these
expectations for a number of reasons, including the unwillingness or inability
of licensees to pay for the license and other fees, a decline in the demand for
the Companys patented technology, higher than expected operating expenses, and
license delays due to legal and other factors. Acquisition Integration The Company has made, and will continue to evaluate and may make,
strategic acquisitions in public and privately held technology companies. Since
some of these companies may be early-stage ventures with unproven business
models, products that are not yet fully developed, or products that have not
yet achieved market acceptance, these acquisitions are inherently risky.
Additionally, the Company may encounter a number of risks, including (1)
diversion of managements attention; (2) failure to retain and motivate key
acquired personnel; (3) failure to integrate acquired operations, products and
technologies; (4) risks associated with unanticipated events, circumstances or
legal liabilities; (5) client satisfaction or performance problems within the
acquired business; and (6) amortization of acquired intangible assets. These
difficulties could disrupt Forgents ongoing business, distract existing
management and employees, increase the Companys expenses, and materially and
adversely affect results of operations and liquidity. Accordingly, there can
be no assurances that any of the Companys investments will be successful or
that the Company will be able to recover the amounts invested. Software Marketing and Sales Forgents first software product was introduced in the fall of 2001, and
as such, it has limited market awareness. Since that time Forgent has enhanced
this product through internal development and acquisitions. The Companys
future success will be dependent in significant part on its ability to generate
demand for its scheduling software products and professional services. To this
end, Forgents sales operations must increase market awareness of its products
to generate increased revenue. All sales new hires 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 or that it will be able to
hire enough qualified individuals or retain existing employees in the future.
The Company cannot be certain that it will be successful in its efforts to
market and sell its products, and if it is not successful in building greater
market awareness and generating increased sales, future results of operations
will be adversely affected. Software Development Forgent expects that its future financial performance will depend
significantly on revenue from its existing and future software products and the
related products that the Company plans to develop or acquire. There are
significant risks inherent in any new product introduction, such as with
Forgents ALLIANCE software products and its Network Simplicity software
products. 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 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 may require significant resources and could
ultimately be unsuccessful. Such significant investment could adversely affect
the Companys operating results as well as its liquidity. Additionally, Forgent cannot be certain that its existing or future
products offerings will meet customer performance needs or expectations when
shipped or that they will be free of significant software defects or bugs. If
the Companys products do not meet customer needs or expectations, for whatever
reason, the Companys sales would be adversely affected and further, upgrading
or enhancing the Companys products could be costly and time consuming. Such
upgrades or enhancements could have an adverse effect on the Companys results
of operations and liquidity. 23




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Increased Business from Current and New Customers Forgents business model depends on the expanded use of its software
within its current and new customers organizations. Therefore, Forgent must
execute on its growth objectives, including growth from its acquired companies
or assets. If the Company fails to grow its customer base or generate repeat
and expanded business from its current customers, Forgents business and
operating results could be adversely affected. Since the Companys maintenance
and other professional service fees depend largely on the size and number of
licenses that are sold, any downturn in Forgents software license revenue
would negatively impact the Companys professional services revenue and future
maintenance revenue. Additionally, if customers elect not to renew their
maintenance agreements, Forgents maintenance revenue could be adversely
affected. Quarterly Revenues and Operating Results In the past, Forgents revenues and operating results have varied
significantly from quarter to quarter. Additionally, management expects that
revenues and operating results will continue to fluctuate significantly from
quarter to quarter. These fluctuations may lead to reduced prices for the
Companys common stock. Several factors may cause the quarterly results to
fluctuate, including:  
    
    Timing of intellectual property license agreements and related recording of licensing revenues;
    
    Market demand for the Companys software products and services;
    
    Timing of customers budget cycles;
    
    Timing of customer orders and deployment of Forgents software products;
    
    The mix of software license and services revenue;
    
    Seasonal fluctuations in capital spending;
    
    Changes in the rapidly evolving market for web-based applications;
    
    Managements ability to manage operating costs, a large portion of
which are relatively fixed in advance of any particular quarter;
    
    Timing and costs related to possible acquisitions of technology or businesses;
    
    Costs of attracting, retaining, and training skilled personnel;
    
    Managements ability to manage future growth; and
    
    General economic climate. Some of these factors are within managements control while others are
not. Accordingly, management believes that quarter-to-quarter comparisons of
the Companys revenues and operating results are not necessarily meaningful.
Therefore, investors should not rely on the results of any particular quarter
as an indication of future performance. Key Personnel and Senior Management Forgents success depends upon its ability to attract, hire, and retain
highly trained and experienced software developers and engineers to design and
develop software applications in order to keep pace with client demand for
rapidly evolving technologies and varying client needs. The Companys
operations are also dependent on the continued efforts of its executive
officers and senior management. Additionally, Forgent will likely depend on
the senior management of any business it may acquire in the future. If any of
the Companys key personnel or senior management are unable or unwilling to
continue in his or her present role, or if Forgent is unable to hire, train and
integrate new personnel effectively, Forgents business could be adversely
affected. Technological Changes and Product Transitions The technology industry is characterized by continuing improvements in
technology, which results in the frequent introduction of new products, short
product life cycles, and continual improvement in product performance
characteristics. If the Company fails to anticipate and respond effectively to
these improvements and new product introductions, these improvements could
render the Companys products noncompetitive. While Forgent believes that its
experience over the past few years as a provider of scheduling software and
professional services and its prior experience in the videoconferencing
industry affords it a competitive advantage over some of its competitors, rapid
changes in technology present challenges and risks for the Company. 24




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Competition and New Entrants The Company may encounter new entrants or competition from competitors in
some or all aspects of its business. The Company competes on the basis of
price, technology, availability, performance, quality, reliability, service,
and support. The Company believes that its experience and business model
creates a competitive advantage over its competitors. However, there can be no
assurance that the Company will be able to maintain this advantage. Many of the
Companys current and possibly future competitors have greater resources than
the Company and, therefore, may be able to compete more effectively on price
and other terms. Limited Operating History Although founded in 1985, Forgent has a limited operating history in its
current lines of business due to the Companys recent transition to a provider
of scheduling software and professional services and a licensor of intellectual
property. As a result of this limited operating history, Forgent cannot
forecast revenue and operating expenses based on historical results.
Additionally, the Companys ability to forecast quarterly revenue accurately is
limited because of the relative unpredictability of its intellectual property
licensing revenues. The Companys business, operating results, and financial
condition will be materially adversely affected if revenues do not meet
projections and if results in a given quarter do not meet expectations. Patents and Trademarks The Companys success and ability to compete are substantially dependent
on its proprietary technology and trademarks. The Company seeks to protect
these assets through a combination of patent, copyright, trade secret, and
trademark laws, as well as confidentiality procedures and contractual
provisions. These legal protections afford only limited protection and
enforcement of these rights may be time consuming and expensive. Furthermore,
despite best efforts, the Company may be unable to prevent third parties from
infringing upon or misappropriating its intellectual property. Also,
competitors may independently develop similar, but not infringing, technology,
duplicate products, or design around the Companys patents or other
intellectual property. Additionally, the Companys patent applications or trademark registrations
may not be approved. Moreover, even if approved, the resulting patents or
trademarks may not provide Forgent with any competitive advantage or may be
challenged by third parties. If challenged, patents might not be upheld or
claims could be narrowed. Any litigation surrounding the Companys rights could
force Forgent to divert important financial and other resources away from
business operations. Divestiture Transactions As a result of Forgents transition to a provider of scheduling software
and professional services and licensor of intellectual property, the Company
has divested certain non-core operations, including a videoconferencing
endpoint manufacturing business, an integration business, and a
videoconferencing hardware services business. There can be no assurance that,
having divested such non-core operations, Forgent will be able to achieve
greater or any profitability, strengthen its core operations, or compete more
effectively in existing markets. In addition, the Company continues to evaluate
the profitability realized or that is likely to be realized by its existing
businesses and operations. Forgent reviews from a strategic standpoint, which,
if any, of its businesses or operations should be divested. Entering into,
evaluating or consummating divestiture transactions may entail risks and
uncertainties in addition to those which may result from the
divestiture-related change in the Companys business operations, including but
not limited to extraordinary transaction costs, unknown indemnification
liabilities, and unforeseen administrative complications, any of which could
result in reduced revenues, increased charges, or post-transaction
administrative costs, or could otherwise have a material adverse effect on
Forgents business, financial condition, or results of operations. Recently Proposed and Enacted Laws and Regulations As a result of assessing, implementing, and complying with recently
proposed and enacted changes in the laws and regulations affecting public
companies, including but not limited to the Sarbanes-Oxley Act of 2002,
management anticipates potential increased accounting, audit, and legal fees,
as well as potential increased costs for certain types of insurance.
Additionally, the new and proposed rules could also make it more difficult for
Forgent to 25




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retain qualified individuals to serve on its Board of Directors. Although
management continually monitors and evaluates the developments with respect to
these new and proposed laws and regulations, management cannot estimate the
amount of the additional costs the Company may incur or the timing of such
costs at this time. However, such increased costs could materially affect
Forgents results of operations. Due to the risk factors noted above and elsewhere in the Managements
Discussion and Analysis of Financial Condition and Results of Operations,
Forgents 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 securities
analysts could have an immediate and significant effect on the trading price of
the Companys common stock in any given period. CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS Certain statements in this Quarterly Report on Form 10-Q represent
forward-looking statements under Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
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. Whenever possible, Forgent 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 managements current plans and expectations,
which are believed to be reasonable as of the filing date of this quarterly
report, they inherently are subject to certain risks and uncertainties. Such
risks and uncertainties include, but are not limited to: (1) inability to
execute upon growth objectives, including growth in entities acquired by
Forgent; (2) failure of Forgents sales pipeline to be converted to realized
sales and recorded as revenue; (3) litigation involving intellectual property
and other matters; (4) rapid changes in technology; (5) unexpected changes in
customer order patterns; (6) inability to recruit and retain professionals with
the high level of skills and experience needed to develop and enhance Forgents
software products; (7) general economic conditions; (8) the intensity of
competition; (9) pricing pressures; (10) changes in the capital markets; (11)
changes in tax and other laws and governmental rules applicable to Forgents
business; and other risks indicated in Forgents filings with the Securities
and Exchange Commission. These risks and uncertainties are beyond the
Companys control, and in many cases, management cannot predict all of the
risks and uncertainties that could cause actual results to differ materially
from those contemplated, projected, anticipated, planned or budgeted in any
such forward-looking statements. Additionally, Forgent does not assume
responsibility for the accuracy and completeness of such statements and 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. 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Companys primary market risk exposure relates to interest rate risk.
Forgents interest income is sensitive to changes in U.S. interest rates.
However, due to the short-term nature of the Companys investments, Forgent
does not consider these risks to be significant. 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
Companys Annual Report on Form 10-K for the year ended July 31, 2003. 
 ITEM 4. CONTROLS AND PROCEDURES Under the supervision and with the participation of the Companys Chief
Executive Officer and Chief Financial Officer, management of the Company has
evaluated the effectiveness of the Companys disclosure controls and procedures
(as defined in Rule 13a-14(c) and Rule 15d-14 under the Securities Exchange Act
of 1934) as of a date within 90 days prior to the filing date of this report.
Based on that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that, as of the date of the evaluation, the Companys
disclosure controls and procedures are effective in timely alerting them to the
material information relating to the Company required to be included in its
periodic filings with the Securities and Exchange Commission. No changes were
made in the Companys internal controls over financial reporting during the
quarter ended January 31, 2004, that have
materially affected, or is reasonably likely to materially affect, the
Companys internal controls over financial reporting. 26




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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. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse affect on its financial condition or results of operations. In late February 2003, the Company received a letter from legal counsel
for the independent executrix of the Estate of Gordon Matthews, asserting that
the Company was obligated to pay the independent executrix of the Estate of
Gordon Matthews for the asserted value of services claimed to have been
rendered by Mr. Matthews in connection with his alleged involvement in the
Companys Patent Licensing Program. In late February 2003, the Company
initiated an action in the 261st District Court in Travis County Texas, styled
Forgent Networks, Inc. v. Monika Matthews, et al., for the purposes of
declaring that the Company has no obligation to the defendant. In that action,
the defendant has filed a counter claim asserting that the independent
executrix of the Estate of Gordon Matthews is entitled to recover in quantum
meruit for the reasonable value of the work and services claimed to have been
provided by Gordon Matthews, a former member of the board of directors and
consultant to the Company, which the defendant asserts is at least $5.0
million. The Company does not believe the counter claim has merit and intends
to continue to vigorously pursue declaratory relief from the court that no
liability is due to the independent executrix of the Estate of Gordon Matthews. The Company recently received notification from the Federal Trade
Commission (the FTC) that it is conducting a non-public investigation to
determine whether the Company may have engaged in violation of the Federal
Trade Commission Act by reason of the alleged involvement of Compression Labs,
Inc., (CLI), the Companys subsidiary, in the JPEG standard-setting process
during the 1980s and very early 1990s and its subsequent licensing of the
672 Patent, which the Company believes is infringed by the implementation of
that standard. If the FTC proceeds with an investigation and thereafter
determines that the Company acted improperly, further proceedings before the
FTC could ensue, which could result in a challenge to the Companys 672 patent
licensing program. The Company believes that CLI has not acted improperly and
has so advised the FTC. 
 ITEM 2. CHANGES IN 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 AND REPORTS ON FORM 8-K (a) Exhibits: 31.1
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 27




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32.1
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 (b) Reports on Form 8-K: On March 9, 2004 the registrant filed a report on Form 8-K
announcing the Companys financial results for the quarter ended
January 31, 2004 by issuing a press release. 28




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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.March 16, 2004
    By:
    /s/ RICHARD N. SNYDERRichard N. SnyderChief Executive OfficerMarch 16, 2004
    By:
    /s/ JAY C. PETERSONJay C. PetersonChief Financial Officer 29




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INDEX TO EXHIBITS EXHIBITNUMBER
    
    DESCRIPTION31.1
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002