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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 APRIL 30, 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 [  ]     No [X] At June 10, 2004 the registrant had outstanding 24,889,851 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 April 30, 2004 (unaudited) and July 31, 2003
    
    3Unaudited Consolidated Statements of Operations for the Three and Nine Months
Ended April 30, 2004 and 2003
    
    4Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended
April 30, 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
    
    28Signatures
    
    29Certification Pursuant to Section 302Certification Pursuant to Section 302Certification Pursuant to U.S.C. Section 1350Certification Pursuant to 18 U.S.C. Section 1350
  2




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FORGENT NETWORKS, INC. 
 CONSOLIDATED BALANCE SHEETS
 APRIL 30,
    
    JULY 31,2004
    
    2003(UNAUDITED)ASSETSCurrent Assets:Cash and equivalents, including restricted cash of $650 and
$730 at April 30, 2004 and July 31, 2003
    
    $
    17,434
    
    
    $
    21,201Short-term investments
    
    
    3,675
    
    
    
    3,845Accounts receivable, net of allowance for doubtful accounts
of $145 and $0 at April 30, 2004 and July 31, 2003
    
    
    634
    
    
    
    9,457Notes receivable, net of reserve of $780 and $639
at April 30, 2004 and July 31, 2003
    
    
    77
    
    
    
    74Prepaid expenses and other current assets
    
    
    432
    
    
    
    415Total Current Assets
    
    
    22,252
    
    
    
    34,992Property and equipment, net
    
    
    3,478
    
    
    
    2,158Intangible assets, net
    
    
    308
    
    
    
    5,042Capitalized software, net
    
    
    
    
    
    
    4,827Other assets
    
    
    266
    
    
    
    230$
    26,304
    
    
    $
    47,249LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    1,268
    
    
    $
    3,178Accrued compensation and benefits
    
    
    315
    
    
    
    683Other accrued liabilities
    
    
    1,585
    
    
    
    1,661Notes payable, current position
    
    
    355
    
    
    
    323Deferred revenue
    
    
    531
    
    
    
    281Total Current Liabilities
    
    
    4,054
    
    
    
    6,126Long-Term Liabilities:Deferred revenue
    
    
    41
    
    
    
    59Other long-term obligations
    
    
    2,511
    
    
    
    1,810Total Long-Term Liabilities
    
    
    2,552
    
    
    
    1,869Stockholders equity:Preferred stock, $.01 par value; 10,000 authorized;
none issued or outstanding
    
    
    
    
    
    
    Common
stock, $.01 par value; 40,000 authorized; 26,581 and 26,172 shares
issued; 24,860 and 24,588 shares outstanding
at April 30, 2004 and July 31, 2003, respectively
    
    
    265
    
    
    
    261Treasury stock, 1,721 and 1,584 issued at April 30, 2004 and
July 31, 2003, respectively
    
    
    (4,685
    )
    
    
    (4,231
    )Additional paid-in capital
    
    
    264,540
    
    
    
    263,875Accumulated deficit
    
    
    (240,433
    )
    
    
    (219,991
    )Unearned compensation
    
    
    (3
    )
    
    
    (28
    )Accumulated other comprehensive income
    
    
    14
    
    
    
    (632
    )Total Stockholders Equity
    
    
    19,698
    
    
    
    39,254$
    26,304
    
    
    $
    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
 FOR THE
    
    FOR THETHREE MONTHS ENDED
    
    NINE MONTHS ENDEDAPRIL 30,
    
    APRIL 30,2004
    
    2003
    
    2004
    
    2003(UNAUDITED)
    
    (UNAUDITED)REVENUES:Software and professional services
    
    $
    549
    
    
    $
    1,134
    
    
    $
    2,341
    
    
    $
    3,379Intellectual property licensing
    
    
    267
    
    
    
    12,150
    
    
    
    8,937
    
    
    
    25,618Other
    
    
    
    
    
    
    97
    
    
    
    22
    
    
    
    566Total revenues
    
    
    816
    
    
    
    13,381
    
    
    
    11,300
    
    
    
    29,563COST OF SALES:Software and professional services
    
    
    269
    
    
    
    945
    
    
    
    6,719
    
    
    
    2,418Intellectual property licensing
    
    
    134
    
    
    
    6,075
    
    
    
    4,469
    
    
    
    12,809Other
    
    
    
    
    
    
    77
    
    
    
    24
    
    
    
    497Total cost of sales
    
    
    403
    
    
    
    7,097
    
    
    
    11,212
    
    
    
    15,724GROSS
MARGIN
    
    
    413
    
    
    
    6,284
    
    
    
    88
    
    
    
    13,839OPERATING
EXPENSES:Selling, general and administrative
    
    
    3,292
    
    
    
    2,459
    
    
    
    9,708
    
    
    
    8,025Research and development
    
    
    918
    
    
    
    901
    
    
    
    3,152
    
    
    
    2,784Amortization of intangible assets
    
    
    12
    
    
    
    
    
    
    
    29
    
    
    
    Restructuring charge
    
    
    628
    
    
    
    
    
    
    
    628
    
    
    
    Impairment of assets
    
    
    
    
    
    
    1,211
    
    
    
    6,989
    
    
    
    712Total operating expenses
    
    
    4,850
    
    
    
    4,571
    
    
    
    20,506
    
    
    
    11,521(LOSS) INCOME FROM OPERATIONS
    
    
    (4,437
    )
    
    
    1,713
    
    
    
    (20,418
    )
    
    
    2,318OTHER INCOME (EXPENSES):Interest income
    
    
    49
    
    
    
    37
    
    
    
    164
    
    
    
    123Foreign currency translation
    
    
    (22
    )
    
    
    
    
    
    
    (655
    )
    
    
    Interest expense and other
    
    
    (6
    )
    
    
    (36
    )
    
    
    (106
    )
    
    
    (75
    )Total other income (expenses)
    
    
    21
    
    
    
    1
    
    
    
    (597
    )
    
    
    48(LOSS) INCOME FROM CONTINUING OPERATIONS, BEFORE INCOME TAXES
    
    
    (4,416
    )
    
    
    1,714
    
    
    
    (21,015
    )
    
    
    2,366Provision for income taxes
    
    
    
    
    
    
    (59
    )
    
    
    
    
    
    
    (69
    )(LOSS) INCOME FROM CONTINUING OPERATIONS
    
    
    (4,416
    )
    
    
    1,655
    
    
    
    (21,015
    )
    
    
    2,297Income from discontinued operations,
net of income taxes
    
    
    
    
    
    
    68
    
    
    
    
    
    
    
    1,666Income on disposal, net of income taxes
    
    
    
    
    
    
    
    
    
    
    573
    
    
    
    INCOME
FROM DISCONTINUED OPERATIONS, NET OF INCOME TAXES
    
    
    
    
    
    
    68
    
    
    
    573
    
    
    
    1,666NET (LOSS) INCOME
    
    $
    (4,416
    )
    
    $
    1,723
    
    
    $
    (20,442
    )
    
    $
    3,963BASIC AND DILUTED (LOSS) INCOME PER SHARE:(Loss) income from continuing operations
    
    $
    (0.18
    )
    
    $
    0.07
    
    
    $
    (0.85
    )
    
    $
    0.09Income from discontinued operations
    
    $
    0.00
    
    
    $
    0.00
    
    
    $
    0.02
    
    
    $
    0.07Net (loss) income
    
    $
    (0.18
    )
    
    $
    0.07
    
    
    $
    (0.83
    )
    
    $
    0.16WEIGHTED AVERAGE SHARES OUTSTANDING:Basic
    
    
    24,802
    
    
    
    24,629
    
    
    
    24,679
    
    
    
    24,693Diluted
    
    
    24,802
    
    
    
    24,715
    
    
    
    24,679
    
    
    
    25,144
 The accompanying notes are integral part of these consolidated financial statements. 4




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FORGENT NETWORKS, INC. 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 FOR THE NINEMONTHS ENDEDAPRIL 30,2004
    
    2003(UNAUDITED)CASH FLOWS FROM OPERATING ACTIVITIES:(Loss) income from continuing operations
    
    $
    (21,015
    )
    
    $
    2,297Adjustments to reconcile net (loss) income to net cash
used in operations:Depreciation and amortization
    
    
    1,981
    
    
    
    1,969Amortization of leasehold advance and lease impairment
    
    
    (735
    )
    
    
    (1,133
    )Provision for doubtful accounts
    
    
    329
    
    
    
    Impairment of assets
    
    
    11,827
    
    
    
    712Amortization of unearned compensation
    
    
    38
    
    
    
    201Foreign currency translation loss
    
    
    650
    
    
    
    Loss on disposal of fixed assets
    
    
    24
    
    
    
    17Sale of accounts receivable
    
    
    1,746
    
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    6,952
    
    
    
    (5,220
    )Inventories
    
    
    
    
    
    
    (31
    )Prepaid expenses and other current assets
    
    
    (115
    )
    
    
    (243
    )Accounts payable
    
    
    (1,955
    )
    
    
    (1,661
    )Accrued expenses and other long-term obligations
    
    
    (544
    )
    
    
    (665
    )Deferred revenues
    
    
    161
    
    
    
    33Net cash used in operating activities
    
    
    (656
    )
    
    
    (3,724
    )CASH FLOWS FROM INVESTING ACTIVITIES:Net sales of short-term investments
    
    
    170
    
    
    
    2,013Net purchases of property and equipment
    
    
    (669
    )
    
    
    (156
    )Net collection of notes receivable
    
    
    162
    
    
    
    110Increase in capitalized software
    
    
    (889
    )
    
    
    (2,202
    )Increase in other assets
    
    
    (200
    )
    
    
    (45
    )Purchase of Network Simplicity Software Inc.
    
    
    (2,297
    )
    
    
    Net cash used in investing activities
    
    
    (3,723
    )
    
    
    (280
    )CASH FLOWS FROM FINANCING ACTIVITIES:Net proceeds from issuance of stock
    
    
    656
    
    
    
    212Purchase of treasury stock
    
    
    (454
    )
    
    
    (858
    )Proceeds from notes payable
    
    
    267
    
    
    
    163Payments on notes payable and capital leases
    
    
    (426
    )
    
    
    (728
    )Net cash provided by (used in) financing activities
    
    
    43
    
    
    
    (1,211
    )CASH FLOWS FROM DISCONTINUED OPERATIONS:Net cash provided by discontinued operations
    
    
    573
    
    
    
    1,606Effect of exchange rate changes on cash and equivalents
    
    
    (4
    )
    
    
    19Net change in cash and equivalents
    
    
    (3,767
    )
    
    
    (3,590
    )Cash and equivalents at beginning of period
    
    
    21,201
    
    
    
    17,237Cash and equivalents at end of period
    
    $
    17,434
    
    
    $
    13,647
 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
 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 April 30,
2004 and July 31, 2003, the results of operations for the three and nine months
ended April 30, 2004 and April 30, 2003, and the cash flows for the nine months
ended April 30, 2004 and April 30, 2003. The results for the interim periods
are not necessarily indicative of results for a full fiscal year. 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 companies and
departments or divisions of large enterprises. This strategic acquisition
allows the Company 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 approximately $1,200 in
potential future cash considerations. The $2,115 represents the amount
recorded as the purchase price of the acquisition, which was accounted for as a
purchase of assets. Accordingly, the purchase price was allocated to the
tangible and identifiable intangible assets acquired based on their estimated
fair values at the date of acquisition. 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
 During April 2004, $358 of the potential future cash considerations was
earned by the seller of Network Simplicity and recorded as an adjustment to the
purchase price as of April 30, 2004 and to acquired software allocated. The remaining $842 tied to future
contingencies will be recorded as additional purchase price when, and if, the
amounts are paid. As a result of the acquisition, Forgents workforce grew by ten employees,
and the Network Simplicity workforce remained based in Richmond, British
Columbia, Canada. Additionally, 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 nine months ended April 30, 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) NOTE 3  RESTRUCTURING ACTIVITIES During the third fiscal quarter, Forgent streamlined its software
operations to be more commensurate with its software revenue base and
implemented a leaner cost structure, which included reducing headcount and
closing certain sales offices to conform to the Companys new operating
structure. As a result of this restructuring, Forgent terminated 62 employees,
or 58% of the workforce, which affected 33 employees in sales and marketing, 22
employees in research and development, and seven employees in general and
administrative functions. The designated employees were terminated upon the
announcement of the reduction and were assisted with outplacement support
services and severance. Additionally, Forgent closed its sales offices in
McLean, Virginia and Houston, Texas. In accordance with Statement of Financial
Accounting Standards (SFAS) No. 146, Accounting for Costs Associated with
Exit or Disposal Activities, the Company recorded a one-time charge of $616
for termination benefits and $12 related to the office closings during the
three months ended April 30, 2004. As of April 30, 2004, the Company had a
liability of $212 related to the restructuring activities. Most of this
liability will be paid in the fourth fiscal quarter and the remainder will be
paid during the first fiscal quarter of 2005. NOTE 4  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
products 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, certain ALLIANCE assets were impaired. 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 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) 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. 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. Also during the second
fiscal quarter, 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 $1,725
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. During the third fiscal quarter, Forgent negotiated
and settled its lease obligations on its office in Melville, New York. As of
April 30, 2004, Forgent remained obligated to make lease payments in accordance
with the original terms of its Wild Basin property lease and had $1,956
recorded as a liability on the Consolidated Balance Sheet related this
property. During the three months ended April 30, 2003, Forgent believed that the
ongoing difficult economic environment and the associated negative impact on
the Companys software business represented an indicator of a possible
impairment on the Companys software business. Therefore, the Company was
required to perform an impairment analysis in accordance with SFAS No. 142,
Goodwill and Other Intangible Assets to determine the fair value of the
assets and liabilities of its software business. As a result of this analysis,
Forgent recorded a $1,331 impairment of its goodwill related to its acquisition
of Global Scheduling Solutions, Inc. This impairment was recorded as part of
continuing operations on the Companys 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. Similarly, during the quarter ended
April 30, 2003, management agreed with VTELs management to offset Forgents
accounts payable to VTEL with the outstanding notes receivable and interest
receivable from VTEL, thus relieving an additional $120 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 reductions of the reserves are also reported as part of
the asset impairment from continuing operations. No cash was exchanged with
this transaction. 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) NOTE 5  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 second fiscal quarter, 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
April 30, 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. 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 $68 and $1,666 in income from
its discontinued operations for the three and nine months ended April 30, 2003.
The $573 in income recorded from discontinued operations during the nine
months ended April 30, 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 disposal of the Services Business. The
Company did not conduct any business from this business line during the nine
months ended April 30, 2004. NOTE 6  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 $30 for the nine months ended April 30, 2004. 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) NOTE 7  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) and foreign currency translation adjustments.
Comprehensive loss for the three and nine months ended April 30, 2004 was
$4,406 and $19,796 respectively. Comprehensive income for the three and nine
months ended April 30, 2003 was $120 and $438, respectively. NOTE 8  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 April 30, 2004 and therefore the adoption of these provisions
has no material impact on Forgents financial position or results of
operations. 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 April 30, 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. In
December 2003, the SEC issued Staff Accounting Bulletin No. 104
(SAB 104), Revenue Recognition, which
codifies, revises and rescinds certain sections of Staff Accounting
Bulletin No. 101 (SAB 101), Revenue
Recognition in Financial Statements, in order to make this
interpretive guidance consistent with current authoritative
accounting and auditing guidance and SEC rules and regulations. The
changes noted in SAB 104 did not have a material effect on the
Companys
consolidated results of operations, consolidated financial position
or consolidated cash flows. NOTE 9  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: 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) For the
    
    For theThree Months Ended
    
    Nine Months EndedApril 30,
    
    April 30,2004
    
    2003
    
    2004
    
    2003Net (loss) earningsNet (loss) earnings, as reported
    
    $
    (4,416
    )
    
    $
    1,723
    
    
    $
    (20,442
    )
    
    $
    3,963Add: Stock-based employee compensation
expense included in reported net (loss)
earnings, net of related tax effects
    
    
    5
    
    
    
    30
    
    
    
    37
    
    
    
    210Deduct: Stock-based employee
compensation expense determined under fair value-based method for all awards, net of
related tax effects
    
    
    (408
    )
    
    
    (543
    )
    
    
    (1,178
    )
    
    
    (1,656
    )Net (loss) earnings, pro forma
    
    $
    (4,811
    )
    
    $
    1,221
    
    
    $
    (21,616
    )
    
    $
    2,496Basic (loss) earnings per common share:As reported
    
    $
    (0.18
    )
    
    $
    0.07
    
    
    $
    (0.83
    )
    
    $
    0.16Pro forma
    
    $
    (0.19
    )
    
    $
    0.05
    
    
    $
    (0.88
    )
    
    $
    0.10Diluted
(loss) earnings per common share:As reported
    
    $
    (0.18
    )
    
    $
    0.07
    
    
    $
    (0.83
    )
    
    $
    0.16Pro forma
    
    $
    (0.19
    )
    
    $
    0.05
    
    
    $
    (0.88
    )
    
    $
    0.10
 The assumptions used to calculate the fair value of options granted are
evaluated and revised, as necessary, to reflect market conditions and
experience. NOTE 10  SEGMENT INFORMATION 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. 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 nine months ended April 30, 2004 and 2003: IntellectualSoftware &
    
    PropertyProfessional
    
    Licensing &Services
    
    Other
    
    TotalFor the Three Month Period Ending April 30, 2004Revenues from unaffiliated customers
    
    $
    549
    
    
    $
    267
    
    
    $
    816Gross margin
    
    
    280
    
    
    
    133
    
    
    
    413Operating (loss) income
    
    
    (3,755
    )
    
    
    (682
    )
    
    
    (4,437
    )For the Three Month Period Ending April 30, 2003Revenues from unaffiliated customers
    
    $
    1,134
    
    
    $
    12,247
    
    
    $
    13,381Gross margin
    
    
    189
    
    
    
    6,095
    
    
    
    6,284Operating (loss) income
    
    
    (3,636
    )
    
    
    5,349
    
    
    
    1,713For the Nine Month Period Ending April 30, 2004Revenues from unaffiliated customers
    
    $
    2,341
    
    
    $
    8,959
    
    
    $
    11,300Gross margin
    
    
    (4,378
    )
    
    
    4,466
    
    
    
    88Operating (loss) income
    
    
    (21,123
    )
    
    
    705
    
    
    
    (20,418
    )For the Nine Month Period Ending April 30, 2003Revenues from unaffiliated customers
    
    $
    3,379
    
    
    $
    26,184
    
    
    $
    29,563Gross margin
    
    
    961
    
    
    
    12,878
    
    
    
    13,839Operating (loss) income
    
    
    (8,921
    )
    
    
    11,239
    
    
    
    2,318
 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) NOTE 11  CONTINGENCIES The Company 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. 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 April 30, 2004
and July 31, 2003 and for the three and nine months ended April 30, 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 NINEMONTHS ENDED
    
    MONTHS ENDEDAPRIL 30,
    
    APRIL 302004
    
    2003
    
    2004
    
    2003Software and professional services revenues
    
    
    67
    %
    
    
    8
    %
    
    
    21
    %
    
    
    11
    %Intellectual property licensing revenues
    
    
    33
    
    
    
    91
    
    
    
    79
    
    
    
    87Other revenues
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    2Gross margin
    
    
    51
    
    
    
    47
    
    
    
    1
    
    
    
    47Selling, general and administrative
    
    
    403
    
    
    
    18
    
    
    
    86
    
    
    
    27Research and development
    
    
    113
    
    
    
    7
    
    
    
    28
    
    
    
    10Restructuring charge
    
    
    77
    
    
    
    
    
    
    
    6
    
    
    
    Impairment of assets
    
    
    
    
    
    
    9
    
    
    
    62
    
    
    
    2Total operating expenses
    
    
    594
    
    
    
    34
    
    
    
    182
    
    
    
    39Other income, net
    
    
    3
    
    
    
    
    
    
    
    (5
    )
    
    
    Income (loss) from continuing operations
    
    
    (541
    )
    
    
    12
    
    
    
    (186
    )
    
    
    8Income (loss) from discontinued operations
    
    
    
    
    
    
    1
    
    
    
    5
    
    
    
    5Net income (loss)
    
    
    (541
    )%
    
    
    13
    %
    
    
    (181
    )%
    
    
    13
    %
 THREE AND NINE MONTHS ENDED APRIL 30, 2004 AND 2003 REVENUES. Revenues for the three months ended April 30, 2004 were $0.8
million, a decrease of $12.6 million, or 94%, from the $13.4 million reported
for the three months ended April 30, 2003. Revenues for the nine months ended
April 30, 2004 were $11.3 million, a decrease of $18.3 million, or 62%, from
the $29.6 million reported for the nine months ended April 30, 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 5, in
the accompanying financial statements). Software and professional services revenues decreased by $0.6 million, or
52%, to $0.5 million for the three months ended April 30, 2004 from $1.1
million for the three months ended April 30, 2003. Software and professional
services revenues decreased by $1.0 million, or 31%, to $2.3 million for the
nine months ended April 30, 2004 from $3.3 million for the nine months ended
April 30, 2003. Software and professional services revenues as a percentage of
total revenues were 67% and 8% for the three months ended April 30, 2004 and
2003, respectively. Software and professional services revenues as a
percentage of total revenues were 21% and 11% for the nine months ended April
30, 2004 and 2003, respectively. Revenues from this line of business include
sales of Forgents ALLIANCE software products (ALLIANCE), including ALLIANCE
SCHEDULER and ALLIANCE MEDIA MANAGER, and the newly acquired software
products from Network Simplicity, Meeting Room Manager and Visual Asset
Manager. Also included are software maintenance, royalties, and professional
services, such as add-on software customization, installation and training, and
network consulting services. The $0.6 million decrease during the three months ended April 30, 2004 and
the $1.0 million decrease during the nine months ended April 30, 2004 as
compared to the related periods in fiscal year 2003 are due to decreases in
sales of ALLIANCE software products and related professional services during
fiscal year 2004, which 13




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are offset by $0.3 million and $0.6 million in sales of Network Simplicity
software products and related services. As a result of less than anticipated
sales of ALLIANCE, Forgent started decreasing its investment in ALLIANCE late
in the second fiscal quarter, and the Company continued to experience
decreasing revenues related to ALLIANCE in the third fiscal quarter. During
the upcoming months, Forgent will continue to support ALLIANCE customers and
will determine how best to utilize the ALLIANCE assets in order to maximize
shareholder value. The company expects to continue to experience
decreasing Revenue from the ALLIANCE Product. However, software and professional services revenues
related to Network Simplicity increased by 53% over the second fiscal quarter.
This increase is attributable to an increase in bookings and an increase in the
average selling price during the third fiscal quarter as compared to the second
fiscal quarter. Approximately 59% of the Network Simplicity revenues are
generated from the Education, Legal, and Healthcare industries. In June 2004,
Forgent introduced three new software products designed for small businesses,
schools, universities, and busy families: Resource Scheduler, Classroom
Manager, and Family Scheduler. With these new scheduling solutions, management
anticipates continued growth in its Network Simplicity revenues. Intellectual property licensing revenues decreased by $11.9 million, or
98%, to $0.3 million for the three months ended April 30, 2004 from $12.2
million for the three months ended April 30, 2003. Intellectual property
licensing revenues decreased by $16.7 million, or 65%, to $8.9 million for the
nine months ended April 30, 2004 from $25.6 million for the nine months ended
April 30, 2003. Intellectual property licensing revenues as a percentage of
total revenues were 33% and 91% for the three months ended April 30, 2004 and
2003, respectively. Intellectual property licensing revenues as a percentage
of total revenues were 79% and 87% for the nine months ended April 30, 2004 and
2003, respectively. The decrease in intellectual property licensing revenues
for the three and nine months ended April 30, 2004 as compared to the three and
nine months ended April 30, 2003 is due to the variability caused by the timing
of signing the license agreements. The 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
licensees. The third fiscal quarter of 2004 marks the ninth consecutive
quarter that Forgent has generated licensing revenues. As of April 30, 2004,
the Companys Patent Licensing Program has generated $89.1 million in aggregate
licensing revenues. During the third fiscal quarter, Forgent initiated litigation against 31
technology companies for infringement of its 672 patent (the 672
Litigation). Although the Company previously offered to provide a license of
the 672 patent to these companies, including Canon USA, Dell Incorporated,
International Business Machines Corp., Toshiba Corporation, and Xerox
Corporation, none of the defendants chose to do so. In addition to the current
litigation, Forgent will continue to pursue licensing agreements with targeted
companies, whether or not named in the litigation. The timing of signing the license
agreements and the timing of the litigation results continue to pose
forecasting challenges, which inevitably causes peaks and valleys in the Patent
Licensing Program. However, management anticipates its licensing program will
generate additional intellectual property licensing revenues. Nevertheless,
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. Other revenues decreased by $0.1 million, or 100%, to $0.0 million for the
three months ended April 30, 2004 from $97 thousand for the three months ended
April 30, 2003. Other revenues decreased by $0.5 million, or 96%, to $22
thousand for the nine months ended April 30, 2004 from $0.6 million for the
nine months ended April 30, 2003. Other revenues as a percentage of total
revenues were 0% and 1% for the three months ended April 30, 2004 and 2003,
respectively. Other revenues as a percentage of total revenues were 0% and 2%
for the nine months ended April 30, 2004 and 2003, respectively. During the
three and nine months ended April 30, 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 $0.6 million in other revenues
during the three and nine months ended April 30, 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 April 30, 2004 was
$0.4 million, a decrease of $5.9 million, or 93%, from the $6.3 million
reported for the three months ended April 30, 2003. Gross margin for 14




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the nine months ended April 30, 2004 was $0.1 million, a decrease of $13.7
million, or 99%, from the $13.8 million reported for the nine months ended
April 30, 2003. Gross margin as a percentage of total revenues were 51% and 47%
for the three months ended April 30, 2004 and 2003, respectively. Gross margin
as a percentage of total revenues were 1% and 47% for the nine months ended
April 30, 2004 and 2003, respectively. During the nine months ended April 30, 2004, the Company recorded 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 Forgents ALLIANCE software development costs and certain
prepaid royalties, which was recorded as part of cost of sales. Without the
effects of the impairment charge, gross margins decreased by $8.9 million, or
64%, for the nine months ended April 30, 2004, as compared to the nine months
ended April 30, 2003. The $5.9 million decrease in Forgents gross margin during the quarter
ended April 30, 2004, as compared to the quarter ended April 30, 2003, is due
to the $5.9 million decrease in gross margin from patent licensing agreements
obtained during the third fiscal quarter. Similarly, the $8.4 million decrease
in Forgents gross margin, prior to the effects of the impairment charge,
during the nine months ended April 30, 2004, as compared to the nine months
ended April 30, 2003, is due primarily to the $8.3 million decrease in gross
margin from patent licensing agreements. 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. 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 do not increase. Excluding the effects of the impairment, 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, the amortization of the Companys purchased intangible assets, and
compensation expenses. Thus, the cost of sales from this line of business is
relatively fixed. During the three and nine months ended April 30, 2004, the
amortization costs and compensation expenses equaled $0.2 million and $1.8
million, representing 93% and 95% of this segments total cost of sales,
excluding the impairment charge of $4.8 million, respectively. For the three
and nine months ended April 30, 2003, the amortization costs and compensation
expenses equaled $0.6 million and $1.5 million, representing 61% and 62% of
this segments total cost of sales, respectively. Based on the result of the
$4.8 million impairment charge for the remaining unamortized software
development costs during the second fiscal quarter and the restructuring of the
Companys business during the third fiscal quarter, management anticipates its
software segments cost of sales to decrease since it will no longer have
expenses related to the amortization of the ALLIANCE software development costs
and it will have reduced compensation expenses. However, these reductions will
be offset by increases in the amortization of the purchased software
development costs and intangible assets. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
(SG&A) expenses for the three months ended April 30, 2004 were $3.3 million,
an increase of $0.8 million, or 34%, from the $2.5 million reported for the
three months ended April 30, 2003. SG&A expenses for the nine months ended
April 30, 2004 were $9.7 million, an increase of $1.7 million, or 21%, from the
$8.0 million reported for the nine months ended April 30, 2003. SG&A expenses
as a percentage of total revenues were 403% and 18% for the three months ended
April 30, 2004 and 2003, respectively. SG&A expenses as a percentage of total
revenues were 86% and 27% for the nine months ended April 30, 2004 and 2003,
respectively. Approximately 71% of the $0.8 million increase in SG&A expenses during the
three months ended April 30, 2004 and approximately 83% of the $1.7 million
increase in SG&A expenses during the nine months ended April 30, 2004 are
attributable to increases in corporate expenses, bad debt expenses, and
marketing expenses, which are offset by decreases in compensation 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 $0.9 million in expenses during the three and nine
months ended April 30, 2004, respectively. 15




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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 third fiscal quarter, Forgent recorded $0.3 million in bad debt
expense, approximately 86% of which is due to the uncollectability of one
customers account. Management has turned this account over to a third party
for increased collection efforts and intends to continue aggressively pursuing
collection from this customer, as well as all of its other customers. During the three and nine months ended April 30, 2004, Forgents marketing
expenses increased by $0.2 million and $0.4 million over the comparable periods
ended April 30, 2003, respectively. These increases are due primarily to
expenses related to generating demand for the ALLIANCE software products, which
were launched in July 2003, and the Network Simplicity software products, which
were acquired in October 2003. As a result of the restructuring executed
during the third fiscal quarter, the increases in allocated corporate expenses,
bad debt expenses, and marketing expenses for the three and nine months ended
April 30, 2004, as compared to the three and nine months ended April 30, 2003,
are offset by decreases of $0.2 million and $0.2 million in SG&A compensation
expenses, respectively. Due to the restructuring and the continued efforts to
reduce all unnecessary expenses, management anticipates a decrease in total
SG&A expenses in the fourth fiscal quarter. RESEARCH AND DEVELOPMENT. Research and development (R&D) expenses for
the three months ended April 30, 2004 were $0.9 million, an increase of $17
thousand, or 2%, from the $0.9 million reported for the three months ended
April 30, 2003. R&D expenses for the nine months ended April 30, 2004 were $3.2
million, an increase of $0.4 million, or 13%, from the $2.8 million reported
for the nine months ended April 30, 2003. R&D expenses as a percentage of total
revenues were 113% and 7% for the three months ended April 30, 2004 and 2003,
respectively. R&D expenses as a percentage of total revenues were 28% and 10%
for the nine months ended April 30, 2004 and 2003, respectively. During the three months ended April 30, 2004, Forgent continued its
efforts on developing its Meeting Room Manager and Visual Asset Manager
software products and on supporting its ALLIANCE software suite. The $17
thousand and $0.4 million increases in R&D expenses during the three and nine
months ended April 30, 2004, as compared to the three and nine months ended
April 30, 2003, are primarily due to reduced software development costs being
capitalized, which are partially offset by decreases in compensation expenses.
The R&D expenses are net of $0.0 million and $0.9 million capitalized during
the three and nine months ended April 30, 2004, respectively, as compared to
$0.6 million and $2.2 million capitalized during the three and nine months
ended April 30, 2003, respectively. Software development costs are capitalized
after a product is determined to be technologically feasible and is in the
process of being developed for market. At the time the product is released for
sale, the capitalized software is amortized over the estimated economic life of
the related project, generally three years. As part of Forgents efforts to
simplify and streamline its software operations to be more commensurate with
its software revenue base, management repriced, repackaged, and repositioned
ALLIANCE to be targeted 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 during the second
fiscal quarter. This impairment charge was recorded as part of cost of sales
on the Consolidated Statement of Operations. As a result, no ALLIANCE R&D
costs were capitalized during the third fiscal quarter but were expensed
instead. The decline in capitalizable R&D costs in fiscal year 2004 account
for $0.6 million and $1.3 million in increases of R&D expenses during the three
and nine months ended April 30, 2004, as compared to the three and nine months
ended April 30, 2003, respectively. These increases are offset by $0.4 million
and $0.8 million decreases in R&D compensation expenses during the three and
nine months ended April 30, 2004, respectively, primarily as the result of the
restructuring in the third fiscal quarter. During the nine months ended April 30, 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 additional new patents during the third
fiscal quarter, bringing the Companys total issued patent count to forty-nine.
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. 16




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IMPAIRMENT OF ASSETS. During the nine months ended April 30, 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
    
    
    
    1,543Impairment 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
products 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, certain ALLIANCE assets were impaired. 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 $4.7 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. 17




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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. Also
during the second fiscal quarter, 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. During the third fiscal quarter, Forgent
negotiated and settled its lease obligations on its office in Melville, New
York. As of April 30, 2004, Forgent remained obligated to make lease payments
in accordance with the original terms of its Wild Basin property lease and had
$2.0 million recorded as a liability on the Consolidated Balance Sheet related
this property. During the three months ended April 30, 2003, Forgent believed that the
ongoing difficult economic environment and the associated negative impact on
the Companys software business represented an indicator of a possible
impairment on the Companys software business. Therefore, the Company was
required to perform an impairment analysis in accordance with SFAS No. 142,
Goodwill and Other Intangible Assets to determine the fair value of the
assets and liabilities of its software business. As a result of this analysis,
Forgent recorded a $1.3 million impairment of its goodwill related to its
acquisition of Global Scheduling Solutions, Inc. This impairment was recorded
as part of continuing operations on the Companys 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. Similarly, during the quarter
ended April 30, 2003, management agreed with VTELs management to offset
Forgents accounts payable to VTEL with the outstanding notes receivable and
interest receivable from VTEL, thus relieving an additional $0.1 million of the
reserve on the notes receivable. Since the initial $6.0 million charge to
reserve the VTEL notes receivable was reported as part of the asset impairment
from continuing operations, the related reductions of the reserves are also
reported as part of the asset impairment from continuing operations. No cash
was exchanged with this transaction. OTHER INCOME (EXPENSES). Other income for the three months ended April 30,
2004 was $21 thousand, an increase of $20 thousand, or 2,000%, from the $1
thousand in other income reported for the three months ended April 30, 2003.
Other expenses for the nine months ended April 30, 2004 was $0.6 million, a
decrease of $0.6 million, or 1,344%, from the $48 thousand in other income
reported for the nine months ended April 30, 2003. Other income as a percentage
of total revenues were 3% and 0% for the three months ended April 30, 2004 and
2003, respectively. Other (expenses) income as a percentage of total revenues
were (5%) and 0% for the nine months ended April 30, 2004 and 2003,
respectively. The increase in other expenses for the nine months ended April
30, 2004 as compared to the nine months ended April 30, 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 April 30, 2004 was $0.0 million, a decrease of $68
thousand, or 100%, from the $68 thousand reported for the three months ended
April 30, 2003. Income from discontinued operations for the nine months ended
April 30, 2004 was $0.6 million, a decrease of $1.1 million, or 66%, from the
$1.7 million reported for the nine months ended April 30, 2003. Income from
discontinued operations as a percentage of total revenues were 0% and 1% for
the three months ended April 30, 2004 and 2003, respectively. Income from
discontinued operations as a percentage of total revenues were 5% and 5% for
the nine months ended April 30, 2004 and 2003, respectively. 18




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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 $0.1 million and $1.7 million for the three and nine months
ended April 30, 2003. The $0.6 million in income recorded from discontinued
operations during the nine months ended April 30, 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. The Company did not
conduct any business from this business line during the nine months ended April
30, 2004. NET (LOSS) INCOME. Forgent incurred a net loss of $4.4 million, or $0.18
per share, during the three months ended April 30, 2004 compared to a net
income of $1.7 million, or $0.07 per share, during the three months ended April
30, 2003. Forgent incurred a net loss of $20.4 million, or $0.83 per share,
during the nine months ended April 30, 2004 compared to a net income of $4.0
million, or $0.16 per share, during the nine months ended April 30, 2003. Net
(loss) income as a percentage of total revenues were (541%) and 13% for the
three months ended April 30, 2004 and 2003, respectively. Net (loss) income as
a percentage of total revenues were (181%) and 13% for the nine months ended
April 30, 2004 and 2003, respectively. The $6.1 million and $24.4 million
decrease in the Companys net income during the three and nine months ended
April 30, 2004 as compared to the three and nine months ended April 30, 2003
are primarily attributable to the $11.8 million in impairment charges recorded
during the second fiscal quarter of 2004 and the $5.9 million and $8.3 million
decreases in gross margins related to the intellectual property segment,
respectively. 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 April 30, 2004, Forgent had working capital of $18.2 million, including
$21.1 million in cash, cash equivalents and short-term investments. Cash used
in operating activities was $0.7 million for the nine months ended April 30,
2004 due primarily to a loss of approximately $9.2 million, excluding the
non-cash impairment charges, which was offset by a $7.0 million decrease in
accounts receivable and the sale of $1.7 million in accounts receivable. Cash
used in operating activities was $3.7 million for the nine months ended April
30, 2003 due primarily to a $5.2 million increase in accounts receivable and a
$1.7 million decrease in accounts payable, which were offset by $2.3 million in
income and $0.8 million in depreciation and amortization expenses. During the
nine months ended April 30, 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 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 $30 thousand for the nine months
ended April 30, 2004. During the fiscal quarter ended April 30, 2004, Forgent
collected $0.9 million in accounts receivable related to its Patent Licensing
Program. Despite these timely collections and the diligent collection of the
Companys other accounts receivable, the decrease in total revenue during the
third fiscal quarter led to the Companys days sales outstanding to increase to
70 days over the previous quarter. Forgent continues to conscientiously
collect all of its outstanding receivables. Cash used in investing activities was $3.7 million for the nine months
ended April 30, 2004 due largely to $2.3 million paid related to the purchase
of Network Simplicity. Cash used in investing activities was $0.3 million for
the nine months ended April 30, 2003 due primarily to $2.2 million in
capitalization of software development costs, which was offset by $2.0 million
in sales of short-term investments. During the nine months ended April 30,
2004, the Company purchased $0.7 million in fixed assets, excluding the fixed
assets purchased as part of the Network Simplicity acquisition. Approximately
40% of the $0.7 million purchases related to leasehold improvements made for
subtenants in order to lease the Companys excess facility capacity. During
the third fiscal quarter, Forgent made minimal fixed asset purchases and does
not anticipate any significant purchases in the fourth fiscal quarter. As of April 30, 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 19




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##### Table of Contents



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
    
    $
    1,047
    
    
    $
    8
    
    
    $
    112
    
    
    $
    1,1672005
    
    
    4,135
    
    
    
    6
    
    
    
    338
    
    
    
    4,4792006
    
    
    4,032
    
    
    
    
    
    
    
    200
    
    
    
    4,2322007
    
    
    3,342
    
    
    
    
    
    
    
    48
    
    
    
    3,3902008
    
    
    3,264
    
    
    
    
    
    
    
    
    
    
    
    3,264Thereafter
    
    
    15,039
    
    
    
    
    
    
    
    
    
    
    
    15,039Total
    
    $
    30,859
    
    
    $
    14
    
    
    $
    698
    
    
    $
    31,571
 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 provided by financing activities was $43 thousand for the nine months
ended April 30, 2004 due primarily to $0.7 million in proceeds received from
the issuance of stock, which was offset by $0.5 million in purchases of
treasury stock. Cash used in financing activities was $1.2 million for the nine
months ended April 30, 2003 due primarily to $0.9 million in purchases of
treasury stock and $0.7 million in payments on notes payable and capital
leases. Forgent currently maintains a stock repurchase program to purchase up
to three million shares of the Companys common stock. During the nine months
ended April 30, 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 April 30, 2004 consisted
of $21.1 million of cash, cash equivalents, and short-term investments.
Forgents ability to generate cash from its intellectual property licensing
business is subject to certain risks as discussed under Risk Factors  License
Program below. Additionally, Forgents expenses related to the 672 Litigation
could increase as discussed under Risk Factors  Litigation 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 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. 20




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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 104, Revenue Recognition. 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 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. 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. 21




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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 recent 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, it 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 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. Litigation The Company has initiated the 672 Litigation against 31 companies for
infringement of its 672 patent. As with any litigation, the outcome is
uncertain and although the Company intends to vigorously pursue the 672
Litigation, there can be no assurance or certainty that the Company will
prevail in the 672 Litigation. Additionally, unintended consequences of the
Companys initiating the 672 Litigation may adversely affect the Companys
business, including, without limitation, that the Company may have to devote
significant time and financial resources to pursuing the 672 Litigation, that
the Company may become subject to counterclaims and that the expenses of
pursuing the 672 Litigation could increase based upon developments occurring
in the 672 Litigation. 22




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These, and other factors not currently known to or deemed material by
management, could have a material and adverse impact on the Companys business
prospects, liquidity, and results of operations. 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 may 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 furthermore,
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. 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 23




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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;  
    
    Timing and cost related to the 672 Litigation;  
    
    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. 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. 24




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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 would
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 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 25




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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, including the expense associated with it; (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-15(e) and Rule 15d-15 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 April 30, 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 effect on its
financial condition or results of operations. In 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 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 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. On April 22, 2004, Forgents wholly-owned subsidiary, Compression Labs,
Inc., initiated litigation against 31 companies for infringement of United
States Patent No. 4,698,672 in the United States District Court for the Eastern
District of Texas, Marshall Division, seeking injunctive relief against sales
of infringing products and monetary damages, among other relief sought. The
defendants consist of Adobe Systems Incorporated, Agfa Corporation, Apple
Computer, Incorporated, Axis Communications, Incorporated, Cannon USA, Concord
Camera Corporation, Creative Labs, Incorporated, Dell Incorporated, Eastman
Kodak Company, Fuji Photo Film Co U.S.A., Fujitsu Computer Products of America,
Gateway, Inc., Hewlett-Packard Company, International Business Machines Corp.,
JASC Software, JVC Americas Corporation, Kyocera Wireless Corporation,
Macromedia, Inc., Matsushita Electric Corporation of America, Oce North
America, Incorporated, Onkyo Corporation, PalmOne, Inc., Panasonic
Communications Corporation of America, Panasonic Mobile Communications
Development Corporation of USA, Ricoh Corporation, Riverdeep, Incorporated
(d.b.a. Broderbund), Savin Corporation, Thomson S.A., Toshiba Corporation, and
Xerox Corporation. 
 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 27




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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 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
  (b)
    
    Reports on Form 8-K: On April 26, 2004 the registrant filed a report on Form 8-K
announcing that the Companys wholly-owned subsidiary, Compression
Labs, Inc., had initiated litigation against 31 companies for
infringement of United States Patent No. 4,698,672 in the United
States District Court for the Eastern District of Texas, Marshall
Division. On June 14, 2004 the registrant filed a report on Form 8-K
announcing the Companys financial results for the quarter ended
April 30, 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.June 14, 2004
    By:
    /s/ RICHARD N. SNYDERRichard N. SnyderChief Executive Officer June 14, 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