SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JULY 31, 2002 COMMISSION FILE NUMBER 0-20008 FORGENT NETWORKS, INC.(f.k.a. VTEL Corporation) A DELAWARE CORPORATION IRS EMPLOYER ID NO. 74-2415696 108 WILD BASIN ROAD AUSTIN, TEXAS 78746 (512) 437-2700 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filings pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K, or any amendment to this Form 10-K. [ ] The aggregate market value of 20,044,754 shares of the registrant's Common Stock held by nonaffiliates on October 21, 2002 was approximately $32,873,397. For purposes of this computation all officers, directors and 5% beneficial owners of the registrant are deemed to be affiliates. Such determination should not be deemed an admission that such officers, directors and beneficial owners are, in fact, affiliates of the registrant. At October 21, 2002 there were 24,568,643 shares of the registrant's Common Stock, $.01 par value, issued and outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the definitive Proxy Statement to be delivered to stockholders in connection with the 2002 Annual Meeting are incorporated by reference into Part III.
GENERAL Forgent Networks, Inc. ("Forgent" or "Company") is an enterprise software and services provider that enables organizations to collaborate effectively and efficiently. The Company has three business lines - enterprise software and services, intellectual property licensing, and legacy services. Forgent's Video Network Platform ("VNP") is a leading network management software that improves quality of service and cost of ownership in multi-vendor and multi-protocol environments. Combining VNP with the newly acquired Global Scheduling System ("GSS"), a state-of-the-art web-based scheduling application, VideoWorks is a powerful self-contained package for managing videoconferencing. Forgent's intellectual property licensing business is derived from the Company's Patent Licensing Program. As a vendor-neutral service provider, the Company's legacy services continue to offer customers maintenance and technical support on thousands of devices and endpoints, hardware units through which a video call is placed, as well as installation and other related services. The Company was founded in 1985 as an early pioneer of the videoconferencing equipment industry with the innovation of utilizing an open PC architecture for videoconferencing endpoints with a platform that allowed using a broad range of PC applications, as well as simultaneous access to the Internet. The Company manufactured and installed videoconferencing endpoints worldwide and continues to provide service for thousands of these endpoints, as well as other endpoints, under maintenance agreements through its legacy services business. The Company consummated the sale of its manufacturing products business on January 23, 2002, shifting its focus from hardware manufacturing to enterprise software and services. The Company also changed its name from VTEL Corporation to Forgent Networks, Inc. in January 2002. During fiscal 2002, the Company has transitioned itself from a videoconferencing hardware manufacturer and hardware-related services provider to an enterprise software and services provider. As the Company has evolved, it has focused its efforts on managing the collaboration environment, particularly video. Forgent started with a focus on videoconferencing and addressed the many problems that have plagued the industry in terms of usability and manageability. Based on its heritage and expertise, the Company is exploring the viability of managing other types of collaboration media. Examples include web and audio conferencing, which are challenged by the same technical issues and lack of standards prevalent in the videoconferencing industry. With its refocused efforts and resources, Forgent believes it is poised to provide the greatest opportunity for long-term success for the Company and its shareholders. INDUSTRY BACKGROUND Videoconferencing was born out of the need to communicate and collaborate, and while that is still an essential driver of this technology, the use of all types of real-time media to ease and enhance collaboration is becoming increasingly widespread. The increased use of a variety of electronic and web-based technologies is also being driven by the current economic climate, which is forcing companies to dramatically reduce travel and other expenses. Over the past several years an array of products and services have entered the market that allow for collaboration among workers regardless of geographical location. Forgent's experience in delivering video network management software, services and solutions positions the Company to address the requirements of this evolving market. Videoconferencing, which became commercially viable in the early 1980's, has a wide range of uses including business and professional meetings, education and training classes, and technical and medical consultations. The technology is used to reduce operating costs, improve customer service, reduce cycle times, and improve intra- or inter-company communications. Videoconferencing endpoints are available as room or group videoconferencing products, or set-top products. As broadband-based networks became more widely available, the demand for set-top or appliance type products increased and price points decreased, thereby encouraging the proliferation of video throughout the enterprise and down to the desktop. In addition, the composition of video networks evolved from single vendor endpoints to multi-vendor, multi-protocol endpoints and devices, and from pure ISDN to mixed ISDN and Internet Protocol ("IP") environments. Key drivers of the videoconferencing industry and, more broadly, collaboration in general, have been social, economic, and technological in nature. As video networks have grown in complexity, customers needed an efficient and effective way to manage, monitor and control video networks from a single console. Leveraging its expertise in video communications, Forgent recognized the need for new management tools to address the problems that plagued videoconferencing to date such as manageability, reliability and ease of use. 2
After months of research, end user surveys and market assessment, in the second fiscal quarter of 2002, Forgent launched Video Network Platform ("VNP"), a video network management software product that delivers a robust set of features and capabilities for managing multi-protocol, multi-vendor video networks, commonly referred to as heterogeneous environments. Unlike other solutions from traditional device manufacturers that are based on proprietary protocols and therefore focused on managing only the device, VNP focuses on managing complex heterogeneous environments from the network out and overcomes the ease-of-use, reliability and manageability problems of heterogeneous video networks. Understanding that the video network world was moving from unmanaged isolated devices in an unconnected world to a world of connected, monitored, scheduled and managed network of devices, Forgent emulated the PC market, and developed a standards-based solution that enables administrators to monitor and manage all video devices on the network. VNP's ability to centralize management of the video network greatly reduces administrative costs of running the video network. In addition, VNP's ability to report on all videoconferencing activity provides users the ability to demonstrate return on investment of the videoconferencing network. According to a June 2002 Frost and Sullivan industry analyst report on the video network management market, this industry is expected to show healthy growth rates due to the untapped demand for solutions that enhance the ease of use and manageability of videoconferencing. According to the report, the compound annual growth rate from 2001 to 2008 for the video network management market is forecasted to be 48.6 percent. As videoconferencing becomes increasingly widespread and users begin to rely more heavily on the technology, enterprise resources may become more constrained and the need for higher reliability and more cost effective solutions will become even greater. As is happening today in the industry, enterprises are looking to consolidate rich media traffic, such as video, onto their IP networks to save costs and increase efficiency. This drive to consolidate data and other traffic onto one network will, in turn, drive the need for tools to manage the non-data traffic on these networks. In addition to the network management platform, scheduling is a critical component of an enterprise software solution that facilitates collaboration. Businesses, government and educational institutions have begun to recognize the need to schedule capital resources such as videoconferencing events and meeting rooms. To address those requirements, organizations have begun to create their own homegrown systems, adapt existing software applications to schedule rooms and equipment, or purchase stand-alone scheduling software applications. Appreciating the industry's need for scheduling software that provides increased levels of flexibility, robustness, and functionality for increasingly complex meeting environments due to the exponential growth of collaboration media, Forgent's Global Scheduling System ("GSS"), a web-based scheduling application, schedules rooms and all associated services such as equipment, technician support and catering. This robust capability augments existing scheduling applications such as Microsoft Outlook and Lotus Notes that are designed primarily to schedule people, as opposed to room and services schedulers. GSS streamlines conference scheduling, reduces conflicts associated with complex meetings and empowers users to schedule meetings without involving support queries. CORPORATE STRATEGY Forgent's focus is on providing software and services that enable enterprises to collaborate effectively and efficiently. The Company's enterprise software products manage collaboration such that people can work together and drive to decisions faster with increased efficiency. Forgent's award-winning software and services help organizations manage the essential elements of collaboration - people, resources and technology - to maximize productivity. Forgent has emerged as a leading provider of a scheduling application and a network management platform, and plans to continue to enhance these products to extend its offerings beyond videoconferencing to include the management of other key collaboration media. As the Company evolves and enhances its product offerings, it will continue to adhere to the following strategies: o develop standards-based management tools that will allow effective and efficient collaboration to occur, regardless of the hardware or software brands that comprise the environment o support ISDN and IP-based networks, as well as the transition from ISDN to IP-based networks o develop industry-leading technology that makes collaboration work o design software solutions that promote the ease of use, manageability and reliability of collaboration o support heterogeneous environments and alleviate the complexity associated with them 3
o design increasing levels of automation into Forgent's software solutions o partner with leading software providers to offer best-of-breed solutions Forgent's initial foray into the enterprise software space has focused on the collaboration media of videoconferencing. This starting point was driven by the needs of the industry to have videoconferencing be more manageable, reliable and easier to use. Forgent intends to expand this strategy beyond videoconferencing into other collaboration media with the same goals in mind -- to make the user's experience seamless in terms of organizing and scheduling the meeting, regardless of media involved, and to make the manageability of the meeting as simple and efficient as possible for those responsible for maintaining the technologies. Forgent also intends to continue efforts to grow its network consulting and software integration services. The Network Consulting Services include a wide range of planning activities, deployment services and post installation support from the Company's H.320 and H.323 videoconferencing experts who provide customers with operational, tactical and strategic options with their video networks. Forgent has developed its Software Deployment and Integration Services offering to assist customers who have licensed Forgent's software products, and need assistance installing and fully deploying their solutions. In addition, Forgent intends to continue efforts to drive revenue from its new intellectual property licensing business and its legacy services business as means to funding the software core business. Today, the Company's legacy service group supports thousands of customers worldwide and will continue to offer services such as total call management, 24x7 hotline support, emergency on-site support, and resident engineering services. While Forgent plans to continue actively pursuing new support and maintenance contracts for hardware products, primarily non-VTEL endpoints, the Company does expect to see continued decline in revenue from this line of business but anticipates replacing it over time with increased revenue from its other activities. The Company intends to also continue its efforts to generate revenue from its world class interoperability testing lab, which allows for real-world testing of video networking technology, regardless of brand. Forgent is the independent verification testing center for the Cisco Architecture for Voice and Video Integrated Data ("AVVID") Partner Program. The Company is authorized to perform compliance testing for IP videoconferencing clients and provide the testing services to verify that videoconferencing products meet the criteria of the program. Companies that want to be AVVID certified must come through Forgent's interoperability testing lab to gain that certification. Forgent plans to continue expanding testing for Cisco and other customers, and extend the type of testing that is performed. Forgent believes its in-depth and broad-scoped experience in providing enterprise software and services for specific customer needs makes the Company positioned to addressing the past limitations with videoconferencing in order to generate new sources of revenue and provide increased growth in shareholder value. However, there can be no assurances that Forgent's strategy will be successful. Furthermore, if this strategy is successful, it is likely that other companies will attempt to duplicate this business model. ENTERPRISE SOFTWARE & SERVICES With more than 20 years of expertise in the videoconferencing industry, Forgent was able to leverage its rich history to develop the industry's first multi-vendor, multi-protocol video network management platform - Video Network Platform ("VNP") - which was successfully launched in December 2001. Ensuring interoperability, the VNP software monitors and manages video and network devices from multiple vendors through a Common Operating Environment, and overcomes the ease-of-use, reliability and manageability problems that have plagued videoconferencing. Its intuitive graphical uses interface enables call administrators to easily configure scheduled or ad-hoc point-to-point or multi-point calls, as well as constantly manage companies' video devices, including LAN/WAN connected video endpoints, multiple control units, gatekeepers, gateways, and other network devices through customized views to provide real-time quality of service measurements. VNP further enhances the quality of service via real-time notifications and diagnostics of faults, events and network alarms to alert network administrators before critical problems impact users and via Call Detail Reports that accurately report on all call activity, thus reducing downtime and improving response time. By centralizing and automating the management of thousands of devices across disparate technologies, vendors, and locations, VNP allows companies to cost-effectively scale their video network to any size environment. Also in the fall of 2001, the Company formed a technology partnership with Global Scheduling Solutions, Inc., a provider of enterprise conference room scheduling and resource management solutions. The purpose of the technology partnership was to integrate VNP with Global Scheduling Solutions, Inc.'s flagship product, Global Scheduling System ("GSS"), a leading scheduling software product, to provide customers with a robust tool to schedule and manage video communications. Global Scheduling Solutions, Inc. and Forgent continued to build on that relationship and solution. After several months of successful co-marketing and joint sales activities, market acceptance of the integrated solution, and joint product development, Forgent acquired certain assets and liabilities of Global Scheduling Solutions, Inc., including GSS, in June 2002. GSS is a web-based scheduling application designed for organizations needing to manage large-scale meeting environments effectively and efficiently. The acquisition enabled Forgent to expand its market presence beyond video network management and into the realm of broader conference management. 4
The Company continued to enhance the integration between the products and built on VNP's management strengths and GSS's scheduling capabilities to deliver an additional, powerful product - VideoWorks, a complete turnkey videoconference scheduling, automation and management solution, to the market in June 2002. VideoWorks allows a user to schedule a highly complex multi-participant, multi-timezone videoconference that is automatically resource validated, autoconfigured and automatically launched on time and with quality, thus eliminating the need for administrative oversight of the videoconference. By combining the power of GSS, which allows corporations to schedule conflict-free meetings, along with VNP, which configures and launches conferences automatically, VideoWorks saves a corporation valuable time and money by maximizing uptime and avoiding the costs of manually conducting and managing meetings and videoconferences. In recognition of this technological leadership, Forgent was awarded the Frost & Sullivan Market Engineering Award for Technology Innovation in June 2002 for its successful development and introduction of new technology through well-designed products that provide significant performance contributions to the industry. Forgent also provides network consulting, software installation, training and comprehensive related services to support its software products through-out the planning, preparation, configuration and deployment processes. Helping companies meet the challenges of deploying new technologies across the enterprise, the Company's Network Consulting and Integration Services offer expert assistance in evaluating current and evolving video network requirements including baseline audits, preparation of capacity plans, development of time-saving migration and implementation plans, and customized integration of Forgent's software with existing third-party applications or with customers' proprietary in-house applications. In terms of assisting customers with deployment of new technologies, Forgent's experienced engineers work side-by-side with customers in the Company's interoperability labs to conduct hands-on extensive testing of their networks to reproduce and resolve problems and to assure all devices work flawlessly together once deployment occurs. For customers who have selected VNP, GSS, or VideoWorks, Forgent's Software Deployment Services provide dedicated engineers to oversee and manage the installation, configuration, and roll-out to assure the application is up and running optimally to maximize the customer's return on their investment. With the introduction of its enterprise software and related services, Forgent is providing enterprise software products designed with the goal of transforming the videoconferencing industry from one proliferated with limiting proprietary architectures to one that offers functionality across multiple vendors and protocols for the end users. As the creator of a complete turnkey videoconferencing network management and scheduling solution, an authorized provider of multiple brand-name hardware equipment, and the largest and most experienced independent service provider in the video industry, Forgent is able to deliver one-stop videoconferencing solutions. Forgent began its video network software and services business in fiscal 2002, and revenues to date are $2.2 million. While management believes it has made substantial progress to date in introducing its software products and services, the Company's results to date have been limited, and there can be no assurance that Forgent will be successful in building a business around its video network software and services. The Company has devoted significant resources and infrastructure to support the development of this line of business. These costs will be incurred, regardless of whether the software products and services are accepted in the market place. If these software products and services are not accepted as anticipated, the Company's results from operations will be adversely affected. INTELLECTUAL PROPERTY LICENSING The Company's Patent Licensing Program is currently focused on generating license revenues relating to the Company's data compression technology embodied in U.S. Patent No. 4,698,672 and its foreign counterparts. Manufacturers in various industries use still-compression technology in their products, including digital cameras, printers, scanners, and wireless devices, as well as new emerging products such as new cell phones and wireless sharing networks. Since the end of fiscal 2002, Forgent has entered into additional licenses and the Company is continuing to actively seek licenses with other users of its technology. Forgent's licensing program involves risks inherent in technology licensing, including risks of protracted delays, possible legal challenges that would lead to disruption or curtailment of the licensing program, increasing expenditures associated with pursuit of the program, and other risks that could adversely affect the Company's licensing program. Additionally, the U.S. patent which has generated the licensing revenues expires in October 2006 and its foreign counterparts expire in September 2007. Thus, there can be no assurance that the Company will be able to continue to effectively license its technology to others. 5
LEGACY SERVICES With years of planning, deployment, and problem-resolution experience across a vast array of video equipment, topologies, and applications, Forgent offers service programs to companies that deploy video networks. Forgent helps companies maximize their video communications investment through maintenance, installation, technical support, and resident engineer services. Traditionally, service has been viewed as a break-fix situation in which companies only fix that which is broken. However, Forgent takes a much more proactive and comprehensive approach to the service equation. Its comprehensive after-market support programs provide varying levels of support to meet companies' specific needs to keep their video networks up and running. The Company currently provides consistent and seamless delivery of services that support thousands of endpoints around the world under maintenance agreements. These endpoints include current VTEL products, legacy products, network products for which the Company acted as a reseller and a growing base of third-party products. Through service and maintenance offerings, Forgent augments its experience and knowledge of the multiple endpoints available within the industry, thus reinforcing the Company as the industry expert in visual communication solutions. In addition to installation and maintenance services, Forgent's commitment to supporting its customers with all of their technical support regardless of the customers' locations is evidenced by several other services. The Company's Technical Assistance Center ("TAC") operates on a 24x7 basis and can quickly and efficiently tackle a wide range of technical support situations. Or customers can take advantage of Forgent's Total Call Management, which gives customers a single point of contact for all of their video needs. For more substantive technical support, customers may outsource their technical video support to Forgent through its Resident Engineer Services which provides a Forgent engineer on-site who can provide emergency on-site support for repairs, preventative maintenance, ongoing equipment evaluations and upgrades, and other required technical assistance. Additionally, Forgent has two exclusive interoperability labs that allow for real-world testing of video networking technology, regardless of brand, from personal and group communications products to peripheral components and network technology. In these labs, Forgent provides its customers the means to ensure that the products and components work, and more importantly, that they work together - before they buy - in order to receive the full value of their video network investments. In the past, the service group has successfully integrated systems into boardrooms and auditoriums for Forgent's corporate customers as well as classrooms in primary schools, colleges and universities. Due to the economic slow down during the recent past, capital budgets were drastically reduced, causing sales of fully integrated videoconferencing systems to decline. Additionally, the sale of integrated videoconferencing systems is no longer consistent with the Company's strategy of becoming a leading provider of enterprise software and services. Therefore, in April 2002 Forgent sold the inventory and certain other assets related to its integration business to SPL Integrated Solutions ("SPL"), the largest independent integrator of large videoconferencing systems and fully-integrated multimedia systems. RESEARCH AND DEVELOPMENT During fiscal 2002, the Forgent development team continued to display technical leadership in the delivery of innovative video network management solutions. The technical staff demonstrated proficiency in many cutting-edge development disciplines, including Java, device management, client-server architectures, automation, database design, user interface design and web-based application development. Leveraging decades of enterprise software development experience obtained at IBM, HP, EDS, Hewlett-Packard and the like, the team was able to deliver several major product releases during fiscal 2002. A robust software development process was used that relied on traditional and proven development methods, while being flexible enough to quickly respond to evolving market requirements and urgent customer needs. Quality remained a major focus for the development team during fiscal 2002 and a goal of zero defects inspired an attention to detail in all phases of the development process. Many quality-related tools and techniques became standard practice: source control, daily builds, defect tracking, code reviews and automated regression testing. The test organization experienced significant growth in both personnel and its use of technology and ended the 2002 fiscal year with almost 7,000 test cases. In addition, a third-level customer support group was created within the test organization to handle critical customer problems. The group's in-depth knowledge of the products, and access to the core development staff, help speed problem resolution and ensure customer satisfaction. 6
DISTRIBUTION STRATEGY Forgent sells its network software and services principally through a direct sales force. During fiscal 2002, the Company expanded its software sales organization to include telemarketing, inside sales, pre-sales engineers and territory managers. This structure enables Forgent to have all critical functions aligned by territory to support the end-to-end selling process -- from prospecting, pre-sale, close, and post-sale customer account management. The Company supplements the efforts of its direct sales force with its Partner Program. The partners in the program, including International Video-Conferencing, Inc., Audio Video Systems, York Telecom, Signet and TKO, have successful track records in selling and supporting videoconferencing and communications solutions in commercial, educational and government accounts. By working with these partners, Forgent expands the reach of its direct sales force and gains access to key opportunities in major market segments. In addition to the software sales force, a separate sales force sells Forgent's legacy videoconferencing services. Additionally, Forgent's legacy services are also sold through channel partners. COMPETITION The competitive landscape in which Forgent finds itself has changed significantly in the last year, as the Company has transitioned its business to focus on enterprise software and services. Forgent now evaluates itself against companies providing enterprise software and services to schedule and manage collaboration environments, particularly video. Part of Forgent's strengths is the breadth, depth and scalability of its products. They have been designed from the ground up to scale to meet the needs of large, global enterprises with thousands of multi-vendor and multi-protocol endpoints and devices across multiple enterprise environments. Although big network providers sell videoconferencing equipment along with the network they are installing, they do not usually provide software to manage the network or post-installation services such as product services and training. In terms of the software landscape as it relates to video network management, many of today's management tools do not provide in-depth information about video devices (endpoints, gateways, gatekeepers, multipoint control units, bridges, etc.). The traditional network management systems vendors like Hewlett Packard, Sun Microsystems, and others have traditionally focused on managing devices and are moving to managing system level applications. However, while interested in covering the widest breadth of device types, these vendors do not have the same depth of understanding of video as Forgent and, today, have no mechanism to discover, monitor, diagnose, or report on video application or device level issues. Similarly, videoconferencing manufacturers may offer a small amount of proprietary device level software to be used on their products but do not usually provide a complete view of the entire network infrastructure showing all the network touch points. Other competition comes from a few start-up companies that are attempting to develop software that manage video networks but they are limited in scope in terms of brands that they can manage and depth of functionality that they can offer. These companies' products are often based on proprietary software and do not have the level of industry experience that Forgent brings to the market. With the emergence of the video network services market, it is possible that other companies, including large and substantial competitors such as Hewlett Packard and Sun Microsystems, among others, could develop and introduce competing products and services. These companies have significantly more marketing and financial resources, and there can be no assurance that the Company could compete effectively with these types of competitors. In the scheduling arena, which is a recent addition to Forgent's enterprise software portfolio, the competitors are many but Forgent's Global Scheduling System ("GSS") can be differentiated in a number of ways. In particular, GSS maintains a centralized status of critical physical resources such as rooms, services and technology while it interfaces with corporate calendaring systems such as Microsoft Outlook to present the most up-to-date status of people resources to the user. Many of the competitive scheduling products in the market today specialize in room scheduling, time and attendance scheduling, facility management (including catering and maintenance) and specialized scheduling for videoconferencing. A few of these products incorporate limited interfaces to Microsoft Outlook and IBM Lotus Notes calendar interfaces but none of them present the universal view of schedulable resources that GSS does in a unified status view. GSS was created with key customer input, which required a global view of all resources that must be inventoried, categorized, and made available to the corporate user population while tracking cost and utilization for every resource. However, there can be no assurance that this differentiation will result in increased purchases of GSS as compared to other products. Forgent believes that the key criteria considered by potential purchasers of its products are as follows: o operational advantages and cost savings provided by a product, o product quality and functional depth, o product price and terms under which the product is licensed, o ease of use, 7
o ease of integration with the customer's existing applications, o ability to easily adapt the product to their unique requirements, o quality of support and product documentation, and o experience and financial stability of the vendor. In addition to its software products, Forgent brings software-related services and traditional lines of services to bear as part of its offerings. In offering its legacy services, the Company competes with hardware manufacturers who often bundle services and maintenance contracts with hardware systems sales, and since the sale of its VTEL products business, Forgent has experienced a decline in its legacy services business. The Company's ability to provide a turnkey videoconference solution including hardware, software and services from a single vendor sets it apart from others in the industry. MARKETING Forgent has developed a comprehensive integrated marketing plan for promoting its products and services throughout the United States and Europe. The integrated elements include a mix of public relations, industry analyst relations, investor relations, demand generation and other corporate communications activities to ensure a consistent and accurate flow of information to and from the Company's key stakeholders and target audiences. Efforts have been focused on developing clear and concise messages regarding the launch of Forgent's enterprise software and services business and relaying that message to shareholders, customers, prospects, trade and technical media, and the business media. In addition, the messages reinforce the core aspect of the Company's strategy, which is to build a software business while driving revenue from its intellectual property business and its legacy services business to support the growth of the core business. The Company revamped its corporate web site to reflect the focus on its software and services business and streamline information for visitors. The web site plays an important role in providing audiences with the most up-to-date and accurate information available on the Company's business, its products and services, successes, and trends and issues the Company faces. PATENTS AND TRADEMARKS The United States Patent and Trademark Office has issued Forgent approximately 40 patents related to videoconferencing, data compression, video mail, and other technology developed by the Company. These patents comprise the Company's intellectual property portfolio. Forgent currently has in excess of 34 patent applications related to its VNP software that are filed but not yet issued by the U.S. Patent and Trademark Office. Forgent anticipates filing an additional four patent applications during the first fiscal quarter of 2003 to protect its intellectual property. There can be no assurance that the pending patents will be issued or that issued patents can be defended successfully. Forgent retained all patents related to the products division sold during fiscal 2002. During fiscal 2002 the Company signed two significant license agreements with two international consumer and commercial electronics firm, including Sony Corporation. The license agreements relate to the Company's data compression technology embodied in a U.S. patent that will expire in October 2006 and its foreign counterparts that will expire in September 2007. Although management fully anticipates signing more patent license agreements with other prominent companies from multiple industries, there can be no assurance the additional licenses can be obtained on similar favorable terms. Applications for the "Forgent" mark are currently pending both in the United States and abroad. The Company was issued trademarks and service marks by the U.S. Patent and Trademark Office and by certain foreign countries and entities covering the "VTEL" mark and the "VTEL" logo. These trademarks and service marks were sold to VTEL Corporation as part of the sale of the products business division. EMPLOYEES Certain business elements that did not contribute to Forgent's core competencies were eliminated as part of the Company's restructuring activities in August 2001. Consequently, 65 employees (17% of Forgent's workforce) were terminated and were provided outplacement support and severance. As a result of the sales of the products business and the integration business, the Company's workforce was further reduced by 117 employees in January 2002 and by 15 employees in May 2002. Forgent's personnel grew by 19 employees in June 2002 when the Company acquired certain assets and liabilities of Global Scheduling Solutions, Inc. As the Company continues to evolve its business strategy, Forgent's workforce is continually evaluated and adjusted accordingly - 8
both in number and composition. Forgent believes it retains the appropriate management team and employees to fully implement its business strategy and that its current employee relations are good. None of the Company's employees are represented by a labor union. Currently, Forgent employs 178 employees as follows:
including Executive Vice President at productmarketing.com from June 1999 to February 2001, President and Chief Executive Officer at Reliant Data Systems from June 1996 to February 1999, Vice President of Marketing at Tivoli Systems, Vice President of Worldwide Marketing at BMC Software, Vice President of Sales and Marketing at System One Corporation, and numerous sales and management positions at IBM Corporation. Mr. Caccamisi received a Bachelor of Arts from Mississippi State University. ITEM 2. PROPERTIES Forgent's headquarters, product development, and sales and marketing facility leases approximately 139,000 square feet in Austin, Texas under a lease which expires in March 2013. As a result of the sale of the products business unit, 52,000 square feet of this space was vacated by the VTEL group. Additionally, Forgent had existing unoccupied leased space inventory due to the downsizing of the Company on account of the recent restructurings. Therefore, during fiscal 2002, Forgent actively engaged in subleasing its available area and incurred a one-time charge of $2.0 million related to these lease impairments. Currently, the Company subleases approximately 48,000 square feet and anticipates continuing to sublease the under-utilized space. The Company also occupied approximately 60,000 square feet of a facility that is situated in a light industrial area in Austin, Texas. This site housed the manufacturing of VTEL equipment and consequently, during the sale of the products division, the lease was assigned to VTEL Corporation, who assumed all obligations under the existing lease. Forgent's legacy services group occupies a facility of approximately 41,000 square feet in the Philadelphia, Pennsylvania vicinity which is leased through June 2006. After the Company sold its integration business division to SPL Integrated Solutions ("SPL") in May 2002, Forgent subleased approximately 6,000 square feet to SPL to facilitate on-site operations. The Company continues to consolidate its office space in remote locations and currently holds office space in Atlanta, Georgia, Houston, Texas, and Chicago, Illinois. Management believes that the facilities in Texas and Pennsylvania are adequate to meet Forgent's current requirements and can accommodate further physical expansion of corporate and development operations, as well as additional sales and marketing offices. ITEM 3. LEGAL PROCEEDINGS The Company is the defendant or plaintiff in various actions that arose in the normal course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse affect on the Company's financial condition or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET INFORMATION Starting June 1, 2001, Forgent's Common Stock has been traded in the NASDAQ-National Market System under the symbol "FORG." Previously, the Company's Common Stock was traded under the symbol "VTEL." The following table sets forth the range of high and low intra-day prices for each fiscal quarter of 2002 and 2001:
On October 21, 2002, Forgent's common stock closed at $1.70 on the NASDAQ. At that date there were approximately 14,000 stockholders of record of the common stock. ITEM 6. SELECTED FINANCIAL DATA The following table sets forth consolidated financial data for Forgent as of the dates and for the periods indicated. The selected consolidated balance sheet data as of July 31, 2001 and 2002 and the selected consolidated operations data for the years ended July 31, 2000, 2001, and 2002 have been derived from the audited consolidated financial statements of Forgent included elsewhere in this Report. The selected consolidated balance sheet data as of July 31, 1998, 1999 and 2000 and the selected consolidated operations data for the year ended July 31, 1998 and 1999 have been derived from the audited consolidated financial statements of Forgent not included in this Report. The selected financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," the consolidated financial statements of Forgent, and the notes to those statements included elsewhere in this Report. The information set forth below is not necessarily indicative of the results of future operations.
Forgent's consolidated statement of operations:
2002, respectively. Service and other revenues include the maintenance and support of thousands of endpoints and bridges under maintenance agreements, as well as sales of a variety of third-party manufactured equipment through its Multi-Vendor Partners Program ("MVP"). The decline in revenues over the past three fiscal years is largely due to the decrease in the renewal rate of service contracts for VTEL products. As a vendor-neutral service provider, offering installation, technical support, and maintenance to a wider array of videoconferencing devices, including endpoints, multipoint control units, gateways, gatekeepers, and traditional network switches and routers, Forgent is offsetting the decrease in renewal of VTEL contracts with service contracts for other third party products. However, the average selling price of the new maintenance contracts has generally been lower and therefore, the sales in the new contracts have not fully offset the decline in renewals of VTEL contracts. Thus, the Company anticipates further declines in service revenues, although rate of the decline is uncertain. Forgent will continue to sell equipment through its MVP program. Management intends to continue efforts to drive revenue from its new intellectual property licensing business and its legacy services business as means to funding the software core business. GROSS MARGIN Consolidated gross margins were $8.5 million in fiscal 2000, $7.0 million in fiscal 2001, and $26.8 million in fiscal 2002. The decline was $1.5 million from 2000 to 2001 and the increase was $19.8 million from 2001 to 2002. This is a decrease of 17.9% for 2001 and an increase of 283.0% for 2002. Consolidated gross margin percentages were 31.3% for fiscal 2000, 26.0% for fiscal 2001, and 45.7% for fiscal 2002. The increase in gross margins, as well as the increase in gross margins as a percentage of total revenues, for the year ended July 31, 2002, is due primarily to the gross margins resulting from the patent license agreements obtained during fiscal 2002. The cost of sales on the intellectual property licensing business relates to the legal fees incurred on successfully achieving signed agreements. The contingent legal fees are based on a standard percentage of the signed agreement and are paid to a national law firm, which has personally invested and continues to invest in developing Forgent's licensing program. 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, gross margins could be adversely affected in the future if licensing revenues decline. Since the costs associated with the network software and services business result primarily from the amortization of the Company's capitalized software development costs on a straight-line basis and from minimal royalty payments to outside vendors, the cost of sales from this line of business is relatively fixed. During the year ended July 31, 2002, Forgent sold twelve VNP licenses. As more licenses are sold, management expects to achieve higher gross margins from the network software and services business, in absolute terms and in terms of percentage of revenue. Similarly, the costs associated with the service and maintenance business are labor intensive and relatively fixed, which causes gross margins to be directly affected by the level of revenue generated from new and renewed service contracts. Gross margins from other revenues are subject to product mix shifts based on the types of MVP products sold. With decreasing VTEL maintenance contract renewals, Forgent's gross margins were deteriorating as evidenced by the $1.5 million or 17.9% decrease from 2000 to 2001. Therefore, in August 2001, the Company resized its infrastructure to incur costs that more closely matched the projected revenue levels. As a result, gross margins from the service and other business significantly increased by 39.6% from $7.0 million to $9.8 million for the year ended July 31, 2002. SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative expenses were $12.3 million in fiscal 2000, $16.5 million in fiscal 2001, and $11.4 million in fiscal 2002. The increase was $4.2 million from 2000 to 2001 and the decrease was $5.1 million from 2001 to 2002. This is an increase of 34.1% for 2001 and a decrease of 30.8% for 2002. Selling, general and administrative ("SG&A") expenses were 45.3%, 61.4% and 19.5% of total revenues for the years ended July 31, 2000, 2001, and 2002, respectively. The SG&A expenses incurred by the Internet subsidiaries, which were folded back into the core operations during fiscal 2001, were $2.0 million and $2.8 million for the fiscal years ended July 31, 2000 and 2001, respectively. Without the effect of the Internet ventures, total SG&A expenses increased $3.4 million, or 32.5%, from 2000 to 2001 and decreased $2.3 million, or 16.6%, from 2001 to 2002. During first fiscal quarter of 2001, the Company announced a new business charter and the reorganizing of its operations, which contributed to reducing a large amount of the Company's global administrative infrastructure. The related workforce reductions and 13
consolidations of office space reduced costs and focused resources on efforts to support the new business strategy. These efforts to find efficiencies and to significantly reduce administrative costs as a percent of expected revenues, including the closing of the Sunnyvale, California facility and the replacement of Forgent's Enterprise Reporting Platform, continue to be realized in fiscal 2002. Additionally, the Company reexamined its overall staffing needs, restructured its operations and recorded a one-time charge of $0.8 million during the year ended July 31, 2002. This restructuring contributed directly to the decrease in SG&A expenses during the year ended July 31, 2002. In acquiring certain assets and liabilities of Global Scheduling Solutions Inc. during the latter half of fiscal 2002, Forgent's sales force has more than doubled and thus, SG&A expenses are projected to increase. However, management is committed to maintaining SG&A expenses at reasonable levels in terms of percentage of revenue and to further decreasing any unnecessary SG&A expenses that do not directly support the generation of revenues for Forgent. RESEARCH AND DEVELOPMENT Research and development expenses were $8.5 million in fiscal 2000, $7.4 million in fiscal 2001, and $3.2 million in fiscal 2002. The decrease was $1.1 million from 2000 to 2001 and $4.2 million from 2001 to 2002. This is a decrease of 12.0% for 2001 and 56.8% for 2002. Research and development expenses were 31.1%, 27.6%, and 5.5% of revenues for the years ended July 31, 2000, 2001, and 2002 respectively. During the year ended July 31, 2000, the Company created two subsidiaries focused on the development and delivery of visual communication products and services over the Internet. OnScreen24 was comprised primarily of Forgent research and development engineers who developed visual communication delivery products for use over the Internet, including products such as video mail as well as the further development of the Company's web streaming product line, Turbocast (TM). ArticuLearn created and managed custom e-learning portals that enabled organizations to create, deliver and manage their learning content directly online as well as offered various professional services to assist organizations in the production of their web-based learning content. During the years ended July 31, 2000 and July 31, 2001, the Company's two Internet subsidiaries incurred $8.5 million and $5.1 million in research and development expenses, respectively. Due to the weakening environment for start-up businesses and related tightening of the venture capital marketplace, the Company absorbed its OnScreen24 operations back into the operations of its core business and terminated ArticuLearn during fiscal 2001. Without the effects of the Internet ventures, the Company incurred $0.0 million, $2.3 million, and $3.2 million in research and development ("R&D") expenses during fiscal 2000, 2001 and 2002, respectively. These expenses, which represent 8.6% and 5.5% of revenue in fiscal 2001 and 2002, respectively, are related to the development of Forgent's network management software, Video Network Platform ("VNP"). Unlike proprietary device management software from manufacturers that only support their brand and consequently lock customers into a single vendor purchase decision, VNP is the industry's only enterprise video network management software that improves quality of service and reduces cost of ownership for multi-protocol and multi-vendor environments. Forgent developed a Common Operating Environment, which uses standards-based interfaces and methods to recognize a host of video devices, as well as traditional network devices, thus allowing companies to grow their video networks and make future purchase decisions that are independent of hardware configurations. The R&D expenses are net of $0.6 million and $3.5 million capitalized during the years ended July 31, 2001 and July 31, 2002, respectively. Software development costs are capitalized after a product is determined to be technologically feasible and is in the process of being developed for market. At the time the product is released for sale, the capitalized software is amortized over the estimated economic life of the related projects, generally three years. As of July 31, 2002, $1.6 million of the Company's net capitalized software expenses relates to the efforts on Forgent's VNP Release 1.0, which finds, controls and manages multi-vendor video devices with network management tools and offers extensive device diagnostics. An additional $1.7 million of the Company's net capitalized software expenses relates to efforts on Forgent's VNP Release 2.0, which offers an intuitive, user-friendly interface that provides an at-a-glance summary and statistics of the entire video network including calls, video devices, and bandwidth utilization and enables users to manage their networks and to quickly resolve problems, even from remote locations. Additionally, VNP Release 2.0 features a new easy-to-use reporting wizard with a rich set of reports that can be customized to meet specific customer requirements. The remaining $0.2 million of the Company's net capitalized software expenses relates to efforts on Forgent's VNP Release 2.5, which delivers group operations support, hot-pluggable devices and failover support for increased scalability and availability. Forgent's development team has fully integrated the acquired Global Scheduling Solutions Inc. development team. The combined team now functions with a shared vision for collaboration management and is developing GSS Version 3.9, which will include additional quality and performance improvements, a new outsourcing in security module, and an extension that will allow users to schedule rooms and attendees directly from Outlook. Both VNP 2.5 and GSS 3.9 are scheduled for general availability in the first quarter of fiscal year 2003. 14
The Company's ability to successfully develop software solutions to enable enterprise video networks is a significant factor in Forgent's success. As Forgent develops its research and development strategy, management anticipates additional costs associated with the recruiting and retention of engineering professionals adept at these technologies. Management will attempt to maintain research and development expenses at reasonable levels in terms of percentage of revenue. However, management believes Forgent's ultimate future success is based significantly on the development and success of its solution offerings related to its software roadmap. WRITE-DOWN OF IMPAIRED ASSETS Initially, management intended to further develop its video streaming technology, which is a server application with the abilities to create video e-mail programs and to store streamed video for later non-real time playback, as an added feature to its current VNP software. Based upon customer feedback regarding the VNP software during the second quarter of fiscal 2002, customers did not need these advanced features but desired fundamental network management applications with more robust device level support and valued added network level instrumentation for ISDN and IP networks to enable them to understand and monitor how well their networks are performing. Therefore, management reviewed its capitalized software development costs and determined the video streaming technology would not be used in the development of VNP. As a result, the $2.4 million capitalized software development costs associated with the video streaming technology was impaired during the year ended July 31, 2002. Due to the disposition of the Products business in fiscal 2002, the VTEL personnel relocated from Forgent's headquarters at 108 Wild Basin Road in Austin, Texas to VTEL's headquarters at 9208 Waterford Centre Blvd. in Austin, Texas. This relocation left a vacancy of approximately 52,000 rentable square feet, or 38% of the total lease space. Additionally, Forgent had existing unoccupied space inventory due to the downsizing of the Company on account of the recent restructurings. In fiscal 2002, Forgent was able to sublease some of the vacated space, but was unable to fully sublease the space due to the economic downturn during the year. Therefore, management analyzed the future undiscounted cash flows related to the lease on the Wild Basin property and determined the economic value of the lost sublease rental income. As a result, Forgent recorded a one-time $2.0 million impairment charge for the unleased space as of July 31, 2002. This non-cash impairment was reported as part of continuing operations on the consolidated statement of operations. During fiscal year 2001 management implemented a strategy to divest all non-core operations to focus on returning to profitability. Therefore, the Company folded its OnScreen24 subsidiary's operations back into the core business. OnScreen24 primarily operated from Forgent's property in Sunnyvale, California. During the third fiscal quarter of fiscal 2001, the Company sold its equity interest in the real estate lease for $500,000 and recorded a related $1.1 million impairment for the leasehold improvements at the Sunnyvale facility. The $1.1 million impairment in fiscal 2001 was all related to continuing operations. As a result of the new charter announced in August 2000, management reviewed certain long-lived assets including property, plant and equipment, goodwill and other intangibles and capitalized software, to evaluate the recoverability of these assets pursuant to Statement of Financial Accounting Standard ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The evaluation indicated that the future undiscounted cash flows related to certain long-lived assets were below the carrying value of the assets associated with their future operations. Further, the closure of certain foreign offices and the termination of the software capitalization projects resulted in the identification of only minimal future cash flows. During the fourth quarter of fiscal 2000, the Company adjusted the long-lived assets associated with its manufacturing operations and the long-lived assets related to the foreign operations and capitalized software. Management calculated the fair value for the long-lived assets based on anticipated future cash flows discounted at a rate commensurate with the risk involved, which resulted in a non-cash impairment charge of $14.1 million. This impairment loss was recorded on the consolidated statement of operations as follows:
AMORTIZATION OF INTANGIBLES Amortization expenses were $1.4 million in fiscal 2000, and $1.4 million in fiscal 2001. The expenses relate to the amortization of goodwill resulting from certain acquisitions. In March 1999, the Company acquired substantially all of the assets of Vosaic LLP, an Internet video software and technology company. In November 1995, the Company acquired certain assets and a specified work force of the Integrated Communications Systems Group ("ICS") of Pierce-Phelps, Inc., which developed into Forgent's legacy services business. The Company acquired certain assets of the videoconferencing division of one of its German resellers in July 1998. The goodwill related to the German acquisition was fully amortized during fiscal 2001. Effective August 1, 2001, the Company chose early adoption of Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangibles Assets," which recognizes that since goodwill and certain intangible assets may have indefinite useful lives, these assets are no longer required to be amortized but are to be evaluated at least annually for impairment. In accordance with SFAS No. 142, the Company is required to complete its transitional impairment test, with any resulting impairment loss recorded as a cumulative effect of a change in accounting principle. Subsequent impairment losses are reflected in operating income from continuing operations on the Consolidated Statement of Operations. Upon adoption of SFAS No. 142, the Company did not record any goodwill amortization expenses during the year ended July 31, 2002. Additionally, as a result of the transitional impairment test, the Company did not record any impairment of its goodwill for the year ended July 31, 2002. RESTRUCTURING ACTIVITIES In August 2001, the Company restructured its organization, which involved the termination of 65 employees, or 17% of the workforce, who were assisted with outplacement support and severance. The reduction affected 16 employees in Austin, Texas, 30 employees in King of Prussia, Pennsylvania, and 19 employees in remote and international locations. The restructuring was the result of eliminating certain business elements that did not contribute to Forgent's core competencies as well as efforts to increase efficiencies and to significantly reduce administrative costs. All of the employees were terminated and the Company recorded a one-time charge of $0.8 million in the first quarter of fiscal 2002 for the restructuring. As of July 31, 2002, all of the involuntary termination benefits had been paid. NON-RECURRING EVENTS On March 3, 2000 Forgent settled a lawsuit pending in the 126th Judicial District Court in Travis County, Texas in which the Company had previously initiated against five former employees who left the Company in September 1996 to form Via Video Communications, Inc. ("Via Video"). Via Video was subsequently acquired by Polycom, Inc. Pursuant to the settlement agreement, the former employees paid $2.5 million in cash and delivered to the Company 300,800 shares of common stock of Polycom, Inc. in settlement of the claims asserted by Forgent. These shares were sold during fiscal 2000 for $33.7 million, net of settlement costs. The parties agreed to dismiss all claims, counterclaims and third party claims in the lawsuit, ending the litigation. Separately, Forgent voluntarily dismissed Polycom, Inc. and Via Video from the case without consideration. On March 3, 2000, the Company granted non-exclusive licenses to Polycom, Inc. ("Polycom") to use three of its patented technologies, and Polycom paid a one time fee of $8.3 million to Forgent as a fully paid up royalty in exchange for such license. In turn and without any payments by the Company, Polycom also granted Forgent a non-exclusive sublicense to its rights under its license agreement with Brown University pertaining to its single camera tracking technology. Through this technology exchange, the parties have access to specified distinctive technologies of the other for use in their product offerings. INTEREST INCOME AND EXPENSE Interest income was $1.2 million in fiscal 2000, $1.2 million in fiscal 2001, and $0.3 million in fiscal 2002. The increase was minimal from 2000 to 2001 and the decrease was $0.9 million from 2001 to 2002. This is an increase of 3.0% for 2001 and a decrease of 72.3% for 2002. Interest income was 4.4%, 4.5%, and 0.6% of revenues for the years ended July 31, 2000, 2001, and 2002. Changes in interest income are based on interest rates earned on invested cash and cash equivalent balances available for investment. The decrease in interest income during fiscal 2002 is largely due to less available cash balance held for investment and a decline in interest rates. The slight increase in interest income during fiscal 2001 is due primarily to a higher average cash balance held for investment in fiscal 2001 than in fiscal 2000. INCOME TAXES As of July 31, 2002, Forgent had federal net operating loss carryforwards of $147.6 million, research and development credit 16
carryforwards of $6.1 million, and alternative minimum tax credit carryforwards of $0.1 million. The net operating loss and credit carryforwards will expire in varying amounts from 2003 through 2021, if not utilized. Minimum tax credit carryforwards do not expire and carry forward indefinitely. Net operating losses related to the Company's foreign subsidiaries of $6.4 million are available to offset future foreign taxable income. However, significant permanent limitations may apply to the use of these losses based upon laws of the foreign tax jurisdictions. As a result of various acquisitions completed in prior years, utilization of Forgent's net operating losses and credit carryforwards may be subject to a substantial annual limitation due to the "change in ownership" provisions of the Internal Revenue Code of 1986. The annual limitation may result in the expiration of net operating losses before utilization. Also, due to the uncertainty surrounding the timing of realizing the benefits of its favorable tax attributes in future tax returns, Forgent has placed a valuation allowance against its net deferred tax asset. Accordingly, no deferred tax benefits have been recorded for the tax years ended July 31, 2000, 2001, and 2002. The valuation allowance increased by $2.1 million during the year ended July 31, 2002. LOSS FROM DISCONTINUED OPERATIONS, NET OF INCOME TAXES During the year ended July 31, 2002, the Company sold the operations and substantially all of the assets of its VTEL products business, including the VTEL name, to VTEL Products Corporation ("VTEL") and the operations and assets of its integration business to SPL Integrated Solutions (see Note 18, in the accompanying financial statements). Accordingly, the products and integration businesses have been accounted for and presented as discontinued operations in the consolidated financial statements. Loss from discontinued operations was $19.9 million in fiscal 2000, $19.0 million in fiscal 2001, and $15.1 million in fiscal 2002. Loss from discontinued operations was 73.1%, 70.6%, and 25.8% of revenues for the years ended July 31, 2000, 2001, and 2002. In April 2002, VTEL did not remit payment on its first subordinated promissory note, as stipulated in the sales agreement. Management is currently renegotiating the terms of the note. Due to this default and the uncertainty in collecting the two outstanding notes from VTEL, the losses from discontinued operations for the year ended July 31, 2002 included a $5.9 million charge for the reserve of the both notes from VTEL. Since the sale of the products business occurred several months after it was originally anticipated to close, and since the operations performed significantly worse than expected, an additional loss of $8.8 million was recorded to discontinued operations in fiscal 2002. The remaining $0.4 million loss is related to the Company's discontinued integration business. LOSS ON DISPOSAL, NET OF INCOME TAXES As of July 31, 2001, the Company estimated the loss from the disposal of the VTEL products business unit to be $1.1 million. The loss was primarily related to legal and consulting fees associated with the sale. During the second fiscal quarter of 2002, Forgent recorded an additional $0.2 million in expenses associated with the completion of the sale. The assets related to the integration business were sold for approximately their net book value and thus an immaterial amount of gain was recorded during the third fiscal quarter of 2002. NET INCOME (LOSS) Net income was $2.3 million in fiscal 2000; net loss was $32.5 million in fiscal 2001; and net loss was $6.1 million in fiscal 2002. The decrease was $34.8 million from 2000 to 2001 and the increase was $26.4 million from 2001 to 2002. This is a decrease of 1,516.6% for 2001 and an increase of 81.2% for 2002. Net income (loss) was 8.4%, (120.9%), and (10.4%) of revenues for the years ended July 31, 2000, 2001, and 2002, respectively. Despite the significant loss from discontinued operations, the increase in net income during the year ended July 31, 2002 is largely due to the revenues generated from the licensing of intellectual property and the decrease in operating expenses. The one-time $44.5 million gain achieved in fiscal 2000 contributed significantly to the net income for the year ended July 31, 2000 and is the primary cause for the decrease in net income during fiscal 2001. During fiscal 2002, Forgent has taken significant steps (1) to grow its revenues through software sales, patent licensing agreements, and increased video network consulting, integration and deployment services, (2) to improve gross margins, (3) to reduce costs by resizing its infrastructure, (4) to maintain a strong cash and investments balance, and (5) to finalize the sales of its less profitable businesses. Despite the current difficult economic business environment in which companies are minimizing capital expenditures, these significant milestones are evidence that Forgent continues to make progress on its business plan. Based upon a solid financial foundation with new and expanding revenue sources, additional joint VNP and GSS software offerings, and a cash 17
generating legacy business, management's vision and direction are advancing the Company's financial results towards growth and profitability. However, uncertainties and challenges remain, and there can be no assurance that the Company can successfully grow its revenues or maintain profitability. OTHER FACTORS AFFECTING RESULTS OF OPERATIONS Forgent's future results of operations and financial condition could be impacted by many factors, including other competitors entering the same market, technical problems in delivering video solutions over enterprise networks, and slow adoption to videoconferencing over enterprise networks. Due to these factors and others noted elsewhere in Management's Discussion and Analysis of Financial Condition and Results of Operations, Forgent's past earnings and stock prices have been, and future earnings and stock prices potentially may be, subject to significant volatility, particularly on a quarterly basis. Past financial performance should not be considered a reliable indicator of future performance and investors are cautioned in using historical trends to anticipate results or trends in future periods. Any shortfall in revenue or earnings from the levels anticipated by securities analysts could have an immediate and significant effect on the trading price of Forgent's Common Stock in any given period. Also, the Company participates in a highly dynamic industry that often contributes to the volatility of Forgent's Common Stock price. LIQUIDITY AND CAPITAL RESOURCES Cash provided by operating activities was $53.5 million in fiscal 2000; cash used in operating activities was $3.5 million in fiscal 2001; and cash provided by operating activities was $14.7 million in fiscal 2002. At July 31, 2002, Forgent had working capital of $9.8 million, including $20.0 million in cash, cash equivalents and short-term investments. Changes in cash from operating activities are primarily the result of the net loss or income generated and changes in working capital, primarily decreases in accounts receivable, and accounts payable. The liquidation of the Internet ventures, which historically required significant funding for operations, as well as the completion of the restructuring efforts and the sale of its less profitable businesses, improved the Company's cash flows from operations during the year ended July 31, 2002, as compared to the year ended July 31, 2001. During fiscal year 2002, the Company had sold $9.3 million of its outstanding accounts receivable, without any recourse, in efforts to recapture cash balances lost due primarily to an unanticipated significant drop in sales from discontinued operations and the remaining payments of outstanding payables related to the discontinued operations. Silicon Valley Bank purchased the assets for a fee of approximately 1.8% of the value of the accounts receivable sold and a one-time set-up fee of $13,000. The Company received proceeds from Silicon Valley Bank of $9.1 million. As a result of the sale of accounts receivable, the Company excluded the related receivables from the Consolidated Balance Sheet and recorded related expenses of $178,000 for the year ended July 31, 2002. Additionally, Forgent received $16.5 million from its technology licensing business during the year ended July 31, 2002. Included in net income for fiscal 2000 was the favorable settlement of litigation in which the Company received $44.5 million in cash and securities (see "Non-recurring events"). Cash used in investing activities was $32.3 million in fiscal 2000; cash provided by investing activities was $21.9 million in fiscal 2001; and cash used in investing activities was $7.7 million in fiscal 2002. The cash used in investing activities during fiscal 2002 was largely the result of the goodwill acquired among other assets from Global Scheduling Solutions, Inc. and the capitalization of software development costs. Forgent's ability to successfully develop software solutions to enable enterprise video networks is a significant factor in the Company's success and management will continue to strategically invest in developing its software products. During the year ended July 31, 2001, the Company owned common stock shares of Accord Networks ("Accord"), a networking equipment manufacturer, which were converted to Polycom, Inc. ("Polycom") common stock shares as a result of Polycom's acquisition of Accord. The cash provided by investing activities in fiscal 2001 was primarily due to the proceeds received from the sale of the Polycom and Accord shares and other short-term investments. During fiscal 2000, the cash used in investing activities was primarily from the investment of cash received from the settlement of litigation (see "Non-recurring events"). Investments were also made in additional property and equipment and capitalized research and development. Capital expenditures incurred during the year ended July 31, 2002 primarily related to the purchase of the Company's new accounting system. For fiscal 2003, Forgent capital budget is approximately $0.8 million and will be used principally to invest in demonstration equipment, spare parts to support the Company's warranties and services, and various other operational equipment as needed. Cash used in financing activities was $11.0 million, $0.6 million, and $0.9 million in fiscal years 2000, 2001 and 2002, respectively. Cash used in financing activities during fiscal 2002 is due primarily to the purchase of treasury stock, which was offset by proceeds received from the issuance of stock. Cash used in financing activities during fiscal 2001 primarily relates to the Company settling its notes payable. Cash used in financing activities for the year ended July 31, 2000 relates to the repayment of cash borrowed under the line of credit and payment on notes payable. In April 2001 Forgent announced a stock repurchase program to purchase up to two million shares of the Company's stock. During fiscal 2001 the Company repurchased 87,400 shares for $0.1 million, including fees. Forgent purchased an additional 787,700 shares for $2.7 million, including fees, during the year ended July 31, 2002. In 18
September 2002, Forgent's board of directors approved the repurchase of an additional million shares of the Company's stock under the current Share Repurchase Program. Management fully anticipates repurchasing more shares during fiscal 2003, depending on the Company's cash position, market conditions and other factors. In March 2000, the Company repaid the outstanding balance on its line of credit with a banking syndicate. At July 31, 2002, Forgent did not have a line of credit in place. Based on the Company's strong cash position and ability to generate positive cash flow from its continuing operations, management does not anticipate acquiring any additional lines of credit in the near future. Forgent's principal sources of liquidity at July 31, 2002 consist of $20.0 million of cash, cash equivalents and short-term investments, and the ability to generate cash from continuing operations. Over the past several quarters, the Company's cash and short-term investment balances have remained relatively stable. With the success of the Company's Patent Licensing Program, management expects the Company's cash position to strengthen as more license agreements are signed and related payments are received. 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 this positive cashflow to invest further in developing Forgent's VNP, GSS, and VideoWorks software and to explore more opportunities for growing the business. However, 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 investments in research and development, increased expense levels and other factors. LEGAL MATTERS Forgent is the defendant or plaintiff in various actions that arose in the normal course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse affect on our financial condition or results of operations. 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 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. We believe the following represent our critical accounting policies: Revenue Recognition In general, the Company recognizes revenue when persuasive evidence of an arrangement exists, service delivery has occurred, fee is fixed or determinable, and collectibility is probable. In accordance with Statement of Position 97-2, "Software Revenue Recognition," software and product revenues are recognized when the software or product is shipped and invoiced. When a sale contains both delivered and deferred elements, the Company utilizes vendor-specific objective evidence to allocate the sale price first to deferred elements and then the residual value is allocated to the delivered elements. Service revenues are recorded at the time the services are rendered. Integration revenues are recognized after the customized systems are tested, installed, and the Company has no significant further obligations to the customer. Revenues for maintenance agreements are recorded ratably over the contract period. Customer prepayments are deferred until services have been rendered and there are no significant further obligations to the customer. Gross intellectual property licensing revenue is recognized at the time a license agreement has been executed and related costs are recorded as cost of goods sold. Software Development Costs Costs incurred in connection with the development of software products are accounted for in accordance with Statement of Financial Accounting Standards ("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. Amortization of capitalized software 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. 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. Impairment of Goodwill and Intangible Assets The Company adopted Statement of Financial Accounting Standards ('SFAS") No. 142, Goodwill and Other Intangible Assets on August 1, 2001 and thus is required to review the carrying value of 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; significant changes in market conditions and trends. If a review event has occurred, the value of the goodwill or intangible is compared to the estimate of future cash flows, and if required, an impairment is recorded. RECENT ACCOUNTING PRONOUNCEMENTS On August 31, 2000 the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities. SFAS No. 133 requires the recognition of all derivatives as either assets or liabilities on the Consolidated Balance Sheet with changes in fair value recorded in the Consolidated Statement of Operations. The accounting for changes in fair value of a derivative depends upon whether it has been designated in a hedging relationship and, further, on the type of hedging relationship pursuant to SFAS No. 133. Changes in the fair value of derivatives not designated in a hedging relationship are recognized each period in earnings. Hedging relationships are established pursuant to the Company's risk management policies, and are initially and regularly evaluated to determine whether they are expected to be, and have been, highly effective hedges. If a derivative ceases to be a highly effective hedge, hedge accounting is discontinued prospectively, and future changes in the fair value of the derivative is recognized in earnings each period. For derivatives designated as hedges of the variability of cash flows related to a recognized asset or liability (cash flow hedges), the effective portion of the change in fair value of the derivatives is reported in other comprehensive income and reclassified into earnings in the period in which the hedged items affect earnings. Gains or losses deferred in accumulated other comprehensive income associated with terminated derivatives remain in accumulated other comprehensive income until the hedged items affect earnings. Forecasted transactions designated as the hedged items in cash flow hedges are regularly evaluated to assess that they continue to be probable of occurring, and if the forecasted transactions are no longer probable of occurring, any gain or loss deferred in accumulated other comprehensive income is recognized in earnings currently. During fiscal 2001 the Company utilized forward currency exchange contracts to reduce the exposure to fluctuations in foreign currency exchange rates related to the European Euro and the Australian Dollar. The changes in these contracts are reflected in the Consolidated Statement of Operations. The Company also utilized derivatives designated as cash flow hedges to ensure a minimum level of cashflows as related to its investment in the Polycom stock. The amount of ineffectiveness with respect to these cash flow hedges was not material. These hedges were recorded at fair value on the Consolidated Balance Sheet, under the caption short-term investments as of July 31, 2001. During the first quarter of fiscal year 2002, the remaining 77 shares of Polycom were sold under a cash flow hedge and $1.7 million was reclassed from other comprehensive income to earnings. In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets. Since the standard 19
recognizes goodwill and certain intangible assets may have indefinite useful lives, these assets are no longer required to be amortized but are evaluated at least annually for impairment. Intangible assets with finite useful lives will continue to be amortized over their useful lives, but without constraint of an arbitrary ceiling. In accordance with SFAS No. 142, the Company is required to complete its transitional impairment test, with any resulting impairment loss recorded as a cumulative effect of a change in accounting principle. Subsequent impairment losses are reflected in operating income from continuing operations on the Consolidated Statement of Operations. Effective August 1, 2001, the Company chose early adoption of SFAS No. 142, and therefore did not record any goodwill amortization expenses during the year ended July 31, 2002. As a result of the transitional impairment test, the Company did not record any impairment of its goodwill for the year ended July 31, 2002. The Company's goodwill, net of accumulated amortization, was $10.6 million and $15.8 million at July 31, 2001 and July 31, 2002, respectively. As required by SFAS No. 142, the results for the prior years have not been restated. A reconciliation of the previously reported net loss and earnings per share for the years ended July 31, 2000, 2001, and 2002 as if SFAS No. 142 had been adopted is presented as follows:
investments, Forgent does not consider these risks to be significant. The Company previously invested in Accord Networks ("Accord") an Israeli-based manufacturer of networking equipment. In June of 2000, Accord filed an initial public offering on the NASDAQ stock exchange in which the Company was apportioned 1.3 million shares. In February 2001, Accord was acquired by Polycom and Forgent's investment in Accord converted to 399,000 shares of Polycom. The Company sold 246,000 shares and then entered into a cash flow hedge to ensure a minimum level of cash flow from the 153,000 remaining shares. These hedges settled in July and October 2001, resulting in net cash flows of $1.8 and $1.8 million, respectively. FOREIGN EXCHANGE RISK Forgent's objective in managing its exposure to foreign currency exchange rate fluctuations is to reduce the impact of adverse fluctuations in earnings and cash flows associated with foreign currency exchange rate changes. Accordingly, the Company historically utilized forward contracts to hedge its foreign currency exposure on firm commitments. The principal currencies hedged during fiscal years 2000 and 2001 were the Euro and Australian dollar. The amount of unrealized gain or (loss) related to these contracts was $38,000 in fiscal 2000 and $0 for fiscal years 2001 and 2002. As of July 31, 2001 and 2002 the Company held no foreign currency contracts. Due to the Company's reduction in international offices and related reduction in foreign exchange risks, Forgent does not anticipate any additional foreign currency hedges. 21
INDEX TO FINANCIAL STATEMENTS
REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Stockholders of Forgent Networks, Inc. (f.k.a. VTEL Corporation) We have audited the accompanying consolidated balance sheets of Forgent Networks, Inc. as of July 31, 2001 and 2002, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three fiscal years in the period ended July 31, 2002. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Forgent Networks, Inc. at July 31, 2001 and 2002 and the consolidated results of their operations and their cash flows for each of the three fiscal years in the period ended July 31, 2002 in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Ernst & Young LLP Austin, Texas September 13, 2002 23
FORGENT NETWORKS, INC. CONSOLIDATED BALANCE SHEETS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
FORGENT NETWORKS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
FORGENT NETWORKS, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (AMOUNTS IN THOUSANDS)
FORGENT NETWORKS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (AMOUNTS IN THOUSANDS)
FORGENT NETWORKS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA OR OTHERWISE NOTED) 1. THE COMPANY Forgent Networks, Inc. (Forgent, or the Company,) is a provider of enterprise software and services that enable organizations to collaborate effectively and efficiently, to expedite decision making, and to streamline operations. Forgent's software manages the essential elements of collaboration: people, resources, and technology, and provides one-stop scheduling of all resources necessary for complex conference automation and management of communication networks. With a 20-year history of video communications experiences, Forgent develops neutral network management software for rich media networks and also offers a full spectrum of top-rated services to the visual communications industry, regardless of brand, to make collaboration easy, reliable and effective. Forgent's services and software are designed to improve industry-wide multi-vendor platform interoperability as well as to improve video network management and reliability standards throughout the industry. On August 23, 2000, the Company announced a new business charter that shifted its core business model from the manufacture of videoconferencing endpoints to a provider of enterprise software and services for visually enabling broadband networks. The Company's vast experience in the industry indicated that videoconferencing would not reach the broad-based market appeal necessary for overall growth through the production of videoconferencing endpoints alone. Therefore, the Company planned to leverage its professional services and software expertise in the deployment and management of videoconferencing endpoints by continuing to actively market its ability to integrate, install and service a wide offering of third-party products, including the products of companies that were traditional competitors when the focus was hardware. Subsequently, management decided to solely focus its efforts on its Solutions business and to exit its Products business. Therefore, Forgent announced in May 2001 that the Company intended to sell its Products business unit and to rename the remaining Solutions business unit as Forgent Corporation, subject to the execution and consummation of a sale agreement and shareholder approval. The Company's shareholders approved the transaction during its 2001 annual meeting and the sale was finalized on January 23, 2002. The Company renamed its remaining business as Forgent Networks, Inc. Management believes it must provide network software products and solutions that support the vast amount of visual communication applications by improving the interoperability of all the components in a broadband video network, by expanding the Company's current interoperability labs to create a center of excellence for standards testing and integration and by developing and introducing enterprise videoconferencing software that provides a high level of manageability, reliability and ease-of-use for existing and new enterprise systems. Furthermore, the development and expansion of Forgent's network consulting and professional services will contribute in transforming the majority of its revenue base from endpoint products to a software and solutions centric provider. Management believes the Company's refocus of its efforts and resources will provide the greatest opportunity for long-term success for Forgent and its shareholders. 2. SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION 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 assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The more significant estimates made by management include the provisions for doubtful accounts receivable and notes receivable, inventory reserve for potentially excess or obsolete inventory, the valuation allowance for the gross deferred tax asset, contingency reserves, lives of fixed assets, the determination of the fair value of its long-lived assets, including its intangible assets, the loss from discontinued operations, and the loss from its lease impairment. Actual amounts could differ from the estimates made. Management periodically evaluates estimates used in the preparation of the financial statements for continued reasonableness. Appropriate adjustments, if any, to the estimates used are made prospectively based upon such periodic evaluation. REVENUE RECOGNITION In general, the Company recognizes revenue when persuasive evidence of an arrangement exists, service delivery has occurred, fee is fixed or determinable, and collectibility is probable. In accordance with Statement of Position 97-2, "Software Revenue Recognition," software and product revenues are recognized when the software or product is shipped and invoiced. When a sale contains both delivered and deferred elements, the Company utilizes vendor-specific objective evidence to allocate the sale price first to deferred elements and then the residual value is allocated to the delivered elements. Service revenues are recorded at the time the services are rendered. Integration revenues are recognized after the customized systems are tested, installed, and the Company has no significant further obligations to the customer. Revenues for maintenance agreements are recorded ratably over the contract period. Customer prepayments are deferred until services have been rendered and there are no significant further obligations to the customer. Gross intellectual property licensing revenue is recognized at the time a license agreement has been executed and related costs are recorded as cost of goods sold. 28
FORGENT NETWORKS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA OR OTHERWISE NOTED) SOFTWARE DEVELOPMENT COSTS Costs incurred in connection with the development of software products are accounted for in accordance with Statement of Financial Accounting Standards ("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. Amortization of capitalized software 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. The Company capitalized internal software development costs of $3,945, $617, and $3,471 for the years ended July 31, 2000, 2001, and 2002, respectively. No amortization of such costs was recorded for the years ended July 31, 2000, and 2001, respectively. Amortization of capitalized software development costs for the year ended July 31, 2002 was $552. During the year ended July 31, 2000, management made the decision to discontinue further development efforts and abandoned certain projects previously capitalized. The resulting charge of $5,120 was included in the write-down of impaired assets during the year ended July 31, 2000 (see Note 7). CASH AND EQUIVALENTS Cash and equivalents include cash and investments in highly liquid investments with an original maturity of three months or less when purchased. As of July 31, 2002, the Company holds $683 in certificates of deposit to secure its note payable to Silicon Valley Bank and one capital lease. SHORT-TERM INVESTMENTS Short-term investments are carried at market value. Short-term investments consist of funds primarily invested in mortgage-backed securities guaranteed by the U.S. government, government securities, commercial paper, and equity securities, and all mature within one year of July 31, 2001 and 2002. The carrying amounts of the Company's short-term investments at July 31, 2001 and 2002 are as follows:
FORGENT NETWORKS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA OR OTHERWISE NOTED) recording realized gains and losses as part of other income and expense on the Consolidated Statements of Operations. Gross unrealized gains on available-for-sale securities were $1.5 million at July 31, 2001. As of July 31, 2002, the Company did not have any unrealized gains or losses on available-for-sale securities. The Company realized $6.5 million and $1.7 million in gains during the year ended July 31, 2001 and July 31, 2002, respectively. INVENTORIES Inventories are stated at the lower of cost or market. Cost is determined on a weighted average basis. Appropriate consideration is given to obsolescence, excessive levels, deterioration and other factors in evaluating net realizable value. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost. Internal support equipment is video teleconferencing equipment used internally for purposes such as sales and marketing demonstrations, Company meetings, testing, troubleshooting customer problems, and engineering, and is therefore recorded at manufactured cost. Depreciation and amortization are provided using the straight-line method over the estimated economic lives of the assets, which range from two to eight years, over the lease term, or over the life of the improvement of the respective assets, as applicable. Repair and maintenance costs are expensed as incurred. The Company periodically reviews the estimated economic lives of property and equipment and makes adjustments according to the latest information available. INTANGIBLE ASSETS Intangible assets include the goodwill that resulted from various acquisitions by the Company (see Note 4). Amortization periods for the intangible assets associated with these acquisitions range from 8 to 15 years for the fiscal years ending July 31, 2000 and July 31, 2001. Accumulated amortization was $5.2 and $6.2 million at July 31, 2000 and 2001, respectively. Effective August 1, 2001, the Company chose early adoption of Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangibles Assets," which recognizes that since goodwill and certain intangible assets may have indefinite useful lives, these assets are no longer required to be amortized but are to be evaluated at least annually for impairment. In accordance with SFAS No. 142, the Company is required to complete its transitional impairment test, with any resulting impairment loss recorded as a cumulative effect of a change in accounting principle. Subsequent impairment losses are reflected in operating income from continuing operations on the Consolidated Statement of Operations. Upon adoption of SFAS No. 142, the Company did not record any goodwill amortization expenses during the year ended July 31, 2002. Additionally, as a result of the transitional impairment test, the Company did not record any impairment of its goodwill for the year ended July 31, 2002. FOREIGN CURRENCY TRANSLATION The financial statements of the Company's foreign subsidiaries are measured using the local currency as the functional currency. Accordingly, assets and liabilities of the subsidiaries are translated at current rates of exchange at the balance sheet date. The resultant gains or losses from translation are included in a separate component of stockholders' equity. Income and expense from the subsidiaries are translated using monthly average exchange rates. In order to manage the Company's exposure to foreign currency exchange rate fluctuations related to the European Euro and the Australian Dollar, management utilized forward currency exchange contracts. Since these forward contracts were used to hedge foreign currency exposures, the net cash amounts paid or received on the contracts were accrued and recognized as an adjustment to currency translation adjustments in the statement of operations. Management ceased utilizing forward currency exchange contracts effective July 31, 2001. INCOME TAXES The Company accounts for income taxes under SFAS No. 109, "Accounting for Income Taxes," which requires the liability method of accounting for income taxes. Under the liability method, deferred taxes are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. 30
FORGENT NETWORKS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA OR OTHERWISE NOTED) CONCENTRATION OF CREDIT RISK The Company sells its services to various companies across several industries, including third-party resellers. The Company performs ongoing credit evaluations of its customers and maintains reserves for potential credit losses. The Company requires advanced payments or secured transactions when deemed necessary. FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of the Company's foreign currency forward contracts at July 31, 2000 was based on quoted market rates. As of July 31, 2001 the Company discontinued using foreign currency contracts. The carrying amount of short-term investments and notes payable approximates fair value because of the short maturity and nature of these instruments. The Company places its cash investment in quality financial instruments and limits the amount invested in any one institution or in any type of instrument. The Company has not experienced any significant losses on its investments. LONG-LIVED ASSETS The Company evaluates its long-lived assets and intangibles based on guidance provided by SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." SFAS No. 121 established accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets to be held and used for long-lived assets and certain identifiable intangibles to be disposed of (see Note 7). EMPLOYEE STOCK PLANS The Company determines the fair value of grants of stock, stock options and other equity instruments issued to employees in accordance with SFAS No. 123, "Accounting and Disclosure of Stock-Based Compensation." SFAS No. 123 encourages, but does not require, companies to recognize compensation expense for grants of stock, stock options, and other equity instruments to employees based on their estimated fair market value on the date of grant. The Company has opted to continue to apply the existing accounting rules contained in APB No. 25, "Accounting for Stock Issued to Employees." As such, SFAS No. 123 has had no effect on the Company's financial position or results of operations. The Company records unearned compensation related to equity instruments that are issued at prices which are below the fair market value of the underlying stock on the measurement date. Such unearned compensation is amortized ratably over the vesting period of the related equity instruments. RECENT ACCOUNTING PRONOUNCEMENTS On August 31, 2000 the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities. SFAS No. 133 requires the recognition of all derivatives as either assets or liabilities on the Consolidated Balance Sheet with changes in fair value recorded in the Consolidated Statement of Operations. The accounting for changes in fair value of a derivative depends upon whether it has been designated in a hedging relationship and, further, on the type of hedging relationship pursuant to SFAS No. 133. Changes in the fair value of derivatives not designated in a hedging relationship are recognized each period in earnings. Hedging relationships are established pursuant to the Company's risk management policies, and are initially and regularly evaluated to determine whether they are expected to be, and have been, highly effective hedges. If a derivative ceases to be a highly effective hedge, hedge accounting is discontinued prospectively, and future changes in the fair value of the derivative is recognized in earnings each period. For derivatives designated as hedges of the variability of cash flows related to a recognized asset or liability (cash flow hedges), the effective portion of the change in fair value of the derivatives is reported in other comprehensive income and reclassified into earnings in the period in which the hedged items affect earnings. Gains or losses deferred in accumulated other comprehensive income associated with terminated derivatives remain in accumulated other comprehensive income until the hedged items affect earnings. Forecasted transactions designated as the hedged 31
FORGENT NETWORKS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA OR OTHERWISE NOTED) items in cash flow hedges are regularly evaluated to assess that they continue to be probable of occurring, and if the forecasted transactions are no longer probable of occurring, any gain or loss deferred in accumulated other comprehensive income is recognized in earnings currently. During fiscal 2001 the Company utilized forward currency exchange contracts to reduce the exposure to fluctuations in foreign currency exchange rates related to the European Euro and the Australian Dollar. The changes in these contracts are reflected in the Consolidated Statement of Operations. The Company also utilized derivatives designated as cash flow hedges to ensure a minimum level of cashflows as related to its investment in the Polycom stock. The amount of ineffectiveness with respect to these cash flow hedges was not material. These hedges were recorded at fair value on the Consolidated Balance Sheet, under the caption short-term investments as of July 31, 2001. During the first quarter of fiscal year 2002, the remaining 77 shares of Polycom were sold under a cash flow hedge and $1.7 million was reclassed from other comprehensive income to earnings. In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets. Since the standard recognizes goodwill and certain intangible assets may have indefinite useful lives, these assets are no longer required to be amortized but are evaluated at least annually for impairment. Intangible assets with finite useful lives will continue to be amortized over their useful lives, but without constraint of an arbitrary ceiling. In accordance with SFAS No. 142, the Company is required to complete its transitional impairment test, with any resulting impairment loss recorded as a cumulative effect of a change in accounting principle. Subsequent impairment losses are reflected in operating income from continuing operations on the Consolidated Statement of Operations. Effective August 1, 2001, the Company chose early adoption of SFAS No. 142, and therefore did not record any goodwill amortization expenses during the year ended July 31, 2002. As a result of the transitional impairment test, the Company did not record any impairment of its goodwill for the year ended July 31, 2002. The Company's goodwill, net of accumulated amortization, was $10.6 million and $15.8 million at July 31, 2001 and July 31, 2002, respectively. As required by SFAS No. 142, the results for the prior years have not been restated. A reconciliation of the previously reported net loss and earnings per share for the years ended July 31, 2000, 2001, and 2002 as if SFAS No. 142 had been adopted is presented as follows:
FORGENT NETWORKS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA OR OTHERWISE NOTED) 3. RESTRUCTURING ACTIVITIES In August 2001, the Company restructured its organization, which involved the termination of 65 employees, or 17% of the workforce, who were assisted with outplacement support and severance. The reduction affected 16 employees in Austin, Texas, 30 employees in King of Prussia, Pennsylvania, and 19 employees in remote and international locations. The restructuring was the result of eliminating certain business elements that did not contribute to Forgent's core competencies as well as efforts to increase efficiencies and to significantly reduce administrative costs. All of the employees were terminated and the Company recorded a one-time charge of $0.8 million in the first quarter of fiscal 2002 for the restructuring. As of July 31, 2002, all of the involuntary termination benefits had been paid. On August 23, 2000, the Company announced a new business charter and the restructuring of its organization. The new business charter was intended to execute a change in business strategy that leverages Forgent's services and systems integration capabilities in order to become the industry leader in providing visual communication solutions over broadband enterprise networks. The restructuring involved the involuntary termination of approximately 200 employees globally, or 34% of the Company's workforce and the consolidation of leased office space in its Austin, Texas headquarters, as well as in Sunnyvale, California and other remote facilities. These workforce reductions and consolidations of office space reduced costs and focused resources on efforts to support the new business strategy. The Company completed all terminations by January 31, 2001. During fiscal 2001, the Company recorded a restructuring charge of $1,708, all of which is included in the loss from discontinued operations. 4. DISCONTINUED OPERATIONS In April 2002, Forgent sold inventory and certain other assets related to its integration business to SPL Integrated Solutions ("SPL"), a leading nationwide integrator that designs and installs large-display videoconferencing systems and fully integrated multimedia systems for corporations, educational institutions and government agencies. SPL currently provides all of the integration services for Forgent and Forgent became the exclusive service provider for SPL, thus allowing each company to strengthen and to significantly expand its individual core services while complementing each others' product offerings. As a result of the sale, Forgent received $150 in cash and a $282 note receivable from SPL. SPL absorbed 15 members of Forgent's Professional Services Integration team and re-located to Forgent's facility in King of Prussia, Pennsylvania, where the combined team of engineers and technicians manage and execute the delivery of audio-video system integration and support. The assets related to the integration business were sold for approximately their net book value and thus an immaterial amount of gain was recorded during the third quarter of fiscal 2002. The sale allowed Forgent to focus its strengths and resources on growing its more profitable software and services business while still providing multimedia systems to its customers through SPL. On October 2, 2001, Forgent announced that it had signed a definitive sales agreement to sell the operations and certain assets of its Products business unit, including the VTEL name, in order to devote its energies and resources to the development of Forgent's services and software business. The Company's shareholders approved the transaction during its 2001 annual meeting and the sale was finalized on January 23, 2002. The sale of substantially all of the assets used in the Products business unit was made to VTEL Products Corporation ("VTEL"), a privately held company created by the former Vice-President of Manufacturing of the Products business unit and two other senior management members of the Products business unit. As a result, the Company received cash of $0.5 million, a 90-day subordinated promissory note, bearing interest at an annual rate of five percent, for approximately $1.0 million, a 5-year subordinated promissory note, bearing interest at an annual rate of five percent, for $5.0 million and 1,045 shares of common stock, par value $0.01 per share, representing 19.9% of the new company's fully diluted equity. Additionally, Forgent and VTEL entered into a general license agreement, in which VTEL was granted certain non-exclusive rights in and to certain patents, software, proprietary know-how, and information of the Company that was used in the daily operations of the Products business unit. Due to uncertainties regarding VTEL's future business, Forgent fully reserved its equity interest in VTEL. VTEL did not remit payment on its first subordinated promissory note due in April 2002, as stipulated in the sales agreement, and management is currently renegotiating the terms of the note. As a result of this default and due to the uncertainty in collecting the two outstanding notes from VTEL, the Company recorded a $5.9 million charge for the reserve of both notes from VTEL, which is presented with the losses from discontinued operations for the year ended July 31, 2002. However, management is continuing its efforts on collecting these outstanding notes receivables. Since the sale of the products business occurred several months after it was originally anticipated to close, and since the operations performed significantly worse than expected, an additional loss of $8.8 million was recorded to discontinued operations in fiscal 2002. As of July 31, 2001, the Company estimated the loss from the disposal of the VTEL Products business unit to be $1.1 million. During the 2002 fiscal year, Forgent recorded an additional $0.2 million in expenses associated with the completion of the sale. As a result of the sales of the integration and products businesses, the Company has presented these businesses as discontinued operations on the accompanying consolidated financial statements. The operating results of the integration and products businesses for the fiscal years ended July 31, 2000, 2001, and 2002 were as follows:
FORGENT NETWORKS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA OR OTHERWISE NOTED) 5. ACQUISITIONS As approved by each company's board of directors, Forgent acquired certain assets and liabilities of Global Scheduling Solutions, Inc., a global provider of enterprise conference room scheduling and resource management solutions, on June, 4, 2002. Forgent paid Global Scheduling Solutions, Inc. a combination of $4.0 million in cash, $0.7 million tied to certain future contingent "earn-out" payments and the assumption of certain liabilities. The contingent liability is recorded as part of the current notes payable on Forgent's consolidated balance sheet as of July 31, 2002 because management believes it is probable that this amount will be paid. The acquisition was accounted for as a purchase of assets. Accordingly, the purchase price has been allocated to tangible and identifiable intangible assets acquired based on their estimated fair values at the date of acquisition. Total costs in excess of tangible and intangible assets acquired of approximately $5.2 million have been recorded as goodwill. Results of acquired operations are included in our consolidated income statements for the period beginning June 4, 2002 through July 31, 2002. Forgent continues to market Global Scheduling Solutions, Inc.'s flagship product, Global Scheduling System, an industry leading web-based application that combines the management of large-scale meeting environments and all necessary resources and services while reducing the cost and time associated with such management. As a result of the acquisition, Forgent becomes the only vendor that can provide complete one-stop video network scheduling, launching, monitoring and management solution. 6. ASSET IMPAIRMENT Initially, management intended to further develop its video streaming technology, which is a server application with the abilities to create video e-mail programs and to store streamed video for later non-real time playback, as an added feature to its current VNP software. Based upon customer feedback regarding the VNP software during the second quarter of fiscal 2002, customers did not need these advanced features but desired fundamental network management applications with more robust device level support and value added network level instrumentation for ISDN and IP networks to enable them to understand and monitor how well their networks are performing. Therefore, management reviewed its capitalized software development costs and determined the video streaming technology would not be used in the development of VNP. As a result, the $2.4 million capitalized software development costs associated with this technology was impaired during the year ended July 31, 2002. Due to the disposition of the Products business in fiscal 2002, the VTEL personnel relocated from Forgent's headquarters at 108 Wild Basin Road in Austin, Texas to VTEL's headquarters at 9208 Waterford Centre Blvd. in Austin, Texas. This relocation left a vacancy of approximately 52 thousand rentable square feet, or 38% of the total lease space. Additionally, Forgent had existing unoccupied space inventory due to the downsizing of the Company on account of the recent restructurings. In fiscal 2002, Forgent was able to sublease some of the vacated space, but was unable to fully sublease the space due to the economic downturn during the year. Therefore, management analyzed the future undiscounted cash flows related to the lease on the Wild Basin property and 34
FORGENT NETWORKS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA OR OTHERWISE NOTED) determined the economic value of the lost sublease rental income. As a result, Forgent recorded a one-time $2.0 million impairment charge for the unleased space as of July 31, 2002. This non-cash impairment was reported as part of continuing operations on the consolidated statement of operations. During fiscal year 2001 management implemented a strategy to divest all non-core operations to focus on returning to profitability. Therefore, the Company folded its OnScreen24 subsidiary's operations back into the core business. OnScreen24 primarily operated from Forgent's property in Sunnyvale, California. During the third quarter of fiscal 2001, the Company sold its equity interest in the real estate lease for $500 and recorded a related $1.1 million impairment for the leasehold improvements at the Sunnyvale facility. The $1.1 million impairment in fiscal 2001 was all related to continuing operations. As a result of the new charter announced in August 2000, management reviewed certain long-lived assets including property, plant and equipment, goodwill and other intangible assets, and capitalized software, to evaluate the recoverability of these assets pursuant to Statement of Financial Accounting Standard ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The evaluation indicated that the future undiscounted cash flows related to certain long-lived assets were below the carrying value of the assets associated with their future operations. Further, the closure of certain foreign offices and the termination of the software capitalization projects resulted in the identification of only minimal future cash flows. During the fourth quarter of fiscal 2000, the Company adjusted the long-lived assets associated with its manufacturing operations and the long-lived assets related to the foreign operations and capitalized software. Management calculated the fair value for the long-lived assets based on anticipated future cash flows discounted at a rate commensurate with the risk involved, which resulted in a non-cash impairment charge of $14.1 million. This impairment loss was recorded on the consolidated statement of operations as follows:
FORGENT NETWORKS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA OR OTHERWISE NOTED) The inventory held as of July 31, 2002 and July 31, 2001 primarily represent third-party equipment to be sold to Forgent's customers through its Multi-Vendor Program ("MVP"). 9. PROPERTY AND EQUIPMENT Property and equipment and related depreciable lives are composed of the following:
FORGENT NETWORKS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA OR OTHERWISE NOTED) STOCK AND STOCK OPTION PLANS Forgent has three stock option plans, the 1989 Stock Option Plan (the "1989 Plan"), the 1996 Stock Option Plan (the "1996 Plan") and the 1992 Director Stock Option Plan (the "1992 Plan"). The 1989 Plan and the 1996 Plan both provide for the issuance of non-qualified and incentive stock options to employees and consultants of the Company. Stock options are generally granted at the fair market value at the time of grant, and the options generally vest ratably over 48 months and are exercisable for a period of ten years beginning with date of grant. Effective June 1999, the 1989 Plan expired whereby the Company can no longer grant options under the Plan; however, options previously granted remain outstanding. The 1992 Plan provides for the issuance of stock options to non-employee directors at the fair market value at the time of grant. Such options vest ratably over 36 months and are exercisable for a period of ten years beginning with the date of the grant. Total compensation expense recognized in the consolidated statement of operations for stock based awards was $126, $4 and 106 thousand for fiscal years ending July 31, 2000, 2001 and 2002. As of July 31, 2002 we had reserved shares of common stock for future issuance under the 1989, 1992 and 1996 Plans as follows:
FORGENT NETWORKS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA OR OTHERWISE NOTED)
FORGENT NETWORKS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA OR OTHERWISE NOTED) 15. EARNINGS (LOSS) PER SHARE The following table sets forth the computation of basic and diluted earnings (loss) per common share for the years ended July 31, 2000, 2001 and 2002:
FORGENT NETWORKS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA OR OTHERWISE NOTED) As a result of various acquisitions performed by the Company in prior years, utilization of the net operating losses and credit carryforwards may be subject to a substantial annual limitation due to the "change in ownership" provisions of the Internal Revenue Code of 1986. The annual limitation may result in the expiration of net operating losses before utilization. Also, due to the uncertainty surrounding realizing the benefits of its favorable tax attributes in future tax returns, the Company has placed a valuation allowance against its net deferred tax asset. Accordingly, no deferred tax benefits have been recorded for the tax years ended July 31, 2000, 2001, and 2002. The valuation allowance increased by $2,078 during the year ended July 31, 2002. The Company's provision (benefit) for income taxes differs from the expected tax expense (benefit) amount computed by applying the statutory federal income tax rate of 34% to income before income taxes for the years ended July 31, 2000, 2001 and 2002 primarily as a result of the following:
FORGENT NETWORKS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA OR OTHERWISE NOTED) CONTINGENCIES The Company is the defendant or plaintiff in various actions that arose in the normal course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse affect on the Company's financial condition, results of operation or cash flows. 18. NON-RECURRING EVENTS On March 3, 2000 the Company settled a lawsuit pending in the 126th Judicial District Court in Travis County, Texas, which the Company had previously initiated against five former employees who left the Company in September 1996 to form Via Video Communications, Inc. ("Via Video"). Via Video was subsequently acquired by Polycom, Inc. Pursuant to the settlement agreement, the former employees paid $2.5 million in cash and delivered to the Company 301 shares of common stock of Polycom, Inc. in settlement of the claims asserted by the Company. These shares were sold during fiscal 2000 for $33.7 million, net of settlement costs. The parties agreed to dismiss all claims and counterclaims and third party claims in the lawsuit, ending the litigation. Separately, the Company voluntarily dismissed Polycom, Inc. and Via Video from the case without consideration. On March 3, 2000, the Company granted non-exclusive licenses to Polycom, Inc. ("Polycom") to use three of its patented technologies, and Polycom paid a one time fee of $8.3 million as a fully paid up royalty in exchange for such license. In turn and without any payments by the Company, Polycom also granted the Company a non-exclusive sublicense to its rights under its license agreement with Brown University pertaining to its single camera tracking technology. Through this technology exchange, the parties have access to specified distinctive technologies of the other for use in their product offerings. 19. SEGMENT INFORMATION In the past, Forgent managed its business primarily along the lines of three reportable segments: Solutions, Products, and Internet Ventures. The Solutions segment provided a wide variety of maintenance, network consulting and support services to customers, and designs and installs custom integrated visual communication systems primarily in meetings spaces of large corporations. The Company focused on this core business line, and the Solutions segment evolved into Forgent Networks, Inc. In April 2002, the Company sold its integration business within this segment and thus accounted for it as discontinued operations in the consolidated financial statements. The Products segment designed, manufactured, and sold multi-media visual communication products to customers primarily through a network of resellers, and to a lesser extent directly to end-users. As a result of the sale of the Products segment in January 2002, the Products business was also accounted for as discontinued operations in the consolidated financial statements. The Internet Ventures included OnScreen24(TM), which delivered and marketed visual communication tools for the Internet and ArticuLearn(TM), an e-learning portal provider for commercial and educational businesses that deliver learning content in a Web environment. OnScreen24's operations were folded back into the core businesses as of January 31, 2001 and ArticuLearn's operations were terminated as of June 30, 2001. As a result of the Company's new business strategy, the Company operates in 3 distinct segments: network software and services, technology licensing, and service and other. We have restated segment information for the fiscal years 2000 and 2001. The accounting policies of the segments are the same as those described in Note 2. The Company evaluates the performance as well as the financial results of its segments. The Company does not identify assets, capital expenditures, or operating income (loss) by reportable segments. Additionally, the Chief Executive Officer and Chief Financial Officer do not evaluate the business groups based on these criteria. Revenue and cost of sales for each of our reportable segments are disclosed in our Consolidated Statements of Operations. Goodwill associated with specific segments is as follows:
FORGENT NETWORKS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA OR OTHERWISE NOTED) Revenue and long-lived assets related to operations in the United States and foreign countries for the three fiscal years ended July 31, 2002 are presented below. Revenues generated between foreign geographic locations have historically been insignificant.
PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS In accordance with paragraph G(3) of the General Instructions to the Annual Report on Form 10-K, the information contained under the caption "Election of Directors" will be filed with the Company's Definitive Proxy Statement pursuant to Regulation 14A on or before November 28, 2002. ITEM 11. EXECUTIVE COMPENSATION In accordance with paragraph G(3) of the General Instructions to the Annual Report on Form 10-K, the information contained under the caption "Executive Compensation" will be filed with the Company's Definitive Proxy Statement pursuant to Regulation 14A on or before November 28, 2002. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT In accordance with paragraph G(3) of the General Instructions to the Annual Report on Form 10-K, the information contained under the caption "Security Ownership of Certain Beneficial Owners and Management" will be filed with the Company's Definitive Proxy Statement pursuant to Regulation 14A on or before November 28, 2002. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In accordance with paragraph G(3) of the General Instructions to the Annual Report on Form 10-K, the information contained under the caption "Certain Relationships and Transactions" will be filed with the Company's Definitive Proxy Statement pursuant to regulation 14A on or before November 28, 2002. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K EXHIBIT NUMBER DOCUMENT DESCRIPTION (a)(1) -- The financial statements filed as part of this Report at Item 8 are listed in the Index to Financial Statements and Financial Statement Schedules on page of this Report (a)(2) -- The financial statement schedule filed as part of this Report at Item 8 is listed in the Index to Financial Statements and Financial Statement Schedules on page of this Report (a)(3) -- The following exhibits are filed with this Annual Report on Form 10-K: 2.1 -- Agreement and Plan of Merger and Reorganization dated as of January 6, 1997 by and among VTEL, VTEL-Sub, Inc. and CLI (incorporated by reference to the Exhibit 99.1 of VTEL's Report on Form 8-K dated January 6, 1997). 3.1 -- Fourth Amended Restated Certificate of Incorporation (incorporated by reference the Exhibit 3.1 to the Company's quarterly report form 10-Q for the period ended June 30, 1993). 3.2 -- Amendment to Fourth Amended and Restated Certificate of Incorporation, as filed on May 27, 1997 with the Secretary of State of Delaware (incorporated by reference the Exhibit 3.1 to the Company's Annual Report on form 10-K for the period ended July 31, 1997). 3.3 -- Bylaws of the Company as adopted by the Board of Directors of the Company effective as of June 11, 1989 (incorporated by reference to Exhibit 3.3 to the Company's Registration 43
Statement on Form S-1, File No. 33-45876, as amended). 3.4 -- Amendment to Bylaws of the Company as adopted by the Board of Directors of the Company effective as of April 28, 1992 (incorporated by reference to Exhibit 19.1 to the Company's Quarterly Report on Form 10-Q for the three months ended March 31, 1992). 3.5 -- Amendment to the Bylaws of the Company as adopted by the Board of Directors of the Company effective as of July 10, 1996 (incorporated by reference to Exhibit 4.5 to the Company's Current Report on Form 8-K dated July 10, 1996). 4.1 -- Specimen Certificate for the Common Stock (incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-1, File No. 33-45876, as amended). 4.2 -- Rights Agreement dated as of July 10, 1996 between VTEL Corporation and First National Bank of Boston, which includes the form of Certificate of Designations for Designating Series A Preferred Stock, $.01 par value, the form of Rights Certificate, and the Summary of Rights to Purchase Series A Preferred Stock (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K dated July 10, 1996). 10.1 -- License Agreement, dated as of November 7, 1990, between Universite de Sherbrooke, as Licenser, and the Company, as Licensee (incorporated by reference to Exhibit 10.5 to the Company's Registration Statement on Form S-1, File No. 33-45876, as amended). 10.2 -- VideoTelecom Corp. 1989 Stock Option Plan, as amended (incorporated by reference to Exhibit 4.1 to the Company's Registration on Form S-8, File No. 33-51822). 10.3 -- Form of VideoTelecom Corp. Nonqualified Stock Option Agreement (incorporated by reference to Exhibit 10.16 to the Company's Registration Statement on Form S-1, File No. 33-45876, as amended). 10.4 -- Form of VideoTelecom Corp. Incentive Stock Option Agreement (incorporated by reference to Exhibit 10.17 to the Company's Registration Statement on Form S-1, File No. 33-45876, as amended). 10.5 -- Distributor Agreement dated January 8, 1990, between US WEST Communications Services, Inc. and the Company (incorporated by reference to Exhibit 10.18 to the Company's Registration Statement on Form S-1, File No. 33-45876, as amended). 10.6 -- Purchase Agreement effective October 1, 1990, between GTE Service Corporation and the Company, as amended July 1, 1991 (incorporated by reference to Exhibit 10.19 to the Company's Registration Statement on Form S-1, File No. 33-45876, as amended). 10.7 -- Distribution Agreement, made and entered into November 1, 1991, by and between Microsoft Corporation and the Company (incorporated by reference to Exhibit 10.22 to the Company's Registration Statement on Form S-1, File No. 33-45876, as amended). 10.8 -- VideoTelecom Corp. 1992 Director Stock Option Plan (incorporated by reference to Exhibit 4.1 to the Company's Registration on Form S-8, File No. 33-51822). 10.9 -- VideoTelecom Corp. Employee Stock Purchase Plan (incorporated by reference to Exhibit 4.1 to the Company's Registration on Form S-8, File No. 33-51822). 10.10 -- Lease agreement, executed by Waterford HP, Ltd. on June 14, 1994, as Landlord, and the Company, as Tenant, together with First Amendment of Lease Agreement between Waterford HP, Ltd., as Landlord, and the Company, as Tenant, dated November 2, 1994, Second Amendment of Lease Agreement between Waterford HP, Ltd., as Landlord, and the Company, as Tenant, dated February 1, 1995, and Net Profits Agreement, executed between Waterford HP, Ltd. on June 14, 1994 and the Company (incorporated by reference to Exhibit 10.17 to the Company's 1994 Annual Report on Form 10-K). 10.11 -- Subscription Agreement dated June 14, 1995 by and between VTEL Corporation, Accord Video Telecommunications, Ltd., Nizanim Fund (1993) Ltd., the "Star Entities", Manakin Investments BV, Messrs. Gideon Rosenfeld and Sigi Gavish, and Eduardo Shoval (incorporated by reference to Exhibit 10.19 to the Company's 1995 Annual Report on Form 10-K. The schedules referred to in the agreement have been omitted but will be furnished to the Securities and Exchange Commission 44
upon request). 10.12 -- Amendment to the VideoTelecom Corp. 1989 Stock Option Plan and the 1992 Director Stock Option Plan (the terms of which are incorporated by reference to the Company's 1996 Definitive Proxy Statement). 10.13 -- The VTEL Corporation 1996 Stock Option Plan (the terms of which are incorporated by reference to the Company's 1995 Definitive Proxy Statement). 10.14 -- Amendment to the VTEL Corporation 1996 Stock Option Plan (the terms of which are incorporated by reference to the Company's Joint Proxy Statement filed on April 24, 1997). 10.15 -- Compression Labs, Incorporated 1980 Stock Option Plan -- the ISO Plan (incorporated by reference to the Annual Report on Form 10-K of Compression Labs, Inc. for the year ended December 31, 1994). 10.16 -- Revised forms of Incentive Stock Option and Early Exercise Stock Purchase Agreement used in connection with the issuance and exercise of options under the ISO Plan (incorporated by reference to the Registration Statement on Form S-8 of Compression Labs, Inc. filed on June 6, 1994). 10.17 -- Consulting and separation agreement between Compression Labs, Incorporated and John E. Tyson dated February 16, 1996 (incorporated by reference to the Annual Report on Form 10-K of Compression Labs, Inc. for the year ended December 31, 1995). 10.18 -- Lease Agreement, dated January 30, 1998, between 2800 Industrial, Inc., Lessor and VTEL Corporation, Lessee (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the three months ended April 30, 1998). 10.19 -- First Amendment, dated March 11, 1998, to Lease Agreement dated January 30, 1998, between 2800 Industrial, Inc., Lessor and VTEL Corporation, Lessee (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the three months ended April 30, 1998). 10.20 -- The VTEL Corporation 1998 Restricted Stock Plan (the terms of which are incorporated by reference to the Company's 1998 Definitive Proxy Statement). 10.21 -- Loan and Security Agreement, dated May 5, 1999, between Silicon Valley Bank and Comerica Bank-Texas, as Creditors, and the Company, as Borrower. 10.22 -- Change-in-Control Agreements with members of senior management of the Company (incorporated by reference to exhibit 10.21 to the Company's Annual Report on Form 10-K for the year ended July 31, 1998) 10.22(a) -- Stephen L. Von Rump 10.22(b) -- Rodney S. Bond 10.22(c) -- Dennis M. Egan 10.22(d) -- Vinay Goel 10.22(e) -- Steve F. Keilen 10.22(f) -- F.H. (Dick) Moeller 10.22(g) -- Ly-Huong T. Pham 10.22(h) -- Michael J. Steigerwald 10.22(i) -- Bob R. Swem 10.22(j) -- Judy A. Wallace 10.23 -- Change-in Control Agreements with members of senior management of the Company (incorporated by reference to exhibit 10.1 to the Company's Annual Report on Form 10-Q for the quarter ended January 31, 2000) 10.23(a) -- Brian C. Sullivan 10.23(b) -- Stephen Cox 10.23(c) -- Stephen Von Rump (amended) 21.1 -- List of Subsidiaries 23.1 -- Consent of Ernst & Young LLP 27.1 -- But filed electronically already 99.1 -- Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 -- 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: None have been filed during the quarter ended July 31, 2002 (c) See subitem 14(a)(3) above. (d) See subitem 14(a)(2) above. 45
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. By /s/ JAY C. PETERSON --------------------------- Jay C. Peterson Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
CERTIFICATION OF PERIODIC REPORT PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 The undersigned, Richard N. Snyder, Chief Executive Officer, of Forgent Networks, Inc. (the "Company), does hereby certify, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that: 1. I have reviewed the Annual Report on Form 10-K of the Company for the fiscal year ended July 31, 2002 (the "Report"); 2. Based on my knowledge, the Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the periods covered by this Report; and 3. Based on my knowledge, the financial statements, and other financial information included in the Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in the Report. /s/ RICHARD N. SNYDER ------------------------- Richard N. Snyder Chief Executive Officer 47
CERTIFICATION OF PERIODIC REPORT PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 The undersigned, Jay C. Peterson, Chief Financial Officer, of Forgent Networks, Inc. (the "Company), does hereby certify, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that: 1. I have reviewed the Annual Report on Form 10-K of the Company for the fiscal year ended July 31, 2002 (the "Report"); 2. Based on my knowledge, the Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the periods covered by this Report; and 3. Based on my knowledge, the financial statements, and other financial information included in the Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in the Report. /s/ JAY C. PETERSON ------------------------- Jay C. Peterson Chief Financial Officer 48
FORGENT NETWORKS, INC. VALUATION AND QUALIFYING ACCOUNTS SCHEDULE II
INDEX TO EXHIBITS
EXHIBIT 21.1 VTEL Corporation List of Subsidiaries Exhibit 21.1 Subsidiary Location of Incorporation Compression Labs, Incorporated Delaware VTEL-ICS, Incorporated Delaware VTEL Australia Ltd. Pty. Australia CLI Belgium Belgium CLI Europe Ltd. United Kingdom VTEL Europe Ltd. United Kingdom VTEL Germany GmbH Germany VTEL France S.A. France VTEL Brazil LTDA Brazil
EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements pertaining to various employee benefit plans of Forgent Networks, Inc. (Form S-8 Nos. 333-77733, 333-44533, 333-48885, 333-28499, 333-51822, 333-64212, 333-65472, 333-65464, 333-95754 and 333-65478) of our report dated September 13, 2002, with respect to the consolidated financial statements and schedule of Forgent Networks, Inc. included in its Annual Report (Form 10-K) for the year ended July 31, 2002. /s/ ERNST & YOUNG LLP Austin, Texas October 29, 2002
EXHIBIT 99.1 CERTIFICATION OF PERIODIC REPORT PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 The undersigned, Richard N. Snyder, Chief Executive Officer, of Forgent Networks, Inc. (the "Company"), does hereby certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that: 1. The Annual Report on Form 10-K of the Company for the fiscal year ended July 31, 2002 (the "Report") fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ RICHARD N. SNYDER ------------------------- Richard N. Snyder Chief Executive Officer
EXHIBIT 99.2 CERTIFICATION OF PERIODIC REPORT PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 The undersigned, Jay C. Peterson, Chief Financial Officer, of Forgent Networks, Inc. (the "Company"), does hereby certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that: 1. The Annual Report on Form 10-K of the Company for the fiscal year ended July 31, 2002 (the "Report") fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ JAY C. PETERSON ------------------------- Jay C. Peterson Chief Financial Officer