EXHIBIT BPINNACLE FUND, LLLP
654 Broadway, Suite 5 | New York, New York10012
Telephone (212) 614-8952 | Facsimile (646) 390-6784
May 4, 2009VIA OVERNIGHT DELIVERY AND FACSIMILE
Management and Board of Directors
Forgent Networks, Inc.
108 Wild Basin Road
Re: Recommendation to Officers and Directors to Abandon Going-Private
Dear Management and the Board of Directors:
We appreciate that certain of you took the time to meet with us, the several
large investors in Forgent Networks, Inc. ("ASUR" or the "Company"), including
Pinnacle Fund, LLLP ("Pinnacle"), last Monday, April 27, 2009.
After having met with you and digested your positions, we remain more concerned
than ever with the Company's future. We believe the decisions being made by
the Company will destroy the remaining shareholder value.
We write now for three reasons: (i) to explain the imprudence of the
going-private proposal; (ii) strategic steps the Company can instead implement
to maximize shareholder value; and (iii) the next corporate governance steps we
intend to undertake, including a proxy fight, if the Company remains on its
current unwise course.
I. The Imprudence of Going Private Proposal
We urge the board to immediately abandon the go-private strategy.
First, the strategy is likely to be doomed in any event. It is our belief that
the plan will be rejected by the shareholders, based on the negative reaction
of the Company's major shareholders who attended the April 27 meeting.
Although management indicated at the meeting that it assumed most other
shareholders favored going private, it was clear at the meeting that
management's only basis was an absence of any express objection to date. We
believe the silent majority - when duly informed - will not endorse management
and the Board's proposal, and we will loudly voice our concerns to the other
shareholders, consistent with applicable law. We believe that the only
shareholders who support the current decisions of ASUR's board and management
team are, in fact, ASUR's board and management team, with their aggregate 2.3%
estimated common stock ownership (which we note was less than each of the four
shareholders present at the meeting last Monday).
Second, the going-private strategy is a substantively poor, imprudent decision.
The proposed- going private transaction hurts shareholder liquidity, wastes
corporate funds and will not provide sufficient savings to restore
profitability. A simple financial analysis demonstrates that the Company will
not be more profitable after going private.
A. Hurts Shareholder Liquidity - Reverse Stock Split Instead
Delisting from NASDAQ is a drastic and unnecessary step that hurts shareholder
value. Management's steps to reduce or eliminate a public market for ASUR
shares make the Company's securities illiquid, less attractive investments.
Shareholders currently benefit from the information that the Company provides
pursuant to Securities and Exchange Commission reporting obligations. Going
private would reduce the flow of information to shareholders and insulate the
board and management from accountability to shareholders. Rather than
willingly go private, the Company should make best efforts to avoid delisting
by effecting a reverse stock split to drive the Company's stock price back
above the $1.00 threshold required by NASDAQ regulations.
B. Wastes More Corporate Funds
The proposed going-private transaction is exorbitantly expensive given the
Company's current stock price. The Company intends to spend approximately
$500,000 to buyout the Company's small-lot shareholders at a price of $0.36 per
share. This is a gross premium to the Company's current stock price of less
than $0.18 per share. At our April 27 meeting, management indicated its
agreement that the premium was excessive, but contended that the cost to
re-price the transaction outweighed the appropriate price change. Management's
analysis is misguided. The correct solution is not re-pricing but abandoning
the entire going-private concept.
C. Many Other Opportunities To Realize Cost Savings
If management's goal is to cut overhead costs, we strongly concur. ASUR's
current corporate overhead, which apparently exceeds $4 million annually, is
inexplicable. The Company's out-of-touch management was unable to adequately
account for these wasteful expenses at our recent meeting (to which ASUR's
chief executive officer and chief financial officer arrived one to two hours
late). Unfortunately, management has overstated the cost savings attributable
to going private. The Company's proxy statement for the special meeting
suggest going private would save $1,069,000 annually, largely through
reductions in audit and legal fees, directors and officers insurance premiums
and internal staffing costs. In fact, these costs are more directly related to
mismanagement rather than being a NASDAQ-listed company. For example, ASUR, as
a $5 million microcap company simply should not be engaging the likes of Ernst
& Young LLP for auditing. Likewise, we believe the Company can obtain
effective legal counsel for significantly less than what it pays Winstead PC,
inclusive of the $150-180,000 ASUR's CFO indicated Winstead was paid annually
for confirming and advising on ASUR's SEC filings. ASUR's D&O policy (indicted
to be one third of the cost savings) expires in the near-term and can be
re-priced at a materially lower level while ASUR remains a public company.
Furthermore, much of the Company's listing and compliance fees could be easily
be offset by eliminating expensive, poorly performing managers. For example,
Richard Snyder, the Company's chairman, president and CEO who intends to step
down anyway if the going private transaction is completed, should be removed
effective immediately, at a savings of at least $125,000 in the next six
D. Financial Analysis
Management has stated publicly that it believes going private will make the
Company profitable by the end of 2009. However, a simple analysis of the
Company's revenue and expenses shows this is highly improbable. At our recent
meeting, Jay Peterson, ASUR's chief financial officer indicated that by going
private the Company would reduce its quarterly operating costs to $3 million.
Mr. Peterson also expected 4% growth for the next three quarters, which -
assuming we begin with a stronger rebound to $2.7 million in this April quarter
(this is our assumption) - would mean ASUR would achieve $3.1 million in
revenues per quarter by the end of 2009. Assuming the Company could achieve an
80 percent gross margin, which is higher than its current rate, ASUR would
still report a $500,000 EBITDA loss per quarter [by the end of 2009]. To
achieve EBITDA profitability, the Company's quarterly revenues will need to
increase versus the Company's most recent quarterly revenue level by at least
56 percent to $3.75 million per quarter - 20 percent more than the trajectory
predicted by Mr. Peterson's math.
II. Alternative Strategic Steps To Maximize Shareholder Value
As an outline of a meaningful strategy that would set the Company on the right
track, please consider the following:
- Replacing the Company's CEO and CFO for cause;
- Terminating the engagement of Ernst & Young as the Company's
auditors and Winstead PC as outside counsel and hiring more cost
effective professional services;
- Realigning the Company's D&O policies with the Company's actual
- Reassessing the profitability of the Company's activities and
terminating those activities with low return on investment potential;
- Implementing a reverse stock split to establish a stock price
of at least $1.00 so that the Company can maintain NASDAQ compliance;
- Commencing a stock repurchase program to provide shareholder
liquidity while maximizing stockholder value.
III. Next Corporate Governance Steps By Pinnacle
Pinnacle is unwilling to let ASUR's stockholder value further deteriorate. The
Company must abandon its misguided go-private strategy and take substantive
action to achieve profitability. As you are aware, we have requested copies of
the Company's stockholder list in order to solicit proxies against each of the
items to be voted on at the upcoming special stockholder meeting. As you also
know, at the Company's overdue annual meeting, we plan to nominate directors
who will in good faith take all required actions to lead ASUR effectively. We
urge you to call this annual meeting immediately so that the Company's
shareholders can exercise their rights under Delaware law, without the need for
judicial intervention, inclusive of our compelling such meeting under Section
211 of Delaware law. As our efforts are focused solely towards enhancing
shareholder value before it is destroyed, you should know neither Pinnacle, Red
Oak, nor any of its affiliated funds will seek to represent a majority of the
board or of the nominated slate.
* * *
We would still like to work with the Company's current board and management to
address and resolve our concerns. But unless the board and management withdraw
from this go-private proposal and map out a workable strategy to restore
profitability, our ability to work together appears limited and a proxy fight
We look forward to hearing your timely response to the above.
PINNACLE FUND, LLLP
By: PINNACLE PARTNERS, LLC,
its general partner
By: RED OAK PARTNERS, L.P.,
its general partner
David Sandberg, Managing Member
cc: Corporate Secretary