Sonic Foundry Reports Record Fourth Quarter and Annual Results

Sonic Foundry[R] Inc. (NASDAQ: SOFO), the leading developer and marketer of digital media and Internet software tools, services, and systems, today announced its financial results for the fiscal fourth quarter and fiscal year ended September 30, 2000.

For the quarter ended September 30, 2000, revenues were $9.4 million compared with $5.1 million reported for the same period ended September 30, 1999, an increase of 84% and up 36% from the prior quarter ended June 30, 2000. The Company also reported that revenues totaled $27.4 million for the fiscal year ended September 30, 2000, an increase of 85%, versus total revenue of $14.8 million for the comparative fiscal year ended September 30, 1999.

Fourth quarter software revenue growth was fueled by the release of VideoFactory[TM], the release of version 2.0 of SIREN[TM] Jukebox, expanded penetration of Vegas[R] Video, and the continued growth in the Company's direct marketing business. OEM revenues were impacted by a recent shift in the Company's strategy designed to take advantage of greater revenue opportunities through back-end upgrades and cross-sell opportunities with larger clients such as Philips Electronics. This strategy contributed to a growth in registered users to nearly 500,000—a dramatic 400 percent growth over the prior year. Over the last three years the Company has delivered approximately seven million copies of software worldwide, either in electronic or fixed media formats.

Sonic Foundry's Media Services[SM] Division experienced 73% growth from Q3 results. The majority of the revenue increase is attributed to the traditional media fulfillment business that accounted for 74% of the division's revenues with the remaining revenues generated from Internet and other nontraditional businesses. The synergies between the Company's software and service efforts began taking hold as evidenced by the business generated by Sony and MGM, two of the Company's top-five customers.

Pro forma net loss, which excludes $8.7 million of noncash acquisition and impairment charges, was $7.2 million or $0.33 per share. This compares to a pro forma net loss of $7.5 million or $0.35 per share for the prior quarter ended June 30, 2000. Pro forma losses for fiscal 2000 were $19.4 million or $1.05 per share.

Commenting on the results, Rimas Buinevicius, chairman and chief executive officer, said, "Management remains focused on driving down costs and has the necessary resources on hand to reach operational breakeven. This was demonstrated in the quarter by holding pro forma operating costs to a 6% increase over Q3 amounts despite a healthy increase in revenues of 36% and a full quarter of operating expenses from the International Image acquisition."

Cash used in operations for the September quarter was cut by approximately 40% to less than $4.5 million from Q3 levels of $7.5 million. The improved operating cash resulted from a reduction in operating losses and focus on working capital management. Fourth quarter DSO's fell 29% from 122 to 87 days outstanding.

Adjustments used to arrive at pro forma loss for the fourth quarter include: the amortization of acquisition-related intangibles of $7.5 million; noncash interest charges calculated in determining the purchase price for International Image of $200,000; and the write-down of advertising credits received in connection with the issuance of common stock to Warner Brothers of $1.0 million. Amortization of goodwill for the quarter ended June 30, 2000, was $6.8 million.

Net losses, including noncash adjustments, were $15.9 million or $0.73 per share for the quarter ended September 30, 2000, and were $34.9 million or $1.89 per share for the full fiscal year. This compares to a net loss of $1.8 million or $0.27 per share for the quarter ended September 30, 1999, and $6.0 million or $1.06 per share for fiscal 1999. The increased loss as compared to fiscal 1999 was driven primarily by the costs associated with the acquisitions of STV Communications Inc. and International Image. Additional expense increases were attributable to expanded operating costs in Research and Development and Sales and Marketing expenses associated with the development and deployment of SIREN Jukebox, Vegas Video, VideoFactory, and the ACID[TM] product line.

"Consistent with our goal to control our operating expenses and managing for profitability, we will remain focused on core business segments, which allow us to reach long-term sustainable growth," stated Buinevicius. "Sonic Foundry's Media Services Division will be one of those focus areas. We are currently engaged in several key pilot projects with leaders in Hollywood that involve our Enterprise Content Management initiative. Likewise, we are seeing immediate revenue impact in areas related to video-on-demand, set top box, and online broadcasting. Our reputation for quality continues to pull in new clients while our existing clients continue to benefit from our ongoing commitment and development of new technologies that meet their exact needs."

In conjunction with the Company's focus on software and media management services, it has decided to enact a staff reduction of 40 employees in areas not considered to be essential to its core business strategy, decreasing associated annual operating costs by an estimated $3.5 million.

Fourth Quarter Company Highlights

Corporate Initiatives

• Sonic Foundry announced its new media services offerings that will include: Media Distribution Fulfillment, Enterprise Content Management, Turnkey Systems, Consulting Services, and Encoding.

Sales Initiatives

• New software channel partners include Kmart Corporation.
• Digital Edge and Kaysound distributors join Sonic Foundry to distribute products to key retailers including: Guitar Center, Sam Ash, Mars Music, Sweetwater, Musician's Friend, and Gand Music.
• Broadfield Corporation and Scott Studios were brought on board to assist in the distribution of Vegas Video.
• New International distributors include: TSI in Spain and Computer Unlimited in London.
• Journey Education and Academic Distributing agree to help distribute products to college bookstores, media centers, and K-12 outlets.
• SIREN Jukebox and the ACID family of products maintained the leading positions in their respective categories.

Client Initiatives

• Sonic Foundry's Vegas Video software was engineered to support Intel's 64-bit Itanium[TM] Processor.
• Sonic Foundry's Media Services Division and Media Bay entered into a partnership to provide encoding services for their digital distribution of media content.
• VideoFactory was shipped with media content from Artbeats Software Inc., enabling access to a multitude of content for video creations.
• Sonic Foundry's Media Services Division encoded and streamed behind-the-scenes footage for the 2000 Olympics.
• Sonic Foundry Media Services provided the tools and technologies to Sony Pictures Digital Entertainment to stream the live webcast celebration for the 7000th episode of Young and the Restless to SoapCity.com.
• Net36, a division of PanAmSat Corporation, partnered with Sonic Foundry's Media Services Division in a three-year services and consulting contract.
• RealNetworks and Sonic Foundry continued their partnership on several levels, including a Vegas Video promotion with their RealServer 8 product, their agreement to sell Sonic Foundry software via their Web site, Sonic Foundry's inclusion of RealVideo 8 in Vegas Video and other products.

Product Initiatives

• Ongoing penetration into the video markets with Vegas Video.
• Sonic Foundry launched ACID[TM] Techno and ACID[TM] Latin.
• Sonic Foundry launched SIREN Jukebox 2.0, the latest version of their digital media jukebox, providing video support, a powerful media manager, Internet radio, and CD-labeling capabilities.
• Sonic Foundry announced VideoFactory, its consumer-based audio and video editor.
• New "Get Media" tool was released to users of Vegas Video and VideoFactory, enabling them to download media footage. Get Media partners include Videometry, PBTM Library, VideoAnimation, INOIZ.COM, SOUNDDOGS.COM, and IMUSIC.COM.
• The Company developed and released Perfect Clarity Audio[TM], a proprietary technology that provides audio compression without any loss in audio quality.
• Sonic Foundry entered into a strategic alliance with Ligos Corporation to distribute MPEG-1 and MPEG-2 software transcoding and decoding capabilities for Vegas Video and VideoFactory.

               Sonic Foundry, Inc. and Subsidiaries
                      Consolidated Balance Sheets
               (in thousands except for per share data)

                      
                                         September 30,   September 30,
                                             2000            1999
Assets
Current assets: 
 Cash and cash equivalents                 $21,948         $5,889
 Accounts receivable, net of 
  allowances of $1,209 and $1,315       
  at September 30, 2000 and 1999, 
  respectively                               9,075          3,704
Accounts receivable -- other                   355             57
 Revenues in excess of billings                105             --
 Inventories                                 1,906          1,041
 Prepaid expenses and other 
  current assets                             1,591            880
 Prepaid advertising                         1,000             --
    Total current assets                    35,980         11,571

Property and equipment:            
 Land                                           95            190
 Buildings and improvements                  3,186          1,738
 Equipment                                  15,370          2,218
 Furniture and fixtures                        504            202
    Total property and equipment            19,155          4,348
 Less accumulated depreciation               3,071            923
    Net property and equipment              16,084          3,425
 
Other assets:
 Goodwill and other purchase 
  intangibles, net                          73,632             --
 Capitalized software 
  development costs, net                       518            643
 Long term investment                          514            514
 Other assets                                   97            556
    Total other assets                      74,761          1,713
Total assets                              $126,825        $16,709



                 Sonic Foundry, Inc. and Subsidiaries
                      Consolidated Balance Sheets
          (in thousands except for share and per share data)

                                         September 30,   September 30,
                                             2000            1999
Liabilities and stockholders' 
 equity Current liabilities:
Accounts payable                           $ 5,231        $ 1,867
Accrued liabilities                          2,819            812
Current portion of long-term  
 obligations                                 5,777             49
    Total current liabilities               13,827          2,728

Long-term obligations, net of 
 current portion                             2,626            654
Subordinated debt                               --          4,580
Other liabilities                                6             --

Stockholders' equity:
 Preferred Stock, $.01 par value, 
  authorized 5,000,000                          
  shares; none issued and outstanding           --             -- 
 5% preferred stock, Series B, 
  voting, cumulative, convertible, $.01             
   par value (liquidation preference at par), 
   authorized 10,000,000 shares; none issued 
   and outstanding                              --             --
 Common stock, $.01 par value, authorized 
  100,000,000 shares; 21,905,000 and 
  12,994,000 shares issued and outstanding at
  September 30, 2000 and 1999                  219            130
 Common stock to be issued                   5,579             --
 Treasury stock
 Additional paid-in capital                   (150)            --
 Currency translations                     148,290         16,283
 Subscriptions receivable                      137             --
 Accumulated deficit                           (72)            --
 Unearned compensation                     (42,388)        (7,466)
Total stockholders' equity                  (1,249)          (200)
Total liabilities and 
 stockholders' equity                      110,366          8,747
                                         $ 126,825       $ 16,709

                 Sonic Foundry, Inc. and Subsidiaries
                 Consolidated Statement of Operations
               (in thousands except for per share data)
                                                   
                              Three Months Ended   Twelve Months Ended
                                 September 30,        September 30,
                                2000       1999      2000      1999
Revenue:
Software license fees         $ 6,549    $ 5,091   $ 22,526  $ 14,830
Media services                  2,823         --      4,852        --
  Total revenue                 9,372      5,091     27,378    14,830

Cost of revenue:
Cost of software license fees   2,068        875      5,493     3,390
Cost of media services          2,519         --      5,177        --
  Total cost of revenue         4,587        875     10,670     3,390

Gross margin                    4,785      4,216     16,708    11,440

Operating expenses:
Selling and marketing expenses  6,309      3,266     19,893    10,484
General and administrative 
 expenses                       3,401      1,659      9,982     4,253
Product development expenses    2,502      1,116      7,868     2,875
Impairment charge               1,000         --      1,000        --
Amortization of goodwill and 
 other purchase intangibles     7,507         --     14,300        --
  Total operating expenses     20,719      6,041     53,043    17,612
Loss from operations          (15,934)    (1,825)   (36,335)   (6,172)

Other income (expense):
Interest expense                 (348)       (34)      (618)      (54)
Interest and other income         335         37      2,023       229
  Total other income              (13)         3      1,405       175
Net loss before taxes         (15,947)    (1,822)   (34,930)   (5,997)
  Income tax benefit               --         --          8        --
Net loss                    $ (15,947) $  (1,822) $ (34,922) $ (5,997)

Loss per common share -
   Basic and diluted        $    (.73) $    (.27) $   (1.89) $  (1.06)

Note: These financial statements reflect adjustments for a 2-for-1
stock split.