Sonic Foundry Reports Second Quarter Results

Sonic Foundry[R] Inc. (NASDAQ: SOFO), a leading developer and marketer of digital media software products and services, today announced its financial results for the fiscal second quarter ended March 31, 2001.
Revenues grew $0.7 million or 11% to nearly $7.3 million during the fiscal second quarter of 2001, compared with $6.5 million in revenues for the fiscal first quarter of 2001 and grew $1.3 million or 21% over fiscal second quarter 2000 revenues of $6.0 million. Software sales generated $4.5 million of total revenue, with the remaining $2.7 million contributed by Media Services. The pro forma net loss was $3.3 million or $0.15 per diluted common share for the quarter ended March 31, 2001 as compared to a pro forma loss of $8.9 million or $0.41 per diluted share during the quarter ended December 31, 2000 and $2.5 million or $0.15 per diluted share for the period ended March 31, 2000. Pro Forma net loss excludes the amortization of intangibles and restructuring charges.
The Company exceeded previously provided guidance by recording a 14% increase in software revenues over fiscal first quarter levels despite a weak retail market. The increase resulted from the high adoption rate of Sound Forge[R] 5.0 by the company's direct and retail user base and strong demand for VideoFactory, the Company's consumer video editing product. As part of the overall Sound Forge launch, the Company marketed the new release via email to its extensive list of several hundred thousand registered users and fulfilled the majority of upgrade orders by electronic download. The same high-margin direct marketing approach has been implemented in the launch of the newly released ACID[TM] PRO 3.0 product. Media Services revenues also met expectations due to seasonal television production and general video encoding revenues.
"The highly successful launch of Sound Forge 5.0 along with our continued focus in video technologies and services has enabled us to meet and surpass our initial projections for this quarter," stated Rimas P. Buinevicius, Chairman and Chief Executive Officer of Sonic Foundry. "The rapid growth of digital media and the continued utilization of enabling technology from Sonic Foundry puts us at the forefront of the next great innovation cycle. Our unique product and service placement, improved operating structure and reputation for quality have positioned us well for the long term."
The Company reported a current period net loss of $10.3 million, or $0.46 per share, compared with a net loss of $19.7 million or $0.90 per share during the quarter ended December 31, 2000 and $2.5 million or $0.15 per share, as adjusted for a 2 for 1 stock split, in the year-earlier quarter. "Our focus has been on dramatically improving operating performance. After last quarter's restructuring costs and this quarter's residual obligations, we are well on our way to achieving a cash neutral operating model," said Ken Minor, Chief Financial Officer. The Company ended the quarter with $10.3 million in cash and achieved a 36% reduction in days sales in receivables to 72 days and a 40% reduction in the amount invested in inventory.
Sonic Foundry is pleased to announce the promotions of two key executives. Brad Reinke has been promoted to General Manager of the Product/Software Division as well as Senior Vice President of Sales and Marketing. Likewise, as previously announced, Ted Lingard has assumed the role of General Manager of Media Services and Senior Vice President of Operations. "Our new streamlined operating structure will allow us to fully integrate the software and service businesses while managing this integration through an efficient operating model," said Buinevicius. "These two executives have demonstrated tremendous leadership and foresight through a difficult business cycle and will now help guide us to the vast horizon of opportunities that lie ahead."

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

                                      March 31,         September 30,
                                          2001                  2000
                                      ------------------------------

Assets                               (Unaudited)
Current Assets:
   Cash and cash equivalents         $  10,327             $  21,948
   Accounts receivable, net of 
   allowances of $2,127 and $1,209 at
   March 31, 2001 and September 30, 
   2000                                  5,819                 9,075
   Accounts receivable, other              249                   355
   Revenues in excess of billings 
   for software license fees               184                   105
   Inventories                           1,291                 1,906
   Prepaid expenses and other 
   current assets                          701                 1,591
   Prepaid Advertising                   1,000                 1,000
                                      ------------------------------
 Total current assets                   19,571                35,980

 Property and equipment:
    Land                                    -                     95
    Buildings and improvements           2,357                 3,186
    Equipment                           15,635                15,370
    Furniture and fixtures                 536                   504
    Assets held for sale                    77                    -
                                      ------------------------------
      Total property and equipment      18,605                19,155
    Less accumulated depreciation        3,900                 3,071
                                      ------------------------------
 Net property and equipment             14,705                16,084

 Other assets:
    Goodwill and other intangibles, net 58,228                73,632
    Capitalized software development 
    costs, net                             273                   518
    Long-term investment                   514                   514
    Other assets                            47                    97
                                      ------------------------------
 Total other assets                     59,062                74,761
                                      ------------------------------
 Total assets                        $  93,338             $ 126,825
                                      ==============================
 
                          Sonic Foundry, Inc.
                      Consolidated Balance Sheets
                 (in thousands except for share data)
 
                                      March 31,         September 30,
Liabilities and stockholders' 
equity                                    2001                  2000
                                      ------------------------------
Current liabilities:
   Accounts payable                     $2,415               $ 5,231
   Accrued liabilities                   2,317                 2,819
   Accrued restructuring charges           487                    -
   Current portion of long-term debt     4,843                 4,300
   Current portion of capital 
   lease obligations                     1,411                 1,477
                                      ------------------------------
Total current liabilities               11,473                13,827

   Long-term obligations, 
   net of current portion                  215                   923
   Capital lease obligations, 
   net of current portion                1,085                 1,703
   Other liabilities                        28                     6

Stockholders' equity:
   Preferred stock, $.01 par value, 
   authorized 5,000,000 shares, non
   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; 
   22,147,285 and 21,904,574 shares 
   issued and 22,117,135 and 21,876,824 
   outstanding at March 31, 2001 and
   September 30, 2000                      221                   219
   Common stock to be issued             5,579                 5,579
   Additional paid-in capital          147,437               148,290
   Accumulated deficit                 (72,338)              (42,388)
   Receivable for common stock issued      (26)                  (72)
   Cumulative foreign currency 
   translations/adjustments               (137)                  137
   Unearned compensation                   (12)               (1,249)
   Treasury stock, at cost, 30,150 and 
   27,750 shares at March 31, 2001 and 
   September 30, 2000                     (187)                 (150)
                                        ----------------------------
Total stockholders' equity              80,537               110,366
                                        ----------------------------
Total liabilities and stockholders' 
equity                                 $93,338              $126,825
                                       =============================

                          Sonic Foundry, Inc.
                       Statements of Operations
                              (Unaudited)
               (in thousands except for per share data)


                            Three Months Ended      Six Months Ended
                                      March 31,             March 31,
                              2001        2000       2001       2000
                            ----------------------------------------
Revenue:
Software license fees     $  4,534    $  5,635   $  8,522   $ 10,684
Media services               2,730         367      5,260        403
                            ----------------------------------------
  Total revenue              7,264       6,002     13,782     11,087

Cost of revenue:
Cost of software 
license fees                 1,790       1,166      3,194      2,220
Cost of media services       1,957         370      4,290        474
                            ----------------------------------------
  Total cost of revenue      3,747       1,536      7,484      2,694
                            ----------------------------------------

Gross margin                 3,517       4,466      6,298      8,393

Operating expenses:
Selling and marketing 
expenses                     2,759       4,029      7,987      8,067
General and administrative 
expenses                     2,187       1,706      5,871      3,158
Product development 
expenses                     1,793       1,522      4,627      2,712
Amortization of goodwill and 
other intangibles            7,009          -      14,027         -
Restructuring expenses          -           -       3,782         -
                            ----------------------------------------
  Total operating 
  expenses                  13,748       7,257     36,294     13,937
                            ----------------------------------------
Loss from operations       (10,231)     (2,791)   (29,996)    (5,544)

Other income (expense):
Interest expense              (185)        (59)      (372)      (226)
Interest and other income      139         379        418      1,095
                            ----------------------------------------
  Total other income           (46)        320         46        869
                            ----------------------------------------
Net loss              $    (10,277)  $  (2,471)  $(29,950)  $ (4,675)
                            ========================================

Loss per common share -
Basic                    $   (0.46)  $   (0.15)  $  (1.36)  $  (0.31)
Diluted                  $   (0.46)  $   (0.15)  $  (1.36)  $  (0.31)
                         ===========================================