To our shareholders,
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SONIC FOUNDRY, INC.
222 West Washington Avenue
Madison, Wisconsin 53703
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To Be Held March 4, 2010
The Annual Meeting of Stockholders of SONIC FOUNDRY, INC., a Maryland corporation (“Sonic”) will be held at
the Monona Terrace Community and Convention Center, One John Nolen Drive, Madison, Wisconsin 53703 on March
4, 2010 at 9:00 a.m. local time, for the following purposes:
1.
2.
To elect one director to hold office for a term of five years, and until his successor is duly elected and qualified.
To ratify the appointment of Grant Thornton LLP as our independent auditors for the fiscal year ending
September 30, 2010.
3.
To transact such other business as may properly come before the meeting or any adjournments thereof.
All the above matters are more fully described in the accompanying Proxy Statement.
Only holders of record of Common Stock at the close of business on January 12, 2010 are entitled to notice of, and to
vote at, this meeting or any adjournment or adjournments thereof.
Please complete and return the enclosed proxy in the envelope provided or follow the instructions on the proxy card to
authorize a proxy by telephone or over the Internet, whether or not you intend to be present at the meeting in person.
By Order of the Board of Directors,
Madison, Wisconsin
January 28, 2010
Kenneth A. Minor
Secretary
─────────────────────────────────────
If you cannot personally attend the meeting, it is earnestly requested that you promptly indicate your vote on
the issues included on the enclosed proxy and date, sign and mail it in the enclosed self-addressed envelope,
which requires no postage if mailed in the United States or, follow the instructions on the proxy card to
authorize a proxy by telephone or over the Internet. Doing so will save us the expense of further mailings. If
you sign and return your proxy card without marking choices, your shares will be voted in accordance with the
recommendations of the Board of Directors.
─────────────────────────────────────
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SONIC FOUNDRY, INC.
222 W. Washington Avenue
Madison, Wisconsin 53703
PROXY STATEMENT
January 28, 2010
The Board of Directors of Sonic Foundry, Inc., a Maryland corporation (“Sonic”), hereby solicits the enclosed
proxy. Unless instructed to the contrary on the proxy, it is the intention of the persons named in the proxy to vote
the proxies:
FOR the election of Mark D. Burish as Director for a term expiring in 2015; and
FOR the ratification of the appointment of Grant Thornton LLP as independent auditors of Sonic for the fiscal
year ending September 30, 2010.
In the event that the nominee for director becomes unavailable to serve, which management does not anticipate, the
persons named in the proxy reserve full discretion to vote for any other person who may be nominated. Proxies may
also be authorized by telephone or over the Internet by following the instructions on the proxy card. Any stockholder
giving a proxy may revoke the same at any time prior to the voting of such proxy. This Proxy Statement and the
accompanying proxy are being mailed on or about February 1, 2010.
Each stockholder will be entitled to one vote for each share of Common Stock standing in his or her name on our
books at the close of business on January 12, 2010 (the “Record Date”). Only holders of issued and outstanding
shares of Sonic's common stock as of the close of business on the Record Date are entitled to notice of and to vote at
the Annual Meeting, including any adjournment or postponement thereof. On that date, we had outstanding and
entitled to vote 3,606,922 shares of Common Stock, held by approximately 7,600 stockholders, of which
approximately 7,200 were held in street name. All stock and option amounts set forth herein reflect a one-for-ten
reverse stock split of the Company’s common stock, which was effective on November 16, 2009.
QUORUM; VOTES REQUIRED
Votes cast by proxy or in person at the Annual Meeting will be tabulated by the inspector of elections appointed for
the Annual Meeting and will determine whether or not a quorum is present. Where, as to any matter submitted to
the stockholders for a vote, proxies are marked as abstentions (or stockholders appear in person but abstain from
voting), such abstentions will be treated as shares that are present and entitled to vote for purposes of determining
the presence of a quorum but as unvoted for purposes of determining the approval of any matter submitted to the
stockholders for a vote. If a broker indicates on the proxy that it does not have discretionary authority as to certain
shares to vote on a particular matter and has not received instructions from the beneficial owner, which is known as
a broker non-vote, those shares will not be considered as present and entitled to vote with respect to that matter;
however, such shares will be considered present for purposes of a quorum, provided that the broker exercises
discretionary authority on any other matter in the Proxy. A majority of the shares of Common Stock issued,
outstanding and entitled to vote at the Annual Meeting, present in person or represented by proxy, shall constitute a
quorum at the Annual Meeting. The election of the Director requires a plurality of the votes present and entitled to
vote. The approval of the other proposal requires the affirmative vote of the holders of a majority of the votes cast at
the Annual Meeting.
DATE, TIME AND PLACE OF ANNUAL MEETING
The Annual Meeting will be held on March 4, 2010 at 9:00 a.m. (Central time) at the Monona Terrace Community
and Convention Center, One John Nolen Drive, Madison, Wisconsin 53703.
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PROPOSAL ONE: ELECTION OF DIRECTORS
Our Amended and Restated Articles of Incorporation and Bylaws provide that the Board of Directors shall be divided
into five classes, with each class having a five-year term. Directors are assigned to each class in accordance with a
resolution or resolutions adopted by the Board of Directors. Vacancies on the Board of Directors resulting from death,
resignation, disqualification, removal or other causes may be filled by either the affirmative vote of the holders of a
majority of the then-outstanding shares or by the affirmative vote of a majority of the remaining directors then in office,
even if less than a quorum of the Board of the Directors. Newly created directorships resulting from any increase in the
number of directors may, unless the Board of Directors determines otherwise, be filled only by a majority vote of the
entire Board of Directors. A director elected by the Board of Directors to fill a vacancy (including a vacancy created
by an increase in the number of directors) shall serve until the next annual meeting of stockholders or until such
director’s successor is elected and qualified.
Our Amended and Restated Articles of Incorporation provide that the number of directors, which shall constitute the
whole Board of Directors, shall be not less than three or more than twelve. Our currently authorized number of
directors is seven. The seat on the Board of Directors currently held by Arnold B. Pollard is designated as a Class II
Board seat, with term expiring as of the Annual Meeting. Mr. Pollard has indicated he will not stand for re-election at
this Annual Meeting. The Board of Directors has nominated Mark D. Burish as a Class II Director for election at the
Annual Meeting.
Mr. Burish, is not currently a Board member of Sonic. If elected at the Annual Meeting, Mr. Burish would serve until
the 2015 Annual Meeting and until his successor is elected and qualified or until his earlier death, resignation or
removal.
Nominees for Director for a Five-Year term expiring on the 2015 Annual Meeting
Mark D. Burish
Mr. Burish, age 56, is a founder and shareholder of the law firm of Hurley, Burish & Stanton, Madison, WI, which
he helped start in 1983. He is the founder and CEO of Our House Senior Living, LLC, Milestone Senior Living,
LLC and Milestone Management Services, LLC which he started in 1997. Mr. Burish received his BA degree in
communications from Marquette University in 1975 and his JD degree from the University of Wisconsin in 1978.
The election of a Director requires the approval of a plurality of the votes cast by holders of the shares of Sonic's
common stock. Any shares not voted, whether by broker non-vote or otherwise, will have no impact on the outcome of
the election. Pursuant to revised stock exchange regulations, brokers will not have discretionary authority to vote on
this matter if the broker has not received instructions from the beneficial owner.
The disinterested members of the Board of Directors unanimously recommends a vote FOR the election of Mr.
Burish as Class II Director.
2
DIRECTORS CONTINUING IN OFFICE
Frederick H. Kopko, Jr.
Term Expires in 2011
Mr. Kopko, age 54, has been corporate Secretary from April 1997 to February 2001 and has been a Director since
December 1995. Mr. Kopko is a partner of the law firm of McBreen & Kopko, Chicago, Illinois, and has been a partner
of that firm since January 1990. He has been a Director of Mercury Air Group, Inc. since 1992. Mr. Kopko received a
B.A. degree in economics from the University of Connecticut, a J.D. degree from the University of Notre Dame Law
School, and an M.B.A. degree from the University of Chicago.
Rimas P. Buinevicius
Term Expires in 2012
Mr. Buinevicius, age 47, has been the Chairman of the Board since October 1997 and Chief Executive Officer since
January 1997. In addition to his organizational duties, Mr. Buinevicius is a recognized figure in the rich media
industry focused on the convergence of technology, digital media and entertainment. Mr. Buinevicius joined Sonic
in 1994 as General Manager and Director of Marketing. Prior to joining Sonic, Mr. Buinevicius spent the majority of
his professional career in the fields of biomedical and industrial control research and development. Mr. Buinevicius
earned an M.B.A. degree from the University of Chicago; a Master's degree in Electrical Engineering from the
University of Wisconsin, Madison; and a Bachelor's degree in Electrical Engineering from the Illinois Institute of
Technology, Chicago. Mr. Buinevicius is a recipient of Ernst and Young’s Entrepreneur of the Year award.
Monty R. Schmidt
Term Expires in 2013
Mr. Schmidt, age 45, has been the Chief Technology Officer since July 2003 and served as President from March 1994
to July 2003 and as a Director since February 1994. Throughout his tenure at Sonic Foundry, Mr. Schmidt has
spearheaded a variety of engineering and strategic initiatives that have helped grow Sonic from the one person startup
he founded in 1991. In addition to acting as an industry liaison, Mr. Schmidt is responsible for managing and
facilitating technology development and utilization. Prior to joining Sonic, Mr. Schmidt served in software and
hardware engineering capacities for companies in the medical and food service equipment industries. Mr. Schmidt has
a B.S. degree in Electrical Engineering from the University of Wisconsin, Madison.
Gary R. Weis
Term Expires in 2013
Mr. Weis, age 62, has been a Director of Sonic since February 2004 and was President, Chief Executive Officer and
a Director of Cometa Networks, a wireless broadband Internet access company from March 2003 to April 2004.
From May 1999 to February 2003 he was Senior Vice President of Global Services at AT&T where he was
responsible for one of the world's largest data and IP networks, serving more than 30,000 businesses and providing
Internet access to more than one million individuals worldwide. While at AT&T, Mr. Weis also was CEO of
Concert, a joint venture between AT&T and British Telecom. Previously, from January 1995 to May 1999 he was
General Manager of IBM Global Services, Network Services. Mr. Weis served as a Director from March 2001 to
February 2003 of AT&T Latin America, a facilities-based provider of telecom services in Brazil, Argentina, Chile,
Peru and Columbia. Mr. Weis earned BS and MS degrees in Applied Mathematics and Computer Science at the
University of Illinois, Chicago.
David C. Kleinman
Term Expires in 2014
Mr. Kleinman, age 74, has been a Director of Sonic since December 1997 and has taught at the Chicago Booth
School of Business at the University of Chicago since 1971, where he is now Adjunct Professor of Strategic
Management. Mr. Kleinman has been a Director (trustee) of the Columbia Acorn Trust, and it’s predecessors since
1972 (which he is a member of the Committee on Investment Performance and a member of the Compliance
Committee); a Director (trustee) of the Wanger Advisors Trust since 2005; a Director and non-executive chair of the
Board since 1984 of North Lime Holdings and its wholly owned subsidiary, Irex Corporation, a contractor and
distributor of insulation materials (where he is chairman of the Board of Directors); and a Director since 1993 of
Plymouth Tube Company, a manufacturer of metal tubing and metal extrusions (where he serves on the Audit
3
Committee). From 1999 to 2006, he was a member of the Advisory Board of DSC Logistics, a logistics management
and warehousing firm. From May 1997 to February 2004, Mr. Kleinman served as a Director of AT&T Latin
America and predecessor companies, a facilities-based provider of telecom services in Brazil, Argentina, Chile, Peru
and Columbia (where he was chair of the Audit Committee and a member of the Compensation Committee). From
1994 to 2005, he was a director of Wisconsin Paper and Products Company, a jobber of paper and paper products.
From 1964 to 1971, Mr. Kleinman was a member of the finance staff of the Ford Motor Company.
Paul S. Peercy
Term Expires in 2014
Mr. Peercy, age 69, has been a Director of Sonic since February 2004. Since September 1999, Mr. Peercy has served
as dean of the University of Wisconsin-Madison College of Engineering. Since 2001 Mr. Peercy has been a member
of the National Academy of Engineering. In 2000, then-Wisconsin Governor Tommy Thompson named Mr. Peercy
to the Wisconsin Technology and Entrepreneurship Council. From August 1995 to September 1999, Mr. Peercy
served as president of SEMI/SEMATECH, an Austin, Texas-based non-profit consortium of more than 160 of the
nation’s suppliers to the semiconductor industry. Prior to that position he was director of Microelectronics and
Photonics at Sandia National Laboratories in Albuquerque, New Mexico. He is the author or co-author of more than
175 technical papers and the recipient of two patents. Mr. Peercy is a Director and member of the audit committee of
Bemis Company, Inc, a manufacturer of flexible packaging and pressure sensitive materials. Mr. Peercy received a
BA degree in Physics from Berea College and MS and PhD degrees in Physics from the University of Wisconsin -
Madison.
Director Independence
CORPORATE GOVERNANCE
Through its listing requirements for companies with securities listed on the NASDAQ Capital Market, the
NASDAQ Stock Market (“NASDAQ”) requires that a majority of the members of our Board be independent, as
defined under NASDAQ’s rules. The NASDAQ rules have both objective tests and a subjective test for determining
who is an “independent director.” The objective tests state, for example, that a director is not considered
independent if he or she is an employee of the Company or has engaged in various types of business dealings with
the Company. The subjective test states that an independent director must be a person who lacks a relationship that
in the opinion of the Board would interfere with the exercise of independent judgment in carrying out the
responsibilities of a director. The Board has made a subjective determination as to each independent director that no
relationship exists which, in the opinion of the Board, would interfere with the exercise of independent judgment in
carrying out the responsibilities of a director. In making these determinations, the Board reviews information
provided by the directors in an annual questionnaire with regard to each director’s business and personal activities as
they relate to the Company. Based on this review and consistent with NASDAQ’s independence criteria, the Board
has affirmatively determined that the following directors: David C. Kleinman, Paul S. Peercy, Arnold B. Pollard and
Gary R. Weis and that the nominee for director, Mark D. Burish, are independent.
Related Person Transaction
The Board has adopted a Related Person Transaction Policy (the “Policy”), which is a written policy governing the
review and approval or ratification of Related Person Transactions, as defined in SEC rules.
Under the Policy, each of our directors and executive officers must notify the Chairman of the Audit Committee in
writing of any potential Related Person Transaction involving such person or an immediate family member. The
Audit Committee will review the relevant facts and circumstances and will approve or ratify the transaction only if it
determines that the transaction is in, or is not inconsistent with, the best interests of the Company. The Related
Party Transaction must then be approved by the independent directors. In determining whether to approve or ratify
a Related Person Transaction, the Audit Committee and the independent directors may consider, among other things,
the benefits to the Company; the impact on the director’s independence (if the Related Person is a director or an
immediate family member); the availability of other sources for comparable products or services; the terms of the
4
transaction; and the terms available to unrelated third parties or to employees generally. There were no Related
Person Transactions in the fiscal year ended September 30, 2009 (“Fiscal 2009”).
Board Structure and Meetings
The Board met six times during Fiscal 2009. The Board also acted by written consent from time to time. All
directors attended at least 75% of the total number of Board meetings and committee meetings on which they serve
(during the period in which each director served). In addition, NASDAQ marketplace rules contemplate that the
independent members of our Board will meet during the year in separate closed meetings referred to as “executive
sessions” without any employee director or executive officer present. Executive sessions were usually held after
regularly scheduled Board meetings during Fiscal 2009.
The Board of Directors has four standing committees, the Audit Committee, the Executive Compensation Committee,
the Nominations Committee and the Operations Analysis Committee.
Sonic has a standing audit committee established in accordance with Section 3(a)(58)(A) of the Securities Exchange
Act of 1934, as amended (the “Exchange Act”). Messrs. Kleinman (chair), Weis and Peercy serve on the Audit
Committee. Sonic’s Board of Directors has determined that all members of Sonic’s Audit Committee are
“independent” as that term is used in Item 7(d)(3)(iv) of Schedule 14A under the Exchange Act and as defined under
Nasdaq listing standards. The Audit Committee provides assistance to the Board in fulfilling its oversight
responsibility including: (i) internal and external financial reporting, (ii) risks and controls related to financial reporting,
and (iii) the internal and external audit process. The Audit Committee is also responsible for recommending to the
Board the selection of our independent public accountants and for reviewing all related party transactions. The Audit
Committee met five times in Fiscal 2009. A copy of the charter of the Audit Committee is available on Sonic’s
website.
Sonic's Board of Directors has determined that, due to his affiliation with the Graduate School of Business at the
University of Chicago, and due to his serving as a director on numerous company boards, along with his other
academic and business credentials, Mr. Kleinman has the requisite experience and applicable background to meet
Nasdaq standards requiring financial sophistication of at least one member of the audit committee. Sonic's Board of
Directors has also determined that neither Mr. Kleinman nor any other member of the Audit Committee is an audit
committee financial expert as defined by applicable SEC regulations
The Compensation Committee consists of Messrs. Kleinman (chair), Weis and Peercy. The Board of Directors has
determined that all of the members of the Compensation Committee are “independent” as defined under Nasdaq listing
standards. The Compensation Committee makes recommendations to the Board with respect to salaries of employees,
the amount and allocation of any incentive bonuses among the employees, and the amount and terms of stock options
to be granted to executive officers. The Compensation Committee met two times in Fiscal 2009. A copy of the charter
of the Compensation Committee is available on Sonic’s website.
The Nominations Committee consists of Messrs. Peercy (chair), Weis and Kleinman. The Board of Directors has
determined that all of the members of the Nominations Committee are “independent” as defined under Nasdaq listing
standards. The purpose of the Nominations Committee is to evaluate and recommend candidates for election as
directors, make recommendations concerning the size and composition of the Board of Directors, develop specific
criteria for director independence, and assess the effectiveness of the Board of Directors. Our Board of Directors has
adopted a charter for the Nominations Committee, which is available on Sonic’s website. The Nominations Committee
will review all candidates in the same manner regardless of the source of the recommendation. Stockholder
recommendations of candidates for Board membership will be considered when submitted to Corporate Secretary,
Sonic Foundry, Inc., 222 W. Washington Ave., Madison, WI 53703. When submitting candidates for nomination to be
elected at Sonic's annual meeting of stockholders, stockholders must also follow the notice procedures and provide the
information required by Sonic's bylaws.
In particular, for a stockholder to nominate a candidate for election at the 2011 Annual Meeting of Stockholders, the
nomination must be delivered or mailed to and received by Sonic's Secretary between November 4, 2010 and
December 4, 2010 (or, if the 2011 annual meeting is advanced by more than 30 days or delayed by more than 60 days
5
from such anniversary date, not earlier than the close of business on the 120th day prior to such annual meeting and not
later than the close of business on the later of the 90th day prior to such annual meeting or the tenth calendar day
following the date on which public announcement of the date of the annual meeting is first made). The nomination
must include the same information as is specified in Sonic's bylaws for stockholder nominees to be considered at an
annual meeting, including the following:
• The stockholder's name and address and the beneficial owner, if any, on whose behalf the nomination is
proposed;
• The stockholder's reason for making the nomination at the annual meeting, and the signed consent of the
nominee to serve if elected;
• The number of shares owned by, and any material interest of, the record owner and the beneficial owner,
if any, on whose behalf the record owner is proposing the nominee;
• A description of any arrangements or understandings between the stockholder, the nominee and any other
•
person regarding the nomination; and
Information regarding the nominee that would be required to be included in Sonic's proxy statement by
the rules of the Securities and Exchange Commission, including the nominee's age, business experience
for the past five years and any other directorships held by the nominee.
The Operations Analysis Committee consists of Messrs. Weis (chair) and Pollard. The Operations Analysis Committee
was established in May 2008 to facilitate communication and provide advisory leadership in planning and strategic
growth. The Operations Analysis Committee met in person and held numerous informal and telephonic meetings in
Fiscal 2009.
DIRECTORS COMPENSATION
Our directors, who are not also our full-time employees, receive an annual retainer of $20,000 in addition to a fee of
$1,500 for attendance at each meeting of the Board of Directors and $1,000 per committee meeting attended, other than
the chair of our Audit Committee, Mr. Kleinman, who receives $2,000 per Audit Committee meeting attended. In
addition, the chair of our Operations Analysis Committee, Mr. Weis, receives compensation of a $12,000 retainer per
year and Mr. Pollard receives an annual retainer of $6,000 per year as compensation as a member of the Operations
Analysis Committee. The cash compensation paid to the five non- employee directors combined in Fiscal 2009 was
approximately $210,000. When traveling from out-of-town, the members of the Board of Directors are also eligible for
reimbursement for their travel expenses incurred in connection with attendance at Board meetings and Board
Committee meetings. Directors who are also employees do not receive any compensation for their participation in
Board or Board Committee meetings.
Pursuant to the 2008 Sonic Foundry Non-Employee Directors Stock Option Plan (the “Directors Plan”) we grant to
each non-employee director who is reelected or who continues as a member of the Board of Directors at each annual
stockholders meeting a stock option to purchase 2,000 shares of Common Stock. Further, the chair of our Audit
Committee receives an additional stock option grant to purchase 500 shares of Common Stock per year and the chair of
our Operations Analysis Committee received a one-time stock option grant to purchase 5,000 shares of common stock
which vest 25% immediately, and 25% on each of 4 months, 16 months and 28 months from the date of grant for his
role in managing the activities of the Operations Analysis Committee pursuant to Sonic’s Non Qualified Stock Option
Plan.
The exercise price of each stock option granted was equal to the market price of Common Stock on the date the stock
option was granted. Stock options issued under the Directors Plan vest fully on the first anniversary of the date of grant
and expire after ten years from date of grant. An aggregate of 50,000 shares are reserved for issuance under the
Directors Plan.
If any change is made in the stock subject to the Directors Plan, or subject to any option granted thereunder, the
Directors Plan and options outstanding thereunder will be appropriately adjusted as to the type(s), number of securities
and price per share of stock subject to such outstanding options.
6
The options and warrants set forth above have an exercise price equal to the fair market value of the underlying
common stock on the date of grant. The term of all such options is ten years.
The following table summarizes cash and equity compensation provided our non-employee directors during the
fiscal year ended September 30, 2009.
Fees Earned
Or Paid In
Cash
($)(1)
(b)
Stock
Awards
($)
(c)
Option
Awards
($)(2)
(d)
Non-Stock
Incentive Plan
Compensation
($)
(e)
Name
(a)
David C. Kleinman
Frederick H. Kopko
Paul S. Peercy
Arnold B. Pollard
Gary R. Weis
42,000
29,000
37,000
41,000
61,000
—
—
—
—
—
18,850
15,080
15,080
15,080
28,894
—
—
—
—
—
Change in
Pension
Value and
Non-qualified
Deferred
Compensation
Earnings
($)
(f)
—
—
—
—
—
All Other
Compensation
($)
(g)
—
—
—
—
—
Total
($)
(h)
60,850
44,080
52,080
56,080
89,894
(1)
(2)
The amount reported in column (b) is the total of retainer fees and meeting attendance fees.
The amount reported in column (d) is the dollar amount recognized for financial reporting purposes for the
fiscal year ended September 30, 2009 in accordance with FAS 123(R). Each director received an option award
of 2,000 shares on March 5, 2009 at an exercise price of $5.50 with a grant date fair value of $6,346. In
addition, Mr. Kleinman received a grant of 500 shares on March 5, 2009 at an exercise price of $5.50 with a
grant date fair value of $1,587 in connection with his position as chair of the Audit Committee and Mr. Weis
received a grant of 5,000 shares on November 3, 2008 at an exercise price of $5.00 with a grant date fair value
of $13,814 in connection with his position as chair of the Operations Analysis Committee.
7
EXECUTIVE OFFICERS OF SONIC
Our executive officers, who are appointed by the Board of Directors, hold office for one-year terms or until their
respective successors have been duly elected and have qualified. There are no family relationships between any of the
executive officers of Sonic.
Rimas P. Buinevicius is our Chairman of the Board of Directors and Chief Executive Officer. (See " Directors
Continuing in Office ".)
Monty R. Schmidt is our Chief Technology Officer and a Director. (See " Directors Continuing in Office ".)
Kenneth A. Minor, age 47, has been our Chief Financial Officer since June 1997, Assistant Secretary from December
1997 to February 2001 and Secretary since February 2001. From September 1993 to April 1997, Mr. Minor was
employed as Vice President and Treasurer for Fruehauf Trailer Corporation, a manufacturer and global distributor of
truck trailers and related after market parts and service where he was responsible for financial, treasury and investor
relations functions. Prior to 1993, Mr. Minor served in various senior accounting and financial positions for public and
private corporations as well as the international accounting firm of Deloitte Haskins and Sells. Mr. Minor is a certified
public accountant and has a B.B.A. degree in accounting from Western Michigan University.
Robert M. Lipps, age 38, has been Executive Vice President of Sales since April 2008, joining Sonic Foundry in April
2006 as Vice President of International Sales and assuming expanded responsibility for U.S. central sales in 2007. Mr.
Lipps leads the company’s global sales organization including oversight of domestic, international and channel sales.
He holds 15 years of sales leadership, business development and emerging market entry expertise in the technology and
manufacturing sectors, including sales and channel management. From January 2004 to March 2006 he served as
General Manager of Natural Log Homes LLC, a New Zealand based manufacturer of log homes. From July 1999 to
Dec 2002 he served as Latin America Regional Manager of Adaytum, a software publisher of planning and
performance management solutions, (acquired by Cognos Software, an IBM Company, in January 2003) and from May
1996 to July 1999 he served as International Sales Manager for Persoft, a software publisher of host access and
mainframe connectivity solutions (acquired by Esker software in 1998). Mr. Lipps has a B.S. degree in Marketing from
the University of Wisconsin at La Crosse.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table shows information known to us about the beneficial ownership of our Common Stock as of
January 12, 2010, by each stockholder known by us to own beneficially more than 5% of our Common Stock, each of
our executive officers named in the Summary Compensation Table (“Named Executive Officers”), each of our
directors, and all of our directors and executive officers as a group. Unless otherwise noted, the mailing address for
these stockholders is 222 West Washington Avenue, Madison, Wisconsin 53703.
Beneficial ownership is determined in accordance with the rules of the SEC, and includes voting or investment power
with respect to shares. Shares of common stock issuable upon the exercise of stock options or warrants exercisable
within 60 days after January 12, 2010, which we refer to as Presently Exercisable Options, are deemed outstanding for
computing the percentage ownership of the person holding the options but are not deemed outstanding for computing
the percentage ownership of any other person. Unless otherwise indicated below, to our knowledge, all persons named
in the table have sole voting and investment power with respect to their shares of common stock, except to the extent
authority is shared by spouses under applicable law. The inclusion of any shares in this table does not constitute an
admission of beneficial ownership for the person named below.
8
Based on currently available Schedules 13D and 13G filed with the SEC, we do not know of any beneficial owners of
more than 5% of our Common Stock, other than listed below.
Name of Beneficial Owner(1)
Number of Shares of
Class
Beneficially Owned
Percent
of Class(2)
Common Stock
Monty R. Schmidt (3)
Rimas P. Buinevicius(4)
Mark D. Burish(5)
33 East Main St.
Madison, WI 53703
Arnold B. Pollard(6)
733 Third Avenue
New York, NY 10017
Kenneth A. Minor(7)
Frederick H. Kopko, Jr.(8)
20 North Wacker Drive
Chicago, IL 60606
David C. Kleinman(9)
1101 East 58th Street
Chicago, IL 60637
Gary R. Weis(10)
P.O. Box 272
Deerfield, IL 60015
Paul S. Peercy(11)
1415 Engineering Dr
Madison, WI 53706
Robert M. Lipps(12)
339,626
278,778
90,000
63,082
47,093
38,627
30,000
20,250
14,040
11,324
9.4%
7.5
2.5
1.7
1.3
1.1
*
*
*
*
All Executive Officers and Directors as a Group (9 persons)(13)
842,820
21.4%
*
(1)
less than 1%
Sonic believes that the persons named in the table above, based upon information furnished by such persons, have
sole voting and investment power with respect to the number of shares indicated as beneficially owned by them.
(2) Applicable percentages are based on 3,606,922 shares outstanding, adjusted as required by rules promulgated by
(3)
(4)
the Securities and Exchange Commission.
Includes 25,313 shares subject to Presently Exercisable Options.
Includes 125,333 shares subject to Presently Exercisable Options. Also includes 20,205 shares owned by
Cleopatra Buinevicius for which Mr. Buinevicius has power of attorney to vote and/or dispose of such shares.
Ms. Buinevicius is the mother of Mr. Buinevicius. Mr. Buinevicius disclaims beneficial ownership of such
shares.
(5) Mr. Burish is a nominee for Director
(6) Consists of 63,082 shares subject to Presently Exercisable Options.
9
(7)
(8)
(9)
(10)
(11)
(12)
(13)
Includes 38,894 shares subject to Presently Exercisable Options.
Includes 10,000 shares subject to Presently Exercisable Options.
Includes 27,000 shares subject to Presently Exercisable Options.
Includes 17,750 shares subject to Presently Exercisable Options.
Includes 14,000 shares subject to Presently Exercisable Options.
Includes 11,249 shares subject to Presently Exercisable Options.
Includes an aggregate of 332,621 Presently Exercisable Options.
Introduction
Compensation Discussion and Analysis
This Compensation Discussion and Analysis describes our compensation strategy, policies, programs and practices
for the executive officers identified in the Summary Compensation Table. Throughout this proxy statement, we refer
to these individuals, who serve as our Chief Executive Officer, Chief Financial Officer, Chief Technology Officer
and Executive Vice President of Sales as the “executive officers.”
The Compensation Committee (“Committee”) establishes and oversees our compensation and employee benefits
programs and approves the elements of total compensation for the executive officers. The day-to-day design and
administration of our retirement and employee benefit programs available to our employees are handled by our
Human Resources and Finance Department employees. The Committee is responsible for reviewing these programs
with management and approving fundamental changes to them.
Overview and Objectives of our Executive Compensation Program
The compensation program for our executive officers is designed to attract, motivate, reward and retain highly
qualified individuals who can contribute to Sonic’s growth with the ultimate objective of improving stockholder
value. Our compensation program consists of several forms of compensation: base salary, annual bonus, long-term
incentives and limited perquisites and benefits.
Base salary and annual bonus are cash-based while long-term incentives consist of stock option awards. The
Committee does not have a specific allocation goal between cash and equity-based compensation or between annual
and long-term incentive compensation. Instead, the Committee relies on the process described in this discussion and
analysis in its determination of compensation levels and allocations for each executive officer.
The Committee does not utilize objective guidelines or formulae, performance targets or short-term changes in our
stock price to determine the elements and levels of compensation for our executive officers. Instead, it relies upon its
collective judgment as applied to the challenges confronting Sonic, together with advice from independent
consultants, information provided by Sonic and independent sources, and the recommendations of our Chief
Executive Officer. The Committee also uses subjective information when considering the credentials, length of
service, experience, consistent performance, and available competitive alternatives of our executive officers. The
Committee receives and reviews a variety of information throughout the year to assist it in directing the executive
compensation program. Throughout the year, the Committee reviews financial reports comparing Sonic’s
performance on a year-to-date basis versus budget and at each meeting of the Board of Directors the executive
officers present an operating report.
The recommendations of the Chief Executive Officer play a significant role in the compensation-setting process.
The Chief Executive Officer provides the Committee with an annual overall assessment of Sonic’s achievements
and performance, his evaluation of individual performance and his recommendations for annual compensation,
bonus and long-term incentive awards. The Committee has discretion to accept, reject or modify the Chief Executive
Officer’s recommendations.
The Committee determines the compensation for each executive officer in an executive session.
10
Market Competitiveness
The Committee’s target is for total cash compensation to average between the 50th and 75th percentile of published
compensation data derived from two sources: (i) a peer group of companies that are in our industry, competitors for
key talent, or with similar financial characteristics; and (ii) published market survey data for companies within our
revenue range. The peer group data was obtained from the most recently filed proxy statement of 14 publicly-traded
technology companies with annual revenues ranging from $16.5 million to $30 million; market capitalization of $5
million to $55 million, five year revenue growth of at least 15% and employees of 200 or less. The following
companies comprised the peer group for the study: A.D.A.M., Inc., Artificial Life Inc, Aware Inc., Bitstream, Inc.,
Entech Solar, Inc., Global Axcess Corp, Global Medical Technologies, Inc., Glowpoint, Inc., I.D. Systems, Inc.,
KIT Digial, Inc., Onstream Media Corporation, Onvia, Inc., Voxware, Inc. and Waytronx, Inc. Given competitive
recruiting pressures, the Committee retains its discretion to deviate from this target under appropriate circumstances.
The Committee periodically receives updates of the published compensation data.
Pay for Performance
The Committee believes that both long and short term compensation of executive officers should correlate to
Sonic’s overall financial performance. Incentive payouts will be larger with strong performance and smaller if
Sonic’s financial results decline. From time to time, extraordinary Board-approved initiatives in a fiscal year, such
as a restructuring, acquisition, or divestiture, are considered by the Committee in its overall evaluation of Sonic’s
performance.
Competitive Benchmarking/Peer Group Analysis
The Committee reviewed market data from the American Electronics Association dated September 1, 2008(“AeA”)
in various size and industry stratifications similar to that of Sonic.
The second source of compensation data came from a peer group of fourteen public companies that we consider
similar to our market for sales, or for key talent, or with similar financial or other characteristics such as number of
employees. The companies in the peer group ranged in market capitalization between $5 million and $55 million,
had fewer than 200 employees, revenues between $16.5 million and $30 million and exhibited long-term revenue
growth in excess of 15%.
Components of Executive Compensation
Base Salary
The Committee seeks to pay the executive officers a competitive base salary in recognition of their job
responsibilities for a publicly held company. As noted above, the target compensation range for an executive’s total
cash compensation (salary and bonus) is between the 50th and 75th percentile of the market data reviewed by the
Committee.
As part of determining annual increases, the Committee also considers the Chief Executive Officer’s
recommendation regarding individual performance as well as internal equitable considerations.
In evaluating individual performance, the Committee considers initiative, leadership, tenure, experience, skill set for
the particular position, knowledge of industry and business, and execution of strategy in placing the individual
within the range outlined.
In response to poor economic conditions management recommended to the Committee that no change be made to
base salaries of any executive officer for fiscal 2010. The Committee accepted management’s recommendation at a
11
meeting of the Committee held on November 25, 2009. Accordingly, base compensation for Mr. Buinevicius,
Schmidt, Minor and Lipps was maintained at $344,000, $268,000, $241,000 and $185,000, respectively. After its
review of all sources of market data as described above, the Committee believes that the base salaries and the
bonuses described below are within its targeted range for total cash compensation.
Bonus
The Committee typically targets an annual cash bonus as a percentage of total cash compensation within the 50th to
75th percentile of market data as noted above. Recognizing that Sonic’s internal budgets are based on pre-
established financial goals, the evaluation of individual performance reflects a discretionary assessment by the
Committee of each officer’s contribution during the year. The Committee may consider factors such as general
economic conditions, acquisitions, divestitures, or restructuring initiatives that may not have been contemplated
when the financial budgets were developed. To aid in this evaluation, the Chief Executive Officer provides an
overview of Sonic’s financial metrics and performance, new product introductions, strategic initiatives, and investor
relations activities for the year.
In an effort to conserve cash, management recommended to the Committee that no discretionary bonus be granted
for fiscal 2009 performance to any executive officer. The Committee considered and approved management’s
recommendation at a Committee meeting held November 25, 2009. Mr. Lipps receives incentive compensation
quarterly based upon achieving predetermined targets for product and services billings set during Sonic’s business
planning process. Total incentives paid to Mr. Lipps during fiscal 2009 totaled $93,552.
Stock Options
The Committee has a long-standing practice of providing long-term incentive compensation grants to the executive
officers. The Committee believes that such grants, in the form of stock options, help align our executive officers’
interests with Sonic’s stockholders. All stock options have been granted under either our 1995 Stock Option Plan,
the 1999 Non-Qualified Plan or the 2009 Stock Incentive Plan (“Employee Plans”).
The Committee reviews option grant recommendations by the Chief Executive Officer for each executive officer,
but retains full discretion to accept, reject or revise each recommendation. The Committee’s policy is to grant
options on the date it approves them or such other future date as the Committee may agree at the time of approval.
The exercise price is determined in accordance with the terms of the Employee Plan and cannot be less than the Fair
Market Value, as defined in the Plan, of Sonic’s common stock. The Committee typically grants options once a year,
but may grant options to newly hired executives at other times.
In making its determinations, the Committee considers the number of options or shares owned by the executive
officers.
On November 25, 2009, the Committee approved option grants to purchase 6,000 shares each to Mssrs. Buinevicius,
Schmidt, Minor and Lipps to be granted at the closing price of Sonic’s stock on December 2, 2009, each of which
will vest one third on the first, second and third anniversary of the grant.
Health and Welfare Benefits
Our officers are covered under the same health and welfare plans, including our 401(k) plan, as salaried employees.
Employment Agreements
We entered into employment agreements with Rimas P. Buinevicius and Monty R. Schmidt on substantially the same
terms as the prior agreements in January 2001. The employment agreements automatically renew every two years for
successive two year terms and were last automatically renewed on January 1, 2009. The salaries of each of Messrs.
12
Buinevicius and Schmidt are subject to increase each year at the discretion of the Board of Directors. Messrs.
Buinevicius and Schmidt are also entitled to incidental benefits of employment under the agreements. Each of the
employment agreements provides that if (i) Sonic Foundry breaches its duty under such employment agreement, (ii) the
employee's status or responsibilities with Sonic Foundry has been reduced, (iii) Sonic Foundry fails to perform its
obligations under such employment agreement, or (iv) after a Change in Control of Sonic Foundry, Sonic Foundry’s
financial prospects have significantly declined, the employee may terminate his employment and receive all salary and
bonus owed to him at that time, prorated, plus three times the highest annual salary and bonus paid to him in any of the
three years immediately preceding the termination. If the employee becomes disabled, he may terminate his
employment and receive all salary owed to him at that time, prorated, plus a lump sum equal to the highest annual
salary and bonus paid to him in any of the three years immediately preceding the termination. Pursuant to the
employment agreements, each of Messrs. Buinevicius and Schmidt has agreed not to disclose our confidential
information and not to compete against us during the term of his employment agreement and for a period of two years
thereafter. Such non-compete clauses may not be enforceable, or may only be partially enforceable, in state courts of
relevant jurisdictions.
A "Change in Control" is defined in the employment agreements to mean: (i) a change in control of a nature that would
have to be reported in our proxy statement, ; (ii) Sonic Foundry is merged or consolidated or reorganized into or with
another corporation or other legal person and as a result of such merger, consolidation or reorganization less than 75%
of the outstanding voting securities or other capital interests of the surviving, resulting or acquiring corporation or other
legal person are owned in the aggregate by our stockholders immediately prior to such merger, consolidation or
reorganization; (iii) Sonic Foundry sells all or substantially all of its business and/or assets to any other corporation or
other legal person, less than 75% of the outstanding voting securities or other capital interests of which are owned in
the aggregate by our stockholders, directly or indirectly, immediately prior to or after such sale; (iv) any person (as the
term "person" is used in Section 13(d) (3) or Section 14(d) (2) of the Securities Exchange Act of 1934 (the "Exchange
Act") had become the beneficial owner (as the term "beneficial owner" is defined under Rule 13d-3 or any successor
rule or regulation promulgated under the Exchange Act) of 25% or more of the issued and outstanding shares of our
voting securities; or (v) during any period of two consecutive years, individuals who at the beginning of any such
period constitute our directors cease for any reason to constitute at least a majority thereof unless the election, or the
nomination or election by our stockholders, of each new director was approved by a vote of at least two- thirds of such
directors then still in office who were directors at the beginning of any such period.
We entered into employment agreements with Kenneth A. Minor in October 2007 and Robert M. Lipps in August
2008. The salaries of each of Messrs. Minor and Lipps are subject to increase each year at the discretion of the Board
of Directors. Messrs. Minor and Lipps are also entitled to incidental benefits of employment under the agreements.
Each of the employment agreements provide that a cash severance payment be made upon termination, other than for
cause. In the case of Mr. Minor, such cash severance is equal to the highest cash compensation paid in any of the last
three fiscal years immediately prior to termination and with respect to Mr. Lipps, such cash severance payment is equal
to the cash compensation paid in the previous fiscal year immediately prior to termination. In addition, Mssrs. Minor
and Lipps will receive immediate vesting of all previously unvested common stock and stock options and have the right
to voluntarily terminate their employment, and receive the same severance arrangement detailed above following (i)
any “person” becoming a “ beneficial” owner of stock of Sonic Foundry representing 50% or more of the total voting
power of Sonic Foundry’s then outstanding stock; or, (ii) Sonic Foundry is acquired by another entity through the
purchase of substantially all of its assets or securities and following such acquisition, Rimas Buinevicius does not
remain as Chief Executive Officer and Chairman of the Board of Directors of Sonic Foundry or the acquisition is
without the written consent of the Board of Directors of Sonic Foundry; or (iii) Sonic Foundry is merged with another
entity, consolidated with another entity or reorganized in a manner in which any “person” is or becomes a “beneficial”
owner of stock of the surviving entity representing 50% or more of the total voting power of the surviving entity’s then
outstanding stock; and Messrs. Minor or Lipps is demoted without cause or his duties are substantially altered.
Pursuant to the employment agreements, each of Messrs. Minor and Lipps has agreed not to disclose our confidential
information and not to compete against us during the term of his employment agreement and for a period of one year
thereafter. Such non-compete clauses may not be enforceable, or may only be partially enforceable, in state courts of
relevant jurisdictions.
13
For illustrative purposes, if Sonic terminated the employment of Messrs. Buinevicius, Schmidt, Minor and Lipps (not
for cause) on September 30, 2009 or if Messrs. Buinevicius, Schmidt, Minor and Lipps elected to terminate their
employment following a demotion or alteration of duties on September 30, 2009, and a change of control as defined in
the employment agreements had occurred, Sonic would be obligated to pay $1,109,000, $895,000, $272,000 and
$278,000 to of Messrs. Buinevicius, Schmidt, Minor and Lipps, respectively. In addition, any non-vested rights of
Messrs. Buinevicius, Schmidt, Minor and Lipps under the Employee Plans, would vest as of the date of employment
termination. The value of the accelerated vesting of the options under these circumstances would be $7,000 for
Messrs. Buinevicius and Schmidt; $18,000 for Mr. Minor and $27,000 Mr. Lipps.
Personal Benefits
Our executives receive a limited number of personal benefits certain of which are considered taxable income to them
and which are described in the footnotes to the section of this Proxy Statement entitled “Summary Compensation
Table ”.
Internal Revenue Code Section 162(m)
Internal Revenue Code Section 162(m) limits the ability of a public company to deduct compensation in excess of
$1 million paid annually to each of the Chief Executive Officer and each of the other executive officers named in the
Summary Compensation Table. There are exemptions from this limit, including compensation that is based on the
attainment of performance goals that are established by the Committee and approved by the Company stockholders.
No executive officer was affected by this limitation in fiscal 2009.
COMPENSATION COMMITTEE REPORT
The Compensation Committee of Sonic has reviewed and discussed the Compensation Discussion and Analysis
required by Item 402(b) of Regulation S-K with management and, based on such review and discussions, the
Compensation Committee recommended to the Board that the Compensation Discussion and Analysis be included
in the Proxy Statement.
COMPENSATION COMMITTEE
David C. Kleinman, Chair
Gary R. Weis
Paul S. Peercy
14
The following table sets forth the compensation of our principal executive officer, our principal financial officer and
our other two executive officers for the fiscal year ended September 30, 2009.
Summary Compensation
Change in
Pension
Value and
Non-qualified
Deferred
Compensation
Earnings
($)
(h)
—
—
—
—
—
—
—
—
—
—
—
All Other
Compen-
sation
($)(3)
(i)
Total
($)
(j)
1,766
1,610
10,314
373,649
338,143
387,618
14,799
7,841
16,457
305,562
289,286
296,537
22,819
8,856
16,049
319,996
283,799
321,989
8,649
6,735
331,384
263,134
Stock
Awards
($)
(e)
Option
Awards
($)(2)
(f)
Non-Equity
Incentive Plan
Compensation
($)
(g)
—
—
—
—
—
—
—
—
—
—
—
29,412
21,997
7,770
50,796
51,402
7,770
29,412
21,997
7,770
44,183
34,165
—
—
—
—
—
—
—
—
—
93,552
65,888
Name and Principal
Position
(a)
Rimas P. Buinevicius
Chairman and
Chief Executive Officer
Kenneth A. Minor
Chief Financial Officer
and Secretary
Monty R. Schmidt
Chief Technology
Officer
Robert M. Lipps
Executive Vice
President - Sales
Salary
($)
(c)
342,471
277,539
309,534
239,967
198,243
212,310
267,765
217,952
238,170
Year
(b)
2009
2008
2007
2009
2008
2007
2009
2008
2007
Bonus
($)(1)
(d)
—
30,000
60,000
—
31,800
60,000
—
30,000
60,000
2009
2008
185,000
156,346
—
—
(1) The amounts in column (d) represent cash bonuses which were awarded for performance during the prior fiscal
year. Fiscal year 2008 bonuses are payable at a future date at the discretion of the executive and coincident with
the payment to the Company of an equal amount for the exercise of certain options to purchase common stock.
(2) The option awards in column (f) represent stock option grants for which Sonic recorded compensation expense
during the fiscal year. Under the required FAS 123(R) methodology, the compensation expense reflected is for
grants made in the fiscal year and grants made in prior years which continued to be expensed in the fiscal year. The
full FAS 123(R) grant date fair value of the option awards granted in fiscal 2008 is included in column (l) in the
“Grants of Plan-Based Awards” table included below in this Proxy Statement. The assumptions and methodology
used in calculating the FAS 123(R) compensation expense of the option awards are provided in Sonic’s Form 10-
K. See Note 1, “Stock Based Compensation” in the Notes to the Consolidated Financial Statements in Sonic’s
Form 10-K. The amounts in this column represent our accounting expense for these awards and not necessarily the
actual value that will be realized by the executive. There can be no assurance that the options will ever be
exercised (in which case no value will be realized by the executive) or that the value on exercise will equal the
FAS123(R) value.
(3) The amount shown under column (i) includes Sonic’s matching contribution under our 401(k) plan of $0, $9,599,
$10,711 and $8,649 for Messrs Buinevicius, Minor, Schmidt and Lipps. In addition, Mr. Buinevicius receives a
car allowance equal to $713 per month of which the taxable personal portion of $1,766 is included in this column.
Messrs. Minor and Schmidt receive $650 per month as a car allowance of which the taxable personal portions
were $5,200 and $12,108, respectively. Mr. Lipps receives a car allowance of $700 per month of which there was
no taxable personal portion.
15
The Following table shows the plan-based awards granted to the Named Executive Officers during fiscal 2009.
Grants of Plan-Based Awards
Name
(a)
Grant
Date
(b)
Rimas P. Buinevicius 11/03/08
11/10/08
Kenneth A. Minor
11/03/08
Monty R. Schmidt
11/10/08
Robert M. Lipps
Estimated Future Payouts
Under Non-Equity Incentive
Plan Awards
Target
($)
(d)
—
—
—
—
Maximum
($)
(e)
—
—
—
—
Threshold
($)
(c)
—
—
—
—
Estimated Future Payouts
Under Equity
Incentive
Plan Awards
Target
($)
(g)
—
—
—
—
Maximum
($)
(h)
—
—
—
—
Threshold
($)
(f)
—
—
—
—
All other
stock
awards:
Number of
Shares of
stock or
units
(#)
(i)
—
—
—
—
All other
option
awards:
Number of
Securities
Underlyin
g
Options
(#)
(j)
6,000
6,000
6,000
6,000
Exercise
or base
price of
option
awards
($/Sh)
(1)
(k)
5.00
5.30
5.00
5.30
Grant
Date fair
Value of
Stock and
option
awards
($)
(2)
(l)
14.772
15,660
14.772
19,376
(1) Sonic grants employee stock options with exercise prices equal to the closing stock price on the date of grant.
(2) The amount reported in column (l) represents the grant date fair value of the award following the required FAS
123(R) compensation methodology. Grant date fair value is calculated using the Lattice method. See Note 1,
“Stock Based Compensation” in the Notes to the Consolidated Financial Statements in Sonic’s Form 10-K for the
fiscal year ended September 30, 2009 for an explanation of the methodology and assumptions used in the FAS
123(R) valuation. With respect to the option grants, there can be no assurance that the options will ever be
exercised (in which case no value will be realized by the executive) or that the value on exercise will equal the
FAS 123(R) value.
Sonic grants options to its executive officers under our employee stock option plans. As of September 30, 2009, options
to purchase a total of 766,615 shares were outstanding under the plans, and options to purchase 405,399 shares
remained available for grant thereunder.
16
Outstanding Equity Awards at Fiscal Year-End
The following table shows information concerning outstanding equity awards as of September 30, 2009 held by the
Named Executive Officers.
Option Awards
Stock Awards
Equity
Incentive
Plan
Awards:
Market
or
Payout
Value of
Unearned
Shares,
Units or
Other
Rights
That
Have Not
Vested
($)
(j)
Equity
Incentive
Plan
Awards:
Number
of
Unearned
Shares,
Units or
Other
Rights
That Have
Not
Vested
(#)
(i)
Market
Value of
Shares or
Units of
Stock
That
Have
Not
Vested
($)
(h)
Number
of Shares
or Units
of Stock
That Have
Not
Vested
(#)
(g)
Equity
Incentive
Plan
Awards:
Number
of
Securities
Underlying
Unexercised
Unearned
Options
(#)
(d)
None
None
None
None
Number
of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
(1)(2)
(b)
Number
of
Securities
Underlying
Unexercised
Options
(#)
Unexercisabl
e
(1)(2)
(c)
1,000
10,000
100,000
5,000
1,666
6,000
1,300
1,000
6,300
594
8,000
10,000
5,000
4,000
1,000
8,000
1,980
5,000
1,666
6,000
2,500
500
500
833
3,333
0
0
0
0
0
3,334
0
0
0
0
0
0
0
0
8,000
0
0
0
0
3,334
0
0
250
1,000
1,667
6,667
6,000
Option
Exercise
Price
($)
(1)(2)
(e)
10.94
10.94
11.20
14.50
15.50
5.00
5.91
10.94
10.94
10.10
11.20
4.20
14.50
15.50
10.94
10.94
10.10
14.50
15.50
5.00
22.60
37.10
15.50
7.50
7.80
5.30
Option
Expiration
Date
(1)
(f)
12/20/2010
12/20/2010
10/25/2011
11/26/2014
12/04/2017
11/03/2018
12/13/2009
12/20/2010
12/20/2010
10/09/2011
10/25/2011
05/09/2013
11/26/2014
12/04/2017
12/20/2010
12/20/2010
10/09/2011
11/26/2014
12/04/2017
11/03/2018
04/10/2016
12/07/2016
12/04/2017
03/10/2018
04/16/2018
11/10/2018
Name
(a)
Rimas P. Buinevicius
Kenneth A. Minor
Monty R. Schmidt
Robert M. Lipps
(1) All options were granted under either our shareholder approved Employee Stock Option Plans or the Non-
Qualified Stock Option Plan. All unexercisable options listed in the table become exercisable over a three-year
period in equal annual installments beginning one year from the date of grant.
(2) All options have been adjusted for the one-for-ten reverse stock split of the Company’s shares completed on
November 16, 2009.
17
The following table shows information concerning option exercises in fiscal 2009 by the Named Executive Officers.
Option Exercises and Stock Vested
Option Awards
Stock Awards
Number of
Shares
Acquired
on Exercise
(#)
Value
Realized
on
Exercise
($)
Number
of Shares
Acquired
on
Vesting
(#)
Value
Realized
on
Vesting
($)
Kenneth A. Minor
6,000
(600)
—
—
Equity Compensation Plan Information
Plan category
Equity compensation plans approved
by security holders (1)
Equity compensation plans not
approved by security holders (2)
Total
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
Weighted average
exercise price of
outstanding
options, warrants
and rights
Number of
securities
remaining
available for
future issuance
(a)
521,957
244,658
766,615
(b)
18.44
11.36
16.17
(c)
405,399
-
405,399
(1) Consists of the Employee Stock Option Plan and the Directors Stock Option Plan. For further information
regarding these plans, reference is made to Sonic’s 2009 Form 10-K in Note 7 of the financial statements.
(2) Consists of the Non-Qualified Stock Option Plan. For further information regarding this plan, reference is
made to Sonic’s 2009 Form 10-K in Note 7 of the financial statements.
Compensation Committee Interlocks and Insider Participation
The members of the Executive Compensation Committee of Sonic's Board of Directors for Fiscal 2009 were those
named in the Executive Compensation Committee Report. No member of the Committee was at any time during Fiscal
2009 or at any other time an officer or employee of Sonic Foundry, Inc.
No executive officer of Sonic Foundry, Inc. has served on the board of directors or compensation committee of any other
entity that has or has had one or more executive officers serving as a member of the Board of Directors of Sonic
Foundry.
18
PROPOSAL TWO: RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
The Board of Directors, upon the recommendation of the Audit Committee, has appointed the firm of Grant Thornton
LLP (“GT”) as independent auditors to audit our financial statements for the year ending September 30, 2010, and has
further directed that management submit the selection of independent public accountants for certification by the
stockholders at the annual meeting. Representatives of GT are expected to be present at the annual meeting to respond
to stockholders' questions and to have the opportunity to make any statements they consider appropriate.
Stockholder ratification of the selection of GT as our independent auditors is not required by our Bylaws or otherwise.
However, the Board is submitting the selection of GT to the stockholders for ratification as a matter of good corporate
practice. If the stockholders fail to ratify the selection, the Board and the Audit Committee will reconsider whether or
not to retain that firm. Even if the selection is ratified, the Board and the Audit Committee in their discretion may
direct the appointment of a different independent accounting firm at any time during the year if they determine that
such a change would be in the best interests of Sonic and its stockholders.
The ratification of the appointment of GT as independent public accountants requires the approval of a majority of the
votes cast by holders of our shares. Shares may be voted for or withheld from this matter. Shares that are withheld and
broker non-votes will have no effect on this matter because ratification of the appointment of GT requires a majority of
the shares cast. Brokers may have discretionary authority to vote for this matter if the broker has not received
instructions from the beneficial owner.
Recommendation of Board of Directors
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR PROPOSAL 2
RATIFYING THE APPOINTMENT OF GT AS INDEPENDENT AUDITORS FOR SONIC FOUNDRY.
Relations with Independent Auditors
GT has served as our independent public accountants since its appointment in July 2004. As stated in Proposal 2, the
Board has selected GT to serve as our independent auditors for the fiscal year ending September 30, 2010.
Audit services performed by GT for Fiscal 2009 and 2008 consisted of the examination of our financial statements,
review of fiscal quarter results, services related to filings with the Securities and Exchange Commission (SEC). We
also retained GT to perform certain audit related services associated with the audit of our benefit plan, and tax
preparation and consultative services associated with the preparation of Federal and State tax returns. Fiscal 2009 and
2008 tax fees also included international tax services and additional sales and use tax services. All fees paid to GT
were reviewed, considered for independence and upon determination that such payments were compatible with
maintaining such auditors’ independence, approved by Sonic’s audit committee prior to performance.
Fiscal Years 2009 and 2008 Audit Firm Fee Summary
During fiscal years 2009 and 2008, we retained GT to provide services in the following categories and amounts:
Audit Fees
Audit Related
Tax Fees
Other Fees
Years Ended September 30,
2008
2009
$ 117,511
9,360
36,751
─
$ 165,049
10,920
45,035
─
19
All of the services described above were approved by Sonic’s audit committee prior to performance. The Audit
Committee may, in its discretion, delegate to one or more of its members the authority to pre-approve any audit or non-
audit services to be performed by the independent auditors, provided that any such approvals are presented to the Audit
Committee at its next scheduled meeting. The audit committee has determined that the payments made to its
independent accountants for these services are compatible with maintaining such auditors’ independence.
REPORT OF THE AUDIT COMMITTEE 1
The Audit Committee's role includes the oversight of our financial, accounting and reporting processes, our system of
internal accounting and financial controls and our compliance with related legal and regulatory requirements, the
appointment, engagement, termination and oversight of our independent auditors, including conducting a review of
their independence, reviewing and approving the planned scope of our annual audit, overseeing the independent
auditors' audit work, reviewing and pre-approving any audit and non-audit services that may be performed by them,
reviewing with management and our independent auditors the adequacy of our internal financial controls, and
reviewing our critical accounting policies and the application of accounting principles. The Audit Committee held five
meetings during fiscal 2009.
Mssrs. Kleinman, Weis and Peercy meet the rules of the SEC for audit committee membership and are "independent"
as that term is used in Item 7(d)(3)(iv) of Schedule 14A under the Exchange Act and under Nasdaq listing standards. In
August 2009, the Board approved revisions to the Audit Committee Charter to reflect new rules and standards set forth
in certain SEC regulations as well as changes to Nasdaq listing standards. A copy of the Audit Committee Charter is
available on Sonic’s website.
As set forth in the Audit Committee Charter, management of Sonic is responsible for the preparation, presentation and
integrity of Sonic’s financial statements and for the effectiveness of internal control over financial reporting.
Management and the accounting department are responsible for maintaining Sonic’s accounting and financial reporting
principles and internal controls and procedures designed to assure compliance with accounting standards and applicable
laws and regulations. The independent auditors are responsible for auditing Sonic’s financial statements and
expressing an opinion as to their conformity with generally accepted accounting principles.
We have reviewed and discussed with our independent auditors, GT, matters required to be discussed pursuant to
Statement on Auditing Standards No. 61 (Communications with Audit Committees). We have received from the
auditors a formal written statement describing the relationships between the auditor and Sonic that might bear on the
auditor's independence consistent with applicable requirements of the Public Company Accounting Oversight Board.
We have discussed with GT matters relating to its independence, including a review of both audit and non-audit fees,
and considered the compatibility of non-audit services with the auditors' independence.
The members of the Audit Committee are not full-time employees of Sonic and are not performing the functions of
auditors or accountants. As such, it is not the duty or responsibility of the Audit Committee or its members to conduct
“field work” or other types of auditing or accounting reviews or procedures or to set auditor independence standards.
Members of the Committee necessarily rely on the information provided to them by management and the independent
accountants. Accordingly, the Audit Committee’s considerations and discussions referred to above do not assure that
the audit of Sonic’s financial statements has been carried out in accordance with generally accepted auditing standards,
that the financial statements are presented in accordance with generally accepted accounting principles or that Sonic’s
auditors are in fact “independent”.
1 The material in this report is not “soliciting material”, is not deemed filed with the SEC, and is not to be
incorporated by reference in any of our filings under the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended, whether made before or after the date hereof and irrespective of any general
incorporation language in such filing.
20
We have reviewed and discussed with management and GT the audited financial statements. We discussed with GT the
overall scope and plans of their audit. We met with GT, with and without management present, to discuss results of
their examination and the overall quality of Sonic’s financial reporting.
Based on the reviews and discussions referred to above and our review of Sonic’s audited financial statements for fiscal
2009, we recommended to the Board that the audited financial statements be included in the Annual Report on
Form 10-K for the fiscal year ended September 30, 2009, for filing with the SEC.
Respectfully submitted,
AUDIT COMMITTEE
David C. Kleinman, Chair
Gary R. Weis
Paul S. Peercy
CERTAIN TRANSACTIONS
Frederick H. Kopko, Jr., a director and stockholder of Sonic Foundry, is a partner in McBreen & Kopko. Pursuant to
the 1997 Directors' Stock Option Plan, Mr. Kopko has been granted options to purchase 6,000 shares of Common
Stock at exercise prices ranging from $17.40 to $598.80 and was granted options to purchase 4,000 shares of
Common Stock at exercise prices ranging from $5.50 to $8.00 pursuant to the 2008 Non-Employee Directors Plan.
During fiscal 2009, we paid the Chicago law firm of McBreen & Kopko certain compensation for legal services
rendered subject to standard billing rates.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires Sonic's officers and directors, and persons who own
more than ten percent of the Common Stock, to file reports of ownership and changes in ownership with the
Securities and Exchange Commission. Based solely upon a review of Forms 3 and Forms 4 furnished to us pursuant
to Rule 16a-3 under the Exchange Act during our most recent fiscal year, to Sonic Foundry's knowledge, all
reporting persons complied with all applicable filing requirements of Section 16(a) of the Securities Exchange Act
of 1934, as amended, except with respect with Mssrs. Schmidt and Weis, who each inadvertently filed one late Form
4 report and Mr. Buinevicius who inadvertently filed two late From 4 reports.
Code of Ethics
Sonic has adopted a Code of Ethics (as defined in Item 406 of Regulation S-K) that applies to its principal executive,
financial and accounting officers. Sonic Foundry will provide a copy of its code of ethics, without charge, to any
investor that requests it. Requests should be addressed in writing to Mr. Kenneth Minor, Corporate Secretary, 222
West Washington Ave, Madison, WI 53703.
COMMUNICATIONS WITH THE BOARD OF DIRECTORS
Any stockholder who desires to contact our Board or specific members of our Board may do so electronically by
sending an email to the following address: directors@sonicfoundry.com. Alternatively, a stockholder can contact
our Board or specific members of our Board by writing to: Secretary, Sonic Foundry Incorporated, 222 West
Washington Avenue, Madison, WI 53703.
Each communication received by the Secretary will be promptly forwarded to the specified party following normal
business procedures. The communication will not be opened but rather will be delivered unopened to the intended
recipient. In the case of communications to the Board or any group or committee of Directors, the Secretary will
open the communication and will make sufficient copies of the contents to send to each Director who is a member of
the group or committee to which the envelope is addressed.
21
STOCKHOLDER PROPOSALS FOR 2011 ANNUAL MEETING OF STOCKHOLDERS
Requirements for Stockholder Proposals to be Considered for Inclusion in Sonic's Proxy Materials. Stockholders of
Sonic may submit proposals on matters appropriate for stockholder action at meetings of Sonic's stockholders in
accordance with Rule 14a-8 promulgated under the Securities Exchange Act of 1934. For such proposals to be
included in Sonic's proxy materials relating to its 2011 Annual Meeting of Stockholders, all applicable requirements
of Rule 14a-8 must be satisfied and such proposals must be received by Sonic no later than the anniversary date of
120 days prior to the date of this proxy statement (September 30, 2010). Such proposals should be delivered to
Corporate Secretary, Sonic Foundry, Inc., 222 West Washington Avenue, Madison, Wisconsin 53703.
Requirements for Stockholders Proposals to be Brought Before the Annual Meeting.
Sonic's bylaws provide that, except in the case of proposals made in accordance with Rule 14a-8, for stockholder
nominations to the Board of Directors or other proposals to be considered at an annual meeting of stockholders, the
stockholder must have given timely notice thereof in writing to the Secretary not less than ninety nor more than one
hundred twenty calendar days prior to the anniversary of the date on which Sonic held its immediately preceding
annual meeting of stockholders. To be timely for the 2011 Annual Meeting of Stockholders, a stockholder's notice
must be delivered or mailed to and received by Sonic's Secretary at the principal executive offices of Sonic between
November 4, 2010 and December 4, 2010. However, in the event that the annual meeting is advanced by more than
30 days or delayed by more than 60 days from such anniversary date, to be timely, notice by the stockholders must
be so received not earlier than the close of business on the 120th day prior to such annual meeting and not later than
the close of business on the later of the 90th day prior to such annual meeting or the tenth calendar day following the
date on which public announcement of the date of the annual meeting is first made. In no event will the public
announcement of an adjournment of an annual meeting of stockholders commence a new time period for the giving
of a stockholder's notice as provided above. A stockholder's notice to Sonic's Secretary must set forth the
information required by Sonic's bylaws with respect to each matter the stockholder proposes to bring before the
annual meeting.
In addition, the proxy solicited by the Board of Directors for the 2011 Annual Meeting of Stockholders will confer
discretionary authority to vote on (i) any proposal presented by a stockholder at that meeting for which Sonic has not
been provided with notice on or prior to the anniversary date of 45 days prior to the date of this proxy statement
(December 14, 2010) and (ii) any proposal made in accordance with the bylaws provisions, if the 2011 proxy
statement briefly describes the matter and how management's proxy holders intend to vote on it, if the stockholder
does not comply with the requirements of Rule 14a-4(c)(2) under the Securities Exchange Act of 1934.
OTHER MATTERS
The Board of Directors has at this time no knowledge of any matters to be brought before this year's Annual Meeting
other than those referred to above. However, if any other matters properly come before this year's Annual Meeting, it
is the intention of the persons named in the proxy to vote such proxy in accordance with their judgment on such
matters.
22
GENERAL
A copy of our Annual Report to Stockholders for the fiscal year ended September 30, 2009 is being mailed, together
with this Proxy Statement, to each stockholder. Additional copies of such Annual Report and of the Notice of Annual
Meeting, this Proxy Statement and the accompanying proxy may be obtained from us. We will, upon request,
reimburse brokers, banks and other nominees, for costs incurred by them in forwarding proxy material and the Annual
Report to beneficial owners of Common Stock. In addition, directors, officers and regular employees of Sonic and its
subsidiaries, at no additional compensation, may solicit proxies by telephone, telegram or in person. All expenses in
connection with soliciting management proxies for this year's Annual Meeting, including the cost of preparing,
assembling and mailing the Notice of Annual Meeting, this Proxy Statement and the accompanying proxy are to be
paid by Sonic.
Sonic will provide without charge (except for exhibits) to any record or beneficial owner of its securities, on
written request, a copy of Sonic's Annual Report on Form 10-K filed with the Securities and Exchange
Commission for the fiscal year ended September 30, 2009, including the financial statements and schedules
thereto. Exhibits to said report, and exhibits to this proxy statement, will be provided upon payment of fees
limited to Sonic's reasonable expenses in furnishing such exhibits. Written requests should be directed to
Investor Relations, 222 West Washington Avenue, Madison, Wisconsin 53703. We also make available, free of
charge, at the “Investor Information” section of our website, our annual report on Form 10-K, our quarterly
reports on Form 10-Q, our current reports on Form 8-K, our proxy statement, amendments and exhibits to
such reports as soon as practicable after the filing of such reports, exhibits and proxy statements with the
Securities and Exchange Commission.
In order to assure the presence of the necessary quorum at this year's Annual Meeting, and to save Sonic the expense of
further mailings, please date, sign and mail the enclosed proxy promptly in the envelope provided. No postage is
required if mailed within the United States. The signing of a proxy will not prevent a stockholder of record from voting
in person at the meeting.
By Order of the Board of Directors,
January 28, 2010
Kenneth A. Minor, Secretary
23
(This page intentionally left blank.)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
FORM 10-K
(cid:95)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal period ended September 30, 2009
OR
(cid:134)
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number
1-14007
SONIC FOUNDRY, INC.
(Exact name of registrant as specified in its charter)
MARYLAND
(State or other jurisdiction of incorporation or
organization)
39-1783372
(I.R.S. Employer Identification No.)
222 W. Washington Ave, Madison, WI 53703
(Address of principal executive offices)
(608) 443-1600
(Issuer's telephone number)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common stock par value $0.01 per share
Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act.
Yes
No
(cid:57)
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.
Yes
No
(cid:57)
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
(cid:57)
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of 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.
Yes
No
(cid:57)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
(cid:57)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes
No
(cid:57)
The aggregate market value of the registrant’s common stock held by non-affiliates computed by reference to the
price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the
last business day of the Registrant’s most recently completed second fiscal quarter was approximately $21,860,000.
The number of shares outstanding of the registrant's common equity was 3,606,922 as of December 1, 2009.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2009 Annual Meeting of Stockholders are incorporated by reference into
Part III. A definitive Proxy Statement pursuant to Regulation 14A will be filed with the Commission no later than
January 28, 2010.
TABLE OF CONTENTS
PAGE NO.
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Business .................................................................................................................................
Risk Factors ...........................................................................................................................
Unresolved Staff Comments ..................................................................................................
Properties ...............................................................................................................................
Legal Proceedings..................................................................................................................
Submission of Matters to a Vote of Security Holders............................................................
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities...............................................................................................
Selected Consolidated Financial Data....................................................................................
Management's Discussion and Analysis of Financial Condition and Results of
Operations..............................................................................................................................
Quantitative and Qualitative Disclosures About Market Risk ...............................................
Consolidated Financial Statements and Supplementary Data:
Report of Grant Thornton LLP, Independent Registered Public Accounting Firm ...............
Consolidated Balance Sheets .................................................................................................
Consolidated Statements of Operations .................................................................................
Consolidated Statements of Stockholders' Equity..................................................................
Consolidated Statements of Cash Flows ................................................................................
Notes to Consolidated Financial Statements..........................................................................
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure ..............................................................................................................................
Controls and Procedures ........................................................................................................
Other Information ..................................................................................................................
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Directors, Executive Officers and Corporate Governance.....................................................
Executive Compensation .......................................................................................................
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters ...............................................................................................................
Certain Relationships and Related Transactions, and Director Independence.......................
Principal Accountant Fees and Services ................................................................................
3
16
27
27
27
27
28
31
32
40
41
41
42
43
44
45
46
63
63
63
64
64
64
64
65
Explanatory Note:
Effective November 16, 2009, Sonic Foundry, Inc. implemented a one-for-ten reverse split of its stock. All share
amounts and per share data in this Annual Report on Form 10-K have been adjusted to reflect this reverse stock
split.
(This page intentionally left blank.)
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2009
When used in this Report, the words “anticipate”, “expect”, “plan”, “believe”, “seek”, “estimate” and similar
expressions are intended to identify forward-looking statements. These are statements that relate to future
periods and include, but are not limited to, statements about the features, benefits and performance of our Rich
Media products, our ability to introduce new product offerings and increase revenue from existing products,
expected expenses including those related to selling and marketing, product development and general and
administrative, our beliefs regarding the health and growth of the market for Rich Media products, anticipated
increase in our customer base, expansion of our products functionalities, expected revenue levels and sources of
revenue, expected impact, if any, of legal proceedings, the adequacy of liquidity and capital resources, and
expected growth in business. Forward-looking statements are subject to risks and uncertainties that could cause
actual results to differ materially from those projected. These risks and uncertainties include, but are not limited
to, market acceptance for our products, our ability to attract and retain customers and distribution partners for
existing and new products, our ability to control our expenses, our ability to recruit and retain employees, the
ability of distribution partners to successfully sell our products, legislation and government regulation, shifts in
technology, global and local business conditions, our ability to effectively maintain and update our products and
service portfolio, the strength of competitive offerings, the prices being charged by those competitors, and the
risks discussed elsewhere herein. These forward-looking statements speak only as of the date hereof. We
expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-
looking statements contained herein to reflect any change in our expectations with regard thereto or any change
in events, conditions or circumstances on which any such statement is based.
ITEM 1.
BUSINESS
Who We Are
PART I
Sonic Foundry, Inc. is a web communications technology leader, providing webcasting, lecture capture and
knowledge management solutions for higher education institutions, businesses and government agencies worldwide.
Powered by our patented webcasting platform, Mediasite®, Sonic Foundry empowers people to transform the way
they communicate. We help our customers connect within a dynamic, evolving world of shared knowledge and
envision a future where learners and workers around the globe use webcasting to bridge time and distance;
accelerate research, productivity and growth; and reduce the environmental impact of traditional education and
business communications.
Sonic Foundry solutions include:
• Mediasite Recorders for capturing multimedia presentations
• Mediasite EX Server platform for streaming, archiving and managing online presentation content
• Sonic Foundry Event Services for turnkey event webcasting based on the Mediasite platform
• Sonic Foundry Services for hosting, installation, training and custom development
• Mediasite Customer Assurance for annual hardware and software maintenance and technical support
Today, nearly 1,800 customers using more than 3,500 Mediasite Recorders in presentation venues around the world
are capturing hundreds of thousands of multimedia presentations with millions of viewers.
Sonic Foundry, Inc. was founded in 1991, incorporated in Wisconsin in March 1994 and merged into a Maryland
corporation of the same name in October 1996. Our executive offices are located at 222 West Washington Ave.,
Madison, Wisconsin 53703 and our
is
www.sonicfoundry.com. In the “Investor Information” section of our website we make available, free of charge, our
annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to
reports required to be filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as soon as
reasonably practicable after the filing of such reports with the Securities and Exchange Commission.
is (608) 443-1600. Our corporate website
telephone number
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Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2009
Challenges We Address
Every organization faces a fundamental need to communicate information efficiently to individuals who need it.
Universities and colleges need to connect lecturers with students for advanced learning. Corporations strive for
successful communication and collaboration between colleagues to provide value to customers. Government
agencies must keep partners, stakeholders and constituents informed to operate effectively. And yet, communication
and e-learning challenges remain, including:
Ensuring students’ academic and professional success
• Enabling learners to watch or review course material to improve retention and positively impact grades
• Providing distance learners with the same quality education as on-campus students
• Helping students balance education, career and family commitments
•
• Capturing complex graphics where visual clarity is essential for learning
Increasing enrollment without the expense of new classrooms and facilities
Connecting with a geographically-dispersed audience
• Simultaneously addressing people in multiple locations
• Holding meetings when it is not feasible for everyone to attend
• Transmitting timely information that is crucial for all to receive
• Requiring employees, regardless of time zone or schedule, to attend training
Improving productivity and overall organizational knowledge
• Avoiding the need for participants to leave their desks to attend a meeting or training
• Maintaining productivity while in training
• Reducing time to train new hires
•
• Keeping everyone on the same page to prevent false starts and forgotten directives
• Documenting meeting content for later review
• Maintaining a rich library of organizational knowledge
• Documenting and preserving expertise from a retiring workforce
Increasing retention by avoiding distractions, interruptions or absence
Reducing logistical and financial impacts
• Cutting travel expenses and carbon footprints
• Eliminating repetition of the same presentation to different audiences
• Reducing repeated costs for printing, mailing and meeting expenses
Avoiding cumbersome and restrictive technologies
• Maintaining the way presenters present without requiring technical expertise in presentation systems
• Capturing and sharing knowledge in real-time without pre-authoring or pre-uploading of content or needing
substantial post-production time
• Removing significant time and specialized expertise to manage presentation systems
Sonic Foundry Solutions
Sonic Foundry is changing the way organizations share and use information. Our solutions include:
• Mediasite Recorders for capturing multimedia presentations
• Mediasite EX Server platform for streaming, archiving and managing online presentation content
• Sonic Foundry Event Services for turnkey event webcasting based on the Mediasite platform
• Sonic Foundry Services for hosting, installation, training and custom development
• Mediasite Customer Assurance for annual hardware and software maintenance and technical support
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Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2009
Mediasite Recorders are designed with presenters in mind. They automatically record what presenters say and
show, without changing how they present, and webcast it online. Mediasite Recorders automate the capture and
delivery of any presenter’s audio, video and presentation graphics as high resolution, interactive presentations that
can be immediately watched via the web – live or on-demand. The result is the industry’s simplest workflow,
eliminating time-consuming authoring, slide uploads and post-production work. Plus, seamless integration with
existing audio/video and educational technology means organizations can confidently scale multimedia webcasting
throughout their academic or corporate enterprise.
We offer Mediasite Recorders for the following environments:
• A room-based Mediasite Recorder (RL Series) for presentation facilities like conference and training rooms,
lecture halls, auditoriums and classrooms
• A mobile Mediasite Recorder (ML Series) for portability to off-site events, conferences, trade shows or multiple
venues throughout an organization
Accompanying all Mediasite Recorders is the Mediasite Editor, a desktop software tool allowing users to edit their
presentations, if desired, before publishing them to the web.
Mediasite EX Server Platform is a powerful platform for delivering and managing live and on-demand webcasts.
It greatly simplifies content management by providing a single system to schedule, catalog, customize, secure, track
and integrate recorded presentations. It brings order and control to valuable content libraries by making it easy to
manage hundreds of system users, thousands of recorded hours and as many viewers as needed.
Mediasite EX Server allows organizations to:
• Save time and staffing by scheduling presentations to be automatically recorded without an operator
• Automatically create customizable and searchable online content catalogs without web development or
integration skills
• Secure presentations and Mediasite system access for authorized users
• Customize and brand their presentation content, incorporate audience interactivity through polls and Q&A
• Support closed captions to provide viewers a richer presentation experience while meeting federal or state
accessibility mandates
• Track and report on viewing activity to see who is watching what presentations when and to analyze viewing
patterns that may correlate to improved learning outcomes, increased performance or program effectiveness
• Centrally monitor and control the recording functions of multiple simultaneous Mediasite Recorders for
•
increased operator efficiency
Integrate Mediasite content into other course/learning/contentmanagement systems, web portals, blogs or online
community sites
• Leverage existing network technologies for content distribution efficiency and performance
• Reliably scale to meet the webcasting needs of departmental and enterprise-wide implementations alike
• Choose the deployment model that best suits their environment, whether on-premise or hosted in the Sonic
Foundry datacenter
Sonic Foundry Event Services equips customers with a team of trained technicians who work on-site to webcast
conferences and events. Event webcasting:
• Enhances attendee experience with online presentation catalogs
• Reaches a wider audience, making presentations available to those not able to attend
• Brands presentations using organization logos, colors and messages
• Reviews a real-time record of what took place
• Links handout materials with the full presentation, including audio, video and graphics
• Offers sample content to entice new attendees to participate
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Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2009
Sonic Foundry Services enable organizations to quickly and easily take advantage of the Mediasite platform,
without having to wade through the IT or network complexities associated with their own infrastructure. Sonic
Foundry Services include:
• Hosting or Software as a Service (SaaS): Our pay-as-you-go service offerings provide content hosting, delivery
and management of Mediasite content using Sonic Foundry’s data center and infrastructure. These managed
services allow organizations of all sizes to jump start their web communications initiatives quickly and simply.
They provide a low-risk way to implement online multimedia communications before bringing hosting
requirements in-house and can offer a hassle-free long-term solution.
Installation: Sonic Foundry provides onsite consulting and installation services to help customers optimize their
deployment and efficiently integrate Mediasite within their existing AV and IT infrastructures, processes and
workflows.
•
• Training: To maximize customers’ return on investments, skilled trainers provide the necessary knowledge
transfer so organizations feel confident in using, managing and leveraging Mediasite’s capabilities. On-site
training is customized to specific requirements and skill levels, while online training provides convenient
anytime access to a web-based catalog of training modules.
• Custom Development: Sonic Foundry streamlines how Mediasite interfaces with a customer’s specific
technologies, internal policies, workflow or content delivery systems through project-based development.
Mediasite Customer Assurance provides customers annually renewable maintenance and support plans for their
Mediasite solutions – giving them access to Sonic Foundry technical expertise and Mediasite software updates. With
a Mediasite Customer Assurance contract, customers are entitled to:
• Software upgrades and updates for Mediasite Recorders and Servers
• Unlimited technical support assistance
• Extension of their recorder hardware warranty
• Advanced Recorder hardware replacement
• Authorized access to the Mediasite Customer Assurance Portal where they can access software available for
download, documentation, knowledge base articles, tutorials, online training and technical resources at any
time.
The majority of our customers purchase a Customer Assurance plan when they purchase Mediasite Recorders or
Servers.
What Sets Mediasite Apart?
• Ease of use – We believe that presenters should not need to know anything about the technology that is
facilitating their online communication. Automated or schedule-based recording simplifies what has previously
been a technical and complex workflow. As a result, presenters can present as they normally do, which enables
non-technical, line of business and subject matter experts to feel comfortable communicating via Mediasite.
Similarly, viewers need nothing more than a web browser to watch Mediasite presentations.
• Comprehensive content management – We understand the need to bring order to a growing presentation
library so content can be found, used and re-purposed to derive maximum value. Organizations must find ways
to manage that content, and Sonic Foundry believes a complete solution focuses not only on the recording of
knowledge, but also the retention and management of that knowledge in a system specifically designed for rich
media. Mediasite automatically creates searchable online catalogs that index and organize presentations with
customizable playback experiences. With integration support for leading enterprise directories, all content can
be secured to allow/deny access to specific groups or individuals based on roles and permissions. Mediasite
also allows organizations to track and generate reports for every presentation and/or user of the system, letting
them see exactly who is watching what, when and how long.
• Reliability – Whether starting at the department level with a couple rooms or at the enterprise level with a
campus- or company-wide implementation, Mediasite was developed to be the single platform to confidently
and reliably scale to organizations’ webcasting needs. Nearly 1,800 customers around the world depend on
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Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2009
Mediasite and its proven design to webcast critical information, enrich daily communications and retain their
organizational knowledge.
• Dynamic multimedia experience – The Mediasite experience takes into account different individual learning
styles – auditory, visual and kinesthetic – providing an interactive format that engages the viewer via different
modalities to increase content comprehension and retention. We understand that learning materials and
supporting visuals come in many different forms, and Mediasite Recorders’ flexible capture options support
input from any laptop application, tablet PC, electronic whiteboard, document camera, medical instrumentation
and more. (Many other webcast solutions focus on PowerPoint as the predominant or only source of content
and may not support video.) In November 2006, the United States Patent and Trademark Office granted Sonic
Foundry a patent on Mediasite’s unique method to capture and automatically index and synchronize what the
presenter says (audio and video) with visual aids (RGB-based presentation content) and instantly stream them
both over the Internet. Mediasite is also the first lecture capture solution to offer a fully Microsoft®
Silverlight®-enabled Player which provides a more dynamic, user-controlled viewing experience. Adding to
Mediasite’s interactivity is the ability to incorporate polls, Q&A or links to other related reference materials
supporting the learning process. Support for video closed captioning benefits those with hearing disabilities, but
also allows all users to use keyword search to pinpoint and play back content of interest within a Mediasite
presentation.
• Software as a Service (SaaS) deployment option – To minimize IT challenges, network infrastructure issues
and expertise required to install, configure and maintain Mediasite within the enterprise, Sonic Foundry hosting
provides organizations a low-risk method of using the complete Mediasite platform within a state-of-the-art
datacenter.
• Customer service – Sonic Foundry and the growing Mediasite community provide a reliable, collaborative
support network for all Mediasite customers. Our breadth of field-based system engineers and responsive
customer care ensure that customers have readily available resources committed to their success. The Mediasite
User Group (MUG), now over 900 members strong, is one of the most vibrant, diverse and rapidly expanding
user communities for lecture capture, online training and e-learning. MUG members share ideas and get
feedback from community experts through online forum discussions, participate in live quarterly meetings to
exchange best practices and network at UNLEASH, the annual Mediasite User Conference.
Sonic Foundry Solutions in Higher Education and the Enterprise
Sonic Foundry solutions are rapidly emerging as the standard for recording, delivering and managing one-to-many
multimedia webcasts for higher education and corporate, healthcare or government enterprises
Sonic Foundry solutions in higher education:
Among post-secondary institutions, Mediasite is used for:
• Online lectures (blended/hybrid learning): students review content outside of in-class instruction
• Distance learning: off-campus students learn remotely online
• Continuing education: professionals learn online or supplement classroom experiences
• Faculty training and development
• Research and collaboration: faculty document and present findings
• Recruitment and orientation: campus tours, financial aid instructions
• Special events: commencement, guest speakers
• University business: leadership meetings, alumni relations, outreach
Through interviews, many higher education institutions report that Mediasite:
•
Improves student learning outcomes
o Lets students watch and re-watch presentations at their convenience, boosting information retention
o Replicates the in-class experience for online students or those unable to attend class
o Contributes to enhanced grades
o Caters to different learning modalities – audio, visual, kinesthetic
• Enables their institution to remain competitive
o Allows quick development and delivery cost-effective online programs
o Supports higher enrollment and/or tuition without new classrooms
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Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2009
Improves student retention and matriculation
o
o Helps attract students and faculty
• Empowers faculty
o Allows them to teach as usual without learning new technology
o Promotes greater in-class interactivity rather than copious note-taking
o
o Enables knowledge sharing and collaboration with colleagues
Improves student outcomes
• Boosts campus outreach
o Bolsters recruitment efforts
o Captures and preserves campus events
o Enhances alumni relations
Given the technology pedigree of today’s college students, this move to online learning makes perfect sense as most
of these students have never known a world without personal computers and the web. The delivery options for a
modern education are akin to the electronic delivery of music that emerged several years ago. Students demand
immediate access to their coursework regardless of time or place.
Recent trends such as the slowing economy and lingering high fuel prices continue to drive more students,
particularly adult learners, to online education – through enrollment in blended or hybrid courses with a traditional
on-campus component or through fully online distance learning programs. Historically, graduate programs and
STEM (science, technology, engineering and math)-oriented degree programs in schools of medicine, nursing,
engineering or business have comprised the majority of the company’s academic customer base. We are now
experiencing heightened market demand for lecture capture within undergraduate and community college programs
as well.
According to The November 2008 Sloan Consortium report, Staying the Course: Online Education in the United
States, 2008, online enrollments the past several years have been growing considerably. The 12.9 percent growth
rate for online enrollments far exceeds the 1.2 percent growth of the overall higher education student population. In
the 2007 fall term, over 3.9 million, or more than 20 percent of all U.S. higher education students, were taking at
least one online course, a 12 percent increase over the previous year.
Community colleges, specifically, have significantly increased their number of blended or hybrid and web-enhanced
courses. The Instructional Technology Council’s “2008 Distance Education Survey Results: Tracking the Impact of
eLearning at Community Colleges (April 2009)” shows that overall, 74 percent of community colleges offer at least
one “online degree”, meaning at least 70 percent of the required course work is offered online. Sixty-four percent of
community colleges plan to increase the number of “blended courses”, for which 30 to 79 percent of course content
is delivered online, with some face-to-face meetings. The most recent data indicates no signs of these online learning
trends slowing.
In September 2008, Sonic Foundry sponsored a research project with the University of Wisconsin E-Business
Institute which resulted in the study, “Insights Regarding Undergraduate Preference for Lecture Capture.” A survey
was sent to 29,078 undergraduate and graduate students at the University of Wisconsin-Madison in April 2008.
Average response rate exceeded 25 percent. Of the survey participants, a significant number of undergraduates (47
percent) have taken a class in which lectures were recorded and made available online. Eighty-two percent of the
undergraduates in the sample strongly preferred a course that records and streams lecture content online versus a
course that only features in-room instruction. Students reported better retention, improved ability to review for
exams and greater engagement during classes with lecture capture. Over half of the undergraduates indicated that,
even after course completion, having course material available online would be important and that there was interest
in accessing online material in their professional lives. Over 60 percent of the sample was willing to pay for lecture
capture services. Of those willing to pay, the majority of undergraduates (69 percent) expressed a preference to pay
on a course-by-course basis rather than having lecture capture fees bundled with existing technology fees.
Several universities have conducted their own independent studies to assess the impact of Mediasite on student
performance. Penn State Hershey Medical Center and College of Medicine, a Mediasite campus since January 2004,
deployed a pilot program at the onset of the 2007-2008 academic year to record lectures to first year medical
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Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2009
students. During this academic year, lectures were viewed a total of 22,451 times, averaging 59.1 views per lecture
by a class of 154 students. Mediasite use increased throughout the academic year, with 97 percent of students using
Mediasite to review lectures by the semester's end. Almost half of the students surveyed (41 percent) cited reviewing
complicated material as the number one motivator for using Mediasite. The majority (88 percent) agreed that
Mediasite helps them achieve their educational goals. Much fewer (25 percent) said podcasting had the same effect.
Faculty members reported that recording their lectures did not decrease class attendance. The survey also revealed a
correlation between the grading method and the use of Mediasite. Students watch lectures more often via Mediasite
for classes where grades are awarded as honors, high pass, pass and fail versus simply pass/fail.
The Paul Merage School of Business at the University of California, Irvine, surveyed students in its 2007-2008
MBA for Executives and MBA for Health Care Executives programs. Ninety-one percent used Mediasite to view
lectures, 71 percent found they were more engaged in lectures when they didn’t have to focus on taking copious
notes and 83 percent said they learned more in courses when lectures were available on demand. The survey also
determined that 93 percent of the students would choose an MBA program that produces mediasite course content
over a school with traditional in-class instruction alone. Furthermore, 82 percent would pay higher tuition for a
program that streams and archives instruction, with almost half willing to pay between $2,000 and $5,000 more for
their two-year degree.
To remain relevant, colleges and universities are striving to differentiate themselves through technical leadership as
a means to attract these tech-savvy students, while balancing their campus technology improvements with systems
that faculty will embrace and adopt. As a result, the education market is beginning to restructure and increase
investments around online learning. We believe the visible integration of multimedia learning content into core
university applications and the success of bundled online learning technology solutions are two healthy indicators
for the widespread adoption of online campus lectures.
To date, Sonic Foundry has installed Mediasite in the larger lecture halls and classrooms of campuses nationwide.
We now see more and broader expansions and integrations of Mediasite at the campus-wide level. Course and
learning management systems like Blackboard®, Moodle, Desire2Learn®, Angel, or Sakai are ubiquitous in the
education enterprise. As the foundation for e-learning, these systems are rapidly moving beyond simply aggregating
related course documents (handouts, assignments, course syllabi) to becoming students’ single-source portal for all
course-related materials including recorded multimedia content like online lectures. Mediasite’s packaged
integrations for Blackboard and Moodle, the leading course management systems used in higher education, address
the need to make learning content accessible to students when and where they need it.
Sonic Foundry Solutions in the Enterprise:
Within medium to large corporate, healthcare and government enterprises, Mediasite has numerous applications.
In corporate enterprises it is used for:
• Executive communications: state of the enterprise speeches, all-hands meetings
• Workforce development: training, HR briefings, policy documentation
• Sales and marketing: demonstrations, product announcements, webinars, channel relations
•
• Customer support: product tutorials, self-guided troubleshooting
•
Investor relations: earnings calls, analyst briefings, annual reports
• Conferences and events
Internal knowledge repositories: technical training, research collaboration, user-generated content
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Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2009
In health-related enterprises it is used for:
• Education: CME, grand rounds, seminars, student/patient simulations
• On-demand medical information
• Caregiver training
• Emergency response coordination
• Public health announcements
• Research and collaboration
• Conferences and events
In government agencies it is used for:
• Program management: relief work, military coordination, emergency preparedness
• Community outreach: committee meetings, public safety announcements
• Training, workshops and events
• Executive and legislative communications: constituent relations, public speeches, debates
Through interviews across these verticals, enterprise customers report that Mediasite:
• Expands training and communications opportunities
o Enables them to offer training to more and larger audiences
o Captures knowledge from a retiring workforce
o Supports the creation and sharing of user-generated content
o Aides in building a knowledge library
o Extends the life of conferences and events
• Cuts travel and meeting expenses
o Eliminates redundant speaking engagements
o Opens communication channels with dispersed audiences regardless of location or time zone
o Provides the ability to address everyone at once
• Boosts efficiency
o Enables immediate communication of time-sensitive information
o Delivers the message directly to the desktop to reduce downtime
o Allows participants to watch when it’s convenient to avoid interruptions and increase retention
o Reduces new hire training time
• Helps build stronger teams
o Fosters direct management/employee communications
o Supports more frequent, clearer communication with colleagues and staff
o Keeps all employees aligned
o Cultivates team morale and collaboration
Less than a decade ago, the only people in the enterprise talking openly about online multimedia were AV
specialists in IT or media services units, and even these people were skeptical about what benefits streaming would
hold for the enterprise. Now, knowledge workers, executives, event planners and people in training, sales, human
resources and research and development are pushing for online multimedia and webcasting as part of their e-
learning initiatives. They have a business need to be seen and heard by their colleagues, and the return on investment
(ROI) for multimedia online learning is real and measurable.
Claire Schooley, senior analyst with Forrester Research, Inc., wrote in the April 2009 report, The ROI of eLearning,
“Online learning earns companies a positive ROI in less than a year. If you have a business that is spread across
many locations, it makes good business sense to implement an online learning program as a replacement for some
face-to-face learning and as a complement to other instructor-led training in the form of blended learning. Whether
employees take compliance training, desktop skills development, or leadership training, online learning is flexible,
consistent, and repeatable with minimal travel costs. The keys to success include excellent eLearning content that
engages the learner; good change management plans for this new way of learning; and technology that is scalable
and easy to use to manage the learning.” She goes on to state that “Outside of subject areas where face-to-face
interaction is necessary, recent research indicates that no significant differences exist in the effectiveness of learning
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Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2009
through classroom, online, or self-study. Self-paced eLearning allows learners to assimilate content at their own
speed – often 20% to 50% faster than in a classroom”
Gartner vice president and distinguished analyst, Carol Rozwell, echoes the value of e-learning in the January 2009
report, Key Issues for Corporate Learning Systems, 2009. She states, “Getting people ‘up to speed’ quickly and
efficiently is critical for all roles, but especially for those positions with a high turnover rate, such as sales and
customer support. Reducing ‘time to competency’ demands that employees, customers and business partners are
connected to high-quality learning content so they can achieve workplace performance objectives. In times of
financial stress, interest in e-learning increases. It gives learners the opportunity for training without the expense of
travel and it allows the company to support ‘green’ initiatives.”
technology market for enterprise streaming solutions
The
that support many e-learning and business
communications initiatives is growing as well. In Wainhouse Research’s, Enterprise Streaming Products Market
Size and Forecast (July 2009), senior analyst and partner, Ira Weinstein, estimates the enterprise streaming products
market (which includes content capture and management solutions and related services for installation, training and
support) to be $365 million. This market will expand to $1.039 billion by 2013 with Weinstein projecting annual
growth rates to stabilize in the mid-30% range in the latter portion of the 2009-2013 forecast period.
Future Directions
Because webcasting and lecture capture are becoming an everyday part of the way people work and learn, we are
driven to shorten the time it takes people not only to capture and share their information but also to find the
information they need. While today leading universities use Mediasite for lecture capture and corporations webcast
training and executive communications, we envision a future where people around the globe use webcasting to
bridge time and distance; accelerate research, productivity and growth; and reduce the environmental impact of
traditional education and business communications. As a company, we are helping create the libraries of tomorrow
with technology that does not compound the world’s information overload. We are working to put a human face on
all online knowledge, and we believe the world will be more knowledgeable and more connected as a result.
Supporting this vision, our ongoing innovations center on:
• Developing deployment options to meet the webcasting needs for organizations of all sizes. This includes:
-
Significant investment, development and evolution of our current Mediasite hosting platform to provide
Software as a Service (SaaS). This alternative to traditional on-premise deployments provides an ideal
way to minimize IT challenges and potential webcasting risks while affordably extending high
performance, fault tolerant webcasting to small and large customers alike.
- Content capture innovations that economically scale across entire organizations, allowing anyone to record
and share their knowledge or expertise.
•
Integrating with and embedding Mediasite content into enterprise portals, learning and course management
systems, content management repositories, blogs and online communities.
• Enabling context-based viewing of multimedia webcasts within online environments that enable and encourage
discussion around the content and synchronized with it.
• Supporting content playback experiences on additional platforms and popular mobile computing devices.
• Evolving Mediasite’s content management capabilities to accommodate organizations’ existing digital video
assets.
• Continuing development of keyword search within and across archived multimedia presentations.
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Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2009
Segment Information
We have determined that in accordance with FASB ASC-280-10, we operate in only one segment as we do not
disaggregate profit and loss information on a segment basis for internal management reporting purposes to our chief
operating decision maker. Therefore, such information is not presented.
We have included the cash effect of billings not recorded as revenue, which are deferred for GAAP purposes, in
arriving at non-GAAP net income or loss. Our services are typically billed and collected in advance of providing
the service which requires minimal cost to perform in the future. Billings are a better indicator of customer activity
and cash flow than revenue is, in management’s opinion, and is therefore used by management as a key operational
indicator. Billings is computed by combining revenue with the change in unearned revenue. Total billings for
Mediasite product and support outside the United States totaled 28 percent and 19 percent in 2009 and 2008,
respectively.
Our largest individual customers are typically value added resellers (“VARs”) and distributors since the majority of
our end users require additional complimentary products and services which we do not provide. Accordingly, in
fiscal 2009 and 2008 a master distributor, Synnex Corporation (“Synnex”), contributed 29 percent and 44 percent,
respectively, of total world-wide billings. As a master distributor, Synnex fulfills transactions to VARs, end users
and other distributors. No other customer represented over 10 percent in 2008 or 2009.
Sales
We sell and market our offerings through a sales force that manages a channel of value-added resellers, system
integrators, consultants and distributors. These third party representatives specialize in understanding both
audio/video systems and IT networking. In fiscal 2009, we utilized two master distributors in the U.S. and over 100
resellers, and sold our products to nearly 1,000 total end users. Our focus has been primarily in the United States and
primarily to customers we have identified as having the greatest potential for high use; that is, organizations with
presenters, trainers, lecturers, marketers and leaders who have a routine need to communicate to many people in
higher education, government, health and certain corporate markets. Despite our primary attention on the North
American market, reseller and customer interest outside of North America has grown and accordingly, we allocated
three sales professionals to address international demand. To date, we have sold our products to customers in over
40 countries outside the United States. Total billings for Mediasite product and support outside the United States
totaled 28 percent and 19 percent in fiscal 2009 and 2008, respectively.
Vertical market expansion: Over half our revenue is realized from the education market. Recent trends such as
high gas prices and the slowing economy are driving more students, particularly adult learners, to seek online
education options. Similarly, demand for lecture capture within undergraduate, community college and blended
learning programs is beginning to demonstrate growth. This development represents an emerging trend beyond the
traditional academic customer base for the company, which has primarily consisted of graduate, distance learning
and technical degree programs.
For our higher education as well as corporate, government and association clients, we anticipate weakening
economic conditions will expand market demand for more outsourced services versus licensed sales. Over the last
two years, the company has made extensive capital and technology investments to advance its services model with
turnkey event webcasting, comprehensive hosting/Software as a Service (SaaS), and e-commerce capabilities that
position us well to deliver more diversified business services.
With the launch of our Event Services group in 2007, we continue to see growing demand for conference and event
webcasting. These event-based communication, education and training applications, combined with outsourced
webcasting services, are expected to drive the company’s corporate sales activities going forward.
12
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2009
Repeat orders: Many customers initially purchase a small number of Mediasite Recorders to test or pilot in a
department, school or business unit. A successful pilot project and the associated increase in webcasting demand
from other departments or schools leads to follow up, multiple Recorder orders as well as increased Mediasite
Server capacity. In fiscal 2009, 62 percent of billings were to preexisting customers compared to 59 percent in fiscal
2008.
Renewals: As is typical in the industry, we offer annual support and maintenance service contract extensions for a
fee to our customer base.
Marketing
Marketing efforts span the spectrum of product demonstrations, tradeshows, websites, webinars, brochures, direct
mail, e-mail campaigns, newsletters, print and online advertising, sponsorships, white papers and analyst relations.
We often request and receive press release quotes and written or multimedia testimonials from satisfied, high-profile
reference customers, particularly those that demonstrate innovative and valuable uses of the Mediasite platform and
Event Services. We solicit respected industry magazines and trade organizations to review our product and use
advisors as introductions to new channels or customers. We have a large, growing database of potential customers in
the education, government and corporate marketplaces and have established a process of targeting specific verticals
that have a direct and demonstrated need for our offerings.
Operations
We contract with third parties to build the hardware of our Mediasite Recorders and purchase quantities sufficient to
fill specific customer orders, including purchases of inventory by resellers. Quantities are maintained in inventory by
the third party providers and shipped directly to the end customer or reseller. The hardware manufacturers provide a
limited one-year warranty on the hardware, which we pass on to our customers who purchase a Mediasite Customer
Assurance support and maintenance plan. We have an alternate source of manufacturing for some of the products we
produce and believe there are numerous additional sources and alternatives to the existing production process. To
date, we have not experienced any material difficulties or delays in the manufacture and assembly of our products or
material returns due to product defects.
OTHER INFORMATION
Competition
In the lecture capture and webcasting market we face competition from various companies that provide related, but
different, communication technologies. These include:
• Web conferencing includes solutions from Adobe, Cisco (WebEx), Microsoft and Citrix. Although part of the
overall online multimedia communications landscape, these solutions are designed primarily for collaborative
communications versus one-to-many communications like Mediasite. Many organizations acknowledge that they
need both technologies – one-to-many webcasting and collaborative web conferencing – to appropriately address
their different communication requirements.
• Video conferencing includes solutions from Polycom, TANDBERG (now Cisco) and Sony. These solutions are
designed primarily for one-to-one or group communications with high levels of interactivity and collaboration. Like
web conferencing, many organizations use both video conferencing and webcasting. Mediasite integrates with
videoconferencing endpoints from Polycom and TANDBERG to record and manage interactive meetings,
discussions and distance learning courses alongside other Mediasite content.
• Authoring tools include solutions like Accordent PresenterPLUS, Camtasia Studio and Microsoft Producer. Unlike
webcasting, web conferencing or video conferencing, which are forms of online multimedia communication that
capture and distribute/stream content, these solutions are production-oriented tools designed to create and edit
13
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2009
multimedia content only. Some organizations will use these desktop tools to create training content by manually
integrating existing audio, video, images, branding and other visual elements into a multimedia presentation which
can then be published to a web or streaming server for distribution. This process can require a significant amount of
production effort and user expertise in presentation authoring.
• Online video services and virtual meeting platforms include solutions from inXpo, Livestream, ON24, Stream57,
Thomson Reuters, Unisfair and Wall Street Webcasting. These companies offer services or SaaS-based platforms
that either allow audio and video to be captured from a presenter’s computer (often with supporting materials
uploaded in advance), produced streaming video services or 2D/3D virtual environments that may or may not
include rich media webcasts.
Other vendors such as Echo360, Tegrity, Accordent Technologies and Panopto, provide lecture capture or webcasting
capabilities, but differ in their technology approach, particularly in the lecture capture arena. Mediasite is an appliance-
or room-based platform for lecture capture. It provides a full integrated system designed around an automated purpose-
built recording appliance that captures, publishes and manages rich media content. Room-based appliances are capable
of streaming live or on-demand and can leverage the full breadth of in-room audio/visual technology. Transparent
recording automation means no presenter intervention which leads to the broadest end-user adoption across campus. A
room-based platform like Mediasite also includes a complete content management platform for captured multimedia
presentations. Other lecture capture solutions are implemented as software applications designed to capture and publish
rich media content, but dependent upon a third-party content management platform, typically the institution’s course
management system. Software applications for lecture capture support on-demand streaming only and require in-room
PC integration with varying levels of presenter intervention and recording knowledge which may lead to lower adoption
rates throughout the campus. Lastly, laptop-resident desktop tools capture and publish non-rich media (limited video and
presentation graphics). Like software applications they support on-demand streaming only and require a third-party
content management platform. Desktop tools require the greatest degree of presenter intervention, technical confidence
and support. While prevalent on many campuses, these three factors limit the practicality for campus-wide adoption.
Some current and potential customers have developed their own home-grown webcasting or lecture capture solutions
which may compete with Mediasite. However, we often find many of these organizations are now looking for a solution
that requires less internal maintenance and effort, offers comprehensive management capabilities and a less cumbersome
workflow.
The more successful we are in the growing market for lecture capture and webcasting, the more competitors are likely to
emerge. We believe that the principal competitive factors in our market include:
• Ease of use and application transparency to the user
• Content management and scalability to address enterprise requirements
• Reliability and performance
• Security of content, applications and services
• Ability to integrate with third-party solutions and services
• Flexible deployment and acquisition options to suit various budgets
• Customer service and support
• A significant reference-able customer base
• Ability to introduce new products and services to the market in a timely manner
Two leading industry analyst firms recognize Sonic Foundry’s Mediasite as the leading, best-of-breed platform for
lecture capture. Frost & Sullivan awarded Sonic Foundry consecutive Market Leadership Awards for Lecture
Capture based on the market analyses in their World Presentation Assembly and Management Platforms reports
(2009 and 2007). The Frost & Sullivan Award for Market Leadership is given to the company that exhibits market
share leadership through the implementation of market strategy. Wainhouse Research also recognizes Mediasite as a
streaming and lecture capture market leader for distance education and elearning in their report, The Distance
Education and e-Learning Landscape V2 (December 2008). Among Wainhouse’s evaluation criteria are innovation,
market understanding, overall viability, product strategy and customer experience. According to the report, Sonic
14
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2009
Foundry ranks highest from the perspective of depth of overall blend of products and ranks among the leaders in its
ability to execute.
Intellectual Property
The status of United States patent protection in the Internet industry is not well defined and will evolve as the U.S.
Patent and Trademark Office grants additional patents. Currently two U.S patents that have been issued to us, and
four U.S. patent applications are pending. We may seek additional patents in the future. We do not know if our
pending patent applications or any future patent application will result in any patents being issued with the scope of
the claims we seek, if such patents are issued at all. We do not know whether the patents which were recently
approved or any patents we may receive in the future will be challenged, invalidated or be of any value. It is
difficult to monitor unauthorized use of technology, particularly in foreign countries where the laws may not protect
our proprietary rights as fully as in the United States, and our competitors may independently develop technology
similar to ours. We will continue to seek patent and other intellectual property protections, when appropriate, for
those aspects of our technology that we believe constitute innovations providing significant competitive advantages.
Our pending, and any future, patent applications may not result in the issuance of valid patents.
Our success depends in part upon our rights to proprietary technology. We rely on a combination of copyright, trade
secret, trademark and contractual protection to establish and protect our proprietary rights. We have registered
seven U.S. and four foreign country trademarks. We require our employees to enter into confidentiality and
nondisclosure agreements upon commencement of employment. Before we will disclose any confidential aspects of
our services, technology or business plans to customers, potential business distribution partners and other non-
employees, we routinely require such persons to enter into confidentiality and nondisclosure agreements. In
addition, we require all employees, and those consultants involved in the deployment of our services, to agree to
assign to us any proprietary information, inventions or other intellectual property they generate, or come to possess,
while employed by us. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to
copy or otherwise obtain and use our services or technology. These precautions may not prevent misappropriation
or infringement of our intellectual property.
Third parties may infringe or misappropriate our copyrights, trademarks and similar proprietary rights. In addition,
we may be subject to claims of alleged infringement of patents and other intellectual property rights of third parties.
We may be unaware of filed patent applications which have not yet been made public and which relate to our
services.
Intellectual property claims may be asserted against us in the future. Intellectual property litigation is expensive and
time-consuming and could divert management’s attention away from running our business. Intellectual property
litigation could also require us to develop non-infringing technology or enter into royalty or license agreements.
These royalty or license agreements, if required, may not be available on acceptable terms, if at all. Our failure or
inability to develop non-infringing technology or license the proprietary rights on a timely basis would harm our
business.
Research and Development
We believe that our future success will depend in part on our ability to continue to develop new business, and to
enhance our existing business. Accordingly, we invest a significant amount of our resources in research and
development activities. During each of the fiscal years ended September 30, 2009 and 2008, we spent $3.5 million
on internal research and development activities in our business. These amounts represent 19% and 23%,
respectively, of total revenue in each of those years.
Employees
As of September 30, 2009and 2008, we had 93 and 91 full-time employees, respectively. Our employees are not
represented by a labor union, nor are they subject to a collective bargaining agreement. We have never experienced
a work stoppage and believe that our employee relations are satisfactory.
15
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2009
ITEM 1A. RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW BEFORE MAKING AN
INVESTMENT DECISION. THE RISKS DESCRIBED BELOW ARE NOT THE ONLY ONES WE FACE.
ADDITIONAL RISKS THAT WE ARE NOT PRESENTLY AWARE OF OR THAT WE CURRENTLY BELIEVE ARE
IMMATERIAL MAY ALSO IMPAIR OUR BUSINESS OPERATIONS. OUR BUSINESS COULD BE HARMED BY
ANY OR ALL OF THESE RISKS. THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE
SIGNIFICANTLY DUE TO ANY OF THESE RISKS, AND YOU MAY LOSE ALL OR PART OF YOUR
INVESTMENT. IN ASSESSING THESE RISKS, YOU SHOULD ALSO REFER TO THE OTHER INFORMATION
CONTAINED OR INCORPORATED BY REFERENCE IN THIS ANNUAL REPORT ON FORM 10-K, INCLUDING
OUR CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES.
Economic conditions could materially adversely affect the Company.
The Company’s operations and performance depend significantly on worldwide economic conditions. Uncertainty
about current global economic conditions poses a risk as businesses, educational institutions and government entities
may cancel or postpone spending in response to tighter credit, negative financial news, declines in income or asset
values and/or reduced public sector funding, which could have a material negative effect on the demand for the
Company’s products and services and on the Company’s financial condition and operating results.
The current financial turmoil affecting the banking system and financial markets have resulted in a tightening in the
credit markets, a low level of liquidity in many financial markets, and extreme volatility in fixed income, credit,
currency and equity markets. There could be a number of follow-on effects from the credit crisis on the Company’s
business, including insolvency of key suppliers resulting in products delays, inability of customers, including
channel partners, to obtain credit to finance purchases of the Company’s products and/or customer, including
channel partner insolvencies; and inability of our channel partners and other customers to pay accounts receivable
owed to us, or delays in the payment of such receivables. Additionally, if these economic conditions persist, our
intangible assets may be impaired. If we determine that the fair value of intangible assets is less than its carrying value,
we would then measure impairment based on a comparison of the implied fair value of the intangible assets with the
carrying amount of the intangible assets. To the extent the carrying amount is greater than the implied fair value, we
would record an impairment charge for the difference.
Economic conditions may have a disproportionate affect on the sale of our products.
Many of our customers will look at the total A/V equipment and labor cost to outfit a typical conference room or
lecture hall as one amount for budgetary purposes. Consequently, although our products represent only a portion of
the total cost, the entire project of outfitting a room or conference hall may be considered excessive and may not
survive budgetary constraints. Alternatively, our resellers may modify their quotes to end customers by eliminating
our products or substituting less expensive competitive products in order to win opportunities within budget
constraints. Event service partners may similarly suggest that customers eliminate recording and webcasting as a
means of reducing event cost. Consequently, declines in spending by government, educational or corporate
institutions due to budgetary constraints may have a disproportionate impact on the Company and result in a
material adverse impact on our financial condition.
We may need to raise additional capital if we do not quickly become profitable.
At September 30, 2009 we had cash of $2.6 million and availability under our line of credit facility with Silicon Valley
Bank of $0.8 million. The Company has historically financed its operations primarily through cash from sales of equity
securities, cash from operations, and to a limited extent, through bank credit facilities. The Company has incurred losses
from operations in each of the last three fiscal years. In response to the recurring operating losses, the Company
initiated cost reduction efforts in January 2008. These efforts achieved a reduction in quarterly operating expenses
16
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2009
of approximately 24%. The Company anticipates operating expenses to remain at or near these reduced levels in
fiscal 2010. The Company achieved billings growth in fiscal 2009 of approximately 8% over 2008 and believes its
cash position is adequate to accomplish its business plan through at least the next twelve months even if billings are
unchanged from fiscal 2009.
We may evaluate further operating or capital lease opportunities to finance equipment purchases in the future and
expect to utilize the Company’s revolving line of credit to support working capital needs. While the Company
anticipates that it will be in compliance with all provisions of the agreement, there can be no assurance that the
existing Loan Agreement will remain available to the Company nor that additional financing will be available or on
terms acceptable to the Company.
The business environment is not currently conducive to raising additional debt or equity financing and may not improve
in the near term. If we borrow money, we may incur significant interest charges, which could harm our profitability.
Holders of debt would also have rights, preferences or privileges senior to those of existing holders of our common
stock. If we raise additional equity, the terms of such financing may dilute the ownership interests of current investors
and cause our stock price to fall significantly. We may not be able to secure financing upon acceptable terms, if at all. If
we cannot raise funds on acceptable terms, we may not be able to develop or enhance our products, take advantage of
future opportunities or respond to competitive pressures or unanticipated requirements, which could seriously harm our
business, operating results, and financial condition
We have a history of losses.
For the year ended September 30, 2009, we had a gross margin of $14.2 million on revenue of $18.6 million with which
to cover selling, marketing, product development and general administrative costs. Our selling, marketing, product
development and general administration costs have historically been a significant percentage of our revenue, due partly
to the expense of developing leads and the relatively long period required to convert leads into sales associated with
selling products that are not yet considered "mainstream" technology investments. For the years ended September 30,
2009 and 2008 our cash used in operations was ($1.5) and ($3.9) million, respectively. Although we expect our
operations to continue to improve in fiscal 2010, we may never achieve or sustain profitability on a quarterly or annual
basis.
We could lose revenues if there are changes in the spending policies or budget priorities for government funding
of colleges, universities, schools and other education providers.
Most of our customers and potential customers are public colleges, universities, schools and other education providers
who depend substantially on government funding. Accordingly, any general decrease, delay or change in federal, state or
local funding for colleges, universities, schools and other education providers could cause our current and potential
customers to reduce their purchases of our products and services, or to decide not to renew service contracts, either of
which could cause us to lose revenues. In addition, a specific reduction in governmental funding support for products
such as ours would also cause us to lose revenues. The severe economic downturn experienced in the U.S. and
globally has caused many of our clients to experience severe budgetary pressures, which has and will likely continue
to have a negative impact on sales of our products. Continuing unfavorable economic conditions may result in
further budget cuts and lead to lower overall spending, including information technology spending, by our current
and potential clients, which may cause our revenues to decrease. In addition, our accounts receivable may increase
and the relative aging of our receivables may deteriorate if our clients delay or are unable to make their payments
due to the tightening of credit markets and the lack of available funding. Also, because many of our clients begin
their fiscal year in July or later, easing of budgetary pressure may not occur until late fiscal 2010.
If we are unable to comply with NASDAQ’s continued listing requirements, our common stock could be delisted from
the NASDAQ Capital Market.
In March 2008, our common stock failed to maintain a minimum bid price of $1.00 for at least 10 consecutive days,
which caused our stock price to fail to meet one of the minimum standards required by the NASDAQ Stock Market for
continued listing as a NASDAQ Global Market security. On March 10, 2008 we received a letter from NASDAQ
17
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2009
indicating that we need to regain compliance with the minimum bid price requirement by September 8, 2008 in order to
remain on the NASDAQ Global Market. On September 9, 2008 we were notified by NASDAQ that we had failed to
regain compliance with the minimum bid price during the 180 days provided and our securities were therefore subject to
delisting from the NASDAQ Global Market. In response, we applied for and were notified on September 12, 2008 by
NASDAQ that NASDAQ approved our request to transfer the listing of our shares to the NASDAQ Capital Market.
Transfer to the NASDAQ Capital Market and compliance with its initial listing standards afforded an additional 180 day
period for our stock to attain the minimum $1.00 bid price for at least 10 consecutive business days until March 9, 2009.
We received notice from NASDAQ on October 22, 2008, December 23, 2008 and March 24, 2009 that NASDAQ had
determined to extend the suspension of the minimum bid price for additional 90 day periods. On July 14, 2009, we
received notice from NASDAQ that enforcement of the minimum bid price requirement would be reinstated on
August 3, 2009. The Company had 141 calendar days remaining in its bid price compliance period when suspension
began, extending the period in which to regain compliance to December 21, 2009. On November 2, 2009 the Company
notified NASDAQ that it intended to execute a reverse split of its stock in the ratio of one for ten, effective November
16, 2009. On December 2, 2009, the Company received notice from NASDAQ that the Company had regained
compliance with the minimum bid requirement and the matter was now closed. While there is no pending listing
compliance issue with NASDAQ, there is no assurance that the Company will not fail one or more listing requirements
in the future. If our stock is delisted, it may have a material adverse effect on the price of our common stock and the
levels of liquidity currently available to our stockholders. Delisting would also make it more difficult for us to raise
capital in the future or impact customer confidence. If our common stock is removed from the NASDAQ Capital
Market, an investor could find it more difficult to dispose of, or to obtain accurate quotations as to the market value of,
our common shares. Additionally, our stock may then be subject to "penny stock" regulations.
If a sufficient number of customers do not accept our products, our business may not succeed.
We cannot predict how the market for our products will develop, and part of our strategic challenge will be to convince
enterprise customers of the productivity, improved communications, cost savings, suitability and other benefits of our
products. Our future revenue and revenue growth rates will depend in large part on our success in delivering these
products effectively, creating market acceptance for these products, and meeting customer’s needs for new or enhanced
products. If we fail to do so, our products will not achieve widespread market acceptance, and we may not generate
significant revenue to offset our product development and selling and marketing costs, which will hurt our business.
We may not be able to innovate to meet the needs of our target market.
Our future success will continue to depend upon our ability to develop new products or product enhancements that
address future needs of our target markets and to respond to these changing standards and practices. Our revenue could
be reduced if we do not capitalize on our current market leadership by timely developing innovative new products or
product enhancements that will increase the likelihood that our products will be accepted in preference to the products of
our current and future competitors.
Multiple unit sales may fail to materialize.
We need to sell multiple units to educational, corporate and government institutions in order to sell most efficiently and
become profitable. In fiscal 2009, 62% of revenue was to existing customers compared to 59% in fiscal 2008. In
particular, selling multiple units to corporate customers has lagged results achieved in the higher education market;
consequently, we have allocated more resources to the higher education market. While we have addressed a strategy to
leverage existing customers and close multiple unit transactions, a customer may choose not to make expected purchases
of our products. The failure of our customers to make expected purchases will harm our business.
If our marketing and lead generation efforts are not successful, our business will be harmed.
We believe that continued marketing efforts will be critical to achieve widespread acceptance of our products. Our
marketing campaign may not be successful given the expense required. For example, failure to adequately generate
and develop sales leads could cause our future revenue growth to decrease. In addition, our inability to generate and
cultivate sales leads into large organizations, where there is the potential for significant use of our products, could
18
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2009
have a material effect on our business. We may not be able to identify and secure the number of strategic sales leads
necessary to help generate marketplace acceptance of our products. If our marketing or lead-generation efforts are
not successful, our business and operating results will be harmed.
The length of our sales and deployment cycle is uncertain, which may cause our revenue and operating results to
vary significantly from quarter to quarter and year to year.
During our sales cycle, we spend considerable time and expense providing information to prospective customers about
the use and benefits of our products without generating corresponding revenue. Our expense levels are relatively fixed in
the short-term and based in part on our expectations of future revenue. Therefore, any delay in our sales cycle could
cause significant variations in our operating results, particularly because a relatively small number of customer orders
represent a large portion of our revenue.
Our largest potential sources of revenue are educational institutions, large corporations and government entities that often
require long testing and approval processes before making a decision to purchase our products, particularly when
evaluating our products for inclusion in new buildings under construction or high dollar transactions. In general, the
process of selling our products to a potential customer may involve lengthy negotiations, collaborations with consultants,
designers and architects, time consuming installation processes and changes in network infrastructure in excess of what
we or our VARs are able to provide. As a result, our sales cycle is unpredictable. Our sales cycle is also subject to
delays as a result of customer-specific factors over which we have little or no control, including budgetary constraints
and internal approval procedures.
Our products are aimed toward a broadened user base within our key markets and these products are relatively early in
their product life cycles. We cannot predict how the market for our products will develop and part of our strategic
challenge will be to convince targeted users of the productivity, improved communications, cost savings and other
benefits. Accordingly, it is likely that delays in our sales cycles with these products will occur and this could cause
significant variations in our operating results.
Sales of some of our products have experienced seasonal fluctuations which have affected sequential growth rates
for these products, particularly in our first fiscal quarter. For example, there is generally a slowdown for sales of our
products in the higher education and corporate markets in the first fiscal quarter of each year. Seasonal fluctuations
could negatively affect our business, which could cause our operating results to fall short of anticipated results for
such quarters.
Our operating results are hard to predict as a significant amount of our sales typically occur at the end of a quarter
and the mix of product and service orders may vary significantly.
Revenue for any particular quarter is extremely difficult to predict with any degree of certainty. We typically ship
products within a short time after we receive an order and therefore, we typically do not have an order backlog with
which to estimate future revenue. In addition, orders from our channel partners are based on the level of demand
from end-user customers. Any decline or uncertainty in end-user demand could negatively impact end-user orders,
which could in turn significantly negatively affect orders from our channel partners in any given quarter.
Accordingly, our expectations for both short and long-term future revenue is based almost exclusively on our own
estimate of future demand based on the “pipeline” of sales opportunities we manage, rather than on firm channel
partner orders. Our expense levels are based largely on these estimates. In addition, the majority of our orders are
received in the last month of a quarter; thus, the unpredictability of the receipt of these orders could negatively
impact our future results. We historically have received all or nearly all our channel partner orders in the last month
of a quarter and often in the last few days of the quarter. Accordingly, any significant shortfall in demand for our
products in relation to our expectations would have an adverse impact on our operating results.
We have experienced growing demand for our hosting and event services as well as a growing preference from our
corporate customers in purchasing our solution as a service (SaaS). As a result, we expect that service billings as a
percentage of total billings will continue to grow which we believe will ultimately lead to higher gross margins and
19
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2009
more recurring revenue. The percentage of billings represented by service is also likely to fluctuate from quarter to
quarter due to seasonality of event services and other factors. Since services are typically billed in advance of
providing the service, revenue is initially deferred, leading to reduced current period revenue with a corresponding
negative impact to profits or losses in periods of significant growth in billings for deferred services. An increase, or
significant fluctuation, in service billings as a percentage of total billings may therefore lead to a temporary decline
in our reported revenue.
We are subject to risks associated with our channel partners’ product inventories and product sell-through.
We sell a significant amount of our products to Synnex, Starin and other channel partners who maintain their own
inventory of our products for sale to dealers and end-users. If these channel partners are unable to sell an adequate
amount of their inventory of our products in a given quarter to dealers and end-users or if channel partners decide to
decrease their inventories for any reason, such as a recurrence of global economic uncertainty and downturn in
technology spending, the volume of our sales to these channel partners and our revenue would be negatively
affected. In addition, if channel partners decide to purchase more inventory, due to product availability or other
reasons, than is required to satisfy end-user demand or if end-user demand does not keep pace with the additional
inventory purchases, channel inventory could grow in any particular quarter, which could adversely affect product
revenue in the subsequent quarter. In addition, we also face the risk that some of our channel partners have inventory
levels in excess of future anticipated sales. If such sales do not occur in the time frame anticipated by these channel
partners for any reason, these channel partners may substantially decrease the amount of product they order from us
in subsequent periods, which would harm our business.
If stock balancing returns or price adjustments exceed our reserves, our operating results could be adversely
affected.
We provide some of our distributors with stock balancing return rights, which generally permit our distributors to
return products, subject to ordering an equal dollar amount of alternate products. We also provide price protection
rights to most of our distributors. Price protection rights require that we grant retroactive price adjustments for
inventories of our products held by distributors if we lower our prices for those products within a specified time
period. To cover our exposure to these product returns and price adjustments, we establish reserves based on our
evaluation of historical product trends and current marketing plans. However, we cannot be assured that our
reserves will be sufficient to cover our future product returns and price adjustments. If we inadequately forecast
reserves, our operating results could be adversely affected.
We depend in part on the success of our relationships with third-party resellers and integrators.
Our success depends on various third-party relationships, particularly with our international and events services
operations. The relationships include third party resellers as well as system integrators that assist with
implementations of our products and sourcing of our products and services. Identifying partners, negotiating and
documenting relationships with them and maintaining their relationships require significant time and resources from
us. In addition, our agreements with our resellers and integrators are typically non-exclusive and do not prohibit
them from working with our competitors or form offering competing products or services. Our competitors may be
effective in providing incentives to third parties to favor their products or services. If we are unsuccessful in
establishing or maintaining our relationships with these third parties, our ability to compete in the marketplace or to
maintain or grow our revenue could be impaired and our operating results would suffer.
Manufacturing disruption or capacity constraints would harm our business.
We subcontract the manufacture of our recorders to one third-party contract manufacturer and subcontract the
manufacture of our rack-unit recorder and a proprietary component with another third-party contract manufacturer.
Although we believe there are multiple sources of supply from other contract manufacturers as well as multiple
suppliers of component parts required by the contract manufacturers, a short term disruption of supply of component
parts or completed products near the end of a quarter would have a negative impact on our revenues. Moreover, any
incapacitation of the manufacturing site due to destruction, natural disaster or similar events could result in a loss of
product inventory. As a result of any of the foregoing, we may not be able to meet demand for our products, which
20
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2009
could negatively affect revenues in the quarter of the disruption or longer depending upon the magnitude of the
event, and could harm our reputation.
Our cash flow could fluctuate due to the potential difficulty of collecting our receivables.
A significant portion of our sales are fulfilled by VARs, regional distributors or master distributors. As an example,
29% of our billings in 2009 were to Synnex, a master distributor who fulfills demand from other distributors, VARs
or end users. While our distributors and VARs typically maintain payment terms consistent with other end users, a
delay in payment may occur as a result of a number of factors including changes in demand, general economic
factors, financial performance, inventory levels or disputes over payments. Any delay from Synnex, or other large
distributors or VARs could have a material impact on the collections of our receivables during a particular quarter.
Over the past year we have begun to expand the level of sales representation in Europe and Asia as well as other
international regions. We offer credit terms to some of our international customers; however, payments tend to go
beyond terms in certain countries. Therefore, as Europe, Asia and other international regions grow as a percentage
of our revenue, accounts receivable balances will likely increase as compared to previous years.
Accounting regulations and related interpretations and policies, particularly those related to revenue recognition,
cause us to defer revenue recognition into future periods for portions of our products and services.
Revenue recognition for our products and services is complex and subject to multiple sources of authoritative
guidance as well as varied interpretations and implementation practices for such rules. These rules require us to
defer revenue recognition in certain situations. Factors that are considered in revenue recognition include those such
as vendor specific objective evidence (VSOE), the inclusion of other services and contingencies to payment terms.
We expect that we will continue to defer portions of our product and service billings because of these factors. The
amounts deferred may be significant and will vary each quarter depending on the mix of products sold in each
market and geography, as well as the actual contract terms.
Additional changes in authoritative guidance or changes in practice in applying such rules could also cause us to
defer the recognition of revenue to future periods or recognize lower revenue
Because most of our service contracts are renewable on an annual basis, a reduction in our service renewal rate
could significantly reduce our revenues.
Our clients have no obligation to renew their content hosting agreements, customer support contracts or other annual
service contracts after the expiration of the initial period, which is typically one year, and some clients have elected
not to do so. A decline in renewal rates could cause our revenues to decline. We have limited historical data with
respect to rates of renewals, so we cannot accurately predict future renewal rates. Our renewal rates may decline or
fluctuate as a result of a number of factors, including client dissatisfaction with our products and services, our failure
to update our products to maintain their attractiveness in the market or budgetary constraints or changes in budget
priorities faced by our clients.
Because we generally recognize revenues ratably over the term of our service contracts, downturns or upturns in
service transactions will not be fully reflected in our operating results until future periods.
We recognize most of our revenues from service contracts monthly over the terms of their agreements, which are
typically 12 months, although terms can range from less than one month to over 36 months. As a result, much of the
service revenue we report in each quarter is attributable to agreements entered into during previous quarters.
Consequently, a decline in sales, client renewals, or market acceptance of our products in any one quarter will not
necessarily be fully reflected in the revenues in that quarter, and will negatively affect our revenues and profitability
in future quarters. This ratable revenue recognition also makes it difficult for us to rapidly increase our revenues
through additional sales in any period, as revenues from new clients must be recognized over the applicable
agreement term.
21
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2009
There is a great deal of competition in the market for our products, which could lower the demand for our products.
In the lecture capture and webcasting market we face competition from various companies that provide related, but
different, communication technologies. These include:
• Web conferencing includes solutions from Adobe, Cisco (WebEx), Microsoft and Citrix. Although part of the
overall online multimedia communications landscape, these solutions are designed primarily for collaborative
communications versus one-to-many communications like Mediasite. Many organizations acknowledge that they
need both technologies – one-to-many webcasting and collaborative web conferencing – to appropriately address
their different communication requirements.
• Video conferencing includes solutions from Polycom, TANDBERG (now, Cisco) and Sony. These solutions are
designed primarily for one-to-one or group communications with high levels of interactivity and collaboration. Like
web conferencing, many organizations use both video conferencing and webcasting. Mediasite integrates with
videoconferencing endpoints from Polycom and TANDBERG to record and manage interactive meetings,
discussions and distance learning courses alongside other Mediasite content.
• Authoring tools include solutions like Accordent PresenterPLUS, Camtasia Studio and Microsoft Producer. Unlike
webcasting, web conferencing or video conferencing, which are forms of online multimedia communication that
capture and distribute/stream content, these solutions are production-oriented tools designed to create and edit
multimedia content only. Some organizations will use these desktop tools to create training content by manually
integrating existing audio, video, images, branding and other visual elements into a multimedia presentation which
can then be published to a web or streaming server for distribution. This process can require a significant amount of
production effort and user expertise in presentation authoring.
• Online video services and virtual meeting platforms include solutions from inXpo, Livestream, ON24, Stream57,
Thomson Reuters, Unisfair and Wall Street Webcasting. These companies offer services or SaaS-based platforms
that either allow audio and video to be captured from a presenter’s computer (often with supporting materials
uploaded in advance), produced streaming video services or 2D/3D virtual environments that may or may not
include rich media webcasts.
Other vendors such as Echo360, Tegrity, Accordent Technologies and Panopto, provide lecture capture or webcasting
capabilities, but differ in their technology approach, particularly in the lecture capture arena. Mediasite is an appliance-
or room-based platform for lecture capture. It provides a full integrated system designed around an automated purpose-
built recording appliance that captures, publishes and manages rich media content. Room-based appliances are capable
of streaming live or on-demand and can leverage the full breadth of in-room audio/visual technology. Transparent
recording automation means no presenter intervention which leads to the broadest end-user adoption across campus. A
room-based platform like Mediasite also includes a complete content management platform for captured multimedia
presentations. Other lecture capture solutions are implemented as software applications designed to capture and publish
rich media content, but dependent upon a third-party content management platform, typically the institution’s course
management system. Software applications for lecture capture support on-demand streaming only and require in-room
PC integration with varying levels of presenter intervention and recording knowledge which may lead to lower adoption
rates throughout the campus. Lastly, laptop-resident desktop tools capture and publish non-rich media (limited video and
presentation graphics). Like software applications they support on-demand streaming only and require a third-party
content management platform. Desktop tools require the greatest degree of presenter intervention, technical confidence
and support. While prevalent on many campuses, these three factors limit the practicality for campus-wide adoption.
The presence of these competitors could reduce the demand for our systems, and we may not have the financial
resources to compete successfully.
If potential customers or competitors use open source software to develop products that are competitive with our
products and services, we may face decreased demand and pressure to reduce the prices for our products.
22
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2009
The growing acceptance and prevalence of open source software may make it easier for competitors or potential
competitors to develop software applications that compete with our products, or for customers and potential
customers to internally develop software applications that they would otherwise have licensed from us. One of the
aspects of open source software is that it can be modified or used to develop new software that competes with
proprietary software applications, such as ours. Such competition can develop without the degree of overhead and
lead time required by traditional proprietary software companies. As open source offerings become more prevalent,
customers may defer or forego purchases of our products, which could reduce our sales and lengthen the sales cycle
for our products or result in the loss of current customers to open source solutions. If we are unable to differentiate
our products from competitive products based on open source software, demand for our products and services may
decline, and we may face pressure to reduce the prices of our products, which would hurt our profitability.
Our customers may use our products to share confidential and sensitive information, and if our system security is
breached, our reputation could be harmed and we may lose customers.
Our customers may use our products and services to share confidential and sensitive information, the security of
which is critical to their business. Third parties may attempt to breach our security for customer hosted content or
the networks of our customers. Customers may take inadequate security precautions with their sensitive information
and may inadvertently make that information public. We may be liable to our customers for any breach in security,
and any breach could harm our reputation and cause us to lose customers. In addition, customers are vulnerable to
computer viruses, physical or electronic break-ins and similar disruptions, which could lead to interruptions, delays
or loss of data. We may be required to expend significant capital and other resources to further protect against
security breaches or to resolve problems caused by any breach, including litigation-related expenses if we are sued.
Operational failures in our network infrastructure could disrupt our remote hosting services, could cause us to
lose clients and sales to potential clients and could result in increased expenses and reduced revenues.
Unanticipated problems affecting our network systems could cause interruptions or delays in the delivery of the
hosting services we provide to some of our clients. We provide remote hosting through computer hardware, some of
which is within our facility and some of which is currently located in a third-party co-location facility. We do not
control the operation of this co-location facility. Lengthy interruptions in our hosting service could be caused by the
occurrence of a natural disaster, power loss, vandalism or other telecommunications problems at the co-location
facility or if this co-location facility were to close without adequate notice. We currently do not have adequate
computer hardware and systems to provide alternative service for most of our hosted clients in the event of an
extended loss of service at the co-location facility. We are not equipped to provide full disaster recovery to all of our
hosted clients. If there are operational failures in our network infrastructure that cause interruptions, slower response
times, loss of data or extended loss of service for our remotely hosted clients, we may be required to issue credits or
pay penalties, current clients may terminate their contracts or elect not to renew them, and we may lose sales to
potential clients. If we determine that we need additional hardware and systems, we may be required to make further
investments in our network infrastructure.
The technology underlying our products and services is complex and may contain unknown defects that could
harm our reputation, result in product liability or decrease market acceptance of our products.
The technology underlying our products is complex and includes software that is internally developed, software
licensed from third parties and hardware purchased from third parties. These products may contain errors or
defects, particularly when first introduced or when new versions or enhancements are released. We may not
discover defects that affect our current or new applications or enhancements until after they are sold and our
insurance coverage may not be sufficient to cover our complete liability exposure. Any defects in our products and
services could:
(cid:131) Damage our reputation;
(cid:131) Cause our customers to initiate product liability suits against us;
(cid:131)
(cid:131) Cause us to lose sales; and
(cid:131) Delay market acceptance of our products.
Increase our product development resources;
23
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2009
If we are viewed only as a commodity supplier, our margins and valuations will shrink.
We need to provide value-added services in order to avoid being viewed as a commodity supplier. This entails building
long-term customer relationships and developing features that will distinguish our products. Our technology is complex
and is often confused with other products and technologies in the market place, including video conferencing, streaming
and collaboration. If we fail to build long-term customer relationships and develop features that distinguish our products
in the market place, our margins will shrink, and our stock may become less valued to investors.
Our success depends upon the proprietary aspects of our technology.
Our success and ability to compete depend to a significant degree upon the protection of our proprietary technology.
We currently have two U.S. patents that have been issued to us and four U.S. patent applications that are pending.
We may seek additional patents in the future. Our current patent applications cover different aspects of the
technology used in our products which is important to our ability to compete. However, it is possible that:
(cid:131)
(cid:131)
(cid:131)
(cid:131)
(cid:131)
our pending patent applications may not result in the issuance of patents;
any patents acquired by or issued to us may not be broad enough to protect us;
any issued patent could be successfully challenged by one or more third parties, which could result in our
loss of the right to prevent others from exploiting the inventions claimed in those patents;
current and future competitors may independently develop similar technology, duplicate our services or
design around any of our patents; and
effective patent protection, including effective legal-enforcement mechanisms against those who violate
our patent-related assets, may not be available in every country in which we do or plan to do business.
We also rely upon trademarks, copyrights and trade secrets to protect our technology, which may not be sufficient
to protect our intellectual property.
We also rely on a combination of laws, such as copyright, trademark and trade secret laws, and contractual
restrictions, such as confidentiality agreements and licenses, to establish and protect our technology. We have
registered seven U.S. and four foreign country trademarks. These forms of intellectual property protection are
critically important to our ability to establish and maintain our competitive position. However,
(cid:131)
(cid:131)
(cid:131)
(cid:131)
(cid:131)
third parties may infringe or misappropriate our copyrights, trademarks and similar proprietary rights;
laws and contractual restrictions may not be sufficient to prevent misappropriation of our technology or to
deter others from developing similar technologies;
effective trademark, copyright and trade secret protection, including effective legal-enforcement
mechanisms against those who violate our trademark, copyright or trade secret assets, may be unavailable
or limited in foreign countries;
other companies may claim common law trademark rights based upon state or foreign laws that precede the
federal registration of our marks; and
policing unauthorized use of our services and trademarks is difficult, expensive and time-consuming, and
we may be unable to determine the extent of any unauthorized use.
Reverse engineering, unauthorized copying or other misappropriation of our proprietary technology could enable third
parties to benefit from our technology without paying us for it, which would significantly harm our business.
If other parties bring infringement or other claims against us, we may incur significant costs or lose customers.
Other companies may obtain patents or other proprietary rights that would limit our ability to conduct our business and
could assert that our technologies infringe their proprietary rights. We could incur substantial costs to defend any legal
proceedings, even if without merit, and intellectual property litigation could force us to cease using key technology,
obtain a license, or redesign our products. In the course of our business, we may sell certain systems to our
customers, and in connection with such sale, we may agree to indemnify these customers from claims made against
them by third parties for patent infringement related to these systems. In particular, claims are currently being made
by holders of patents against educational institutions using streaming in their curriculum. We could be subject to similar
claims, which could harm our business.
24
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2009
If we lose key personnel or fail to integrate replacement personnel successfully, our ability to manage our
business could be impaired.
Our future success depends upon the continued service of our key management, technical, sales, and other critical
personnel. Certain of our officers and certain of our other key personnel are employees-at-will, and we cannot assure
that we will be able to retain them. Key personnel have left our company in the past, sometimes to accept
employment with companies that sell similar products or services to existing or potential customers of ours. There
will likely be additional departures of key personnel from time to time in the future and such departures could result
in additional competition, loss of customers or confusion in the marketplace. The loss of any key employee could
result in significant disruptions to our operations, including adversely affecting the timeliness of product releases,
the successful implementation and completion of company initiatives, and the results of our operations. In particular,
the loss of the services of our Chief Executive Officer, Rimas Buinevicius, or our co-founder and Chief Technology
Officer, Monty Schmidt, would harm our business. Although we do have employment agreements with Messrs.
Buinevicius and Schmidt, we do not have life insurance policies on any of our key employees. In addition, the
integration of replacement personnel could be time consuming, may cause disruptions to our operations, and may be
unsuccessful.
Because our business is susceptible to risks associated with international operations, we may not be able to
maintain or increase international sales of our products.
International product and service billings ranged from 14% to 28% of our total billings in each of the past three
years. Our international operations are expected to continue to account for a significant portion of our business in the
future. However, in the future we may be unable to maintain or increase international sales of our products and
services. International sales are subject to a variety of risks, including:
(cid:131)
(cid:131)
(cid:131)
difficulties in establishing and managing international distribution channels;
difficulties in selling, servicing and supporting overseas products and in translating products into foreign
languages;
the uncertainty of laws and enforcement in certain countries relating to the protection of intellectual
property or requirements for product certification or other restrictions;
(cid:131) multiple and possibly overlapping tax structures;
(cid:131)
currency and exchange rate fluctuations; and
(cid:131)
economic or political changes in international markets.
We face risks associated with government regulation of the internet, and related legal uncertainties.
Currently, few existing laws or regulations specifically apply to the Internet, other than laws generally applicable to
businesses. Many Internet-related laws and regulations, however, are pending and may be adopted in the United
States, in individual states and local jurisdictions and in other countries. These laws may relate to many areas that
impact our business, including encryption, network and information security, and the convergence of traditional
communication services, such as telephone services, with Internet communications, taxes and wireless networks.
These types of regulations could differ between countries and other political and geographic divisions both inside
and outside the United States. Non-U.S. countries and political organizations may impose, or favor, more and
different regulation than that which has been proposed in the United States, thus furthering the complexity of
regulation. In addition, state and local governments within the United States may impose regulations in addition to,
inconsistent with, or stricter than federal regulations. The adoption of such laws or regulations, and uncertainties
associated with their validity, interpretation, applicability and enforcement, may affect the available distribution
channels for, and the costs associated with, our products and services. The adoption of such laws and regulations
may harm our business.
25
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2009
Exercise of outstanding options and warrants will result in further dilution.
The issuance of shares of common stock upon the exercise of our outstanding options and warrants will result in dilution
to the interests of our stockholders, and may reduce the trading price of our common stock.
At September 30, 2009, we had 500 thousand of outstanding warrants and 7.7 million of outstanding stock options
granted under our stock option plans, 4.7 million of which are immediately exercisable.
To the extent that these stock options or warrants are exercised, dilution to the interests of our stockholders will likely
occur. Additional options and warrants may be issued in the future at prices not less than 85% of the fair market value of
the underlying security on the date of grant. Exercises of these options or warrants, or even the potential of their exercise
may have an adverse effect on the trading price of our common stock. The holders of our options or our warrants are
likely to exercise them at times when the market price of the common stock exceeds the exercise price of the securities.
Accordingly, the issuance of shares of common stock upon exercise of the options and warrants will likely result in
dilution of the equity represented by the then outstanding shares of common stock held by other stockholders. Holders
of our options and warrants can be expected to exercise or convert them at a time when we would, in all likelihood, be
able to obtain any needed capital on terms, which are more favorable to us than the exercise terms provided, by these
options and warrants.
We may need to make acquisitions or form strategic alliances or partnerships in order to remain competitive in our
market, and potential future acquisitions, strategic alliances or partnerships could be difficult to integrate, disrupt our
business and dilute stockholder value.
We may acquire or form strategic alliances or partnerships with other businesses in the future in order to remain
competitive or to acquire new technologies. As a result of these acquisitions, strategic alliances or partnerships, we may
need to integrate products, technologies, widely dispersed operations and distinct corporate cultures. The products,
services or technologies of the acquired companies may need to be altered or redesigned in order to be made compatible
with our software products and services, or the software architecture of our customers. These integration efforts may not
succeed or may distract our management from operating our existing business. Our failure to successfully manage future
acquisitions, strategic alliances or partnerships could seriously harm our operating results. In addition, our stockholders
would be diluted if we finance the acquisition, strategic alliances or partnerships by incurring convertible debt or issuing
equity securities.
Our ability to utilize our net operating loss carryforwards may be limited.
Our federal net operating loss carryforwards are subject to limitations on how much may be utilized on an annual
basis. The use of the net operating loss carryforwards may have additional limitations resulting from certain future
ownership changes or other factors under Section 382 of the Internal Revenue Code.
If our net operating loss carryforwards are further limited, and we have taxable income which exceeds the available
net operating loss carryforwards for that period, we would incur an income tax liability even though net operating
loss carryforwards may be available in future years prior to their expiration. Any such income tax liability may
adversely affect our future cash flow, financial position and financial results.
Our corporate compliance program cannot guarantee that we are in compliance with all potentially applicable
regulations.
As a publicly traded company we are subject to significant regulations, including the Sarbanes-Oxley Act of 2002.
While we have developed and instituted a corporate compliance program based on what we believe are the current
best practices and continue to update the program in response to newly implemented regulatory requirements and
guidance, we cannot assure that we are or will be in compliance with all potentially applicable regulations.
Although our non-affiliate market capitalization was less than $75 million at March 31, 2008 and 2009 and we were
26
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2009
therefore not required to have an auditor attestation on our internal controls over financial reporting for fiscal 2008
or fiscal 2009, current SEC rules require us to have such an attestation at September 30, 2010. We cannot assure
that in the future our management or, beginning in fiscal 2010, our auditors, will not find a material weakness in
connection with their annual reviews of our internal control over financial reporting pursuant to Section 404 of the
Sarbanes-Oxley Act. We also cannot assure that we could correct any such weakness to allow our management to
assess the effectiveness of our internal control over financial reporting as of the end of our fiscal year in time to
enable our independent registered public accounting firm to attest that such assessment will have been fairly stated
in our Annual Report on Form 10-K to be filed with the Securities and Exchange Commission or attest that we have
maintained effective internal control over financial reporting as of the end of our fiscal year. If we fail to comply
with any of these regulations, we could be subject to a range of regulatory actions, fines, or other sanctions or
litigation. In addition, if we must disclose any material weakness in our internal control over financial reporting, our
stock price may decline.
Provisions of our charter documents and Maryland law could also discourage an acquisition of our company that
would benefit our stockholders.
Provisions of our articles of incorporation and by-laws may make it more difficult for a third party to acquire control of
our company, even if a change in control would benefit our stockholders. Our articles of incorporation authorize our
board of directors, without stockholder approval, to issue one or more series of preferred stock, which could have voting
and conversion rights that adversely affect or dilute the voting power of the holders of common stock. Furthermore, our
articles of incorporation provide for a classified board of directors, which means that our stockholders may vote upon the
retention of only one or two of our seven directors each year. Moreover, Maryland corporate law restricts certain
business combination transactions with “interested stockholders” and limits voting rights upon certain acquisitions of
“control shares.”
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None
ITEM 2.
PROPERTIES
Our principal office is located in Madison, Wisconsin in a leased facility of approximately 19,000 square feet. The
building serves as our corporate headquarters, accommodating our general and administrative, product development
and selling and marketing departments. We believe this facility is adequate and suitable for our needs. The current
lease term for this office expires on September 30, 2011.
ITEM 3.
LEGAL PROCEEDINGS
None
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth quarter ended September 30, 2009.
27
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2009
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock was initially traded on the American Stock Exchange under the symbol "SFO," beginning with
our initial public offering in April of 1998. On April 24, 2000, our common stock began trading on the NASDAQ
Global Market under the symbol "SOFO." Effective September 16, 2009, we transferred the listing of our common
stock to the NASDAQ Capital Market. The following table sets forth, for the periods indicated, the high and low
sale prices per share of our common stock as reported on the NASDAQ Global or Capital Markets. All share and per
share data have been adjusted for the one-for-ten reverse stock split which was effective on November 16, 2009.
Year Ended September 30, 2010:
First Quarter (through November 30, 2009)
hgiH
woL
$ 7.50
$ 4.65
Year Ended September 30, 2009:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Year Ended September 30, 2008:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
6.50
7.60
8.90
7.50
28.50
14.90
9.50
9.00
3.21
4.30
6.30
5.00
11.80
6.10
6.00
5.00
In March 2008, our common stock failed to maintain a minimum bid price of $1.00 for at least 10 consecutive days,
which caused our stock price to fail to meet one of the minimum standards required by the NASDAQ Stock Market for
continued listing as a NASDAQ Global Market security. On March 10, 2008 we received a letter from NASDAQ
indicating that we need to regain compliance with the minimum bid price requirement by September 8, 2008 in order to
remain on the NASDAQ Global Market. On September 9, 2008 we were notified by NASDAQ that we had failed to
regain compliance with the minimum bid price during the 180 days provided and our securities were therefore subject to
delisting from the NASDAQ Global Market. In response, we applied for and were notified on September 12, 2008 by
NASDAQ that NASDAQ approved our request to transfer the listing of our shares to the NASDAQ Capital Market.
Transfer to the NASDAQ Capital Market and compliance with its initial listing standards afforded an additional 180 day
period for our stock to attain the minimum $1.00 bid price for at least 10 consecutive business days until March 9, 2009.
We received notice from NASDAQ on October 22, 2008, December 23, 2008 and March 24, 2009 that NASDAQ had
determined to extend the suspension of the minimum bid price for additional 90 day periods. On July 14, 2009, we
received notice from NASDAQ that enforcement of the minimum bid price requirement would be reinstated on
August 3, 2009. The Company had 141 calendar days remaining in its bid price compliance period when suspension
began, extending the period in which to regain compliance to December 21, 2009. On November 2, 2009 the Company
notified NASDAQ that it intended to execute a reverse split of its stock in the ratio of one for ten in order to gain
compliance. The Company’s reverse stock split became effective November 16, 2009. On December 2, 2009, the
Company received notice from NASDAQ that the Company had regained compliance with the minimum bid
requirement and the matter was now closed. While there is no pending listing compliance issue with NASDAQ, there is
no assurance that the Company will not fail one or more listing requirements in the future. If our stock is delisted, it may
have a material adverse effect on the price of our common stock and the levels of liquidity currently available to our
stockholders. Delisting would also make it more difficult for us to raise capital in the future or impact customer
confidence. If our common stock is removed from the NASDAQ Capital Market, an investor could find it more difficult
to dispose of, or to obtain accurate quotations as to the market value of, our common shares. Additionally, our stock may
then be subject to "penny stock" regulations.
28
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2009
The Company has not paid any cash dividends and does not intend to pay any cash dividends in the foreseeable
future. The Company is prohibited from paying any cash dividends pursuant to the terms of the loan and security
agreement with Silicon Valley Bank.
At December 1, 2009 there were 471 common stockholders of record and approximately 9,000 total shareholders.
Many shares are held by brokers and other institutions on behalf of shareholders.
Equity Compensation Plan Information
Plan category
Equity compensation plans approved
by security holders (1)
Equity compensation plans not
approved by security holders (2)
Total
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
Weighted average
exercise price of
outstanding
options, warrants
and rights
Number of
securities
remaining
available for
future issuance
(a)
(b)
(c)
521,957
244,658
766,615
18.44
11.36
16.17
405,399
-
405,399
(1) Consists of the 2009 Stock Incentive Plan, Employee Incentive Stock Option Plan and the Directors Stock
Option Plan. For further information regarding these plans, reference is made to Note 5 of the financial
statements.
(2) Consists of the Non-Qualified Stock Option Plan. For further information regarding this plan, reference is
made to Note 5 of the financial statements.
29
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2009
The graph below compares the cumulative total stockholder return on our common stock from September 30, 2004
through and including September 30, 2009 with the cumulative total return on The NASDAQ Stock Market (US only)
and the RDG Technology Composite. The graph assumes that $100 was invested in our common stock on September
30, 2004 for each of the indexes and that all dividends were reinvested. Unless otherwise specified, all dates refer to the
last day of each month presented. The comparisons in the graph below are based on historical data, with our common
stock prices based on the closing price on the dates indicated, and are not intended to forecast the possible future
performance of our common stock.
(A) RECENT SALES OF UNREGISTERED SECURITIES
None
(B) USE OF PROCEEDS FROM REGISTERED SECURITIES
None
(C) ISSUER PURCHASES OF EQUITY SECURITIES
None
30
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2009
ITEM 6.
SELECTED CONSOLIDATED FINANCIAL DATA
The selected financial and operating data were derived from our consolidated financial statements. The selected
financial data set forth below is qualified in its entirety by, and should be read in conjunction with, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and notes
thereto appearing elsewhere in this annual report on Form 10-K (in thousands except per share data). All share and
per share data have been adjusted for the one-for-ten reverse stock split which was effective on November 16, 2009.
Years Ended September 30,
Revised
2007
Revised
2008
Revised
2006
$ 15,601
4,205
11,396
19,279
(7,883)
10
(256)
$ (8,129)
$ 16,737
4,133
12,604
19,222
(6,618)
248
(201)
$ (6,571)
$ 12,564
3,215
9,349
12,909
(3,560)
77
(56)
$ (3,539)
Revised
2005
$ 8,342
2,754
5,588
9,944
(4,356)
187
(229)
$ (4,398)
2009
$ 18,577
4,331
14,246
16,724
(2,478)
(25)
(142)
$ (2,645)
$ (0.74)
$ (2.28)
$ (1.89)
$ (1.10)
$ (1.45)
Statement of Operations Data:
Revenue
Cost of revenue
Gross margin
Operating expenses
Loss from operations
Other income, net
Provision for income taxes
Net loss
Basic net loss per common
share
Diluted net loss per common
share
$ (0.74)
$ (2.28)
$ (1.89)
$ (1.10)
$ (1.45)
Weighted average common
shares: - Basic
- Diluted
Balance Sheet Data at
September 30:
Cash and cash equivalents
Working capital
Total assets
Long-term liabilities
Stockholders' equity
3,598,040
3,598,040
3,557,966
3,557,966
3,468,803
3,468,803
3,201,531
3,201,531
3,036,255
3,036,255
2009
$ 2,598
(344)
16,173
1,977
6,601
Revised
2008
$ 3,560
774
17,474
1,610
8,455
Revised
2007
$ 8,008
7,940
23,981
1,825
15,908
Revised
2006
Revised
2005
$ 2,751
2,198
16,912
1,170
10,950
$ 4,271
4,205
16,245
621
12,549
During 2009, the Company identified an issue requiring revision of the prior period financial statements relating to
the presentation of Deferred Tax Liabilities. Beginning with an acquisition in fiscal year 2002, the Company has
amortized Goodwill for tax purposes over a 15 year life. The difference between the book and tax balance of
Goodwill creates a Deferred Tax Liability and an annual tax expense.
Management has correctly recorded the Deferred Tax Liability and corresponding expense in fiscal year 2009 and
has corrected prior year amounts on the financial statements and disclosures beginning with this fiscal year 2009 10-
K filing. Refer to Notes 2 and 8 for additional details.
31
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2009
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The financial and business analysis below provides information that Sonic Foundry, Inc. (the Company) believes is
relevant to an assessment and understanding of the Company's consolidated financial position and results of
operations. This financial and business analysis should be read in conjunction with the consolidated financial
statements and related notes.
When used in this Report, the words “anticipate”, “expect”, “plan”, “believe”, “seek”, “estimate” and similar
expressions are intended to identify forward-looking statements. These are statements that relate to future periods
and include, but are not limited to, statements about the features, benefits and performance of our products, our
ability to introduce new product offerings and increase revenue from existing products, expected expenses including
those related to selling and marketing, product development and general and administrative, our beliefs regarding
the health and growth of the market for products, anticipated increase in our customer base, expansion of our
products functionalities, expected revenue levels and sources of revenue, expected impact, if any, of legal
proceedings, the adequacy of liquidity and capital resources, and expected growth in business. Forward-looking
statements are subject to risks and uncertainties that could cause actual results to differ materially from those
projected. These risks and uncertainties include, but are not limited to, market acceptance for our products, our
ability to attract and retain customers and distribution partners for existing and new products, our ability to control
our expenses, our ability to recruit and retain employees, the ability of distribution partners to successfully sell our
products, legislation and government regulation, shifts in technology, global and local business conditions, our
ability to effectively maintain and update our products and service portfolio, the strength of competitive offerings,
the prices being charged by those competitors, and the risks discussed elsewhere herein. These forward-looking
statements speak only as of the date hereof. We expressly disclaim any obligation or undertaking to release publicly
any updates or revisions to any forward-looking statements contained herein to reflect any change in our
expectations with regard thereto or any change in events, conditions or circumstances on which any such statement
is based.
Overview
Sonic Foundry, Inc. is a technology leader in the emerging web communications marketplace, providing enterprise
solutions and services that link an information-driven world. The company’s principal product line, Mediasite® is a
web communication and content management system that automatically and cost-effectively webcasts lectures and
presentations. Trusted by Fortune 500 companies, top education institutions and Federal, state and local government
agencies for a variety of critical communication needs, Mediasite is the leading one-to-many multimedia
communication solution for capturing knowledge and sharing it online.
Reverse Stock Split
Effective November 16, 2009, the Company implemented a one-for-ten reverse stock split of its stock (see Note 15).
All shares and per share data in this report have been adjusted to reflect this reverse stock split.
Critical Accounting Policies
We have identified the following as critical accounting policies to our Company and have discussed the development,
selection of estimates and the disclosure regarding them with the audit committee of the board of directors:
Impairment of long-lived assets;
(cid:131) Revenue recognition, allowance for doubtful accounts, and reserves;
(cid:131)
(cid:131) Valuation allowance for net deferred tax assets; and
(cid:131) Accounting for stock-based compensation.
32
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2009
Revenue Recognition, Allowance for Doubtful Accounts and Reserves
General
Revenue is recognized when persuasive evidence of an arrangement exists, delivery occurs or services are rendered,
the sales price is fixed or determinable and collectability is reasonably assured. Revenue is deferred when
undelivered products or services are essential to the functionality of delivered products, customer acceptance is
uncertain, significant obligations remain, or the fair value of undelivered elements is unknown. The Company does
not offer customers the right to return product, other than for exchange or repair pursuant to a warranty or stock
rotation. The Company’s policy is to reduce revenue if it incurs an obligation for price rebates or other such
programs during the period the obligation is reasonably estimated to occur. The following policies apply to the
Company’s major categories of revenue transactions.
Products
Products are considered delivered, and revenue is recognized, when title and risk of loss have been transferred to the
customer. Under the terms and conditions of the sale, this occurs at the time of shipment to the customer. Product
revenue currently represents sales of our Mediasite recorders and Mediasite related products such as server software
revenue.
Services
We sell support contracts to our customers, typically one year in length, and record the related revenue ratably over
the contractual period. Our support contracts cover phone and electronic technical support availability over and
above the level provided by our distribution partners, software upgrades on a when and if available basis, advance
hardware replacement and an extension of the standard hardware warranty from 90 days to one year. The
manufacturers we contract with to build the units provide a limited one-year warranty on the hardware. We also sell
installation, training, event webcasting, and customer content hosting services. Revenue for those services is
recognized when performed in the case of installation, training and event webcasting services and is recognized
ratably over the contract period for content hosting services. Service amounts invoiced to customers in excess of
revenue recognized are recorded as deferred revenue until the revenue recognition criteria are met.
Revenue Arrangements that Include Multiple Elements
Revenue for transactions that include multiple elements such as hardware, software, installation, training, and post
customer support is allocated to each element based on vendor-specific objective evidence of the fair value “VSOE”
in accordance with FASB ASC-985-605. Revenue is recognized for each element when the revenue recognition
criteria have been met for that element. VSOE is based on the price charged when the element is sold separately. If
VSOE of fair value does not exist for all elements in a multiple element arrangement, revenue is allocated first to the
fair value of the undelivered elements and the residual revenue to the delivered elements. The Company recognizes
revenue for delivered elements only when all of the following criteria are satisfied: undelivered elements are not
essential to the functionality of delivered elements, uncertainties regarding customer acceptance are resolved, and
the fair value for all undelivered elements is known.
Reserves
We record reserves for stock rotations, price adjustments, rebates, and sales incentives to reduce revenue and
accounts receivable for these and other credits we may grant to customers. Such reserves are recorded at the time of
sale and are calculated based on historical information (such as rates of product stock rotations) and the specific
terms of sales programs, taking into account any other known information about likely customer behavior. If actual
customer behavior differs from our expectations, additional reserves may be required. Also, if we determine that we
can no longer accurately estimate amounts for stock rotations and sales incentives, we would not be able to
recognize revenue until the customers exercise their rights, or such rights lapse, whichever is later.
33
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2009
Credit Evaluation and Allowance for Doubtful Accounts
We perform ongoing credit evaluations of our customers’ financial condition and generally do not require collateral.
We maintain allowances for potential credit losses and such losses have been within our expectations.
Impairment of long-lived assets
We assess the impairment of goodwill and capitalized software development costs on an annual basis or whenever
events or changes in circumstances indicate that the fair value of these assets is less than the carrying value.
If we determine that the fair value of goodwill is less than its carrying value, based upon the annual test or the existence
of one or more indicators of impairment, we would then measure impairment based on a comparison of the implied fair
value of goodwill with the carrying amount of goodwill. To the extent the carrying amount of goodwill is greater than
the implied fair value of goodwill, we would record an impairment charge for the difference.
We evaluate all of our long-lived assets, including intangible assets other than goodwill, for impairment in accordance
with the provisions of FASB ASC-360-10. We evaluate all of our long-lived assets and intangible assets, including
intangible assets other than goodwill, for impairment. Long-lived assets and intangible assets other than goodwill are
evaluated for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may
not be recoverable based on expected undiscounted cash flows attributable to that asset. Should events indicate that any
of our long-lived assets are impaired; the amount of such impairment will be measured as the difference between the
carrying value and the fair value of the impaired asset and recorded in earnings during the period of such impairment.
Valuation allowance for net deferred tax assets
Deferred income taxes are provided for temporary differences between financial reporting and income tax basis of assets
and liabilities, and are measured using currently enacted tax rates and laws. Deferred income taxes also arise from the
future benefits of net operating loss carryforwards. A valuation allowance equal to 100% of the net deferred tax assets
has been recognized due to uncertainty regarding future realization.
Accounting for stock-based compensation
Upon the adoption of FASB ASC-718, the Company changed its option valuation model from the Black-Scholes
model to a lattice valuation model for all stock options granted subsequent to September 30, 2005. The lattice
valuation model is a more flexible analysis to value employee options because of its ability to incorporate inputs that
change over time, such as actual exercise behavior of option holders. The Company used historical data to estimate
the option exercise and employee departure behavior used in the lattice valuation model. Expected volatility is
based on historical volatility of the Company’s stock. The Company uses historical data to estimate option exercise
and employee termination within the valuation model. The Company considers all employees to have similar
exercise behavior and therefore has not identified separate homogenous groups for valuation. The expected term of
options granted is derived from the output of the option pricing model and represents the period of time that options
granted are expected to be outstanding. The risk-free rate for periods within the contractual term of the options is
based on the U.S. Treasury yields in effect at the time of grant. Forfeitures are based on actual behavior patterns.
Recent Accounting Pronouncements
In September 2006, the FASB issued guidance, which provided enhanced guidance for using fair value to measure
assets and liabilities. The standard applies whenever other standards require or permit assets or liabilities to be
measured at fair value. The Standard does not expand the use of fair value in any new circumstances. The adoption
of this standard on October 1, 2008 for financial assets and liabilities did not have a material effect on the
Company’s results of operations or financial position. In February 2008, the FASB issued additional guidance
which deferred the effective date for all nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring basis (that is, at least annually), to
fiscal years beginning after November 15, 2008. Early adoption is permitted. The adoption of this standard related
to non financial assets and liabilities on October 1, 2009 is not expected to have a material effect on the Company's
results of operations or financial position other than requiring additional disclosures for those items where non-
recurring fair valuing of certain assets is performed.
34
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2009
In February 2007, the FASB issued guidance which permits but does not require the Company to measure financial
instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option
has been elected are reported in earnings. This statement is effective for financial statements issued for fiscal years
beginning after November 15, 2007. The adoption of this standard did not have a material effect on the Company’s
results of operations or financial position.
In December 2007, the FASB issued guidance which establishes principles and requirements for how an acquirer
recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any
non-controlling interest in an acquiree, including the recognition and measurement of goodwill acquired in a
business combination. This guidance is effective for fiscal years beginning on or after December 15, 2008. Early
adoption is prohibited. The adoption of this standard is not expected to have a material effect on the Company's
results of operations or financial position.
In April 2008, the FASB issued guidance that amends the factors that should be considered in developing renewal or
extension assumptions used to determine the useful life of a recognized intangible asset. The guidance is effective
for fiscal years beginning after December 15, 2008. Early adoption is prohibited. The adoption of this standard is not
expected to have a material effect on the Company's results of operations or financial position.
In April 2009, the FASB issued guidance concerning interim disclosures about fair value of financial instruments
requiring publicly traded companies to provide disclosure about the fair value of financial instruments whenever
interim summarized financial information is reported. Previously, disclosures about the fair value of financial
instruments were only required on an annual basis. Disclosure shall include the method(s) and significant
assumptions used to estimate the fair value of financial instruments and shall describe changes in method(s) and
significant assumptions, if any, during the period. This guidance was effective for interim and annual periods ending
after June 15, 2009, and, as such, the Company began including this disclosure with its third quarter 2009 financial
statements.
In May 2009, the FASB issued guidance regarding the disclosure of subsequent events. This guidance made no
changes to current accounting but added required disclosures regarding the date through which the Company has
evaluated subsequent events and whether that evaluation date is the date of financial statement issuance or the date
the financial statements were available to be issued. This guidance was effective, and adopted by the Company, for
interim and annual periods ending after June 15, 2009.
In June 2009, the FASB approved the “FASB Accounting Standards Codification” (the “Codification”) as the single
source of authoritative nongovernmental U.S. GAAP to be launched on July 1, 2009. The codification does not
change current U.S. GAAP, but is intended to simplify user access to all authoritative U.S. GAAP by providing all
the authoritative literature related to a particular topic in one place. All existing accounting standard documents will
be superseded and all other accounting literature not included in the Codification will be considered non-
authoritative. The Codification is effective for interim and annual periods ending after September 15, 2009.
Adoption by the Company has not led to any material impact on its consolidated financial position, results of
operation or cash flows.
At its September 23, 2009 board meeting, the FASB ratified final consensus on revenue arrangements with multiple
deliverables. This Issue supersedes FASB ASC 605-25. The issue addresses the unit of accounting for arrangements
involving multiple deliverables. It also addresses how arrangement consideration should be allocated to the separate
units of accounting, when applicable. However, guidance on determining when the criteria for revenue recognition
are met and on how an entity should recognize revenue for a given unit of accounting are located in other sections of
the Codification. The issue will ultimately be issued as an Accounting Standards Update (ASU) that will amend
FASB ASC 605-25. Final consensus is effective for fiscal years beginning on or after June 15, 2010. Entities can
elect to apply this Issue (1) prospectively to new or materially modified arrangements after the Issue’s effective date
or (2) retrospectively for all periods presented. The Company does not believe that revisions to FASB ASC 605-25
will have a material impact on the Company’s consolidated financial statements.
35
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2009
At its September 23, 2009 board meeting, the FASB also ratified final consensus on software revenue recognition.
This Issue amends FASB ASC 985-605 and FASB ASC 985-605-15-3 to exclude from their scope all tangible
products containing both software and non-software components that function together to deliver the product’s
essential functionality. That is, the entire product (including the software deliverables and non-software
deliverables) would be outside the scope of FASB ASC 985-605 and would be accounted for under other accounting
literature. The revised scope of FASB ASC 985-605 (Issue 09-3) will ultimately be issued as an Accounting
Standards Update (ASU) that will amend the ASC. The final consensus is effective for fiscal years beginning on or
after June 15, 2010. Entities can elect to apply this Issue (1) prospectively to new or materially modified
arrangements after the Issue’s effective date or (2) retrospectively for all periods presented. Early application is
permitted. The Company does not believe that FASB ASC 985-605 will have a material impact on the Company’s
consolidated financial statements.
Subsequent to the issuance of the Codification, the FASB has released Accounting Standard Update Nos. 2009-01
through 2009-15. The Company has reviewed each of these updates and determined that none will have a material
impact on the Company’s financial statements.
RESULTS OF OPERATIONS
You should read the following discussion of our results of operations and financial condition in conjunction with our
consolidated financial statements and related notes thereto included in Item 8 of this Annual Report on Form 10-K.
Revenue
Revenue from our business include the sales of Mediasite recorders and server software products and related
services contracts, such as customer support, installation, training, content hosting and event services sold
separately. We market our products to educational institutions, corporations and government agencies that need to
deploy, manage, index and distribute video content on Internet-based networks. We reach both our domestic and
international markets through reseller networks, a direct sales effort and partnerships with system integrators.
Revenue in 2009 totaled $18.6 million, compared to $15.6 million in 2008, an increase of 19%. Revenue consisted
of the following:
(cid:131) Product revenue from the sale of Mediasite recorder units and server software increased from $8.4 million
in 2008 to $9.6 million in 2009. The increase is primarily due to an increase in units sold. The average
selling price decreased as a result of completing more multi-unit transactions as well as the sale of
discounted hardware upgrades for products at end of life. Additionally, $498 thousand of revenue for
product not installed was deferred at September 30, 2008. There was no such deferral at September 30,
2009.
Units sold
Rack to mobile ratio
Average sales price, excluding support (000’s)
2009
846
2.1 to 1
$10.7
2008
776
1.2 to 1
$11.3
(cid:131) Services revenue represent the portion of fees charged for Mediasite customer assurance service contracts
amortized over the length of the contract, typically 12 months, as well as training, installation, event and
content hosting services. Services revenue increased from $7.0 million in 2008 to $8.8 million in 2009 due
primarily to an increase in support contracts on new Mediasite recorder units and renewals of support
contracts entered into in prior years as well as increases in event and content hosting services. At
September 30, 2009 $5.3 million of deferred revenue remained in unearned revenue, of which we expect to
recognize approximately $2.2 million in the quarter ending December 31, 2009.
(cid:131) Other revenue relates to freight charges billed separately to our customers.
36
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2009
Gross Margin
Total gross margin in 2009 was $14.2 million or 77% compared to $11.4 million or 73% in 2008. Gross margin
increased primarily due to realizing a decrease in the cost of manufacturing Mediasite units. The significant
components of cost of revenue include:
Material and freight costs for the Mediasite recorders. Costs for 2009 Mediasite recorder hardware and
other costs totaled $3.0 million compared to $3.4 million in fiscal 2008. Freight costs were $155 thousand
and labor and allocated costs were $683 thousand in 2009 compared to $148 thousand and $357 thousand
in fiscal 2008.
Services costs. Staff wages and other costs allocated to cost of service revenues were $537 thousand in
fiscal 2009 and $319 thousand in fiscal 2008, resulting in gross margin on services of 94% in fiscal 2009
and 95% in fiscal 2008.
Gross margin is expected to increase in fiscal 2010 as total revenue increases and as the mix of revenue continues to
reflect a significant percentage of higher margin services revenue. Further cost reductions relating to manufacturing
of Mediasite units are also expected in fiscal 2010.
Operating Expenses
Selling and Marketing Expenses
Selling and marketing expenses include wages and commissions for sales, marketing, business development and
technical support personnel, print advertising and various promotional expenses for our products. Timing of these
costs may vary greatly depending on introduction of new products and services, entrance into new markets or
participation in major tradeshows.
Selling and marketing expense decreased $2.6 million, or 20% from $12.9 million in 2008 to $10.3 million in 2009.
Significant differences include:
Salaries, incentive compensation, and benefits decreased $991 thousand over prior year due to lower staff
levels. During the second quarter of fiscal 2008, management implemented a cost reduction plan that
resulted in lower staff levels for the remainder of 2008 and all of 2009. Severance payouts also contributed
to the higher costs during 2008.
The Company initiated a plan in 2008 to focus its selling and marketing efforts on the higher education
market resulting in reductions, beginning in Q2-2008, to tradeshow and other marketing efforts focused on
the corporate markets as well as a reduction in selling and marketing staff. This plan resulted in a decrease
of $720 thousand in marketing and tradeshow costs in fiscal 2009.
Travel expenses decreased by $333 thousand as a result of lower staff levels, fewer tradeshows and reduced
travel requirements necessary to close transactions.
Costs allocated from General and Administrative also decreased by $487 thousand as a result of lower
General and Administrative costs resulting from the cost reduction plan implemented in fiscal 2008.
As of September 30, 2009 we had 60 employees in Selling and Marketing, an increase from 59 employees at
September 30, 2008. We reduced our headcount in Selling and Marketing in January 2008 from 73 and expect our
headcount to remain at or near current levels in fiscal 2010.
General and Administrative Expenses
General and administrative (“G&A”) expenses consist of personnel and related costs associated with the facilities,
finance, legal, human resource and information technology departments, as well as other expenses not fully
allocated to functional areas.
37
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2009
G&A expenses increased $67 thousand, or 2%, from $2.8 million in 2008 to $2.9 million in 2009. Major
components of the change include:
(cid:131)
In 2008 we recorded a benefit of $200 thousand due to the reversal of certain accruals in which payment is
now deemed remote. There was no such reversal in 2009.
(cid:131) Professional fees decreased approximately $68 thousand due primarily to reduced accounting and investor
relations costs in fiscal 2009.
(cid:131) State and local franchise, sales and other taxes decreased in fiscal 2009 by approximately $67 thousand.
As of September 30, 2009 we had 8 full-time employees in G&A. We do not anticipate growth in G&A headcount
in fiscal 2009.
Product Development Expenses
Product development (R&D) expenses include salaries and wages of the software research and development staff
and an allocation of benefits, facility and administrative expenses. Fluctuations in product development expenses
correlate directly to changes in headcount.
R&D expenses decreased $67 thousand, or 2%, from $3.53 million in 2008 to $3.46 million in 2009.
As of September 30, 2009 and 2008 we had 25 employees, excluding interns, in Research and Development. We do
not anticipate significant growth in R&D headcount in fiscal 2010. No fiscal 2009 software development efforts
qualified for capitalization.
Other Income
Other income included primarily interest income from investments in certificates of deposit and overnight
investment vehicles. Lower interest rates and reduced cash balances led to a decrease in interest income from $99
thousand in 2008 to $47 thousand in 2009.
Provisions Related to Income Taxes
In fiscal 2009, the Company recorded a non-cash deferred tax liability related to goodwill acquired in 2001 and
made corresponding revisions to 2008 results. The net impact was to record a $142 thousand non-cash provision for
taxes and an increase to a long-term deferred tax liability of $142 thousand in fiscal 2009 and to record a $256
thousand non-cash provision for taxes in fiscal 2008 as well as the accumulated impact of prior period amortization
of goodwill. This liability had historically been presented net of deferred tax assets and associated valuation
allowances. Management determined that due to the nature of the deferred tax liability and future growth of such
non-cash liability it was more prudent to present separately. Fiscal 2008 numbers have been revised to match this
presentation. See notes 2 and 8 for more information.
38
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2009
LIQUIDITY AND CAPITAL RESOURCES
We have funded our operations to date primarily from public and private placement offerings of equity securities
and debt. On September 30, 2009 and 2008, we had cash and cash equivalents of $2.6 million and $3.6 million,
respectively.
Cash used in operating activities totaled $1.5 million in 2009 compared to $3.9 million in 2008, an improvement of
$2.4 million or 62%. Cash used in 2009 was impacted by a decrease in the net loss of $5.5 million from $8.1
million to $2.6 million and offset by changes in non-cash charges and working capital. Working capital changes
included the positive effects of an increase in unearned revenue and reductions in accounts receivable of $614
thousand and $168 thousand, respectively. These were offset by the negative effects of a decrease in accounts
payable, accrued liabilities and other long-term liabilities of $629 thousand. During 2008, working capital
adjustments included the positive effects of an increase in unearned revenue, reductions in accounts receivable, and
reductions in prepaid expenses of $1.5 million, $1.3 million, and $306 thousand, respectively.
Cash used in investing activities totaled $237 thousand in 2009 compared to cash used in investing activities of $218
thousand in 2008. Investing activities for each of these two years were due to purchases of property and equipment.
The Company has historically financed its operations primarily through cash from sales of equity securities, cash
from operations, and to a limited extent, through bank credit facilities. Cash provided by financing activities in 2009
totaled $753 thousand compared to cash used in financing activities of $361 thousand in 2008. During 2009,
financing activities included proceeds from the revolving line of credit and note payable totaling $938 thousand. In
response to a history of recurring operating losses, the Company initiated cost reduction efforts in January
2008. These efforts achieved a 24% reduction in quarterly operating expenses during fiscal 2008. Continued efforts
to control costs and improve revenues led to a 19% growth in revenues, an increase of three percentage points in
gross margin and further reductions in operating costs in fiscal 2009. The Company anticipates further
improvements in the gross margin rate and further reductions in operating expenses in fiscal 2010 and therefore
believes its cash position is adequate to accomplish its business plan through at least the next twelve months, even if
revenues in fiscal 2010 do not continue to improve. We may evaluate further operating or capital lease opportunities
to finance equipment purchases in the future or utilize the Company’s revolving line of credit to support working
capital needs, if the Company deems it advisable to do so. We may also seek additional equity financing, or issue
additional shares previously registered in our available shelf registration, although we currently have no plans to do
so.
On April 14, 2009, the Company executed the First Amendment to the Amended and Restated Loan and Security
Agreement (the “First Amendment”) with Silicon Valley Bank which extended an existing credit facility in the form
of a $3,000,000 secured revolving line of credit and a $1,000,000 term loan. While the Company anticipates limited
use of the line of credit and that it will be in compliance with all provisions of the agreement, there can be no
assurance that the existing Amended Loan Agreement will remain available to the Company nor that additional
financing will be available or on terms acceptable to the Company.
Contractual Obligations
The following summarizes our contractual obligations at September 30, 2009 and the effect those obligations are
expected to have on our liquidity and cash flow in future periods (in thousands):
Contractual Obligations:
Purchase commitments
Operating lease obligations
Capital lease obligations (a)
Notes payable (a)
Total
$ 572
1,010
25
981
Less than
1 Year
$ 572
501
25
380
Years 2-3
$ ─
509
─
601
Years 4-5
$ ─
─
─
─
Over 5
years
$ ─
─
─
─
(a) Includes fixed and determinable interest payments
39
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2009
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Derivative Financial Instruments
We are not party to any derivative financial instruments or other financial instruments for which the fair value
disclosure would be required under FASB ASC-815-10. Our cash equivalents consist of overnight investments in
money market funds that are carried at fair value. Accordingly, we believe that the market risk of such investments
is minimal.
Interest Rate Risk
Our cash equivalents are subject to interest rate fluctuations, however, we believe this risk is immaterial due to the
short-term nature of these investments.
Foreign Currency Exchange Rate Risk
All international sales of our products are denominated in US dollars.
40
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2009
ITEM 8.
CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Sonic Foundry, Inc.
We have audited the accompanying consolidated balance sheets of Sonic Foundry, Inc. and subsidiary (a Maryland
Corporation) (the Company) as of September 30, 2009 and 2008, and the related consolidated statements of
operations, stockholders’ equity, and cash flows for each of the years then ended. Our audits of the basic financial
statements included the financial statement schedule listed in the index appearing under Item 15. These financial
statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(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. The Company is not required to have, nor were
we engaged to perform an audit of its internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal
control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial statements, 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 consolidated financial statements referred to above present fairly, in all material respects, the
financial position of Sonic Foundry, Inc. as of September 30, 2009 and 2008, and the results of their operations and
their cash flows for each of the years then ended in conformity with accounting principles generally accepted in the
United States of America. 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.
/s/ GRANT THORNTON LLP
Madison, Wisconsin
December 4, 2009
41
Sonic Foundry, Inc.
Consolidated Balance Sheets
(in thousands except for share and per share data)
Assets
Current assets:
Cash and cash equivalents
Accounts receivable, net of allowances of $105 and $150
Inventories
Prepaid expenses and other current assets
Total current assets
Property and equipment:
Leasehold improvements
Computer equipment
Furniture and fixtures
Total property and equipment
Less accumulated depreciation and amortization
Net property and equipment
Other assets:
Goodwill
Other intangibles, net of amortization of $35 and $19
Total assets
Liabilities and stockholders' equity
Current liabilities:
Revolving line of credit
Accounts payable
Accrued liabilities
Unearned revenue
Current portion of capital lease obligations
Current portion of notes payable
Total current liabilities
Long-term portion of capital lease obligations
Long-term portion of notes payable
Other liabilities
Deferred tax liability
Total liabilities
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, authorized 500,000 shares; none issued
5% preferred stock, Series B, voting, cumulative, convertible, $.01 par value
(liquidation preference at par), authorized 1,000,000 shares, none issued
Common stock, $.01 par value, authorized 10,000,000 shares; 3,619,639 and
3,572,883 shares issued and 3,606,922 and 3,560,167 shares outstanding
Additional paid-in capital
Accumulated deficit
Receivable for common stock issued
Treasury stock, at cost, 12,716 shares
Total stockholders' equity
Total liabilities and stockholders' equity
See accompanying notes
4 2
September 30,
2009
$ 2,598
3,741
440
472
7,251
980
2,545
461
3,986
2,670
1,316
Revised
2008
$ 3,560
3,864
330
429
8,183
980
2,476
461
3,917
2,223
1,694
7,576
30
$ 16,173
7,576
21
$ 17,474
$ 300
636
1,047
5,272
24
316
7,595
-
557
170
1,250
9,572
─
─
362
184,990
(178,556)
(26)
(169)
6,601
$ 16,173
$ -
1,256
1,113
4,661
46
333
7,409
24
223
255
1,108
9,019
─
─
357
184,204
(175,911)
(26)
(169)
8,455
$ 17,474
Years Ended September 30,
Revised
2008
2009
446,9 $
8,813
120
775,81
934,8 $
7,037
125
106,51
3,794
537
133,4
14,246
053,01
019,2
464,3
427,61
(2,478)
)27(
74
)52(
)305,2(
)241(
3,886
319
502,4
11,396
509,21
348,2
135,3
972,91
(7,883)
)98(
99
01
)378,7(
)652(
$ (2,645)
$ (8,129)
)47.0( $
)47.0( $
)82.2( $
)82.2( $
040,895,3
040,895,3
669,755,3
669,755,3
Sonic Foundry, Inc.
Consolidated Statements of Operations
(in thousands except for share and per share data)
Revenue:
tcudorP
Services
Other
eunever latoT
Cost of revenue:
Product
Services
eunever fo tsoc latoT
Gross margin
Operating expenses:
gnitekram dna gnilleS
evitartsinimda dna lareneG
tnempoleved tcudorP
sesnepxe gnitarepo latoT
Loss from operations
esnepxe tseretnI
ten ,emocni rehtO
emocni rehto latoT
sexat emocni erofeb ssoL
sexat emocni rof noisivorP
Net loss
Loss per common share:
erahs nommoc rep ssol ten cisaB
erahs nommoc rep ssol ten detuliD
cisaB – serahs nommoc egareva dethgieW
detuliD –
See accompanying notes
43
Sonic Foundry, Inc.
Consolidated Statements of Stockholders' Equity
For the Year Ended September 30, 2009 and 2008
(in thousands)
Common
stock
Additional
paid-in
capital
Accumulated
Deficit
Receivable
for common
stock issued
Treasury
stock
Total
$ 357
$ 183,528
$ (167,782)
$ (26)
$ (169)
$ 15,908
─
─
─
─
639
7
─
─
30
─
─
(8,129)
─
─
─
─
─
─
─
─
639
7
30
(8,129)
357
184,204
(175,911)
(26)
(169)
8,455
─
3
2
─
584
99
─
─
103
─
─
(2,645)
─
─
─
─
─
─
─
─
584
102
105
(2,645)
$ 362
$184,990
$ (178,556)
$ (26)
$ (169)
$ 6,601
Revised balance,
September 30, 2007
Stock compensation
Issuance of common
stock warrants and
options
Exercise of common
stock warrants and
options
Revised net loss
Revised balance,
September 30, 2008
Stock compensation
Issuance of common
stock
Exercise of common
stock warrants and
options
Net loss
Balance,
September 30, 2009
See accompanying notes
44
Sonic Foundry, Inc.
Consolidated Statements of Cash Flows
(in thousands)
Operating activities
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of other intangibles
Depreciation and amortization of property and equipment
Loss on sale of fixed assets
Provision for doubtful accounts
Deferred taxes
Share-based compensation expense related to stock warrants and options
Other non-cash items
Changes in operating assets and liabilities:
Accounts receivable
Inventories
Prepaid expenses and other assets
Accounts payable, accrued liabilities and other long-term liabilities
Unearned revenue
Net cash used in operating activities
Investing activities
Purchases of property and equipment
Net cash used in investing activities
Financing activities
Net proceeds from revolving line of credit
Proceeds from notes payable
Payments on notes payable
Payments of loan fees
Proceeds from issuance of common stock, net of issuance costs
Proceeds from issuance of common stock warrants and options
Proceeds from exercise of common stock warrants and options
Payments on capital leases
Net cash (used in) provided by financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental cash flow information:
Interest paid
Non-cash transactions:
Property and equipment financed by accounts payable or other accrued liabilities
See accompanying notes
Years Ended September 30,
Revised
2008
2009
$ (2,645)
$ (8,129)
16
615
—
(45)
142
584
(3)
168
(110)
(43)
(771)
614
(1,478)
(237)
(237)
300
638
(321)
(25)
102
—
105
(46)
753
13
702
5
(120)
256
639
98
1,257
(126)
306
(259)
1,489
(3,869)
(218)
(218)
—
—
(333)
—
—
7
30
(65)
(361)
(962)
3,560
$ 2,598
(4,448)
8,008
$ 3,560
72
10
89
—
45
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2009
1. Basis of Presentation and Significant Accounting Policies
Business
Sonic Foundry, Inc. (the Company) is in the business of providing enterprise solutions and services for the web
communications market.
Reverse Stock Split
Effective November 16, 2009, the Company implemented a one-for-ten reverse stock split of its stock (see Note 15).
All shares and per share data in this report have been adjusted to reflect this reverse stock split.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its subsidiary. All
significant intercompany transactions and balances have been eliminated. In 2009 and 2008, net loss equaled
comprehensive loss as there were no items of comprehensive income.
Use of Estimates
In preparing financial statements in conformity with accounting principles generally accepted in the United States of
America (US GAAP), management is required to make estimates and assumptions that affect the reported amounts
of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenue and expense during the period. Actual results could differ from
those estimates.
Revenue Recognition
General
Revenue is recognized when persuasive evidence of an arrangement exists, delivery occurs or services are rendered,
the sales price is fixed or determinable and collectability is reasonably assured. Revenue is deferred when
undelivered products or services are essential to the functionality of delivered products, customer acceptance is
uncertain, significant obligations remain, or the fair value of undelivered elements is unknown. The Company does
not offer customers the right to return product, other than for exchange or repair pursuant to a warranty or stock
rotation. The Company’s policy is to reduce revenue if it incurs an obligation for price rebates or other such
programs during the period the obligation is reasonably estimated to occur. The following policies apply to the
Company’s major categories of revenue transactions.
Products
Products are considered delivered, and revenue is recognized, when title and risk of loss have been transferred to the
customer. Under the terms and conditions of the sale, this occurs at the time of shipment to the customer. Product
revenue currently represents sales of our Mediasite recorder and Mediasite related products such as server software
revenue.
Services
We sell support contracts to our customers, typically one year in length and record the related revenue ratably over
the contractual period. Our support contracts cover phone and electronic technical support availability over and
above the level provided by our distributors, software upgrades on a when and if available basis, advance hardware
replacement and an extension of the standard hardware warranty from 90 days to one year. The manufacturer we
contract with to build the units performs hardware warranty service. We also sell installation, training, event
webcasting, and customer content hosting services. Revenue for those services is recognized when performed in the
46
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2009
case of installation, training and event webcasting services and is recognized ratably over the contract period for
content hosting services. Service amounts invoiced to customers in excess of revenue recognized are recorded as
deferred revenue until the revenue recognition criteria are met.
Revenue Arrangements that Include Multiple Elements
Revenue for transactions that include multiple elements such as hardware, software, installation, training, and post
customer support is allocated to each element based on vendor-specific objective evidence of the fair value
(“VSOE”) in accordance with FASB ASC-985-605. Revenue is recognized for each element when the revenue
recognition criteria have been met for that element. VSOE is based on the price charged when the element is sold
separately. If VSOE of fair value does not exist for all elements in a multiple element arrangement, revenue is
allocated first to the fair value of the undelivered elements and the residual revenue to the delivered elements. The
Company recognizes revenue for delivered elements only when all of the following criteria are satisfied: undelivered
elements are not essential to the functionality of delivered elements, uncertainties regarding customer acceptance are
resolved, and the fair value for all undelivered elements is known.
Reserves
We record reserves for stock rotations, price adjustments, rebates, and sales incentives to reduce revenue and
accounts receivable for these and other credits we may grant to customers. Such reserves are recorded at the time of
sale and are calculated based on historical information (such as rates of product stock rotations) and the specific
terms of sales programs, taking into account any other known information about likely customer behavior. If actual
customer behavior differs from our expectations, additional reserves may be required. Also, if we determine that we
can no longer accurately estimate amounts for stock rotations and sales incentives, we would not be able to
recognize revenue until resellers sell the inventory to the final end user.
Shipping and Handling
The Company’s shipping and handling costs billed to customers are included in other revenue. Costs related to
shipping and handling are included in cost of revenue and are recorded at the time of shipment to the customer.
Concentration of Credit Risk and Other Risks and Uncertainties
The Company’s cash and cash equivalents are deposited with two major financial institutions. At times, deposits in
these institutions exceed the amount of insurance provided on such deposits. The Company has not experienced any
losses on such amounts and believes that it is not exposed to any significant credit risk on these balances.
We perform ongoing credit evaluations of our customers’ financial condition and generally do not require collateral.
We maintain allowances for potential credit losses and such losses have been within our expectations. We had
billings for Mediasite product and support services as a percentage of total billings to one distributor of
approximately 29% in 2009 and 44% in 2008.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original maturity of three months or less to
be cash equivalents.
Trade Accounts Receivable
The majority of the Company’s accounts receivable are due from entities in, or distributors or value added resellers
to, the education, corporate and government sectors. Credit is extended based on evaluation of a customer’s
financial condition and, generally, collateral is not required. Accounts receivable are typically due within 30 days
and are stated at amounts due from customers net of an allowance for doubtful accounts. Accounts outstanding
longer than the contractual payment terms are considered to be past due. The Company determines its allowance by
47
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2009
considering a number of factors, including the length of time trade accounts receivable are past due, the Company’s
previous loss history, the customer’s current ability to pay its obligation to the Company, and the condition of the
general economy and the industry as a whole. The Company writes-off accounts receivable when they become
uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful
accounts. Interest is not accrued on past due receivables.
Inventory Valuation
Inventory consists of raw materials and supplies used in the assembly of Mediasite recorders and finished units.
Inventory of completed units and spare parts are carried at the lower of cost or market, with cost determined on a
first-in, first-out basis.
Inventory consists of the following (in thousands):
Raw materials and supplies
Finished goods
Software Development Costs
September 30,
2009
2008
$ 10
430
$ 440
$ 10
320
$ 330
Internal software development costs are capitalized after technological feasibility is established. The capitalized
cost is then amortized on a straight-line basis over the estimated product life, or on the ratio of current revenue to
total projected product revenue, whichever is greater. To date, the period between achieving technological
feasibility, which the Company has defined as the establishment of a working model, typically occurs when the beta
testing commences, and the general availability of such software has been short and software development costs
qualifying for capitalization have been insignificant. Accordingly, the Company has not capitalized any internal
software development costs.
Property and Equipment
Property and equipment are recorded at cost and are depreciated using the straight-line method for financial
reporting purposes. The estimated useful lives used to calculate depreciation are as follows:
Leasehold improvements
Computer equipment
Furniture and fixtures
Impairment of Long-Lived Assets
Years
5 to 10 years
3 to 5 years
7 years
The Company reviews long-lived assets, including property and equipment, capitalized software development costs
and other intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable. Goodwill is reviewed for impairment annually. Recoverability of an asset is measured by
comparing its carrying value to the expected undiscounted cash flows. An impairment is measured by the amount
by which the carrying value of the related asset or group of assets exceeds the expected undiscounted cash flows.
The Company has recognized no such losses as of September 30, 2009.
Advertising Expense
Advertising costs included in selling and marketing, are expensed when the advertising first takes place.
Advertising expense was $113 and $306 thousand for years 2009 and 2008, respectively.
48
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2009
Research and Development Costs
Research and development costs are expensed in the period incurred.
Income Taxes
Deferred income taxes are provided for temporary differences between financial reporting and income tax basis of
assets and liabilities, and are measured using currently enacted tax rates and laws. Deferred income taxes also arise
from the future benefits of net operating loss carryforwards. A valuation allowance equal to 100% of the net
deferred tax assets has been recognized due to uncertainty regarding the future realization of these assets, excluding
the deferred tax liability for goodwill amortization.
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash and cash equivalents, accounts receivable, accounts
payable and debt instruments. The book values of cash and cash equivalents, accounts receivable, debt and accounts
payable are considered to be representative of their respective fair values. The carrying value of capital lease
obligations, including the current portion, approximates fair market value as the fixed rate approximates the current
market rate of interest available to the Company.
Stock-Based Compensation
The Company uses a lattice valuation model to account for all stock options granted subsequent to September 30,
2005. The lattice valuation model is a more flexible analysis to value options because of its ability to incorporate
inputs that change over time, such as actual exercise behavior of option holders. The Company uses historical data
to estimate the option exercise and employee departure behavior in the lattice valuation model. Expected volatility is
based on historical volatility of the Company’s stock. The Company uses historical data to estimate option exercise
and employee termination within the valuation model. The Company considers all employees to have similar
exercise behavior and therefore has not identified separate homogenous groups for valuation. The expected term of
options granted is derived from the output of the option pricing model and represents the period of time that options
granted are expected to be outstanding. The risk-free rate for periods the options are expected to be outstanding is
based on the U.S. Treasury yields in effect at the time of grant.
The fair value of each option grant is estimated using the assumptions in the following table:
)sraey( efil detcepxE
etar tseretni eerf-ksiR
ytilitalov detcepxE
dleiy dnedivid detcepxE
Years Ending September 30,
2008
2009
sraey 0.6 – 7.5
%7.1 - %3.1
%0.78 - %2.08
%0
sraey 0.6 – 7.5
%4.3 - %2.2
%4.67 - %1.36
%0
49
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2009
Per Share Computation
Basic and diluted net loss per share information for all periods is presented under the requirements of FASB ASC-
260-10. Basic earnings per share has been computed using the weighted-average number of shares of common
stock outstanding during the period, less shares that may be repurchased, and excludes any dilutive effects of options
and warrants. If the Company had reported net income during the periods presented below, diluted net income per
share would have been computed using common equivalent shares related to outstanding options and warrants to
purchase common stock. The numerator for the calculation of basic and diluted earnings per share is net income
(loss). The following table sets forth the computation of basic and diluted weighted average shares used in the
earnings per share calculations:
erahs rep sgninrae cisab rof rotanimoneD
serahs nommoc egareva dethgiew -
,03 rebmetpeS dedne sraeY
8002
9002
040,895,3
669,755,3
Effect of dilutive options and warrants (treasury method)
─
─
Denominator for diluted earnings per share
serahs nommoc egareva dethgiew detsujda -
040,895,3
669,755,3
Options and warrants outstanding during each year, but not included in the
computation of diluted earnings per share because they are antidilutive
816,256
680,688
Recent Accounting Pronouncements
In September 2006, the FASB issued guidance, which provided enhanced guidance for using fair value to measure
assets and liabilities. The standard applies whenever other standards require or permit assets or liabilities to be
measured at fair value. The Standard does not expand the use of fair value in any new circumstances. The adoption
of this standard on October 1, 2008 for financial assets and liabilities did not have a material effect on the
Company’s results of operations or financial position. In February 2008, the FASB issued additional guidance
which deferred the effective date for all nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring basis (that is, at least annually), to
fiscal years beginning after November 15, 2008. Early adoption is permitted. The adoption of this standard related
to non financial assets and liabilities on October 1, 2009 is not expected to have a material effect on the Company's
results of operations or financial position other than requiring additional disclosures for those items where non-
recurring fair valuing of certain assets is performed.
In February 2007, the FASB issued guidance which permits but does not require the Company to measure financial
instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option
has been elected are reported in earnings. This statement is effective for financial statements issued for fiscal years
beginning after November 15, 2007. The adoption of this standard did not have a material effect on the Company’s
results of operations or financial position.
In December 2007, the FASB issued guidance which establishes principles and requirements for how an acquirer
recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any
noncontrolling interest in an acquiree, including the recognition and measurement of goodwill acquired in a business
combination. This guidance is effective for fiscal years beginning on or after December 15, 2008. Early adoption is
prohibited. The adoption of this standard is not expected to have a material effect on the Company's results of
operations or financial position.
50
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2009
In April 2008, the FASB issued guidance that amends the factors that should be considered in developing renewal or
extension assumptions used to determine the useful life of a recognized intangible asset. The guidance is effective
for fiscal years beginning after December 15, 2008. Early adoption is prohibited. The adoption of this standard is not
expected to have a material effect on the Company's results of operations or financial position.
In April 2009, the FASB issued guidance concerning interim disclosures about fair value of financial instruments
requiring publicly traded companies to provide disclosure about the fair value of financial instruments whenever
interim summarized financial information is reported. Previously, disclosures about the fair value of financial
instruments were only required on an annual basis. Disclosure shall include the method(s) and significant
assumptions used to estimate the fair value of financial instruments and shall describe changes in method(s) and
significant assumptions, if any, during the period. This guidance was effective for interim and annual periods ending
after June 15, 2009, and, as such, the Company began including this disclosure with its third quarter 2009 financial
statements.
In May 2009, the FASB issued guidance regarding the disclosure of subsequent events. This guidance made no
changes to current accounting but added required disclosures regarding the date through which the Company has
evaluated subsequent events and whether that evaluation date is the date of financial statement issuance or the date
the financial statements were available to be issued. This guidance was effective, and adopted by the Company, for
interim and annual periods ending after June 15, 2009.
In June 2009, the FASB approved the “FASB Accounting Standards Codification” (the “Codification”) as the single
source of authoritative nongovernmental U.S. GAAP to be launched on July 1, 2009. The codification does not
change current U.S. GAAP, but is intended to simplify user access to all authoritative U.S. GAAP by providing all
the authoritative literature related to a particular topic in one place. All existing accounting standard documents will
be superseded and all other accounting literature not included in the Codification will be considered
nonauthoritative. The Codification is effective for interim and annual periods ending after September 15, 2009.
Adoption by the Company has not led to any material impact on its consolidated financial position, results of
operation or cash flows.
At its September 23, 2009 board meeting, the FASB ratified final consensus on revenue arrangements with multiple
deliverables. This Issue supersedes FASB ASC 605-25. The issue addresses the unit of accounting for arrangements
involving multiple deliverables. It also addresses how arrangement consideration should be allocated to the separate
units of accounting, when applicable. However, guidance on determining when the criteria for revenue recognition
are met and on how an entity should recognize revenue for a given unit of accounting are located in other sections of
the Codification. The issue will ultimately be issued as an Accounting Standards Update (ASU) that will amend
FASB ASC 605-25. Final consensus is effective for fiscal years beginning on or after June 15, 2010. Entities can
elect to apply this Issue (1) prospectively to new or materially modified arrangements after the Issue’s effective date
or (2) retrospectively for all periods presented. The Company does not believe that revisions to FASB ASC 605-25
will have a material impact on the Company’s consolidated financial statements.
At its September 23, 2009 board meeting, the FASB also ratified final consensus on software revenue recognition.
This Issue amends FASB ASC 985-605 and FASB ASC 985-605-15-3 to exclude from their scope all tangible
products containing both software and non-software components that function together to deliver the product’s
essential functionality. That is, the entire product (including the software deliverables and non-software
deliverables) would be outside the scope of FASB ASC 985-605 and would be accounted for under other accounting
literature. The revised scope of FASB ASC 985-605 will ultimately be issued as an Accounting Standards Update
(ASU) that will amend the ASC. The final consensus is effective for fiscal years beginning on or after June 15,
2010. Entities can elect to apply this Issue (1) prospectively to new or materially modified arrangements after the
Issue’s effective date or (2) retrospectively for all periods presented. Early application is permitted. The Company
does not believe that FASB ASC 985-605 will have a material impact on the Company’s consolidated financial
statements.
51
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2009
Subsequent to the issuance of the Codification, the FASB has released Accounting Standard Update Nos. 2009-01
through 2009-15. The Company has reviewed each of these updates and determined that none will have a material
impact on the Company’s financial statements.
2. Prior Year Revisions
During 2009, the Company identified an issue requiring revision of the prior period financial statements relating to
the presentation of disclosure of Deferred Tax Liabilities. Beginning with an acquisition in fiscal year 2002, the
Company has amortized Goodwill for tax purposes over a 15 year life. Goodwill is not amortized for book
purposes. Annual impairment tests are performed for book purposes and the balance of goodwill is to be written
down if impairment occurs. The impairment tests have not indicated any goodwill impairment.
The difference between the book and tax balance of Goodwill creates a Deferred Tax Liability and an annual tax
expense. Because of the long term nature of the goodwill timing difference, tax planning strategies cannot be
applied related to the Deferred Tax Liability. The balance of the Deferred Tax Liability at September 30, 2008 was
$1.1 million. This amount was disclosed in the footnotes but was omitted from the consolidated balance sheet.
Management incorrectly netted the amount with the $36 million Deferred Tax Assets, which are also disclosed in
the footnotes but not recorded on the consolidated balance sheet. Because of the long-term nature of the goodwill
timing difference, these amounts cannot be netted.
Management has deemed this to be not material in the prior periods presented; however, management has elected to
revise the statements under the guidance of SEC SAB 108 as the difference between book and tax goodwill, i.e., the
Deferred Tax Liability, will continue to increase and could become material in future periods.
Management has correctly recorded the Deferred Tax Liability and corresponding expense in fiscal year 2009 and
has corrected prior year amounts on the financial statements and disclosures beginning with this fiscal year 2009 10-
K filing. Refer to Note 8 for additional details.
The following table discloses selected fiscal 2008 financial information as originally presented and as revised.
Balance Sheet
(in thousands)
Deferred tax liability
Total liabilities
Accumulated deficit
Total stockholders' equity
Statement of Operations
(in thousands except share and per share data)
September 30, 2008
Adjust-
ments
As Presented
$ -
7,911
$ 1,108
1,108
Revised
$ 1,108
9,019
(174,803)
$ 9,563
(1,108)
$ (1,108)
(175,911)
$ 8,455
Year Ended
September 30, 2008
Adjust-
ments
As
Presented
Revised
Provision for income taxes
$ -
$ (256)
$ (256)
Net loss
$ (7,873)
(256)
$ (8,129)
Loss per common share:
Basic net loss per common share
Diluted net loss per common share
$ (2.21)
$ (2.21)
$ (0.07)
$ (0.07)
$ (2.28)
$ (2.28)
52
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2009
Statement of Stockholder’s Equity
September 30, 2008
As Presented
September 30, 2008
As Revised
(in thousands)
Accumulated
Deficit
Total
Accumulated
Deficit
Total
ssol teN
Balance, September 30, 2008
)378,7( $
$ (174,803)
)378,7( $
$ 9,563
)921,8( $
$ (175,911)
)921,8( $
$ 8,455
Statement of Cash Flows
(in thousands)
Year Ended
September 30, 2008
Adjust-
ments
As
Presented
Revised
sexat emocni rof noisivorP
- $
652 $
652 $
3. Commitments
The Company leases certain equipment under capital lease agreements expiring through April 2010. Such leases are
included in fixed assets with a cost of $168 thousand and accumulated depreciation of $133 thousand at September
30, 2009. Minimum lease payments, including principal and interest, are summarized in the table below.
Fiscal Year (in thousands)
2010
stnemyap latoT
Less interest
Total
latipaC
$ 25
52
(1)
$ 24
The Company leases certain facilities and equipment under operating lease agreements expiring at various times
through September 30, 2011. Total rent expense related to continuing operations on all operating leases was
approximately $484 and $622 for the years ended September 30, 2009 and 2008, respectively.
The following is a schedule by year of future minimum lease payments under operating leases:
Fiscal Year (in thousands)
2010
2011
retfaereht dna 2102
Total
gnitarepO
$ 501
509
-
$ 1,010
The Company enters into unconditional purchase commitments on a regular basis for the supply of Mediasite
recorders. The Company has an obligation to purchase a remaining $572 thousand, which is not recorded on the
Company's Balance Sheet.
The Company enters into license agreements that generally provide indemnification against intellectual property
claims for its customers as well as indemnification agreements with certain service providers, landlords and other
parties in the normal course of business. The Company has not incurred any material costs as a result of such
indemnifications and has not accrued any liabilities related to such obligations in the consolidated financial
statements.
53
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2009
4. Liquidity
In response to a history of recurring operating losses, the Company initiated cost reduction efforts in January
2008. These efforts achieved a 24% reduction in quarterly operating expenses during fiscal 2008. Continued efforts
to control costs and improve revenues led to a 19% growth in revenues, an increase of three percentage points in
gross margin and further reductions in operating costs in fiscal 2009. The Company anticipates further
improvements in the gross margin rate and further reductions in operating expenses in fiscal 2010 and therefore
believes its cash position is adequate to accomplish its business plan through at least the next twelve months, even if
revenues in fiscal 2010 do not continue to improve. We may evaluate further operating or capital lease opportunities
to finance equipment purchases in the future or utilize the Company’s revolving line of credit to support working
capital needs, if the Company deems it advisable to do so. We may also seek additional equity financing, or issue
additional shares previously registered in our available shelf registration, although we currently have no plans to do
so.
On April 14, 2009, the Company executed the First Amendment to the Amended and Restated Loan and Security
Agreement (the “First Amendment”) with Silicon Valley Bank which extended an existing credit facility in the form
of a $3,000,000 secured revolving line of credit and a $1,000,000 term loan. While the Company anticipates limited
use of the line of credit and that it will be in compliance with all provisions of the agreement, there can be no
assurance that the existing Amended Loan Agreement will remain available to the Company nor that additional
financing will be available or on terms acceptable to the Company.
5. Credit Arrangements
On June 16, 2008, the Company and its wholly-owned subsidiary, Sonic Foundry Media Systems, Inc. (collectively,
the “Companies”) entered into an Amended and Restated Loan and Security Agreement (the “Amended Loan
Agreement”) with Silicon Valley Bank providing for a credit facility in the form of a $3,000,000 secured revolving
line of credit and a $1,000,000 term loan. The ability to borrow up to the maximum $3,000,000 amount of the
revolving line of credit is determined by applying an applicable percentage to eligible accounts receivable, which, is
reduced by, among other things, a reserve. Prior to the First Amendment, discussed below, the reserve was equal to
the balance of the term loan when EBITDA, as defined, would have been less than $200,000 during the preceding
six month period. The revolving line of credit accrues interest at a per annum rate equal to the following: (i) during
such period that Sonic Foundry maintains an Adjusted Quick Ratio (as defined) of greater than 2.00 to 1.00, the
greater of one percentage point (1.0%) above Silicon Valley’s prime rate, or seven percent (7.0%); or (ii) during
such period that Sonic Foundry maintains an Adjusted Quick Ratio equal to or less than 2.00 to 1.00, the greater of
one and one-half percent (1.5%) above Silicon Valley’s prime rate, or seven and one-half percent (7.5%). Under the
Amended Agreement, the term loan will continue to accrue interest at a per annum rate equal to the greater of (i) one
percentage point (1.0%) above Silicon Valley’s prime rate; or (ii) eight and three quarters percent (8.75%). Prior to
the First Amendment, the maturity of both the term loan and the revolving line of credit was June 1, 2010. At the
maturity date all outstanding borrowings and any unpaid interest thereon must be repaid, and all outstanding letters
of credit must be cash collateralized. Principal on the term loan is to be repaid in thirty-six (36) monthly
installments, and prior to the First Amendment, was to be repaid in full on May 1, 2010.
The Amended Loan Agreement contains certain financial covenants, including a covenant requiring the Companies
to maintain certain of their depository, operating and securities accounts with Silicon Valley Bank, and a covenant
relating to EBITDA (“EBITDA Covenant”); however, the EBITDA Covenant will not have to be satisfied provided
that Sonic Foundry maintains an Adjusted Quick Ratio (as defined) greater than or equal to 1.75 to 1.00. The
Amended Loan Agreement also contains certain other restrictive loan covenants, including covenants limiting the
Companies’ ability to dispose of assets, make acquisitions, be acquired, incur indebtedness, grant liens, make
investments, pay dividends, and repurchase stock. At September 30, 2009 the Company was in compliance with all
covenants in the Amended Loan Agreement, as amended by the First Amendment to the Amended and Restated
Loan Agreement (“First Amendment”).
54
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2009
The Amended Loan Agreement contains events of default that include, among others, non-payment of principal or
interest, inaccuracy of any representation or warranty, violation of covenants, bankruptcy and insolvency events,
material judgments, cross defaults to certain other indebtedness, and material adverse changes. The occurrence of an
event of default could result in the acceleration of the Companies’ obligations under the Amended Loan Agreement.
Pursuant to the Amended Loan Agreement, the Company and its wholly-owned subsidiary pledged as collateral to
the Bank substantially all non-intellectual property business assets, and entered into an Intellectual Property Security
Agreement with respect to intellectual property assets.
On April 14, 2009, the Company executed the First Amendment with Silicon Valley Bank. The First Amendment,
among other things, a) refinances the $361,111 outstanding balance of the Term Loan with a new “Term Loan 2” in
the amount of $1,000,000, due in 36 equal monthly installments of principal and interest; b) modifies the method of
determining the requirement for a reserve under the Revolving Line for the balance of the term loan to require a
reserve unless, for three (3) consecutive monthly periods, the ratio of EBITDA to Debt Service, in each case for the
three (3) month period then ending is greater than or equal to 1.25 to 1.00; c) modifies the minimum requirements
under the EBITDA covenant, but maintains the provision to override such covenant if the Company maintains a
minimum Quick Ratio of 1.75 to 1.00; and d) extends the maturity date of the Revolving Line to October 1, 2011
and the Term Loan 2 to April 1, 2012. At September 30, 2009, a balance of $873 thousand was remaining on the
term loan and a balance of $300 thousand was outstanding on the revolving line of credit. At September 30, 2009,
there was $800 thousand available under this credit facility for advances.
The annual principal payments on the term loan are as follows:
Fiscal Year (in thousands)
2010
2011
2012
Total
6.
Common Stock Warrants
$ 316
344
213
$ 873
The Company has issued restricted common stock purchase warrants to various consultants and other third parties.
Each warrant represents the right to purchase one share of common stock. All warrants are currently exercisable.
The Company did not grant any warrants in fiscal 2009 and granted warrants to purchase 750 warrants in fiscal
2008. All such warrants are either valued and expensed in full at the date of grant or valued at the date of grant and
deferred over the term of the relevant contract for services.
Exercise Prices
September 30, 2009
Expiration Date
Warrants Outstanding at
$ 9.90 to 15.40
21.10 to 37.10
112.30
38,200
10,550
890
046,94
2009 to 2011
2011 to 2017
2010
7. Stock Options and Employee Stock Purchase Plan
The Company maintains an employee qualified stock option plan under which the Company may grant options to
acquire up to 700 thousand shares of common stock and a non-qualified plan under which 380 thousand shares of
common stock can be issued. On March 5, 2009, Stockholders approved adoption of the 2009 Stock Incentive Plan
(the “2009 Plan”). The 2009 Plan will, beginning October 1, 2009, replace both plans. The Company also
55
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2009
maintains a directors' stock option plan under which options may be issued to purchase up to an aggregate of 50,000
shares of common stock. Each non-employee director, who is re-elected or who continues as a member of the board
of directors on each annual meeting date and on each subsequent meeting of Stockholders, will be granted options to
purchase 2,000 shares of common stock under the directors’ plan, or at other times or amounts at the discretion of
the Board of Directors.
Each option entitles the holder to purchase one share of common stock at the specified option price. The exercise
price of each option granted under the plans was set at the fair market value of the Company's common stock at the
respective grant date. Options vest at various intervals and expire at the earlier of termination of employment,
discontinuance of service on the board of directors, ten years from the grant date or at such times as are set by the
Company at the date of grant.
Compensation cost for options will be recognized in earnings, net of estimated forfeitures, on a straight-line basis
over the requisite service period. There were no capitalized stock-based compensation costs at September 30, 2009.
The number of shares available for grant under these plans at September 30 is as follows:
Employee
Stock Option
Plans
Non-
Qualified
Stock Option
Plan
Director
Stock Option
Plans
Shares available for grant at September 30, 2007
Shareholder approval of 2008 Director Plan
Options granted
Options forfeited
Options remaining at expiration of plan
Shares available for grant at September 30, 2008
Options granted
Options forfeited
Shareholder approval of 2009 Stock Incentive Plan
Options remaining at expiration of plan
Shares available for grant at September 30, 2009
216,031
–
(187,075)
86,376
–
115,332
(188,690)
50,533
400,000
(1,776)
375,399
72,549
–
(70,550)
20,000
–
21,999
(42,750)
22,746
–
(1,995)
–
10,000
50,000
(10,000)
4,000
(14,000)
40,000
(10,000)
–
–
–
30,000
The following table summarizes information with respect to outstanding stock options.
Years Ended September 30,
2009
2008
Outstanding at beginning of year
Granted
Exercised
Forfeited
Outstanding at end of year
Exercisable at end of year
Weighted average fair value of options granted
Weighted
Average
Exercise
Price
$ 20.50
5.90
5.30
21.00
$ 16.20
Options
624,044
241,440
(19,592)
(79,279)
766,615
466,434
Weighted
Average
Exercise
Price
$ 24.10
11.50
6.90
19.10
$ 20.50
Options
471,230
267,625
(4,432)
(110,379)
624,044
426,802
during the year
$ 3.40
$ 5.50
56
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2009
The options outstanding at September 30, 2009 have been segregated into six ranges for additional disclosure as
follows:
Options Outstanding
Options Exercisable
Options
Outstanding at
September 30,
2009
333,411
368,654
24,641
25,500
8,259
6,150
766,615
Weighted
Average
Remaining
Contractual
Life
8.9
4.5
5.9
7.3
4.0
0.5
Weighted
Average
Exercise
Price
$ 6.21
12.95
22.96
37.29
51.73
587.98
Options
Exercisable at
September 30,
2009
95,087
316,883
20,136
20,650
7,457
6,150
466,363
Weighted
Average
Exercise
Price
$ 5.94
12.55
22.70
37.36
52.61
587.98
Exercise Prices
$ 4.20 to $9.90
10.00 to 19.40
20.00 to 29.00
30.00 to 39.50
40.00 to 66.10
155.00 to 587.98
As of September 30, 2009, there was $601 thousand of total unrecognized compensation cost related to non-vested
share-based compensation, net of $229 thousand of estimated forfeitures. The cost is expected to be recognized over
a weighted-average life of 1.6 years.
A summary of the status of the company’s non-vested shares as of September 30, 2009 and for the year then ended
is presented below:
Non-vested shares at October 1, 2008
detnarG
detseV
detiefroF
Non-vested shares at September 30, 2009
Weighted Average
Grant Date
Fair Value
$ 7.70
04.3
07.5
01.7
$ 5.10
Shares
197,244
044,142
)961,821(
)005,9(
301,015
Stock-based compensation recorded in the year ended September 30, 2009 of $584 thousand was allocated $375
thousand to selling and marketing expenses, $52 thousand to general and administrative expenses and $157
thousand to product development expenses. Stock-based compensation recorded in the year ended September 30,
2008 of $639 thousand was allocated $352 thousand to selling and marketing expenses, $90 thousand to general and
administrative expenses and $197 thousand to product development expenses. Cash received from option exercises
under all stock option plans for the years ended September 30, 2009 and 2008 was $105 thousand and $30 thousand,
respectively. There were no tax benefits realized for tax deductions from option exercises for the years ended
September 30, 2009 and 2008. The Company currently expects to satisfy share-based awards with registered shares
available to be issued.
57
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2009
8.
Income Taxes
The provision for income taxes consists of the following (in thousands):
xat emocni laredeF
)tifeneb( esnepxe xat emocni derrefeD
ecnawolla noitaulav ni egnahC
sexat emocni rof noisivorP
,03 rebmetpeS dednE sraeY
desiveR
2008
9002
241 $
)330,1(
330,1
241 $
652 $
)533,3(
533,3
652 $
The reconciliation of income tax expense (benefit) computed at the U.S. federal statutory rate to income tax expense
(benefit) is as follows (in thousands):
%43 fo etar yrotutats .S.U ta )tifeneb( esnepxe xat emocnI
)tifeneb( esnepxe xat emocni etatS
ten ,secnereffid tnenamreP
snruter xat emocni ot secnereffid yraropmet fo tnemtsujdA
ecnawolla noitaulav ni egnahC
esnepxe xat emocnI
,03 rebmetpeS dednE sraeY
9002
8002
)158( $
)031(
41
67
330,1
241 $
)776,2( $
)904(
91
21
533,3
652 $
The significant components of the deferred tax accounts recognized for financial reporting purposes are as follows
(in thousands):
:stessa xat derrefeD
sdrawrofyrrac rehto dna ssol gnitarepo teN
stnarraw kcots nommoC
stnuocca luftbuod rof ecnawollA
Other
stessa xat derrefed latoT
ecnawolla noitaulaV
noitazitroma lliwdooG
Deferred tax liability for goodwill amortizati
no
,03 rebmetpeS
9002
8002
665,43 $
799,1
14
74
876,63
)876,63(
)052,1(
)052,1( $
057,33 $
967,1
95
67
546,53
)546,53(
)801,1(
)801,1( $
At September 30, 2009, the Company had net operating loss carryforwards of approximately $87 million for both
U.S. Federal and state tax purposes, which expire in varying amounts between 2013 and 2029. Utilization of the
Company’s net operating loss may be subject to substantial annual limitation due to the ownership change
limitations provided by the Internal Revenue Code and similar state provisions. Such an annual limitation could
result in the expiration of the net operating loss carryforwards before utilization. In addition, the Company has
research and development tax credit carryforwards of approximately $544 thousand, which expire in varying
amounts beginning 2011. The Company’s net deferred tax asset has been offset by a valuation allowance of the
same amount. The valuation allowance has been recorded due to the uncertainty of realization of the deferred tax
asset.
58
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2009
Beginning with an acquisition in fiscal year 2002, the Company has amortized Goodwill for tax purposes over a 15
year life. Goodwill is not amortized for book purposes. Annual impairment tests are performed for book purposes
and the balance of goodwill is to be written down if impairment occurs. The impairment tests have not indicated
any goodwill impairment.
The difference between the book and tax balance of Goodwill creates a Deferred Tax Liability and an annual tax
expense. Because of the long term nature of the goodwill timing difference, tax planning strategies cannot be
applied related to the Deferred Tax Liability. The balance of the Deferred Tax Liability at September 30, 2008 was
$1.1 million. This amount was disclosed in the footnotes but was omitted from the consolidated balance sheet.
Management incorrectly netted the amount with the $36 million Deferred Tax Assets, which are also disclosed in
the footnotes, but not recorded on the consolidated balance sheet. Because of the long-term nature of the goodwill
timing difference, these amounts cannot be netted.
Management has deemed this to be not material in the prior periods presented; however, management has elected to
revise the statements under the guidance of SEC SAB 108 as the difference between book and tax goodwill, i.e., the
Deferred Tax Liability, will continue to increase and could become material in future periods.
Management has correctly recorded the Deferred Tax Liability and corresponding expense in fiscal year 2009 and
has revised prior year amounts on the financial statements and disclosures beginning with this fiscal year 2009 10-K
filing. Refer to Note 8 for additional details.
The Company's practice is to recognize interest and/or penalties related to income tax matters in income tax
expense. The Company had no accruals for interest and penalties on the Company's Balance Sheets at September 30,
2009 and 2008, and has not recognized any interest or penalties in the Statement of Operations for the years ended
September 30, 2009 or 2008.
The Company is subject to taxation in the U.S. and various state jurisdictions. All of the Company's tax years are
subject to examination by the U.S. and state tax authorities due to the carryforward of unutilized net operating
losses.
9. Savings Plan
The Company's defined contribution 401(k) savings plan covers substantially all employees meeting certain
minimum eligibility requirements. Participating employees can elect to defer a portion of their compensation and
contribute it to the plan on a pretax basis. The Company may also match certain amounts and/or provide additional
discretionary contributions, as defined. The Company made discretionary contributions of $307 and $293 thousand
during the years ended September 30, 2009 and 2008, respectively.
The Company also has an Employee Stock Purchase Plan (Purchase Plan) under which an aggregate of 50,000
common shares may be issued. All employees who have completed 90 days of employment with the company on the
first day of each offering period are eligible to participate in the Purchase Plan. An employee who, after the grant of
an option to purchase, would hold common stock and/or hold outstanding options to purchase stock possessing 5%
or more of the total combined voting power or value of the company will not be eligible to participate. Eligible
employees may make contributions through payroll deductions of up to 10% of their compensation. No participant
in the Purchase Plan is permitted to purchase common stock under the Purchase Plan if such option would permit his
or her rights to purchase stock under the Purchase Plan to accrue at a rate that exceeds $25,000 of the fair market
value of such shares, or that exceeds 1,000 shares, for each calendar year. The company makes a bi-annual offering
to eligible employees of options to purchase shares of common stock under the Purchase Plan on the first trading
day of January and July. Each offering period is for a period of six months from the date of the offering, and each
eligible employee as of the date of offering is entitled to purchase shares of common stock at a purchase price equal
to the lower of 85% of the fair market value of common stock on the first or last trading day of the offering period.
There were 27,162 shares purchased by employees during 2009. The Company recorded stock compensation
expense of $57 thousand during 2009. There was no such expense in 2008.
59
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2009
10. Related-Party Transactions
The Company incurred fees of $255 and $249 thousand during the years ended September 30, 2009 and 2008,
respectively, to a law firm whose partner is a director and stockholder of the Company. The Company had accrued
liabilities for unbilled services of $19 thousand at September 30, 2009 to the same law firm. There were no unbilled
services at September 30, 2008.
The Company recorded Mediasite product and customer support revenue related to $600 and $580 thousand of
billings during the years ended September 30, 2009 and 2008 to Mediasite KK, a Japanese reseller in which the
Company has an equity interest. Mediasite KK owed the Company $128 and $108 thousand on such billings at
September 30, 2009 and 2008, respectively. The Company accounts for its investment in Mediasite KK under the
equity method. The recorded value as of September 30, 2009 and 2008 is zero.
During the years ended September 30, 2009 and 2008, the Company had a loan outstanding to an executive totaling
$26 thousand. The loan is collateralized by company stock.
11. Goodwill and Other Intangible Assets
The Company accounts for goodwill and other intangible assets in accordance with FASB ASC-350 which requires
that goodwill and intangible assets that have indefinite useful lives not be amortized but, instead, tested at least
annually for impairment. We assess the impairment of goodwill and capitalized software development costs on an
annual basis or whenever events or changes in circumstances indicate that the fair value of these assets is less than the
carrying value.
If we determine that the fair value of goodwill is less than its carrying value, based upon the annual test or the existence
of impairment, we would then measure impairment based on a comparison of the implied fair value of goodwill with the
carrying amount of goodwill. To the extent the carrying amount of goodwill is greater than the implied fair value of
goodwill, we would record an impairment charge for the difference.
On July 1, 2009, the Company performed its annual goodwill impairment test and tested goodwill recognized in
connection with the acquisition of Mediasite and determined it was not impaired. Subsequent impairment charges
for Mediasite or other acquisitions, if any, will be reflected as an operating expense in the statement of operations.
The following tables present details of the Company’s total intangible assets at September 30, 2009 and 2008:
(in thousands)
:elbazitromA
Loan origination fees
Life
(years)
Gross
Accumulated
Amortization at
September 30,
2009
Balance at
September 30,
2009
3
$ 65
56
$ 35
53
$ 30
03
7,576
606,7 $
Non-amortizable goodwill
latoT
7,576
146,7 $
-
53 $
60
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2009
Life
(years)
Gross
Accumulated
Amortization at
September 30,
2008
Balance at
September 30,
2008
3
$ 40
04
$ 19
91
7,576
616,7 $
-
91 $
$ 21
12
7,576
795,7 $
(in thousands)
:elbazitromA
Loan origination fees
Non-amortizable goodwill
latoT
12. Segment Information
The Company has determined that it operates in only one segment in accordance with FASB ASC-280-10 as it does
not disaggregate profit and loss information on a segment basis for internal management reporting purposes to its
chief operating decision maker.
The Company’s long-lived assets maintained outside the United States are insignificant.
The following summarizes revenue by geographic region (in thousands):
setatS detinU
tsaE elddiM dna eporuE
aisA
rehtO
latoT
13. Customer Concentration
,03 rebmetpeS dednE sraeY
9002
8002
273,31 $
479,3
686
545
775,81 $
995,21 $
676,1
626
007
106,51 $
In the fiscal year ended September 30, 2009 and 2008, one distributor represented 29% and 44% of total revenue.
14. Quarterly Financial Data (unaudited)
The following table sets forth selected quarterly financial information for the years ended September 30, 2009 and
2008. The operating results are not necessarily indicative of results for any future period.
(in thousands except
per share data)
Revenue
Gross margin
Loss from
operations
Net loss
Basic and diluted net
loss per share
Q4-’09 Q3-’09
Q2-’09
Q1-’09
Revised
Q4-’08
Q3-’08
Q2-’08
Q1-’08
ataD laicnaniF ylretrauQ
$ 4,128
3,113
$ 5,027
3,932
$ 5,413
4,083
$ 4,009
3,118
$ 4,065
2,940
$ 5,087
3,783
$ 3,929
2,775
$ 2,520
1,898
(952)
(1,090)
(151)
(162)
(144)
(152)
(1,231)
(1,240)
(1,218)
(1,482)
(820)
(829)
(2,273)
(2,278)
(3,572)
(3,540)
$ (0.30)
$ (0.04)
$ (0.04)
$ (0.35)
$ (0.42)
$ (0.23)
$ (0.64)
$ (1.00)
61
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2009
15. Subsequent Event
The Company completed a one-for-ten reverse stock split of its stock effective at the end of trading on November
16, 2009. The number of shares of Sonic Foundry common stock issued and outstanding have been reduced from
approximately 36,069,000 shares to approximately 3,606,900 shares post-split, without accounting for the payout on
fractional shares. This reverse stock split has been reflected in the share and per share data presented throughout
this report.
Management has considered all events through the filing date, December 4, 2009, and determined that no additional
subsequent event disclosures are necessary.
62
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2009
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A.
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Based on evaluations as of the end of the period covered by this report, our principal executive officer and principal
financial officer, with the participation of our management team, have concluded that our disclosure controls and
procedures (as defined in Rules 13a-15(e), and 15d-15(e) under the Securities Exchange Act) were effective.
Limitations on the effectiveness of Controls and Permitted Omission from Management’s Assessment
Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. All internal control systems, no matter how well designed, have inherent
limitations, including the possibility of human error and the circumvention or overriding of controls. Accordingly,
even effective internal controls can only provide reasonable assurance with respect to financial statement
preparation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls
may become inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting,
as such term is defined in Exchange Act Rules 13a-15(f).
Under the supervision and with the participation of our management, including our principal executive officer and
principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial
reporting based on the framework in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
Based on this evaluation, our management believes that, as of September 30, 2009, our internal control over
financial reporting was effective based on those criteria.
Changes in Internal Control Over Financial Reporting
During the period covered by this report, we have not made any change to our internal control over financial
reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial
reporting.
ITEM 9B.
OTHER INFORMATION
None.
63
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2009
PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
The information required by Item 10 of Form 10-K with respect to directors and executive officers is incorporated
herein by reference to the information contained in the section entitled “Proposal One: Election of Directors” and
“Executive Officers of Sonic”, respectively, in the Company’s definitive Proxy Statement to be filed with the
Securities and Exchange Commission in connection with the solicitation of proxies for the Company’s 2009 Annual
Meeting of Stockholders, which will be filed no later than January 28, 2010 (the “Proxy Statement”).
Item 405 of Regulation S-K calls for disclosure of any known late filings or failure by an insider to file a report
required by Section 16(a) of the Securities Act. This information is contained in the Section entitled “Section 16(a)
Beneficial Ownership Reporting Compliance” in the Proxy Statement and is incorporated herein by reference.
Item 401 of Regulation S-K calls for disclosure of whether or not the Company has a financial expert serving on the
audit committee of its Board of Directors, and if so who that individual is. This information is contained in the
Section entitled “Meetings and Committees of Directors” in the Proxy Statement and is incorporated herein by
reference.
Item 407 of Regulation S-K calls for disclosure of whether or not the Company has an audit committee and a
financial expert serving on the audit committee of the Board of Directors, and if so, who that individual is. Item 407
also requires disclosure regarding the Company’s nominating committee and the director nomination process. This
information is contained in the section entitled “Meetings and Committees of Directors” in the Proxy Statement and
is incorporated herein by reference.
Sonic Foundry has adopted a code of ethics that applies to all officers and employees, including Sonic Foundry’s
principal executive officer, its principal financial officer, and persons performing similar functions. This code of
ethics is available, without charge, to any investor who requests it. Request should be addressed in writing to Mr.
Kenneth A. Minor, Corporate Secretary, 222 West Washington Avenue, Madison, Wisconsin 53703.
ITEM 11.
EXECUTIVE COMPENSATION
The information required by Item 11 of Form 10-K is incorporated herein by reference to the information contained
in the sections entitled “Directors Compensation”, “Executive Compensation and Related Information” and
“Compensation Committee Interlocks and Insider Participation” in the Proxy Statement.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
The information required by Item 12 of Form 10-K is incorporated herein by reference to the information contained
in the sections entitled “Security Ownership of Certain Beneficial Owners and Management” in the Proxy
Statement. Information related to equity compensation plans is set forth in Item 5 herein.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS , AND DIRECTOR
INDEPENDENCE
The information required by Item 13 of Form 10-K is incorporated herein by reference to the information contained
in the section entitled “Certain Transactions” and “Meetings and Committees of Directors” in the Proxy Statement.
64
Sonic Foundry, Inc.
Annual Report on Form 10-K
For the Year Ended September 30, 2009
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by Item 14 of Form 10-K is incorporated herein by reference to the information contained
in the section entitled “Ratification of Appointment of Independent Auditors – Fiscal 2008 and 2009 Audit Fee
Summary” in the Proxy Statement.
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