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Sony Bets Heavy on Wisconsin Digital Entertainment Presence

On July 29th, Sonic Foundry (NASDAQ: SOFO) will hold its annual meeting at which shareholders will be asked to vote to approve the purchase of its entire desktop software business – including its Sound Forge, Vegas video editing and ACID music creation computer programs – to a subsidiary of Sony Pictures Digital for $19 million in cash and assumption of certain trade payables, accrued liabilities and capital leases associated with the desktop software business. SPD has further agreed to purchase 10 MediaSite Live units from Sonic for a total consideration of approximately $300,000 according to SEC documents.

Sony intends to maintain and grow the operation based in Madison and retain most of the approximately 70 employees who work in the software products group. Sony and Sonic Foundry have a relationship dating back to 1999 that involves the licensing of Sonic Foundry’s products to Sony for resale and for inclusion with Sony Computers and other digital devices, as well being an integral part of the tools for SPD’s Screenblast.com online service.

“During the last three years we have come to recognize and admire Sonic Foundry’s engineering expertise and value their software applications,” said Patrick Kennedy, executive vice-president of Sony Pictures Digital. “We are excited to integrate this world-class team and their products into ongoing efforts to produce and deliver the next generation of consumer digital entertainment services.”


Why Madison?

Sony Pictures Digital choose to pursue and outbid other potential buyers of Sonic Foundry’s software products because of an existing business relationship that they have enjoyed with Sonic Foundry and their desktop group for three years as well as the attractive talent base in Madison, according to Kennedy “Sonic Foundry will provide us with us with a solid and qualified engineering team. We look forward to building to building upon this. The acquisition adds a complimentary capability to what we have already developed internally.” he said.
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“Wisconsin has done a terrific job of attracting and developing technology-based enterprises and we are very excited about the opportunities for us in Madison. Sony Pictures Digital understands and appreciates the quality of talent that exists in Madison and throughout Wisconsin and we are looking for forward to a bright future in the state,” added Kennedy.

”One of the most important aspects of our deal with Sonic Foundry is the commitment of the community to the development of a technology industry. I cannot think of another state that has the commitment and priority to grow both IT and biotechnology as Wisconsin has. This is exciting! There is a lot of raw talent in Madison and in Wisconsin. As we look to grow our company it will be exciting to recruit new engineers from UW-Madison and The Milwaukee School of Engineering. This was a factor in our buying of Sonic Foundry to keep our engineering fresh and thriving.” Kennedy said.

Patrick Kennedy will be in Madison for the Sonic Foundry shareholders’ meeting in late July and to meet with business and government leaders in the technology community. Kennedy will be the featured speaker at Accelerate Madison’s July 30 meeting at the UW-Fluno Center, sharing his company's vision while satisfying curiosities about what lies ahead after Sony lands in Madison.

Kennedy has roots in the Midwest and Wisconsin. He is a Minneapolis native and holds a bachelors degree in engineering from the Milwaukee School of Engineering and holds a masters degree in electrical engineering from Stanford.

Wisconsin has a great software legacy that not only includes Sonic Foundry, but also companies including PK Ware, creator of the PK ZIP standard, game developer Raven Software, iNEWS/Avid, a developer of newsroom computer software and Epic Systems, a health technology vendor, all of which have their roots in the state.

“We couldn’t pick a better partner than Sony Pictures Digital to carry on the same passion and success we’ve achieved over the past 12 years,” said Rimas Buinevicius, chairman and CEO of Sonic Foundry. “There is a tremendous amount of discussion on how Wisconsin and Madison can get a large technology company to locate here. Sony recognized that there is a significant technology community in Madison, as well as good labor, quality engineering and a wealth of culture. This deal was put together by the private sector and did not involve any government or state economic development agencies.”

Governor Doyle commenting on Sony’s planned arrival in Wisconsin said, “Sonic Foundry has had a history of great technology and products. The fact that Sony has recognized that is great.”

Tom Still, president of the Wisconsin Technology Council said, “The acquisition of Sonic Foundry's desktop software products line by Sony Pictures Digital is like a Hollywood happy ending- everyone wins. Most of all, Madison and Wisconsin win by the addition of an international name, Sony to its tech community. This confirms the fact that Wisconsin not only produces globally competitive technology, but it can attract globally competitive companies that want to make Wisconsin home."

The Deal and Beyond

The agreement with Sony marks a major milestone in Sonic Foundry's longer-term strategy to divest of most of its assets and concentrate on markets where rich media solutions are being embraced. In May 2003 Sonic Foundry completed the sale of its entertainment industry-based business that in 2002 had $9.4 million in sales to Deluxe Media Services, Inc., a leader in motion picture capture and control, production facilities and services, for approximately $5.6 million cash.

The pending acquisition and approval of the Sonic Foundry’s desktop software by Sony will be the last step in a 11-month process led by investment banking firm Silverwood Partners LLC that involved up to twenty potential buyers and resulted in three finalists for the software unit.

The Desktop Software Business designs, develops, markets and supports desktop software products for digitizing, converting, editing and publishing of audio, video, and/or multimedia content. In 2002, annual revenue from Sonic’s desktop software business was $15.9 million, or approximately 61% of their total revenues.

When the sales is complete Sonic Foundry will maintain its remaining Media Systems business and will have approximately $15 million in cash, after payment of certain indebtedness. The cash generated from the sales of its desktop software assets will be used for development of its Media Systems business. That business unit generated revenues of only approximately $900,000 in fiscal 2002. The Media Systems business develops automated rich-media application software and systems.

Sonic Foundry plans to relocate its remaining 25-30 employees to an office in downtown Madison as Sony plans to occupy its current building.

Sony Pictures Digital oversees the digital production and online assets of Sony Pictures Entertainment (SPE) and consists of four key operating business units: Sony Pictures Animation, Sony Pictures Imageworks, Sony Online Entertainment and Sony Pictures Digital Networks which includes SoapCity, Screenblast, Sony Pictures mobile and wireless services , the studio's online promotional arm SPiN, and the UK interactive television service GoPlayTV.

SPD leads its efforts to develop and provide new forms of online content, games, interactive programming, open-access video-on-demand and wireless entertainment. Screenblast, which first debuted in September 2001, gives the consumer the ability to create, enhance and share their digital videos, music and photos with a combination of a powerful software suite and an easy-to-use online service for sharing and personalizing consumers' media. Screenblast Movie Studio and Screenblast Music Studio software have been available through retail outlets since October 2002.


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Mike Klein is the Founder and Editorial Director of the Wisconsin Technology Network and can be reached at mike@wistechnology.com

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