<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 1
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported): MARCH 24, 1998
REALNETWORKS, INC.
(Exact name of registrant as specified in charter)
WASHINGTON
(State or other jurisdiction of incorporation)
0-23137
(Commission File Number)
91-1628146
(IRS Employer Identification No.)
1111 THIRD AVENUE, SUITE 2900,
SEATTLE, WA 98101
(Address of principal executive offices) (Zip Code)
(206) 674-2700
(Registrant's telephone number, including area code)
NONE
(Former name or former address, if changed since last report)
<PAGE> 2
As reported on a Form 8-K filed with the Securities and Exchange
Commission on April 8, 1998, RealNetworks, Inc. ("RealNetworks") acquired all of
the outstanding capital stock of Vivo Software, Inc. ("Vivo") on March 24, 1998
for approximately $19.7 million, including acquisition costs. RealNetworks
hereby amends such Form 8-K as set forth herein.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
The following financial statements required by Item 7 with respect to
the Vivo acquisition are filed as part of this report:
FINANCIAL STATEMENTS OF BUSINESS ACQUIRED
Balance Sheet, December 31, 1997 and 1996
Statement of Operations for the Years Ended December 31, 1997 and 1996
Statement of Changes in Stockholders' (Deficit) Equity for the Years
Ended December 31, 1997 and 1996
Statement of Cash Flows for the Years Ended December 31, 1997 and 1996
PRO FORMA FINANCIAL INFORMATION
Unaudited Pro Forma Condensed Consolidated Statement of Operations
for the Three Months Ended March 31, 1998 and for the Year Ended
December 31, 1997
(a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED.
<PAGE> 3
REPORT OF INDEPENDENT ACCOUNTANTS
March 20, 1998
To the Board of Directors and Stockholders of
Vivo Software, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, of changes in stockholders' (deficit) equity and of cash flows
present fairly, in all material respects, the financial position of Vivo
Software, Inc. at December 31, 1997 and 1996, and the results of its operations
and its cash flows for the years then ended in conformity with generally
accepted accounting principles. These financial statements 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 of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit 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, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As discussed in Note 1, the Company has suffered recurring losses from
operations and has limited working capital to fund future operations. On
February 20, 1998, the Company entered into an agreement to be acquired by
RealNetworks, Inc. as disclosed in Note 10.
/s/ Price Waterhouse LLP
<PAGE> 4
Vivo Software, Inc.
Balance Sheet
<TABLE>
<CAPTION>
December 31,
1997 1996
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 883,030 $ 247,080
Short-term investments -- 4,194,811
Accounts receivable, net of allowance for doubtful accounts of
$12,716 and $5,723 at December 31, 1997 and 1996, respectively 255,900 52,753
Accounts receivable from related party 165,000 162,957
Inventories 24,173 3,628
Prepaid expenses 50,764 3,094
------------ ------------
Total current assets 1,378,867 4,664,323
Fixed assets, net 322,051 326,072
Other assets 13,367 11,509
------------ ------------
$ 1,714,285 $ 5,001,904
============ ============
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Current portion of notes payable $ 44,651 $ 115,610
Accounts payable 368,982 197,173
Accrued expenses 443,871 203,170
Sales returns allowances 171,965 --
Deferred revenue 710,976 --
------------ ------------
Total current liabilities 1,740,445 515,953
------------ ------------
Long-term portion of notes payable -- 44,651
------------ ------------
Redeemable convertible preferred stock, $.01 par value;
18,782,979 shares authorized; 17,946,675 shares
and 9,582,979 shares issued and outstanding at
December 31, 1997 and 1996, respectively
(aggregate liquidation preference of $1,003,644
and $23,957,448 at December 31, 1997 and 1996, respectively,
and aggregate redemption value of $28,582,467 and
$25,137,468 at December 31, 1997 and 1996, respectively) 21,998,998 19,344,278
------------ ------------
Commitments (Note 9) -- --
Stockholders' (Deficit) Equity:
Common stock, $.01 par value; 28,022,082 shares authorized;
2,827,592 and 2,815,592 shares issued and outstanding at
December 31, 1997 and 1996, respectively 28,276 28,156
Additional paid-in capital 31,141 29,460
Accumulated deficit (22,080,245) (14,956,264)
Treasury stock: 139,729 shares at cost at December 31, 1997 and 1996 (4,330) (4,330)
------------ ------------
Total stockholders' deficit (22,025,158) (14,902,978)
------------ ------------
$ 1,714,285 $ 5,001,904
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 5
VIVO SOFTWARE, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997 1996
<S> <C> <C>
Net revenues, including $570,000 and
$300,000 from related party in 1997
and 1996, respectively $ 1,780,513 $ 1,143,737
Cost of revenues 275,526 82,048
----------- -----------
Gross profit 1,504,987 1,061,689
----------- -----------
Operating costs and expenses:
Research and development 2,370,339 2,217,515
Selling and marketing 3,512,334 1,800,395
General and administrative 1,129,180 1,016,866
----------- -----------
Total costs and expenses 7,011,853 5,034,776
----------- -----------
Loss from operations (5,506,866) (3,973,087)
Other income (expense):
Interest income 82,614 120,786
Interest expense (8,652) (26,051)
Other expense -- (21,641)
----------- -----------
Net loss $(5,432,904) $(3,899,993)
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 6
Vivo Software, Inc.
Statement of Changes in Stockholders' (Deficit) Equity
<TABLE>
<CAPTION>
Common Stock Additional Total
Number of Par paid-in Accumulated Treasury stockholders'
shares value capital deficit stock (deficit) equity
------------ ------------ ------------ ------------ ------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 2,772,883 $ 27,729 $ 25,995 $ (9,717,492) $ (1,958) $ (9,665,726)
Exercise of common stock options 42,709 427 3,465 -- -- 3,892
Repurchase of 100,564 shares of
common stock -- -- -- -- (2,372) (2,372)
Accretion of redeemable preferred
stock to redemption value -- -- -- (1,338,779) -- (1,338,779)
Net loss -- -- -- (3,899,993) -- (3,899,993)
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 1996 2,815,592 28,156 29,460 (14,956,264) (4,330) (14,902,978)
Exercise of common stock options 12,000 120 1,681 -- -- 1,801
Accretion of redeemable preferred
stock to redemption value -- -- -- (1,691,077) -- (1,691,077)
Net loss -- -- -- (5,432,904) -- (5,432,904)
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 1997 2,827,592 $ 28,276 $ 31,141 $(22,080,245) $ (4,330) $(22,025,158)
============ ============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 7
Vivo Software, Inc.
Statement of Cash Flows
<TABLE>
<CAPTION>
Year ended
December 31,
1997 1996
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Cash flows from operating activities:
Net loss $ (5,432,904) $ (3,899,993)
Adjustments to reconcile net loss to net cash used for operating activities:
Depreciation and amortization 178,845 214,164
Accretion of discount (5,189) (55,342)
Increase (decrease) resulting from changes in operating assets and liabilities:
Accounts receivable (203,147) 30,059
Accounts receivable from related party (2,043) (162,957)
Inventories (20,545) 69,534
Prepaid expenses (47,670) 2,995
Accounts payable 171,809 79,313
Accrued expenses 240,701 91,817
Sales returns allowances 171,965 --
Deferred revenue 710,976 (31,635)
------------ ------------
Net cash used for operating activities (4,237,202) (3,662,045)
------------ ------------
Cash flows from investing activities:
Proceeds from sale of fixed assets -- 23,448
Purchases of fixed assets (174,824) (140,875)
Loss on disposal of fixed assets -- 21,640
(Increase)/decrease in other assets (1,858) 7,531
Purchases of short-term investments -- (12,341,633)
Sales/maturities of short-term investments 4,200,000 8,700,894
------------ ------------
Net cash provided by (used for) investing activities 4,023,318 (3,728,995)
------------ ------------
Cash flows from financing activities:
Principal payments on notes payable (115,610) (199,884)
Net proceeds from issuance of redeemable convertible preferred stock 963,643 7,053,516
Proceeds from issuance of common stock 1,801 3,892
Purchase of treasury stock -- (2,372)
------------ ------------
Net cash provided by financing activities 849,834 6,855,152
------------ ------------
Net increase/(decrease) in cash and cash equivalents 635,950 (535,888)
Cash and cash equivalents, beginning of year 247,080 782,968
------------ ------------
Cash and cash equivalents, end of year $ 883,030 $ 247,080
============ ============
</TABLE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
During 1997 and 1996, the Company paid approximately $8,652 and $28,265,
respectively, for interest.
The accompanying notes are an integral part of these financial statements
<PAGE> 8
Vivo Software, Inc.
Notes to Financial Statements
December 31, 1997
1. NATURE OF THE BUSINESS AND BASIS OF PRESENTATION
Vivo Software, Inc. (the "Company") was incorporated on October 19,
1992 in the Commonwealth of Massachusetts. The Company develops,
markets, and sells software tools for the production and delivery of
video and audio at low to moderate bit rates over the Internet's
World Wide Web and over corporate intranets.
The accompanying financial statements have been prepared assuming
that the Company will continue as a going concern. The Company has an
accumulated deficit of $22,080,245 at December 31, 1997 and has
limited working capital to fund future operations. As discussed in
Note 10, the Company entered into an agreement on February 20, 1998
to be acquired by RealNetworks, Inc.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company invests its excess cash in money market funds, United
States treasury notes and mortgage-backed securities. Cash, cash
equivalents and short-term investments are maintained in lending
institutions or securities with strong credit ratings and
accordingly, the Company believes that they are subject to minimal
credit and market risk. For purposes of the statement of cash flows,
the Company considers all highly liquid debt instruments purchased
with a maturity of three months or less to be cash equivalents. At
December 31, 1997 and 1996, the Company's cash equivalents are
classified as available-for-sale and include $154,112 and $229,927 in
money market funds, respectively. The carrying amount of cash
equivalents approximates fair value because of the short maturity and
holding period of these instruments.
At December 31, 1996, the Company's short-term investments are
classified as held-to-maturity and are recorded at amortized cost,
which approximates fair value. All of the Company's short-term
investments at December 31, 1996 were mortgaged-backed securities
which matured within six months of the date purchased.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out method. Inventories consist
primarily of finished goods.
FIXED ASSETS
Fixed assets are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the assets.
<PAGE> 9
RESEARCH AND DEVELOPMENT AND SOFTWARE DEVELOPMENT COSTS
Costs associated with the development of computer software prior to
establishing technological feasibility are expensed as incurred.
Capitalization of software development costs begins upon the
establishment of technological feasibility as defined by Statement of
Financial Accounting Standards ("SFAS") No. 86, "Accounting for the
Cost of Computer Software to Be Sold, Leased, or Otherwise Marketed",
and continues until the product is released for sale. To date,
software development costs eligible for capitalization have not been
material to the Company's statement of operations or financial
position.
REVENUE RECOGNITION AND DEFERRED REVENUE
Revenues from product sales and licensing of software, except to
distributors, are recognized upon shipment. Revenues from product
sales to distributors are generally recognized by the Company when
the distributor sells the product to their customers. Revenues are
recognized provided no significant obligations remain and collection
of the related receivable is probable. To the extent that rights of
return exist, the Company provides an allowance for estimated
returns.
During the year ended December 31, 1997, one customer accounted for
approximately 32% of the Company's total revenue. During the year
ended December 31, 1996, three customers accounted for approximately
26%, 26%, and 13% of the Company's total revenue. Included in these
amounts was revenue from one customer of $300,000 which was generated
through the customer's forfeiture of prepaid royalties due to the
termination of a development arrangement.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially expose the Company to
concentrations of credit risk consist primarily of accounts
receivable. The Company does not believe that such amounts are
subject to any unusual credit risk beyond the normal credit risk
associated with operating its business. Ongoing credit evaluations of
customers' financial condition are performed and generally collateral
is not required. At December 31, 1997 and 1996, accounts receivable
from three customers and two customers accounted for approximately
76% and 96%, respectively, of total amounts due to the Company.
Management does not believe that the Company was exposed to any
material credit losses at December 31, 1997.
ACCOUNTING FOR STOCK-BASED COMPENSATION
Stock options issued to employees are accounted for in accordance
with Accounting Principles Board Opinion ("APB") No. 25, "Accounting
for Stock Issued to Employees", and related interpretations;
accordingly, no compensation expense is recorded for options awarded
to employees with exercise prices equal to or in excess of the
stock's fair market value and where the number of options and
exercise price are fixed. The Company adopted SFAS No. 123,
"Accounting for Stock-Based Compensation", in 1996 through disclosure
only (Note 6).
ADVERTISING COSTS
Advertising costs are charged to operations when incurred.
Advertising expense for the years ended December 31, 1997 and 1996
was $360,412 and $326,392, respectively.
<PAGE> 10
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenue and expense during the reporting period. Components
particularly subject to estimation include allowances for sales
returns, doubtful accounts, inventories, accrued expenses and
deferred revenue. Actual results could differ from these estimates.
3. FIXED ASSETS
Fixed assets consist of the following:
<TABLE>
<CAPTION>
Useful life December 31,
in years 1997 1996
<S> <C> <C> <C>
Furniture and fixtures 7 $ 241,778 $ 217,582
Computer equipment 3 839,653 689,025
---------- ----------
1,081,431 906,607
Less - Accumulated depreciation 759,380 580,535
---------- ----------
$ 322,051 $ 326,072
========== ==========
</TABLE>
Depreciation expense relating to fixed assets was $178,845 and
$214,164 for the years ended December 31, 1997 and 1996,
respectively.
<PAGE> 11
4. NOTES PAYABLE
Notes payable consists of the following:
<TABLE>
<CAPTION>
December 31,
1997 1996
<S> <C> <C>
Note payable converted from an equipment line of credit during 1996,
principal payments due in monthly installments of $2,977
commencing March 31, 1996, interest payable at prime plus 1.25%
per annum (9.75% at December 31, 1997), secured by related
equipment, due August 31, 1999 $ 44,651 $ 80,371
Note payable, principal payments due in monthly installments of
$13,314, interest payable monthly at prime plus 1.50% per annum
(9.75% at December 31, 1996), secured by substantially
all of the Company's assets, due June 30, 1997 -- 79,890
-------- --------
44,651 160,261
Less portion due within one year 44,651 115,610
-------- --------
$ -- $ 44,651
======== ========
</TABLE>
The Company is required to comply with certain covenants under the
remaining note payable, the more restrictive of which require the
Company to maintain minimum amounts of net worth, liquidity and other
financial ratios. At December 31, 1997, the Company was not in
compliance with certain covenant requirements. Accordingly, the
entire note payable balance has been classified as current at
December 31, 1997.
5. REDEEMABLE CONVERTIBLE PREFERRED STOCK
The Company has authorized, issued and outstanding redeemable
convertible preferred stock as follows:
<TABLE>
<CAPTION>
Issued and Outstanding Shares
Authorized December 31,
Series Shares 1997 1996
<S> <C> <C> <C>
A 3,510,000 3,510,000 3,510,000
B 3,232,979 3,232,979 3,232,979
C 2,840,000 2,840,000 2,840,000
D 9,200,000 8,363,696 -
</TABLE>
<PAGE> 12
<TABLE>
<CAPTION>
Carrying Amount Redemption Value
December 31, December 31,
Series 1997 1996 1997 1996
<S> <C> <C> <C> <C>
A $ 5,130,361 $ 4,770,068 $ 6,449,386 $ 6,011,357
B 7,714,689 7,129,734 9,875,088 9,156,933
C 8,166,097 7,444,476 10,856,192 9,969,178
D 987,851 -- 1,401,801 --
----------- ----------- ----------- -----------
$21,998,998 $19,344,278 $28,582,467 $25,137,468
=========== =========== =========== ===========
</TABLE>
In October 1997, the Company issued 8,363,696 shares of Series D
redeemable convertible preferred stock ("preferred stock"), $.01 par
value per share, at a price of $0.12 per share resulting in total
gross proceeds of $1,003,643. The Series D preferred stock has
similar rights and characteristics as the Series A, Series B and
Series C preferred stock, except in the event of liquidation,
dissolution or winding up of the Company as discussed below.
The Series A, Series B, Series C and Series D preferred stock are all
redeemable on September 30, 2001 (the "Redemption Date") at a
redemption price equal to original issuance price plus 10% of the
original issuance price per year since issue. The difference between
the issuance price and the redemption price is being accreted by a
charge to accumulated deficit. Total accretion for Series A, Series
B, Series C and Series D of preferred stock to redemption value was
$1,691,077 and $1,338,779 during the years ended December 31, 1997
and 1996, respectively.
The Series A, Series B, Series C and Series D preferred stock is
convertible into common stock, at the option of the holder, at any
time from the date of issuance to the fifth day prior to the
Redemption Date, at the original issuance price (the "Conversion
Price"), subject to certain adjustments, as defined in the preferred
stock agreements (the "Agreements"). Additionally, such shares are
automatically converted into shares of common stock upon the
consummation of an initial public offering of the Company's common
stock. Such conversion shall take place at the Conversion Price, as
adjusted per the Agreements, and is subject to certain minimum
proceeds and per share requirements, which are also defined in the
Agreements.
Series A, Series B, Series C and Series D preferred stockholders are
entitled to non-cumulative dividends, payable quarterly, at the
greater of $.09, $.16, $.225 and $.0108 per share, respectively, per
annum or the amount paid on any other outstanding shares of the
Company's stock, to the extent declared by the Board of Directors.
Through December 31, 1997, no dividends have been declared.
Preferred stockholders are entitled to one vote for each share of
common stock into which the Series A, Series B, Series C and Series D
preferred stock could be converted. Such holders shall have full
voting rights and powers equal to the voting rights and powers of the
holders of common stock.
<PAGE> 13
In the event of any liquidation, dissolution or winding up of the
Company, the holders of Series D preferred stock shall be entitled to
receive, prior and in preference to any distribution of any of the
assets of the Company to the holders of the Series A, Series B or
Series C preferred stock and common stock, an amount per share equal
to the sum of $0.12 for each outstanding share of Series D preferred
stock, plus an amount equal to declared but unpaid dividends on each
share, subject to certain adjustments, as defined in the Agreements.
After the distribution to the Series D preferred stockholders, the
remaining assets of the Company available for distribution to the
stockholders shall be distributed among the holders of the Series A,
Series B and Series C preferred stock and common stock, pro rata,
based on the number of shares of common stock on an as-converted
basis held by each.
The following table summarizes activity of the Company's redeemable
convertible preferred stock for the years ended December 31, 1997 and
1996:
<TABLE>
<CAPTION>
Number of
shares Amount
----------- -----------
<S> <C> <C>
Balance, December 31, 1995 6,742,979 $10,951,983
Issuance of Series C redeemable
convertible preferred stock,
net of issuance costs of $46,484 2,840,000 7,053,516
Accretion of redeemable preferred
stock to redemption value -- 1,338,779
----------- -----------
Balance, December 31, 1996 9,582,979 19,344,278
Issuance of Series D redeemable
convertible preferred stock,
net of issuance costs of $40,000 8,363,696 963,643
Accretion of redeemable preferred
stock to redemption value -- 1,691,077
----------- -----------
Balance, December 31, 1997 17,946,675 $21,998,998
=========== ===========
</TABLE>
6. STOCK OPTION PLAN
During 1993, the Company adopted the Equity Incentive Plan (the
"Plan"), which allows for the issuance of incentive and non-qualified
stock options to employees and directors
<PAGE> 14
and certain consultants. Under the Plan, the Company may issue up to
7,005,500 shares of common stock. Incentive stock options granted
under this Plan must have an exercise price equal to or greater than
the fair market value of the Company's common stock at the date of
grant, and vest at a rate not to exceed ten years.
Subject to the terms noted above, the Board of Directors is
authorized to designate the options granted under the Plan, the
number of shares covered by each option, the option term, exercise
dates and the exercise price at the date of grant.
On November 21, 1997, the Company's Board of Directors implemented an
exchange/repricing program for options previously issued under the
Plan, whereby holders of certain stock options were offered the
opportunity to cancel certain existing options and receive a grant of
new options at the then current fair market value. Under this
program, the Company cancelled 1,546,500 stock options with exercise
prices ranging from $0.05 to $0.20 per share and granted 3,589,000
options with an exercise price of $0.01 per share. The new options
granted were subject to the same vesting schedule as the previous
options.
Activity under the Plan is set forth in the table below:
<TABLE>
<CAPTION>
Weighted
Number average
of exercise
Shares price
<S> <C> <C>
Outstanding at December 31, 1995 429,333 $ 0.13
Granted 1,271,000 0.15
Exercised (19,625) 0.11
Terminated (107,235) 0.13
----------
Outstanding at December 31, 1996 1,573,473 0.15
Granted 4,834,000 0.02
Exercised (12,000) 0.15
Terminated (1,906,973) 0.15
----------
Outstanding at December 31, 1997 4,488,500 $ 0.01
==========
Exercisable at December 31, 1997 1,669,897
Weighted average fair value of options $ 0.01
granted during the period
Options available for future grant 2,005,694
</TABLE>
<PAGE> 15
The following table summarizes information about stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Weighted
average
remaining
contractual Shares
Range of exercise price Shares life exercisable
<S> <C> <C> <C>
$0.01 4,488,500 8.6 years 1,669,897
--------- ---------
4,488,500 1,669,897
--------- ---------
</TABLE>
Had compensation cost been determined based on the fair value of the
options granted to employees at the grant date consistent with the
provisions of SFAS No. 123, the Company's net loss for the years
ended December 31, 1997 and 1996 would have increased by $21,601 and
$13,299, respectively. Because options vest over several years and
additional option grants are expected to be made in future years, the
pro forma results for 1997 and 1996 are not representative of pro
forma results for future years.
For the purposes of pro forma disclosure, the fair value of each
option grant is estimated on the date of grant using the minimum
value method option-pricing model with the following assumptions for
grants in the years ended December 31, 1997 and 1996: no dividend
yield; no volatility; risk-free interest rates of 5.8% for 1997 and
6.1% for 1996; and expected option terms of 5 years.
7. INCOME TAXES
Deferred tax assets consist of the following:
<TABLE>
<CAPTION>
Year ended
December 31,
1997 1996
<S> <C> <C>
Net operating loss carryforwards $ 6,441,000 $ 4,465,000
Research and development credits 641,000 415,000
Miscellaneous temporary differences 98,000 125,000
----------- -----------
Gross deferred tax assets 7,180,000 5,005,000
Deferred tax asset valuation allowance (7,180,000) (5,005,000)
----------- -----------
$ -- $ --
=========== ===========
</TABLE>
<PAGE> 16
The Company has provided a valuation allowance for the full amount of
the deferred tax assets at December 31, 1997 and 1996 since the
realization of these future benefits cannot be reasonably assured at
this time. If the Company achieves profitability, a significant
portion of these deferred tax assets could be available to offset
future income taxes.
The expected U.S. federal income tax benefit determined by applying
the statutory U.S. federal income tax rate to pretax loss for the
years ended December 31, 1997 and 1996 differs from the U.S. income
tax benefit in the financial statements primarily due to increases in
the valuation allowance for deferred tax assets.
At December 31, 1997, the Company has net operating loss and research
and development tax credit carryforwards of approximately $15,618,000
and $742,000, respectively, available to reduce future federal and
state taxable income and income taxes payable. These credits expire
from 2008 to 2012.
Under the provisions of the Internal Revenue Code, should certain
substantial changes in the Company's ownership occur, the amount of
net operating loss carryforwards available annually to offset future
taxable income may be limited. The amount of this potential annual
limitation is determined based upon the Company's value prior to any
ownership changes taking place.
8. RELATED PARTIES
During 1997 and 1996, the Company executed software licensing and
royalty agreements with a preferred stockholder of the Company. The
Agreements provide for certain minimum and per unit royalties to be
paid to and paid by the Company.
9. COMMITMENTS
The Company leases all facilities under operating lease agreements.
The Company leases certain equipment under noncancellable operating
lease agreements. Total rent expense under noncancellable operating
leases was approximately $190,916 and $166,293 for the years ended
December 31, 1997 and 1996, respectively. At December 31, 1997, no
operating lease agreements had noncancellable terms in excess of one
year.
<PAGE> 17
10. SUBSEQUENT EVENT
On February 20, 1998, the Company entered into an agreement to be
acquired by RealNetworks, Inc. ("RNWK") for 1,101,733 shares of RNWK
common stock, valued as of that date at approximately $17.1 million.
The agreement has been approved by the boards of directors of both
companies and has received the consent of the shareholders of the
capital stock of the Company entitled to vote in accordance with the
Company's Articles of Organization. In connection with the agreement
and in satisfaction of a previous corporate commitment, 829,675
shares of Series D preferred stock were issued at a price of $0.12
per share resulting in total gross proceeds of $99,561.
11. SUBSEQUENT EVENT (UNAUDITED)
On March 24, 1998, the Company was acquired by RNWK for approximately
1.1 million shares of RNWK common stock. See Note 10.
<PAGE> 18
(b) PRO FORMA FINANCIAL INFORMATION.
On March 24, 1998, RealNetworks completed the acquisition of Vivo.
Under the terms of the acquisition, RealNetworks issued approximately 1,102,000
shares of its common stock in exchange for all outstanding shares of Vivo common
stock. In addition, RealNetworks issued options to purchase approximately 48,000
shares of RealNetworks common stock in exchange for outstanding unvested options
to purchase Vivo common stock. The cost of the acquisition was approximately
$19.7 million, including acquisition costs. The acquisition is being accounted
for using the purchase method of accounting. See Note 2 to RealNetworks
Condensed Consolidated Financial Statements for the quarter ended March 31, 1998
filed on Form 10-Q with the Securities and Exchange Commission.
The following Unaudited Pro Forma Condensed Consolidated Statements
of Operations ("Pro Forma Statements of Operations") for the year ended December
31, 1997 and the three months ended March 31, 1998 give effect to the
acquisition of Vivo as if it had occurred on January 1, 1997. The Pro Forma
Statements of Operations are based on historical results of operations of
RealNetworks and Vivo for the year ended December 31, 1997 and the three months
ended March 31, 1998. The Pro Forma Statements of Operations and the
accompanying notes ("Pro Forma Financial Information") should be read in
conjunction with and are qualified by the historical financial statements and
notes thereto of RealNetworks and Vivo.
The Pro Forma Financial Information is intended for information
purposes only and is not necessarily indicative of the combined results that
would have occurred had the acquisition taken place on January 1, 1997, nor is
it necessarily indicative of results that may occur in the future.
<PAGE> 19
RealNetworks, Inc. and Subsidiaries
Unaudited Pro Forma Condensed Consolidated Statement of Operations
Three Months Ended March 31, 1998
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
RealNetworks, Inc. Vivo Pro Forma
and Subsidiaries Software, Inc. Adjustments Pro Forma
---------------- -------------- ----------- ---------
<S> <C> <C> <C> <C>
Total net revenues $ 12,502 $ 653 $ 13,155
Total cost of revenues 2,439 83 2,522
-------- -------- -------- --------
Gross profit 10,063 570 10,633
Operating expenses:
Research and development 4,419 481 4,900
Selling and marketing 6,830 605 7,435
General and administrative 2,100 542 74 (a) 2,716
Acquisition related charges 17,879 -- (17,879)(b) --
-------- -------- -------- --------
Total operating expenses 31,228 1,628 (17,805) 15,051
Operating loss (21,165) (1,058) 17,805 (4,418)
Other income, net 1,077 2 1,079
-------- -------- -------- --------
Net loss $(20,088) $ (1,056) $ 17,805 $ (3,339)
Accretion of redemption value of preferred
stock -- (442) (442)
-------- -------- -------- --------
Net loss attributable to common shareholders $(20,088) $ (1,498) $ 17,805 $ (3,781)
======== ======== ======== ========
Basic and diluted net loss per share $ (0.65) $ (0.12)(c)
Shares used to compute basic and
diluted net loss per share 31,042 31,830
</TABLE>
<PAGE> 20
RealNetworks, Inc. and Subsidiaries
Unaudited Pro Forma Condensed Consolidated Statement of Operations
Year Ended December 31, 1997
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
RealNetworks, Inc. Vivo Pro Forma
and Subsidiaries Software, Inc. Adjustments Pro Forma
---------------- -------------- ----------- ---------
<S> <C> <C> <C> <C>
Total net revenues $ 32,720 $ 1,781 $ 34,501
Total cost of revenues 6,465 276 6,741
-------- -------- -------- --------
Gross profit 26,255 1,505 27,760
Operating expenses:
Research and development 13,268 2,370 15,638
Selling and marketing 20,124 3,513 23,637
General and administrative 6,024 1,129 278(a) 7,431
-------- -------- -------- --------
Total operating expenses 39,416 7,012 278 46,706
-------- -------- -------- --------
Operating loss (13,161) (5,507) (278) (18,946)
Other income, net 1,992 74 2,066
-------- -------- -------- --------
Net loss $(11,169) $ (5,433) $ (278) $(16,880)
Accretion of redemption value of preferred stock (488) (1,691) (2,179)
-------- -------- -------- --------
Net loss attributable to common shareholders $(11,657) $ (7,124) $ (278) $(19,059)
======== ======== ======== ========
Basic and diluted net loss per share $ (2.88) $ (3.87)(c)
Shares used to compute basic and
diluted net loss per share 4,041 4,923
</TABLE>
<PAGE> 21
RealNetworks, Inc.
Notes to the Unaudited Pro Forma Condensed Consolidated Statements of Operations
(a) The pro forma adjustments represent amortization of goodwill of
$74,000 and $278,000 for the three months ended March 31, 1998 and
the year ended December 31, 1997, respectively, assuming the
transaction had occurred on January 1, 1997.
(b) The pro forma adjustment represents $17,879,000 of acquired
in-process research and development and other acquisition related
costs. These costs are excluded from the pro forma results of
operations as they are not expected to have a continuing impact on
RealNetworks results of operations.
(c) Pro forma basic and diluted net loss per share is computed by
dividing the pro forma net loss attributable to common shareholders
by the pro forma weighted average number of common shares
outstanding.
The following table reconciles shares used to compute historical
basic and diluted net loss per share to shares used to compute pro
forma basic and diluted net loss per share:
<TABLE>
<CAPTION>
Three Year
Months Ended Ended
March 31, December 31,
1998 1997
------ ------
(in thousands)
<S> <C> <C>
Shares used to compute historical basic
and diluted net loss per share 31,042 4,041
Impact of shares issued in acquisition -
assumed outstanding from January 1, 1997 788 882
------ ------
Shares used to compute pro forma basic
and diluted net loss per share 31,830 4,923
====== ======
</TABLE>
Excluded from the computation of shares used to compute pro forma
basic and diluted net loss per share are approximately 220,000 shares
of RealNetworks common stock issued in connection with the
acquisition that were placed in escrow to secure indemnification
obligations of former shareholders of Vivo.
<PAGE> 22
(c) EXHIBITS.
<TABLE>
<CAPTION>
Exhibit Number Description
-------------- -----------
<S> <C>
23.1 Consent of Price Waterhouse LLP
</TABLE>
<PAGE> 23
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
REALNETWORKS, INC.
By: /s/ MARK KLEBANOFF
---------------------------
Mark Klebanoff
Chief Financial Officer
Dated: June 4, 1998
<PAGE> 24
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Number Description
-------------- -----------
<S> <C>
23.1 Consent of Price Waterhouse LLP
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF PRICE WATERHOUSE LLP
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 333-42579 and 333-53127) of RealNetworks, Inc. and
subsidiaries of our report dated March 20, 1998 relating to the financial
statements of Vivo Software, Inc., which appear in Amendment No. 1 to the
Current Report on Form 8-K/A of RealNetworks, Inc. and subsidiaries dated March
24, 1998.
/s/ Price Waterhouse LLP
Boston, Massachusetts
June 1, 1998
