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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended March 31, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-23137
----------------
RealNetworks, Inc.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Washington 91-1628146
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1111 Third Avenue, Suite 2900 98101
Seattle, Washington (Zip Code)
(Address of principal executive offices)
</TABLE>
(206) 674-2700
(Registrant's telephone number, including area code)
----------------
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 [X] No [_]
The number of shares of the registrant's Common Stock outstanding as of May
1, 1999 was 67,885,612 (as adjusted to give effect to the two-for-one stock
split effected by the registrant on May 10, 1999). In addition, there were
40,000 outstanding shares of the registrant's Special Common Stock, par value
$0.001 per share, that automatically convert on a two-for-one basis into
Common Stock on a bona fide sale to a purchaser who is not an affiliate of the
holder.
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REALNETWORKS, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1999
TABLE OF CONTENTS
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<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements............................................. 3
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................ 10
Item 3. Quantitative and Qualitative Disclosure about Market Risk........ 33
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................ 34
Item 2. Changes in Securities and Use of Proceeds........................ 34
Item 6. Exhibits and Reports on Form 8-K................................. 35
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
REALNETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands except per share data)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- ------------
<S> <C> <C>
ASSETS
------
Current assets:
Cash, cash equivalents and short-term investments..... $ 89,120 $ 89,777
Trade accounts receivable, net of allowance for
doubtful accounts and sales returns.................. 5,031 4,941
Prepaid expenses and other current assets............. 3,276 3,212
-------- --------
Total current assets.................................. 97,427 97,930
Equipment and leasehold improvements, at cost:
Equipment and software................................ 12,497 10,914
Leasehold improvements................................ 7,384 1,441
-------- --------
Total equipment and leasehold improvements.......... 19,881 12,355
Less accumulated depreciation and amortization........ 6,945 6,082
-------- --------
Net equipment and leasehold improvements 12,936 6,273
-------- --------
Goodwill, net........................................... 8,516 9,048
Restricted cash equivalents............................. 13,700 13,700
Other assets............................................ 1,160 1,108
-------- --------
Total assets...................................... $133,739 $128,059
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable...................................... $ 3,256 $ 3,563
Accrued liabilities................................... 13,810 10,418
Deferred revenue, excluding non-current portion....... 30,145 23,742
-------- --------
Total current liabilities........................... 47,211 37,723
-------- --------
Deferred revenue, excluding current portion............. 2,617 5,833
Note payable............................................ 994 987
Shareholders' equity:
Preferred stock, $0.001 par value, no shares issued
and outstanding
Series A: authorized 200 shares..................... -- --
Undesignated series: authorized 59,800 shares....... -- --
Common stock, $0.001 par value
Authorized 295,791 shares; issued and outstanding
66,604 shares in 1999 and 61,975 shares in 1998.... 66 62
Special common stock, $0.001 par value
Authorized 4,209 shares; issued and outstanding 500
shares in 1999 and 2,586 shares in 1998............ 1 3
Additional paid-in capital............................ 117,765 117,515
Accumulated deficit................................... (34,674) (33,938)
Accumulated other comprehensive loss.................. (241) (126)
-------- --------
Total shareholders' equity........................ 82,917 83,516
-------- --------
Total liabilities and shareholders' equity $133,739 $128,059
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements
3
<PAGE>
REALNETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
(in thousands except per share data)
<TABLE>
<CAPTION>
Quarter Ended March 31,
-------------------------
1999 1998
----------- ------------
<S> <C> <C>
Net revenues:
Software license fees............................. $ 17,010 $ 9,418
Service revenues.................................. 5,249 2,622
Advertising....................................... 1,266 462
----------- ------------
Total net revenues.............................. 23,525 12,502
----------- ------------
Cost of revenues:
Software license fees............................. 2,811 1,586
Service revenues.................................. 920 521
Advertising....................................... 550 332
----------- ------------
Total cost of revenues.......................... 4,281 2,439
----------- ------------
Gross profit.................................... 19,244 10,063
----------- ------------
Operating expenses:
Research and development.......................... 7,289 4,419
Sales and marketing............................... 10,215 6,830
General and administrative........................ 2,913 2,100
Goodwill amortization............................. 532 --
Acquisition charges............................... -- 8,723
----------- ------------
Total operating expenses........................ 20,949 22,072
----------- ------------
Operating loss.................................. (1,705) (12,009)
Other income, net................................. 969 1,077
----------- ------------
Net loss.......................................... $ (736) $(10,932)
=========== ============
Basic and diluted net loss per share.............. $ (0.01) $ (0.18)
=========== ============
Shares used to compute basic and diluted net loss
per share........................................ 67,457 62,084
Comprehensive loss:
Net loss.......................................... $ (736) $(10,932)
Translation adjustment............................ (115) (14)
----------- ------------
Comprehensive loss.............................. $ (851) $(10,946)
=========== ============
</TABLE>
See accompanying notes to condensed consolidated financial statements
4
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REALNETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Quarter Ended
March 31,
------------------
1999 1998
-------- --------
<S> <C> <C>
Net cash provided by (used in) operating activities....... $ 6,697 $ (1,020)
-------- --------
Cash flows from investing activities:
Purchases of equipment and leasehold improvements....... (7,490) (637)
Purchases of short-term investments..................... (25,244) (25,594)
Proceeds from sales and maturities of short-term invest-
ments.................................................. 8,144 10,105
Cash obtained through acquisition....................... -- 203
-------- --------
Net cash used in investing activities................. (24,590) (15,923)
-------- --------
Cash flows from financing activities:
Net proceeds from exercise of stock options............. 252 2
-------- --------
Net cash provided by financing activities............. 252 2
-------- --------
Effect of exchange rate changes on cash................... (116) (5)
-------- --------
Net decrease in cash and cash equivalents............. (17,757) (16,946)
Cash and cash equivalents at beginning of period.......... 51,876 62,255
-------- --------
Cash and cash equivalents at end of period................ $ 34,119 $ 45,309
======== ========
Supplemental disclosure of noncash financing and investing
activities:
Common stock issued in business combination............... $ -- $ 16,526
</TABLE>
See accompanying notes to condensed consolidated financial statements
5
<PAGE>
REALNETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Description of Business
RealNetworks, Inc. and subsidiaries (Company) is a leading provider of media
delivery and distribution solutions designed for the Internet. The Company's
solutions enable consumers to experience and content providers to deliver a
broad range of multimedia content, including audio, video, text and animation.
The Company pioneered the development and commercialization of "streaming
media" systems that enable the creation, real-time delivery and playback of
multimedia content. The Company recently extended its media delivery platform
to include a digital music management system that allows consumers to acquire,
record, store, organize and play their personal music collections on personal
computers and digital playback devices.
(b) Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries. All
significant intercompany balances and transactions have been eliminated in
consolidation.
These statements reflect all adjustments, consisting only of normal,
recurring adjustments that, in the opinion of the Company's management, are
necessary for a fair presentation of the results of operations for the periods
presented. Operating results for the quarter ended March 31, 1999 are not
necessarily indicative of the results that may be expected for any subsequent
quarter or for the year ending December 31, 1999. Certain information and
footnote disclosures normally included in financial statements prepared in
conformity with generally accepted accounting principles have been condensed
or omitted pursuant to the rules and regulations of the Securities and
Exchange Commission.
These condensed consolidated financial statements should be read in
conjunction with the financial statements and related notes included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1998.
(c) Cash, Cash Equivalents and Short-Term Investments
Cash, cash equivalents and short-term investments are comprised of the
following:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- ------------
(in thousands)
<S> <C> <C>
Cash and cash equivalents............................ $34,119 $51,876
Short-term investments............................... 55,001 37,901
------- -------
Total cash, cash equivalents and short-term
investments....................................... $89,120 $89,777
======= =======
Restricted cash equivalents.......................... $13,700 $13,700
======= =======
</TABLE>
Restricted cash equivalents represent a restricted escrow account
established in connection with a lease agreement for new corporate
headquarters. Under certain circumstances, $10,000,000 of the escrow account
will be maintained for the term of the lease. The remaining $3,700,000 will be
released as the Company funds tenant improvements. The Company expects to take
occupancy of the new facilities during the quarter ending June 30, 1999.
(d) Revenue Recognition
The Company recognizes revenue in accordance with Statement of Position 97-
2, "Software Revenue Recognition" (SOP 97-2), which provides specific industry
guidance and stipulates that revenue recognized from software arrangements is
to be allocated to each element of the arrangement
6
<PAGE>
REALNETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
based on the relative fair values of the elements, such as software products,
upgrades, enhancements, post contract customer support, installation, or
training. Under SOP 97-2, the determination of fair value is based on
objective evidence that is specific to the vendor. If such evidence of fair
value for each element of the arrangement does not exist, all revenue from the
arrangement is deferred until such time that evidence of fair value does exist
or until all elements of the arrangement are delivered.
Revenue from software license fees is recognized upon delivery, net of an
allowance for estimated returns, provided all the requirements of SOP 97-2
have been met.
Revenue from software license agreements with original equipment
manufacturers (OEM) is recognized when the OEM delivers its product
incorporating the Company's software to the end user. In the case of
prepayments received from an OEM, the Company generally recognizes revenue
based on the actual products sold by the OEM. If the Company anticipates
providing ongoing support to the OEM in the form of future upgrades,
enhancements or other services over the term of the contract, revenue is
recognized on the straight-line method over the term of the contract.
Service revenues include payments under support and upgrade contracts, and
fees from consulting and streaming media content hosting. Support and upgrade
revenues are recognized ratably over the term of the contract, which typically
is twelve months. Other service revenues are recognized when the service is
performed.
Revenues from advertising appearing on the Company's Web sites are
recognized ratably over the terms of the advertising contracts. The Company
guarantees to certain advertising customers a minimum number of page
impressions to be delivered to users of its Web sites for a specified period.
To the extent minimum guaranteed page impression deliveries are not met, the
Company defers recognition of the corresponding revenues until guaranteed page
impression delivery levels are achieved.
(e) Comprehensive Loss
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (SFAS 130), establishes standards for the reporting and
disclosure of comprehensive income and its components (revenues, expenses,
gains and losses) in a full set of financial statements. The Company's
comprehensive loss for the quarters ended March 31, 1999 and 1998 consisted of
net loss and the gross amount of foreign currency translation adjustments. The
tax effect of the translation adjustments was insignificant.
(f) Net Loss Per Share
Basic net loss per share is computed by dividing net loss by the weighted
average number of common shares outstanding during the period. Diluted net
loss per share is computed by dividing net loss by the weighted average number
of common and dilutive common equivalent shares outstanding during the period.
As the Company had a net loss attributable to common shareholders in each of
the periods presented, basic and diluted net loss per share are the same.
Excluded from the computation of diluted net loss per share for the quarters
ended March 31, 1999 and 1998 are options to acquire 18,004,000 and 15,110,000
shares of common stock, respectively, with weighted-average exercise prices of
$13.62 and $2.46, respectively, because their effects would be anti-dilutive.
7
<PAGE>
REALNETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(g) Recent Accounting Pronouncements
In December 1998, the American Institute of Certified Public Accounts
(AICPA) issued Statement of Position 98-9, "Modification of SOP 97-2, Software
Revenue Recognition, with Respect to Certain Transactions" (SOP 98-9), which
amends certain elements of SOP 97-2, "Software Revenue Recognition" and is
effective for fiscal years beginning after March 15, 1999. RealNetworks
believes that the adoption of SOP 98-9 will not have a material effect on its
results of operations or financial position.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS 133). SFAS 133 establishes a new model for
accounting for derivatives and hedging activities and supersedes and amends
existing accounting standards and is effective for fiscal years beginning
after June 15, 1999. SFAS 133 requires that all derivatives be recognized in
the balance sheet at their fair market value, and the corresponding derivative
gains or losses be either reported in the statement of operations or as a
component of other comprehensive income depending on the type of hedge
relationship that exists with respect to such derivative. RealNetworks does
not expect the adoption of SFAS 133 to have a material impact on its
consolidated financial statements.
In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" (SOP 98-1). SOP 98-1
requires the capitalization of certain costs incurred in connection with
developing or obtaining software for internal use. The Company adopted SOP 98-
1 on January 1, 1999. The adoption of SOP 98-1 did not have a material impact
on the Company's consolidated financial statements for the quarter ended March
31, 1999.
NOTE 2--SEGMENT INFORMATION
The Company operates in one business segment, streaming media, for which the
Company receives revenues from its customers. The Company's Chief Operating
Decision Maker is considered to be the Company's Operating Committee (COC)
which is comprised of the Company's Chief Executive Officer and the Company's
Senior Vice Presidents. The COC reviews financial information presented on a
consolidated basis accompanied by disaggregated information about products and
services and geographical region for purposes of making decisions and
assessing financial performance. The COC does not review discrete financial
information regarding profitability of the Company's different products or
services and, therefore, the Company does not have operating segments as
defined by SFAS 131.
The Company's customers consist primarily of end users located in the United
States and various foreign countries. Revenues by geographic region are as
follows (in thousands):
<TABLE>
<CAPTION>
Quarter Ended
March 31,
---------------
1999 1998
------- -------
<S> <C> <C>
North America............................................. $15,990 $ 8,012
Europe.................................................... 2,786 1,019
Asia...................................................... 1,975 913
Rest of world............................................. 357 141
------- -------
Subtotal................................................ 21,108 10,085
Microsoft license revenue................................. 2,417 2,417
------- -------
Total................................................... $23,525 $12,502
======= =======
</TABLE>
8
<PAGE>
REALNETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Revenue from external customers by product type is as follows (in
thousands):
<TABLE>
<CAPTION>
Quarter Ended
March 31,
---------------
1999 1998
------- -------
<S> <C> <C>
Streaming media license revenue........................... $14,593 $ 7,001
Streaming media service revenue........................... 5,249 2,622
Microsoft license revenue................................. 2,417 2,417
Advertising revenue....................................... 1,266 462
------- -------
Total net revenues...................................... $23,525 $12,502
======= =======
</TABLE>
Long-lived assets by geographic location are as follows (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- ------------
<S> <C> <C>
United States....................................... $20,692 14,538
Japan............................................... 412 454
Europe.............................................. 348 329
------- ------
Total............................................. $21,452 15,321
======= ======
</TABLE>
NOTE 3--SUBSEQUENT EVENTS
(a) Stock Split
On April 27, 1999, the board of directors approved a 2-for-1 split of the
Company's Common Stock in the form of a stock dividend. The stock split was
effected on May 10, 1999. Accordingly, the accompanying consolidated financial
statements and notes thereto have been retroactively restated to reflect the
stock split.
(b) Pending Acquisition
On April 13, 1999, the Company entered into a definitive agreement to
acquire privately held Xing Technology Corp. (Xing), a developer and provider
of MP3 software. The Company will acquire Xing in exchange for shares of
common stock of the Company with a maximum value of $75 million. The
acquisition, which is expected to be accounted for as a pooling of interests
and is subject to certain customary conditions, is expected to be completed no
later than the third quarter of 1999.
9
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The discussion in this report contains forward-looking statements that
involve risks and uncertainties. RealNetworks' actual results could differ
materially from those discussed below. Factors that could cause or contribute
to such differences include, but are not limited to, those identified below,
and those discussed in the section titled "Factors that May Affect
RealNetworks' Business, Future Operating Results and Financial Condition",
included elsewhere in this Report. You should also carefully review the risk
factors set forth in other reports or documents RealNetworks files from time
to time with the Securities and Exchange Commission, particularly Quarterly
Reports on Form 10-Q and any Current Reports on Form 8-K.
Overview
We are a leading provider of media delivery and distribution solutions
designed for the Internet. Our solutions enable consumers to experience and
content providers to deliver a broad range of multimedia content, including
audio, video, text and animation. We pioneered the development and
commercialization of "streaming media" systems that enable the creation, real-
time delivery and playback of multimedia content. We believe that we have
established a leadership position in the market for these systems. We have
more than 60 million registered users of our RealPlayer product and believe
that 85% of all Web pages using streaming media use our technology. The broad
acceptance of the Internet as a means of content delivery, combined with
recent technological advances, has greatly increased the practicality and
popularity of a number of new online media delivery formats. In response, we
have extended our media delivery platform to include a digital music
management system that allows consumers to acquire, record, store, organize
and play their personal music collections on PCs and digital playback devices.
We were incorporated in February 1994 and were in the development stage
until July 1995, when we released the commercial version of RealAudio Version
1.0. From inception through December 31, 1995, our operating activities
related primarily to recruiting personnel, raising capital, purchasing
operating assets, conducting research and development, building the RealAudio
brand and establishing the market for streaming audio. During 1996, we
continued to invest heavily in research and development and marketing and in
building our domestic and international sales channels and our general and
administrative infrastructure. In August 1996, we began selling RealPlayer
Plus, a premium version of our RealPlayer product. RealPlayer continues to be
available for download free of charge from our websites. In June 1997, we
released the commercial version of RealVideo Version 4.0. In December 1997, we
released the commercial version of RealSystem Version 5.0, a streaming media
solution that includes RealAudio and RealVideo technology. In November 1998,
we released the commercial version of RealSystem G2, our latest generation
media delivery system. In May 1999, we released RealSystem MP, as well as a
beta version of RealJukebox.
Our revenues are reported in the following three categories:
. Software license fees include revenues from sales of our RealPlayer
Plus, RealServers and related authoring and publishing tools, OEM
sales of our products and sales of third-party products.
. Service revenues include support and maintenance services that we sell
to customers who purchase our RealPlayer Plus, RealServers and tools
products. We also provide broadcast hosting services through our Real
Broadcast Network and offer consulting services.
. Advertising revenues are derived from the sale of advertising on our
websites.
In March 1998, we acquired Vivo Software, a leading developer of streaming
media creation tools, in an acquisition accounted for using the purchase
method of accounting. On April 13, 1999, we
10
<PAGE>
entered into a definitive agreement to acquire privately held Xing Technology,
a leading developer and provider of MP3 software, in exchange for shares of
our common stock having a maximum value of $75 million. The acquisition, which
we expect to account for as a pooling of interests, is subject to certain
customary conditions. It is expected to be completed no later than the third
quarter of 1999.
Results of Operations
Revenues
Software License Fees. Software license fees were $17.0 million for the
quarter ended March 31, 1999, an increase of 81% from $9.4 million in the
comparable quarter of the prior year. The increase was due primarily to a
greater volume of products sold, which resulted from growth in the demand for
streaming media on the Internet, the introduction of the RealSystem G2 in
November 1998, successful product promotions and increased sales of third-
party products. Software license fees for each of the quarters ended March 31,
1999 and 1998 included $2.4 million related to the Microsoft license agreement
we entered into in June 1997.
Service Revenues. Service revenues were $5.2 million for the quarter ended
March 31, 1999, an increase of 100% from $2.6 million in the comparable
quarter of the prior year. The increase was primarily due to a larger
installed base of our products from which we derive support and maintenance
revenues and increases in revenues from our consulting and streaming media
hosting services.
Advertising. Advertising revenues were $1.3 million for the quarter ended
March 31, 1999, an increase of 174% from $0.5 million in the comparable
quarter of the prior year. The increase in advertising revenues was due to
increased traffic on websites and increased effectiveness of our advertising
sales force.
Geographic Revenues. Excluding revenues from the Microsoft license
agreement, international revenues represented 21% of total net revenues in the
quarter ended March 31, 1998 and 24% of total net revenues in the quarter
ended March 31, 1999. Revenues generated in Europe were 10% and 13% of total
net revenues (excluding revenues from the Microsoft license agreement) in the
quarters ended March 31, 1998 and 1999, respectively, and revenues generated
in Japan/Asia Pacific were 9% of total net revenues (excluding revenues from
the Microsoft license agreement) in each of the quarters ended March 31, 1998
and 1999.
Cost of Revenues
Cost of Software License Fees. Cost of software license fees includes costs
of product media, duplication, manuals, packaging materials, amounts paid for
licensed technology and fees paid to third-party vendors for order
fulfillment. Cost of software license fees was $2.8 million for the quarter
ended March 31, 1999, an increase of 77% from $1.6 million in the comparable
quarter of the prior year, and remained a constant 17% of software license
fees. The increase in absolute dollars was due primarily to higher sales
volumes.
Cost of Service Revenues. Cost of service revenues includes the cost of in-
house and contract personnel providing support and other services and
bandwidth expenses for streaming media hosting services. Cost of service
revenues was $0.9 million for the quarter ended March 31, 1999, an increase of
77% from $0.5 million in the comparable quarter of the prior year, but
decreased as a percentage of service revenues to 18% from 20%. The increase in
absolute dollars was primarily due to increased staff and contract personnel
needed to provide services to a greater number of customers. The decrease as a
percentage of service revenues was primarily due to economies of scale in
providing support services to a larger customer base.
11
<PAGE>
Cost of Advertising. Cost of advertising includes the cost of personnel
associated with content creation and maintenance and fees paid to third
parties for content included in our websites. Cost of advertising was $0.6
million for the quarter ended March 31, 1999, an increase of 66% from $0.3
million in the comparable quarter of the prior year, but decreased as a
percentage of advertising revenues to 43% from 72%. The increase in absolute
dollars was primarily due to increases in the quality and quantity of content
available on our websites, the addition of new websites and higher bandwidth
costs. The decrease as a percentage of advertising revenues was due to greater
economies of scale.
Our gross margins may fluctuate based on the mix of distribution channels
used and the mix of products sold.
Operating Expenses
Research and Development. Research and development expenses consist
primarily of salaries and consulting fees associated with product development
and costs of technology acquired from third parties to be incorporated into
products currently under development. To date, all research and development
costs have been expensed as incurred because technological feasibility is
generally not established until substantially all development is complete. We
believe that significant investment in research and development is a critical
factor in attaining our strategic objectives and, as a result, we expect to
increase research and development expenditures in future periods. Research and
development expenses were $7.3 million for the quarter ended March 31, 1999,
an increase of 65% from $4.4 million in the comparable quarter of the prior
year, but decreased as a percentage of total net revenues to 31% from 35%. The
increase in absolute dollars was primarily due to increases in internal
development personnel, consulting expenses and contract labor. Research and
development expenses were primarily related to the development of new
technology and products, including RealSystem MP and RealJukebox, and
enhancements made to existing products. The decrease in percentage terms was a
result of revenues growing at a faster rate than expenses.
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, sales commissions, consulting fees, trade show expenses, advertising
costs and cost of marketing collateral. We intend to increase our branding and
marketing efforts and therefore expect sales and marketing expenses to
increase significantly in future periods. Sales and marketing expenses were
$10.2 million for the quarter ended March 31, 1999, an increase of 50% from
$6.8 million in the comparable quarter of the prior year, but decreased as a
percentage of total net revenues to 43% from 55%. The increase in absolute
dollars was due to the expansion of our direct sales and marketing
organization, the creation of additional sales offices, promotions and other
expenses related to the continued development of the "Real" brand. The
decrease in percentage terms was a result of revenues growing at a faster rate
than expenses.
General and Administrative. General and administrative expenses consist
primarily of salaries, fees for professional services and bad debt expense. We
expect general and administrative expenses to increase as we expand our staff
and incur additional costs related to growth of our business. General and
administrative expenses were $2.9 million for the quarter ended March 31,
1999, an increase of 39% from $2.1 million in the comparable quarter of the
prior year, but decreased as a percentage of total net revenues to 12% from
17%. The increase in absolute dollars was primarily a result of increased
personnel and facility expenses necessary to support our growth. The decrease
in percentage terms was due to revenues growing at a faster rate than
expenses.
Goodwill Amortization and Acquisition Charges
In March 1998, we acquired Vivo Software, a developer of streaming media
creation tools. We issued approximately 2.2 million shares of our common stock
in exchange for all outstanding shares
12
<PAGE>
of Vivo common stock and assumed options to purchase approximately 95,000
shares of our common stock. The acquisition was accounted for using the
purchase method of accounting and, accordingly, the results of Vivo's
operations are included in our financial statements since the date of
acquisition.
The purchase price was allocated to the fair value of the acquired assets
and assumed liabilities based on their fair values at the date of the
acquisition. A portion of the purchase price represents acquired in-process
research and development that has not yet reached technological feasibility
and has no alternative future use. Of the total purchase price, $8.6 million
was allocated to in-process research and development expense, $10.6 million
was allocated to goodwill, and $0.5 million was allocated to tangible assets.
Goodwill is amortized over its estimated life of five years.
The in-process research and development projects acquired in the acquisition
of Vivo consisted of the development of encoder tools and server and client
codecs. The encoder tools allow users to create media content to be streamed
over the Internet or intranets. The server and client codecs enhance the
compression and decompression of multimedia content streamed over the Internet
or intranets.
The percentage completion of the projects at the time of acquisition was as
follows:
<TABLE>
<S> <C>
Encoder tools..................................................... 40%-70%
Server codec...................................................... 30%
Client codec...................................................... 30%
</TABLE>
We completed the development of the encoder tools in 1998. The total cost to
complete development of the encoder tools was approximately $1.0 million. The
server and client codec projects are expected to be complete in 1999. The
expected aggregate cost to complete the server and client codecs is
approximately $0.7 million.
Since the acquisition, we have continued to market and support Vivo's
existing products on a limited basis and will continue to do so until the in-
process projects are completed.
The acquisition of Vivo was a tax-free reorganization under the Internal
Revenue Code. Therefore, the charge for in-process research and development
and amortization of acquired intangible assets is not deductible for income
tax purposes.
Other Income, Net
Other income, net consists primarily of earnings on RealNetworks' cash, cash
equivalents and short-term investments. Other income, net was $1.0 million for
the quarter ended March 31, 1999 and $1.1 million for the quarter ended March
31, 1998.
Liquidity and Capital Resources
Net cash provided by operating activities was $6.7 million for the quarter
ended March 31, 1999. Net cash used in operating activities was $1.0 million
for the quarter ended March 31, 1998. Net cash provided by operating
activities in the quarter ended March 31, 1999 resulted primarily from an
increase in current liabilities of $6.4 million and from noncash charges
associated with depreciation and amortization of $1.3 million, partially
offset by the reported net loss of $0.7 million. Cash used in operating
activities for the quarter ended March 31, 1998 was primarily due to the
reported net loss, partially offset by non-cash acquisition charges.
Net cash used in investing activities was $24.6 million and $15.9 million
for the quarters ended March 31, 1999 and 1998, respectively, and was
primarily a result of net purchases of short-term investments and purchases of
equipment and leasehold improvements.
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Net cash provided by financing activities was $252,000 and $2,000 for the
quarters ended March 31, 1999 and 1998, respectively, and was a result of net
proceeds from the exercise of stock options.
At March 31, 1999, we had $89.1 million in cash, cash equivalents and short-
term investments. As of March 31, 1999, our principal commitments consisted of
obligations under operating leases and a $1.0 million note payable. Since our
inception, we have experienced a substantial increase in our capital
expenditures to support expansion of our operations and information systems.
In January 1998, we entered into a lease agreement for a new location for
our corporate headquarters. The lease commenced on April 1, 1999 and expires
on April 1, 2011, with an option to renew the lease for either a three- or
ten-year period. We expect to occupy the new facilities in May 1999. We are
funding the tenant improvements, a portion of which may be financed through
equipment leases. In addition, we are in the process of upgrading and
replacing our existing internal information systems. We anticipate that the
costs of the tenant improvements and information systems will total
approximately $14.0 million in 1999.
We do not hold derivative financial instruments or equity securities in our
investment portfolio. Our cash equivalents and short-term investments consist
of high-quality securities, as specified in our investment policy guidelines.
The policy limits the amount of credit exposure to any one issue or issuer to
a maximum of 5% of the total portfolio and requires that all short-term
investments mature in two years or less, with the average maturity being one
year or less. These securities are subject to interest rate risk and will
decrease in value if interest rates increase. If market interest rates were to
increase immediately and uniformly by 10% from levels at March 31, 1999, the
fair value of the portfolio would decline by an immaterial amount. Because we
have historically held our fixed-income investments until maturity, we would
not expect our operating results or cash flows to be significantly affected by
a sudden change in market interest rates on our securities portfolio.
We conduct our operations in five primary functional currencies: the United
States dollar, the Japanese yen, the British pound, the French franc and the
German mark. Historically, neither fluctuations in foreign exchange rates nor
changes in foreign economic conditions have had a significant impact on our
financial condition or results of operations. We currently do not hedge our
foreign currency exposures and are therefore subject to the risk of exchange
rates. We invoice the customers of our international subsidiaries primarily in
U.S. dollars, except in Japan, where we invoice our customers primarily in
yen. We are exposed to foreign exchange rate fluctuations as the financial
results of foreign subsidiaries are translated into U.S. dollars in
consolidation. Our exposure to foreign exchange rate fluctuations also arises
from intercompany payables and receivables to and from our foreign
subsidiaries. Foreign exchange rate fluctuations did not have a material
impact in 1998 and 1997.
On January 1, 1999, the participating member countries of the European Union
converted to a common currency, the euro. On that same date they established
fixed conversion rates between their existing sovereign currencies and the
euro. Even though legacy currencies are scheduled to remain legal tender in
the participating countries as denominations of the euro until January 1,
2002, the participating countries will no longer be able to direct independent
interest rates for the legacy currencies. The authority to set monetary policy
will now reside with the new European Central Bank. We do not anticipate any
material impact from the euro conversion on our financial information systems,
which currently accommodate multiple currencies. Due to numerous
uncertainties, we cannot reasonably estimate the effect that the euro
conversion issue will have on our pricing or market strategies or the impact,
if any, it will have on our financial condition and results of operations.
Since our inception, we have significantly increased our operating expenses.
We currently anticipate that we will continue to experience significant growth
in our operating expenses and that
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such expenses will be a material use of our cash resources. Not including the
estimated net proceeds we expect to receive from this offering, we believe
that our current cash, cash equivalents and short-term investments will be
sufficient to meet our anticipated cash needs for working capital and capital
expenditures for at least the next 12 months. In the future, we may seek to
raise additional funds through public or private equity financing, or through
other sources such as credit facilities. The sale of additional equity
securities could result in dilution to our shareholders.
Microsoft Relationship
In June 1997, we entered into a strategic agreement with Microsoft pursuant
to which we granted Microsoft a nonexclusive license to certain substantial
elements of the source code of our RealAudio/RealVideo Version 4.0 technology
and related RealNetworks trademarks for a license fee of $30.0 million. We are
recognizing revenue related to the agreement ratably over the three-year term
of our ongoing obligations.
Microsoft may sublicense its rights to the licensed source code to third
parties under certain conditions without further compensation to RealNetworks.
In addition, Microsoft was granted an option to receive two additional
deliveries of updated versions of the source code. Microsoft's right to
receive the first delivery expired unexercised in July 1998. Microsoft may
elect to acquire an updated version of the source code once before July 1999,
upon payment of a license fee of $35.0 million. Under certain conditions, if
we license our source code to a third party, the agreement provides for a
partial refund of the license fee paid by Microsoft, based on a declining
scale over the three-year term of the agreement.
In connection with the agreement, Microsoft made a $30.0 million minority
investment in RealNetworks in the form of 3.3 million shares of nonvoting
preferred stock. These shares were converted into nonvoting special common
stock concurrent with our initial public offering in November 1997. All shares
of special common stock automatically convert into two shares of common stock
upon sale or transfer by Microsoft to a third party not otherwise affiliated
with Microsoft. As of May 6, 1999, Microsoft had sold all 3.3 million shares
of its special common stock.
On July 23, 1998, Robert Glaser, our chief executive officer, testified
before the Senate Judiciary Committee that if a consumer had the RealPlayer on
his or her computer system, and then downloaded the Windows Media Player, the
Windows Media Player disabled important functions of our RealPlayer in certain
instances. As a result, some of our customers who had downloaded the free
RealPlayer, or paid for the RealPlayer Plus, found that their players did not
work. We quickly incorporated a workaround solution into our RealPlayer and
RealPlayer Plus and also posted this workaround solution on our website. We
believe the workaround solution corrected the problem at the time and, as a
result, we believe only a small number of customers were impacted by the
situation. However, we believe there is a continued risk that future versions
of Microsoft's products, especially Internet Explorer and the Windows Media
Player, may negatively impact the experience of our customers by displaying a
Windows Media Player when the customer seeks to play RealAudio or RealVideo
content, or by posting an error message when the customer tries to play
content available in RealNetworks' formats that may not be viewed through the
Windows Media Player, without telling the customer how to obtain the latest
RealPlayer. Such actions by Microsoft could materially reduce market share for
the RealPlayer and have a negative effect on demand for our server software
and tools. We have provided and will continue to seek to provide useful input
to Microsoft to address these situations so as to provide an optimal
experience for consumers. In light of these recent events, our relationship
with Microsoft has become more competitive. See "--Factors That May Affect Our
Business, Future Operating Results and Financial Condition--We may be unable
to successfully compete with Microsoft and other companies in the media
delivery market."
Year 2000 Compliance
The "Year 2000" problem exists because many existing computer programs use
only the last two digits to refer to a year. As a result, date-sensitive
computer programs may not be able to distinguish
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whether a two-digit date designated as "00" refers to 1900 or 2000. This
problem could cause system failures or the creation of wrong information and
disrupt our operations.
We have developed a phased plan to achieve Year 2000 compliance for our
internal processing and operational systems and the current versions of our
software products. During the first quarter of 1999, we assessed the state of
our internal and external Year 2000 compliance. Currently, a plan to correct
problems found during the assessment is being developed and tested. During the
third quarter of 1999, we will implement this remediation plan, consisting of
upgrading and replacement of certain product versions, if necessary, and test
them for compliance.
We have publicly made Year 2000 readiness disclosures stating that the
current versions of our products are "Year 2000 compliant." "Year 2000
compliant" means that software products and systems are able to function
properly before, during and after the year 2000 without loss of functionality
due to date changes. This assurance assumes that:
. our products are configured and used in accordance with the related
documentation;
. the underlying operating system of the host machine for our products
and any other software used with or in such host machine are also Year
2000 compliant; and
. all other products, whether hardware, software, or firmware, used with
one of our products properly exchange data with it.
We are currently testing and will continue to test our products and systems
and may find errors or defects associated with Year 2000 date functions. We
have not tested our products on all platforms or all versions of operating
systems that we currently support. We believe that all of the current versions
of our products will be Year 2000 compliant by the end of 1999. We have not
specifically tested software obtained from third parties, such as licensed
software, shareware and freeware, that is incorporated into our products, but
we are seeking assurances from our vendors that licensed software is Year 2000
compliant. Despite our testing, testing by our current and potential
customers, and whatever assurances, if any, we may receive from developers of
technology incorporated into our products, our products and those of our
vendors may contain undetected errors or defects associated with Year 2000
date functions.
We rely on third parties for services and supplies such as
telecommunications, Internet service and utilities. We are seeking
confirmation from such service providers that their systems are Year 2000
compliant. Interruption of those services or supplies due to Year 2000 issues
could adversely affect our operations. We are also subject to external forces
that might generally affect industry and commerce, such as utility or
transportation company Year 2000 compliance failures and related service
interruptions. We are in the process of updating and upgrading our internal
information systems. Although the replacement of information systems is not in
direct response to Year 2000 concerns, we expect that all new internal
information systems implemented in 1999 will be Year 2000 compliant.
Known or unknown Year 2000 errors or defects in our internal systems and
products, lack of Year 2000 compliance by third-party software incorporated in
our products and/or interruption of services from our external service
providers due to Year 2000 problems could result in failure or disruption of
our products and operations, delay or loss of revenue, diversion of
development resources, damage to our reputation, claims or litigation and
increased service and warranty costs, any of which could impair our finances
or business prospects. Some commentators have predicted significant litigation
regarding Year 2000 compliance issues, and we are aware of such lawsuits
against other software vendors. Because of the unprecedented nature of such
litigation, we are uncertain whether or to what extent we may be affected by
it.
We currently respond to customer concerns about our products on a case-by-
case basis. In addition, we have posted a web page on our primary website
indicating the Year 2000 status of our
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products. We believe that the purchasing patterns of customers and potential
customers may be affected by Year 2000 issues in a variety of ways, including
the decision to delay purchasing our products until the Year 2000. We believe
that it is not possible to predict the overall impact of these decisions.
At this stage in our analysis and remediation process, it is difficult to
specifically identify the cause and the magnitude of any adverse economic
impact of the most reasonably likely worst case Year 2000 scenario. Our
reasonably likely worst case scenario would include the unavailability of our
major internal systems to our employees and the failure of our products to
operate properly, causing customers' systems and/or operations to fail or be
disrupted. This worst case scenario also would include the failure of key
vendors and/or suppliers to correct their own Year 2000 issues, which could
cause failure or disruption of our operations or products. If a worst case
scenario occurs, we may incur expenses to repair our systems or upgrade our
products, face interruptions in the work of our employees, lose advertising,
service and product license revenue, be unable to support the broadcast of
other companies' content over the Internet, be unable to deliver downloads of
our products, incur increased warranty and service expenses and suffer damage
to our reputation. In addition, customers may sue us or otherwise seek
compensation for their losses. We have agreed to indemnify certain customers
for claims and losses if our products are not Year 2000 compliant. Any or all
of the above events could harm our business.
We have not yet fully developed a comprehensive contingency plan to address
situations that may result if we are unable to achieve Year 2000 readiness of
our critical operations. The cost of developing and implementing such a plan
may itself be material. To date, we have not incurred significant expenditures
for our Year 2000 remediation efforts. Although we do not anticipate the costs
to address our Year 2000 issues to be material, the costs of Year 2000
remediation work and the date on which we plan to complete such work are based
on management's best estimates. These estimates are derived from assumptions
about future events, including the availability of certain resources, third-
party remediation plans and other factors. In addition, undetected errors or
the failure of such systems to be Year 2000 compliant could create significant
record-keeping and operational deficiencies. Accordingly, if Year 2000
modifications, evaluations, assessments and conversions are not made or are
not completed in time, the Year 2000 problem could harm our business.
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FACTORS THAT MAY AFFECT OUR BUSINESS, FUTURE OPERATING RESULTS AND FINANCIAL
CONDITION
We have a limited operating history, which makes it difficult to evaluate our
business
We were incorporated in February 1994 and have a limited operating history.
We have limited financial results on which you can assess our future success.
Our prospects must be considered in light of the risks, expenses and
difficulties frequently encountered by growing companies in new and rapidly
evolving markets, such as streaming media software, media delivery systems and
electronic commerce.
To address the risks and uncertainties we face, we must:
. establish and maintain broad market acceptance of our products and
services and convert that acceptance into direct and indirect sources
of revenue;
. maintain and enhance our brand name;
. continue to timely and successfully develop new products, product
features and services and increase the functionality and features of
existing products;
. successfully respond to competition from Microsoft and others; and
. develop and maintain strategic relationships to enhance the
distribution, features and utility of our products and services.
Our business strategy may be unsuccessful and we may be unable to address
the risks we face in a cost-effective manner, if at all. Our inability to
successfully address these risks will harm our business.
We have a history of losses and may never attain profitability
We have incurred significant losses since our inception and we may never
become profitable. As of March 31, 1999, we had an accumulated deficit of
approximately $34.7 million. We devote significant resources to developing,
enhancing, selling and marketing our products and services. As a result, we
will need to generate significant revenues to achieve and maintain
profitability. We may not continue our historical growth or generate
sufficient revenues for profitability. If we do achieve profitability, we may
not sustain or increase profitability on a quarterly or annual basis in the
future.
Our operating results are likely to fluctuate significantly
As a result of our limited operating history and the rapidly changing nature
of the markets in which we compete, our quarterly and annual revenues and
operating results are likely to fluctuate from period to period. These
fluctuations may be caused by a number of factors, many of which are beyond
our control. These factors include the following, as well as others discussed
elsewhere in this section:
. how and when we introduce new products and services and enhance our
existing products and services;
. the timing and success of our brand-building and marketing campaigns;
. our ability to establish and maintain strategic relationships;
. the demand for Internet advertising and sponsorships;
. the emergence and success of new and existing competition;
. varying operating costs and capital expenditures related to the
expansion of our business operations and infrastructure, domestically
and internationally, including the hiring of new employees;
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. technical difficulties with our products, system downtime, system
failures or interruptions in Internet access;
. costs related to the acquisition of businesses or technology; and
. costs of litigation and intellectual property protection.
In addition, because the market for our products and services is relatively
new and rapidly changing, it is difficult to predict future financial results.
Our research and development and sales and marketing efforts, and business
expenditures generally, are partially based on predictions regarding certain
developments for media delivery. To the extent that these predictions prove
inaccurate, our revenues and operating expenses may fluctuate.
For these reasons, you should not rely on period-to-period comparisons of
our financial results as indications of future results. Our future operating
results could fall below the expectations of public market analysts or
investors and significantly reduce the market price of our common stock.
Fluctuations in our operating results will likely increase the volatility of
our stock price.
We may be unable to successfully compete with Microsoft and other companies in
the media delivery market
The market for software and services for media delivery over the Internet is
relatively new, constantly changing and intensely competitive. As media
delivery evolves into a central component of the Internet experience, more
companies are entering the market for, and expending increasing resources to
develop, media delivery software and services. We expect that competition will
continue to intensify.
Many of our current and potential competitors have longer operating
histories, greater name recognition, more employees and significantly greater
financial, technical, marketing, public relations and distribution resources
than we do. The competitive environment may require us to make changes in our
products, pricing, licensing, services or marketing to maintain and extend our
current brand and technology franchise. Price concessions or the emergence of
other pricing or distribution strategies of competitors may diminish our
revenues, impact our margins or lead to a reduction in our market share, any
of which will harm our business.
We believe that the primary competitive factors in the media delivery market
include:
. the quality and reliability of the overall media delivery solution;
. access to distribution channels necessary to achieve broad
distribution and use of products;
. the availability of content for delivery over the Internet and access
to necessary intellectual property rights;
. the ability to develop and support secure formats for digital media
delivery, particularly music and video;
. the size of the active audience for streaming media and its appeal to
content providers and advertisers;
. features for creating, editing and adapting content for the Internet;
. ease of use and interactive user features in products;
. ease of finding and accessing content over the Internet;
. scalability of streaming media and media delivery technology and cost
per user;
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. pricing and licensing terms;
. compatibility with new and existing media formats;
. compatibility with the user's existing network components and software
systems; and
. challenges caused by bandwidth constraints and other limitations of
the Internet infrastructure.
Our failure to adequately address any of the above factors could harm our
business strategy and operating results.
Microsoft is a principal competitor in the development and distribution of
streaming media and media distribution technology. Microsoft currently
competes with us in the market for streaming media server and player software
and has announced its intent to compete in the market for digital distribution
of media. We believe that Microsoft's commitment to and presence in the media
delivery industry has increased and that Microsoft will continue to increase
competitive pressure in the overall market for streaming media and media
distribution.
Microsoft distributes its competing streaming media server and tools
products by bundling them with its Windows NT servers at no additional charge
and by making them available for download from its website for free. While we
also provide free downloads of certain of our products, including players,
servers and tools, Microsoft's practices have caused, and may continue to
cause, pricing pressure on our products. These practices could lead to longer
sales cycles, decreased sales and reduced market share. In addition, we
believe that Microsoft has used and may be able to use its dominant position
in the computer industry and its financial resources to secure preferential or
exclusive distribution and bundling contracts for its streaming media products
with third parties such as Internet service providers (ISPs), online service
providers, content providers, entertainment companies, media companies,
broadcasters, value added resellers (VARs) and original equipment
manufacturers (OEMs), including third parties with whom we have relationships.
Such arrangements, together with Microsoft's aggressive marketing of Windows
NT and of its streaming media products, may reduce our share of the streaming
media market.
Microsoft's Windows Media Player competes with our RealPlayer products. The
Windows Media Player is available for download from Microsoft's website for
free, and is bundled by Microsoft with its Windows 98 operating system and
with its Web browser, Internet Explorer. In addition, Microsoft has bundled
certain audio capabilities into a radio toolkit for Internet Explorer 5.0, its
latest Web browser. Internet Explorer 5.0 includes Web Events, which provides
links to multimedia content on the Internet, especially content in Microsoft's
streaming media formats. We expect that by leveraging its dominant position in
operating systems and tying streaming media into its operating system and its
browser, Microsoft will distribute substantially more copies of the Windows
Media Player in the future than it has in the past and may be able to attract
more users to its streaming media products. Currently, our RealPlayer has a
high degree of market penetration: we have over 60 million registered users
and estimate that over 85% of all Web pages on the Internet that use streaming
media do so using our formats. Our market position may be difficult to
sustain, particularly in light of Microsoft's efforts and dominant position in
operating systems.
On July 23, 1998, Robert Glaser, our chief executive officer, testified
before the Senate Judiciary Committee that if a consumer had the RealPlayer on
his or her computer system, and then downloaded the Windows Media Player, the
Windows Media Player disabled important functions of our RealPlayer in certain
instances. As a result, some of our customers who had downloaded the free
RealPlayer, or paid for the RealPlayer Plus, found that their players did not
work. We quickly incorporated a workaround solution into our RealPlayer and
RealPlayer Plus and also posted this workaround solution on our website. We
believe the workaround solution corrected the problem at the
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time and, as a result, we believe only a small number of customers were
impacted by the situation. However, we believe there is a continued risk that
future versions of Microsoft's products, especially Internet Explorer and the
Windows Media Player, may negatively impact the experience of our customers by
displaying a Windows Media Player when the customer seeks to play RealAudio or
RealVideo content, or by posting an error message when the customer tries to
play content available in RealNetworks' formats that may not be viewed through
the Windows Media Player, without telling the customer how to obtain the
latest RealPlayer. Such actions by Microsoft could materially reduce market
share for the RealPlayer and have a negative effect on demand for our server
software and tools. We have provided and will continue to seek to provide
useful input to Microsoft to address these situations so as to provide an
optimal experience for consumers. In light of these recent events, our
relationship with Microsoft has become more competitive.
In addition to Microsoft, we face increasing competition from other
companies that are developing and marketing streaming media products.
Competitors include Apple Computer, which has just announced the availability
of QuickTime 4.0 with a streaming media server, Cisco Systems/Precept
Software, PictureTel/Starlight Networks and Oracle. As more companies enter
the market with products that compete with our servers, players and tools, the
competitive landscape could change rapidly to our disadvantage.
We do not believe that clear standards have emerged with respect to non-PC
wireless and cable-based systems. Likewise, no one company has gained a
dominant position in the mobile device market. Other companies' products and
services or new standards may emerge in any of these areas, which could reduce
demand for our products or render them obsolete.
In addition, our streaming media and media delivery products face
competition from non-streaming, "fast download" media delivery technologies
such as AVI, QuickTime and MP3. Other fast download or non-streaming IP-based
content distribution methods are likely to emerge and could compete with our
products and services, which could harm our business.
We may be unable to successfully compete in other parts of our business
Media Hosting. Our media hosting service, the Real Broadcast Network,
competes with a variety of companies that provide streaming media hosting
services. These companies include Broadcast.com (which has agreed to be
acquired by Yahoo!) and Intervu and emerging broadcast networks such as CMGI's
Magnitude Network and Enron Communications. We may not establish or sustain
our competitive position in this market segment. Some media hosting
competitors are also customers on whom we rely to help drive product download
traffic to our website through their broadcast events.
Website Destinations, Content and Advertising. While Internet advertising
revenues across the industry continue to grow, the number of websites
competing for advertising revenues is also growing rapidly. Our websites,
including Real.com, Film.com and LiveConcerts.com, compete for user traffic
and Internet advertising revenues with a wide variety of websites, Internet
portals and ISPs. In particular, aggregators of audio, video and other media,
such as Broadcast.com and Microsoft's Web Events, compete with our RealGuide.
We also compete with traditional media such as television, radio and print for
a share of advertisers' total advertising budgets. Our advertising sales force
and infrastructure are still in early stages of development relative to those
of our competitors. We cannot be certain that advertisers will place
advertising with us or that revenues derived from such advertising will be
meaningful. If we lose advertising customers, fail to attract new customers,
are forced to reduce advertising rates or otherwise modify our rate structure
to retain or attract customers, or if we lose website traffic, our business
could be harmed.
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Electronic Commerce. The electronic commerce features of our websites
compete with a variety of other websites for consumer traffic. To compete
successfully in the electronic commerce market, we must attract sufficient
traffic to our websites by offering high-quality, competitively priced,
desirable merchandise in a compelling, easy-to-purchase format. In addition,
we must successfully leverage our existing user base to develop the market for
our products and services. We may not compete successfully in the growing and
rapidly changing market for electronic commerce. Our failure to do so could
harm our business.
Increased competition may result in price reductions, reduced margins, loss
of market share, loss of customers, and a change in our business and marketing
strategies, any of which could harm our business.
We may not be successful in the market for downloadable media and local media
delivery
In May 1999, we announced the RealSystem MP, a digital music architecture
enabling integration with a wide range of Internet services and hardware
devices. We also released a beta version of RealJukebox, our client software
based on the RealSystem MP. These products represent an extension of our
business into downloadable media and local media delivery, which is a
substantial evolution from our historical focus on streaming media products
and services. We do not know whether there is a sustainable market for
products such as RealSystem MP and RealJukebox. Even if that market exists, we
may be unable to develop a revenue model or sufficient demand to take
advantage of the market opportunity.
While over one million copies of RealJukebox have been downloaded since its
beta release on May 3, 1999, it is too soon to determine if RealJukebox will
be widely received in the marketplace. There are now a number of competitive
products on the market that offer certain of the features that RealJukebox
offers. In addition, given the size and importance of the general market for
music distribution, competitors will likely release products that directly
compete with RealJukebox, which could harm our business. Even if RealJukebox
achieves widespread market acceptance, it may not achieve a high level of use,
which would lead to a low rate of upgrade sales and electronic commerce
opportunities.
RealJukebox has been released only as an early beta version. Although we
tested this version prior to its release, it likely contains errors. We will
spend substantial development resources to continue to test the product, to
correct errors and to improve the product before we release a commercial
version of RealJukebox. We may never release a commercial version. Our
inability to commercially release RealJukebox, to achieve widespread
acceptance for RealSystem MP and RealJukebox, or to create new revenue streams
from new market segments could harm our business.
RealJukebox allows users to record and play back music in a variety of
technical formats, including RealAudio G2 and MP3. However, technical formats
and consumer preferences evolve very rapidly, and we may be unable to
adequately address consumer preferences or fulfill the market demand to the
extent it exists.
We have had long-term relationships with recording companies, including
major record labels, many of which offer their streaming content in our
formats. However, recording companies, including those with whom we have a
relationship, may be uncomfortable with some features of RealJukebox. As a
result, some record companies may decide to withhold content from RealJukebox,
or refrain from or delay participating in promotional opportunities with
respect to RealJukebox.
RealJukebox is intended to allow users of the product to acquire, record,
play back and manage music for their personal use. It is possible for a user
of RealJukebox to elect not to use the copyright-protection features it
contains and then violate the intellectual property rights of artists and
recording
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companies by engaging in an authorized distribution of music. The laws
governing the recording, distribution and performance of digital music are new
and largely untested. While we believe we have developed RealJukebox to comply
with U.S. copyright laws, a court may find us in violation of these laws. The
Recording Industry Association of America, an industry group, recently pursued
legal action to enjoin the distribution of the Rio, an MP3 player made by
Diamond Multimedia. Similar action or other litigation in the United States or
abroad directed at us could harm our business, even if such litigation were
entirely without merit.
We may not successfully develop new products and services
Our growth depends on our ability to continue to develop leading edge media
delivery and digital distribution products and services. If we fail to develop
products and services that achieve widespread market acceptance or that fail
to generate significant revenues to offset development costs, our business and
operating results would be harmed. We may not timely and successfully
identify, develop and market new product and service opportunities. If we
introduce new products and services, they may not attain broad market
acceptance or contribute meaningfully to our revenues or profitability.
Because the markets for our products and services are rapidly changing, we
must develop new offerings quickly. We have experienced development delays and
cost overruns in our development efforts in the past and we may encounter such
problems in the future. Delays and cost overruns could affect our ability to
respond to technological changes, evolving industry standards, competitive
developments or customer requirements. Our products also may contain
undetected errors that could cause increased development costs, loss of
revenues, adverse publicity, reduced market acceptance of the products or
lawsuits by customers.
We rely on content provided by third parties to increase market acceptance of
our products
If third parties do not develop or offer compelling content to be delivered
over the Internet, our business will be harmed and our products may not
achieve or sustain broad market acceptance. We rely on third-party content
providers, such as radio and television stations, record labels, media
companies, websites and other companies, to develop and offer content in our
formats that can be delivered using our server products and played back using
our player products. While we have a number of short-term agreements with
third parties to provide content from their websites in our formats, most
third parties are not obligated to develop or offer content using our
technology. In addition, some third parties have entered into and may in the
future enter into agreements with our competitors, principally Microsoft, to
develop or offer all or a substantial portion of their content in our
competitors' formats. Microsoft has more resources to secure preferential and
even exclusive relationships with content providers. If Microsoft or another
competitor were to secure preferential or exclusive relationships with the
leading broadcasters, record companies or websites, it could result in less
demand for and use of our products. We cannot guarantee that third-party
content providers will continue to rely on our technology or offer compelling
content in our formats to encourage and sustain broad market acceptance of our
products. Their failure to do so would harm our business.
As we move into the market for digital distribution of media and local media
playback, our success depends on the availability of third-party content,
especially music, that users of our RealJukebox product can lawfully and
easily access, record and play back. If third parties are unwilling to offer
their content for free download or purchase by users of RealJukebox, our
product may not achieve or sustain market acceptance. Competitors could secure
exclusive distribution relationships with such content providers, which would
harm our business.
We depend on key personnel who may leave us at any time
Our success substantially depends on the continued employment of our
executive officers and key employees, particularly Robert Glaser, our chairman
of the board and chief executive officer. The loss
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of the services of Mr. Glaser or any of our other executive officers or key
employees could harm our business. None of our executive officers has a
contract that guarantees employment. Other than the $2 million insurance
policy on the life of Mr. Glaser, we do not maintain "key person" life
insurance policies.
Our failure to attract, train or retain highly qualified personnel could harm
our business
Our success also depends on our ability to attract, train and retain
qualified personnel, specifically those with management and product
development skills. In particular, we must hire additional skilled software
engineers to further our research and development efforts. Competition for
such personnel is intense, particularly in high-technology centers such as the
Pacific Northwest. In making employment decisions, particularly in the
Internet and high-technology industries, job candidates often consider the
value of stock options they may receive in connection with their employment.
As a result of recent volatility in our stock price, we may be disadvantaged
in competing with companies that have not experienced similar volatility or
that have not yet sold their stock publicly. If we do not succeed in
attracting new personnel or retaining and motivating our current personnel,
our business could be harmed.
We may not successfully manage our growth
We cannot successfully implement our business model if we fail to manage our
growth. We have rapidly and significantly expanded our operations domestically
and internationally and anticipate further expansion to take advantage of
market opportunities. We have increased the number of our full-time employees
from 325 on January 1, 1998 to 490 on March 31, 1999. Managing this
substantial expansion has placed a significant strain on our management,
operational and financial resources. If our growth continues, we will need to
continue to improve our financial and managerial control and reporting systems
and procedures.
We are in the process of implementing new management information software
systems. This will affect many aspects of our business, including our
accounting, operations, electronic commerce, customer service, purchasing,
sales and marketing functions. The purchase, implementation and testing of
these systems has resulted, and will result, in significant capital
expenditures and could disrupt our day-to-day operations. If these systems are
not implemented as expected, our ability to provide products and services to
our customers on a timely basis will suffer and delays in the recording and
reporting of our operating results could occur.
The growth of our business depends on the increased use of the Internet for
communications, commerce and advertising
The growth of our business depends on the continued growth of the Internet
as a medium for communications, electronic commerce and advertising. Our
business will be harmed if Internet usage does not continue to grow,
particularly as a source of media information and entertainment and as a
vehicle for commerce in goods and services. Our success also depends on the
efforts of third parties to develop the infrastructure and complementary
products and services necessary to maintain and expand the Internet as a
viable commercial medium. The Internet may not be accepted as a viable
commercial medium for broadcasting multimedia content or media delivery for a
number of reasons, including:
. potentially inadequate development of the necessary infrastructure to
accommodate growth in the number of users and Internet traffic;
. lack of acceptance of the Internet as a medium for distributing
streaming media content or for media delivery;
. unavailability of compelling multimedia content;
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. inadequate commercial support for Web-based advertising; and
. delays in the development or adoption of new technological standards
and protocols or increased governmental regulation, which could
inhibit the growth and use of the Internet.
In addition, we believe that other Internet-related issues, such as
security, reliability, cost, ease of use and quality of service, remain
largely unresolved and may affect the amount of business that is conducted
over the Internet.
If Internet usage grows, the Internet infrastructure may not be able to
support the demands placed on it by this growth, specifically the demands of
delivering high-quality media content. As a result, its performance and
reliability may decline. In addition, websites have experienced interruptions
in service as a result of outages and other delays occurring throughout the
Internet network infrastructure. If these outages or delays occur frequently
in the future, Internet usage, as well as the usage of our products, services
and websites, could grow more slowly or decline.
Changes in network infrastructure, transmission methods and broadband
technologies pose risks to our business
We believe that increased Internet use may depend on the availability of
greater bandwidth or data transmission speeds (also known as broadband
transmission). If broadband access becomes widely available, we believe it
presents both a substantial opportunity and a significant business challenge
for us. Internet access through cable television set-top boxes, digital
subscriber lines or wireless connections could dramatically reduce the demand
for our products and services by utilizing alternate technology that more
efficiently transmits data. This could harm our business as currently
conducted.
Development of products and services for a broadband transmission
infrastructure involves a number of additional risks, including:
. changes in content delivery methods and protocols;
. obtaining compelling content that takes advantage of broadband access
and helps drive market acceptance of our products and services;
. the emergence of new competitors, such as traditional broadcast and
cable television companies, which have significant control over access
to content, substantial resources and established relationships with
media providers;
. the development of relationships by our current competitors with
companies that have significant access to or control over the
broadband transmission infrastructure or content;
. the need to establish new relationships with non-PC based providers of
broadband access, such as providers of television set-top boxes and
cable television, some of which may be our competitors; and
. the general risks of new product and service development, including
the challenges to develop error-free products and enhancements,
develop compelling services and achieve market acceptance for these
products and services.
We depend on the efforts of third parties to develop and provide a
successful infrastructure for broadband transmission. Even if broadband access
becomes widely available, heavy use of the Internet may negatively impact the
quality of media delivered through broadband connections. If these third
parties experience delays or difficulties establishing a widespread broadband
transmission infrastructure or if heavy usage limits the broadband experience,
the release of our broadband products and services could be delayed. Even if a
broadband transmission infrastructure is developed for widespread use, our
products and services may not achieve market acceptance or generate sufficient
revenues to offset our development costs.
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We could lose strategic relationships that are essential to our business
The loss of certain current strategic relationships, the inability to find
other strategic partners or the failure of our existing relationships to
achieve meaningful positive results for us could harm our business. We rely in
part on strategic relationships to help us:
. maximize adoption of our products through distribution arrangements;
. increase the amount and availability of compelling media content on
the Internet to help boost demand for our products and services;
. enhance our brand;
. expand the range of commercial activities based on our technology;
. expand the distribution of our streaming media content without a
degradation in fidelity; and
. increase the performance and utility of our products and services.
Many of these goals are beyond our traditional strengths. We anticipate that
the efforts of our strategic partners will become more important as the
multimedia experience over the Internet matures. For example, we may become
more reliant on strategic partners to provide multimedia content, provide more
secure and easy-to-use electronic commerce solutions and build out the
necessary infrastructure for media delivery. We may not be successful in
forming strategic relationships. In addition, the efforts of our strategic
partners may be unsuccessful. Furthermore, these strategic relationships may
be terminated before we realize any benefit.
Our industry is experiencing consolidation that may intensify competition
The Internet industry has recently experienced substantial consolidation and
a proliferation of strategic transactions. We expect this consolidation and
strategic partnering to continue. Acquisitions or strategic relationships
could harm us in a number of ways. For example:
. competitors could acquire or partner with companies with which we have
strategic relationships and discontinue our relationship, resulting in
the loss of distribution opportunities for our products and services
or the loss of certain enhancements or value-added features to our
products and services; or
. a competitor could be acquired by a party with significant resources
and experience that could increase the ability of the competitor to
compete with our products and services.
Recent announcements and consolidations that could affect our business
include:
. Microsoft's strategic investments in broadband initiatives, including
its recently announced $5 billion investment in AT&T;
. AT&T's acquisition of TCI and its announcement that it will acquire
MediaOne Communications;
. At Home's announcement that it will acquire Excite; and
. Yahoo!'s announcements that it will acquire Broadcast.com and
GeoCities.
Potential acquisitions involve risks we may not adequately address
The failure to adequately address the financial and operational risks raised
by acquisitions of technology and businesses could harm our business. We have
acquired complementary technologies
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and businesses in the past, and intend to do so in the future. Financial risks
related to acquisitions include:
. potentially dilutive issuances of equity securities;
. use of cash resources;
. the incurrence of additional debt and contingent liabilities;
. large write-offs; and
. amortization expenses related to goodwill and other intangible assets.
Acquisitions also involve operational risks, including:
. difficulties in assimilating the operations, products, technology,
information systems and personnel of the acquired company;
. diversion of management's attention from other business concerns;
. impairment of relationships with our employees, affiliates,
advertisers and content providers;
. inability to maintain uniform standards, controls, procedures and
policies;
. entrance into markets in which we have no direct prior experience; and
. loss of key employees of the acquired company.
We currently have an agreement to acquire Xing Technology, an MP3 software
developer, in a transaction that we expect to account for as a pooling of
interests. We may not adequately integrate this or any future acquisitions. In
addition, we may not be able to account for future acquisitions as a pooling
of interests, which could harm our operating results.
Our business will suffer if our systems fail or become unavailable
A reduction in the performance, reliability and availability of our websites
and network infrastructure will harm our ability to distribute our products
and services to our users, as well as our reputation and ability to attract
and retain users, customers, advertisers and content providers. Our revenues
depend in large part on the number of users that download our products from
our websites and access the content services on our websites. Our systems and
operations could be damaged or interrupted by fire, flood, power loss,
telecommunications failure, Internet breakdown, earthquake and similar events.
Our systems are also subject to break-ins, sabotage, intentional acts of
vandalism and similar misconduct. Our computer and communications
infrastructure is located at a single leased facility in Seattle, Washington.
We are currently preparing to move our entire main headquarters and computer
and communications infrastructure to a new leased facility, also in Seattle,
Washington. This move involves risks associated with moving our
infrastructure, though we plan to temporarily operate multiple computer
systems to minimize the risk of system outage. We do not have fully redundant
systems or a formal disaster recovery plan, and we do not carry adequate
business interruption insurance to compensate us for losses that may occur
from a system outage.
Our electronic commerce and digital distribution activities are managed by
sophisticated software and computer systems. We may encounter delays in
developing these systems, and they may contain undetected errors that could
cause system failures. Any system error or failure that causes interruption in
availability of products or content or an increase in response time could
result in a loss of potential or existing business services customers, users,
advertisers or content providers. If we suffer sustained or repeated
interruptions, our products, services and websites could be less attractive to
such entities or individuals and our business would be harmed.
A sudden and significant increase in traffic on our websites could strain
the capacity of the software, hardware and telecommunications systems that we
deploy or use. This could lead to slower
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response times or system failures. Our operations also depend on receipt of
timely feeds from our content providers, and any failure or delay in the
transmission or receipt of such feeds could disrupt our operations. We depend
on Web browsers, ISPs and online service providers to provide Internet users
access to our websites. Many of these providers have experienced significant
outages in the past, and could experience outages, delays and other
difficulties due to system failures unrelated to our systems. In addition,
certain ISPs have temporarily interrupted our website operations in response
to the heavy volume of e-mail transmission we generate and send to our large
user base. These types of interruptions could continue or increase in the
future.
Our network is subject to security risks that could harm our reputation and
expose us to litigation or liability
Online commerce and communications depend on the ability to transmit
confidential information securely over public networks. Any compromise of our
ability to transmit confidential information securely, and costs associated
with preventing or eliminating any problems, could harm our business. Online
transmissions are subject to a number of security risks, including:
. our own or licensed encryption and authentication technology may be
compromised, breached or otherwise insufficient to ensure the security
of customer information;
. we could experience unauthorized access, computer viruses and other
disruptive problems, whether intentional or accidental;
. a third party could circumvent our security measures and
misappropriate proprietary information or interrupt operations; and
. credit card companies could restrict online credit card transactions.
The occurrence of any of these or similar events could damage our reputation
and expose us to litigation or liability. We may also be required to expend
significant capital or other resources to protect against the threat of
security breaches or to alleviate problems caused by such breaches.
Our international operations involve risks
We operate subsidiaries in England, France, Germany and Japan, and market
and sell products in several other countries. For the quarter ended March 31,
1999, approximately 24% of our revenues, excluding revenues derived from our
license agreement with Microsoft, were derived from international operations.
We are subject to the normal risks of doing business internationally, as well
as risks specific to Internet-based companies in foreign markets. These risks
include:
. delays in the development of the Internet as a broadcast, advertising
and commerce medium in international markets;
. difficulties in managing operations due to distance, language and
cultural differences, including issues associated with establishing
management systems infrastructures in individual markets;
. unexpected changes in regulatory requirements;
. export and import restrictions, including those restricting the use of
encryption technology;
. tariffs and trade barriers and limitations on fund transfers;
. difficulties in staffing and managing foreign operations;
. longer payment cycles and problems in collecting accounts receivable;
. potential adverse tax consequences;
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. exchange rate fluctuations;
. increased risk of piracy and limits on our ability to enforce our
intellectual property rights; and
. other legal and political risks.
Any of these factors could harm our business. We do not currently hedge our
foreign currency exposures. See "--Liquidity and Capital Resources."
We may be unable to adequately protect our proprietary rights
Our inability to protect our proprietary rights, and the costs of doing so,
could harm our business. Our success and ability to compete partly depend on
the superiority, uniqueness or value of our technology, including both
internally developed technology and technology licensed from third parties. To
protect our proprietary rights, we rely on a combination of patent, trademark,
copyright and trade secret laws, confidentiality agreements with our employees
and third parties, and protective contractual provisions. Despite our efforts
to protect our proprietary rights, unauthorized parties may copy or infringe
aspects of our technology, products, services or trademarks, or obtain and use
information we regard as proprietary. In addition, others may independently
develop technologies that are similar or superior to ours, which could reduce
the value of our intellectual property.
Companies in the computer industry have frequently resorted to litigation
regarding intellectual property rights. We may have to litigate to enforce our
intellectual property rights, to protect our trade secrets or to determine the
validity and scope of other parties' proprietary rights. From time to time, we
have received, and may receive in the future, notice of claims of infringement
of other parties' proprietary rights. For instance, in August 1998, Venson M.
Shaw and Steven M. Shaw filed a lawsuit against us and co-defendant
Broadcast.com in the United States District Court for the Northern District of
Texas--Dallas Division. The plaintiffs allege that we, individually and in
combination with Broadcast.com, infringe on a certain patent by making, using,
selling and/or offering to sell software products and services directed to
media delivery systems for the Internet and corporate intranets. The
plaintiffs seek to enjoin us from the alleged infringing activity and to
recover damages in an amount no less than a reasonable royalty. We believe the
allegations are without merit and intend to vigorously defend ourselves
against the claim. However, litigation is inherently uncertain, and we may be
unable to successfully defend ourselves against this claim.
Similar claims may involve our internally developed technology or technology
and enhancements that we license from third parties. Claims of this nature
could require us to spend significant amounts of time and money to defend
ourselves against them. If any of these claims were to prevail, we could be
forced to pay damages, comply with injunctions, or halt distribution of our
products while we re-engineer them or seek licenses to necessary technology,
which might not be available on reasonable terms. We could also be subject to
claims for indemnification resulting from infringement claims made against our
customers and strategic partners, which could increase our defense costs and
potential damages. Any of these events could harm our business.
We are subject to risks associated with governmental regulation and legal
uncertainties
We are not currently subject to direct regulation by any governmental agency
other than laws and regulations generally applicable to businesses, although
certain U.S. export controls and import controls of other countries, including
controls on the use of encryption technologies, may apply to our products. Few
existing laws or regulations specifically apply to the Internet. However, it
is likely that a number of laws and regulations may be adopted in the United
States and other countries with respect to the Internet. These laws may relate
to areas such as content issues (such as obscenity, indecency and defamation),
copyright and other intellectual property rights, encryption, use of key
escrow data,
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caching of content by server products, electronic authentication or "digital
signatures," personal privacy, advertising, taxation, electronic commerce
liability, e-mail, network and information security and the convergence of
traditional communication services with Internet communications, including the
future availability of broadband transmission capability. Other countries and
political organizations are likely to impose or favor more and different
regulation than that which has been proposed in the United States, thus
furthering the complexity of regulation. The adoption of such laws or
regulations, and uncertainties associated with their validity and enforcement,
may affect the available distribution channels for and costs associated with
our products and services, and may affect the growth of the Internet. Such
laws or regulations may therefore harm our business.
We do not know for certain how existing laws governing issues such as
property ownership, copyright and other intellectual property issues,
taxation, illegal or obscene content, retransmission of media and personal
privacy and data protection apply to the Internet. The vast majority of such
laws were adopted before the advent of the Internet and related technologies
and do not address the unique issues associated with the Internet and related
technologies. Most of the laws that relate to the Internet have not yet been
interpreted. Changes to or the interpretation of these laws could:
. limit the growth of the Internet;
. create uncertainty in the marketplace that could reduce demand for our
products and services;
. increase our cost of doing business;
. expose us to significant liabilities associated with content available
on our websites or distributed or accessed through our products or
services; or
. lead to increased product development costs, or otherwise harm our
business.
On October 28, 1998, the Digital Millennium Copyright Act (DMCA) was
enacted. The DMCA includes statutory licenses for the performance of sound
recordings and for the making of recordings to facilitate transmissions. Under
these statutory licenses, we and our broadcast customers will be required to
pay licensing fees for sound recordings we deliver in original and archived
programming and through retransmissions of radio broadcasts. The DMCA does not
specify the rate and terms of the licenses, which will be determined either
through voluntary inter-industry negotiations or arbitration. Depending on the
rates and terms adopted for the statutory licenses, the DMCA could harm our
business.
The Child Online Protection Act and the Child Online Privacy Protection Act
(COPA) were enacted in October 1998. The COPA impose civil and criminal
penalties on persons distributing material harmful to minors (e.g., obscene
material) over the Internet to persons under the age of 17, or collecting
personal information from children under the age of 13. We do not currently
distribute the types of materials that we believe the COPA would deem illegal,
and do not knowingly collect and disclose personal information from such
minors. The manner in which the COPA may be interpreted and enforced cannot be
fully determined, and future legislation similar to the COPA could subject us
to potential liability, which in turn could harm our business. Such laws could
also damage the growth of the Internet generally and decrease the demand for
our products and services.
Provisions of our charter documents, shareholder rights plan and Washington
law could discourage our acquisition by a third party
Our articles of incorporation provide for a strategic transaction committee
of the board of directors currently comprised of Messrs. Glaser, Breyer and
Kapor. Without the prior approval of this committee, and subject to certain
limited exceptions, the board of directors does not have the authority to:
. adopt a plan of merger;
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. authorize the sale, lease, exchange or mortgage of:
(A) assets representing more than 50% of the book value of our assets
prior to the transaction; or
(B) any other asset or assets on which our long-term business strategy
is substantially dependent;
. authorize our voluntary dissolution; or
. take any action that has the effect of any of the above.
We also entered into an agreement providing Mr. Glaser with a direct
contractual right to require us to abide by and perform all terms of the
articles with respect to the strategic transactions committee. This agreement
also provides that so long as Mr. Glaser owns a specified number of shares, we
will use our best efforts to cause him to be nominated to, elected to, and not
removed from the board of directors. In addition, the articles provide that
Mr. Glaser will serve, or will appoint another officer of RealNetworks to
serve, as our policy ombudsman, with the exclusive authority to adopt or
change our editorial policies as reflected on our websites or in other
communications or media in which we have a significant editorial or media
voice. The provisions with respect to the authority of the Strategic
Transactions Committee and the policy ombudsman may be amended only with the
approval of 90% of the shares entitled to vote on an amendment to the
articles.
We have adopted a shareholder rights plan that provides that shares of our
common stock have associated preferred stock purchase rights. These rights
become exercisable and detachable from the associated common stock only
following the acquisition by a person or a group of 15% or more of our
outstanding common stock or 10 days following the announcement of a tender or
exchange offer for 15% or more of our outstanding common stock. The rights
entitle our shareholders, other than the person or entity who has acquired or
made an exchange or tender offer for 15% or more of our outstanding common
stock, to acquire additional shares of our capital stock at a price equal to
one-half of the market price at the time of the event and, in certain
circumstances, would allow our shareholders to acquire capital stock in the
entity that has acquired or made an exchange or tender offer for 15% or more
of our outstanding common stock at a similar discount. The exercise of these
rights would make the acquisition of RealNetworks by a third party more
expensive to that party and has the effect of discouraging third parties from
acquiring our company without the approval of our board of directors, which
has the power to redeem these rights and prevent their exercise.
Washington law imposes restrictions on some transactions between a
corporation and certain significant shareholders. Chapter 23B.19 of the
Washington Business Corporation Act prohibits a "target corporation," with
some exceptions, from engaging in certain significant business transactions
with an "acquiring person," which is defined as a person or group of persons
that beneficially owns 10% or more of the voting securities of the target
corporation, for a period of five years after such acquisition, unless the
transaction or acquisition of shares is approved by a majority of the members
of the target corporation's board of directors prior to the acquisition. Such
prohibited transactions include, among other things:
. a merger or consolidation with, disposition of assets to, or issuance
or redemption of stock to or from the acquiring person;
. termination of 5% or more of the employees of the target corporation
as a result of the acquiring person's acquisition of 10% or more of
the shares; or
. allowing the acquiring person to receive any disproportionate benefit
as a shareholder.
After the five-year period, a "significant business transaction" may occur,
as long as it complies with certain "fair price" provisions of the statute. A
corporation may not opt out of this statute. This provision may have the
effect of delaying, deterring or preventing a change in control of
RealNetworks.
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The foregoing provisions of our charter documents, shareholder rights plan
and Washington law, as well as those relating to a classified board of
directors and the availability of "blank check" preferred stock, could have
the effect of making it more difficult or more expensive for a third party to
acquire, or of discouraging a third party from attempting to acquire, control
of us. These provisions may therefore have the effect of limiting the price
that investors might be willing to pay in the future for our common stock.
Our stock price has been and may continue to be volatile
The trading price of our common stock has been and is likely to continue to
be highly volatile. For example, during the 52-week period ended May 14, 1999,
the price of our common stock ranged from $7.625 to $131.875 per share. Our
stock price could be subject to wide fluctuations in response to factors such
as:
. actual or anticipated variations in quarterly operating results;
. announcements of technological innovations, new products or services
by us or our competitors;
. changes in financial estimates or recommendations by securities
analysts;
. the addition or loss of strategic relationships;
. conditions or trends in the Internet, media streaming, media delivery
and online commerce markets;
. changes in the market valuations of other Internet, online service or
software companies;
. announcements by us or our competitors of significant acquisitions,
strategic partnerships, joint ventures or capital commitments;
. additions or departures of key personnel;
. sales of our common stock; and
. general market conditions.
In addition, the stock market in general, and the Nasdaq National Market and
the market for Internet and technology companies in particular, have
experienced extreme price and volume fluctuations that have often been
unrelated or disproportionate to the operating performance of these companies.
These broad market and industry factors may reduce our stock price, regardless
of our operating performance. The trading prices of the stocks of many
technology companies are at or near historical highs and reflect price-
earnings ratios substantially above historical levels. These trading prices
and price-earnings ratios may not be sustained.
We may be subject to assessment of sales and other taxes for the sale of our
products, license of technology or provision of services
We may have to pay past sales or other taxes that we have not collected from
our customers. We do not currently collect sales or other taxes on the sale of
our products, license of technology or provision of services in states and
countries other than those in which we have offices or employees. In October
1998, the Internet Tax Freedom Act (ITFA) was signed into law. Among other
things, the ITFA imposes a three-year moratorium on discriminatory taxes on
electronic commerce. Nonetheless, foreign countries or, following the
moratorium, one or more states, may seek to impose sales or other tax
obligations on companies that engage in such activities within their
jurisdictions. Our business would be harmed if one or more states or any
foreign country were able to require us to collect sales
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or other taxes from current or past sales of products, licenses of technology
or provision of services, particularly because we would be unable to go back
to customers to collect sales taxes for past sales and may have to pay such
taxes out of our own funds.
We intend to donate a portion of net income to charity
If we achieve and sustain profitability, we intend to donate approximately
5% of our annual net income to charitable organizations. This will reduce our
net income.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Information relating to quantitative and qualitative disclosure about market
risk is set forth under the caption "Liquidity and Capital Resources" in Part
I, Item 2, Management's Discussion and Analysis of Financial Condition and
Results of Operations.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In August 1998, Venson M. Shaw and Steven M. Shaw filed a lawsuit against us
and co-defendant Broadcast.com in the United States District Court for the
Northern District of Texas--Dallas Division. The plaintiffs allege that we,
individually and in combination with Broadcast.com, infringe on a certain
patent by making, using, selling and/or offering to sell software products and
services directed to media delivery systems for the Internet and corporate
intranets. The plaintiffs seek to enjoin us from our alleged infringing
activity and to recover damages in an amount no less than a reasonable
royalty. Although we can give no assurance as to the outcome of this lawsuit,
we believe that the allegations in this action are without merit, and intend
to vigorously defend ourselves against these claims. We may be required to
indemnify Broadcast.com under the terms of our license agreement with it. The
plaintiffs filed a similar claim based on the same patent and seeking similar
remedies as a separate lawsuit against Microsoft and Broadcast.com in the same
court. The court has consolidated the lawsuit against Microsoft and
Broadcast.com with the lawsuit against RealNetworks and Broadcast.com.
On July 29, 1998, Left Bank Management, Inc. filed a lawsuit against us in
the U.S. District Court for the Western District of Washington. The plaintiff
alleges that we entered into an oral agreement with it in 1995 pursuant to
which the plaintiff claims it is entitled to 30% of our revenues from the use
of RealAudio technology to promote, sample or sell music. The plaintiff claims
breach of contract, unjust enrichment, promissory estoppel and breach of
implied-in-fact contract. We have denied each of the plaintiff's claims. In
response to our motion to dismiss, the plaintiff withdrew its claim for breach
of fiduciary duty. Although no assurance can be given as to the outcome of
this lawsuit, we believe the allegations in this action are without merit, and
we intend to vigorously defend ourselves against these claims.
From time to time we are, and expect to continue to be, subject to legal
proceedings and claims in the ordinary course of our business, including
contract-related claims and claims of alleged infringement of third-party
patents, trademarks and other intellectual property rights. These claims, even
if not meritorious, could force us to spend significant financial and
managerial resources. We currently are not aware of any legal proceedings or
claims that we believe will have, individually or taken together, a material
adverse effect on our business, prospects, financial condition and operating
results.
Item 2. Changes in Securities and Use of Proceeds
(d) Use of Proceeds
RealNetworks' registration statement under the Securities Act of 1933, as
amended, for its initial public offering became effective on November 21,
1997. Offering proceeds, net of aggregate expenses of approximately $4.6
million, were approximately $38.5 million. RealNetworks has used all of the
net offering proceeds for the purchase of temporary investments consisting of
cash, cash equivalents and short-term investments. RealNetworks has not used
any of the net offering proceeds for construction of plant, building or
facilities, purchases of real estate, acquisition of other businesses, or
repayment of indebtedness. None of the net offering proceeds were paid
directly or indirectly to directors, officers, or general partners of
RealNetworks or their associates, persons owning 10% or more of any class of
RealNetworks' securities, or affiliates of RealNetworks.
34
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-K:
<TABLE>
<C> <S>
2.1 Agreement and Plan of Merger dated as of April 12, 1999 among
RealNetworks, Inc., XTC Acquisition Corp., Xing Technology
Corporation, Hassan Miah and Dean Kaplan
10.1 RealNetworks, Inc. Amended and Restated 1996 Stock Option Plan
10.2 First Lease Amendment dated November 13, 1998 between 2601 Elliott
LLC and RealNetworks, Inc.
27.1 Restated Financial Data Schedule which is submitted electronically
to the Securities and Exchange Commission for information purposes
only and is not filed
27.2 Financial Data Schedule which is submitted electronically to the
Securities and Exchange Commission for information purposes only
and is not filed
</TABLE>
(b) Reports on Form 8-K:
None
35
<PAGE>
SIGNATURES
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, thereunto duly authorized, on May 14, 1999.
RealNetworks, Inc.
/s/ Paul Bialek
By___________________________________
Paul Bialek
Senior Vice President, Finance and
Operations and Chief Financial
Officer
36
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
------- ----------------------------------------------------------------------
<C> <S>
2.1 Agreement and Plan of Merger dated as of April 12, 1999 among
RealNetworks, Inc., XTC Acquisition Corp., Xing Technology
Corporation, Hassan Miah and Dean Kaplan
10.1 RealNetworks, Inc. Amended and Restated 1996 Stock Option Plan
10.2 First Lease Amendment dated November 13, 1998 between 2601 Elliott LLC
and RealNetworks, Inc.
27.1 Restated Financial Data Schedule which is submitted electronically to
the Securities and Exchange Commission for information purposes only
and is not filed
27.2 Financial Data Schedule which is submitted electronically to the
Securities and Exchange Commission for information purposes only and
is not filed
</TABLE>
<PAGE>
EXHIBIT 2.1
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER is dated as of April 12, 1999 (the
"Agreement") by and among RealNetworks, Inc., a Washington corporation
("RealNetworks"), XTC Acquisition Corp., a Delaware corporation and the wholly-
owned subsidiary of RealNetworks ("Purchaser"), Xing Technology Corporation, a
California corporation (the "Company"), and, solely for the provisions of
paragraphs 8.5, 8.6, 8.8, 8.9 and Article IX, Hassan Miah and Dean Kaplan
(collectively, the "Executive Shareholders").
WHEREAS, the Board of Directors of each of RealNetworks, Purchaser and the
Company have determined that a business combination between RealNetworks and the
Company merging their respective businesses is in the best interests of their
respective companies and shareholders and accordingly have agreed to effect the
merger provided for herein upon the terms and subject to the conditions set
forth herein; and
WHEREAS, it is the intention of the parties to this Agreement that (a) for
federal income tax purposes, the merger provided for herein shall qualify as a
"reorganization" within the meaning of Section 368 of the Internal Revenue Code
of 1986, as amended (the "Code"); and (b) for accounting purposes, the merger
provided for herein shall qualify as a "pooling of interests"; and
NOW, THEREFORE, in consideration of the premises and of the
representations, warranties, covenants and agreements set forth herein, the
parties hereto hereby agree as follows:
ARTICLE I
THE MERGER
1.1. The Merger. Upon the terms and subject to the conditions of this
Agreement, at the Effective Time (as defined in Section 1.3 of this Agreement),
Purchaser shall be merged with and into the Company in accordance with the laws
of the State of California and the terms of this Agreement (the "Merger"),
whereupon the separate corporate existence of Purchaser shall cease, and the
Company shall be the surviving corporation of the Merger (the Company, as the
surviving corporation after the Merger is sometimes referred to herein as the
"Surviving Corporation") .
1.2. Closing. Subject to the terms and conditions of this Agreement, the
closing of the Merger (the "Closing") shall take place (a) at the offices of
Perkins Coie LLP, 135 Commonwealth Drive, Suite 250, Menlo Park, California
94025-1105 at 10:00 a.m. three business days after all the conditions set forth
in Article VI of this Agreement (other than those that are waived by the party
or parties for whose benefit such conditions exist) are satisfied or (b) at such
other place, time, and/or date as the parties hereto may otherwise
<PAGE>
agree. The date upon which the Closing shall occur is referred to herein as the
"Closing Date."
1.3. Effective Time. If all the conditions to the Merger set forth in
Article VI of this Agreement have been fulfilled or waived and this Agreement
shall not have been terminated as provided in Article VII hereof, the parties
hereto shall cause this Agreement and the appropriate certificates (the
"Articles of Merger") to be properly executed and filed in accordance with the
laws of the State of California and the terms of this Agreement on or before the
Closing Date. The parties hereto shall also take such further actions as may be
required under the laws of the State of California in connection with the
consummation of the Merger. The Merger shall become effective at such time as
the Articles of Merger are duly filed with the Secretary of State of California
or at such later time as is specified in the Articles of Merger (the "Effective
Time"). From and after the Effective Time, the Surviving Corporation shall
possess all the rights, privileges, powers and franchises and be subject to all
of the restrictions, disabilities and duties of the Company and Purchaser, all
as provided under applicable law.
1.4. Conversion of Shares.
(a) At the Effective Time:
(i) each share of Common Stock, no par value per share, of Purchaser
outstanding at the Effective Time, by virtue of the Merger and without any
action on the part of the holders thereof, shall be converted into and
exchanged for one share of Common Stock, no par value per share, of the
Surviving Corporation;
(ii) each share of Common Stock, no par value per share, of the
Company (the "Company Common Stock"), including (i) each share of Company
Common Stock to be issued upon the conversion of each issued and
outstanding share of Preferred Stock (as defined herein) and (ii) each
share of Company Common Stock to be issued upon the conversion of all
residual equity interests, outstanding at the Effective Time, by virtue of
the Merger and without any action on the part of the holders thereof,
except as otherwise provided in Sections 1.4(d) or 1.8 hereof, shall be
converted into the right to receive the number of shares of Common Stock,
$0.001 par value per share, of RealNetworks (together with associated
preferred stock purchase rights pursuant to the Shareholder Rights Plan,
dated as of December 4, 1998 between RealNetworks and ChaseMellon
Shareholder Services L.L.C., the "RealNetworks Common Stock") equal to the
following: (A) subject to subsection 1.4(f), fifty million dollars
($50,000,000) (the "Purchase Price"), less any adjustment pursuant to
Sections 5.9; divided by (B) the aggregate number of shares of Company
Common Stock outstanding at the Effective Time on a fully diluted basis,
including, without limitation, the number of shares of Company Common Stock
which can be purchased and/or received by the conversion of all outstanding
shares of Preferred Stock at the Effective Time or the exercise of all
outstanding options, warrants, or other rights to
-2-
<PAGE>
purchase shares of Company Common Stock, whether or not such rights are
currently exercisable, and the number of shares of Company Common Stock
issuable upon conversion of all residual equity interests, at the Effective
Time; and further divided by (C) the Average Closing Price (as defined
herein) (the "Exchange Ratio").
(b) Subject to the provisions of Section 1.8, ten percent (10%) of the
shares of RealNetworks Common Stock otherwise deliverable at the Effective Time
to the shareholders of the Company (the "Shareholders") in connection with the
Merger, shall be deposited into an escrow account (the "Escrow"), which shares
shall be held and distributed in accordance with the terms of an Escrow
Agreement (the "Escrow Agreement") to be entered into by RealNetworks, the
Indemnity Representative (as defined herein) and ChaseMellon Shareholder
Services, L.L.C., as escrow agent (the "Escrow Agent"), in substantially the
form attached hereto as Schedule 1.4(b). The issuance to the Shareholders of the
shares of RealNetworks Common Stock shall be subject to the condition subsequent
that such shares be released from the Escrow pursuant to the terms of the Escrow
Agreement, and, except as expressly set forth herein or therein, the
Shareholders shall have no rights with respect to such shares in Escrow unless
the same are so released from such Escrow.
(c) As a result of the Merger and without any action on the part of the
holder thereof, at the Effective Time, all shares of Company Common Stock shall
cease to be outstanding and shall be canceled and retired and shall cease to
exist, and each holder of shares of Company Common Stock shall thereafter cease
to have any rights with respect to such shares of Company Common Stock, except
for the right to receive (except as otherwise provided in Section 1.8 hereof),
without interest, the consideration set forth in this Section 1.4 and Section
1.6 of this Agreement upon the surrender of a certificate (each, a
"Certificate") representing such shares of Company Common Stock and Preferred
Stock in accordance with the provisions of this Article I.
(d) Each share of Company Common Stock and each share of Series A and B
Preferred Stock of the Company and any other shares of Preferred Stock of the
Company (collectively, the "Preferred Stock") held by the Company as treasury
stock or owned by RealNetworks or any Subsidiary (as defined in Section 1.4(e)
of this Agreement) of RealNetworks at the Effective Time shall be canceled, and
no payment shall be made with respect thereto.
(e) For purposes of this Agreement, (i) the term "Average Closing Price"
shall mean the average of the per share last daily closing price of RealNetworks
Common Stock as quoted on the Nasdaq National Market ("NASDAQ") (and as reported
by The Wall Street Journal or, if not reported thereby, by another authoritative
source) during the ten (10) consecutive trading days ending on the trading day
immediately preceding the Closing Date; provided, however, that (A) if the
Average Closing Price is greater than $130.00, for purposes of this Agreement,
the Average Closing Price shall be deemed to be equal to $130.00 (subject to
1.4(f)); and (B) if the Average Closing Price is less than $100.00, for purposes
of this Agreement, the Average Closing Price shall be deemed to be equal to
-3-
<PAGE>
$100.00; (ii) the word "Subsidiary" when used with respect to any Person means
any corporation or other organization, whether incorporated or unincorporated,
of which (A) at least fifty percent (50%) of the securities or other interests
having by their terms ordinary voting power to elect a majority of the board of
directors or others performing similar functions with respect to such
corporation or other organization is directly or indirectly owned or controlled
by such Person or by any one or more of its Subsidiaries; or (B) such Person or
any other Subsidiary of such Person is a general partner, it being understood
that representations and warranties of a Person concerning any former Subsidiary
of such Person shall be deemed to relate only to the periods during which such
former Subsidiary was a Subsidiary of such Person; and (iii) the word "Person"
means an individual, a corporation, a limited liability company, a partnership,
an association, a trust or any other entity or organization, including a
government or political subdivision or any agency or instrumentality thereof.
(f) In the event that the actual Average Closing Price is greater than
$195.00, the Purchase Price shall be deemed to be seventy-five million dollars
($75,000,000) and the Average Closing Price shall be the actual Average Closing
Price.
1.5. Convertible Securities.
(a) Stock Options. All options to acquire Company Common Stock
(individually, a "Company Option" and collectively, the "Company Options")
outstanding at the Effective Time under the Company's 1992 Incentive Stock
Option Plan or any other stock option agreement (collectively, the "Company
Stock Option Plans"), shall, by virtue of the Merger and without any further
action on the part of the Company or the holder of such Company Options, convert
into an option (a "Replacement Option") to acquire, upon the same terms and
conditions as under the applicable Company Stock Option Plan and the applicable
option agreement, into the whole number of shares of RealNetworks Common Stock
(rounded down to the nearest whole share) equal to the number of shares of
Company Common Stock subject to the unexercised portion of such Company Option
multiplied by the Exchange Ratio at an option exercise price per share of
RealNetworks Common Stock equal to the option exercise price per share of
Company Common Stock subject to such Company Option in effect at the Effective
Time divided by the Exchange Ratio (the option price per share, as so
determined, being rounded up to the nearest full cent). No payment shall be made
for fractional interests. The term, exercisability, vesting schedule, and all of
the other terms of the Replacement Options shall otherwise be the same as for
the replaced Company Option unless modified by or as a result of the transaction
contemplated by this Agreement. In no event shall the holder of any Company
Option to which Section 421 of the Code applies receive any additional benefits
under such Company Option by reason of this Section 1.5 which such holder did
not have prior to the Effective Time. RealNetworks shall take all corporate
actions necessary to reserve for issuance such number of shares of RealNetworks
Common Stock as will be necessary to satisfy exercises in full of all Company
Options after the Effective Time.
-4-
<PAGE>
(b) Warrants. Each outstanding warrant to purchase securities of the
Company shall be assumed by RealNetworks and shall constitute a warrant to
acquire, on the same terms and conditions as were applicable under such assumed
warrant, that a number of shares of RealNetworks Common Stock equal to the
product of the Exchange Ratio and the number of shares of Company Common Stock
subject to such warrant, at a price per share equal to the aggregate exercise
price for the shares of Company Common Stock subject to such warrant divided by
the number of full shares of RealNetworks Common Stock deemed to be purchasable
pursuant to such warrant; provided, however, that the number of shares of
RealNetworks Common Stock that may be purchased upon exercise of such warrant
shall not include any fractional shares. Promptly after the Effective Date,
RealNetworks shall deliver to holders of warrants appropriate warrant agreements
representing the right to acquire shares of RealNetworks Common Stock on the
same terms and conditions as contained in the outstanding warrants (subject to
any adjustments required by the preceding sentence), upon surrender of the
outstanding warrants.
1.6. Exchange of Certificates Representing Company Common Stock and
Preferred Stock.
(a) ChaseMellon Shareholder Services, L.L.C. shall act as exchange agent
(the "Exchange Agent") in the Merger.
(b) As of the Effective Time and in any event, no later than three (3)
business days after the Effective Time, RealNetworks shall deposit or cause to
be deposited with the Exchange Agent for exchange in accordance with this
Article I, the shares of RealNetworks Common Stock issuable pursuant to Section
1.4 in exchange for shares of Company Common Stock or Preferred Stock
outstanding at the Effective Time.
(c) On or promptly after the Effective Time, RealNetworks shall cause the
Exchange Agent to mail to each holder of record of shares of Company Common
Stock (i) a letter of transmittal which shall specify that delivery shall be
effected, and risk of loss and title to such shares of Company Common Stock
shall pass, only upon delivery of the Certificates representing such shares to
RealNetworks; and (ii) instructions for use in effecting the surrender of such
Certificates in exchange for the consideration to be received by such holder
pursuant to Sections 1.4 and 1.6 hereof. Upon surrender of a Certificate
representing shares of Company Common Stock or Preferred Stock for cancellation
to RealNetworks, together with such letter of transmittal, duly executed and
completed in accordance with the instructions thereto, the holder of the shares
represented by such Certificate shall be entitled to receive in exchange
therefor, a certificate representing that number of whole shares of RealNetworks
Common Stock and a check representing the amount of unpaid dividends and
distributions, if any, which such holder has the right to receive in respect of
the Certificate surrendered pursuant to the provisions of this Section 1.6,
after giving effect to any required withholding tax, and the shares represented
by the Certificate so surrendered shall forthwith be canceled. No interest will
be paid or accrued on the unpaid dividends and distributions, if any, payable to
holders of shares of Company
-5-
<PAGE>
Common Stock who receive shares of RealNetworks Common Stock pursuant to Section
1.4 hereof. In the event of a transfer of ownership of Company Common Stock
which is not registered in the transfer records of the Company, the
consideration to be paid to such holder of Company Common Stock or Preferred
Stock pursuant to Sections 1.4 and 1.6 hereof may be issued to such a transferee
if the Certificate representing such Company Common Stock or Preferred Stock is
presented to RealNetworks, accompanied by all documents required to evidence and
effect such transfer and to evidence that any applicable stock transfer taxes
have been paid or, alternatively, payments of such transfer tax to the Exchange
Agent. Until so surrendered, each Certificate that, at the Effective Time,
represented shares of Company Common Stock will be deemed from and after the
Effective Time, for all corporate purposes other than the payment of dividends
(except to the extent provided in Section 1.6(d) below), to evidence the
consideration to be received by the holders of Company Common Stock pursuant to
Sections 1.4 and 1.6 hereof.
(d) As of the Effective Time, RealNetworks shall deposit or cause to be
deposited with the Escrow Agent a Certificate (issued in the name of the Escrow
Agent or its nominee) representing the RealNetworks Common Stock deposited in
the Escrow (the "Escrow Shares"), as described in Section 1.4(b), for the
purpose of satisfying any entitlement it may have to receive indemnity under the
provisions of Article VIII hereunder (other than any entitlement it may have to
additional indemnity directly from the Executive Shareholders for intentional
fraud or willful misconduct (other than a breach of contract)). The Escrow
Shares shall be held by the Escrow Agent under the Escrow Agreement, pursuant to
the terms thereof and shall be disbursed in accordance with the terms of the
Escrow Agreement. The adoption of this Agreement and the approval of the Merger
by the Shareholders shall constitute approval of the Escrow Agreement and of all
of the arrangements relating thereto, including without limitation the placement
of the Escrow Shares in escrow and the appointment of the Indemnity
Representative (as defined herein). Any shares of RealNetworks Common Stock or
other equity securities issued or distributed by RealNetworks (including shares
issued upon a stock split) ("New Shares") in respect of RealNetworks Common
Stock in the Escrow which have not been released from the Escrow shall be added
to the Escrow and become a part thereof. New Shares issued in respect of the
RealNetworks Common Stock which have been released from the Escrow shall not be
added to the Escrow, but shall be distributed to the holders thereof. When and
if cash dividends on RealNetworks Common Stock in the Escrow shall be declared
and paid, they shall not be added to the Escrow, but shall be paid to those on
whose behalf such RealNetworks Common Stock is held who, at the Effective Time,
held Company Common Stock or Preferred Stock. Each Shareholder shall have voting
rights with respect to the shares of RealNetworks Common Stock contributed to
the Escrow on behalf of such Shareholder (and on any voting securities added to
the Escrow in respect of such shares of RealNetworks Common Stock) so long as
such shares of RealNetworks Common Stock or other voting securities are held in
the Escrow. As the record holder of such shares, the Escrow Agent shall vote
such shares in accordance with the instructions of the Shareholders having the
beneficial interest therein and shall promptly deliver copies of all proxy
solicitation materials to such Shareholders.
-6-
<PAGE>
RealNetworks shall show the RealNetworks Common Stock contributed to the Escrow
Fund as issued and outstanding on its balance sheet.
(e) Notwithstanding anything to the contrary contained herein, no
dividends or other distributions declared after the Effective Time on
RealNetworks Common Stock shall be paid with respect to any shares of Company
Common Stock represented by a Certificate until such Certificate is surrendered
for exchange as provided herein. Subject to the effect of applicable laws,
following surrender of any such Certificate, there shall be paid to the holder
of the certificates representing whole shares of RealNetworks Common Stock
issued in exchange therefor, without interest, (i) at the time of such
surrender, the amount of dividends or other distributions with a record date
after the Effective Time theretofore payable with respect to such whole shares
of RealNetworks Common Stock and not paid, less the amount of any withholding
taxes which may be required thereon; and (ii) at the appropriate payment date,
the amount of dividends or other distributions with a record date after the
Effective Time but prior to surrender and a payment date subsequent to surrender
payable with respect to such whole shares of RealNetworks Common Stock, less the
amount of any withholding taxes which may be required thereon.
(f) At or after the Effective Time, there shall be no transfers on the
stock transfer books of the Company of the shares of Company Common Stock which
were outstanding at the Effective Time. If, after the Effective Time,
Certificates are presented to the Surviving Corporation, they shall be canceled
and exchanged for the consideration set forth in this Article I deliverable in
respect thereof pursuant to this Agreement in accordance with the procedures set
forth in this Section 1.6. Certificates surrendered for exchange by any person
constituting an "affiliate" of the Company for purposes of Rule 145(c) under the
Securities Act of 1933, as amended (the "Securities Act"), shall not be
exchanged until RealNetworks has received an Affiliate Letter (as defined
herein) from such person as provided in Section 5.8.
(g) No fractional shares of RealNetworks Common Stock shall be issued
pursuant hereto. In lieu of the issuance of any fractional share of RealNetworks
Common Stock pursuant to Section 1.4, the aggregate number of shares of
RealNetworks Common Stock a Shareholder is entitled to receive shall be rounded
to the nearest whole share, with 0.5 rounded upward.
(h) All former Shareholders of the Company shall look only to RealNetworks
for payment of shares of RealNetworks Common Stock and unpaid dividends and
distributions on the RealNetworks Common Stock deliverable in respect of each
share of Company Common Stock such Shareholder holds as determined pursuant to
this Agreement, in each case, without any interest thereon.
(i) None of RealNetworks, Purchaser, the Company, the Surviving
Corporation or any other person shall be liable to any former holder of shares
of Company Common
-7-
<PAGE>
Stock for any amount properly delivered to a public official pursuant to
applicable abandoned property, escheat or similar laws.
(j) In the event any Certificate shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
such Certificate to be lost, stolen or destroyed and, if required by the
Surviving Corporation, the posting by such person of a bond in such reasonable
amount as the Surviving Corporation may direct as indemnity against any claim
that may be made against it with respect to such Certificate, RealNetworks will
issue in exchange for such lost, stolen or destroyed Certificate, the
consideration to be received by the holder of such Certificate pursuant to
Sections 1.4 and 1.6 hereof.
(k) Any portion of the property delivered to the Exchange Agent in
accordance with this Section 1.6 that remains unclaimed by the Shareholders one
year after the Effective Time shall be delivered to RealNetworks. Any
Shareholder who has not theretofore complied with this Section 1.6 shall
thereafter look only to RealNetworks for payment of their consideration to be
received by such Shareholder pursuant to Sections 1.4 and 1.6 hereof deliverable
in respect of each share of the Company Common Stock or Preferred Stock such
Shareholder holds as determined pursuant to this Agreement, in each case,
without any interest thereon.
1.7. Adjustment of Exchange Ratio. In the event that, subsequent to the
date of this Agreement but prior to the Effective Time, the outstanding shares
of RealNetworks Common Stock or Company Common Stock shall have been changed
into a different number of shares or a different class as a result of a stock
split, reverse stock split, stock dividend, subdivision, reclassification,
split, combination, exchange, recapitalization or other similar transaction, the
Exchange Ratio and the Average Closing Price shall be appropriately adjusted.
1.8. Dissenting Shares. Notwithstanding anything to the contrary
contained in this Agreement, in the event appraisal rights are available to the
Shareholders pursuant to applicable law, any shares of Company Common Stock held
by a person who objects to the Merger and who complies with all of the
provisions of applicable law concerning the rights of such person to dissent
from the Merger and to require appraisal of such person's shares of Company
Common Stock (the "Company Dissenting Shares"), shall not be converted into the
right to receive shares of RealNetworks Common Stock pursuant to Section 1.4 of
this Agreement but shall become the right to receive such consideration as may
be determined to be due to the holder of such Company Dissenting Shares pursuant
to applicable law; provided however, that the Company Dissenting Shares held by
a person at the Effective Time who shall, after the Effective Time, withdraw the
demand for appraisal or lose the right to appraisal, in either case pursuant to
applicable law, shall be deemed to have converted, as of the Effective Time, his
or her shares of Company Common Stock or Preferred Stock into shares of
RealNetworks Common Stock pursuant to Section 1.4 of this Agreement.
1.9. Accounting Treatment. It is intended by the parties hereto that the
Merger be accounted for as a pooling of interests.
-8-
<PAGE>
1.10. Indemnity Representative. By approving the Merger at a special
meeting of Shareholders or by written consent of the Shareholders, each
Shareholder shall irrevocably approve the appointment of Hassan Miah, in
consultation with Sumitomo Corporation, and if Hassan Miah is unavailable,
Sumitomo Corporation, as the Indemnity Representative hereunder, with full power
of substitution and resubstitution, to have all of the powers and authority of
the Indemnity Representative hereunder and under the Escrow Agreement with
respect to the Escrow, the Escrow Shares and the Escrow Agreement. The Indemnity
Representative is not, and shall not be deemed or construed to be, the agent of
any party hereto or of any Shareholder or of any Indemnitee with respect to the
Indemnity Representative's rights, powers, duties and obligations hereunder and
under the Escrow Agreement, and Indemnity Representative shall have no fiduciary
or other obligation to any such person arising from its appointment as Indemnity
Representative hereunder. The Indemnity Representative shall not be liable to
any party hereto, to any Shareholder or to any Indemnitee for any acts or
omissions taken within the scope of the Indemnity Representative's authority
hereunder and under the Escrow Agreement, whether or not such acts or omissions
are negligent, grossly negligent, willful or otherwise. Under no circumstances
shall the Indemnity Representative have any liability to the Shareholders, the
Company, RealNetworks, the Surviving Corporation, or the Escrow Agent, for the
exercise of his or its business judgment, in his or its respective sole and
absolute discretion.
1.11. Taking of Necessary Action; Further Action. If, at any time after
the Effective Time, any further action is necessary or desirable to carry out
the purposes of this Agreement and to vest the Surviving Corporation with full
right, title and possession to all assets, property, rights, privileges, powers
and franchises of the Company and Purchaser, the officers and directors of the
Company and Purchaser are fully authorized in the name of their respective
corporations or otherwise to take, and will take, all such lawful and necessary
action, so long as such action is consistent with this Agreement.
1.12. Transfer Taxes. All stock transfer, transfer gains, documentary,
stamp, registration and other similar Taxes and fees incurred by the
Shareholders in connection with the Merger shall by borne by the Shareholders.
ARTICLE II
CERTAIN MATTERS RELATING TO
THE SURVIVING CORPORATION
2.1. Certificate of Incorporation of the Surviving Corporation. The
certificate of incorporation of Purchaser in effect at the Effective Time shall
be the articles of incorporation of the Surviving Corporation until amended in
accordance with its terms and pursuant to applicable law; provided however, that
Article I of the Articles of Incorporation of the Surviving Corporation shall be
amended to read as follows: "The name of the corporation is Xing Technology
Corporation".
-9-
<PAGE>
2.2. Bylaws of the Surviving Corporation. The Bylaws of Purchaser in
effect at the Effective Time shall be the Bylaws of the Surviving Corporation
until amended in accordance with the terms of such Bylaws and pursuant to
applicable law and the Articles of Incorporation of the Surviving Corporation.
2.3. Directors of the Surviving Corporation. The directors of the
Surviving Corporation immediately after the Effective Time shall consist of the
persons listed on Schedule 2.3 attached hereto, to hold office until their
successors are duly appointed or elected in accordance with applicable law.
2.4. Officers of the Surviving Corporation. The officers of the Surviving
Corporation immediately after the Effective Time shall consist of the persons
listed on Schedule 2.4 attached hereto who shall hold the offices listed
opposite their respective names until their successors are duly appointed or
elected in accordance with applicable law.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
OF REALNETWORKS AND THE PURCHASER
RealNetworks and Purchaser represent and warrant to the Company that the
statements contained in this Article III are true and correct, except as set
forth in the disclosure statement delivered by RealNetworks and Purchaser to the
Company concurrently herewith and identified as the "RealNetworks Disclosure
Statement." All exceptions noted in the RealNetworks Disclosure Statement shall
be numbered to correspond to the applicable sections to which such exception
refers.
3.1. Existence, Good Standing, Corporate Authority. Each of RealNetworks
and Purchaser (i) is a corporation duly incorporated, validly existing and in
good standing under the laws of its respective jurisdiction of incorporation;
and (ii) has all requisite power and authority to own or lease, and operate its
properties and assets, and to carry on its business as now conducted and as
currently proposed to be conducted, except where the failure to have such power
and authority would not have a RealNetworks Material Adverse Effect (as defined
herein) and to consummate the transactions contemplated hereby. The copies of
RealNetworks' and Purchaser's Articles of Incorporation and Bylaws as in effect
on the date hereof have been previously delivered to the Company or have been
made available for the Company's review and are true and correct. For purposes
of this Agreement: (a) a "RealNetworks Material Adverse Effect" means (i) a
material adverse effect on the business, results of operations, financial
condition or prospects of RealNetworks and its Subsidiaries, taken as a whole,
or (ii) a material impairment in the ability of RealNetworks or its Subsidiaries
to perform any of their obligations under this Agreement or to consummate the
Merger; and (b) a "Company Material Adverse Effect" means: (i) a material
adverse effect on the business, results of operations, financial condition or
prospects of the Company and its Subsidiaries, taken as a whole, or (ii) a
material impairment in the ability of the Company or
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its Subsidiaries to perform any of their obligations under this Agreement or to
consummate the Merger.
3.2. Authorization of Agreement and Other Documents. The execution and
delivery of this Agreement and the other documents executed or to be executed in
connection herewith to which RealNetworks or Purchaser is a party (collectively,
the "RealNetworks Operative Documents"), have been duly authorized by the Board
of Directors of RealNetworks and Purchaser and no other proceedings on the part
of RealNetworks or Purchaser or their shareholders are necessary to authorize
the execution, delivery or performance of this Agreement or any RealNetworks
Operative Document. This Agreement is, and as of the Closing Date each of the
RealNetworks Operative Documents will be, a valid and binding obligation of
RealNetworks and/or Purchaser, as the case may be, enforceable against
RealNetworks and/or Purchaser, as the case may be, in accordance with its terms,
except to the extent that enforcement thereof may be limited by bankruptcy,
insolvency, reorganization, moratorium, fraudulent conveyance or other similar
laws affecting enforcement of creditors' rights generally, and by general
principles of equity (regardless of whether enforcement is considered in a
proceeding at law or in equity).
3.3. No Violation. Neither the execution and delivery by RealNetworks and
Purchaser of this Agreement or the RealNetworks Operative Agreements, nor the
consummation by RealNetworks and Purchaser of the transactions contemplated
hereby and thereby in accordance with their respective terms, will (a) conflict
with or result in a breach of any provisions of the Articles of Incorporation or
Bylaws of RealNetworks or Purchaser; (b) require any consent, approval or
authorization of any Person, other than the filings provided for in Section 1.3,
filings required under the Hart-Scott-Rodino Antitrust Improvements Act of 1976
(the "HSR Act"), if any, the Securities Exchange Act of 1934 (the "Exchange
Act"), the Securities Act, or applicable state securities and "Blue Sky" laws or
filings in connection with the maintenance of qualification to do business in
other jurisdictions (collectively, the "Regulatory Filings"); or (c) contravene
or conflict with or constitute a violation of any provision of any law,
regulation, judgement, injunction, order or decree binding upon or applicable to
RealNetworks or Purchaser, except for any of the foregoing matters which would
not have a RealNetworks Material Adverse Effect.
3.4. SEC Documents. RealNetworks has delivered or made available to the
Company true and complete copies of its Annual Report on Form 10-K for the
fiscal year ended December 31, 1998 (the "Form 10-K"), and will deliver or make
available true and complete copies of its Proxy Statement related to its 1999
Annual Meeting of Shareholders ("1999 Proxy"), any Reports on Form 8-K filed
after the date of the Form 10-K (each, a "Form 8-K"), and any of its Quarterly
Reports on Form 10-Q filed after the date of the Form 10-K (each, a "Form 10-
Q"), each in the form (including exhibits and any amendments thereto) filed with
the Securities and Exchange Commission ("SEC") (collectively, the "RealNetworks
Reports"). As of their respective dates, the RealNetworks Reports complied or,
will comply, as to form in all material respects with the applicable
requirements of the
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Exchange Act, and the rules and regulations of the SEC promulgated thereunder.
The RealNetworks Reports did not at the time they were filed (or if amended or
superceded by a subsequent filing, then on the date of such filing), or, with
respect to the 1999 Proxy, any Form 8-K or any Form 10-Q, will not at the time
they are filed (or if amended or superceded by any subsequent filing, then on
the date of such filing) contain any untrue statement of a material fact or omit
to state a material fact necessary in order to make the statements therein, in
light of the circumstances in which they were made, not misleading.
3.5. No Brokers. RealNetworks has not entered into any contract,
arrangement or understanding with any person or firm which may result in the
obligation of the Company or RealNetworks, Purchaser or their respective
Subsidiaries to pay any finder's fee, brokerage or agent's commissions or other
like payments in connection with the negotiations leading to this Agreement or
the consummation of the transactions contemplated hereby.
3.7. RealNetworks Common Stock. The issuance and delivery by RealNetworks
of shares of RealNetworks Common Stock in connection with the Merger and this
Agreement have been duly and validly authorized by all necessary corporate
action on the part of RealNetworks. The shares of RealNetworks Common Stock to
be issued in connection with the Merger and this Agreement, when issued in
accordance with the terms of this Agreement, will be validly issued, fully paid
and nonassessable and free of preemptive rights.
3.8. Capitalization. The total authorized capital stock of RealNetworks
consists of (i) 300,000,000 shares of RealNetworks Common Stock, which is
divided into common stock and special common stock ("Special Common Stock"), of
which there were 33,329,559 shares of RealNetworks common stock and 500,000
shares of Special Common Stock issued and outstanding as of April 1, 1999 and
(ii) 60,000,000 shares of RealNetworks preferred stock, par value $0.001 per
share, none of which are issued and outstanding as of the date of this
Agreement. The authorized capital stock of Purchaser consists of 1000 shares of
Common Stock, $.01 par value per share, 100 shares of which, as of the date
hereof, are issued and outstanding and are held by RealNetworks. There are no
shares of capital stock of RealNetworks or Purchaser of any other class
authorized, issued or outstanding. The RealNetworks Common Stock is listed for
trading on NASDAQ, no suspension of trading in the RealNetworks Common Stock is
in effect, or to RealNetworks' knowledge, threatened, and the RealNetworks
Common Stock meets the criteria for listing on NASDAQ.
3.9. Hearing Notice and Proxy Statement. At the time the notice of the
hearing (the "Hearing Notice") to be held by the California Commissioner of
Corporations to consider the terms, conditions and fairness of the transactions
contemplated hereby (the "Hearing") pursuant to Section 25142 of the Corporate
Securities Law of 1968 of the State of California (the "California Law") shall
be mailed to the Shareholders, and at the time the information statement to be
delivered to the Shareholders in connection with the solicitation of written
consents or the shareholder meeting of the Company to vote on the Merger and the
other transactions contemplated hereby (the "Proxy Statement") shall be
delivered to the
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Shareholders, and at all times subsequent to such dates up to and including the
date of the shareholder meeting and the Effective Time, such Hearing Notice,
with respect to all information (other than written information with respect to
the Company furnished to RealNetworks by the Company specifically for inclusion
therein, as to which no representation or warranty is hereby made) set forth
therein, and such Proxy Statement, with respect to information (including all
financial data) set forth therein with respect to RealNetworks or Purchaser
furnished to the Company by RealNetworks or Purchaser for inclusion therein,
respectively, will not contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary to make
the statements or information contained therein, in the light of the
circumstances under which such statements are made, not misleading.
3.10. Securities Act Exemption. The RealNetworks Common Stock to be issued
pursuant to this Agreement and the Articles of Merger will be exempt from the
registration requirements of the Securities Act by virtue of Section 3 (a)(10)
thereunder.
3.11. Accounting Treatment. RealNetworks has not taken or failed to take
any action which would prevent the Merger from being treated as a "pooling of
interests" in accordance with Accounting Principles Board Opinion No. 16, the
interpretative releases issued pursuant thereto, and the pronouncements of the
SEC.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to RealNetworks and Purchaser that the
statements contained in this Article IV are true and correct, except as set
forth in the disclosure statement delivered by the Company to RealNetworks and
Purchaser concurrently herewith and identified as the "Disclosure Statement."
All exceptions noted in the Disclosure Statement shall be numbered to correspond
to the applicable sections to which such exception refers. As used herein in
connection with a specific representation or warranty, "knowledge" of the
Company means that arising from the actual knowledge of one or more of Hassan
Miah, Dean Kaplan or Howard Gordon, acquired in the course of their performance
as executive officers or directors of the Company. For purposes of this Article
IV, other than Sections 4.3 and 4.29(b), the term "Subsidiaries" shall not
include Xing Technology Japan Corporation, an entity organized under the laws of
Japan ("XTJ").
4.1. Organization, Standing and Qualification. The Company and each of
its Subsidiaries, each of which is listed in Section 4.3 of the Disclosure
Statement, (i) is a corporation duly organized, validly existing and in good
standing under the laws of its respective jurisdiction of incorporation; (ii)
has all requisite power and authority to own or lease, and operate their
respective properties and assets, and to carry on their respective businesses as
now conducted and as currently proposed to be conducted except where the failure
to have such power and authority would not have a Company Material Adverse
Effect and to consummate the transactions contemplated hereby; (iii) is duly
qualified or licensed to
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do business and is in good standing in all jurisdictions in which they own or
lease property or in which the conduct of their respective businesses requires
them to so qualify or be licensed except where the failure to so qualify,
individually or in the aggregate, would not have a Company Material Adverse
Effect; and (iv) has obtained all licenses, permits, franchises and other
governmental authorizations necessary to the ownership or operation of their
respective properties or the conduct of their respective businesses except where
the failure to have obtained such licenses, permits, franchises or
authorizations would not have a Company Material Adverse Effect.
4.2. Capitalization.
(a) The total authorized capital stock of the Company consists of (i)
20,000,000 shares of common stock, no par value per share, 8,735,240 shares of
which are issued and outstanding as of the date of this Agreement; (ii)
5,000,000 shares of preferred stock, no par value per share, of which (A)
390,000 shares are designated Series A Convertible Preferred Stock, 387,000
shares of which are issued and outstanding as of the date of this Agreement; and
(B) 2,300,000 shares are designated Series B Convertible Preferred Stock,
2,285,716 shares of which are issued and outstanding as of the date of this
Agreement. There are no shares of capital stock of the Company of any other
class authorized, issued or outstanding. As of the date of this Agreement, the
Company Common Stock and the Preferred Stock are owned of record by the
Shareholders in the amounts set forth in the Disclosure Statement.
(b) Except as set forth in the Disclosure Statement, each share of the
outstanding Company Common Stock and Preferred Stock is (i) duly authorized and
validly issued; (ii) fully paid and nonassessable and free of preemptive rights;
and (iii) to the knowledge of the Company, with respect to the shares of Company
Common Stock and Preferred Stock owned by the directors and officers of the
Company, free and clear of all liens, pledges, security interests, claims or
other encumbrances and restrictions on voting and transfer other than
restrictions on transfer imposed by Federal and state securities laws.
(c) Except as set forth in the Disclosure Statement, there are currently
no outstanding, and as of the Closing there will be no outstanding, (i)
securities convertible into or exchangeable for any capital stock of the Company
or any of its Subsidiaries, (ii) options, warrants or other rights to purchase
or subscribe to capital stock of the Company or any of its Subsidiaries or
securities convertible into or exchangeable for capital stock of the Company or
any of its Subsidiaries, (iii) contracts, commitments, agreements,
understandings, arrangements, calls or claims of any kind to which the Company
or any of its Subsidiaries is a party or is bound relating to the issuance,
registration or voting of any capital stock of the Company or any of its
Subsidiaries, or loans, leases or other instruments representing indebtedness of
the Company or any of its Subsidiaries which may be convertible into any capital
stock of the Company or any of its Subsidiaries. The Disclosure Statement
identifies, as of the date hereof, the holder, the number of shares subject to
each convertible security, the conversion or exercise price, the vesting
schedule and the expiration date of each outstanding right to acquire capital
stock of the Company or any of its Subsidiaries.
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<PAGE>
4.3. Subsidiaries. The Company owns directly or indirectly each of the
outstanding shares of capital stock (or other ownership interests having by
their terms ordinary voting power to elect a majority of directors or others
performing similar functions with respect to such Subsidiary) of each of the
Company's Subsidiaries. Each of the outstanding shares of capital stock owned by
the Company of each of the Company's Subsidiaries is duly authorized, validly
issued, fully paid and nonassessable, and is owned, directly or indirectly, by
the Company free and clear of all liens, pledges, security interests, claims or
other encumbrances other than liens imposed by local law which are not material.
The following information for each Subsidiary of the Company is listed in the
Disclosure Statement, if applicable: (a) its name and jurisdiction of
incorporation or organization; (b) the location of its chief executive office;
(c) a summary of its lines of business and products; (d) its authorized capital
stock or share capital; (e) the number of issued and outstanding shares of
capital stock or share capital; and (f) the owner of each issued and outstanding
share of capital stock.
4.4. Ownership Interests. Except for the interests in the Company's
Subsidiaries and the interests disclosed in the Disclosure Statement, neither
the Company nor any of its Subsidiaries owns any direct or indirect interest in
any corporation, joint venture, limited liability company, partnership,
association or other entity. Except as set forth in the Disclosure Statement or
in the Financial Statements, the Company has not (i) disposed of the capital
stock (other than Company Common Stock) or all or substantially all of the
assets of any ongoing business, or (ii) purchased the business and/or all or
substantially all of the assets of another person, firm or corporation (whether
by purchase of stock, assets, merger or otherwise).
4.5. Constituent Documents. Except as set forth in the Disclosure
Statement, true and complete copies of the Articles of Incorporation and all
amendments thereto, the Bylaws as amended and currently in force, all stock
records, and all corporate minute books and records of the Company and each of
its Subsidiaries have been furnished or made available by the Company to
RealNetworks for inspection.
4.6. Authorization of Agreement and Other Documents.
(a) The execution and delivery of this Agreement and the other documents
executed or to be executed in connection herewith to which the Company or any
Shareholder is a party (collectively, the "Company Operative Documents"), have
been duly authorized by the Board of Directors of the Company (the "Board") and
no other proceedings on the part of the Company are necessary to authorize the
execution, delivery or performance of this Agreement or any Company Operative
Document, except the approval of the Merger, this Agreement and the transactions
contemplated hereby by the Shareholders. This Agreement is, and as of the
Closing Date, each of the Company Operative Documents will be, a valid and
binding obligation of the Company, enforceable against the Company in accordance
with its terms, except to the extent that enforcement thereof may be limited by
bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or
other similar laws
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affecting enforcement of creditors' rights generally, and by general principles
of equity (regardless of whether enforcement is considered in a proceeding at
law or in equity) and subject to the receipt of Shareholder approval of the
Merger.
(b) The execution and delivery of this Agreement and the Company Operative
Documents by each Executive Shareholder, have, with respect to each Executive
Shareholder, been duly authorized by such Executive Shareholder and no other
proceedings on the part of such Executive Shareholder are necessary to authorize
the execution, delivery or performance of this Agreement or any Company
Operative Document. This Agreement is, and as of the Closing Date, each of the
Company Operative Documents will be, a valid and binding obligation of the
Executive Shareholders, enforceable against the Executive Shareholders in
accordance with its terms, except to the extent that enforcement thereof may be
limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent
conveyance or other similar laws affecting enforcement of creditors' rights
generally, and by general principles of equity (regardless of whether
enforcement is considered in a proceeding at law or in equity).
4.7. No Violation. Except as set forth in the Disclosure Statement,
neither the execution and delivery of this Agreement nor the Company Operative
Documents by the Company nor the consummation by the Company of the transactions
contemplated hereby and thereby in accordance with their respective terms, will
(a) conflict with or result in a breach of any provisions of the Articles of
Incorporation or Bylaws of the Company or any of its Subsidiaries; (b) except
for Company Options held by the Executive Shareholders and Robert Kavner, result
in a breach or violation of, a default under, or the triggering of any payment
or other material obligations pursuant to, or accelerate vesting under, any of
the Company Stock Option Plans, or any grant or award made under any of the
foregoing; (c) violate, conflict with, result in a breach of any provision of,
constitute a default (or an event which, with notice or lapse of time or both,
would constitute a default) under, result in the termination, or in a right of
termination or cancellation of, accelerate the performance required by, result
in the triggering of any payment or other material obligations pursuant to,
result in the creation of any lien, security interest, charge or encumbrance
upon any of the material properties of the Company or any of its Subsidiaries
under, or result in being declared void, voidable, or without further binding
effect, any of the terms, conditions or provisions of any note, bond, mortgage,
indenture, deed of trust or any material license, franchise, permit, lease,
contract, agreement or other instrument, commitment or obligation to which the
Company or any of its Subsidiaries is a party, or by which the Company or any of
its Subsidiaries or any of their respective properties is bound or affected; (d)
contravene or conflict with or constitute a violation of any provision of any
law, regulation, judgment, injunction, order or decree binding upon or
applicable to the Company or any of its Subsidiaries, except for any of the
foregoing matters which would not have a Company Material Adverse Effect; or (e)
other than the Regulatory Filings, require any material consent, approval or
authorization of, or declaration of, or filing or registration with, any
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domestic governmental or regulatory authority, the failure to obtain or make
which would have a Company Material Adverse Effect.
4.8. Compliance with Laws.
(a) The Company and each of its Subsidiaries hold all permits, licenses,
variances, exemptions, orders and approvals of any court, arbitrator, tribunal,
administrative agency or commissioner or other governmental or other regulatory
authority or agency ("Governmental Entities") necessary for the lawful conduct
of its business (the "Permits"), except where the failure to hold such Permits
would not have a Company Material Adverse Effect.
(b) The Company and its Subsidiaries are in compliance with the terms of
their Permits, except where the failure to be in compliance would not have a
Company Material Adverse Effect.
(c) The Company and its Subsidiaries are in compliance with all laws,
ordinances or regulations of all Governmental Entities (including, but not
limited to, those related to occupational health and safety, controlled
substances, employment and employment practices and Environmental Laws, as
defined herein) that are applicable to the Company or any of its Subsidiaries or
affect or relate to this Agreement or the transactions contemplated hereby,
except for any noncompliance that would not have a Company Material Adverse
Effect.
(d) Neither the Company nor any of its Subsidiaries is subject to any
written agreement, contract or decree with any Governmental Entities arising out
of any current or previously existing violations of any laws, ordinances or
regulations applicable to the Company or any of its Subsidiaries.
(e) For the purposes of this Agreement, "Environmental Laws" means all
federal, state and local statutes, regulations, ordinances, rules, regulations
and policies, all court orders and decrees and arbitration awards, and the
common law, which pertain to environmental matters or contamination of any type
whatsoever.
4.9. Books and Records. The Company's and its Subsidiaries' books,
accounts and records are, and have been, in all material respects, maintained in
the Company's and its Subsidiaries usual, regular and ordinary manner, and all
material transactions to which the Company or any of its Subsidiaries is or has
been a party are properly reflected therein.
4.10 Financial Statements. The Disclosure Statement contains complete and
accurate copies of the audited balance sheets, statements of income and
shareholders' equity, statements of cash flows and notes to financial statements
(together with any supplementary information thereto) of the Company as of and
for the fiscal years ended June 30, 1997 and 1996. The financial statements
described in the preceding sentence are hereinafter referred to as the
"Financial Statements." The Disclosure Statement also contains complete and
accurate
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copies of the unaudited balance sheet, unaudited statement of income and
unaudited statement of cash flows of the Company as of and for the eight-month
period ended February 28, 1999. The financial statements described in the
preceding sentence are referred to herein as the "Interim Financial Statements".
The Financial Statements fairly present, and the audited balance sheet,
statement of income and shareholders' equity, statement of cash flows and notes
to financial statements of the Company as of and for the fiscal year ended June
30, 1998, and the audited balance sheet, statement of income, statement of cash
flows and notes to financial statements of the Company for the eight month
period ended February 28, 1999 (the "Audited Interim Financial Statements"),
when delivered to RealNetworks hereunder, will fairly present, in all material
respects, the financial position of the Company as of the dates thereof
(subject, in the case of the Audited Interim Financial Statements, to normal
year-end audit adjustments) and the results of operations and cash flows of the
Company for the periods covered by said statements, in accordance with generally
accepted accounting principals consistently applied ("GAAP") (except as may be
indicated in the notes thereto), except that the Audited Interim Financial
Statements do not include footnotes. Since June 30, 1997, there has been no
change in the Company's accounting methods or principles except as described in
the notes to the Financial Statements. The Company has provided to RealNetworks
or its counsel complete and correct copies of all attorneys' written responses
to audit inquiry letters and all management letters from the Company's
independent certified public accountants received by it for the last three (3)
fiscal years of the Company. The Company will use its best efforts to cause its
independent auditors to provide to RealNetworks the work papers supporting the
Financial Statements and the Audited Interim Financial Statements.
4.11. Bank Accounts. The Disclosure Statement contains a list showing: (a)
the name of each bank, safe deposit company or other financial institution in
which the Company or any of its Subsidiaries has an account, lock box or safe
deposit box; and (b) all instruments or agreements to which the Company or any
of its Subsidiaries is a party as an endorser, surety or guarantor, other than
checks or other instruments endorsed for collection or deposit.
4.12. Intellectual Property.
(a) Intellectual Property Definitions. For purposes of this Agreement,
the following terms shall have the following meanings: (i) "Computer Programs"
shall mean all of the computer programs, computer systems, modules, CD ROMs and
any related data and materials (whether in source code, object code or other
form) licensed, used or distributed by the Company or its Subsidiaries other
than off-the-shelf products acquired by the Company or its Subsidiaries that are
distributed generally in commerce; (ii) "Intellectual Property" shall means all
forms of industrial or intellectual property and technology, including patents,
patent applications, inventions, whether made, conceived or reduced to practice,
all Trademarks, as defined herein, designs, processes, know-how, technology,
formulae, customer lists, all trade secrets, proprietary information and
copyrights, now used in or
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necessary for the conduct of the Company's or its Subsidiaries respective
businesses or developed, licensed or acquired in connection with the Company's
or its Subsidiaries respective businesses other than offthe-shelf products
acquired by the Company or its Subsidiaries that are distributed generally in
commerce, including, without limiting the generality of the foregoing, all
rights or right to claim or make application, whether in equity or at law or
otherwise, under the laws of copyright, moral rights, neighboring rights,
patent, industrial design, design patent, mask work, integrated circuit
topography, trademark, confidential information or any other industrial or
intellectual property law; (iii) "Technology" shall mean all of the intangible
property and assets of the Company or its Subsidiaries containing Intellectual
Property of the Company including all ongoing business, accrued work in
progress, all of the relationships of the Company or its Subsidiaries with
actual, perspective or potential licensees or customers for any of the Computer
Programs, technology or consulting services of the Company or its Subsidiaries;
and (iv) "Trademarks" shall mean all trademarks, service marks, or design marks,
whether registered or not, slogans, trade names, trade dress and like devices or
means used to distinguish the products or services of the Company or its
Subsidiaries, together with the associated goodwill of each.
(b) The Disclosure Statement identifies all Computer Programs,
Intellectual Property (including but not limited to Trademarks, common law
trademarks, patents and pending applications to patent any technology or design
and all registrations of and applications to register copyrights) and Technology
which are material to the business of the Company or any of its Subsidiaries and
in which the Company or any of its Subsidiaries claims any ownership rights.
(c) Intellectual Property Representations. Except as set forth on the
Disclosure Statement: (i) all of the Intellectual Property is valid and
subsisting and enforceable against any third party; (ii) the Trademarks have all
been used without material interruption by the Company or its Subsidiaries, and
all Trademarks which are registered or are the subject of an application for
registration are used solely as registered or applied for, as applicable; (iii)
no other party has been permitted to use or granted a license to use any of the
Intellectual Property of the Company or its Subsidiaries except for licenses
granted to end users in the ordinary course of business; (iv) the Company or its
Subsidiaries owns all right, title and interest in and to, or otherwise is
entitled to use (as currently used by the Company or such Subsidiary in its
business) the Intellectual Property without payment of any royalty or other
fees; (v) no proceedings have been instituted or, to the knowledge of the
Company or its Subsidiaries, threatened that challenge the right of the Company
or its Subsidiaries to own, use or license others to use any of the Intellectual
Property or to distribute Computer Programs to others; (vi) no: (A) process,
method or algorithm used, practiced, performed, sold or licensed to any party;
(B) product, device or apparatus made, used, produced, sold or licensed to any
party; or (C) service provided by the Company or its Subsidiaries or on their
behalf; nor the conduct of the Company's or its Subsidiaries respective
businesses, infringe any patent, trademark, trade name, trade secret, know-how,
industrial design, design patent, utility model, integrated circuit topography,
mask work, copyright, moral rights, neighboring
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right or other industrial or intellectual property or other right owned or used
by another nor is the subject of any pending or, to the knowledge of the Company
or its Subsidiaries, threatened legal, administrative or regulatory proceedings
or outstanding court order; (vii) neither the Company nor its Subsidiaries has a
pending or, to the knowledge of the Company or its Subsidiaries, potential
claim, demand or allegation charging any party with violation of its rights with
respect to the Intellectual Property, Computer Programs or Technology and
neither knows of such claim; (viii) there is no patent or patent application
nor, to the knowledge of the Company or its Subsidiaries, investigation by any
person that would adversely affect the Company's or its Subsidiaries respective
businesses or any product, apparatus, method, process or design of the Company
or its Subsidiaries; (ix) to the knowledge of the Company or its Subsidiaries,
there is no government restriction or any limitation, domestic or foreign, on
the manner in which any of the Intellectual Property may be used or licensed;
(x) the Company and its Subsidiaries have promptly identified any commercially
viable invention made, conceived or reduced to practice and have promptly filed
applicable patent applications for protection of any such invention and have,
until such filing of the first patent application has occurred, kept the
invention strictly secret and not permitted any disclosure, public use nor
publication of the elements of the invention nor other means by which the
elements of the invention may become available to the public; (xi) all of the
Technology and Computer Programs were created by employees of the Company or its
Subsidiaries working within the scope of their employment except to the extent
that elements thereof have been licensed to the Company or are in the public
domain; (xii) in each case of development of Computer Programs and Technology
set out in the Disclosure Statement, the Company or its Subsidiaries has
obtained either a duly executed assignment of all copyright, trademarks, patent
rights, obligations of confidence, property rights or any other right, title or
interest in and to such Computer Programs and Technology as may have been
developed or had such individual duly execute an employment agreement with the
Company or its Subsidiaries, which employment agreement shall, in addition to
its other terms, transfer all such copyright, trademarks, patent rights,
obligations of confidence, property rights and any other right, title or
interest in such prior developed Computer Programs and Technology or any part
thereof to the Company or its Subsidiaries; (xiii) none of the Intellectual
Property rights nor Computer Programs of the Company or its Subsidiaries
violates or infringes any rights of others and neither the Company nor its
Subsidiaries has received any notice of any claim or threat of such a violation
or infringement; (xiv) neither the Company nor its Subsidiaries, nor any
shareholder, officer, director or employee or former employee of the Company,
its Subsidiaries or any third party has disclosed any confidential information
of the Company or its Subsidiaries except in the ordinary course of business of
the Company or its Subsidiaries or with the authority of the Company or its
Subsidiaries; (xv) the Company or its Subsidiaries has obtained assignments or
waivers of moral rights from any authors of any Computer Programs of the Company
or its Subsidiaries, such that the Company or its Subsidiaries may enjoy
uninterrupted use, sale, distribution, modification, alteration and attribution
of or for each such Computer Program; and (xvi) the Company or its Subsidiaries
has obtained assignments or waivers of all applicable neighboring rights from
any authors of any Computer Programs of the Company or its
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Subsidiaries such that the Company or its Subsidiaries may enjoy uninterrupted
use, sale, distribution, reproduction, modification, alteration, public display,
publication and attribution of or for each such Computer Program.
(d) Computer Programs and Technology: (i) All rights of the Company or
its Subsidiaries in the Computer Programs and the Technology are good, valid,
subsisting and enforceable by the Company or its Subsidiaries and no further
rights are necessary for the Company's past and present use, manufacture,
reproduction, marketing, distribution, display, adaptation, modification,
creation of derivative works, sale or license of any products, Computer Programs
or Technology of the Company or its Subsidiaries; (ii) the Company's past and
present use, manufacture, reproduction, performance, operation, marketing,
distribution, display, adaptation, modification, creation of derivative works,
sale, licensing or other dealing with any of the products, Computer Programs or
Technology of the Company or its Subsidiaries does not infringe on any rights of
any third party; (iii) all of the Computer Programs distributed by the Company
or its Subsidiaries have been developed and tested, and operate substantially in
accordance with the Company's or its Subsidiaries' specifications and user
documentation therefor; (iv) neither the Company nor its Subsidiaries has
licensed or provided to any third party any of the Company's or its
Subsidiaries' Computer Programs, except in circumstances where the use of that
Computer Program is subject to the provisions of an end user license agreement
(the "End User License Agreements") of the Company or its Subsidiaries, copies
of which have been included in the Disclosure Statement; (v) neither the Company
nor any of its Subsidiaries has any obligation or commitment to develop,
implement or install modifications, corrections, enhancements, improvements or
additional functions of the Computer Programs distributed by the Company or its
Subsidiaries; (vi) the Company or its Subsidiaries has maintained their Computer
Programs, including, without limitation, all source code relating thereto, as
strictly confidential and a trade secret and has maintained sufficient
contractual and other arrangements to protect the confidentiality thereof; and
(vii) there is and has been no infringement or claim of infringement of any
rights of third parties in or by the use of such Technology, including without
limitation, the Computer Programs of the Company or its Subsidiaries, there does
not exist any facts or circumstances which cause any of the rights represented
by the Technology to be unenforceable or which limit or restrict the scope of
use, publication, manufacture, distribution, display, adaptation, modification,
creation of derivative works, sale or licensing of any of the Computer Programs
of the Company or its Subsidiaries.
(e) Domain Names. The Disclosure Statement sets forth a list of all
Internet domain names used by the Company or its Subsidiaries in its respective
businesses (collectively, the "Domain Names"). The Company and its Subsidiaries
have, and after the Effective Time the Surviving Corporation will have, a valid
registration and all material rights (free of any material restriction) in and
to the Domain Names, including without limitation all rights necessary to
continue to conduct the Company's or its Subsidiaries' respective businesses as
it is currently conducted.
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(f) Year 2000. Except as set forth in the Disclosure Statement, (i) each
hardware, software and firmware product used, licensed or distributed by the
Company or its Subsidiaries in its respective businesses (collectively, the
"Information Technology") will accurately process date-related data (including,
but not limited to, calculating, comparing and sequencing) from, into and
between the twentieth and twenty-first centuries, including, without limitation,
leap year calculations, without a decrease in the functionality of the
Information Technology, (ii) the Information Technology is designed to be used
prior to, during and after the calendar year 2000 A.D. and will operate during
each such time period without error relating to date-related data, specifically
including any error relating to, or the product of, date-related data which
represents or references different centuries or more than one century; and (iii)
without limiting the generality of the foregoing, the Information Technology (a)
will not abnormally end or provide invalid or incorrect results as a result of
date-related data, specifically including date data which represents or
references different centuries or more than one century, (b) has been designed
to ensure Year 2000 compatibility, including, but not limited to, date data
century recognition, calculations which accommodate same century and multi-
century formulas and date values, and date data interface values that reflect
the century, and (c) includes "Year 2000 Capabilities," meaning that the
Information Technology (I) will manage and manipulate data involving dates,
including single century formulas and multi-century formulas, and will not cause
an abnormally ending scenario within the application or generate incorrect
values or invalid results involving such dates, (II) provides that all date-
related user interface functionalities and data fields include the indication of
century, and (III) provides that all date-related data interface functionalities
include the indication of century, except for inaccuracies in any of the
foregoing which would not have a Company Material Adverse Effect. Nothing herein
is intended to represent or warrant any of the foregoing with respect to any
product or system of any third party.
4.13. Title to Properties. The Company or its Subsidiaries (i) has good,
marketable, legal and valid title to all of its tangible personal property, free
and clear of all liens, claims, encumbrances or security interests
(collectively, "Liens"), except for (A) Liens set forth on the Disclosure
Statement and (B) (x) mechanic's, materialmen's, and similar Liens which secure
obligations which are not yet due and payable, and liens for taxes not yet due
and payable, (y) Liens arising under worker's compensation, unemployment
insurance, social security, retirement, and similar legislation, securing
obligations which are not yet due and payable, and all statutory liens and (z)
Liens on goods in transit incurred pursuant to documentary letters of credit
(each of (x), (y) and (z), collectively, "Permitted Liens"); and (ii) enjoys
peaceful and undisturbed possession under all leases to which it is a party as
lessee. All of the leases to which the Company or any of its Subsidiaries is a
party (other than leases for Leased Premises) are legal, valid and binding
obligations of the Company or its Subsidiaries and in full force and effect, and
no default by the Company or its Subsidiaries, or, to the knowledge of the
Company, any other party thereto has occurred or is continuing thereunder. The
Disclosure Statement lists all properties and assets used by the Company or any
of its Subsidiaries in connection with the operation of their respective
businesses which are held under any lease or under any conditional sale or other
title
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retention agreement. Except for such assets and facilities as are immaterial to
the business of the Company or its Subsidiaries, all tangible assets and
facilities of the Company and its Subsidiaries are in good operating condition
and repair (ordinary wear and tear and obsolescence excepted) and, in the
aggregate with the intangible assets of the Company, are sufficient to conduct
the business of the Company and its Subsidiaries as previously conducted prior
to the date hereof.
4.14. Real Estate.
(a) Neither the Company nor any of its Subsidiaries owns any real estate,
or has the option to acquire any real estate, other than the premises identified
in the Disclosure Statement (the "Real Estate").
(b) Neither the Company nor any of its Subsidiaries leases any real estate
other than the premises identified in the Disclosure Statement as being so
leased (the "Leased Premises"). The Leased Premises are leased to the Company
or its Subsidiaries, pursuant to written leases, true, correct and complete
copies of which have been provided to RealNetworks or its counsel.
4.15. Contracts.
(a) Neither the Company nor any of its Subsidiaries is a party to, or
bound by, or the issuer or beneficiary of, any undischarged written or oral: (i)
agreement or arrangement, the term or payment obligations of which have not
expired, obligating the Company or its Subsidiaries to pay an amount in excess
of $25,000 (excluding purchase and sale orders entered into by the Company or
its Subsidiaries in the ordinary course of business consistent with past
practices); (ii) current employment or consulting agreement or arrangement;
(iii) current collective bargaining agreement; (iv) in force plan or contract or
arrangement providing for bonuses, severance, options, deferred compensation,
retirement payments, profit sharing, medical and dental benefits or the like
covering employees of the Company or its Subsidiaries, other than Plans, Welfare
Plans and Employee Benefit Plans (in each case as defined herein) described in
the Disclosure Statement; (v) agreement restricting in any manner the Company's
or any of its Subsidiaries' right to compete with any other person or entity,
the Company's or any of its Subsidiaries' right to sell to or purchase from any
other person or entity, the right of any other party to compete with the Company
or any of its Subsidiaries, or the ability of the Company to employ any other
person's or entity's employees ; (vi) secrecy or confidentiality agreements;
(vii) any material distributorship, non-employee commission or marketing agent,
representative or franchise agreement providing for the marketing and/or sale of
the products or services of the Company or any of its Subsidiaries; (viii)
material guaranty, performance, bid or completion bond, or surety or
indemnification agreement; (ix) requirements contract; (x) loan or credit
agreement, pledge agreement, note, security agreement, mortgage, debenture,
indenture, factoring agreement or letter of credit; (xi) power of attorney;
(xii) any agreement relating to the ownership or control of any interest in a
partnership, corporation, limited liability company, joint venture
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or other entity or similar arrangement; (xiii) any other agreement not entered
into in the ordinary course of business.
(b) All agreements, leases, subleases and other instruments referred to in
this Section 4.15, are, pursuant to their terms, in full force and binding upon
the Company or its Subsidiaries, and, to the knowledge of the Company, the other
parties thereto. Neither the Company nor any of its Subsidiaries is and, to the
Company's knowledge, none of the other parties thereto are in default of a
material provision under any such agreement, lease, sublease or other
instrument. No event, occurrence or condition exists which, with the lapse of
time, the giving of notice, or both, or the happening of any further event or
condition, would become a default of a material provision under any such
agreement, lease, sublease or other instrument by the Company or its
Subsidiaries, or, to the knowledge of the Company, the other contracting party.
Neither the Company nor any of its Subsidiaries has released or waived any
material right under any such agreement, lease, sublease or other instrument
other than in the ordinary course of business consistent with past practices.
4.16. Insurance. The Disclosure Statement contains a true and correct list
of all insurance policies which are owned by the Company or its Subsidiaries or
which name the Company or any of its Subsidiaries as an insured (or loss payee),
and with respect to which the premiums have been paid in the last twelve months
including without limitation those which pertain to the Company's or its
Subsidiaries' assets, employees or operations. All such insurance policies are
in full force and effect and neither the Company nor any of its Subsidiaries
have received written notice of cancellation of any such insurance policies.
4.17. Litigation. Except as set forth in the Disclosure Statement or
matters which are immaterial to the Company or its Subsidiaries, there is no
litigation or proceeding, in law or in equity, and there are no proceedings,
governmental investigations, review or inquiry before any commission, other
administrative authority, or other Governmental Entity (including, but not
limited to, (i) any unfair labor practice charge or complaint before the
National Labor Relations Board; (ii) any charge or complaint before the Equal
Employment Opportunity Commission, the California Department of Fair Employment
and Housing, or any other comparable entity charged with enforcing laws
concerning unlawful discrimination or harassment; (iii) any report or complaint
of sexual or other unlawful harassment or other unlawful discrimination made by
any employee of the Company within the year preceding the Closing Date; and
(iv); any grievance or arbitration proceeding arising out of any collective
bargaining agreement), pending or, to the Company's knowledge, threatened
against the Company or any of its Subsidiaries, or any of the Company's or its
Subsidiaries' respective officers, directors or affiliates, with respect to or
affecting the Company's or its Subsidiaries' respective operations, businesses,
products or financial condition, or related to the consummation of the
transactions contemplated hereby or by the RealNetworks Operative Documents or
the Company Operative Documents.
4.18. Warranties. To the Company's knowledge, since June 30, 1997, neither
the Company nor any of its Subsidiaries has made any oral or written warranties
with respect to
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the quality or absence of defects of its products or services which they have
sold or performed which are in force as of the date hereof except as are
described in the Disclosure Statement. There are no material claims pending or,
to the knowledge of the Company, threatened against the Company or any of its
Subsidiaries with respect to the quality of or absence of defects in such
products or services nor are there any facts known to the Company relating to
the quality of or absence of defects in such products or services which, if
known by a potential claimant or governmental authority, would reasonably give
rise to a material claim or proceeding.
4.19. Products Liability. Except as set forth on the Disclosure Statement,
neither the Company nor any of its Subsidiaries have received any written notice
relating to, nor does the Company have knowledge of any facts or circumstances
which could reasonably give rise to, any claim involving any product
manufactured, produced, distributed or sold by or on behalf of the Company or
its Subsidiaries resulting from an alleged defect in design, manufacture,
materials or workmanship, or any alleged failure to warn, or from any breach of
implied warranties or representations, other than notices or claims that have
been settled or resolved by the Company or its Subsidiaries prior to the date of
this Agreement, or those which would not have a Company Material Adverse Effect.
4.20. Arbitration. Neither the Company nor any of its Subsidiaries is a
party to, or bound by, any decree, order or arbitration award (or agreement
entered into in any administrative, judicial or arbitration proceeding with any
governmental authority).
4.21. Taxes.
(a) As used in this Agreement, (i) the term "Taxes" means all federal,
state, local, foreign and other net income, gross income, gross receipts, sales,
use, ad valorem, transfer, franchise, profits, license, lease, service, service
use, withholding, payroll (including FICA and unemployment), employment, excise,
severance, stamp, occupation, premium, property, windfall profits, customs,
duties or other taxes, fees, assessments or charges of any kind whatever of a
nature similar to taxes, together with any interest and any penalties, additions
to tax or additional amounts with respect thereto, and the term "Tax" means any
one of the foregoing Taxes; (ii) the term "Returns" means all returns,
declarations, reports, statements, reports, claims for refunds, information
return, and other documents required to be filed in respect of Taxes, and the
term "Return" means any one of the foregoing Returns, and (iii) "Tax Group"
means any federal, state, local or foreign consolidated, affiliated, combined,
unitary or other similar group of which the Company is now or was formerly a
member.
(b) Except as set forth in the Disclosure Statement; (i) there have been
properly completed and filed on a timely basis and in correct form all Returns
required to be filed by the Company or any of its Subsidiaries, (ii) as of the
time of filing, the foregoing Returns were correct and complete in all material
respects, and (iii)an extension of time within which to file any Return which
has not been filed has not been requested or granted.
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(c) All material Taxes of the Company and its Subsidiaries (whether or not
reflected on any Return) have been fully and timely paid. To the Company's
knowledge, no taxing authority in a jurisdiction where the Company does not file
Returns has made a written claim, assertion, or threat to the Company that the
Company is or may be subject to taxation by such jurisdiction. The Company and
its Subsidiaries have duly and timely withheld from employee salaries, wages and
other compensation and paid over to the appropriate governmental authority all
amounts required to be so withheld and paid over for all periods under all
applicable laws. There are no Tax rulings, requests for rulings, or closing
agreements relating to the Company or its Subsidiaries which could affect the
liability for Taxes or the amount of taxable income of the Company for any
period (or portion of a period) after the date hereof.
(d) To the Company's knowledge, no issues have been raised (and are
currently pending) by any taxing authority in connection with any of the
Returns. No waivers of statutes of limitation with respect to the Returns have
been given by the Company or any of its Subsidiaries (or with respect to any
Return which a taxing authority has asserted should have been filed by the
Company or any of its Subsidiaries) which waivers are still in effect. The
Disclosure Statement sets forth those years for which examinations have been
completed, those years for which examinations are presently being conducted, and
those years for which Returns will be required but are not yet due to be filed
and have not yet been filed. All deficiencies asserted or assessments made as a
result of any examinations have been fully paid, or are fully reflected as a
liability in the financial statements contained in the Company Report, or are
being contested and an adequate reserve therefor has been established and is
fully reflected as a liability in the financial statements contained in the most
recent Company Report. Any adjustment of Taxes of the Company or its
Subsidiaries made by the IRS in any examination which is required to be reported
to the appropriate state, local or foreign taxing authorities has been reported,
and any additional Taxes due with respect thereto have been paid.
(e) The unpaid Taxes of the Company or any of its Subsidiaries (i) did
not, as of February 28, 1999, exceed the reserve for tax liability (rather than
the reserve for deferred Taxes established to reflect temporary differences
between book and tax bases) set forth or included in the financial statements
included in the most recent Company Report, and (ii) do not exceed that reserve
as adjusted for the passage of time through the Closing in accordance with the
past custom and practice of the Company and its Subsidiaries in filing Returns.
(f) Except as set forth on the Disclosure Statement, neither the Company
nor any of its Subsidiaries is or at any time has been a party to or bound by
any tax indemnity, tax sharing or tax allocation agreement.
(g) Except as set forth on the Disclosure Statement, neither the Company
nor any of its Subsidiaries has ever been a member of a Tax Group an affiliated
group of corporations, within the meaning of section 1504 of the Code, other
than the group the common parent of which is the Company. Neither the Company
nor its Subsidiaries has any
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liability for Taxes of any person under Treasury Regulations Section 1.1502-6
(or any similar provision of state, local or foreign law) as a transferee or
successor by contract or otherwise.
(h) Neither the Company nor any Subsidiary nor any other Person on their
behalf (i) has filed a consent pursuant to Section 341(f) of the Code or agreed
to have Section 341(f)(2) of the Code apply to any disposition of a subsection
(f) asset (as such term is defined in Section 341(f)(4) of the Code) owned by
the Company; (ii) has executed or entered into a closing agreement pursuant to
Section 7121 of the Code or any predecessor provision thereof or any similar
provision of state, local or foreign law; or (iii) has agreed to or is required
to make any adjustments pursuant to Section 481 (a) of the Code or any similar
provision of state, local or foreign law by reason of a change in accounting
method initiated by the Company or has notice that a governmental authority has
proposed any such adjustment or change in accounting method.
(i) The Company has not made any payments, is not obligated to make any
payments and is not a party to any agreement that under certain circumstances
could obligate it to make any payments that will not be deductible under Section
280G of the Code (or any similar provision of state, local or foreign law).
(j) The Company has not been a United States real property holding
corporation within the meaning of Section 897(c)(2) of the Code during the
applicable period specified in Section 897(c)(1)(A)(ii) of the Code.
4.22. ERISA. (a) The Disclosure Statement contains a list of all
retirement, pension, profit sharing, deferred compensation, savings, bonus,
incentive, cafeteria, flexible benefits, medical, dental, vision,
hospitalization, life insurance, dependent care assistance, tuition
reimbursement, disability, sick pay, holiday, vacation, severance, stock
purchase, stock option, stock appreciation rights, change of control, fringe
benefit and other employee benefit plans, funds, policies, programs, contracts,
arrangements or practices (including, without limitation, each "employee benefit
plan," as defined in section 3(3) of ERISA) and each employment or consulting
contract or agreement, whether formal or informal, whether written or unwritten
and whether legally binding or not, (i) sponsored, maintained or contributed to
by the Company or any ERISA Affiliate, (ii) covering or benefiting any current
or former officer, employee, agent, director or independent contractor of the
Company or any ERISA Affiliate (or any dependent or beneficiary of any such
individual) or (iii) with respect to which the Company or any ERISA Affiliate
has (or could have) any actual or potential obligation or liability
(individually, an "Employee Benefit Plan" and, collectively, the "Employee
Benefit Plans"). Neither the Company nor any ERISA Affiliate has any agreement,
arrangement or commitment, whether formal or informal, whether written or
unwritten and whether legally binding or not, to create any additional employee
benefit plan, fund, policy, program, contract, arrangement or practice or to
modify or amend any existing Employee Benefit Plan. For purposes of this
Agreement, "ERISA Affiliate" means any Subsidiary and any other corporation,
trade, business or other entity that must be
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aggregated with either the Company or any Subsidiary under Section 414(b), (c),
(m) or (o) of the Code;
(b) The Company has delivered to RealNetworks true, complete and accurate
copies (or, in the case of unwritten Employee Benefit Plans, descriptions) of
all Employee Benefit Plans (and all amendments thereto), along with, to the
extent applicable to the particular Employee Benefit Plan, (i) copies of the
Form 5500 series and other reports filed with any government agency or entity
for the last three years, (ii) copies of the summary plan descriptions, summary
annual reports, summaries of modifications and all employee manuals or
communications filed or distributed with respect to such Employee Benefit Plan
during the last three years, (iii) copies of any insurance contracts or trust
agreements (and any amendments thereto) through which such Employee Benefit Plan
is funded, (iv) copies of all contracts (and any amendments thereto) relating to
such Employee Benefit Plan, including, but not limited to, service provider
agreements, insurance contracts, investment management agreements and
recordkeeping agreements, and (v) a copy of the most recent determination letter
issued by the Internal Revenue Service (the "IRS") with respect to such Employee
Benefit Plan;
(c) There has been no amendment, written interpretation or announcement
(whether or not written) by either the Company or any ERISA Affiliate relating
to a change in participation or coverage under any Employee Benefit Plan that,
either alone or together with any other such items or events, could increase the
expense of maintaining such Plan above the level of expense incurred with
respect thereto for the most recent fiscal year included in the Company's or any
ERISA Affiliate's audited financial statements;
(d) With respect to each Employee Benefit Plan (i) such Employee Benefit
Plan and any related trust agreements, insurance contracts or annuity contracts
(or any related trust instruments) are and at all times since inception have
been maintained, administered, operated, and funded in accordance with their
terms and in compliance with each applicable provision of ERISA, the Code and
any other applicable laws, including, without limitation, rules promulgated
pursuant thereto or in connection therewith, (ii) no event has occurred or is
threatened or about to occur that constitutes or could constitute a nonexempt
prohibited transaction under Section 406 or 407 of ERISA or under Section 4975
of the Code, and (iii) no transaction, event or omission has occurred or failed
to occur that could subject the Company or any ERISA Affiliate, directly or
indirectly, to a tax, fine, penalty or related charge under any applicable law,
including, without limitation, Chapter 43 of Subtitle D of the Code and Section
502(c), 502(i), 502(l) or 4071 of ERISA;
(e) Neither the Company, any ERISA Affiliate nor any Employee Benefit Plan
provides or has any obligation to provide (or contribute toward the cost of) any
health, life insurance or other "welfare plans" (within the meaning of Section
3(1) of ERISA) with respect to any current or former officer, employee, agent,
director or independent contractor of the Company, any Subsidiary or any other
entity beyond such individual's retirement or
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other termination of service (other than continuation coverage mandated by
Sections 601 through 608 of ERISA or Section 4980B(f) of the Code);
(f) All contributions, premiums and other payments due or required to be
made to (or with respect to) each Employee Benefit Plan under the terms of such
Employee Benefit Plan or under applicable law have been made on or before their
due dates in accordance with the terms of such Employee Benefit Plan or
applicable law, or, if not yet due, have been properly accrued on the financial
statements of the Company. The costs of administering the Employee Benefit
Plans, including, without limitation, fees for the trustees and other service
providers which are customarily paid by the Company or any ERISA Affiliate, have
been timely paid, or will be timely paid or accrued on the financial statements
of the Company;
(g) Neither the Company nor any ERISA Affiliate sponsors, maintains or
contributes to, or has ever sponsored, maintained or contributed to (or been
obligated to contribute to), (i) any multiemployer plan within the meaning of
Section 3(37) or 4001(a)(3) of ERISA or Section 414(f) of the Code, (ii) any
multiple employer plan within the meaning of Section 4063 or 4064 of ERISA or
Section 413(c) of the Code, or (iii) any employee benefit plan, fund, program,
contract or arrangement that is subject to Section 412 of the Code or Section
302 or Title IV of ERISA;
(h) There are no pending or threatened claims, lawsuits or arbitration
asserted or instituted against any Employee Benefit Plans, fiduciaries or any
officers, employees, directors, agents or owners of the Company or any ERISA
Affiliate with respect to such Plan, and the Company has no knowledge of any
facts which would give rise to or could reasonably be expected to give rise to
any such claims, lawsuits or arbitrations. No Employee Benefit Plan is currently
under investigation, audit or review by the IRS, Department of Labor or any
other governmental entity or agency, and the Company has no knowledge of any
facts which could give rise to or could reasonably be expected to give rise to
any such claims, lawsuits or arbitrations;
(i) Neither the execution and delivery of this Agreement or any related
agreement nor the consummation of the transactions contemplated by this
Agreement or any related agreement will (i) entitle any current or former
officer, employee, director, agent or independent contractor of the Company or
any ERISA Affiliate to severance pay, unemployment compensation or any other
payment from the Company, any ERISA Affiliate or any other Person, or otherwise
increase the amount of compensation due to any such individual, (ii) result in
any benefit or right becoming established or increased, or accelerate the time
of payment or vesting of any benefit, under any Employee Benefit Plan, (iii)
require the Company or any ERISA Affiliate to make any contribution to a trust
or other funding arrangement or to increase its contributions to any Employee
Benefit Plan, or (iv) conflict with the terms of any Employee Benefit Plan,
whether or not some other subsequent action or event would be required to
trigger any of the items specified in this paragraph.
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4.23. Labor Matters. To the Company's knowledge, except as set forth in
the Disclosure Statement or for events that occur after the date hereof which
are disclosed in writing by the Company to RealNetworks, (a) there is no labor
strike, dispute, slowdown, work stoppage or lockout pending or, threatened
against or affecting the Company or any of its Subsidiaries and during the past
three years, there has not been any such action; (b) no union representation or
union organizational activity exists with respect to the Company's employees,
(c) neither the Company nor any of its Subsidiaries is a party to or bound by
any collective bargaining or similar agreement; (d) neither the Company nor any
of its Subsidiaries is delinquent in payments to any of its employees for any
wages, salaries, commissions, bonuses, overtime, accrued vacation, or other
direct compensation for any services performed by them to the date of this
Agreement or amounts required to be reimbursed to such employees; and (e) the
Disclosure Statement contains a true and complete list of all employees who are
employed by the Company or any of its Subsidiaries as of December 1, 1998 and
April 1, 1999, and said list correctly reflects their salaries, wages, other
compensation (other than benefits under the Plans, Welfare Plans and Employee
Benefit Plans), dates of employment and positions.
4.24. Interim Conduct of Business. Except as otherwise contemplated by
this Agreement or as set forth on the Disclosure Statement, since February 28,
1999, neither the Company nor any of its Subsidiaries has:
(a) sold, assigned, leased, exchanged, transferred or otherwise disposed
of any material portion of its assets or property, except for sales of inventory
and cash applied in the payment of the Company's or its Subsidiaries'
liabilities in the ordinary course of business in accordance with the Company's
or its Subsidiaries' past practices;
(b) written off any asset which has a net book value which exceeds $5,000
individually or $25,000 in the aggregate in value, or suffered any casualty,
damage, destruction or loss, or interruption in use, of any material asset,
property or portion of inventory (whether or not covered by insurance), on
account of fire, flood, riot, strike or other hazard or Act of God;
(c) waived any material right arising out of the conduct of, or with
respect to, its business;
(d) made (or committed to make) capital expenditures in an amount which
exceeds $10,000 for any item or $50,000 in the aggregate;
(e) made any change in accounting methods or principles;
(f) borrowed any money or issued any bonds, debentures, notes or other
corporate securities (other than equity securities), including without
limitation, those evidencing borrowed money;
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(g) entered into any transaction with any Related Party (as herein
defined) which calls for the payment of more than $10,000, or made any payment
to, or incurred any liability to, any Related Party which exceeds $10,000,
except, in each case, in the ordinary course of business to Related Parties who
are employees of the Company or its Subsidiaries);
(h) increased the compensation payable to any employee, except for normal
pay increases in the ordinary course of business consistent with past practices;
(i) made any payments or distributions to its employees, officers or
directors except such amounts as constitute currently effective compensation for
services rendered, or reimbursement for reasonable ordinary and necessary out-
of-pocket business expenses;
(j) paid or incurred any management or consulting fees, or engaged any
consultants, except in the ordinary course of business;
(k) hired any employee who has an annual salary in excess of $35,000, or
employees with aggregate annual salaries or wages in excess of $70,000;
(l) terminated any employee having an annual salary or wages in excess of
$35,000 or employees with aggregate annual salaries or wages in excess of
$70,000;
(m) adopted any new Plan, Welfare Plan or Employee Benefit Plan;
(n) issued or sold any securities of any class, except for the grant or
exercise of options to purchase Company Common Stock under the Company Option
Plans;
(o) discharged any liability or prepaid any liability except in the
ordinary course of business in accordance with past practices; or
(p) paid, declared or set aside any dividend or other distribution on its
securities of any class, or purchased, exchanged or redeemed any of its
securities of any class.
Notwithstanding the foregoing, the Company shall not be deemed to have breached
the terms of this Section 4.24 by entering into this Agreement or by
consummating the transactions contemplated hereby.
4.25. Affiliated Transactions. Except as set forth on the Disclosure
Statement, since June 30, 1997, the Company has not been a party to any
transaction (other than those relating to employee compensation and other
ordinary incidents of employment) with a "Related Party" which calls for payment
in excess of $10,000. For purposes of this Agreement, the term "Related Party"
shall mean: any present or former officer or director, 5% shareholder, any
present or former known spouse, ancestor or descendant of any of the
aforementioned persons or any trust or other similar entity for the benefit of
any of the foregoing persons.
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4.26. Material Adverse Change. Since February 28, 1999, neither the
Company nor its Subsidiaries has suffered or been threatened with (and the
Company has no knowledge of any facts which would reasonably cause or result in)
any material adverse change in the business, operations, assets, liabilities or
financial condition of the Company and its Subsidiaries, taken as a whole.
4.27. Bribes. Neither the Company, its Subsidiaries nor, to the Company's
knowledge, any of their respective officers, directors, employees, agents or
representatives has made, directly or indirectly, with respect to the Company,
its Subsidiaries or their respective business activities, any bribes or
kickbacks, illegal political contributions, payments from corporate funds not
recorded on the books and records of the Company or its Subsidiaries, payments
from corporate funds to governmental officials, in their individual capacities,
for the purpose of affecting their action or the action of the government they
represent, to obtain favorable treatment in securing business or licenses or to
obtain special concessions, or illegal payments from corporate funds to obtain
or retain business. Without limiting the generality of the foregoing, neither
the Company nor any of its Subsidiaries has directly or indirectly made or
agreed to make (whether or not said payment is lawful) any payment to obtain, or
with respect to, sales other than usual and regular compensation to its
employees and sales representatives with respect to such sales.
4.28. Absence of Indemnifiable Claims, etc. There are no pending claims or
claims threatened in writing of any director, officer or employee of the Company
or its Subsidiaries for indemnification by the Company or its Subsidiaries under
applicable law, the Articles of Incorporation or By-laws of the Company or its
Subsidiaries or any insurance policy maintained by the Company or its
Subsidiaries.
4.29. No Undisclosed Liabilities. There are no liabilities or obligations
of any nature whatsoever (whether accrued, absolute, contingent or otherwise)
(a) of the Company required by GAAP to be reflected or disclosed on the February
28, 1999 balance sheet of the Company, other than (i) liabilities reflected or
reserved against in the Interim Financial Statements; (ii) liabilities which,
individually or in the aggregate, would exceed $25,000; (iii) liabilities under
this Agreement (or contemplated hereby) or disclosed in the Disclosure Statement
and (iv) liabilities incurred since February 28, 1999 in the ordinary course of
business and consistent with past practices; or (b) of XTJ required to be
reflected or disclosed on the December 31, 1998 balance sheet of XTJ, other than
liabilities (i) incurred in the ordinary course of business and consistent with
past practices; or (ii) immaterial in amount.
4.30. Hart Scott Rodino. The Company is its own ultimate parent entity as
defined under the rules and regulations promulgated under the HSR Act. The
Company is not a ten million dollar ($10,000,000) person as defined thereunder.
Other than with respect to Sumitomo Corporation, there are no shareholders of
the Company whose acquisition of RealNetworks Common Stock, or the right to
receive RealNetworks Common Stock, would trigger the jurisdictional tests of the
HSR Act. Furthermore, Sumitomo Corporation is
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acquiring the RealNetworks Common Stock solely for the purpose of investment
within the meaning of 16 C.F.R. 802.9.
4.31. Employees of Company and Subsidiaries. Since February 28, 1999,
neither the Company nor any of its Subsidiaries have taken any actions which
were intended to dissuade any present employees or consultants, of the Company
or any of its Subsidiaries from continuing an association with the Company or
any of its Subsidiaries after the Closing.
4.32. No Brokers. Neither the Company nor any of its Subsidiaries has
entered into any contract, arrangement or understanding with any person or firm
which may result in the obligation of the Company or RealNetworks, Purchaser or
their respective Subsidiaries to pay any finder's fee, brokerage or agent's
commissions or other like payments in connection with negotiations leading to
this Agreement or the consummation of the transactions contemplated hereby.
4.33. Accounting Treatment. Neither the Company nor any of its
Subsidiaries has taken or failed to take any action which would prevent the
Merger from being treated as a "pooling of interests" in accordance with
Accounting Principles Board Opinion No. 16, the interpretative releases issued
pursuant thereto, and the pronouncements of the SEC.
4.34. Information Supplied.
(a) The information supplied or to be supplied in writing by the Company,
its Subsidiaries, the Executive Shareholders, or any of their respective
officers, directors, representatives, agents or employees, specifically for
inclusion or incorporation by reference in the Proxy Statement will not, at the
time the information statement is first mailed to the Shareholders, and at the
time such Shareholders vote on adoption of this Agreement, contain any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements made therein, in light of the circumstances under
which they were made, not misleading.
(b) The information supplied or to be supplied in writing by the Company
or any of its Affiliates in reference to the Affiliate Letters will not contain
any untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements made therein, in light of the
circumstances under which they were made, not misleading.
ARTICLE V
COVENANTS
5.1. Alternative Proposals.
(a) Prior to the Effective Time, the Company agrees, except to the extent
reasonably required by fiduciary duty obligations under applicable law, (i) that
neither it nor any of its Subsidiaries shall, and it shall direct its officers,
directors, employees, agents and
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representatives (including, without limitation, any investment banker, attorney
or accountant retained by it or any of its Subsidiaries) not to, initiate,
solicit, encourage or take any other action to facilitate, directly or
indirectly, any inquiries or the making or implementation of any proposal that
constitutes, or may reasonably be expected to lead to, any Alternative Proposal
(as defined below) or engage in any negotiations concerning, or provide any
confidential information or data to, any person relating to an Alternative
Proposal, or otherwise facilitate any effort or attempt to make or implement an
Alternative Proposal; (ii) that it will immediately cease and cause to be
terminated any existing activities, discussions or negotiations with any parties
conducted heretofore with respect to any of the foregoing, and it will take the
necessary steps to inform the individuals or entities referred to above of the
obligations undertaken in this Section 5.1; and (iii) that it will notify the
other immediately if any such inquiries or proposals are received by, any such
information is requested from, or any such negotiations or discussions are
sought to be initiated or continued with it.
(b) As used herein, the term "Alternative Proposal" means (in each case
other than the transactions contemplated hereby) (A) a bona fide tender offer or
exchange offer for 25% or more of the then outstanding shares of the Company
which shall have been publicly proposed to be made or shall have been commenced
or made by any Person (other than RealNetworks or one of its Subsidiaries); (B)
a merger, consolidation, or other business combination with the Company, or with
any of its Subsidiaries, shall have been effected by any Person, or an agreement
relating to any such transaction shall have been entered into; (C) any sale,
lease, exchange, mortgage, pledge, transfer, or other disposition (whether in
one transaction or a series of related transactions) involving a substantial
part of the Company's consolidated assets, or all or a substantial part of the
assets of any of its Subsidiaries, to any Person shall have been effected, or
any agreement relating to such transaction, shall have been entered into; (D)
the acquisition by any Person (other than RealNetworks or one of its
Subsidiaries) of beneficial ownership (within the meaning of Rule 13d-3 under
the Exchange Act, which will be deemed for purposes hereof to provide that a
Person beneficially owns any shares of Company Common Stock that may be acquired
by such person pursuant to any right, option, warrant, or other agreement,
regardless of when such acquisition would be permitted by the terms thereof) of
25% or more of the outstanding shares of Company Common Stock (including Company
Common Stock currently beneficially owned by such Person); (E) any
reclassification of securities or recapitalization of the Company or other
transaction that has the effect, directly or indirectly, of increasing the
proportionate share of any class of equity security (including securities
convertible into equity securities) of the Company that is owned by any Person
shall have been effected, or any agreement relating to such transaction shall
have been entered into or plan with respect thereto adopted; (F) any transaction
having an effect similar to those described in (A) through (E) above; or (G) a
public announcement with respect to a proposal, plan, or intention by the
Company or another Person to effect any of the foregoing transactions (which may
include publication of notice of filing or any similar notice under applicable
law).
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(c) Except in the reasonable exercise of fiduciary duties, nothing in this
Section 5.1 shall (i) permit the Company to terminate this Agreement (except as
specifically provided in Article VII hereof); (ii) permit the Company to enter
into any agreement with respect to an Alternative Proposal during the term of
this Agreement (it being agreed that during the term of this Agreement, the
Company shall not enter into any agreement with any person intended to provide
for or in any way facilitate, an Alternative Proposal (other than a
confidentiality agreement in customary form)); or (iii) affect any other
obligation of the Company under this Agreement.
5.2. Interim Operations. During the period from the date of this
Agreement and continuing until the earlier of the termination of this Agreement
or the Effective Time, except as set forth in the Disclosure Statement, unless
RealNetworks has consented in writing thereto (which consent shall not be
unreasonably withheld), the Company shall, and shall cause each of its
Subsidiaries to:
(i) conduct their respective operations according to ordinary course in
substantially the same manner as heretofore conducted;
(ii) to the extent consistent with their respective businesses, use
commercially reasonable efforts to preserve intact their respective business
organizations and goodwill, keep available the services of their respective
officers and employees and maintain satisfactory relationships with those
persons having business relationships with them;
(iii) not amend their respective Articles of Incorporation or Bylaws or
comparable governing instruments;
(iv) promptly notify RealNetworks of any material emergency or other
Company Material Adverse Effect, any material litigation or material
governmental complaints, investigations or hearings (or communications
indicating that the same may be contemplated), or the material breach of any
representation or warranty contained herein;
(v) promptly deliver to RealNetworks true and correct copies of any
report, statement or schedule filed with any Governmental Entity subsequent to
the date of this Agreement, except for any of the foregoing filed in the
ordinary course of business;
(vi) not (A) except pursuant to the exercise of options, warrants,
conversion rights and other contractual rights existing on the date hereof and
disclosed pursuant to this Agreement, issue any shares of its capital stock,
effect any stock split or otherwise change its capitalization as it existed on
the date hereof; (B) grant, confer or award any option, warrant, conversion
right or other right not existing on the date hereof to acquire any shares of
its capital stock; (C) increase any compensation or enter into or amend any
employment agreement with any of its present or future officers, directors or
employees, except for normal increases consistent with past practice, but in no
event, in an amount in excess of five percent (5%) than the annual salary of
each such employee as set forth in the Disclosure Statement;
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(D) grant any material severance or termination package to any employee or
consultant; (E) hire any new employee who shall have, or terminate the
employment of any employee who has, an annual salary in excess of $50,000; or
(F) adopt any new employee benefit plan (including any stock option, stock
benefit or stock purchase plan) or amend any existing employee benefit plan in
any material respect, except for changes which are less favorable to
participants in such plans;
(vii) except for repurchases of employee shares of capital stock pursuant
to the terms of the respective grant documents under the Company Stock Option
Plans, not (A) declare, set aside or pay any dividend or make any other
distribution or payment with respect to any shares of its capital stock or other
ownership interests; or (B) directly or indirectly, redeem, purchase or
otherwise acquire any shares of its capital stock or shares of capital stock of
its Subsidiaries, or make any commitment for any such action;
(viii) not enter into any material agreement or transaction, or agree to
enter into any material agreement or transaction, outside the ordinary course of
business, including, without limitation, any transaction involving a merger,
consolidation, joint venture, license agreement, partial or complete liquidation
or dissolution, reorganization, recapitalization, restructuring or a purchase,
sale, lease or other disposition of a material portion of assets or capital
stock;
(ix) not incur any indebtedness for borrowed money or guarantee any such
indebtedness or issue or sell any debt securities or warrants or rights to
acquire any debt securities of others other than in the ordinary course of its
business, but in no event in an amount exceeding $50,000 in the aggregate (other
than normal expenditures for the purchase of raw materials or other supplies);
(x) not make any loans, advances or capital contributions to, or
investments in, any other Person except for advances to employees in the
ordinary course of business and immaterial in amount;
(xi) except as described in the Disclosure Statement, not make or commit
to make any capital expenditures in excess of $10,000 individually or $20,000 in
the aggregate;
(xii) not apply any of its assets to the direct or indirect payment,
discharge, satisfaction or reduction of any amount payable directly or
indirectly to or for the benefit of any Related Party of the Company or any of
its Subsidiaries or enter into any transaction with any Related Party of the
Company or its Subsidiaries (except for payment of salary and other customary
expense reimbursements made in the ordinary course of business to Related
Parties who are employees of the Company or its Subsidiaries);
(xiii) not voluntarily elect to materially alter the manner of keeping its
books, accounts or records, or materially change in any manner the accounting
practices therein
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reflected, except for changes in accounting rules and practices which effect all
software companies generally;
(xiv) not grant or make any mortgage or pledge or subject itself or any of
its material properties or assets to any Lien, charge or encumbrance of any
kind, except Permitted Liens; or
(xv) maintain insurance on its tangible assets and its businesses in such
amounts and against such risks and losses as are currently in effect.
5.3. Approval by Shareholders. The Company will take all action necessary
in accordance with applicable law and its Articles of Incorporation and Bylaws
to convene a meeting of the Shareholders (or commence a consent solicitation) as
promptly as practicable to consider and vote upon the approval of the Merger,
this Agreement and the transactions contemplated hereby. The Board shall
recommend such approval and the Company shall take all lawful action to solicit
such approval, including, without limitation, timely mailing of the Proxy
Statement to the Shareholders; provided, however, that such recommendation or
solicitation is subject to any action (including any withdrawal or change of its
recommendation) taken by, or upon authority of, the Board in the exercise of its
good faith judgment as to its fiduciary duties to the Shareholders imposed by
law. Except with respect to any Shareholder exercising rights under Section
5.14, approval of this Agreement by the Shareholders shall constitute approval
of all other agreements contemplated hereby, including without limitation, the
Escrow Agreement.
5.4. Filings; Other Action. Subject to the terms and conditions herein
provided, the Company and RealNetworks shall: (a) if required, promptly make
their respective filings and thereafter make any other required submissions
under the HSR Act with respect to the Merger; (b) use all reasonable efforts to
cooperate with one another in (i) determining which filings are required to be
made prior to the Effective Time with, and which consents, approvals, permits or
authorizations are required to be obtained prior to the Effective Time from,
governmental or regulatory authorities of the United States, the several states
and foreign jurisdictions in connection with the execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby; and (ii)
timely making all such filings and timely seeking all such consents, approvals,
permits or authorizations; (c) use commercially reasonable efforts to obtain all
consents under or with respect to, any contract, lease, agreement, purchase
order, sales order or other instrument or Permit, where the consummation of the
transactions contemplated hereby would be prohibited or constitute an event of
default, or grounds for acceleration or termination, in the absence of such
consent; and (d) take, or cause to be taken, all other commercially reasonable
actions as are reasonably necessary, proper or appropriate to consummate and
make effective the transactions contemplated by this Agreement. If, at any time
after the Effective Time, any further commercially reasonable action is
necessary or desirable to carry out the purpose of this Agreement, the proper
officers and directors of RealNetworks and the Surviving Corporation shall take
all such necessary action.
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5.5. Inspection of Records. From the date hereof to the Effective Time,
the Company shall (a) allow all designated officers, attorneys, accountants and
other representatives of RealNetworks reasonable access at all reasonable times
to the offices, records and files, correspondence, audits and properties, as
well as to all information relating to commitments, contracts, titles and
financial position, or otherwise pertaining to the business and affairs of the
Company and its Subsidiaries; (b) furnish to RealNetworks, its counsel,
financial advisors, auditors and other authorized representatives such financial
and operating data and other information as such persons may reasonably request;
and (c) instruct the employees, counsel and financial advisors of the Company
and its Subsidiaries to cooperate with RealNetworks and its investigation of the
business of the Company and its Subsidiaries. All information disclosed by the
Company to RealNetworks and its representatives shall be subject to the terms of
that certain No-Shop and Non-Disclosure Agreement (the "Confidentiality
Agreement") dated as of March 17, 1999 between RealNetworks and the Company.
5.6. Publicity. Neither party hereto shall make any press release or
public announcement with respect to this Agreement, the Merger or the
transactions contemplated hereby without the prior written consent of the other
party hereto (which consent shall not be unreasonably withheld); provided,
however, that each party hereto may make any disclosure or announcement which
such party, in the opinion of its legal counsel, is obligated to make pursuant
to applicable law or regulation of any national securities exchange, in which
case, the party desiring to make the disclosure shall consult with the other
party hereto prior to making such disclosure or announcement.
5.7. Fairness Hearing. Pursuant to Section 25142 of the California Law,
as soon as practicable after the date hereof, RealNetworks and the Company shall
submit an application for a permit (the "Exemption Permit") with the
Commissioner of Corporations of the State of California to allow RealNetworks to
issue the shares of RealNetworks Common Stock pursuant to the terms of this
Agreement in compliance with Section 3(a)(10) of the Securities Act and the
California Securities Laws.
5.8. Affiliate Letters. At least twenty (20) days prior to the Closing
Date, the Company shall deliver to RealNetworks a list of names and addresses of
those persons who were or will be, in the Company's reasonable judgment, at the
record date for its Shareholders' meeting to approve the Merger, "affiliates"
(each such person, an "Affiliate") of the Company within the meaning of Rule 145
of the rules and regulations promulgated under the Securities Act. The Company
shall provide RealNetworks such information and documents reasonably available
to it as RealNetworks shall reasonably request for purposes of reviewing such
list.
5.9. Expenses. Whether or not the Merger is consummated, all costs and
expenses incurred in connection with this Agreement and the transactions
contemplated hereby (which the parties agree shall include any amounts due by
the Company as a result of any finder's fee, brokerage or agent's commissions or
other similar payments in connection with the
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transactions contemplated hereby, as well as the cost of insurance coverage for
the current and former officers and directors of the Company for one year after
the Effective Time, but in no event shall include the costs and expenses
incurred in connection with the preparation of the Company's audited financial
statements or its tax returns) shall be paid by the party incurring such
expenses, except (a) as otherwise expressly provided for herein; and (b) if the
Merger is consummated, the costs and expenses of the Company shall be paid by
the Company; provided that to the extent that such costs and expenses exceed two
hundred thousand dollars ($200,000), the purchase price shall be reduced by the
amount of such excess by reducing the numerator in the Exchange Ratio (as
described in Section 1.4(a)(ii)) by the amount of such excess.
5.10. Tax Treatment of Merger. Except where otherwise required by law, the
parties shall not take a position on any Returns inconsistent with the treatment
of the Merger for tax purposes as a reorganization within the meaning of Section
368(a)(1)(A) of the Code by reason of Section 368(a)(2)(E) of the Code.
5.11. Supplement to RealNetworks Disclosure Statement and the Disclosure
Statement Each of RealNetworks and the Company shall no later than three days
prior to the Closing, supplement or amend the RealNetworks Disclosure Statement
and the Disclosure Statement, respectively, with respect to any matter hereafter
arising that, if existing or occurring at the date of this Agreement, would have
been required to be set forth or described in the RealNetworks Disclosure
Statement or the Disclosure Statement, as the case may be. No supplement or
amendment to the RealNetworks Disclosure Statement or the Disclosure Statement,
as the case may be, will have an effect for the purpose of determining
satisfaction of the conditions set forth in Sections 6.2(b) and 6.3(b) hereof,
as applicable.
5.12. Report to RealNetworks. The Company will promptly advise
RealNetworks in writing of all actions taken by the directors and shareholders
of the Company at meetings or in connection with written consents filed with the
Company in lieu thereof and will furnish RealNetworks with copies of all monthly
and other interim financial statements of the Company and its Subsidiaries as
they become available.
5.13. Dissent Process. The Company will give to RealNetworks prompt notice
of any written notice relating to the exercise of appraisal rights, including
the name of the dissenting shareholder and the number of shares of Company
Common Stock or Preferred Stock to which the dissent relates. RealNetworks will
have the right to participate in all negotiations and proceedings relating
thereto, except as required by law. The Company will not make any payment with
respect to, or settle or offer to settle, any appraisal demands without
RealNetworks' prior written consent, except as required by law.
5.14. Delivery of Shareholder List. The Company shall arrange to have its
transfer agent deliver to RealNetworks or its designee, immediately prior to the
Closing Date, a true and complete list setting forth the names and addresses of
the Shareholders. From time to time prior to the Closing Date, the Company shall
deliver to RealNetworks such information
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as RealNetworks may request regarding the holdings of stock of persons who may
be affiliates of the Company and such other shareholder information as
RealNetworks may reasonably request.
5.15. Listing Application. RealNetworks shall promptly prepare and submit
to NASDAQ a listing application covering the shares of RealNetworks Common Stock
issuable in the Merger, and shall use commercially reasonable efforts to obtain,
prior to the Effective Time, approval for the listing of such shares of
RealNetworks Common Stock, subject to official notice of issuance.
5.16. Indemnification of Company Directors and Officers. RealNetworks
agrees (i) that it will, or it will cause the Surviving Corporation to,
indemnify the current and former officers and directors of the Company (the
"Company Parties") to the fullest extent provided by law (including the payment
of legal fees as incurred), for any action taken prior to the Effective Time,
for a period of not less than four (4) years from the Effective Time, and (ii)
until four (4) years after the Effective Time, to maintain insurance coverage
for the current and former directors and officers of the Company (including a
tail policy) in such amounts and on such terms as currently in effect.
5.17. Tax Covenant. RealNetworks presently intends to continue at least
one significant historic business line of the Company, or shall use at least a
significant portion of the Company's historic business assets in a business, in
each case within the meaning of Treasury Regulation Section 1.368-1(d).
5.18. Personal Loans. Hassan Miah and the Company shall enter into a
pledge agreement in form acceptable to RealNetworks, to secure the payment of
the outstanding balance of the loan previously provided by the Company to Mr.
Miah.
5.19. Further Action. Each party hereto shall, subject to the fulfillment
at or before the Effective Time of each of the conditions of performance set
forth herein or the waiver thereof, perform such further acts and execute such
documents as may be reasonably required to effect the Merger.
ARTICLE VI
CONDITIONS
6.1. Conditions to Each Party's Obligation to Effect the Merger. The
respective obligations of each party to effect the Merger shall be subject to
the fulfillment at or prior to the Closing Date of each of the following
conditions (unless waived by each of the parties hereto in accordance with the
provisions of Section 7.3 hereof):
(a) This Agreement and the Merger and other transactions contemplated
hereby shall have been approved and adopted by the requisite vote of the
Shareholders.
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(b) The waiting period, if any, applicable to the consummation of the
Merger under the HSR Act shall have expired or been terminated.
(c) The Commissioner of Corporations of the State of California shall have
issued the Exemption Permit, and all necessary approvals under other state
securities laws relating to the issuance or trading of the RealNetworks Common
Stock to be issued to the Shareholders in connection with the Merger shall have
been received.
(d) The Company shall have executed and delivered to Purchaser
counterparts of the Articles of Merger.
(e) No preliminary or permanent injunction or other order or decree by any
federal or state court which prevents the consummation of the Merger or
materially changes the terms or conditions of this Agreement shall have been
issued and remain in effect. In the event any such order or injunction shall
have been issued, each party agrees to use its reasonable efforts to have any
such injunction lifted.
(f) The RealNetworks Common Stock to be issued to the Shareholders in
connection with the Merger shall have been listed on NASDAQ subject only to
official notice of issuance.
(g) RealNetworks, the Escrow Agent and the Indemnity Representative shall
have entered into the Escrow Agreement.
6.2. Conditions to Obligation of the Company to Effect the Merger. The
obligation of the Company to effect the Merger shall be subject to the
fulfillment at or prior to the Closing Date of the following conditions (unless
waived by the Company in accordance with the provisions of Section 7.3 hereof):
(a) RealNetworks shall have performed, in all material respects, all of
its agreements contained herein that are required to be performed by
RealNetworks on or prior to the Closing Date, and the Company shall have
received a certificate of an executive officer of RealNetworks, dated the
Closing Date, certifying to such effect.
(b) Each of the representations and warranties by RealNetworks and
Purchaser contained in this Agreement shall be true and correct in all material
respects (or where any statement in a representation or warranty expressly
contains a standard of materiality, such statement shall be true and correct in
all respects) at, or as of, the date of this Agreement, and (except to the
extent such representation speaks as of an earlier date) as of the Closing Date
as though such representations and warranties were made on and as of said date,
except with respect to changes expressly contemplated in this Agreement and
inaccuracies which do not involve a RealNetworks Material Adverse Effect, and
the Company shall have received a certificate of an executive officer of
RealNetworks and Purchaser, dated as of the Closing Date, certifying to such
effect.
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(c) The Company shall have received from RealNetworks certified copies of
the resolutions of RealNetworks' and Purchaser's Boards of Directors approving
and adopting this Agreement, the RealNetworks Operative Documents and the
transactions contemplated hereby and thereby.
(d) From the date of this Agreement through the Effective Time, there
shall not have occurred any event that has had, would have or would be
reasonably likely to have a RealNetworks Material Adverse Effect; provided, that
such an event will not be deemed to have occurred solely as a result of
fluctuations in the value of RealNetworks Common Stock due to or arising from
any public disclosures by RealNetworks or others, including, without limitation,
disclosures relating to RealNetworks' entering into any other transactions
(including, without limitation, transactions relating to the acquisition of
assets, stock or merger transactions).
6.3. Conditions to Obligation of RealNetworks and Purchaser to Effect the
Merger. The obligations of RealNetworks and Purchaser to effect the Merger
shall be subject to the fulfillment at or prior to the Closing Date of the
following conditions (unless waived by RealNetworks in accordance with the
provisions of Section 7.3 hereof):
(a) The Company shall have performed, in all material respects, all of its
agreements contained herein that are required to be performed by the Company on
or prior to the Closing Date, and RealNetworks shall have received a certificate
of an executive officer of the Company, dated the Closing Date, certifying to
such effect.
(b) Each of the representations and warranties by the Company contained in
this Agreement shall be true and correct in all material respects (or where any
statement in a representation or warranty expressly contains a standard of
materiality, such statement shall be true and correct in all respects) at, or as
of, the date of this Agreement without giving effect to any supplement to the
Disclosure Statement for matters other than those permitted by, or approved by
RealNetworks in accordance with, Section 5.2, and (except to the extent such
representation speaks as of an earlier date) as of the Closing Date as though
such representations and warranties were made on and as of said date, except
with respect to changes expressly contemplated in this Agreement and
inaccuracies which do not involve, individually or in the aggregate, a dollar
amount in excess of $2,500,000 (the "Liability Threshold"), and RealNetworks
shall have received a certificate of an executive officer of the Company, dated
as of the Closing Date, certifying to such effect.
(c) RealNetworks shall have received from the Company certified copies of
the resolutions of the Board and the Shareholders approving and adopting this
Agreement, the Company Operative Documents and the transactions contemplated
hereby and thereby.
(d) RealNetworks shall have received the opinion of Munger, Tolles &
Olson, LLP as to the matters described in Schedule 6.3(d) hereto.
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(e) On or prior to the Closing Date, the Company shall deliver to
RealNetworks a properly executed statement in a form reasonably acceptable to
RealNetworks for purposes of satisfying RealNetworks' obligations under Treasury
Regulation Section 1.1445-2(c)(3).
(f) From the date of this Agreement through the Effective Time, there
shall not have occurred any event that has had, or would be reasonably likely to
have, a material adverse change in the business, operations, assets, liabilities
or financial condition of the Company involving, individually or in the
aggregate, a dollar amount in excess of $2,500,000.
(g) The Company shall have received all necessary consents, as identified
on Schedule 6.3(g), if any.
(h) All of the holders of the Preferred Stock shall have converted their
Preferred Stock into Company Common Stock pursuant to Article IV, Section
3(l)(ii) of the Company's Articles of Incorporation.
(i) The holders of not more than five percent (5%) of the outstanding
shares of Company Common Stock shall have perfected dissenters' rights under
applicable law.
(j) RealNetworks shall have received the written resignations effective as
of the Closing Date of such of the directors, board observers and officers of
the Company and its Subsidiaries (to the extent designated by the Company) as
are designated by RealNetworks to resign.
(k) RealNetworks shall have received the Affiliate Letters from each of
the Affiliates identified by the Company pursuant to Section 5.8. RealNetworks
shall be entitled to place legends as specified in such Affiliate Letters on the
certificates evidencing any RealNetworks Common Stock to be received by such
Affiliates pursuant to the terms of this Agreement, and to issue appropriate
stop transfer instructions to the transfer agent for the RealNetworks Common
Stock, consistent with the terms of such Affiliate Letters.
(l) RealNetworks shall have received audited financial statements of the
Company for the fiscal year ended June 30, 1998 and the interim period ended
February 28, 1999.
(m) RealNetworks shall have received a letter from KPMG LLP, dated the
Closing Date, stating that KPMG LLP concurs with management's conclusion that
the Merger qualifies for treatment as a "pooling of interests" for accounting
purposes.
ARTICLE VII
TERMINATION
7.1. Termination. This Agreement may be terminated and the Merger may be
abandoned at any time before the Closing Date notwithstanding the approval or
adoption of
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this Agreement by the Shareholders and subject to the payment obligations
contained in Section 7.2 hereof:
(a) By the mutual written consent of RealNetworks and the Company.
(b) By written notice from the Board of Directors of either RealNetworks
or the Company if (i) the approval of the Shareholders required by Section
6.1(a) shall not have been obtained at a meeting duly convened therefor or at
any adjournment thereof (or as a result of any consent solicitation; provided,
however, that any failure to obtain requisite approval by consent shall not
relieve the Company from calling a meeting of the Shareholders to consider the
Merger); and provided further, that the Company shall not have the right to
terminate this Agreement under this Section 7.1(b)(i) if the Company caused
(directly or indirectly) or aided in the failure to obtain such approval other
than pursuant to the reasonable exercise of its fiduciary duties; or (ii) a
court of competent jurisdiction or a governmental, regulatory or administrative
agency or commission shall have issued an order, decree or ruling or taken any
other action either (A) permanently restraining, enjoining or otherwise
prohibiting the transactions contemplated by this Agreement; or (B) compelling
RealNetworks, Purchaser or the Surviving Corporation to dispose of or hold
separate all or a material portion of the respective businesses or assets of
RealNetworks and the Company, or sell or license any material product of
RealNetworks or the Company, and such order, decree, ruling or other action
shall have become final and non-appealable.
(c) By either RealNetworks or the Company if the Closing has not occurred
(other than through the failure of the party seeking to terminate this Agreement
to comply with its obligations under this Agreement) on or before July 31, 1999.
(d) By RealNetworks, if without its prior approval, (A) the Company (I)
shall have withdrawn, modified, or amended in any respect its approval or
recommendation of this Agreement or the transactions contemplated hereby, (II)
shall not have recommended or shall have withdrawn, modified, or amended in any
respect its recommendation that the Shareholders vote in favor of this
Agreement, (III) shall not have included such recommendation in the Proxy
Statement; or (IV) shall have taken any action or public position inconsistent
with such approval or recommendation; or (B) the Board shall have resolved to do
any of the foregoing, in each of subparagraphs (A) or (B) above, other than upon
the happening of an event described in Section 7.1(f).
(e) By RealNetworks if any Person shall have solicited proxies in
opposition to the approval of the Merger, and the Board has taken action or a
public position consistent with approving of such Person's proxy solicitation.
(f) By action of the Board of the Company, if (i) there has been a breach
by RealNetworks or Purchaser of any representation or warranty contained in this
Agreement which would have a RealNetworks Material Adverse Effect, which is not
curable or, if curable, is not cured within thirty (30) days after RealNetworks
became aware of such
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breach; (ii) there has been a material breach of any of the material covenants
or agreements set forth in this Agreement on the part of RealNetworks, which
breach is not curable or, if curable, is not cured within thirty (30) days after
written notice of such breach is given by the Company to RealNetworks, and in
the case of (i) or (ii), which results in a failure of RealNetworks to fulfill
the conditions set forth in Section 6.2(a) or (b) as applicable; or (iii)
RealNetworks has engaged in any gross negligence, willful misconduct or fraud.
(g) By action of the Board of Directors of RealNetworks, if (i) there has
been a breach by the Company of any representation or warranty contained in this
Agreement which would result in a Liability Threshold; (ii) there has been a
material breach of any of the material covenants or agreements set forth in this
Agreement on the part of the Company, which breach is not curable or, if
curable, is not cured within thirty (30) days after written notice of such
breach is given by RealNetworks to the Company, and in the case of (i) or (ii),
which results in a failure of the Company to fulfill the conditions set forth in
Section 6.3(a) or (b) as applicable; or (iii) the Company has engaged in any
gross negligence, willful misconduct or fraud.
7.2. Effect of Termination and Abandonment.
(a) If the Company terminates this Agreement pursuant to Section 7.1(f),
RealNetworks shall reimburse the Company for all actual out-of-pocket costs and
expenses incurred by the Company in connection with this Agreement and the
consummation and negotiation of the transactions contemplated hereby,
(including, without limitation, legal, professional and service fees and
expenses) up to a maximum aggregate amount of $200,000, which amount shall be
payable by wire transfer of same day funds within ninety (90) days from the date
of termination of this Agreement.
(b) If RealNetworks terminates this Agreement pursuant to Sections 7.1
(d), 7.1 (e) or 7.1 (g), the Company shall reimburse RealNetworks for all actual
out-of-pocket costs and expenses incurred by RealNetworks and Purchaser in
connection with this Agreement and the consummation and negotiation of the
transactions contemplated hereby, (including, without limitation, legal,
professional and service fees and expenses) up to a maximum aggregate amount of
$200,000, which amount shall be payable by wire transfer of same day funds,
within ninety (90) days from the date of termination of this Agreement.
(c) Each party acknowledges that the agreements contained in this Section
7.2 are an integral part of the transactions contemplated by this Agreement, and
that, without these agreements, the other parties would not enter into this
Agreement. Accordingly, if either party fails to promptly pay the amount due
pursuant to this Section 7.2, and, in order to obtain such payment, the other
party commences a suit which results in a final, non-appealable judgment against
the non-paying party for the fee set forth in this Section 7.2, the nonpaying
party shall pay to the other party its costs and expenses (including attorneys'
fees) incurred by the other party in connection with such suit, together with
interest on the amount of the fee at the rate of 15% per annum.
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(d) In the event of termination of this Agreement and the abandonment of
the Merger pursuant to this Article VII, all obligations of the parties hereto
(other than rights and obligations arising from the breach of this Agreement
prior to termination) shall terminate, except the obligations of the parties
pursuant to this Section 7.2 and the provisions of Section 5.6, which
obligations shall survive the termination of this Agreement.
(e) The rights of RealNetworks under the License Agreement by and between
RealNetworks and the Company of even date herewith (the "License Agreement"),
shall survive the termination of this Agreement to the extent set forth therein.
7.3. Extension; Waiver. At any time prior to the Effective Time, any
party hereto, by action taken by its Board of Directors, may, to the extent
legally allowed, (a) extend the time for the performance of any of the
obligations or other acts of the other parties hereto; (b) waive any
inaccuracies in the representations and warranties made to such party contained
herein or in any document delivered pursuant hereto; and (c) waive compliance
with any of the agreements or conditions for the benefit of such party contained
herein. Any agreement on the part of a party hereto to any such extension or
waiver shall be valid only if set forth in an instrument in writing signed on
behalf of such party.
ARTICLE VIII
INDEMNIFICATION
8.1. General. From and after the Closing, subject to the limitations set
forth in Section 8.5, the parties shall indemnify each other as provided in this
Article VIII. For purposes of this Article VIII, each party shall be deemed to
have remade all of its representations and warranties contained in this
Agreement at the Closing with the same effect as if originally made at the
Closing; provided, however, that the RealNetworks Disclosure Statement and the
Disclosure Statement may be updated at the Closing by RealNetworks and the
Company, as the case may be, and, except as otherwise provided in this Article
VIII, no indemnity shall be provided hereunder with respect to the matters set
forth therein. No disclosure contained in the updated RealNetworks Disclosure
Statement or the Disclosure Statement, as the case may be, shall be deemed a
waiver of RealNetworks' or the Company's representations and warranties made on
the date hereof with respect to the conditions to closing set forth in Sections
6.2(b) and 6.3(b) hereof.
8.2. Certain Definitions. As used in this Article VIII, the following
terms shall have the indicated meanings:
(a) "Damages" shall mean all liabilities, assessments, levies, losses,
fines, penalties, damages, costs and expenses, including, without limitation,
reasonable fees and expenses of attorneys, accountants and other professionals,
actually sustained or incurred by an Indemnified Party in connection with the
defense or investigation of any claim (after giving effect to any insurance
proceeds actually received by an Indemnified Party).
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(b) "Indemnified Party" shall mean a party hereto who is entitled to
indemnification from another party hereto pursuant to this Article VIII.
(c) "Indemnifying Party" shall mean a party hereto who is required to
provide indemnification under this Article VIII to another party hereto.
(d) "Third Party Claims" shall mean any claims for Damages which are
asserted or threatened by a party other than the parties hereto, their
successors and permitted assigns, against any Indemnified Party or to which an
Indemnified Party is subject.
8.3. Indemnification of RealNetworks and the Purchaser. Subject to and in
accordance with the terms of Section 8.5, RealNetworks and the Purchaser, each
of their respective Subsidiaries and their respective successors and permitted
assigns (each a "RealNetworks Indemnitee" and collectively the "RealNetworks
Indemnitees") shall be entitled to be indemnified and held harmless against and
from all Damages sustained or incurred by any RealNetworks Indemnitee, as a
result of or arising out of: (a) any inaccuracy in or breach of any
representation and warranty made by the Company to RealNetworks herein or in any
Company Operative Document, without giving effect to any supplement to the
Disclosure Statement for matters other than those permitted by, or approved by
RealNetworks in accordance with, Section 5.2; (b) any breach by the Company of,
or failure of the Company to comply with, any of the covenants or obligations
under this Agreement or the Company Operative Documents to be performed by the
Company (including, without limitation, the Company's obligations under this
Article VIII).
8.4. Indemnification of the Company and the Shareholders. Subject to the
terms of Section 8.5, RealNetworks shall indemnify, save and keep the Company,
the Shareholders and their respective successors and permitted assigns ("Company
Indemnitees"), forever harmless against and from all Damages sustained or
incurred by any Company Indemnitee, as a result of or arising out of: (a) any
inaccuracy in or breach of any representation and warranty made by RealNetworks
to the Company herein or in any RealNetworks Operative Document; and (b) any
breach by RealNetworks of, or failure by RealNetworks to comply with, any of the
covenants or obligations under this Agreement or the RealNetworks Operative
Documents to be performed by RealNetworks (including, without limitation, its
obligations under this Article VIII).
8.5. Limitation on Indemnification Obligations.
(a) All representations and warranties made by any party to this Agreement
shall survive the Closing for a period ending the earlier of: (i) twelve months
from the Closing Date; or (ii) the date of completion of the next independent
audit of the financial statements of RealNetworks (the "Survival Period"). A
claim by a RealNetworks Indemnitee or a Company Indemnitee for indemnification
under this Article VIII must be asserted within the applicable Survival Period.
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(b) (i) The indemnification rights of a RealNetworks Indemnitee pursuant
to this Article VIII shall be limited to the Escrow Shares and shall be subject
to the terms and conditions of the Escrow Agreement; provided that the Executive
Shareholders, severally and not jointly, shall each be liable (without
limitation) for Damages suffered by the Company as a direct result of his own
respective acts of intentional fraud. In no event shall an Executive Shareholder
be responsible or liable for acts or omissions prior to the date on which such
Executive Shareholder first provided services to the Company. Except as
otherwise set forth in this Article VIII with respect to the Executive
Shareholders, RealNetworks shall not be entitled to pursue any claims for
indemnification under this Article VIII (each a "Claim") against the
Shareholders directly or personally and the sole recourse of RealNetworks for
indemnification shall be to make Claims against the Escrow Shares in accordance
with the terms of the Escrow Agreement. With respect to each of the Executive
Shareholders, RealNetworks shall be entitled to make claims against the Escrow
Shares and, to the extent permitted under the first sentence of this Section
8.5(b)(i), directly and personally against the applicable Executive Shareholder.
(ii) The Escrow Shares shall be held for the Survival Period, except that,
to the extent permitted under the Escrow Agreement and provided that retention
of such Escrow Shares does not violate the requirements to account for the
transaction as a "pooling of interests", Escrow Shares may be withheld after the
expiration of the Survival Period to satisfy claims for indemnification which
are the subject of an indemnity claim by an RealNetworks Indemnitee pursuant to
a Claim Notice (as defined below) delivered to the Indemnity Representative
prior to the expiration of the Survival Period.
(c) Notwithstanding Sections 8.3, 8.4, and 8.5(b)(i) as it relates to the
Executive Shareholders, (i) no party shall have liability under said sections
unless the aggregate of all Damages for which such party would otherwise be
required to provide indemnity under said sections exceeds (individually or in
the aggregate) One Hundred Thousand Dollars ($100,000) in which case the full
dollar value of any Claim or Claims may be made pursuant to this Section VIII,
and (ii) no individual Claim or series of related Claims for indemnification
under said sections shall be valid and assertable unless it is (or they are) for
an amount in excess of Five Thousand Dollars ($5,000).
(d) The indemnification obligations of RealNetworks pursuant to Section
8.4 hereof shall be limited to an amount equal to $5,000,000 in the aggregate,
exclusive of (i) RealNetworks' obligations set forth in Section 5.16, to which
no limit shall apply, and (ii) RealNetworks' obligation to distribute the Escrow
Shares under the terms of the Escrow Agreement.
(e) For purposes of the indemnification obligations hereunder, (i) any
inaccuracy in or a breach of a representation or warranty shall be deemed to
constitute a breach of such representation or warranty, notwithstanding any
limitation or qualification as to materiality or Material Adverse Effect set
forth in such representation or warranty, as to the scope, accuracy or
completeness thereof and (ii) no supplement or amendment to the Disclosure
Statement
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shall have the effect of excluding Damages arising from any liability so
disclosed from the calculation of any indemnifiable amount under this Article
VIII for matters other than those permitted by, or approved by RealNetworks in
accordance with, Section 5.2.
(f) The satisfaction of any Damages owed to RealNetworks under this
Article VIII shall be made by delivery by the Escrow Agent to RealNetworks of
that number of Escrow Shares calculated by dividing the dollar amount of any
Damage by the Average Closing Price.
8.6. Cooperation. Subject to the provisions of Section 8.8, the
Indemnifying Party shall have the right, at its own expense, to participate in
the defense of any Third Party Claim, and if said right is exercised, the
parties shall cooperate in the investigation and defense of said Third Party
Claim.
8.7. Subrogation. The Indemnifying Party shall not be entitled to require
that any action be brought against any other person before action is brought
against it hereunder by the Indemnified Party and shall not be subrogated to any
right of action until it has paid in full or successfully defended against the
Third Party Claim for which indemnification is sought.
8.8. Indemnification Claims Procedures.
(a) In connection with Claims by a Company Indemnitee, or by a
RealNetworks Indemnitee against an Executive Shareholder, the Indemnified Party
shall give written notice (the "Claim Notice") of any Claim for indemnification
under this Article VIII to the Indemnifying Party as promptly as practicable,
but in any event: (i) if such Claim relates to a Third Party Claim, within 30
days after the assertion of such Third Party Claim, or (ii) if such Claim is not
in respect of a Third Party Claim, within 30 days after the discovery of facts
upon which the Indemnified Party intends to base a Claim for indemnification
pursuant to Article VIII hereof; provided, however, that the failure or delay to
so notify the Indemnifying Party shall not relieve the Indemnifying Party of any
obligation or liability that the Indemnifying Party may have to the Indemnified
Party except to the extent that the Indemnifying Party demonstrates that the
Indemnifying Party's ability to defend or resolve such Claim is adversely
affected thereby. Any such Claim Notice shall describe the facts and
circumstances on which the asserted Claim for indemnification is based and shall
specify how such Indemnified Party intends to recover such funds pursuant to
this Agreement and the basis for the determination of the amount which the
Indemnified Party intend to recover.
(b) The Provisions of this subsection (b) shall apply to Claims by a
Company Indemnitee, or by a RealNetworks Indemnitee against an Executive
Shareholder, arising from Third Party Claims.
(i) Subject to the rights of or duties to any insurer or other third
party having potential liability therefor, the Indemnifying Party shall
have the right, upon
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written notice given to the Indemnified Party within 30 days after receipt
of the notice from the Indemnified Party of any Third Party Claim, to
assume the defense or handling of such Third Party Claim, at the
Indemnifying Party's sole expense, in which case the provisions of Section
8.8(b)(ii) hereof shall govern.
(ii) The Indemnifying Party shall select counsel reasonably acceptable
to the Indemnified Party in connection with conducting the defense or
handling of such Third Party Claim, and the Indemnifying Party shall defend
or handle the same in consultation with the Indemnified Party and shall
keep the Indemnified Party timely apprised of the status of such Third
Party Claim. The Indemnifying Party shall not, without the prior written
consent of the Indemnified Party, agree to a settlement of any Third Party
Claim, unless (A) the settlement provides an unconditional release and
discharge of the Indemnified Party and the Indemnified Party is reasonably
satisfied with such discharge and release and (B) except in the case of an
Executive Shareholder, the Indemnified Party shall not have reasonably
objected to any such settlement on the ground that the circumstances
surrounding the settlement could result in an adverse impact on the
business, operations, assets, liabilities (absolute, accrued, contingent or
otherwise), condition (financial or otherwise) or prospects of the
Indemnified Party. The Indemnified Party shall cooperate with the
Indemnifying Party and shall be entitled to participate in the defense or
handling of such Third Party Claim with its own counsel and at its own
expense.
(c) In connection with Claims for indemnity arising under subsection (b)
above, the further provisions of this subsection (c) shall apply.
(i) If the Indemnifying Party does not give written notice to the
Indemnified Party within 30 days after receipt of the notice from the
Indemnified Party of any Third Party Claim of the Indemnifying Party's
election to assume the defense or handling of such Third Party Claim, the
provisions of Section 8.8(c)(ii) hereof shall govern.
(ii) The Indemnified Party may, at the Indemnifying Party's expense
(which shall be paid from time to time by the Indemnifying Party as such
expenses are incurred by the Indemnified Party), select counsel in
connection with conducting the defense or handling of such Third Party
Claim and defend or handle such Third Party Claim in such manner as it may
deem appropriate; provided, however, that the Indemnified Party shall keep
the Indemnifying Party timely apprised of the status of such Third Party
Claim and shall not settle such Third Party Claim without the prior written
consent of the Indemnifying Party, which consent shall not be unreasonably
withheld. If the Indemnified Party defends or handles such Third Party
Claim, the Indemnifying Party shall cooperate with the Indemnified Party
and shall be entitled to participate in the defense or handling of such
Third Party Claim with its own counsel and at its own expense.
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(d) The provisions of this subsection (d) shall apply to Claims by a
RealNetworks Indemnitee other than those referred to in subsections (a), (b) or
(c) above.
(i) RealNetworks shall give a Claim Notice to the Indemnity
Representative and Escrow Agent specifying in reasonable detail the nature
and dollar amount of the Claim. If the Indemnity Representative gives
notice to RealNetworks and the Escrow Agent disputing any such Claim (a
"Counter Notice") within 30 days following receipt by the Indemnity
Representative of the original Claim Notice regarding such Claim, such
Claim shall be resolved as provided in clause (iii) below. If no Counter
Notice is received by the Escrow Agent within such 30-day period, then the
dollar amount of Damages claimed by the RealNetworks Indemnitee as set
forth in the Claim Notice shall be deemed established for purposes of the
Escrow Agreement and this Agreement and, at the end of the 30-day period,
the Escrow Agent shall promptly deliver to RealNetworks that number of
Escrow Shares calculated by dividing the dollar amount of such Damage by
the Average Closing Price. Neither the Escrow Agent nor the Indemnity
Representative shall be required to inquire into or consider whether a
Claim complies with the requirements of this Agreement and the Escrow
Agreement.
(ii) If a Counter Notice is given with respect to a Claim, then the
Escrow Agent shall make payment with respect to the contested amount only
if (x) RealNetworks and the Indemnity Representative issue a joint written
instruction to the Escrow Agent specifically authorizing such payment, or
(y) written instructions are issued to the Escrow Agent by a duly
authorized representative of The American Arbitration Association ("AAA")
acting as arbitrator in accordance with the provisions hereof specifically
authorizing such payment. Either RealNetworks or the Indemnity
Representative may submit the matter to binding arbitration before the AAA
in Seattle, Washington, which arbitration shall be final and binding on the
parties and the exclusive method, absent agreement between RealNetworks and
the Indemnity Representative, for purposes of determining the ability of
RealNetworks to satisfy the Claim against the Escrow Shares.
(iii) The following provisions shall apply to any such arbitration:
(A) All claims shall be settled by one arbitrator in
accordance with the Commercial Arbitration Rules then in effect of the AAA
(the "AAA Rules"). If the Indemnity Representative and RealNetworks are
unable to resolve any such dispute within 30 days after delivery of the
Counter Notice, the Indemnity Representative and RealNetworks shall have an
arbitrator appointed in accordance with the AAA Rules. The Indemnity
Representative and RealNetworks shall cause the arbitrator to decide the
matter to be arbitrated pursuant hereto within 30 days after the
appointment of the arbitrator. The arbitrator's decision shall relate
solely to whether RealNetworks is entitled to receive the contested amount
(or a portion thereof) pursuant to the applicable terms of the Merger
Agreement. The final
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decision of the arbitrator shall be furnished to the Indemnity
Representative, RealNetworks and the Escrow Agent in writing and shall
constitute the conclusive determination of the issue in question binding
upon the Indemnity Representative, RealNetworks and the Escrow Agent, and
shall not be contested by any of them. Such decision may be used in a court
of law only for the purpose of seeking enforcement of the arbitrator's
decision.
(B) All of the fees and expenses of the arbitrator shall be
paid by RealNetworks; provided, however, that if RealNetworks is the
prevailing party in the arbitration, such fees and expenses shall be
treated as "Damages" and RealNetworks shall be entitled to recover the
amount of such fees and expenses from the Escrow Shares in accordance with
the provisions of this Agreement and the Escrow Agreement. For purposes of
this Agreement and the Escrow Agreement, the prevailing party shall be that
party in whose favor final judgment is rendered or who substantially
prevails, if both parties are awarded judgment.
(C) In the event the prevailing party is the Indemnity
Representative, the reasonable fees (including reasonable attorneys' fees)
and expenses of the Indemnity Representative shall be paid by RealNetworks.
In the event the prevailing party is RealNetworks, then (i) to the extent
that there shall be Escrow Shares remaining after satisfaction of the
particular Damage, the reasonable fees and expenses of RealNetworks and the
Indemnity Representative shall be paid by RealNetworks; provided, however,
that such fees and expenses shall be treated as "Damages" and RealNetworks
shall be entitled to recover the amount of such fees and expenses from the
Escrow Shares in accordance with the Escrow Agreement, or (ii) to the
extent that there shall not be Escrow Shares remaining sufficient to
satisfy the payment of such reasonable fees and expenses, such portion of
the fees and expenses as shall deplete the remaining Escrow Shares shall be
treated as "Damages," with the balance paid by RealNetworks.
8.9. Remedies. Except as otherwise provided, the indemnification
provisions of this Article VIII are the sole and exclusive remedy of any party
to this Agreement for a breach of any representation, warranty or covenant
contained herein. Notwithstanding the preceding sentence, each of the parties
acknowledges and agrees that the other parties hereto would be damaged
irreparably in the event any of the provisions of this Agreement are not
performed in accordance with their specific terms or otherwise are breached.
Accordingly, each of the parties hereto agrees that the other parties hereto
shall be entitled to an injunction to prevent breaches of the provisions of this
Agreement and to enforce specifically this Agreement and the terms and
provisions hereof (including the indemnification provisions hereof) in any
competent court having jurisdiction over the parties, in addition to any other
remedy to which they may be entitled at law or in equity.
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ARTICLE IX
GENERAL PROVISIONS
9.1. Notices. All notices required or permitted to be given hereunder
shall be in writing and may be delivered by hand, by facsimile or by nationally
recognized private courier. Notices delivered by hand by facsimile, or by
nationally recognized private carrier shall be deemed given on the day following
receipt; provided, however, that a notice delivered by facsimile shall only be
effective if such notice is also delivered by hand, or deposited in the United
States mail, postage prepaid, registered or certified mail, on or before two (2)
business days after its delivery by facsimile. All notices shall be addressed as
follows:
If to RealNetworks: If to the Company:
RealNetworks, Inc. Xing Technology Corporation
1111 Third Avenue, Suite 2900 2925 McMillan Avenue
Seattle, Washington 98101 San Luis Obispo, California 93401
Fax: (206) Fax: (805) 783-4931
Attn: KellyJo MacArthur, Esq. Attn: Dean Kaplan, Chief
Vice President, General Counsel Financial Officer
With copies to: With copies to:
Perkins Coie LLP Munger, Tolles & Olson LLP
1201 Third Avenue, 40th Floor 355 South Grand Avenue
Seattle, Washington 98101-3099 Los Angeles, California 90071
Fax: (206) 583-8500 Fax: (213) 687-3702
Attn: Scott L. Gelband, Esq. Attn: Robert L. Adler, Esq.
If to Hassan Miah: If to Dean Kaplan:
Hassan Miah Dean Kaplan
4958 Bridge Creek Road 4677 Snapdragon Way
San Luis Obispo, California 93401 San Luis Obispo, California 93401
With copies to: With copies to:
LeWinter & Rosman Greenberg, Glusker, Fields & Christie
16255Ventura Boulevard, Suite 600 1900 Avenue of the Stars, Suite 2000
Encino, California 91436 Los Angeles, California 90067
Fax: (818) 784-5096 Fax: (310) 553-0687
Attn: Richard D. Rosman, Esq. Attn: Michael Bales, Esq.
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or to such other address as any party shall specify by written notice so given,
and such notice shall be deemed to have been delivered as of the date so
telecommunicated, personally delivered or mailed.
9.2. Assignment, Binding Effect. Neither this Agreement nor any of the
rights, interests or obligations hereunder shall be assigned by any of the
parties hereto (whether by operation of law or otherwise) without the prior
written consent of the other parties. Subject to the preceding sentence, this
Agreement shall be binding upon and shall inure to the benefit of the parties
hereto and their respective permitted successors and assigns. Notwithstanding
anything contained in this Agreement to the contrary, except for the provisions
of Sections 1.4, 1.5, 1.6, 1.7, 1.8, 2.3, 2.4, and 5.16, nothing in this
Agreement, expressed or implied, is intended to confer on any person other than
the parties hereto or their respective heirs, successors, executors,
administrators and assigns any rights, remedies, obligations or liabilities
under or by reason of this Agreement.
9.3. Entire Agreement. This Agreement, the Exhibits, the Disclosure
Statement, the RealNetworks Disclosure Statement, the Confidentiality Agreement,
the Company Operative Documents, the RealNetworks Operative Agreements, the
License Agreement and any other documents delivered by the parties in connection
herewith constitute the entire agreement among the parties with respect to the
subject matter hereof and supersede all prior agreements and understandings
among the parties with respect thereto, including, but not limited to, the
Letter of Intent dated as of March 17, 1999. No addition to or modification of
any provision of this Agreement shall be binding upon any party hereto unless
made in writing and signed by all parties hereto.
9.4. Amendment. This Agreement may be amended by the parties hereto, by
action taken by their respective Boards of Directors, at any time before or
after approval of matters presented in connection with the Merger by the
Shareholders, but after any such Shareholder approval, no amendment shall be
made which by law requires the further approval of Shareholders without
obtaining such further approval. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties hereto.
9.5. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California without regard to its rules
of conflict of laws.
9.6. Counterparts. This Agreement may be executed by the parties hereto
in separate counterparts, each of which when so executed and delivered shall be
an original, but all such counterparts shall together constitute one and the
same instrument.
9.7. Headings. Headings of the Articles and Sections of this Agreement
are for the convenience of the parties only and shall be given no substantive or
interpretive effect whatsoever.
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9.8. Interpretation. In this Agreement, unless the context otherwise
requires, words describing the singular number shall include the plural and vice
versa, and words denoting any gender shall include all genders and words
denoting natural persons shall include corporations and partnerships and vice
versa.
9.9. Waivers. Except as provided in this Agreement, no action taken
pursuant to this Agreement, including, without limitation, any investigation by
or on behalf of any party, shall be deemed to constitute a waiver by the party
taking such action of compliance with any representations, warranties, covenants
or agreements contained in this Agreement. The waiver by any party hereto of a
breach of any provision hereunder shall not operate or be construed as a waiver
of any prior or subsequent breach of the same or any other provision hereunder.
9.10. Incorporation of Exhibits. The Disclosure Statement, the
RealNetworks Disclosure Statement and all Exhibits and Schedules attached hereto
and referred to herein are hereby incorporated herein and made a part hereof for
all purposes as if fully set forth herein.
9.11. Severability. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of this
Agreement is so broad as to be unenforceable, the provision shall be interpreted
to be only so broad as is enforceable.
9.12. Enforcement of Agreement. The parties hereto agree that irreparable
damage would occur in the event that any of the provisions of this Agreement was
not performed in accordance with its specific terms or was otherwise breached.
It is accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions hereof in any court of competent jurisdiction, this
being in addition to any other remedy to which they are entitled at law or in
equity.
[The remainder of this page is left intentionally blank.]
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IN WITNESS WHEREOF, the parties have executed this Agreement and caused the
same to be duly delivered on their behalf on the day and year first written
above.
REALNETWORKS, INC.
By: /s/ Robert Glaser
----------------------------------------
Title: Chief Executive Officer
-------------------------------------
XTC ACQUISITION CORP.
By: /s/ Robert Glaser
----------------------------------------
Title: President
-------------------------------------
XING TECHNOLOGY CORPORATION
By: /s/ Hassan Miah
----------------------------------------
Title: President and Chief Executive Officer
-------------------------------------
/s/ Hassan Miah
---------------------------------------------
Hassan Miah
/s/ Dean Kaplan
---------------------------------------------
Dean Kaplan
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EXHIBIT 10.1
REALNETWORKS, INC.
AMENDED AND RESTATED
1996 STOCK OPTION PLAN
(as amended and restated
as of April 12, 1999)
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<C> <S> <C>
ARTICLE 1 PURPOSE AND EFFECTIVENESS.......................................... 1
1.1 Purpose............................................................ 1
1.2 Effective Date..................................................... 1
1.3 Acquired Company Awards............................................ 1
ARTICLE 2 DEFINITIONS........................................................ 2
2.1 Certain Defined Terms.............................................. 2
ARTICLE 3 ADMINISTRATION..................................................... 4
3.1 Administrative Committee........................................... 4
3.2 Appointment of Administrative Committee............................ 4
3.3 Powers; Regulations................................................ 4
3.4 Limits on Authority................................................ 5
3.5 Exercise of Authority.............................................. 5
ARTICLE 4 SHARES SUBJECT TO THE PLAN......................................... 5
4.1 Number of Shares................................................... 5
4.2 Adjustments........................................................ 5
ARTICLE 5 ELIGIBILITY........................................................ 6
ARTICLE 6 STOCK OPTIONS...................................................... 6
6.1 Grant of Options................................................... 6
6.2 Purchase Price..................................................... 6
6.3 Limitations on Grants.............................................. 6
6.4 Term of Options.................................................... 7
6.5 Option Agreement................................................... 7
6.6 Exercise of Options................................................ 7
6.7 Manner of Exercise................................................. 8
6.8 Legends............................................................ 8
6.9 Nontransferability................................................. 9
6.10 Repurchase of Shares............................................... 9
6.11 Class of Common Stock.............................................. 10
6.12 Delegation to Executive Officer of Authority to Grant Options...... 11
ARTICLE 7 GENERAL PROVISIONS................................................. 11
7.1 Acceleration of Options--Approved Transactions; Control Purchase... 11
7.2 Termination of Services............................................ 12
7.3 Right to Terminate Services........................................ 13
</TABLE>
<PAGE>
<TABLE>
<C> <S> <C>
7.4 Nonalienation of Benefits.......................................... 13
7.5 Shareholders Agreement............................................. 13
7.6 Termination and Amendment.......................................... 14
7.7 Government and Other Regulations................................... 14
7.8 Withholding........................................................ 15
7.9 Separability....................................................... 15
7.10 Non-Exclusivity of the Plan........................................ 15
7.11 Exclusion from Pension and Profit-Sharing Computation.............. 15
7.12 No Shareholder Rights.............................................. 15
7.13 Governing Law...................................................... 15
7.14 Company's Rights................................................... 15
</TABLE>
<PAGE>
RealNetworks, Inc.
AMENDED AND RESTATED 1996 STOCK OPTION PLAN
1
PURPOSE AND EFFECTIVENESS
1.1 Purpose. The purpose of the 1996 Stock Option Plan (the "Plan") is
to provide a method by which selected individuals rendering services to
RealNetworks, Inc., a Washington corporation (the "Company"), may be offered an
opportunity to invest in capital stock of the Company, thereby increasing their
personal interest in the growth and success of the Company. The Plan is also
intended to aid in attracting persons of exceptional ability to become officers
and employees of the Company.
1.2 Effective Date; Shareholder Approval. The Plan shall be effective at
the time specified in the resolutions of the Board adopting the Plan (the
"Effective Date"). The Plan shall be subject to the requirement of RCW
21.20.310(10) that the Administrator of Securities of the Department of
Financial Institutions of the State of Washington be provided with notification
of the adoption of the Plan. No Option shall be granted hereunder until this
notification requirement has been satisfied. The issuance of Incentive Stock
Options shall be subject to approval of the Plan by holders of shares of Common
Stock constituting at least a majority of the shares of Common Stock represented
in person or by proxy at the meeting at which the approval is sought. If this
shareholder approval requirement is not satisfied within twelve (12) months
after the Effective Date, all Incentive Stock Options issued under the Plan
shall automatically become Nonqualified Stock Options.
1.3 Acquired Company Awards. Notwithstanding anything in the Plan to the
contrary, the Administrative Committee may grant Options under the Plan in
substitution for options issued under other plans, or assume under the Plan
options issued under other plans, if the other plans are or were plans of other
acquired entities ("Acquired Entities") (or the parent of the Acquired Entity)
and the new Option is substituted, or the old option is assumed, by reason of a
merger, consolidation, acquisition of property or of stock, reorganization or
liquidation (the "Acquisition Transaction"). In the event that a written
agreement pursuant to which the Acquisition Transaction is completed is approved
by the Board and said agreement sets forth the terms and conditions of the
substitution for or assumption of outstanding options of the Acquired Entity,
said terms and conditions shall be deemed to be the action of the Administrative
Committee without any further action by the Administrative Committee, except as
may be required for compliance with Rule 16b-3 under the Exchange Act, and the
persons holding such awards shall be deemed to be Holders.
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2
DEFINITIONS
2.1 Certain Defined Terms. Capitalized terms not defined elsewhere in
the Plan shall have the following meanings (whether used in the singular or
plural):
"Administrative Committee" is defined in Section 3.1.
"Affiliate" of the Company means any corporation, partnership, or other
business association that, directly or indirectly, through one or more
intermediaries, controls, is controlled by, or is under common control with the
Company.
"Approved Transaction" means (a) any merger, consolidation or binding share
exchange pursuant to which shares of Common Stock are changed or converted into
or exchanged for cash, securities or other property, other than any such
transaction in which the persons who hold Common Stock immediately prior to the
transaction have immediately following the transaction the same proportionate
ownership of the common stock of, and the same voting power with respect to, the
surviving corporation; (b) any merger, consolidation or binding share exchange
in which the persons who hold Common Stock immediately prior to the transaction
have immediately following the transaction less than a majority of the combined
voting power of the outstanding capital stock of the Company ordinarily (and
apart from rights accruing under special circumstances) having the right to vote
in the election of directors; (c) any liquidation or dissolution of the Company;
and (d) any sale, lease, exchange or other transfer not in the ordinary course
of business (in one transaction or a series of related transactions) of all, or
substantially all, of the assets of the Company.
"Board" means the Board of Directors of the Company.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time, or any successor statute or statutes thereto. Reference to any specific
section of the Code shall include any successor section.
"Common Stock" means the Common Stock, par value $.001 per share, of the
Company.
"Company" means RealNetworks, Inc., a Washington corporation.
"Control Purchase" means any transaction (or series of related
transactions), consummated without the approval or recommendation of the Board,
in which (a) any person, corporation or other entity (including any "person" as
defined in Sections 13(d)(3) and 14(d)(2) of the Exchange Act, but excluding the
Company and any employee benefit plan sponsored by the Company) purchases any
Common Stock (or securities convertible into Common Stock) for cash, securities
or any other consideration pursuant to a tender offer or exchange offer; or (b)
any person, corporation or other entity (including any "person" as defined in
Sections 13(d)(3) and 14(d)(2) of the Exchange Act, but excluding the Company
and any employee benefit plan sponsored by the Company) becomes the "beneficial
owner" (as that term is defined in Rule 13d-3 under the Exchange Act), directly
or indirectly, of securities of the Company representing fifty percent (50%) or
more of the combined voting power of the then outstanding securities of the
Company ordinarily (and apart from rights
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accruing under special circumstances) having the right to vote in the election
of directors (calculated as provided in Rule 13d-3(d) under the Exchange Act in
the case of rights to acquire the Company's securities).
"Disability" means the inability to engage in any substantial gainful
activity by reason of any medically determinable physical or mental impairment
that can be expected to result in death or that has lasted or can be expected to
last for a continuous period of not less than twelve (12) months.
"Disinterested Person" is defined in Section 3.2(b).
"Effective Date" is defined in Section 1.2.
"Eligible Person" is defined in Section 5.
"Equity Securities" has the meaning given that term in Rule 3a11-1
promulgated under the Exchange Act, as amended from time to time, or any
successor rule thereto.
"Exchange Act" means the Securities Exchange Act of 1934, as amended from
time to time, or any successor statute or statutes thereto. Reference to any
specific section of the Exchange Act shall include any successor section.
"Executive Officer" means any employee of the company who is an "officer"
within the meaning of Rule 16a-1(f) of the Exchange Act, as amended from time to
time, or any successor rule thereto.
"Fair Market Value" on any day means, if the Common Stock is publicly
traded, the last sales price (or, if no last sales price is reported, the
average of the high bid and low asked prices) for a share of Common Stock on
that day (or, if that day is not a trading day, on the next preceding trading
day), as reported by the principal exchange on which the Common Stock is listed,
or, if the Common Stock is publicly traded but not listed on an exchange, as
reported by The Nasdaq Stock Market, or, if such prices or quotations are not
reported by The Nasdaq Stock Market, as reported by any other available source
of prices or quotations selected by the Administrative Committee. If the Common
Stock is not publicly traded, or if the Fair Market Value is not determinable by
any of the foregoing means, the Fair Market Value on any day shall be determined
in good faith by the Administrative Committee on the basis of such
considerations as the Administrative Committee deems appropriate.
"Holder" means an Eligible Person who has received an Option under this Plan
or, if rights continue under the Option following the death of the Eligible
Person, the person who succeeds to those rights by will or by the laws of
descent and distribution.
"Incentive Stock Option" means an Option that is an incentive stock option
within the meaning of Section 422 of the Code.
"Nonqualified Stock Option" means an Option that is designated as a
nonqualified stock option.
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"Option" means an option with respect to shares of Common Stock awarded
pursuant to Article 6.
"Option Agreement" is defined in Section 6.5.
"Plan" is defined in Section 1.1.
"Securities Act" means the Securities Act of 1933, as amended from time to
time, or any successor statute or statutes thereto. Reference to any specific
section of the Securities Act shall include any successor section.
"10% Shareholder" means a person who owns (or is considered as owning within
the meaning of Section 424 of the Code) stock possessing more than 10% of the
total combined voting power of all classes of capital stock of the Company.
3
ADMINISTRATION
3.1 Administrative Committee. The Plan shall be administered by the Board
unless the Board, either voluntarily or as required by Section 3.2 below,
appoints a separate committee of the Board to administer the Plan (the Board, or
such committee, if it is administering the Plan, will be referred to in the Plan
as the "Administrative Committee"). The Administrative Committee shall select
one of its members as its chairman and shall hold its meetings at such times and
places as it shall deem advisable. A majority of its members shall constitute a
quorum and all determinations shall be made by a majority of that quorum. Any
determination reduced to writing and signed by all of the members of the
Administrative Committee shall be fully as effective as if it had been made by a
majority vote at a meeting duly called and held.
3.2 Appointment of Administrative Committee. The Board may appoint a
committee consisting of two or more of its members to administer the Plan. Once
appointed, the committee shall continue to serve until otherwise directed by the
Board. From time to time the Board may increase the size of the committee and
appoint additional members, remove members (with or without cause) and appoint
new members in their place, fill vacancies however caused, and/or remove all
members of the committee and thereafter directly administer the Plan.
3.3 Powers; Regulations. The Administrative Committee shall have full
power and authority, subject only to the express provisions of the Plan (a) to
designate the Eligible Persons to whom Options are to be granted under the Plan;
(b) to determine the number of shares subject to, and all of the other terms and
conditions (which need not be identical) of, all Options so granted; (c) to
interpret the provisions of the Plan and the Option Agreements evidencing the
Options so granted; (d) to correct any defect, supply any information and
reconcile any inconsistency in such manner and to such extent as shall be deemed
necessary or advisable to carry out the purpose of the Plan; (e) to supervise
the administration of the Plan; and (f) to take such other actions in connection
with or in relation to the Plan as it deems necessary or advisable. The
Administrative Committee is authorized to establish, amend and rescind such
rules and regulations not inconsistent with the terms and conditions of the Plan
as it deems necessary or advisable for the proper administration of the Plan. In
making determinations hereunder, the Administrative Committee may give such
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consideration to the recommendations of management of the Company as the
Administrative Committee deems desirable.
3.4 Limits on Authority. Exercise by the Administrative Committee of its
authority under the Plan shall be consistent (a) with the intent that all
Incentive Stock Options issued under the Plan be qualified under the terms of
Section 422 of the Code (including any amendments thereto and any similar
successor provision), and (b) if the Company registers any class of Equity
Security pursuant to Section 12 of the Exchange Act, with the intent that the
Plan be administered in a manner so that, to the extent possible, the grant of
Options and all other transactions with respect to the Plan, to Options and to
any Common Stock acquired upon exercise of Options, shall be exempt from the
operation of Section 16(b) of the Exchange Act.
3.5 Exercise of Authority. Each action and determination made or taken
pursuant to the Plan by the Administrative Committee, including but not limited
to any interpretation or construction of the Plan and the Option Agreements,
shall be final and conclusive for all purposes and upon all persons. No member
of the Administrative Committee shall be liable for any action or determination
made or taken by the member or the Administrative Committee in good faith with
respect to the Plan.
4
SHARES SUBJECT TO THE PLAN
4.1 Number of Shares. Subject to the provisions of this Article 4, the
maximum number of shares of Common Stock with respect to which Options may be
granted during the term of the Plan shall be the sum of (a) 11,300,000, plus (b)
an additional 1,045,436 shares of Common Stock previously reserved for issuance
pursuant to Section 4.1 of the Company's 1995 Stock Option Plan (the "1995
Plan"), plus (c) any of the 1,269,123 shares of Common Stock subject to options
currently outstanding under the 1995 Plan to the extent the options terminate
without having been exercised in full. Shares of Common Stock will be made
available from the authorized but unissued shares of the Company or from shares
reacquired by the Company. If any Option terminates for any reason without
having been exercised in full, the shares of Common Stock subject to the Option
for which it has not been exercised shall again be available for purposes of the
Plan.
4.2 Adjustments. If the Company subdivides its outstanding shares of
Common Stock into a greater number of shares of Common Stock (by stock dividend,
stock split, reclassification or otherwise) or combines its outstanding shares
of Common Stock into a smaller number of shares of Common Stock (by reverse
stock split, reclassification or otherwise), or if the Administrative Committee
determines, in its sole discretion, that any stock dividend, extraordinary cash
dividend, reclassification, recapitalization, reorganization, split-up, spin-
off, combination, exchange of shares, warrants or rights offering to purchase
Common Stock, or other similar corporate event (including a merger or
consolidation other than one that constitutes an Approved Transaction) affects
the Common Stock such that an adjustment is required in order to preserve the
benefits or potential benefits intended to be made available under this Plan,
then the Administrative Committee shall, in its sole discretion and in such
manner as the Administrative Committee may deem equitable and appropriate, make
adjustments to any or all of (a) the number and kind of shares with respect to
which Options may thereafter be granted under this Plan; (b) the number and kind
of shares subject to outstanding Options, and (c) the purchase price under
outstanding Options; provided, however,
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that the number of shares subject to an Option shall always be a whole number.
The Administrative Committee may, if deemed appropriate, provide for a cash
payment to any Holder of an Option in connection with any adjustment made
pursuant to this Section 4.2.
5
ELIGIBILITY
The persons eligible to participate in the Plan and to receive Options under
the Plan ("Eligible Persons") shall be (a) employees (including officers and
directors who are also employees) of the Company or any of its Affiliates, and
(b) consultants (and directors who are not employees) rendering services to the
Company or any of its Affiliates in the capacity of independent contractors.
Options may be granted to Eligible Persons even if they hold or have held
Options under this Plan or options or similar awards under any other plan of the
Company or any of its Affiliates.
6
STOCK OPTIONS
6.1 Grant of Options. Subject to the limitations of the Plan, the
Administrative Committee shall designate from time to time each Eligible Person
who is to be granted an Option, the time when the Option shall be granted, the
number of shares subject to the Option, whether the Option is to be an Incentive
Stock Option or a Nonqualified Stock Option and, subject to Section 6.2, the
purchase price of the shares of Common Stock subject to the Option; provided,
however, that Incentive Stock Options may only be granted to Eligible Persons
who are employees of the Company or an Affiliate that constitutes a "parent
corporation" or a "subsidiary corporation" within the meaning of Section 424 of
the Code. Each Option granted under this Plan shall also be subject to such
other terms and conditions not inconsistent with this Plan as the Administrative
Committee, in its sole discretion, determines. Subject to the limitations of the
Plan, the same Eligible Person may receive Incentive Stock Options and
Nonqualified Stock Options at the same time and pursuant to the same Option
Agreement, provided that Incentive Stock Options and Nonqualified Stock Options
are clearly designated as such.
6.2 Purchase Price. The price at which shares may be purchased upon
exercise of an Option shall be fixed by the Administrative Committee and may be
more than, less than or equal to the Fair Market Value of the Common Stock as of
the date the Option is granted; provided, however, that the purchase price of an
Incentive Stock Option shall be (a) at least 110% of the Fair Market Value as of
the date of grant of the Common Stock subject thereto, if the Incentive Stock
Option is being granted to a 10% Shareholder, and (b) at least 100% of the Fair
Market Value as of the date of grant of the Common Stock subject thereto, if the
Incentive Stock Option is being granted to any other Eligible Person.
6.3 Limitations on Grants.
(a) Annual Limitation on Grants of Incentive Stock Options. The
aggregate Fair Market Value of the shares of Common Stock with respect to which,
during any calendar year, one or more Incentive Stock Options under this Plan
(and/or one or more options under any other
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plan maintained by the Company or any of its Affiliates for the granting of
options intended to qualify under Section 422 of the Code) become exercisable
for the first time by a Holder shall not exceed $100,000 (said value to be
determined as of the respective dates on which the options are granted to the
Holder). If (i) a Holder holds one or more Incentive Stock Options under this
Plan (and/or one or more options under any other plan maintained by the Company
or any of its Affiliates for the granting of options intended to qualify under
Section 422 of the Code), and (ii) the aggregate Fair Market Value of the shares
of Common Stock with respect to which, during any calendar year, such options
become exercisable for the first time exceeds $100,000 (said value to be
determined as provided above), then such option or options are intended to
qualify under Section 422 of the Code with respect to the maximum number of such
shares as can, in light of the foregoing limitation, be so qualified, with the
shares so qualified to be the shares subject to the option or options earliest
granted to the Holder. If an Option that would otherwise qualify as an Incentive
Stock Option becomes exercisable for the first time in any calendar year for
shares of Common Stock that would cause such aggregate Fair Market Value to
exceed $100,000, then the portion of the Option in respect of such shares shall
be deemed to be a Nonqualified Stock Option.
(b) Annual Limitation on Grants Following Exchange Act Registration.
If the Company registers any class of any Equity Security pursuant to Section 12
of the Exchange Act, then, from the effective date of the registration until six
(6) months after the termination of the registration, the number of shares
subject to one or more Options granted during any calendar year to an Eligible
Person shall not exceed one million (1,000,000).
6.4 Term of Options. Subject to the provisions of the Plan with respect
to termination of Options upon death, Disability or termination of services, the
term of each Option shall be for such period as the Administrative Committee
shall determine, but not more than (a) five (5) years from the date of grant in
the case of Incentive Stock Options held by 10% Shareholders; (b) ten (10) years
from the date of grant in the case of Incentive Stock Options held by persons
other than 10% Shareholders; and (c) twenty (20) years from the date of grant in
the case of all other Options, provided, however, that the term for a
Nonqualified Stock Option granted more than one (1) year following the Effective
Date shall be ten (10) years unless otherwise determined by the Administrative
Committee.
6.5 Option Agreement. Each Option granted under the Plan shall be
evidenced by an agreement (the "Option Agreement") which shall designate the
Option as an Incentive Stock Option or a Nonqualified Stock Option and contain
such terms and provisions not inconsistent with the provisions of the Plan as
the Administrative Committee from time to time approves. Each grantee of an
Option shall be notified promptly of the grant, an Option Agreement shall be
executed and delivered by the Company to the grantee within sixty (60) days
after the date the Administrative Committee approves the grant, and, in the
discretion of the Administrative Committee, the grant shall terminate if the
Option Agreement is not signed by the grantee (or his or her attorney) and
delivered to the Company within sixty (60) days after it is delivered to the
grantee. An Option Agreement may contain (but shall not be required to contain)
such provisions as the Administrative Committee deems appropriate to insure that
the penalty provisions of Section 4999 of the Code will not apply to any stock
received by the Holder from the Company. An Option Agreement may be modified
from time to time pursuant to Section 7.6(b).
6.6 Exercise of Options. An Option granted under the Plan shall become
and remain exercisable during the term of the Option to the extent provided in
the Option Agreement
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evidencing the Option and in this Plan and, unless the Option Agreement
otherwise provides, may be exercised to the extent exercisable, in whole or in
part, at any time and from time to time during such term; provided, however,
that subsequent to the grant of an Option, the Administrative Committee, at any
time before complete termination of the Option, may accelerate the time or times
at which the Option may be exercised in whole or in part (without reducing the
term of the Option). If an Option is scheduled to become exercisable on one or
more dates specified in its Option Agreement, and its Holder has a leave of
absence without pay, such date or dates shall be postponed for a period equal to
the duration of the leave unless the Administrative Committee determines
otherwise.
6.7 Manner of Exercise.
(a) Form of Payment. An Option shall be exercised by written notice
to the Company upon such terms and conditions as the Option Agreement evidencing
the Option may provide and in accordance with such other procedures for the
exercise of Options as the Administrative Committee may establish from time to
time. The method or methods of payment of the purchase price for the shares to
be purchased upon exercise of an Option and of any amounts required by Section
7.8 shall be determined by the Administrative Committee and may consist of (i)
cash, (ii) check, (iii) promissory note, (iv) whole shares of Common Stock
already owned by the Holder, (v) the withholding of shares of Common Stock
issuable upon exercise of the Option, (vi) the delivery, together with a
properly executed exercise notice, of irrevocable instructions to a broker to
deliver promptly to the Company the amount of sale or loan proceeds required to
pay the purchase price, (vii) any combination of the foregoing methods of
payment, or (viii) such other consideration and method of payment as may be
permitted for the issuance of shares under applicable securities and other laws.
The permitted methods or methods of payment of the amounts payable upon exercise
of an Option, if other than in cash, shall be set forth in the Option Agreement
evidencing the Option and may be subject to such conditions as the
Administrative Committee deems appropriate. Without limiting the generality of
the foregoing, if a Holder is permitted to elect to have shares of Common Stock
issuable upon exercise of an Option withheld to pay all or any part of the
amounts payable in connection with the exercise, then the Administrative
Committee shall have the sole discretion to approve or disapprove the election,
which approval or disapproval shall be given after the election is made.
(b) Value of Shares. Shares of Common Stock delivered in payment
of all or any part of the amounts payable in connection with the exercise of an
Option, and shares of Common Stock withheld for the payment, shall be valued for
such purpose at their Fair Market Value as of the exercise date.
(c) Issuance of Shares. The Company shall effect the issuance of
the shares of Common Stock purchased under the Option as soon as practicable
after the exercise thereof and payment in full of the purchase price therefor
and of any amounts required by Section 7.8, and within a reasonable time
thereafter the issuance shall be evidenced on the books of the Company.
Following the exercise of an Incentive Stock Option, the Administrative
Committee shall cause the information statement required by Section 6039 of the
Code to be furnished to the Holder within the time and in the manner prescribed
by law.
6.8 Legends. Each certificate representing shares of Common Stock
issued under the Plan upon exercise of an Option shall, unless the
Administrative Committee otherwise determines,
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contain on its face the notice "SEE TRANSFER RESTRICTIONS ON REVERSE" and on its
reverse a legend in form substantially as follows, together with any other
legends that are required by the terms and conditions of the Plan or that the
Administrative Committee in its discretion deems necessary or appropriate:
NOTICE: TRANSFER AND OTHER RESTRICTIONS
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, OR ANY STATE SECURITIES LAWS, AND MAY NOT
BE OFFERED, SOLD, TRANSFERRED, ENCUMBERED, OR OTHERWISE DISPOSED OF EXCEPT
UPON SATISFACTION OF CERTAIN CONDITIONS. INFORMATION CONCERNING THESE
RESTRICTIONS MAY BE OBTAINED FROM THE CORPORATION. ANY OFFER OR DISPOSITION
OF THESE SECURITIES WITHOUT SATISFACTION OF SAID CONDITIONS WILL BE
WRONGFUL AND WILL NOT ENTITLE THE TRANSFEREE TO REGISTER OWNERSHIP OF THE
SECURITIES WITH THE CORPORATION.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE ALSO SUBJECT TO
RESTRICTIONS ON TRANSFER, AND MAY BE SUBJECT TO REPURCHASE BY THE
CORPORATION OR ONE OR MORE OF ITS SHAREHOLDERS PURSUANT TO THE PROVISIONS
OF THE CORPORATION'S 1996 STOCK OPTION PLAN AND/OR AN AGREEMENT BETWEEN THE
HOLDER AND THE CORPORATION AND/OR AN AGREEMENT AMONG THE CORPORATION AND
ITS SHAREHOLDERS. INFORMATION CONCERNING THESE RESTRICTIONS MAY BE
OBTAINED FROM THE CORPORATION.
The Company may cause the transfer agent for the Common Stock to place a stop
transfer order with respect to such shares.
6.9 Nontransferability. Unless the Administrative Committee determines
otherwise at the time an Option is granted (or at any later time when the
Administrative Committee, by written notice to the Holder, releases in whole or
in part the restrictions under this Section 6.9), an Option shall not be
transferable other than by will or the laws of descent and distribution, and may
be exercised during the lifetime of the Holder thereof only by the Holder (or
his or her court appointed legal representative). Options shall not be
transferable other than by will or the laws of descent and distribution, and
Options may be exercised during the lifetime of the Holder thereof only by the
Holder (or his or her court appointed legal representative).
6.10 Repurchase of Shares.
(a) Right of Repurchase. If so specified by the Administrative
Committee at the time an Option is granted to a Holder who is an employee of the
Company or any of its Affiliates or a party to a consulting arrangement with the
Company or any of its Affiliates, the Company shall have the right, but shall
not be required, to repurchase from the Holder all or part of (i) the shares of
Common Stock that the Holder acquires upon the exercise of the Option, and (ii)
any other shares of Common Stock or other securities issued or acquired with
respect to the shares specified
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in the preceding clause (i) or this clause (ii) in connection with any stock
dividend, stock split, reclassification, recapitalization, reorganization,
split-up, spin-off, combination, exchange of shares, warrants or rights offering
to purchase Common Stock, or other similar corporate event. Such right shall be
exercisable at any time and from time to time during the period of ninety (90)
days commencing on the date of termination of the Holder's employment or
consulting agreement with the Company or any of its Affiliates for "cause," as
defined in Section 7.2(b).
(b) Exercise of Repurchase Right. The Company's right of repurchase
under this Section 6.10 shall be exercised by delivery written notice to the
Holder specifying the number of shares or other securities to be repurchased and
the effective date of the repurchase, which date shall not be earlier than the
date of the notice nor later than the date of termination of the Company's right
of repurchase. If a Holder transfers shares or other securities that are subject
to the Company's right of repurchase, the shares or other securities shall
remain subject to the Company's right of repurchase during the period specified
in the last sentence of Section 6.10(a) (exercise of the right of repurchase in
such even shall be effected by notice to the person or entity holding the shares
or other securities at the time of exercise).
(c) Repurchase Price. With respect to each share or other security
to be repurchased by the Company upon its exercise of its right of repurchase
under this Section 6.10, the repurchase price shall be the Fair Market Value of
the share or security as of the effective date of the repurchase. The Company
may elect to pay the amount owed to the Holder (or to the person or entity
holding the share or other security to be repurchased) either (i) in cash, in
which case the amount shall be paid, without interest, within thirty (30) days
following the effective date of the repurchase, or (ii) in three equal
installments, with the first installment payable on the first anniversary of the
effective date of the repurchase, and the remaining installments payable on the
corresponding date in each of the next two years, with each installment to
include interest on the unpaid principal computed at the prime rate published in
the Wall Street Journal for the first business day of the month in which the
effective date of the repurchase occurs, for the period from the effective date
of the repurchase or the date of the most recent installment, as the case may
be, to the due date of the installment being paid.
(d) Termination of Right of Repurchase. Any right of repurchase of
the Company under this Section 6.10 shall terminate upon the occurrence of a
Control Purchase or an Approved Transaction (other than an Approved Transaction
in connection with which the Administrative Committee determines, in accordance
with the last sentence of Section 7.1, that Options otherwise subject to such
right of repurchase will not vest or become exercisable on an accelerated basis
and/or will not terminate if not exercised prior to consummation of the Approved
Transaction). Any right of repurchase of the Company under this Section 6.10
shall also terminate upon the effective date of the registration by the Company
of any class of any Equity Security pursuant to Section 12 of the Exchange Act.
6.11 Class of Common Stock. The class of shares subject to each Option
and the class of shares to be received upon exercise of each Option shall depend
upon the employment status of the Eligible Person at the date the Option is
granted and at the date the Option is exercised. If the Eligible Person is an
employee (including officers and directors who are also employees) of the
Company or one of its Affiliates as of the date the Option is granted, the
shares subject to the Option shall be shares of Series B Common Stock, which are
automatically convertible into the shares of Series C Common Stock upon the
occurrence of certain events (a "Conversion Event") as described
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in the Company's Articles of Incorporation, as amended from time to time (the
"Articles"), provided, that if a Conversion Event occurs prior to the exercise
of an Option, the shares subject to the Option shall be shares of Series C
Common Stock, with the rights defined in the Articles. If the Eligible Person is
a consultant (other than a director) rendering services to the Company or any of
its Affiliates in the capacity of an independent contractor as of the date the
Option is granted, the shares subject to the Option shall be shares of Series C
Common Stock, with the rights defined in the Articles, regardless of the
Eligible Person's employment status with the Company at the date the Option is
exercised.
6.12 Delegation to Executive Officer of Authority to Grant Options. The
Board may delegate to an Executive Officer the authority to determine from time
to time (a) the Eligible Persons to whom Options are to be granted; (b) the
number of shares of Common Stock for which the Options are exercisable and the
purchase price of such shares; (c) whether the Options are Incentive Stock
Options or Nonqualified Stock Options; and (d) all of the other terms and
conditions (which need not be identical) of the Options; provided, however, that
(i) the authority delegated to the Executive Officer under this Section 6.12
shall not exceed that of the Administrative Committee under the foregoing
provisions of this Article 6 and shall be subject to such limitations, in
addition to those specified in this Section 6.12, as may be specified by the
Board at the time of delegation; (ii) the Executive Officer may not be delegated
authority under this Section 6.12 to grant any Option to any person who is an
Executive Officer or a director of the Company at the time of the grant; (iii)
the purchase price of each share of Common Stock under an Option granted under
this Section 6.12 shall not be less than the Fair Market Value of such share on
the date of grant of the Option; and (iv) the Executive Officer shall promptly
provide a report to the Administrative Committee of each person to whom an
Option has been granted under this Section 6.12 and the material terms and
conditions of the Option.
7
GENERAL PROVISIONS
7.1 Acceleration of Options--Approved Transactions; Control Purchase.
In the event of any Approved Transaction or Control Purchase, each outstanding
Option under the Plan shall become exercisable in full in respect of the
aggregate number of shares covered thereby, notwithstanding any contrary vesting
schedule in the Option Agreement evidencing the Option (except to the extent the
Option Agreement expressly provides otherwise), effective upon the Control
Purchase or immediately prior to consummation of the Approved Transaction. In
the case of an Approved Transaction, the Company shall provide notice of the
pendency of the Approved Transaction, at least fifteen (15) days prior to the
expected date of consummation thereof, to each Holder of an outstanding Option.
Each Holder shall thereupon be entitled to exercise the Option at any time prior
to consummation of the Approved Transaction. Any such exercise as to any portion
of the Option that will only become vested immediately prior to the consummation
of the Approved Transaction in accordance with the foregoing acceleration
provision shall be contingent on such consummation. Any such exercise as to any
other portion of the Option will not be contingent on such consummation unless
so elected by the Holder in a notice delivered to the Company simultaneously
with the exercise. Upon consummation of the Approved Transaction, all Options
shall expire to the extent such exercise has not occurred. Notwithstanding the
foregoing, except to the extent otherwise provided in one or more Option
Agreements evidencing Options, the Administrative Committee may, in its
discretion, determine that any or all outstanding Options will
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not vest or become exercisable on an accelerated basis in connection with an
Approved Transaction and/or will not terminate if not exercised prior to
consummation of the Approved Transaction, if the Board or the surviving or
acquiring corporation, as the case may be, shall take, or made effective
provision for the taking of, such action as in the opinion of the Administrative
Committee is equitable and appropriate in order to substitute new Options for
such Options, or to assume such Options (which assumption may be effected by any
means determined by the Administrative Committee, in its discretion, including,
but not limited to, by a cash payment to each Holder, in cancellation of the
Options held by him or her, of such amount as the Administrative Committee
determines, in its sole discretion, represents the then value of the Options)
and in order to make such new or assumed Options, as nearly as practicable,
equivalent to the old Options (before giving effect to any acceleration of the
vesting or exercisability thereof), taking into account, to the extent
applicable, the kind and amount of securities, cash or other assets into or for
which the Common Stock may be changed, converted or exchanged in connection with
the Approved Transaction.
7.2 Termination of Services. The provisions of this Section 7.2 shall
apply to any Holder who is an employee of the Company or any of its Affiliates
or a party to a written consulting agreement with the Company or any of its
Affiliates.
(a) General. If such a Holder's employment or consulting agreement
terminates prior to the complete exercise of an Option, then the Option shall,
except to the extent the Option Agreement evidencing the Option expressly
provides otherwise, thereafter be exercisable, to the extent that the Holder was
entitled to exercise the Option on the date of such termination, for a period of
three (3) months following such termination (but not later than the scheduled
expiration date of the Option); provided, however, that (i) if the Holder's
employment or consulting agreement terminates by reason of death or Disability,
then, except to the extent the Option Agreement evidencing the Option expressly
provides otherwise, the Option shall be exercisable, to the extent that the
Holder was entitled to exercise the Option on the date of such termination, for
a period of one (1) year following such termination (but not later than the
scheduled expiration of the Option), and (ii) any termination by the Company or
any of its Affiliates for cause will be treated in accordance with the
provisions of Section 7.2(b) (except to the extent the Option Agreement
expressly provides otherwise).
(b) Termination by Company for Cause. If a Holder's employment or
consulting agreement with the Company or any of its Affiliates is terminated for
cause, then all Options held by the Holder shall immediately terminate and,
accordingly, may not be exercised, except to the extent one or more of the
Option Agreements evidencing the Options expressly provides otherwise. For
purposes of this Plan, "cause" shall have the meaning given that term in any
employment agreement or consulting agreement to which the Holder is a party or,
in the absence thereof, the conduct that shall constitute "cause" for purposes
of this Plan shall be insubordination, a knowing violation of a state or federal
law involving the commission of a crime against the Company or any of its
Affiliates or a felony, any misrepresentation, deception, fraud or dishonesty
that is materially injurious to the Company or any of its Affiliates,
incompetence, moral turpitude, the refusal to perform the Holder's duties and
responsibilities for any reason other than illness or incapacity, and any other
misconduct of any kind that the Administrative Committee determines constitutes
"cause" for purposes of this Plan; provided, however, that if a termination
occurs within twelve (12) months after an Approved Transaction or Control
Purchase, termination for cause shall mean only a felony conviction for fraud,
misappropriation or embezzlement. Following termination of a Holder's
employment or consulting agreement, if the Holder engages in any act that would
have
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constituted cause if the Holder had remained employed by or in a consulting
relationship with the Company or any of its Affiliates, then the Administrative
Committee shall be entitled to terminate any Options held by the Holder.
(c) Miscellaneous. The Administrative Committee may determine
whether any given leave of absence of a Holder constitutes a termination of the
Holder's employment or consulting agreement; provided, however, that for
purposes of the Plan--
(i) a leave of absence, duly authorized in writing by the Company
or any of its Affiliates for military service or sickness, or for any other
purpose approved by the Company or any of its Affiliates, if the period of the
leave does not exceed ninety (90) days, and
(ii) a leave of absence in excess of ninety (90) days, duly
authorized in writing by the Company or any of its Affiliates, provided the
Holder's right to return to service with the Company or the Affiliate is
guaranteed either by statute or by contract--shall not be deemed a termination
of the Holder's employment or consulting agreement. Options granted under the
Plan shall not be affected by any change of a Holder's employment or consulting
agreement so long as the Holder continues to be an employee of or consultant to
the Company or any of its Affiliates. Except to the extent an Option Agreement
evidencing an Option expressly provides otherwise, if a Holder has an employment
or consulting agreement with an Affiliate of the Company that ceases to be an
Affiliate, such event shall be deemed to constitute a termination of the
Holder's employment or consulting agreement for a reason other than death or
Disability.
7.3 Right to Terminate Services. Nothing contained in the Plan or in any
Option Agreement, and no action of the Company or the Administrative Committee
with respect thereto, shall confer or be construed to confer on any Holder any
right to continue in the service of the Company or any of its Affiliates or
interfere in any way with the right of the Company or any of its Affiliates,
subject to the provisions of any agreement between the Holder and the Company or
any of its Affiliates, to terminate at any time, with or without cause, the
employment or consulting agreement with the Holder.
7.4 Nonalienation of Benefits. Except as provided in Section 6.9, no
right or benefit under the Plan shall be subject to anticipation, alienation,
sale, assignment, hypothecation, pledge, exchange, transfer, encumbrance or
charge, and any attempt to anticipate, alienate, sell, assign, hypothecate,
pledge, exchange, transfer, encumber or charge the same shall be void. No right
or benefit hereunder shall in any manner be liable for or subject to the debts,
contracts, liabilities or torts of the person entitled to the right or benefit.
7.5 Shareholders Agreement. Unless the Option Agreement evidencing an
Option expressly provides otherwise, the Holder of the Option shall be required,
as a condition to the issuance of any shares of Common Stock that the Holder
acquires upon the exercise of the Option, to execute and deliver to the Company
a shareholders agreement in such form as may be in use by the Company at the
time of such exercise, or a counterpart thereof, together with, unless the
Holder is unmarried, a spousal consent in the form required thereby, unless the
Holder has previously executed and delivered such documents and they are in
effect at the time the shares are to be issued.
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7.6 Termination and Amendment.
(a) General. Unless the Plan shall previously have been terminated
as hereinafter provided, no Options may be granted under the Plan on or after
the tenth (10th) anniversary of the Effective Date. The Board or the
Administrative Committee may at any time prior to the tenth (10th) anniversary
of the Effective Date terminate the Plan, and may, from time to time, suspend or
discontinue the Plan or modify or amend the Plan in such respects as it shall
deem advisable; provided, however, that any such modification or amendment shall
comply with all applicable laws and stock exchange listing requirements and,
with respect to Incentive Stock Options granted or to be granted under the Plan,
shall be subject to any approval by shareholders of the Company required under
the Code.
(b) Modification. No termination, modification or amendment of the
Plan may adversely affect the rights of the Holder of an outstanding Option in
any material way unless the Holder consents thereto. No modification, extension,
renewal or other change in any Option granted under the Plan shall be made after
the grant of the Option, unless the same is consistent with the provisions of
the Plan. With the consent of the Holder and subject to the terms and conditions
of the Plan (including Section 7.6(a)), the Administrative Committee may amend
outstanding Option Agreements with any Holder, including, without limitation,
any amendment that would (i) accelerate the time or times at which the Option
may be exercised, and/or (ii) extend the scheduled expiration date of the
Option. Without limiting the generality of the foregoing, the Administrative
Committee may, but solely with the Holder's consent unless otherwise provided in
the Option Agreement, agree to cancel any Option under the Plan and issue a new
Option in substitution therefor, provided that the Option so substituted shall
satisfy all of the requirements of the Plan as of the date the new Option is
granted. Nothing contained in the foregoing provisions of this Section 7.6(b)
shall be construed to prevent the Administrative Committee from providing in any
Option Agreement that the rights of the Holder with respect to the Option are
subject to such rules and regulations as the Administrative Committee may,
subject to the express provisions of the Plan, adopt from time to time, or
impair the enforceability of any such provision.
7.7 Government and Other Regulations. The obligation of the Company with
respect to Options shall be subject to all applicable laws, rules and
regulations and such approvals by any governmental agencies as may be required,
including, without limitation, the effectiveness of any registration statement
required under the Securities Act, and the rules and regulations of any
securities exchange or association on which the Common Stock may be listed or
quoted. As long as the Common Stock is not registered under the Exchange Act,
the Company intends that all offers and sales of Options and shares of Common
Stock issuable upon exercise of Options shall be exempt from registration under
the provisions of Section 5 of the Securities Act, and the Plan shall be
administered in a manner so as to preserve such exemption. The Company also
intends that the Plan shall constitute a written compensatory benefit plan,
within the meaning of Rule 701(b) promulgated under the Securities Act, and that
each Option granted under the Plan at a time when the Common Stock is not
registered under the Exchange Act shall, unless otherwise provided by the
Administrative Committee at the time the Option is granted, be granted in
reliance on the exemption from the registration requirements of Section 5 of the
Securities Act provided by Rule 701. As long as the Common Stock is registered
under the Exchange Act, the Company shall use its reasonable efforts to comply
with any legal requirements to file in a timely manner all reports required to
be filed by it under the Exchange Act.
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7.8 Withholding. The Company's obligation to deliver shares of Common
Stock upon exercise of an Option shall be subject to applicable federal, state
and local tax withholding requirements. Federal, state and local withholding tax
due at the time an Option is exercised may, in the discretion of the
Administrative Committee, be paid in shares of Common Stock already owned by the
Holder or through the withholding of shares otherwise issuable to the Holder,
upon such terms and conditions as the Administrative Committee shall determine.
If the Holder shall fail to pay, or make arrangements satisfactory to the
Administrative Committee for the payment of, all such federal, state and local
taxes, then the Company or any of its Affiliates shall, to the extent not
prohibited by law, have the right to deduct from any payment of any kind
otherwise due to the Holder an amount equal to any federal, state or local taxes
of any kind required to be withheld by the Company or any of its Affiliates with
respect to the Option.
7.9 Separability. With respect to Incentive Stock Options, if this Plan
does not contain any provision required to be included herein under Section 422
of the Code, such provision shall be deemed to be incorporated herein with the
same force and effect as if such provision had been set out at length herein;
provided, however, that to the extent any Option that is intended to qualify as
an Incentive Stock Option cannot so qualify, the Option, to that extent, shall
be deemed to be a Nonqualified Stock Option for all purposes of the Plan.
7.10 Non-Exclusivity of the Plan. Neither the adoption of the Plan by
the Board nor the submission of the Plan to the shareholders of the Company for
approval shall be construed as creating any limitations on the power of the
Board to adopt such other incentive arrangements as it may deem desirable,
including, without limitation, the granting of stock options and the awarding of
stock and cash otherwise than under the Plan, and such arrangements may be
either generally applicable or applicable only in specific cases.
7.11 Exclusion from Pension and Profit-Sharing Computation. By acceptance
of an Option, unless otherwise provided in the Option Agreement evidencing the
Option, the Holder shall be deemed to have agreed that the Option is special
incentive compensation that will not be taken into account, in any manner, as
salary, compensation or bonus in determining the amount of any payment under any
pension, retirement or other employee benefit plan, program or policy of the
Company or any of its Affiliates.
7.12 No Shareholder Rights. No Holder or other person shall have any
voting or other shareholder rights with respect to shares of Common Stock
subject to an Option until the Option has been duly exercised, full payment of
the purchase price has been made, all conditions under the Option and this Plan
to issuance of the shares have been satisfied, and a certificate for the shares
has been issued. No adjustment shall be made for cash or other dividends or
distributions to shareholders for which the record date is prior to the date of
such issuance.
7.13 Governing Law. The Plan shall be governed by, and construed in
accordance with, the laws of the State of Washington.
7.14 Company's Rights. The grant of Options pursuant to the Plan shall not
affect in any way the right or power of the Company to make reclassifications,
reorganizations or other changes of or to its capital or business structure or
to merge, consolidate, liquidate, sell or otherwise dispose of all or any part
of its business or assets.
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EXHIBIT 10.2
FIRST LEASE AMENDMENT
This First Lease Amendment ("First Amendment") is entered into on this 13th
day of November, 1998, by and between 2601 Elliott LLC, a Washington limited
liability company ("Landlord") and RealNetworks, Inc., a Washington corporation
("Tenant"). Landlord and Tenant agree to all of the following terms and
conditions, including the recitals.
SECTION 1: RECITALS
1.1 On January 21, 1998, Landlord and Tenant entered into a certain lease (the
"Lease") of certain Premises (the "Premises") located in the Seattle Trade and
Technology Center (the "Building"). The Premises are described with greater
particularity in the Lease.
1.2 Landlord and Tenant now wish to amend the Lease to provide for future
expansion of the Premises on the following terms and conditions.
1.3 Capitalized words and phrases used in this First Amendment shall have the
meaning given them in the Lease.
SECTION 2: EXPANSION SPACE
2.1 The "Future Premises" is hereby redefined to be all of the interior RSF on
Floor 1 in the Building, with the exceptions of (a) the portions thereof already
included in the Initial Premises, (b) a certain below-described common area
lobby (which may be excluded on only a temporary basis, as outlined below) and
(c) the portion thereof in excess of 25,000 RSF. Such excess portion (likely to
be roughly 3,000 RSF to roughly 5,000 RSF) shall be deemed to be part of the
below-described "Expansion Space" and shall hereinafter be referred to as the
"Higher Rent Portion of Floor 1", because the primary reason for drawing a
distinction between the Future Premises and the Higher Rent Portion of Floor 1
is that the Higher Rent Portion of Floor 1, being a part of the Expansion Space,
will cost Tenant and generate to Landlord higher rent than is the case with
regard to the Future Premises. The "Expansion Space" is hereby defined to be
the Higher Rent Portion of Floor 1 and all of the interior RSF on Floors 2, 3
and 4 in the Building, with the exception of the portions thereof already
included in the Initial Premises, and with the further exception of a certain
below-described common area lobby (which may be excluded on only a temporary
basis, as outlined below). In other words, the Expansion Space is made up of
(a) the Higher Rent Portion of Floor 1, (b) roughly the south half of Floors 2
and 3, each of which half floor contains roughly 30,000 RSF, and (c) roughly
25,000 RSF on Floor 4, yielding an Expansion Space totaling approximately 90,000
RSF. The Floor 2 portion of the Expansion Space shall hereinafter be referred
to as "Expansion Space Two"; the Floor 3 portion of the Expansion Space shall
hereinafter be referred to as "Expansion Space Three" ; and the Floor 4 portion
of the Expansion Space shall hereinafter be referred to as "Expansion Space
Four".
2.2 The RSF in the Expansion Space shall be measured in accordance with Section
2(a) of the Lease. Landlord and Tenant acknowledge and agree that the Future
Premises and all of the Expansion Space will forever exclude an exterior
entrance (on Floor 1) and small elevator lobby (on Floors 1 through 4) in the
southeast corner of the Building, which entrance and lobby shall serve the
occupants of the Ground Floor and Floor 5. The location and approximate
dimensions of such southeast entrance and lobby are shown on the floor plan
attached hereto as Exhibit A, and
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incorporated herein by this reference. In addition, at least until such time as
Tenant has occupied all of the Expansion Space and the Future Premises, the
Future Premises shall also exclude an exterior entrance and common area elevator
lobby located on the eastern side of the Future Premises north of the loading
docks (such entrance and lobby shall hereinafter be referred to as the "South
Building Lobby"). The location and approximate dimensions of the South Building
Lobby are shown on Exhibit A. Finally, at least until such time as Tenant has
occupied all of the Expansion Space and the Future Premises, Expansion Space Two
will exclude the skybridge entrance and common area lobby located on the eastern
side of Expansion Space Two immediately adjacent to the skybridge (such entrance
and lobby shall hereinafter be referred to as the "Skybridge Lobby"). The
location and approximate dimensions of the Skybridge Lobby are shown on the
floor plan attached hereto as Exhibit A and incorporated herein by this
reference. The Art Institute of Seattle ("AIS") is the current tenant of the
Ground Floor and Floor 5. Under its lease, AIS's staff and employees (as
distinct from students) have the right to enter the Building at the Skybridge
Lobby and to then take an elevator in the Skybridge Lobby to the South Building
Lobby, at which point they must exit the Building and re-enter at the above-
described southeast entrance and lobby or at their newly created entrance on the
southwest corner of the Ground Floor. If AIS relinquishes such rights to the
Skybridge Lobby and the South Building Lobby on or before the date on which
Tenant occupies all of the Expansion Space and the Future Premises, which
Landlord currently thinks is likely, then, once Tenant has occupied all of the
Expansion Space and the Future Premises, the Future Premises and Expansion Space
Two will include the South Building Lobby and the Skybridge Lobby, respectively.
If, on the other hand, AIS does not relinquish such rights on or before the date
on which Tenant occupies all of the Expansion Space and the Future Premises,
then the Future Premises and Expansion Space Two will exclude the South Building
Lobby and the Skybridge Lobby, respectively, throughout the entire term of the
Lease. Finally, Sections 2(b) and 2(c) of the Lease are hereby revised by
deleting all references to the "AIS Elliot Level Space".
2.3 In lieu of having the right to designate the location of the Future
Premises through July 1, 1999, as such right is outlined in Section 2(c) of the
Lease, Landlord shall have the right through July 1, 1999 to reverse Expansion
Space Three and Expansion Space Four, so that the Floor 3 portion of the
Expansion Space shall become Expansion Space Four and the Floor 4 portion of the
Expansion Space shall become Expansion Space Three.
SECTION 3: EXPANSION SPACE COMMENCEMENT AND EXPIRATION DATES
3.1 The Premises shall be expanded to include each of the three portions of the
Expansion Space (excluding the Higher Rent Portion of Floor 1) on the applicable
"Expansion Space Commencement Date" outlined below. The "Expansion Space
Commencement Dates" shall be the earlier of (a) the date on which Tenant
occupies all or any portion of the Expansion Space in question or (b) the
applicable date outlined below, subject to substantial completion of Landlord's
Work as described below:
<TABLE>
<CAPTION>
Expansion Space Date
--------------------------------- ----------------
<S> <C>
Expansion Space Two August 1, 2000
Expansion Space Three April 1, 2001
Expansion Space Four December 1, 2001
</TABLE>
In addition, Section 3(a) of the Lease is hereby revised to provide that
the "FP Commencement Date" shall be the earlier of (a) the date on which Tenant
occupies all or any portion
2
<PAGE>
of the Future Premises or (b) November 1, 1999, subject to substantial
completion of Landlord's Work as described below. The Premises shall also be
expanded to include the Higher Rent Portion of Floor 1 on the FP Commencement
Date. In all events, Landlord shall deliver the Expansion Space in question (and
the Future Premises) to Tenant with the Landlord's Work in substantially
complete condition at least seventy-five (75) days prior to the above-specified
outside Expansion Space Commencement Date or FP Commencement Date, as the case
may be. For example, Landlord must deliver the Future Premises to Tenant with
the Landlord's Work in substantially complete condition on or before August 17,
1999. As is provided in Section 3(a) of the Lease, Tenant shall, with regard to
all of the Expansion Space and the Future Premises, "in all events and at all
times diligently and in good faith endeavor to complete its tenant improvements
as soon as is reasonable possible", Tenant "will occupy [the Expansion Space in
question and the Future Premises] promptly after substantial completion of such
tenant improvement work" and Landlord shall, with regard to all of the Expansion
Space and the Future Premises, "allow Tenant's tenant improvement contractor to
begin the TI Work...prior to substantial completion of the Landlord's Work,
provided that such does not unreasonably interfere with completion of the
Landlord's Work, and Tenant hereby agrees that it will direct its tenant
improvement contractors to avail themselves of such opportunity, provided such
does not materially increase the cost of completion of the TI Work."
3.2 Tenant's lease of the Expansion Space and the Future Premises shall expire
on the Expiration Date, subject to the terms of Section 3(b) of the Lease, which
Section 3(b) shall apply to the entire Premises, including the Expansion Space
and the Future Premises, but not to any portion thereof.
3.3 The terms of Section 3(c) of the Lease shall not apply to the Expansion
Space or any portion thereof other than the Higher Rent Portion of Floor 1 (such
Section 3(c) shall, however, continue to apply to the Future Premises and the
Initial Premises, and such Section 3(c) shall apply to the Higher Rent Portion
of Floor 1).
SECTION 4: EXPANSION SPACE RENT
Commencing on the Expansion Space Commencement Date in question for that
portion of the Expansion Space (and, with regard to the Higher Rent Portion of
Floor 1, commencing on the FP Commencement Date), Tenant shall pay basic monthly
rent and additional rent on the applicable portion of the Expansion Space in
accordance with the terms of Sections 4(a), 4(c), 5, 6 and other applicable
Lease provisions, with the exception that the basic monthly rent applicable to
all of the Expansion Space shall be fixed at the rate of Twenty Dollars ($20.00)
per RSF per year throughout the initial Lease term (but it shall be subject to
adjustment during the Additional Term, if applicable, in accordance with the
terms of Section 3(b) of the Lease). In other words, Section 4(b) of the Lease
shall continue to apply with full force and effect to the Initial Premises and
the Future Premises, but such Section shall not apply to the Expansion Space.
However, again, the terms of Section 5 of the Lease shall apply with equal force
and effect to the Initial Premises, the Future Premises and the Expansion Space.
SECTION 5: EXPANSION SPACE DEPOSIT
Within ten (10) business days after the execution date of this First
Amendment, Tenant shall increase its Escrowed Deposit from $6,000,000 to
$10,000,000. Thus, all references to "$6,000,000" in Sections 1(h) and 7 of the
Lease are hereby revised to read "$10,000,000". As a result, the $10,000,000 is
subject to all of the terms and conditions of Section 7 of the Lease including,
but not limited to, the terms regarding Escrowed Deposit versus letter of credit
(Landlord agrees that the
3
<PAGE>
Escrowed Deposit shall be used instead of a letter of credit so long as the
Escrowed Deposit conditions outlined in the "Notwithstanding the foregoing, if
the Escrowed Deposit provides..." sentence in Section 7 are satisfied) and the
terms regarding the release of the Escrowed Deposit/letter of credit upon
Tenant's achievement of an S&P Corporate Credit Rating equivalent to what was
BBB- as of January 21, 1998. Moreover, the $10,000,000 will be held by US Bank
under and subject to the terms of the existing Agreement for Pledge in Lieu of
Letter of Credit entered into between Landlord, Tenant and US Bank as of April
1, 1998, and Landlord and Tenant hereby agree to promptly execute a commercially
reasonable amendment document confirming the same.
SECTION 6: TENANT IMPROVEMENT PLEDGE ACCOUNT
Pursuant to Section 11(b) of the Lease, Tenant currently has on account
with Landlord's construction lender, US Bank, a TI Work pledge account in the
amount of $3,700,000. In lieu of increasing such sum significantly as a result
of Tenant's current knowledge as to the cost of the TI Work, Landlord and Tenant
have agreed to hereby amend Section 11(b) to provide simply that the full amount
of such $3,700,000 shall remain on account with Landlord's lender, as such
lender may change from time to time, until lien free completion of the TI Work
on Expansion Space Two (e.g., absent a mutually agreed upon acceleration of
takedown dates, until roughly August of 2000, assuming the space taken on or
around August, 2000 has been completed in accordance with the terms of
subsection (e) of Section 11(b) by August of 2000). In other words, until lien
free completion of the TI Work on Expansion Space Two, Tenant shall not draw
from such account, Tenant shall not be obligated to increase the $3,700,000 in
such account, nor shall Tenant be entitled to reduce the $3,700,000 in such
account. Rather, the $3,700,000 will remain fixed through the lien free
completion of the TI Work on Expansion Space Two. As of the lien free completion
of the TI Work on Expansion Space Two, the TI Work pledge account shall be
reduced by $700,000 to $3,000,000. The $3,000,000 will remain fixed in the
account, without any increases or decreases thereto or draws therefrom, until
lien free completion of the TI Work on Expansion Space Three. Upon lien free
completion of the TI Work on Expansion Space Three, the TI Work pledge account
shall be reduced by an additional $1,500,000, leaving $1,500,000. Such balance
of $1,500,000 shall remain fixed in the account, without any increases or
decreases thereto and without any draws therefrom, until lien free completion of
the TI Work on Expansion Space Four, at which time it shall be refunded in full
to Tenant. As used in this Section 6, "lien free completion of the TI Work"
requires the evidence outlined in subsection (e) of Section 11(b) of the Lease.
All of the provisions pertaining to such pledge account outlined in Section
11(b) shall continue in full force and effect, except to the extent they are
inconsistent with the foregoing terms of this Section 6. Thus, for example,
subsections (a), (b) and (c) shall continue in full force and effect, but
subsection (d) is hereby deleted and subsection (e) is hereby modified as
outlined above to allow partial disbursements upon the lien free completion of
TI Work on Expansion Space Two and Expansion Space Three, with the full balance
being disbursed upon the lien free completion of the TI Work on Expansion Space
Four. Promptly after full execution of this First Amendment, Landlord and Tenant
shall enter into a commercially reasonable amendment consistent with the
foregoing of the existing Disbursement, Subordination, Attornment and Non-
disturbance Agreement dated as of April 1, 1998, which document currently
governs the $3,700,000 pledge account (Landlord's and its lender's right to
apply the pledge account funds to complete TI Work in the event of a default by
Tenant under Section 11 of the Lease, as such right is outlined in paragraph 3.4
of the Disbursement, Subordination, Attornment and Non-Disturbance Agreement,
shall remain unchanged, except that it, like the other pledge account
provisions, shall be modified to apply to the Expansion Space TI Work as well).
4
<PAGE>
SECTION 7: PARKING
Tenant's right to two parking permits per 1,000 RSF in the Initial Premises
and Future Premises shall continue in full force and effect. In addition, Tenant
shall have the right to 1.5 parking permits in the Garage for each 1,000 RSF of
Expansion Space on which Tenant is then paying base monthly rent. Such
additional parking permits shall be subject to the same terms and conditions as
outlined in Section 30(s) of the Lease, with the exception that subsection (v)
is hereby amended to entitle Landlord, after the Expansion Space Commencement
Date for Expansion Space Two, to valet park a total of two hundred (200) of
Tenant's permits on the terms outlined in such subsection (v) (prior to the
Expansion Space Commencement Date for Expansion Space Two, Landlord shall
continue to have its existing right to valet park up to 100 of Tenant's permits
on the terms outlined in subsection (v)).
SECTION 8: EXHIBIT C CHANGES
All of the terms and conditions of Exhibit C to the Lease shall apply
with full force and effect to the Expansion Space, except as provided below:
8.1 Section 2(A) is hereby supplemented by substituting "that date which is six
months prior to each Expansion Space Commencement Date for the portion of the
Expansion Space in question" for "May 31, 1998" for purposes of the Expansion
Space (the May 31, 1998 date continues to be the date that applied to the
Initial Premises).
8.2 Section III(B) is hereby supplemented by substituting "one percent (1%)"
for "two and one-half percent (2 1/2%)" in the last sentence for purposes of the
Expansion Space (the 2 1/2% construction management fee shall continue to apply
with regard to the Initial Premises and the Future Premises).
8.3 Section IV(A) and Section 34 of the Lease shall not apply to the Expansion
Space.
8.4 Regarding Schedule I to Exhibit C:
(i) there shall be no additional allowance for pads/base supports for
tenant satellite dishes;
(ii) the demising walls separating the Initial Premises from the Expansion
Space shall be demolished at Tenant's expense as part of the TI Work;
(iii) the restrooms in the Expansion Space and Future Premises shall be
remodeled in accordance with the plans and specifications attached
hereto as Exhibit B by Landlord at Landlord's expense within the next
several months, but Tenant acknowledges that Landlord will have no
further obligations regarding restrooms in the Expansion Space or the
Future Premises;
(iv) the $15, 000 allowance for a security wall pertains only to the
Initial Premises; it shall not apply proportionately or otherwise to
the Expansion Space;
(v) the mechanical system serving the Expansion Space shall provide a
proportionate amount of cooling capacity in the Expansion Space as is
currently required for the Initial Premises; and
5
<PAGE>
(vi) the location of mechanical rooms, air shafts and ducting from
exterior perimeter walls in the Expansion Space shall be dealt with
the same way such issues are required to be dealt with in the Future
Premises (see the last two sentences on the second page of Schedule
I).
SECTION 9: MISCELLANEOUS
9.1 First Month's Rent - Expansion Space. Sections 1(h) and 7 of the Lease are
hereby supplemented to provide that Tenant shall pay the first month's rent for
each portion of the Expansion Space on or before that day which is six (6)
months prior to the anticipated Expansion Space Commencement Date for the
portion of the Expansion Space in question. For example, absent a mutually
agreed upon acceleration of the takedown date in question, Tenant shall pay
approximately $46,667 (28,000 x $20 / 12) as the prepaid first month's rent for
Expansion Space Two on or before February 1, 2000.
9.2 Commission. Section 30(m) is hereby supplemented to provide that Landlord
shall pay a consulting fee to Tenant in the amount of $1.00 per RSF of Expansion
Space, 1/2 of which shall be due within 10 business days of full execution of
this First Amendment and the remaining 1/2 of which shall be due upon the
occupancy of Expansion Space Two. In return, and subject to the payment of the
foregoing consulting fee, Tenant hereby agrees to indemnify and hold Landlord
harmless from and against any and all liabilities or claims for brokerage
commissions or finders fees which arise from or out of any agreements made by
Tenant, including, but not limited to, any claims made by Douglas Hanafin and/or
Washington Partners.
9.3 Assignment. Section 18(a) is hereby revised by substituting the phrase
"$10,000,000 Escrowed Deposit / letter of credit" for the phrase "$6,000,000
Escrowed Deposit / letter of credit".
9.4 Signage. Section 29(iii) is hereby revised by substituting the phrase
"until and unless Tenant vacates, abandons, subleases or assigns its rights
(other than in a transaction that does not require Landlord's approval pursuant
to Section 18) to more than twenty-five percent (25%) of the total number of RSF
in the Initial Premises, Future Premises and Expansion Space" for the phrase "if
and so long as Tenant occupies at least seventy-five percent (75%) of the RSF in
the Building".
9.5 Satellite Dishes. Section 30(p)(i) is hereby revised to provide that the
55% allocation shall be increased to 64% on the Expansion Space Commencement
Date for Expansion Space Two; to 73% on the Expansion Space Commencement Date
for Expansion Space Three; and to 82% on the Expansion Space Commencement Date
for Expansion Space Four. In addition, Section 30(p) is hereby supplemented by
adding the following:
So as to enable Landlord to make roof equipment commitments to others
(subject to the restrictions outlined in Section 30(p)), if Tenant is not
using all of the portions of the roof to which it is entitled hereunder at
a given time, Tenant hereby agrees to advise Landlord from time to time
upon request as to what portion of its roof entitlements it is prepared to
relinquish, if any, and for how long (Tenant shall make such determination
reasonably and in good faith).
9.6 Contingencies. Landlord and Tenant acknowledge and agree that Landlord has
waived its contingencies outlined in Section 31 and that Section 31 is hereby
deleted in its entirety.
6
<PAGE>
9.7 Right of First Offer. Section 33 is hereby revised to provide that the
Floor 5 space currently occupied by AIS shall be deemed to be RFO Space provided
that all of it becomes available at one time.
SECTION 10: ALL OTHER TERMS REMAIN THE SAME
To the extent not inconsistent with the foregoing, all of the terms and
conditions of the Lease shall continue in full force and effect and shall apply,
except to the extent the context suggests otherwise, to the Expansion Space.
LANDLORD TENANT
- -------- ------
2601 Elliot LLC, a Washington RealNetworks, Inc., a Washington
limited liability company corporation
By: /s/ Jeffrey A. Roush By: /s/ Paul Bialek
-------------------------- ---------------------------
Jeffrey A. Roush, Paul Bialek
Managing Member Its: Sr. Vice President
and CFO
7
<PAGE>
STATE OF WASHINGTON )
) ss.
COUNTY OF KING )
On this ___ day of __________, 1998, before me, the undersigned, a Notary
Public in and for the State of Washington, duly commissioned and sworn
personally appeared Jeffrey A. Roush, known to me to be the Managing Member of
2601 Elliott LLC, a Washington limited liability company, the limited liability
company that executed the foregoing instrument, and acknowledged the said
instrument to be the free and voluntary act and deed of said limited liability
company, for the purposes therein mentioned, and on oath stated that he was
authorized to execute said instrument.
I certify that I know or have satisfactory evidence that the person
appearing before me and making this acknowledgment is the person whose true
signature appears on this document.
WITNESS my hand and official seal hereto affixed the day and year in the
certificate above written.
_____________________________________
Signature
_____________________________________
Print Name
NOTARY PUBLIC in and for the State of
Washington, residing at_____________.
My commission expires_______________.
STATE OF WASHINGTON )
) ss.
COUNTY OF KING )
On this ___ day of __________, 1998, before me, the undersigned, a Notary
Public in and for the State of Washington, duly commissioned and sworn
personally appeared __________________________, known to me to be the
____________________________ of RealNetworks, Inc., a Washington corporation,
the corporation that executed the foregoing instrument, and acknowledged the
said instrument to be the free and voluntary act and deed of said corporation,
for the purposes therein mentioned, and on oath stated that he was authorized to
execute said instrument.
I certify that I know or have satisfactory evidence that the person
appearing before me and making this acknowledgment is the person whose true
signature appears on this document.
WITNESS my hand and official seal hereto affixed the day and year in the
certificate above written.
_____________________________________
Signature
_____________________________________
Print Name
NOTARY PUBLIC in and for the State of
Washington, residing at______________.
My commission expires _______________.
8
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 10-Q AND IS
QUALIFIED IN ITS ENTIRETY BE REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 45,309
<SECURITIES> 45,262
<RECEIVABLES> 16,561
<ALLOWANCES> 929
<INVENTORY> 145
<CURRENT-ASSETS> 109,016
<PP&E> 8,621
<DEPRECIATION> 3,455
<TOTAL-ASSETS> 126,457
<CURRENT-LIABILITIES> 29,085
<BONDS> 1,005
0
0
<COMMON> 29
<OTHER-SE> 83,255
<TOTAL-LIABILITY-AND-EQUITY> 126,457
<SALES> 0
<TOTAL-REVENUES> 12,502
<CGS> 0
<TOTAL-COSTS> 2,439
<OTHER-EXPENSES> 22,072
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (10,932)
<INCOME-TAX> 0
<INCOME-CONTINUING> (10,932)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,932)
<EPS-PRIMARY> (0.18)
<EPS-DILUTED> (0.18)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 10-Q AND IS
QUALIFIED IN TIS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 34,119
<SECURITIES> 55,001
<RECEIVABLES> 6,318
<ALLOWANCES> 1,287
<INVENTORY> 205
<CURRENT-ASSETS> 97,427
<PP&E> 19,881
<DEPRECIATION> 6,945
<TOTAL-ASSETS> 133,739
<CURRENT-LIABILITIES> 47,211
<BONDS> 994
0
0
<COMMON> 66
<OTHER-SE> 82,851
<TOTAL-LIABILITY-AND-EQUITY> 133,739
<SALES> 0
<TOTAL-REVENUES> 23,525
<CGS> 0
<TOTAL-COSTS> 4,281
<OTHER-EXPENSES> 20,949
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (736)
<INCOME-TAX> 0
<INCOME-CONTINUING> (736)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (736)
<EPS-PRIMARY> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>
