<PAGE> 1
SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
REALNETWORKS, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
(1)Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
(2)Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(3)Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee
is calculated and state how it was determined):
- --------------------------------------------------------------------------------
(4)Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
(5)Total fee paid:
- --------------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
- --------------------------------------------------------------------------------
[ ] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
- --------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement no.:
- --------------------------------------------------------------------------------
(3) Filing Party:
- --------------------------------------------------------------------------------
(4) Date Filed:
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<PAGE> 2
[REALNETWORKS LOGO]
REALNETWORKS 1111 Third Avenue, Suite 2900, Seattle, WA 98101
April 27, 1999
Dear Shareholder:
On behalf of RealNetworks, Inc., I cordially invite you to attend the 1999
Annual Meeting of Shareholders (the "Annual Meeting") to be held at 2:00 p.m. on
Friday, May 21, 1999 at the Hotel Monaco, 1101 Fourth Avenue, Seattle,
Washington.
At the Annual Meeting, the shareholders will be asked to (i) elect two
directors to the Company' s Board of Directors and (ii) ratify the appointment
of KPMG LLP as the Company's independent auditors for fiscal year 1999.
Additional details regarding these matters are provided in the attached Notice
of Annual Meeting and Proxy Statement.
The Board of Directors unanimously recommends that shareholders vote "FOR"
these two proposals.
Whether or not you plan to attend the Annual Meeting, we hope that you will
have your shares represented by marking, signing, dating and returning your
proxy card in the enclosed envelope as soon as possible. Your shares will be
voted in accordance with the instructions you have given in your proxy card. You
may, of course, attend the Annual Meeting and vote in person even if you have
previously returned your proxy card.
On behalf of the Board of Directors, I would like to express our
appreciation for your support of the Company. We look forward to seeing you at
the meeting.
Sincerely,
/s/ Robert Glaser
Robert Glaser
Chief Executive Officer and
Chairman of the Board
<PAGE> 3
REALNETWORKS, INC.
1111 THIRD AVENUE, SUITE 2900
SEATTLE, WASHINGTON 98101
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
MAY 21, 1999
TO THE SHAREHOLDERS OF REALNETWORKS, INC.:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of
RealNetworks, Inc., a Washington corporation (the "Company"), will be held on
Friday, May 21, 1999, at 2:00 p.m., local time, at the Hotel Monaco, 1101 Fourth
Avenue, Seattle, Washington, for the following purposes as more fully described
in the accompanying Proxy Statement:
1. To elect two directors to serve until the 2002 Annual Meeting of
Shareholders or until their earlier retirement, resignation or removal,
or the election of their successors;
2. To ratify the appointment of KPMG LLP as independent auditors for the
Company's fiscal year ending December 31, 1999; and
3. To transact such other business as may properly come before the meeting
or any adjournment or postponement thereof.
Only holders of record of the Company's Common Stock at the close of
business on March 22, 1999 are entitled to notice of, and to vote at, this
meeting or any adjournment or postponement thereof. A list of shareholders as of
that date will be available at the meeting and for ten days prior to the meeting
at the Company's principal executive offices located at 1111 Third Avenue, Suite
2900, Seattle, Washington 98101.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ K.J. MacArthur
KELLY JO MACARTHUR
Vice President, General Counsel and
Secretary
Seattle, Washington
April 27, 1999
YOUR VOTE IS IMPORTANT!
ALL SHAREHOLDERS ARE CORDIALLY INVITED TO ATTEND THE MEETING IN PERSON. WHETHER
OR NOT YOU EXPECT TO ATTEND THE MEETING IN PERSON, WE URGE YOU TO COMPLETE,
SIGN, DATE AND RETURN THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE TO ENSURE YOUR
REPRESENTATION AT THE MEETING. A POSTAGE-PREPAID ENVELOPE IS ALSO ENCLOSED FOR
THAT PURPOSE. SENDING IN YOUR PROXY WILL NOT PREVENT YOU FROM VOTING YOUR SHARES
AT THE MEETING IF YOU DESIRE TO DO SO, AS YOUR PROXY IS REVOCABLE AT YOUR
OPTION.
<PAGE> 4
REALNETWORKS, INC.
PROXY STATEMENT FOR THE ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 21, 1999
ANNUAL MEETING AND PROXY SOLICITATION INFORMATION
GENERAL
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of RealNetworks, Inc., a Washington
corporation (the "Company"), for use at the Annual Meeting of Shareholders (the
"Annual Meeting") to be held at 2:00 p.m. on Friday, May 21, 1999 at the Hotel
Monaco, 1101 Fourth Avenue, Seattle, Washington, and at any adjournment or
postponement thereof, for the purposes set forth herein and in the accompanying
Notice of Annual Meeting of Shareholders. This Proxy Statement, a proxy card and
the Annual Report of the Company, which includes financial statements for its
fiscal year ended December 31, 1998, are being sent to all shareholders of
record as of the close of business on March 22, 1999, and are being mailed to
the Company's shareholders on or about April 27, 1999. Although the Annual
Report and this Proxy Statement are being mailed together, the Annual Report is
not part of this Proxy Statement.
QUORUM AND VOTING RIGHTS
At the close of business on March 22, 1999, there were 33,125,518 shares of
common stock, par value $.001 per share (the "Common Stock") of the Company
outstanding. Only holders of record of the shares of Common Stock outstanding at
such time will be entitled to notice of and to vote at the meeting. The presence
at the meeting of at least a majority of such shares, either in person or by
proxy, shall constitute a quorum for the transaction of business. Broker
non-votes and shares held by persons abstaining will be counted in determining
whether a quorum is present. Proxies are solicited to give all shareholders who
are entitled to vote on the matters that come before the meeting the opportunity
to do so, whether or not they choose to attend the meeting in person.
If you are a common shareholder of record, you may vote by using the proxy
card enclosed with this Proxy Statement. When your proxy card is returned
properly signed, the shares represented will be voted according to your
directions. You can specify how you want your shares voted on each proposal by
marking the appropriate boxes on the proxy card. The proposals are identified by
number and a general description on the proxy card. Please review the voting
instructions on the proxy card and read the text of the proposals and the
position of the Board of Directors in the Proxy Statement prior to marking your
vote. If your proxy card is signed and returned without specifying a vote or an
abstention on any proposal, it will be voted according to the recommendations of
the Board of Directors on that proposal. The recommendation of the Board of
Directors for each proposal is shown on the proxy card. For the reasons stated
in more detail later in the Proxy Statement, the Board of Directors recommends a
vote FOR the two individuals nominated to serve as Class 2 directors; and FOR
the ratification of the appointment of KPMG LLP as independent public auditors
for the Company's fiscal year ending December 31, 1999.
It is not expected that any matters other than those referred to in this
Proxy Statement will be brought before the Annual Meeting. However, if any other
matters are properly presented for action, the proxies named on the proxy card
will be authorized by your proxy to vote on those other matters in their
discretion.
On each matter properly brought before the meeting, shareholders will be
entitled to one vote for each share of Common Stock held. Shareholders do not
have the right to cumulate their votes in the election of directors. Under
Washington law and the Company's Articles of Incorporation and Bylaws, if a
quorum exists at the meeting: (a) the two nominees for director who receive the
greatest number of votes cast in the election of directors will be elected; and
(b) the proposal to ratify the appointment of independent auditors will be
approved if the number of votes cast in favor of this proposal exceeds the
number of votes cast against it.
<PAGE> 5
Shareholders may abstain from voting for the nominees for director and may
abstain from voting on the proposal to ratify the appointment of independent
auditors. Abstention from voting on either or both of the matters will have no
effect, since approval of each matter is based solely on the number of votes
actually cast.
Brokerage firms and other intermediaries holding shares of Common Stock in
street name for customers are generally required to vote such shares in the
manner directed by their customers. In the absence of timely directions,
brokerage firms and other intermediaries will generally have discretion to vote
their customers' shares in the election of directors and on the proposal to
ratify the appointment of independent auditors. The failure of a brokerage firm
or other intermediary to vote its customers' shares on the proposal for the
election of directors or on the proposal to ratify the appointment of auditors
will have no effect on any proposal since approval of each proposal is based
solely on the number of votes actually cast.
REVOCABILITY OF PROXIES
If you execute a proxy, you may revoke it by taking one of the following
three actions: (a) by giving written notice of the revocation to the Secretary
of the Company at its principal executive offices prior to May 21, 1999; (b) by
executing a proxy with a later date and delivering it to the Secretary of the
Company at its principal executive offices prior to May 21, 1999; or (c) by
personally attending and voting at the meeting.
SOLICITATION OF PROXIES
The Company will bear the expense of preparing, printing and distributing
proxy materials to its shareholders. In addition to solicitations by mail, a
number of regular employees of the Company may solicit proxies on behalf of the
Board of Directors in person or by telephone. The Company will reimburse
brokerage firms and other intermediaries for their expenses in forwarding proxy
materials to beneficial owners of the Common Stock.
SHAREHOLDER PROPOSALS FOR 2000 ANNUAL MEETING
An eligible shareholder who desires to have a qualified proposal considered
for inclusion in the proxy statement and form of proxy prepared in connection
with the Company's 2000 Annual Meeting of Shareholders must deliver a copy of
the proposal to the Secretary of the Company, at the Company's principal
executive offices, no later than December 28, 1999. In order to be eligible, a
shareholder must have continually been a record or beneficial owner of shares of
Common Stock having a market value of at least $2,000 for a period of at least
one year prior to submitting the proposal, and the shareholder must continue to
hold the shares through the date on which the meeting is held.
A shareholder of record who intends to submit a proposal at the 2000 Annual
Meeting that is not eligible for inclusion in the Company's Proxy Statement must
provide written notice to the Company, addressed to the Secretary of the Company
(or to the Nominating Committee of the Board of Directors, Attn: Mr. Glaser,
Chairman, if the proposal relates to the nomination of one or more directors) at
the Company's principal executive offices, not later than December 28, 1999. The
notice must satisfy certain requirements specified in the Company's Bylaws. A
copy of the Bylaws will be sent to any shareholder upon written request to the
Company's Secretary.
PROPOSAL 1 -- ELECTION OF DIRECTORS
The Class 2 directors are to be elected at the Annual Meeting, to serve
until the 2002 Annual Meeting of Shareholders or until their earlier retirement,
resignation or removal. James Breyer and Bruce Jacobsen, who currently serve as
Class 2 directors of the Company, have been nominated by the Nominating
Committee of the Board of Directors and recommended by the Board for re-election
at the Annual Meeting. The accompanying proxy will be voted for these nominees,
except where you indicate otherwise or authority to so vote is withheld. Should
Mr. Breyer or Mr. Jacobsen be unable to serve, the proxy will be voted for such
person or persons as are designated by the Nominating Committee of the Board of
Directors.
2
<PAGE> 6
NOMINEES FOR DIRECTOR
BRUCE JACOBSEN has served as a Director of the Company since August 1997,
and served as President and Chief Operating Officer from February 1996 to
November 1998. From April 1995 to February 1996, Mr. Jacobsen was Chief
Operating Officer of Dreamworks Interactive, a joint venture between Microsoft
and Dreamworks SKG, a partnership among Steven Spielberg, Jeffery Katzenberg and
David Geffen. From August 1986 to April 1995, Mr. Jacobsen was employed at
Microsoft in a number of capacities, including General Manager of the Kids/Games
business unit. Mr. Jacobsen graduated summa cum laude with Honors from Yale
University and holds an M.B.A. from Stanford University. Age 39.
JAMES BREYER has been a Director of the Company since October 1995. Mr.
Breyer has served as a Managing Partner of Accel Partners L.P. in Palo Alto/San
Francisco since November 1995 and as a general partner from 1990 to 1995. At
Accel Partners L.P., Mr. Breyer has sponsored investments in over a dozen
companies that have completed public offerings or successful mergers.
Previously, Mr. Breyer was a management consultant at McKinsey & Company, Inc.
and worked in product management and marketing at Apple Computer, Inc. and
Hewlett-Packard Corporation. Mr. Breyer holds a B.S. from Stanford University
and an M.B.A. from Harvard University, where he was named a Baker Scholar. Age
37.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE NOMINEES
NAMED IN PROPOSAL 1.
BOARD OF DIRECTORS
The business of the Company is managed under the direction of a Board of
Directors, which is divided into three classes, each class as nearly equal in
number of directors as possible. The Board of Directors has determined that the
Board of Directors shall be composed of seven directors. Four directors
currently serve on the Board, with three vacancies currently existing. Mitchell
Kapor is a Class 1 director, whose term expires at the annual shareholders
meeting in 2001, Bruce Jacobsen and James Breyer are Class 2 directors, whose
terms expire at the Annual Meeting, and Robert Glaser is a Class 3 director,
whose term expires at the annual shareholders meeting in 2000. Commencing with
the Annual Meeting, each newly elected director shall serve for a term ending at
the third annual shareholders meeting following election of such director. The
Board of Directors has responsibility for establishing broad corporate policies
and for the overall performance of the Company. It is not, however, involved in
operating details on a day-to-day basis.
CONTINUING DIRECTORS -- NOT STANDING FOR ELECTION THIS YEAR
The following individual is a Class 1 director:
MITCHELL KAPOR has been a director of the Company since October 1995. Mr.
Kapor has served as a partner of Accel Partners L.P. since January 1999. From
1990 to 1993, Mr. Kapor was President, from 1993 to 1995 he was Chairman and
from 1995 to 1996 he was a director, of the Electronic Frontier Foundation, a
nonprofit public Internet organization that he co-founded in 1990. Mr. Kapor
designed Lotus 1-2-3, and founded Lotus Development Corporation in 1982 and
served as its President and Chief Executive Officer from April 1982 to July
1986. Mr. Kapor holds a B.A. in Cybernetics from Yale University and an M.A. in
Psychology from Beacon College. Age 48.
The following individual is a Class 3 director:
ROBERT GLASER has served as Chairman of the Board, Chief Executive Officer
and Treasurer of the Company since its inception in February 1994, and as
Secretary from March 1995 to April 1998. Mr. Glaser also serves as the Company's
Policy Ombudsman, with the exclusive authority to adopt or change the editorial
policies of the Company as reflected on the Company's Web sites or other
communications or media in which the Company has a significant editorial or
media voice. From 1983 to 1993, Mr. Glaser was employed at Microsoft
Corporation, most recently as Vice President of multimedia and consumer systems,
where he focused on the development of new businesses related to the convergence
of the computer, consumer
3
<PAGE> 7
electronics and media industries. Mr. Glaser holds a B.A. and an M.A. in
Economics and a B.S. in Computer Science from Yale University. Age 37.
MEETINGS OF THE BOARD
The Board meets on a regularly scheduled basis during the year to review
significant developments affecting the Company and to act on matters requiring
Board approval. It also holds special meetings when an important matter requires
Board action between regularly scheduled meetings. The full Board of Directors
met 13 times during the Company's fiscal year ended December 31, 1998, including
action taken by unanimous written consent on seven occasions. No incumbent
member attended fewer than 75% of the total number of meetings (including
consents) of the Board of Directors and of any Board committees of which he was
a member during that fiscal year.
COMPENSATION OF DIRECTORS
Directors of the Company do not receive cash compensation for their
services as directors or members of committees of the Board of Directors, but
are reimbursed for their reasonable expenses incurred in attending Board of
Directors or Committee meetings.
COMMITTEES OF THE BOARD
Committees of the Board consist of an Audit Committee, a Compensation
Committee, a Strategy Committee, a Strategic Transactions Committee and a
Nominating Committee. The Audit Committee, currently composed of Messrs. Breyer,
Jacobsen and Kapor, reviews the Company's internal accounting procedures and
consults with and reviews the services provided by the Company's independent
auditors. The Audit Committee met two times during the fiscal year ended
December 31, 1998. The Compensation Committee, currently composed of Messrs.
Breyer, Glaser and Kapor, reviews and recommends to the Board the compensation
and benefits to be provided to the Company's officers and reviews general policy
matters relating to employee compensation and benefits. The Compensation
Committee met two times during the fiscal year ended December 31, 1998. The
Strategy Committee, currently composed of Messrs. Breyer, Glaser, Jacobsen and
Kapor, makes recommendations to the Board of Directors regarding the overall
strategic goals of the Company and reviews significant business transactions
that affect the future strategic direction of the Company. The Strategy
Committee met two times during the fiscal year ended December 31, 1998. The
approval of the Strategic Transactions Committee, which is currently composed of
Messrs. Glaser, Breyer and Kapor, is required before the Board of Directors may
(i) adopt a plan of merger, (ii) authorize the sale, lease, exchange or mortgage
of (A) assets representing more than 50% of the book value of the Company's
assets prior to the transaction or (B) any other asset or assets on which the
long-term business strategy of the Company is substantially dependent, (iii)
authorize the Company's voluntary dissolution or (iv) take any action that has
the effect of clauses (i) through (iii). The Strategic Transactions Committee
met one time during the fiscal year ended December 31, 1998. The Nominating
Committee, currently composed of Messrs. Glaser, Jacobsen and Breyer, searches
for and recommends to the Board potential nominees for Board positions and makes
recommendations to the Board regarding size and composition of the Board. The
Nominating Committee met one time during the fiscal year ended December 31,
1998.
CONTRACTUAL ARRANGEMENTS
Under a voting agreement (the "Voting Agreement") entered into in September
1997 among the Company, Accel IV L.P. ("Accel IV") and Messrs. Jacobsen, Kapor
and Glaser, each of Accel IV and Messrs. Jacobsen and Kapor have agreed to vote
all shares of stock of the Company owned by them to elect Mr. Glaser to the
Board of Directors of the Company in each election in which he is a nominee. The
obligations under the Voting Agreement terminate with respect to shares
transferred by the parties thereto. The Voting Agreement terminates on the death
of Mr. Glaser.
4
<PAGE> 8
Pursuant to the terms of an agreement entered into in September 1997 among
the Company and Mr. Glaser, the Company has agreed to use its best efforts to
nominate, elect and not remove Mr. Glaser from the Board of Directors so long as
Mr. Glaser owns a specified number of shares.
VOTING SECURITIES AND PRINCIPAL HOLDERS
OWNERSHIP INFORMATION
The following table sets forth, as of April 1, 1999, certain information
regarding beneficial ownership of the Common Stock (a) by each person known to
the Company to be the beneficial owner of more than five percent of the
outstanding Common Stock, (b) by each director, (c) by the Chief Executive
Officer and the Company's four most highly compensated executive officers other
than the Chief Executive Officer for the fiscal year ended December 31, 1998
(the "Named Executive Officers") and (d) by all of the Company's executive
officers and directors as a group. Unless otherwise noted, the named beneficial
owner has sole voting and investment power.
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
SHARES OF COMMON STOCK COMMON STOCK
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) OUTSTANDING
------------------------------------ ---------------------- -------------
<S> <C> <C>
Robert Glaser(2)............................ 14,035,521 42.1
c/o RealNetworks, Inc.
1111 Third Avenue
Suite 2900
Seattle, WA 98101
Mitchell Kapor(3)........................... 1,702,535 5.1
Kapor Enterprises, Inc.
One Broadway
10th Floor
Cambridge, MA 02142
James W. Breyer(4).......................... 1,226,484 3.7
Bruce Jacobsen(5)........................... 613,656 1.8
Len Jordan(6)............................... 28,800 *
Jeff Mandelbaum............................. 0 *
James Higa(7)............................... 37,500 *
Jeff Lehman(8).............................. 22,800 *
All directors and executive officers as a
group (20 persons)(9)..................... 19,059,863 55.2%
</TABLE>
- ---------------
* Less than 1%.
(1) Beneficial ownership is determined in accordance with rules of the
Securities and Exchange Commission (the "SEC") and includes shares over
which the beneficial owner exercises voting or investment power. Shares of
Common Stock subject to options currently exercisable or exercisable within
60 days of April 1, 1999 are deemed outstanding for the purpose of
computing the percentage ownership of the person holding the options, but
are not deemed outstanding for the purpose of computing the percentage
ownership of any other person. Except as indicated, and subject to
community property laws where applicable, the Company believes, based on
information provided by such persons, that the persons named in the table
above have sole voting and investment power with respect to all shares of
Common Stock shown as beneficially owned by them.
(2) Includes 640,160 shares of Common Stock owned by the Glaser Family
Foundation. Mr. Glaser disclaims beneficial ownership of these shares.
(3) Includes 1,507 shares owned by Kubera L.L.C., a limited liability company
of which Mr. Kapor is the sole member.
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<PAGE> 9
(4) Includes 258 shares of Common Stock owned by Accel Partners & Co., Inc., a
corporation of which Mr. Breyer is an officer. Also includes 1,080,479
shares owned by Accel IV L.P., 22,429 shares owned by Accel Keiretsu L.P.,
42,869 shares owned by Accel Investors '95 L.P., 15,502 shares owned by
Accel Japan L.P. and 7,170 shares owned by Accel Investors '93 L.P.
(together the "Accel Group"). Mr. Breyer is a general partner of Accel
Partners L.P., which is the general partner of Accel IV L.P. Mr. Breyer
disclaims beneficial ownership of these shares except to the extent of his
pecuniary interest therein.
(5) Includes 531,456 shares of Common Stock issuable upon exercise of options
exercisable within 60 days of April 1, 1999.
(6) Includes 28,500 shares of Common Stock issuable upon exercise of options
exercisable within 60 days of April 1, 1999.
(7) Includes 500 shares held by Mr. Higa's spouse and 36,500 shares of Common
Stock issuable on exercise of options exercisable within 60 days of April
1, 1999.
(8) Includes 22,500 shares of Common Stock issuable upon exercise of options
exercisable within 60 days of April 1, 1999.
(9) Includes an aggregate of 1,184,167 shares of Common Stock issuable upon
exercise of options that are exercisable within 60 days of April 1, 1999.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities and Exchange Act of 1934, as amended (the
"Exchange Act"), requires that the Company's officers and directors, and persons
who own more than ten percent of a registered class of the Company's equity
securities, file reports of ownership and changes of ownership with the SEC.
Officers, directors and greater than ten percent shareholders are required by
SEC regulation to furnish the Company with copies of all such reports they file.
Based solely on its review of the copies of such reports received by the
Company, and on written representations by the Company's officers and directors
regarding their compliance with the applicable reporting requirements under
Section 16(a) of the Exchange Act, the Company believes that, with respect to
its fiscal year ended December 31, 1998, all of the Company's officers and
directors, and all of the persons known to the Company to own more than ten
percent of the Common Stock, complied with all such reporting requirements.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Compensation Committee is currently composed of Messrs.
Glaser, Breyer and Kapor. Mr. Glaser is the Chairman of the Board, Chief
Executive Officer and Treasurer of the Company. During the fiscal year 1998, Mr.
Glaser participated in deliberations of the Board of Directors concerning
executive officer compensation, excluding those concerning the compensation of
the Chief Executive Officer. No executive officer of the Company serves as a
member of the board of directors or compensation committee of any entity that
has one or more executive officers serving as a member of the Company's Board of
Directors or Compensation Committee. In addition, no interlocking relationship
exists between any member of the Company's Compensation Committee and any member
of the compensation committee of any other company, nor has any such
interlocking relationship existed in the past.
CERTAIN TRANSACTIONS
On December 22, 1998, Glaser Investments, Inc., a Washington corporation
("Glaser Investments") of which Mr. Glaser is the sole shareholder, invested
$800,000 in NonStop Entertainment Software, Inc., a Washington corporation
("NonStop"), in exchange for all of the shares of the Series A Convertible
Preferred Stock of NonStop (the "NonStop Shares"), which shares represented 47%
of the outstanding capital stock of NonStop effective upon the closing of the
transaction. Glaser Investments has granted the Company an option to purchase
the NonStop Shares, together with any additional shares of the capital stock of
NonStop acquired
6
<PAGE> 10
in the future by Glaser Investments, pursuant to a Call Option Agreement between
Glaser Investments and the Company. The Company, at its sole discretion, may
exercise the option at a price that represents a 20% annual return to Glaser
Investments. In addition, the Company has entered into a Software Development
and Distribution Agreement (the "Distribution Agreement") with NonStop pursuant
to which the Company has acquired a license to distribute computer game software
products developed by NonStop.
On March 24, 1998, the Company acquired Vivo Software, Inc. ("Vivo")
pursuant to an Agreement and Plan of Merger among the Company, Vivo and certain
shareholders of Vivo. An aggregate of 1,108,170 shares of Common Stock were
issued to the shareholders of Vivo as consideration in the transaction. The
Accel Group collectively owned approximately 17% of Vivo at the effective time
of the transaction and collectively received 188,353 shares of Common Stock in
connection with the acquisition. Mr. Breyer is a general partner of Accel
Partners L.P. Mr. Kapor became a partner of Accel Partners L.P. in January 1999.
COMPENSATION AND BENEFITS
EXECUTIVE OFFICER COMPENSATION
COMPENSATION SUMMARY. The following table sets forth information regarding
compensation earned during the Company's fiscal year ended December 31, 1998,
and during the preceding two fiscal years, by the Named Executive Officers.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
ANNUAL COMPENSATION SECURITIES
----------------------------------------- UNDERLYING
FISCAL OTHER ANNUAL STOCK
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($)(1) OPTIONS(#)
--------------------------- ------ --------- -------- ------------------ ------------
<S> <C> <C> <C> <C> <C>
Robert Glaser................... 1998 $100,000 $ -- $ -- --
Chairman of the Board, 1997 100,000 -- -- --
Chief Executive Officer 1996 100,000 -- -- --
and Treasurer
Len Jordan...................... 1998 126,667 40,625 -- 40,000
Senior Vice President -- 1997 105,064 20,000 775 150,000
Media Systems 1996 -- -- -- --
James Higa...................... 1998 87,279 42,500 44,956 --
Vice President -- 1997 77,471 -- 37,729 35,000
Asia/Rest of World 1996 27,778 -- 26,533 75,000
Jeff Mandelbaum................. 1998 71,218 67,000 4,600 60,000
Vice President -- 1997 -- -- -- --
North American Sales 1996 -- -- -- --
Jeff Lehman..................... 1998 100,000 113,639 -- --
Vice President -- 1997 21,218 -- 455 75,000
Advertising Sales 1996 -- -- -- --
</TABLE>
- ---------------
(1) Amounts shown for 1998 constitute amounts reimbursed as moving expenses for
Mr. Mandelbaum, and rental fees for principal residence and transportation
allowance for Mr. Higa.
7
<PAGE> 11
OPTION GRANTS. The following table shows information concerning stock
options granted to the Named Executive Officers during the Company's fiscal year
ended December 31, 1998.
OPTION GRANTS IN 1998
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
-------------------------------------------------------- VALUE AT ASSUMED
NUMBER OF PERCENT OF ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO OPTION TERM(1)
OPTIONS EMPLOYEES IN EXERCISE PRICE EXPIRATION ------------------------
NAME GRANTED(#) FISCAL YEAR ($ PER SHARE) DATE 5% 10%
---- ---------- ------------- -------------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Robert Glaser........ -- -- $ -- -- $ -- $ --
Len Jordan........... 40,000 1.3 34.313 06/26/18 2,269,184 7,861,108
James Higa........... -- -- -- -- -- --
Jeff Mandelbaum...... 60,000 2.0 32.875 04/17/18 3,261,130 11,297,494
Jeff Lehman.......... -- -- -- -- -- --
</TABLE>
- ---------------
(1) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. The assumed
5% and 10% rates of stock price appreciation are mandated by the SEC. None
of the assumed rates of stock price appreciation represent the Company's
estimate or projection of the future price of the Common Stock.
OPTION EXERCISES. The following table shows information concerning stock
options exercised by the Named Executive Officers during the Company's fiscal
year ended December 31, 1998, including the aggregate value of any gains
realized on such exercise. The table also shows information regarding the number
and value of unexercised in-the-money options held by the Named Executive
Officers at the end of that fiscal year.
AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1998 AND FISCAL YEAR-END OPTION
VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL YEAR IN-THE-MONEY OPTIONS
SHARES VALUE END(#) AT FISCAL YEAR-END($)(2)
ACQUIRED ON REALIZED --------------------------- ---------------------------
NAME EXERCISE(#) ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Robert Glaser........ -- $ -- -- -- $ -- $ --
Len Jordan........... 18,500 716,875 26,500 145,000 910,938 3,671,855
James Higa........... 10,000 397,130 20,000 80,000 700,500 2,578,000
Jeff Mandelbaum...... -- -- -- 60,000 -- 180,000
Jeff Lehman.......... -- -- -- 75,000 -- 2,015,625
</TABLE>
- ---------------
(1) Represents the aggregate fair market value on the respective dates of
exercise of the shares of Common Stock received on exercise of the options,
less the aggregate exercise price of the options.
(2) These values represent the number of shares subject to in-the-money options
multiplied by the difference between the closing bid price of the Company's
Common Stock on December 31, 1998 ($35.875 per share) and the exercise price
of the options.
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
Compensation Philosophy
The Compensation Committee of the Board of Directors (the "Committee")
consists of two non-employee directors and the Company's Chief Executive Officer
and Chairman of the Board. The Committee works with management to establish the
general compensation policies and programs for the Company's executive officers,
including the determination of salaries and the granting of stock options. In
establishing executive compensation, the Committee is guided by the following
principles: (i) the total compensation for
8
<PAGE> 12
executive officers should be sufficiently competitive with the compensation paid
by other high-growth companies in the software industry for officers in
comparable positions so that the Company can attract and retain highly qualified
executives; (ii) individual compensation should include components that reflect
the financial performance of the Company and the performance of the individual;
(iii) each executive officer will have clear goals and accountability with
regard to corporate performance; and (iv) pay incentives should be aligned with
the long-term interests of the Company's shareholders.
The Company's executive compensation program is designed to align executive
compensation with the Company's business objectives and the executive's
individual performance, and to enable the Company to attract, retain and reward
executive officers who contribute, and are expected to continue to contribute,
to the Company's long-term success. The Compensation Committee believes that
executive compensation should be designed to motivate executives to increase
shareholder value, and further believes that executive officers can best
increase shareholder value by conceiving, developing and positioning the best
products in the Company's chosen markets.
Each executive officer's performance for the past fiscal year and
objectives for the current year are reviewed, together with the executive
officer's responsibility level and the Company's fiscal performance versus
objectives and potential performance targets for the current year. When salaries
and stock option awards are established for executive officers, the following
criteria are considered: (i) the individual's performance during the past year
and recent quarters; (ii) with respect to executive officers whose primary
responsibilities are in the area of sales, the Company's financial performance
during the past year and recent quarters; and (iii) the salaries of executive
officers in similar positions of companies of comparable size in the same
geographic region and other companies within the computer software industry.
With respect to executive officers other than the Chief Executive Officer, the
recommendations of the Chief Executive Officer are taken into consideration when
executive compensation is determined. The method for determining compensation
varies from case to case based on a discretionary and subjective determination
of what is appropriate at the time.
In the fiscal year ended December 31, 1998, the relationship between the
Company's financial performance and executive compensation was primarily through
long-term incentives consisting of stock options. In addition, executives whose
primary responsibilities are in the area of sales had a component of their cash
compensation tied to the Company's revenues.
The Company's Human Resources department obtains executive compensation
data from salary surveys that reflect a peer group of other high technology
companies, including high technology companies of similar sizes that are located
in the same geographic region, and considers this data in establishing
employment offers to and compensation increases for executive officers.
Components of Compensation
The key elements of the Company's executive compensation program are base
salary and long-term incentive compensation in the form of stock option awards.
These elements are addressed separately.
Quantitative methods or mathematical formulas are not used exclusively in
setting any element of compensation. In determining each component of
compensation, all elements of an executive officer's total compensation package
are considered, including insurance and other benefits.
Base Salaries. Base salaries for executive officers are determined by
reviewing the salaries for comparable positions in high-growth companies in the
Company's industry and geographic region, the historical compensation levels of
the Company's executives and the executive's individual performance in the
preceding year. Base salaries are adjusted from time to time to recognize
various levels of responsibility, individual performance and internal equity
issues. Each executive officer's base salary is reviewed annually. The Company's
Human Resources Department obtains executive salary data by utilizing the
services of a consulting firm, which in turn utilizes various national and
regional executive compensation surveys for evaluation.
9
<PAGE> 13
In addition, executive officers whose primary responsibilities are in the
area of sales are entitled to receive commissions based primarily on the
Company's revenues or a specific portion of revenues and performance-based
management business incentives.
Long-Term Incentives. In keeping with the Company's philosophy of providing
a total compensation package that includes at-risk components of pay, long-term
incentives consisting of stock option grants are an important component of an
executive's total compensation package. These incentives are designed to
motivate and reward executives for maximizing shareholder value and encourage
the long-term employment of key employees.
When stock options are granted to executive officers, the executives'
levels of responsibility, prior experience, individual performance criteria,
previous stock option grants and compensation practices at similar companies in
the Company's industry are considered in evaluating total compensation. The size
of stock option grants is generally intended to reflect an executive's position
with the Company and his or her contributions to the Company, and as a result,
the number of shares underlying stock option awards varies. Options generally
have a five-year vesting period to encourage key employees to continue in the
Company's employ. In 1998, a total of 510,000 options were granted to new
executive officers and a total of 80,000 options were granted to existing
executive officers as a group.
Because all of the above grants were made at option prices equal to the
fair market value of the Common Stock on the dates of grant, the stock options
have value only if the stock price appreciates from the value on the date the
options were granted. The use of stock options is intended to focus executives
on enhancing shareholder value over the long-term and to encourage equity
ownership in the Company.
Other Executive Compensation
Subject to certain restrictions, the Company provides programs to executive
officers that are also available to other Company employees, including a 401(k)
plan, an employee stock purchase program permitting employees to purchase
Company stock at a discount, a transportation subsidy, medical and dental
benefits, and a Section 125 plan.
Compensation of the Chief Executive Officer
The Company's Chief Executive Officer, Mr. Glaser, does not participate in
Committee discussions concerning, nor does he act as a Committee member with
respect to, matters related to the compensation of the Chief Executive Officer.
The compensation for the Company's Chief Executive Officer is determined on the
same policies and criteria as the compensation for the other executive officers.
The Committee recognizes that Mr. Glaser is the Company's founder and is also
one of its largest shareholders. Because of his large share ownership, to date
Mr. Glaser has not received any stock option grants.
Policy With Respect to the $1 Million Deduction Limit
Section 162(m) of the Internal Revenue Code of 1986, as amended, generally
limits the federal corporate income tax deduction for compensation paid to
executive officers named in the summary compensation table in the proxy
statement of a public company to $1 million, unless the compensation is
"performance-based compensation" or qualifies under certain other exceptions.
The Committee intends to qualify executive compensation for deductibility under
Section 162(m) to the extent consistent with the best interests of the Company.
Since corporate objectives may not always be consistent with the requirements
for full deductibility, it is conceivable that the Company may enter into
compensation arrangements in the future involving payments that are not
deductible under Section 162(m).
10
<PAGE> 14
Conclusion
The Committee believes these executive compensation policies and programs
serve the interests of shareholders and the Company effectively. The various pay
vehicles offered are appropriately balanced to provide increased motivation for
executives to contribute to the Company's overall long-term success, thereby
enhancing the value of the Company for the shareholders' benefit.
The Compensation Committee
of the Board of Directors
James W. Breyer
Robert Glaser
Mitchell Kapor
COMPARATIVE PERFORMANCE GRAPH
Set forth below is a graph comparing the cumulative total return to
shareholders on the Company's Common Stock with the cumulative total return of
the Nasdaq Composite Index and the Hambrecht & Quist Technology Index for the
period beginning on November 21, 1997 (the date of the Company's initial public
offering), and ended on December 31, 1998.
COMPARISON OF CUMULATIVE TOTAL RETURN AMONG REALNETWORKS, INC. COMMON STOCK,
NASDAQ COMPOSITE INDEX AND THE HAMBRECHT & QUIST TECHNOLOGY INDEX
[PERFORMANCE GRAPH]
<TABLE>
<CAPTION>
NOVEMBER 21, DECEMBER 31, DECEMBER 31,
1997 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
RealNetworks, Inc.............. $100 $111 $287
Nasdaq Composite Index......... 100 97 135
H&Q Technology Index........... 100 93 145
</TABLE>
The total return on the Common Stock and each index assumes the value of
each investment was $100 on November 21, 1997, and that all dividends were
reinvested, although dividends have not been declared on the Common Stock.
Return information is historical and not necessarily indicative of future
performance.
11
<PAGE> 15
PROPOSAL 2 -- APPOINTMENT OF INDEPENDENT AUDITORS
The Board of Directors, acting upon the recommendation of the Audit
Committee of the Board, has appointed the firm of KPMG LLP as independent
auditors for the Company's fiscal year ending December 31, 1999. This firm has
audited the accounts of the Company since 1994. The firm performed audit
services in connection with the examination of the consolidated financial
statements of the Company for its fiscal year ended December 31, 1998. In
addition, the firm has rendered other services, including the review of
financial statements and related information in various registration statements
and filings with the SEC.
If this proposal does not receive the affirmative approval of a majority of
the votes cast on the proposal, the Board of Directors will reconsider the
appointment. Representatives of KPMG LLP are expected to be present at the
annual meeting, will have the opportunity to make a statement if they desire to
do so, and will be available to respond to appropriate questions from
shareholders.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE RATIFICATION
OF THE APPOINTMENT OF KPMG LLP.
OTHER BUSINESS
The Board of Directors does not intend to bring any other business before
the meeting, and, so far as is known to the Board, no matters are to be brought
before the meeting except as specified in the Notice of Annual Meeting of
Shareholders. However, as to any other business which may properly come before
the meeting, it is intended that proxies, in the form enclosed, will be voted in
respect thereof in accordance with the judgment of the persons voting such
proxies.
IT IS IMPORTANT THAT PROXIES ARE RETURNED PROMPTLY AND THAT YOUR SHARES ARE
REPRESENTED. SHAREHOLDERS ARE URGED TO MARK, SIGN AND DATE THE ENCLOSED PROXY
CARD AND MAIL IT PROMPTLY IN THE ENCLOSED RETURN ENVELOPE.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ K.J. MacArthur
KELLY JO MACARTHUR
Vice President, General Counsel and
Secretary
April 27, 1999
Seattle, Washington
12
<PAGE> 16
A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K
FOR THE 1998 FISCAL YEAR, AS FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION, IS AVAILABLE WITHOUT CHARGE
TO ANY SHAREHOLDER UPON WRITTEN REQUEST TO:
INVESTOR RELATIONS DEPARTMENT
REALNETWORKS, INC.
1111 THIRD AVENUE, SUITE 2900
SEATTLE, WASHINGTON 98101
AFTER MAY 27, 1999:
INVESTOR RELATIONS DEPARTMENT
REALNETWORKS, INC.
2601 ELLIOTT AVENUE
SEATTLE, WASHINGTON 98121
13
<PAGE> 17
PROXY
REALNETWORKS, INC.
1111 THIRD AVENUE, SUITE 2900, SEATTLE, WASHINGTON 98101
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Robert Glaser and Kelly Jo MacArthur as
Proxies, each with the power to appoint his or her substitute, and hereby
authorizes them to represent and to vote, as designated below, all the shares of
common stock of RealNetworks, Inc. held of record by the undersigned at the
close of business on March 22, 1999 at the Annual Meeting of Shareholders to be
held on May 21, 1999, or any adjournment or postponement thereof.
(Continued and to be signed on reverse side)
- --------------------------------------------------------------------------------
- FOLD AND DETACH HERE -
<PAGE> 18
Please mark /X/
your votes
as indicated
VOTE FOR ALL NOMINEES
(except as marked to the WITHHOLD AUTHORITY
contrary below) to vote for all nominees
/ / / /
1. ELECTION OF DIRECTORS
Nominees: James Breyer
Bruce Jacobsen
Vote for all nominees listed above, except as specified on the line below:
- --------------------------------------------------------------------------------
FOR AGAINST ABSTAIN
/ / / / / /
2. PROPOSAL TO RATIFY THE APPOINTMENT OF
KPMG LLP as the Company's independent auditors
for the fiscal year ending December 31, 1999.
3. In their discretion the Proxies are authorized to vote upon such other
business as may properly come before the meeting.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS
PROXY WILL BE VOTED FOR PROPOSALS 1 AND 2.
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY
USING THE ENCLOSED ENVELOPE.
Signature(s)____________________________________________ Date:____________, 1999
Please sign exactly as name appears above. When shares are held by joint
tenants, both should sign. When signing as attorney, executor, administrator,
trustee or guardian, please give full title as such. If a corporation, please
sign in full corporate name by President or other authorized officer. If a
partnership, please sign in partnership name by authorized person.
- --------------------------------------------------------------------------------
- FOLD AND DETACH HERE -
