<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 1
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported): JANUARY 25, 2000
REALNETWORKS, INC.
(Exact name of registrant as specified in charter)
WASHINGTON
(State or other jurisdiction of incorporation)
0-23137
(Commission File Number)
91-1628146
(IRS Employer Identification No.)
2601 ELLIOTT AVENUE, SUITE 1000, SEATTLE, WA 98121
(Address of principal executive offices) (Zip Code)
(206) 674-2700
(Registrant's telephone number, including area code)
NONE
(Former name or former address, if changed since last report)
<PAGE> 2
The undersigned registrant hereby amends the following items, financial
statements, exhibits or other portions of its Current Report on Form 8-K,
originally filed with the Securities and Exchange Commission on January 26, 2000
(the "Form 8-K").
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
The following financial statements required by Item 7 with respect to
the NetZip acquisition are filed as part of this report:
(a) Financial Statements of Businesses Acquired.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Financial Information
---------------------
Report of Independent Public Accountants F-1
Balance Sheets, December 31, 1999 and 1998 F-2
Statements of Operations for the Years Ended December 31,
1999 and 1998 F-3
Statements of Shareholders' Equity (Deficit) for the Years
Ended December 31, 1999, and 1998 F-4
Statements of Cash Flows for the Years Ended December 31,
1999 and 1998 F-5
Notes to financial statements F-6
</TABLE>
(b) Pro Forma Financial Information.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Financial Information
---------------------
Unaudited Pro Forma Condensed Consolidated Balance Sheet as
of September 30, 1999 F-14
Unaudited Pro Forma Condensed Consolidated Statements of
Operations for the Nine Months Ended September 30, 1999 F-15
Unaudited Pro Forma Condensed Consolidated Statements of
Operations for the Year Ended December 31, 1998 F-16
Notes to Unaudited Pro Forma Condensed Consolidated
Financial Statements F-17
</TABLE>
(c) Exhibits
<TABLE>
<CAPTION>
Exhibit Number Description
-------------- -----------
<S> <C>
2.1* Agreement and Plan of Merger and Reorganization by
and among RealNetworks, Inc., Varsity Acquisition
Corp., NetZip, Inc., certain shareholders of NetZip,
Inc. and ChaseMellon Shareholder Services, L.L.C.,
dated as of January 25, 2000. (Schedules and
exhibits have been omitted pursuant to Item
601(b)(2) of Regulation S-K. The Company hereby
undertakes to furnish supplementally copies of any
of the omitted schedules
</TABLE>
1
<PAGE> 3
<TABLE>
<S> <C>
and exhibits upon request by the Securities and
Exchange Commission.)
23.1 Consent of Independent Public Accountants
99.1* Press Release dated January 25, 2000 regarding
acquisition of NetZip, Inc.
</TABLE>
------------
* Previously filed.
2
<PAGE> 4
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Netzip, Inc.:
We have audited the accompanying balance sheets of NETZIP, INC., a Georgia
corporation, as of December 31, 1999 and 1998 and the related statements of
operations, shareholders' equity (deficit), and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Netzip, Inc. as of December 31,
1999 and 1998 and the results of its operations and its cash flows for the years
then ended in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Atlanta, Georgia
January 21, 2000
F-1
<PAGE> 5
NETZIP, INC.
BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------------
1999 1998
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and equivalents $ 73,009 $ 304,610
Accounts receivable 256,148 66,431
Prepaid software distribution fees and royalties 263,094 214,244
Prepaid expenses and other current assets 214,065 7,324
------------ ------------
Total current assets 806,316 592,609
------------ ------------
EQUIPMENT AND FURNITURE:
Equipment 462,612 117,954
Furniture 12,180 12,180
------------ ------------
Total equipment and furniture 474,792 130,134
Less accumulated depreciation (139,181) (56,500)
------------ ------------
Equipment and furniture, net 335,611 73,634
------------ ------------
OTHER ASSETS:
Deferred income taxes, net 328,000 --
Other assets 13,060 11,841
------------ ------------
Total other assets 341,060 11,841
------------ ------------
Total assets $ 1,482,987 $ 678,084
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 657,659 $ 65,182
Current portion of note payable, related party 76,701 --
Capital lease obligation 89,585 --
Accrued interest 27,455 --
Accrued settlement costs 50,000 --
Other accrued liabilities 274,526 24,629
Deferred revenue 190,955 127,850
------------ ------------
Total current liabilities 1,366,881 217,661
------------ ------------
LONG-TERM LIABILITIES:
Note payable, related party 999,913 --
COMMITMENTS AND CONTINGENCIES -- --
SHAREHOLDERS' EQUITY (DEFICIT):
Common stock, $.01 par value; 30,000,000 shares authorized, 45,206 31,500
4,520,561 and 3,150,000 shares issued and outstanding at
December 31, 1999, and 1998, respectively
Additional paid-in capital 14,451,311 286,636
Subscription receivable 0 (100)
Deferred stock compensation charges (13,991,920) 0
Retained earnings (deficit) (1,388,404) 142,387
------------ ------------
Total shareholders' equity (deficit) (883,807) 460,423
------------ ------------
Total liabilities and shareholders' equity (deficit) $ 1,482,987 $ 678,084
============ ============
</TABLE>
Accompanying notes are integral to these financial statements.
F-2
<PAGE> 6
NETZIP, INC
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31
---------------------------------
1999 1998
------------ ------------
<S> <C> <C>
REVENUES:
Product $ 4,572,230 $ 2,868,146
Services 566,380 46,992
------------ ------------
Total revenues 5,138,610 2,915,138
------------ ------------
COST OF REVENUES:
Product 677,548 425,731
Services 80,571 14,420
------------ ------------
Total cost of revenues 758,119 440,151
------------ ------------
GROSS PROFIT 4,380,491 2,474,987
------------ ------------
OPERATING EXPENSES:
Research and development 1,240,707 642,185
Selling and marketing 2,151,856 804,016
General and administrative 1,459,296 703,846
Depreciation and amortization 83,520 74,334
Charges for stock-based compensation 17,722,763 --
------------ ------------
Total operating expenses 22,658,142 2,224,381
------------ ------------
OPERATING INCOME (LOSS) (18,277,651) 250,606
------------ ------------
OTHER INCOME (EXPENSE):
Interest, net and other (11,142) 15,564
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES (18,288,793) 266,170
INCOME TAX BENEFIT (328,000) --
------------ ------------
NET INCOME (LOSS) BEFORE PRO FORMA INCOME TAX (17,960,793) 266,170
PROVISION
PRO FORMA INCOME TAX PROVISION 17,000 102,475
------------ ------------
PRO FORMA NET INCOME (LOSS) $(17,943,793) $ 163,695
============ ============
NET INCOME (LOSS) PER SHARE:
Basic $ (4.75) $ .08
Diluted (4.75) .08
PRO FORMA NET INCOME (LOSS) PER SHARE:
Basic $ (4.73) $ .05
Diluted (4.73) .05
WEIGHTED AVERAGE SHARES:
Basic 3,782,567 3,150,000
Diluted 3,782,567 3,288,095
</TABLE>
Accompanying notes are integral to these financial statements.
F-3
<PAGE> 7
NETZIP, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
DEFERRED TOTAL
COMMON STOCK ADDITIONAL STOCK RETAINED SHAREHOLDERS'
------------------- PAID-IN SUBSCRIPTION COMPENSATION (DEFICIT) (DEFICIT)
SHARES AMOUNT CAPITAL RECEIVABLE CHARGES EARNINGS EQUITY
--------- ------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1997 3,150,000 $31,500 $ 286,636 $(100) $ -- $ 39,452 $ 357,488
Distributions to
shareholder -- -- -- -- -- (163,235) (163,235)
Net income before
pro forma income
tax provision -- -- -- -- -- 266,170 266,170
--------- ------- ------------ ----- ------------ ------------ ------------
BALANCE, DECEMBER 31, 1998 3,150,000 31,500 286,636 (100) -- 142,387 460,423
Distributions to
shareholder -- -- (1,076,614) -- -- (101,453) (1,178,067)
Payment for subscription
receivable -- -- -- 100 -- -- 100
Stock option exercises 93,000 930 70,837 -- -- -- 71,767
Issuance of stock-based
compensation 1,277,561 12,776 31,701,907 -- (17,312,833) -- 14,401,850
Amortization of deferred
stock compensation charges -- -- -- -- -- 3,320,913
3,320,913
Conversion from LLC to
C Corporation -- -- (16,531,455) -- -- 16,531,455 --
Net loss before pro forma
income tax provision -- -- -- -- -- (17,960,793) (17,960,793)
--------- ------- ------------ ----- ------------ ------------ ------------
BALANCE, DECEMBER 31, 1999 4,520,561 $45,206 $ 14,451,311 $ -- $(13,991,920) $ (1,388,404) $ (883,807)
========= ======= ============ ===== ============ ============ ============
</TABLE>
Accompanying notes are integral to these financial statements.
F-4
<PAGE> 8
NETZIP, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31
---------------------------------
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(17,960,793) $ 266,170
------------ ------------
Adjustments to reconcile net income (loss) to cash
flow from operations:
Charges for stock-based compensation 17,722,763 0
Depreciation and amortization 83,520 74,334
Deferred income taxes (328,000) 0
Changes in assets and liabilities:
Accounts receivable (189,717) 78,745
Prepaid software distribution fees and
royalties (48,850) (83,688)
Prepaid expenses and other assets (208,799) (127,377)
Accounts payable and accrued liabilities 919,829 45,452
Deferred revenue 63,105 23,850
------------ ------------
Total adjustments 18,013,851 11,316
------------ ------------
Cash flows from operations 53,058 277,486
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (344,658) (23,660)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under capital lease obligation 117,181 0
Payments under capital lease obligation (27,596) 0
Exercise of stock options 71,767 0
Distributions to shareholder (101,453) (163,235)
Capital contributions 100 0
------------ ------------
Cash flows from financing activities 59,999 (163,235)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS (231,601) 90,591
CASH AND EQUIVALENTS, BEGINNING OF YEAR 304,610 214,019
------------ ------------
CASH AND EQUIVALENTS, END OF YEAR $ 73,009 $ 304,610
============ ============
</TABLE>
Accompanying notes are integral to these financial statements.
F-5
<PAGE> 9
NETZIP, INC.
NOTES TO FINANCIAL STATEMENTS
1. COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Netzip, Inc. ("Company") is a developer and provider of Internet download
management and utility software. The Company has developed technology
designed to improve the reliability of downloading media and software files
from the Internet. Netzip's products include:
- Download Demon, a download tool which enables an Internet user to
manage the process of downloading files, such as software, music or
video, from the Internet to the user's personal computer. During the
download process, the Company can deliver advertising and other
content to the Internet user through its "Information Window" to make
the download process a more informative user experience.
- Netzip Classic, an Internet utility for file compression, transfer
and data management, that enables users to compress files before
transmitting them over the Internet.
- Fastview, a multiple file format viewer which enables users to open
and view multimedia files on the Web and from e-mail attachments,
regardless of whether the user has the file or e-mail's originating
application software resident on the user's personal computer.
The Company also resells other software products developed by other
companies under royalty arrangements.
The Company was incorporated on October 22, 1996 and operated as a Limited
Liability Corporation ("LLC") until September 30, 1999. Since October 1,
1999, the Company has operated as a "C" corporation. This change did not
result in a change in shareholder interests of the Company.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Product revenues represent the sale and licensing of software products.
Effective January 1, 1998, the Company adopted Statement of Position
("SOP") 97-2, "Software Revenue Recognition." Under SOP 97-2, the
Company recognizes revenue from the sale of software products upon
download or shipment, net of estimated allowances for returns and costs
associated with fulfillment of acceptance terms. The Company's software
products do not require significant production, modification, or
customization. The end user agrees to the terms of the Company's
license agreement prior to the download (or use) of the product. The
fees are fixed and collected from the customer at the time of delivery.
There are no continuing obligations to provide enhancements or upgrades.
In 1999, service revenues consist principally of advertising.
Advertising revenues are recognized as advertisements are provided to
the Internet user for viewing and thus earned, except where the Company
guarantees minimum page impressions. In these cases, the Company defers
revenue recognition until minimum page impression
F-6
<PAGE> 10
commitments are satisfied. Prior to 1999, service revenues were derived
from consulting services associated with development of custom software
applications for corporations. Such revenues were recognized as services
were performed. Consulting services were discontinued in early 1998.
CASH AND EQUIVALENTS
The Company considers all highly liquid securities purchased with an
original maturity of three months or less at date of purchase to be cash
equivalents.
RESEARCH AND DEVELOPMENT
Costs incurred in research and development are expensed as incurred.
Software development costs are required to be capitalized upon a
product's technological feasibility being established until the date the
product is available for general release to customers. The Company did
not capitalize any software development costs in 1998 or 1999, as
technological feasibility for products developed during these periods
was generally not established until substantially all product
development was complete. The Company did not recognize any amortization
expense associated with software development costs in 1999, as all
previously capitalized costs are fully amortized. The Company recognized
$26,460 of amortization expense in 1998 related to capitalized software
development costs. Such amounts are included in direct product costs in
the accompanying statements of operations.
INCOME TAXES
The Company records income taxes using the liability method prescribed
by Statement of Financial Accounting Standards ("SFAS") No. 109
"Accounting for Income Taxes" which requires that deferred income taxes
be provided for differences between the financial reporting basis and
tax basis of assets and liabilities. Prior to October 1, 1999, the
Company was organized as an LLC. As such, the Company was not subject to
income taxes and no provision for income taxes is recorded in the
accompanying financial statements for such period. As an LLC, taxable
income or loss of the Company was included in the shareholders' federal
and state income tax returns.
FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK
The Company's financial instruments consist of cash and equivalents,
trade accounts receivable, accounts payable, accrued expenses, a capital
lease obligation and a note payable to a related party. The fair value
of these financial instruments approximates their financial reporting
basis.
Accounts receivable at December 31, 1999 primarily represents amounts
owed to the Company for advertising services. The Company extends credit
to these customers based on an evaluation of their financial condition
and overall credit worthiness; collateral is not required.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization of equipment and furniture is computed on
a straight-line basis over the estimated useful lives of the assets,
which is generally three years.
F-7
<PAGE> 11
STOCK-BASED COMPENSATION
The Company has elected to apply the disclosure-only provisions of SFAS
No. 123, "Accounting for Stock-Based Compensation". Accordingly, the
Company accounts for stock-based compensation transactions with
employees using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25 "Accounting for Stock Options Issued to
Employees," and related interpretations. Compensation cost for employee
stock options is measured as the excess, if any, of the fair value of
the Company's common stock at the date of grant over the stock option
exercise price.
NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is computed by dividing net income
(loss) for the period by the weighted average number of outstanding
shares of common stock during such period. Diluted net income (loss) per
share is computed by dividing net income (loss) for the period by the
weighted average number of shares of common stock and potentially
dilutive securities outstanding during the period. Stock options are the
Company's only potentially dilutive security. Basic net loss per share
and diluted net loss per share are the same in 1999, because the assumed
exercise of employee stock options under the treasury stock method is
anti-dilutive for the period.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements. Estimates also affect the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ materially from those estimates.
SEGMENT REPORTING
The Company operates in one industry segment: Internet download and
utility software. This is the basis for how chief operating
decision makers review financial and operating information about the
Company.
2. LICENSE AGREEMENTS
In 1999, the Company implemented its SmartPartner software distribution
program by executing distribution agreements with a number of partners. The
strategic purpose of this program is to increase distribution of the
Company's products by making it available to visitors of widely visited Web
sites on the Internet. Under the program, the Company's distribution
partners ("SmartPartners") can distribute a customized, evaluation version
of the Company's download product at no charge to visitors of its Web site.
SmartPartners benefit by providing Web site visitors a positive experience
while downloading files from its Web site. In return for distributing its
products, the Company generally pays a fee to the SmartPartner for each unit
of the Company's product downloaded from the SmartPartner's Web site to a
user's desktop. These agreements are typically one to two years in length.
Distribution fees paid to SmartPartners in 1999 were $315,603. In certain
SmartPartner arrangements, the Company is required to pay distribution fees
in advance of product distribution. In such cases, the Company defers the
cost
F-8
<PAGE> 12
associated with such payments and amortizes associated costs over the
applicable contract period to achieve matching of costs with product
distribution. Approximately, $147,383 is capitalized as "Prepaid software
distribution fees and royalties" at December 31, 1999 under these
arrangements. Distribution fees charged to expense are classified as
"Selling and marketing expenses".
In 1998, the Company entered into a software license and distribution
agreement whereby it obtained the right to have SmartDownload, a customized
version of Download Demon, integrated into the product of an Internet
browser company. The agreement required the Company to make an initial
payment of $250,000 and seven successive quarterly payments of $125,000
beginning in November 1998. In addition, the Company must pay a fixed
percentage of the advertising revenue generated from the sale of its
products via referrals from the Internet browser company. In return, the
Company will receive royalties for the sale of its products on the other
company's website, as well as a fixed percentage of the advertising revenue
generated by the other company using SmartDownload. The agreement expires in
November 2000. Quarterly payments made under the agreement are paid in
advance for the successive quarter and are amortized over the applicable
quarter on a straight-line basis. At December 31, 1999 and 1998, payments of
$65,278 and 130,556, respectively, had been capitalized as "Prepaid software
distribution fees and royalties". Amortization of these payments is included
in "Selling and marketing expense".
3. BENEFIT PLAN
The Company has a 401(k) profit-sharing plan (the "Plan") covering
substantially all employees. Employees can contribute between 2% and 15% of
their salaries, and the Company matches 50% of qualified employees'
contributions up to 7.5% of their salary. Profit-sharing contributions are
determined annually by resolution of the Company's board of directors.
Company contributions charged to expense in 1999 and 1998 were $20,148 and
$14,702, respectively.
4 NOTE PAYABLE, RELATED-PARTY
On October 1, 1999, the Company issued a note payable to its principal
shareholder in the amount of $1,076,614. Issuance of the note was mandated
by the Company's LLC operating agreement effective with the conversion of
the Company from an LLC to a C Corporation. The note bears interest at
10.25% and is payable in equal monthly installments of $14,377 which
includes principal and interest. The note is unsecured and without recourse.
The note matures as follows:
<TABLE>
<S> <C>
2000 $ 76,701
2001 73,418
2002 81,308
2003 90,045
2004 99,720
Thereafter 655,422
----------
$1,076,614
==========
</TABLE>
5. CAPITAL LEASE OBLIGATION
In 1999, the Company financed the purchase of certain computer hardware at a
cost of $117,181 under a capital lease arrangement. The lease provides the
Company with a bargain purchase
F-9
<PAGE> 13
option at the end of its one year term. Minimum lease payments at December
31, 1999 are as follows:
<TABLE>
<S> <C>
Minimum lease payments, all due in 2000 $93,955
Less amount representing interest 4,370
-------
Present value of minimum lease payments $89,585
=======
</TABLE>
6. STOCK-BASED COMPENSATION
COMMON STOCK AND RESTRICTED COMMON STOCK ISSUED TO EMPLOYEES
During 1999, the Company hired certain key senior executives. In connection
with these actions, the Company issued 630,000 shares of its common stock to
certain members of senior management. The Company has charged to expense
$14,401,850 in 1999 as a result of the stock issuances which represents the
estimated fair value of these shares at the date of issue. The Company
issued an additional 647,561 shares of its common stock to certain senior
management team members subject to "vesting" restrictions. These restricted
shares vest over a period of seven years in varying amounts. The issuance of
these shares was recorded at their estimated fair value of $14,802,651 at
the issue date and are reflected as outstanding in the Company's financial
statements. The Company has recorded a corresponding reduction in
shareholder's equity as "Deferred stock compensation" representing the
unvested portion of the restricted shares. This amount is being amortized
over the vesting period of the shares. In 1999, the Company recorded expense
of $2,774,466 associated with restricted shares which became vested and
unrestricted in 1999. Future amortization associated with the restricted
stock arrangements is $3,136,661 in the years 2000 through 2002, $1,457,659
in 2003, $449,241 in 2004, and $711,303 thereafter.
STOCK OPTIONS
In June 1997, the Company adopted a stock option plan (the "Option Plan")
intended to give employees, consultants and directors an opportunity to
acquire a stake in the future of the Company. The Option Plan provides for
630,000 shares of common stock to be issued from the authorized and unissued
shares of common stock of the Company. The options are generally granted at
an exercise price which is not less than fair value as estimated by the
board of directors and vest over periods ranging from two to four years.
Vested options are exercisable upon certain events and at the discretion of
the board of directors. In addition, the options granted under the Option
Plan expire based on the term determined by the board of directors or upon
termination of service with the Company.
During 1999, the Company issued 120,916 stock options to employees at
exercise prices below the estimated fair market value of such options at the
date of grant. Accordingly, the Company recorded deferred compensation costs
of $2,510,181 in 1999 representing the difference between the estimated fair
market value and exercise price of such options at the date of grant. The
Company is amortizing the deferred compensation costs over the vesting
periods of the options and recognized $546,449 of expense in connection with
these options in 1999. Unvested options outstanding at December 31, 1999
associated with these grants vest ratably over three and four year vesting
periods.
Compensation cost associated with stock options determined by applying the
fair value principles prescribed by SFAS No. 123 does not vary materially
from that recorded in the Company's financial statements.
F-10
<PAGE> 14
Transactions related to stock options are as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
OPTIONS PRICE
------- --------
<S> <C> <C>
Options outstanding at December 31, 1997 90,000 $0.70
Granted 67,725 0.70
-------- -----
Options outstanding at December 31, 1998 157,725 0.70
Granted 520,096 1.71
Exercised (93,100) .77
Forfeited (412,217) 1.57
-------- -----
Options outstanding at December 31, 1999 172,504 $1.63
======== =====
Exercisable, December 31, 1999 20,425 $ .68
======== =====
</TABLE>
7. INCOME TAXES
Prior to October 1, 1999, the Company was organized as an LLC and as such
was not subject to income taxes. Accordingly, the Company recorded no
provision for income taxes in its financial statements during the time it
operated as an LLC. Subsequent to its conversion from an LLC to a C
Corporation in 1999, the Company recorded deferred tax benefits of $328,000.
Differences in the recorded income tax benefit and the amount derived when
applying statutory rates to loss before income taxes, results principally
from nondeductible expenses recorded for stock grants to employees,
operating results of the Company as an LLC for which no taxes have been
provided and a deferred tax charge recorded effective with the conversion of
the Company from an LLC to a C Corporation. The deferred tax charge
represents tax effects of cumulative differences in the financial reporting
and tax basis of assets and liabilities at the conversion date. Tax effects
of temporary differences giving rise to net deferred tax assets are as
follows:
<TABLE>
<CAPTION>
1999
--------
<S> <C>
Deferred tax assets:
Net operating loss carryforward $230,230
Stock options 127,642
Intangible assets 18,876
Allowance for sales returns 6,930
--------
383,678
--------
Deferred tax liabilities:
Fixed assets 9,538
Other 46,140
--------
55,678
--------
Net deferred tax assets $328,000
========
</TABLE>
The Company has an estimated net operating loss carryforward for federal
income tax purposes of approximately $598,000 at December 31, 1999. The
carryforward expires in 2019 and is subject to federal and state income tax
rules which limits its utilization upon a change in shareholder interests in
the Company.
F-11
<PAGE> 15
8. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company currently leases office space under two lease agreements which
require aggregate monthly rental payments of $6,828. Rent expense was
$75,110 in 1999 and $57,218 in 1998. Future minimum lease payments under
these agreements are $75,108, which are due in 2000.
LEGAL CONTINGENCIES
From time to time, the Company has been and continues to be, subject to
legal proceedings and claims which have arisen in the ordinary course of
business, including claims of alleged infringement of third-party patent
rights, trademarks and other intellectual property. Such claims, even if not
meritorious, could require the Company to spend significant financial and
managerial resources. The Company is currently not aware of any legal
proceedings or claims that it believes will have a material adverse effect
on the Company's business, prospects, financial condition or results of
operations.
9. SUBSEQUENT EVENTS (unaudited)
Effective January 25, 2000, the Company merged with a wholly-owned
subsidiary of RealNetworks, Inc. ("RealNetworks"), a leading provider of
software and services for the streaming media market. In connection with the
merger, all of the outstanding shares and vested and unvested stock options
of the Company were exchanged for approximately 1.7 million shares of
RealNetworks common stock.
F-12
<PAGE> 16
PRO FORMA FINANCIAL INFORMATION.
RealNetworks' acquisition of NetZip will be accounted for under the
purchase method of accounting. Under the purchase method of accounting, the
purchase price is allocated to the assets acquired and liabilities assumed based
on their estimated fair values. The estimated fair values included herein are
based upon preliminary estimates and may not be indicative of the final
allocation of purchase price consideration. Any amounts that may be allocable to
in process research and development would be recorded as one time charges that
would reduce the goodwill reflected in the Unaudited Pro Forma Condensed
Consolidated Balance Sheet and the related amortization expense reflected in the
Unaudited Pro Forma Condensed Consolidated Statements of Operations. The
acquisition is valued at approximately $270 million based on the closing price
of RealNetworks' common stock on January 25, 2000. The amount of the
consideration issued to the former shareholders and option holders of NetZip was
determined by arms-length negotiation between the parties.
The following Unaudited Pro Forma Condensed Consolidated Balance sheet
as of September 30, 1999 gives effect to the acquisition of NetZip as if it had
occurred on September 30, 1999 and the Unaudited Pro Forma Condensed
Consolidated Statements of Operations for the year ended December 31, 1998 and
the nine months ended September 30, 1999 ("Pro Forma Financial Statements") give
effect to the acquisition of NetZip as if it had occurred on January 1, 1998.
The Pro Forma Condensed Consolidated Statements of Operations are based on
historical results of operations of RealNetworks and NetZip for the year ended
December 31, 1998 and the nine months ended September 30, 1999. The Pro Forma
Financial Statements and the accompanying notes ("Pro Forma Financial
Information") should be read in conjunction with and are qualified by the
historical financial statements and notes thereto of RealNetworks and NetZip.
On August 10, 1999 RealNetworks completed its acquisition of Xing Technology
Corporation ("Xing") in a transaction accounted for as a pooling of interests.
Accordingly, the accompanying historical financial information of RealNetworks
includes the financial position and results of operations of Xing as if
RealNetworks and Xing had always been combined.
The Pro Forma Financial Information is intended for information purposes
only and is not necessarily indicative of the combined results that would have
occurred had the acquisition taken place on January 1, 1998, nor is it
necessarily indicative of results that may occur in the future.
9
<PAGE> 17
REALNETWORKS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
REALNETWORKS, INC. NETZIP, INC. ADJUSTMENTS PRO FORMA
------------------ ------------ ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash, cash equivalents, and short-term investments $ 326,753 $ 427 $ -- $ 327,180
Trade accounts receivable, net of allowances for
doubtful accounts and sales returns 7,146 189 7,335
Prepaid expenses and other current assets 3,079 134 3,213
--------- ----- --------- ---------
Total current assets 336,978 750 -- 337,728
Equipment and leasehold improvements, at cost:
Equipment and software 18,558 283 (182) (c) 18,659
Leasehold improvements 13,259 - 13,259
--------- ----- --------- ---------
Total equipment and leasehold improvements 31,817 283 (182) 31,918
Less accumulated depreciation and amortization 8,569 102 (102) (c) 8,569
--------- ----- --------- ---------
Net equipment and leasehold improvements 23,248 181 (80) 23,349
--------- ----- --------- ---------
Goodwill, net 7,452 -- 128,030 (c) 135,482
Restricted cash equivalents 13,700 -- -- 13,700
Other assets 1,027 13 1,040
--------- ----- --------- ---------
Total assets $ 382,405 $ 944 $ 127,950 $ 511,299
========= ===== ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,859 $ 187 $ -- $ 4,046
Accrued and other liabilities 22,038 96 2,053 (c) 24,187
Deferred revenue, excluding non-current portion 38,309 187 38,496
--------- ----- --------- ---------
Total current liabilities 64,206 470 2,053 66,729
Shareholders' equity
Common stock 74 45 (45) (b)
2 (a) 76
Additional paid-in capital 359,288 30,185 (30,185) (b)
126,370 (a)
143,972 (e) 629,630
Accumulated deficit (40,926) (16,531) 16,531 (b) (40,926)
Deferred stock compensation charges (13,225) 13,225 (b)
(143,973) (e) (143,973)
Accumulated other comprehensive loss (237) -- (237)
--------- ----- --------- ---------
Total shareholders' equity 318,199 474 125,897 444,570
--------- ----- --------- ---------
Total liabilities and shareholders' equity $ 382,405 $ 944 $ 127,950 $ 511,299
========= ===== ========= =========
</TABLE>
See notes to unaudited pro forma condensed consolidated financial statements.
F-14
<PAGE> 18
REALNETWORKS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999
(In thousands, except per share data)
<TABLE>
<CAPTION>
PRO FORMA
REALNETWORKS, INC. NETZIP, INC. ADJUSTMENTS PRO FORMA
------------------ ------------ ----------- ---------
<S> <C> <C> <C> <C>
NET REVENUES:
Software license fees $ 62,683 $ 3,348 $ -- $ 66,031
Service revenues 17,641 -- -- 17,641
Advertising 7,464 167 -- 7,631
-------- --------- --------- ---------
Total net revenues 87,788 3,515 -- 91,303
-------- --------- --------- ---------
COST OF REVENUES:
Software license fees 9,409 474 -- 9,883
Service revenues 4,274 -- -- 4,274
Advertising 1,822 7 -- 1,829
-------- --------- --------- ---------
Total cost of revenues 15,505 481 -- 15,986
-------- --------- --------- ---------
Gross profit 72,283 3,034 -- 75,317
-------- --------- --------- ---------
OPERATING EXPENSES:
Research and development 25,935 812 -- 26,747
Sales and marketing 37,138 1,254 -- 38,392
General and administrative 10,797 949 -- 11,746
Goodwill amortization 1,596 -- 32,008 (d) 33,604
Stock compensation charges - 16,607 29,035 (e) 45,642
Acquisition charges 1,403 -- 1,403
-------- --------- --------- ---------
Total operating expenses 76,869 19,622 61,043 157,534
-------- --------- --------- ---------
Operating loss (4,586) (16,588) (61,043) (82,217)
Other income, net 5,451 16 -- 5,467
-------- --------- --------- ---------
Net income (loss) $ 865 $ (16,572) $ (61,043) $ (76,750)
======== ========= ========= =========
Basic net income (loss) per share $ 0.01 (f) $ (1.08)
======== =========
Diluted net income (loss) per share $ 0.01 $ (1.08)
======== =========
Shares used to compute basic net income
(loss) per share 70,194 (f) 71,327
Shares used to compute diluted net income
(loss) per share 82,075 (f) 71,327
</TABLE>
See notes to unaudited pro forma condensed consolidated financial statements.
F-15
<PAGE> 19
REALNETWORKS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
REALNETWORKS, INC. NETZIP, INC. ADJUSTMENTS PRO FORMA
------------------ ------------ ----------- ---------
<S> <C> <C> <C> <C>
NET REVENUES:
Software license fees $ 48,487 $ 2,868 $ - $ 51,355
Service revenues 14,742 47 - 14,789
Advertising 3,148 - - 3,148
--------- ------- ---------- ----------
Total net revenues 66,377 2,915 - 69,292
--------- ------- ---------- ----------
COST OF REVENUES:
Software license fees 8,308 426 - 8,734
Service revenues 2,631 14 - 2,645
Advertising 1,727 - - 1,727
--------- ------- ---------- ----------
Total cost of revenues 12,666 440 - 13,106
--------- ------- ---------- ----------
Gross profit 53,711 2,475 - 56,186
--------- ------- ---------- ----------
OPERATING EXPENSES:
Research and development 22,480 716 - 23,196
Sales and marketing 33,460 804 - 34,264
General and administrative 11,540 704 - 12,244
Goodwill amortization 1,596 - 42,677 (d) 44,273
Stock compensation charges 102,701 (e) 102,701
Acquisition charges 8,723 - 8,723
--------- ------- ---------- ----------
Total operating expenses 77,799 2,224 145,378 225,401
--------- ------- ---------- ----------
Operating income (loss) (24,088) 251 (145,378) (169,215)
Other income, net 4,135 15 - 4,150
--------- ------- ---------- ----------
Net income (loss) $ (19,953) $ 266 $ (145,378) $ (165,065)
========= ======= ========== ==========
Basic and diluted net loss per share $ (0.31) (f) $ (2.51)
========= ==========
Shares used to compute basic and
diluted net loss per share 65,078 (f) 65,786
</TABLE>
See notes to unaudited pro forma condensed consolidated financial statements.
F-16
<PAGE> 20
REALNETWORKS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS)
(a) Reflects the issuance of approximately 1,709 shares (including options
to purchase shares) of RealNetworks' common stock to consummate the
acquisition of NetZip, Inc., but approximately 910 of those shares are
subject to repurchase by RealNetworks at a nominal repurchase price in
certain circumstances.
(b) Represents the elimination of the historical shareholders' equity
accounts of NetZip, Inc.
(c) To allocate the purchase price, including approximately $2,053 of
transaction costs incurred in the acquisition to assets and liabilities
of NetZip, Inc. The excess of the purchase price over the fair value of
net assets acquired is reflected as goodwill and is amortized using the
straight-line method over 3 years. The estimated fair values of assets
acquired and liabilities assumed are based upon preliminary estimates
and may not be indicative of the final allocation of purchase price
consideration. Any amounts that may be allocable to in process research
and development would be recorded as one time charges that would reduce
the goodwill reflected in the Unaudited Pro Forma Condensed Consolidated
Balance Sheet and the related amortization expense reflected in the
Unaudited Pro Forma Condensed Consolidated Statements of Operations.
A summary of the purchase price for the acquisition is as follows:
<TABLE>
<S> <C>
Stock and stock options ................................ $126,371
Direct acquisition costs ............................... 2,053
Accrued liabilities assumed ............................ 283
Other liabilities assumed .............................. 187
--------
Total .............................................. $128,894
========
</TABLE>
The purchase price was allocated as follows:
<TABLE>
<S> <C>
Cash acquired .......................................... $ 427
Other current assets acquired .......................... 323
Equipment .............................................. 101
Goodwill ............................................... 128,030
Other assets ........................................... 13
--------
Total .............................................. $128,894
========
</TABLE>
Common stock issued to certain former employees of NetZip of $143,973 is
recorded as deferred employee compensation in shareholders' equity at
the date of acquisition and recognized as employee compensation expense
over the related vesting period as described in note (e) below.
(d) Represents the amortization of goodwill for the nine month period ended
September 30, 1999 and year ended December 31, 1998 assuming the
transaction occurred on January 1, 1998.
(e) Represents non-cash charges associated with shares issued to four key
employees of NetZip, Inc. The Company is recognizing compensation costs
for value of these shares over the associated employment periods in
which these shares vest and will recognize non-cash charges of
approximately $95,647 in 2000, $40,877 in 2001 and $7,449 in 2002.
(f) Pro forma basic and diluted net loss per share are computed by dividing
the pro forma net loss attributable to common shareholders by the pro
forma weighted average number of common shares outstanding. Potentially
dilutive securities were not taken into account because their effects
would be anti-dilutive. A reconciliation of shares used to compute
historical basic and diluted net loss per share to shares used to
compute pro forma basic and diluted net loss per share is as follows:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------ -----------------
<S> <C> <C>
Shares used to compute historical
basic and diluted net loss per share 70,194 65,078
Release of restricted shares 425 --
Shares issued in acquisition 708 708
------ ------
Shares used to compute pro forma
basic and diluted net loss per share 71,327 65,786
====== ======
</TABLE>
F-17
<PAGE> 21
(g) Other Information
The purchase price of approximately $126 million (based on the closing
price of RealNetworks' common stock on January 25, 2000, the date of closing of
the acquisition of NetZip) excludes approximately $144 million of RealNetworks'
common stock issued to certain former stockholders of NetZip which is subject to
forfeiture for a period of 30 months after January 25, 2000.
On January 21, 2000 the board of directors of RealNetworks approved a
2-for-1 split of the Company's common stock payable in the form of a stock
dividend. Shares used for the computation of basic and diluted net income (loss)
per share in the pro forma condensed consolidated financial statements are
presented prior to the split.
F-18
<PAGE> 22
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
REALNETWORKS, INC.
By: /s/ Paul Bialek
--------------------------------------
Paul Bialek
Senior Vice President, Finance and
Operations and Chief Financial Officer
Dated: February 8, 2000
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the registration statements
(Nos. 333-42579, 333-53127 and 333-63333) on Form S-8 of RealNetworks, Inc. and
subsidiaries of our report dated January 21, 2000, relating to the balance
sheets of NetZip, Inc. as of December 31, 1999 and 1998, and the related
statements of operations, shareholders' equity (deficit) and cash flows for the
years then ended, which report appears in the Current Report on Form 8-K/A of
RealNetworks, Inc filed with the Securities and Exchange Commission on February
8, 2000.
/s/ Arthur Andersen LLP
Atlanta, Georgia
February 8, 2000