-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DccwuX8vMk3mcSTPk+vtVf8uNN44IhlhhZDYB8RDaTuu25zgCPJrJRsP7i9+HIyJ uNeEoLeO06C6MX5LI+pTzQ== 0000891020-00-000159.txt : 20000209 0000891020-00-000159.hdr.sgml : 20000209 ACCESSION NUMBER: 0000891020-00-000159 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000125 ITEM INFORMATION: FILED AS OF DATE: 20000208 FILER: COMPANY DATA: COMPANY CONFORMED NAME: REALNETWORKS INC CENTRAL INDEX KEY: 0001046327 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROGRAMMING SERVICES [7371] IRS NUMBER: 911628146 STATE OF INCORPORATION: WA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: SEC FILE NUMBER: 000-23137 FILM NUMBER: 527603 BUSINESS ADDRESS: STREET 1: 2601 ELLIOTT AVENUE STREET 2: STE 1000 CITY: SEATTLE STATE: WA ZIP: 98121 BUSINESS PHONE: 2066742700 MAIL ADDRESS: STREET 1: 2601 ELLIOTT AVENUE STREET 2: STE 1000 CITY: SEATTLE STATE: WA ZIP: 98121 8-K/A 1 FORM 8-K/A FOR PERIOD ENDING JAN. 25, 2000 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) 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.
Page ---- 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
(b) Pro Forma Financial Information.
Page ---- 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
(c) Exhibits
Exhibit Number Description -------------- ----------- 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
1 3 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.
------------ * Previously filed. 2 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 5 NETZIP, INC. BALANCE SHEETS DECEMBER 31, 1999 AND 1998 ASSETS
DECEMBER 31 --------------------------------- 1999 1998 ------------ ------------ 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 ============ ============
Accompanying notes are integral to these financial statements. F-2 6 NETZIP, INC STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1999 AND 1998
YEARS ENDED DECEMBER 31 --------------------------------- 1999 1998 ------------ ------------ 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
Accompanying notes are integral to these financial statements. F-3 7 NETZIP, INC. STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
DEFERRED TOTAL COMMON STOCK ADDITIONAL STOCK RETAINED SHAREHOLDERS' ------------------- PAID-IN SUBSCRIPTION COMPENSATION (DEFICIT) (DEFICIT) SHARES AMOUNT CAPITAL RECEIVABLE CHARGES EARNINGS EQUITY --------- ------- ------------ ------------ ------------ ------------ ------------ 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) ========= ======= ============ ===== ============ ============ ============
Accompanying notes are integral to these financial statements. F-4 8 NETZIP, INC. STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31 --------------------------------- 1999 1998 ------------ ------------ 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 ============ ============
Accompanying notes are integral to these financial statements. F-5 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 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 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 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: 2000 $ 76,701 2001 73,418 2002 81,308 2003 90,045 2004 99,720 Thereafter 655,422 ---------- $1,076,614 ==========
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 13 option at the end of its one year term. Minimum lease payments at December 31, 1999 are as follows: Minimum lease payments, all due in 2000 $93,955 Less amount representing interest 4,370 ------- Present value of minimum lease payments $89,585 =======
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 14 Transactions related to stock options are as follows:
WEIGHTED AVERAGE EXERCISE OPTIONS PRICE ------- -------- 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 ======== =====
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:
1999 -------- 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 ========
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 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 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 17 REALNETWORKS, INC. AND SUBSIDIARIES UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET SEPTEMBER 30, 1999 (IN THOUSANDS)
PRO FORMA REALNETWORKS, INC. NETZIP, INC. ADJUSTMENTS PRO FORMA ------------------ ------------ ----------- --------- 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 ========= ===== ========= =========
See notes to unaudited pro forma condensed consolidated financial statements. F-14 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)
PRO FORMA REALNETWORKS, INC. NETZIP, INC. ADJUSTMENTS PRO FORMA ------------------ ------------ ----------- --------- 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
See notes to unaudited pro forma condensed consolidated financial statements. F-15 19 REALNETWORKS, INC. AND SUBSIDIARIES UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1998 (IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA REALNETWORKS, INC. NETZIP, INC. ADJUSTMENTS PRO FORMA ------------------ ------------ ----------- --------- 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
See notes to unaudited pro forma condensed consolidated financial statements. F-16 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: Stock and stock options ................................ $126,371 Direct acquisition costs ............................... 2,053 Accrued liabilities assumed ............................ 283 Other liabilities assumed .............................. 187 -------- Total .............................................. $128,894 ========
The purchase price was allocated as follows: Cash acquired .......................................... $ 427 Other current assets acquired .......................... 323 Equipment .............................................. 101 Goodwill ............................................... 128,030 Other assets ........................................... 13 -------- Total .............................................. $128,894 ========
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:
NINE MONTHS ENDED YEAR ENDED SEPTEMBER 30, 1999 DECEMBER 31, 1998 ------------------ ----------------- 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 ====== ======
F-17 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 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 EX-23.1 2 CONSENT OF INDEPENDENT AUDITORS 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 -----END PRIVACY-ENHANCED MESSAGE-----