-----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, ISFk2270dauJyoZ2U/43dXBXbj+RtMMxFD7DsRTPsErRtLcCYqGJy2gUJFM8fVZs 22RBOKO5WEfyN5+/TU4uuQ== 0000950123-10-046502.txt : 20100507 0000950123-10-046502.hdr.sgml : 20100507 20100507165901 ACCESSION NUMBER: 0000950123-10-046502 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20100331 FILED AS OF DATE: 20100507 DATE AS OF CHANGE: 20100507 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: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-23137 FILM NUMBER: 10813190 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 10-Q 1 v55756e10vq.htm FORM 10-Q e10vq
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2010
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                      
Commission file number 0-23137
RealNetworks, Inc.
(Exact name of registrant as specified in its charter)
     
Washington
(State of incorporation)
  91-1628146
(I.R.S. Employer Identification Number)
     
2601 Elliott Avenue, Suite 1000
Seattle, Washington

(Address of principal executive offices)
  98121
(Zip Code)
(206) 674-2700
(Registrant’s telephone number, including area code)
     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
             
Large accelerated filer o   Accelerated filer þ   Non-accelerated filer o   Smaller reporting company o
        (Do not check if a smaller reporting company)    
     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
     The number of shares of the registrant’s Common Stock outstanding as of April 30, 2010 was 135,250,369.
 
 

 


 

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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
REALNETWORKS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
                 
    March 31,     December 31,  
    2010     2009  
ASSETS
               
Current assets:
               
Cash and cash equivalents
  $ 202,605     $ 277,030  
Short-term investments
    132,611       107,870  
Trade accounts receivable, net of allowances for doubtful accounts and sales returns
    53,976       60,937  
Related party receivable
    5,994        
Deferred costs, current portion
    4,038       5,192  
Prepaid expenses and other current assets
    30,239       30,624  
 
           
Total current assets
    429,463       481,653  
 
           
Equipment, software, and leasehold improvements, at cost:
               
Equipment and software
    139,743       151,951  
Leasehold improvements
    30,448       31,041  
 
           
Total equipment, software, and leasehold improvements, at cost
    170,191       182,992  
Less accumulated depreciation and amortization
    120,900       125,878  
 
           
Net equipment, software, and leasehold improvements
    49,291       57,114  
Restricted cash equivalents and investments
    13,700       13,700  
Equity method investments
    29,700       50  
Available for sale securities
    20,989       19,503  
Other assets
    3,974       4,030  
Deferred costs, non-current portion
    11,064       10,182  
Deferred tax assets, net, non-current portion
    8,597       10,001  
Other intangible assets, net
    9,434       10,650  
 
           
Total assets
  $ 576,212     $ 606,883  
 
           
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
Current liabilities:
               
Accounts payable
  $ 35,671     $ 32,703  
Accrued and other liabilities
    102,049       124,934  
Deferred revenue, current portion
    23,184       31,374  
Related party payable
          11,216  
Accrued loss on excess office facilities, current portion
    2,095       3,228  
 
           
Total current liabilities
    162,999       203,455  
Deferred revenue, non-current portion
    966       1,933  
Deferred rent
    4,380       4,464  
Deferred tax liabilities, net, non-current portion
    884       961  
Other long-term liabilities
    12,750       13,006  
 
           
Total liabilities
    181,979       223,819  
 
           
Noncontrolling interest in Rhapsody
          7,253  
Shareholders’ equity:
               
Preferred stock, $0.001 par value, no shares issued and outstanding:
               
Series A: authorized 200 shares
           
Undesignated series: authorized 59,800 shares
           
Common stock, $0.001 par value authorized 1,000,000 shares; issued and outstanding 134,823 shares in 2009 and 134,354 shares in 2008
    135       135  
Additional paid-in capital
    686,860       671,606  
Accumulated other comprehensive loss
    (38,674 )     (38,614 )
Retained deficit
    (254,088 )     (257,316 )
 
           
Total shareholders’ equity
    394,233       375,811  
 
           
Total liabilities and shareholders’ equity
  $ 576,212     $ 606,883  
 
           
See accompanying notes to unaudited condensed consolidated financial statements.

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REALNETWORKS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(In thousands, except per share data)
                 
    Quarters Ended  
    March 31,  
    2010     2009  
Net revenue (A)
  $ 128,600     $ 140,773  
Cost of revenue (B)
    49,159       56,021  
 
           
Gross profit
    79,441       84,752  
 
           
Operating expenses:
               
Research and development
    34,675       28,559  
Sales and marketing
    37,827       43,685  
Advertising with related party
    1,065       7,423  
General and administrative
    14,921       22,831  
Restructuring and other charges
    5,615       794  
 
           
Total operating expenses
    94,103       103,292  
 
           
Operating loss
    (14,662 )     (18,540 )
 
           
Other income (expenses):
               
Interest income, net
    380       1,183  
Equity in net loss of investments
          (655 )
Gain on sale of equity investments, net
          137  
Gain on deconsolidation of Rhapsody
    10,929        
Other income (expense), net
    99       855  
 
           
Other income (expenses), net
    11,408       1,520  
 
           
Loss before income taxes
    (3,254 )     (17,020 )
Income taxes benefit (expense)
    3,572       (1,549 )
 
           
Net income (loss)
    318       (18,569 )
Net loss attributable to noncontrolling interest in Rhapsody
    2,910       6,433  
 
           
Net income (loss) attributable to common shareholders
  $ 3,228     $ (12,136 )
 
           
Basic net income (loss) per share available to common shareholders
  $ 0.05     $ (0.10 )
Diluted net income (loss) per share available to common shareholders
  $ 0.05     $ (0.10 )
Shares used to compute basic net income (loss) per share available to common shareholders
    135,130       134,380  
Shares used to compute diluted net income (loss) per share available to common shareholders
    139,573       134,380  
Comprehensive income (loss):
               
Net income (loss)
  $ 318     $ (18,569 )
Unrealized holding (gains) losses on short-term and equity investments, net of income taxes
    1,551       (1,822 )
Foreign currency translation gains (losses)
    (1,611 )     (7,989 )
 
           
Comprehensive loss
    258       (28,380 )
Net loss attributable to noncontrolling interest
    2,910       6,433  
 
           
Comprehensive income (loss) attributable to common shareholders
  $ 3,168     $ (21,947 )
 
           
 
               
(A) Components of net revenue:
               
License fees
  $ 24,172     $ 26,179  
Service revenue
    104,428       114,594  
 
           
 
  $ 128,600     $ 140,773  
 
           
(B) Components of cost of revenue:
               
License fees
  $ 7,549     $ 9,246  
Service revenue
    41,610       46,775  
 
           
 
  $ 49,159     $ 56,021  
 
           

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REALNETWORKS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
                 
    Quarters Ended  
    March 31,  
    2010     2009  
Cash flows from operating activities:
               
Net income (loss)
  $ 318     $ (18,569 )
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
               
Depreciation and amortization
    7,314       7,776  
Stock-based compensation
    3,921       5,222  
Gain on disposal of equipment, software, and leasehold improvements
    (2 )     (33 )
Equity in net loss of investments
          655  
Gain on sale of equity investments, net
          (137 )
Excess tax benefit from stock option exercises
    (29 )     (9 )
Gain on deconsolidation of Rhapsody
    (10,929 )      
Deferred income taxes
    (1,359 )     (212 )
Accrued restructuring and other charges
    4,455       (2,951 )
Other
          10  
Net change in certain operating assets and liabilities, net of acquisitions:
               
Trade accounts receivable
    (988 )     7,121  
Prepaid expenses and other assets
    (3,629 )     76  
Accounts payable
    4,578       12,990  
Accrued and other liabilities
    (36,106 )     (7,978 )
 
           
Net cash (used in) provided by operating activities
    (32,456 )     3,961  
 
           
Cash flows from investing activities:
               
Purchases of equipment, software, and leasehold improvements
    (4,692 )     (3,042 )
Purchases of short-term investments
    (26,613 )     (52,415 )
Proceeds from sales and maturities of short-term investments
    1,872       25,396  
Decrease in restricted cash equivalents and investments
          (25 )
Payment of acquisition costs, net of cash acquired
          (3,154 )
Purchase of equity investments
          (2,000 )
Payment in connection with the restructuring of Rhapsody
    (18,000 )      
Repayment of temporary funding upon deconsolidation of Rhapsody
    5,869        
Proceeds from sales of equity investments
          137  
 
           
Net cash used in investing activities
    (41,564 )     (35,103 )
 
           
Cash flows from financing activities:
               
Net proceeds from sale of common stock under employee stock purchase plan and exercise of stock options
    341       12  
Excess tax benefit from stock option exercises
    29       9  
Payments received on MTVN note
    1,213       7,667  
Capital contribution to Rhapsody from MTVN
          5,000  
 
           
Net cash provided by financing activities
    1,583       12,688  
 
           
Effect of exchange rate changes on cash and cash equivalents
    (1,988 )     (2,805 )
 
           
Net decrease in cash and cash equivalents
    (74,425 )     (21,259 )
Cash and cash equivalents, beginning of period
    277,030       232,968  
 
           
Cash and cash equivalents, end of period
  $ 202,605     $ 211,709  
 
           
Supplemental disclosure of cash flow information:
               
Cash received from income tax refunds
  $ 118     $ 651  
Cash paid for income taxes
  $ 562     $ 2,006  
See accompanying notes to unaudited condensed consolidated financial statements.

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REALNETWORKS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Quarters Ended March 31, 2010 and 2009
Note 1. Summary of Significant Accounting Policies
     Description of Business. RealNetworks, Inc. and subsidiaries (RealNetworks or Company) is a leading global provider of network-delivered digital media products and services. The Company also develops and markets software products and services that enable the creation, distribution and consumption of digital media, including audio and video.
     Inherent in the Company’s business are various risks and uncertainties, including limited history of certain of its product and service offerings and its limited history of offering premium subscription services on the Internet. The Company’s success will depend on the acceptance of the Company’s technology, products and services and the ability to generate related revenue.
     Basis of Presentation. The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. Certain reclassifications have been made to 2009 amounts to conform to the current presentation.
     On August 20, 2007, RealNetworks and MTV Networks, a division of Viacom International Inc. (MTVN), created Rhapsody America LLC (Rhapsody) to jointly own and operate a business-to-consumer digital audio music service. RealNetworks held a 51% equity interest in Rhapsody and Rhapsody’s financial position and operating results have been consolidated into RealNetworks’ financial statements prior to March 31, 2010. The noncontrolling interest’s proportionate share of income (loss) was included in noncontrolling interest in Rhapsody in the unaudited condensed consolidated statements of operations and comprehensive income (loss). MTVN’s proportionate share of equity was included in noncontrolling interest in Rhapsody in the unaudited condensed consolidated balance sheets. On March 31, 2010, the Company and MTVN restructured Rhapsody and as a result, RealNetworks holds slightly less than 47.5% of the outstanding shares of capital stock of Rhapsody. RealNetworks no longer holds a controlling interest and therefore, the Company will treat its ownership interest in Rhapsody as an equity method investment as of March 31, 2010. Rhapsody’s financial position as of March 31, 2010 and its operating results beginning from March 31, 2010 and beyond are no longer consolidated with RealNetworks consolidated financial statements.
     The unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal, recurring adjustments that, in the opinion of the Company’s management, are necessary for a fair presentation of the results of operations for the periods presented. Operating results for the quarter ended March 31, 2010 are not necessarily indicative of the results that may be expected for any subsequent quarter or for the year ending December 31, 2010. Certain information and disclosures normally included in financial statements prepared in conformity with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (SEC).
     These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.
     Revenue Recognition. The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collection is probable. Physical products are considered delivered to the customer once they have been shipped and title and risk of loss have been transferred. For online sales, the products or services are considered delivered at the time the products or services are made available, digitally, to the end user.
     The Company recognizes revenue on a gross or net basis. In most arrangements, the Company contracts directly with end user customers, is the primary obligor and carries all collectability risk. In such arrangements, the Company recognizes revenue on a gross basis. In some cases, the Company utilizes third-party distributors to sell products or services directly to end user customers and carries no collectability risk. In such instances, the Company recognizes revenue on a net basis.
     In the Company’s direct to consumer business segments, which include Music, Games and Media Software and Services (MSS), it derives revenue through (1) subscriptions, (2) sales of content downloads, software and licenses and (3) the sale of advertising and the distribution of third-party products on its websites and in the Company’s games.
     Consumer subscription products are paid in advance, typically for monthly, quarterly or annual duration. Subscription revenue is recognized ratably over the related subscription time period. Revenue from sales of content downloads, software and licenses is recognized at the time the product is made available, digitally, to the end user. Revenue generated from advertising on the Company’s websites and from advertising and the distribution of third-party products included in the Company’s products is recognized as revenue at the time of delivery.

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     The Company’s business-to-business Technology Products and Solutions (TPS) segment generates revenue by providing services that enable wireless carriers to deliver audio and video content to their customers and through sales of software licenses and products and related support and other services.
     Revenue generated from services provided to wireless carriers that enable the delivery of audio and video content to their customers is recognized as the services are provided. Setup fees to build these services are recognized ratably upon launch of the service over the remaining expected term of the service.
     Accounting for Gains on Sale of Subsidiary Stock. Effective January 1, 2009, the Company adopted Statement of Financial Accounting Standards No. 160, Non-controlling Interests in Consolidated Financial Statements, an amendment to ARB No. 51 (SFAS 160) which was primarily codified into FASB ASC 810 — Consolidation (ASC 810). Current guidance requires that the difference between the carrying amount of the parent’s investment in a subsidiary and the underlying net book value to be recorded as an equity transaction. The Company elected to recognize any such gain in its consolidated statement of operations prior to January 1, 2009.
     Noncontrolling Interests. The Company records noncontrolling interest expense (benefit) which reflects the portion of the earnings (losses) of majority-owned entities which are applicable to the noncontrolling interest partners in the consolidated statement of operations. Redeemable noncontrolling interests that are redeemable at either fair value or are based on a formula that is intended to approximate fair value follow the Company’s historical disclosure only policy for the redemption feature. Redeemable noncontrolling interests that are redeemable at either a fixed price or are based on a formula that is not akin to fair value are reflected as an adjustment to income attributable to common shareholders based on the difference between accretion as calculated using the terms of the redemption feature and the accretion entry for a hypothetical fair value redemption feature with the remaining amount of accretion to redemption value recorded directly to equity. Noncontrolling interest expense (benefit) is included within the consolidated statements of operations and comprehensive income (loss). The Company applied this accounting policy to the noncontrolling interest in Rhapsody that was held by MTVN for periods beginning when Rhapsody was formed in August 2007 through the quarter ended March 31, 2010. Due to the completion of the restructuring of Rhapsody on March 31, 2010 which resulted in the Company holding approximately 47.5% of the outstanding shares of capital stock of Rhapsody, this accounting policy will no longer apply with respect to the Company’s investment in Rhapsody in future periods.
Note 2. Recent Accounting Pronouncements
     With the exception of those discussed below, there have been no recent accounting pronouncements or changes in accounting pronouncements during the quarter ended March 31, 2010, to be implemented by the Company in future periods as compared to the recent accounting pronouncements described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, that are of significance, or potential significance to the Company.
     In September 2009, the FASB ratified Accounting Standards Update (ASU) 2009-13 (ASU 2009-13) (previously Emerging Issues Task Force (EITF) Issue No. 08-1, Revenue Arrangements with Multiple Deliverables (EITF 08-1)). ASU 2009-13 supersedes EITF 00-21 and addresses criteria for separating the consideration in multiple-element arrangements. ASU 2009-13 will require companies to allocate the overall consideration to each deliverable by using a best estimate of the selling price of individual deliverables in the arrangement in the absence of vendor-specific objective evidence or other third-party evidence of the selling price. ASU 2009-13 will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010 and early adoption is permitted. The Company is currently evaluating the potential impact, if any, of the adoption of ASU 2009-13 on its consolidated results of operations and financial condition and whether it will adopt the standard early.
     In September 2009, the FASB ratified ASU 2009-14 (ASU 2009-14) (previously EITF No. 09-3, Certain Revenue Arrangements That Include Software Elements). ASU 2009-14 modifies the scope of Software Revenue Recognition to exclude (a) non-software components of tangible products and (b) software components of tangible products that are sold, licensed, or leased with tangible products when the software components and non-software components of the tangible product function together to deliver the tangible product’s essential functionality. ASU 2009-14 has an effective date that is consistent with ASU 2009-13. The Company is currently evaluating the potential impact, if any, of the adoption of ASU 2009-14 on its consolidated results of operations and financial condition and whether it will adopt the standard early.

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Note 3. Stock-Based Compensation
     Stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period, which is the vesting period. The Company uses the Black-Scholes option-pricing model to determine the fair-value of stock-based awards. The Company recognizes compensation cost related to options granted on a straight-line basis over the applicable vesting period.
     The expected term of the options represents the estimated period of time until exercise and is based on historical experience of similar awards, including the contractual terms, vesting schedules, and expectations of future employee behavior. Expected stock price volatility is based on a combination of historical volatility of the Company’s stock for the related expected term and the implied volatility of its traded options. The risk-free interest rate is based on the implied yield available on U.S. Treasury zero-coupon issues with a term equivalent to the expected term of the stock options. The Company has not paid dividends in the past.
     The fair value of options granted was determined using the Black-Scholes model and the following weighted-average assumptions:
                 
    Quarters  
    Ended March 31,  
    2010     2009  
Expected dividend yield
    0 %     0 %
Risk-free interest rate
    1.94 %     1.60 %
Expected life (years)
    4.0       4.2  
Volatility
    62 %     63 %
     Recognized stock-based compensation expense is as follows (in thousands):
                 
    Quarters  
    Ended March 31,  
    2010     2009  
Cost of revenue
  $ 231     $ 630  
Research and development
    1,597       1,824  
Sales and marketing
    996       1,066  
General and administrative
    1,097       1,702  
 
           
Total stock-based compensation expense
  $ 3,921     $ 5,222  
 
           
     No stock-based compensation was capitalized as part of the cost of an asset during the quarters ended March 31, 2010 or 2009. As of March 31, 2010, $21.9 million of total unrecognized compensation cost, net of estimated forfeitures, related to stock options, is expected to be recognized over a weighted-average period of 2.0 years.
Note 4. Rhapsody Joint Venture
Restructuring of Rhapsody
     As described in Note 1, Summary of Significant Accounting Policies, the Company initially formed a joint venture with MTVN to own and operate a business-to-consumer digital audio music service known as Rhapsody. Prior to March 31, 2010, the Company owned 51% of the outstanding equity interests of Rhapsody and MTVN owned the remaining 49%. On March 31, 2010, restructuring transactions involving Rhapsody were completed, and Rhapsody was converted from a limited liability company to a corporation. Following the completion of the restructuring transactions. RealNetworks owns slightly less than 47.5%, MTVN owns 47.5%, and the two minority stockholders hold slightly more than 5% of the outstanding shares of capital stock of Rhapsody. RealNetworks contributed $18.0 million in cash, the Rhapsody brand and certain other assets, including content licenses, in exchange for shares of convertible preferred stock of Rhapsody, carrying a $10.0 million preference upon certain liquidation events. As part of the transactions, RealNetworks’ repurchased the international radio business that was previously contributed to Rhapsody by RealNetworks. MTVN contributed a $33.0 million advertising commitment in exchange for shares of common stock of Rhapsody, and MTVN’s previous obligation to provide advertising of approximately $111 million as of December 31, 2009 was cancelled. In addition, the put and call rights held by RealNetworks and MTVN and MTVN’s rights to receive a preferred return in connection with the exercise of RealNetworks’ put right were terminated. RealNetworks is also obligated to provide certain operational transition services to Rhapsody until December 31, 2010, unless earlier

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terminated by Rhapsody. Rhapsody will be initially governed by a Board of Directors with two directors appointed by each of the Company and MTVN and one independent director appointed by mutual agreement of the Company and MTVN.
     The restructuring resulted in RealNetworks no longer having control over the joint venture and therefore, the operating results of Rhapsody will be accounted for under the equity method of accounting, and the Company’s proportionate share of the income or loss will be recognized as a component of other income and expense, net in the Company’s consolidated statements of operations in periods subsequent to March 31, 2010. Rhapsody’s results of operations are included within RealNetworks’ unaudited condensed consolidated statement of operations for the quarter ended March 31, 2010. As Rhapsody is classified as an equity method investment at March 31, 2010, RealNetworks removed of all Rhapsody related assets and liabilities that were previously consolidated from its unaudited condensed consolidated balance sheet. The removal of these assets and liabilities and the creation of the equity method investment resulted in a one-time net gain of $10.9 million recorded in other income and expense, net in the Company’s unaudited condensed consolidated statement of operations for the quarter ended March 31, 2010. The Company determined the fair value of its retained equity interest of approximately 47.5% to be approximately $29.5 million.
     As mentioned above, the MTVN’s preferred return rights were terminated in connection with the restructuring of Rhapsody. Prior to the restructuring, if the appraised value of Rhapsody at a redemption date was less than $436.3 million, then the exercise price of the put would have included a preferred return for MTVN. The Company previously elected to accrete any excess of the redemption value over the carrying amount as an adjustment to income attributable to common shareholders, and adjusted earnings per share for the current quarter’s accretion of the difference between accretion as calculated using the terms of the redemption feature and the accretion entry for a hypothetical fair value redemption feature. Due to the termination of MTVN’s preferred return rights at the completion of the restructuring, the Company decreased the noncontrolling interest on the unaudited condensed consolidated balance sheet at March 31, 2010, by $10.4 million as part of the deconsolidation transactions, of which, $3.7 million was an adjustment to income attributable to common shareholders for the purposes of calculating earnings per share for the quarter ended March 31, 2010. The Company increased the noncontrolling interest on the unaudited condensed consolidated balance sheet for the quarter ended March 31, 2009, by $1.4 million which was an adjustment to income attributable to common shareholders for the purposes of calculating earnings per share. See Note 12, Earnings Per Share, for more information on this item.
Noncontrolling interest rollforward
     Activity in noncontrolling interest and equity attributable to common shareholders is as follows (in thousands):
                 
    Noncontrolling interest     Total Equity  
Balances, December 31, 2008
  $ 378     $ 553,558  
Net loss
    (6,433 )     (12,136 )
Contribution and other transactions with owners
    10,048       3,732  
Accretion of MTVN’s preferred return in Rhapsody
    1,434       (1,434 )
Unrealized holding losses on short-term and equity investments, net of taxes
          (1,822 )
Foreign currency translation losses
          (7,989 )
Stock-based transactions and compensation expense, net of taxes
          5,047  
 
           
Balances, March 31, 2009
  $ 5,427     $ 538,956  
 
           
                 
    Noncontrolling interest     Total Equity  
Balances, December 31, 2009
  $ 7,253     $ 375,811  
Net loss
    (2,910 )     3,228  
Contribution and other transactions with owners
    616       619  
Reversal of MTVN’s accretion equity interest in Rhapsody
    (6,736 )     6,736  
Reversal of MTVN’s preferred return in Rhapsody
    (3,700 )     3,700  
Deconsolidation
    5,477        
Unrealized holding losses on short-term and equity investments, net of taxes
          1,551  
Foreign currency translation losses
          (1,611 )
Stock-based transactions and compensation expense, net of taxes
          4,199  
 
           
Balances, March 31, 2010
  $     $ 394,233  
 
           
Note 5. Fair Value Measurements
     The Company measures certain financial assets at fair value on a recurring basis, including cash equivalents, short-term investments, and equity investments. The fair value of these financial assets was determined based on three levels of inputs:

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    Level 1: Observable inputs such as quoted prices in active markets for identical assets or liabilities
 
    Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly; these include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active
 
    Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions
Items Measured at Fair Value on a Recurring Basis
     The following table presents information about the Company’s financial assets that have been measured at fair value (in thousands) on a recurring basis as of March 31, 2010 and December 31, 2009 and indicates the fair value hierarchy of the valuation inputs utilized to determine such fair value.
                                 
    Fair Value Measurements as of  
    March 31, 2010  
    Total     Level 1     Level 2     Level 3  
            (In thousands)          
Cash equivalents
                               
Money market funds
  $ 85,342     $ 85,342     $     $  
Corporate notes and bonds
    63,997       63,997     $     $  
Short-term investments
                               
Corporate notes and bonds
    96,175       96,175              
U.S. government agency securities
    36,436       36,436              
Restricted cash equivalents and investments
    13,700       13,700                  
Available for sale securities
    20,989       20,989              
 
                       
Total
  $ 316,639     $ 316,639     $     $  
 
                       
                                 
    Fair Value Measurements as of  
    December 31, 2009  
    Total     Level 1     Level 2     Level 3  
            (In thousands)          
Cash equivalents
                               
Money market funds
  $ 223,909     $ 223,909     $     $  
Short-term investments
                               
Corporate notes and bonds
    73,462       73,462              
U.S. government agency securities
    34,408       34,408              
Restricted cash equivalents and investments
    13,700       13,700              
Available for sale securities
    19,503       19,503              
 
                       
Total
  $ 364,982     $ 364,982     $     $  
 
                       
     Investments in marketable securities classified as short-term investments and equity investments of public companies are measured at fair value using quoted market prices and are classified within Level 1 of the valuation hierarchy. The Company carries its equity investments in private companies at cost and no fair value is derived. The Company has consistently applied these valuation techniques in all periods presented.
Items Measured at Fair Value on a Nonrecurring Basis
     Certain assets and liabilities of the Company are measured at estimated fair value on a non-recurring basis. These instruments are subject to fair value adjustments only in certain circumstances (for example, when there is evidence of impairment). The Company performed a valuation using Level 3 inputs of its investment in the Rhapsody joint venture as of March 31, 2010. The Company performed the analysis as a result of the restructuring and related deconsolidation of Rhapsody which are further described in Note 4. Rhapsody Joint Venture. The fair value analysis used multiple valuation models and was based on assumptions of future results made by management, including operating and cash flow projections.
Note 6. Cash, Cash Equivalents, Trading Securities, Short-Term Investments, and Restricted Cash Equivalents and Investments

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     Cash, cash equivalents, trading securities, short-term investments, and restricted cash equivalents and investments as of March 31, 2010 consist of the following (in thousands):
                                 
            Gross     Gross        
    Amortized     Unrealized     Unrealized     Estimated  
    Cost     Gains     Losses     Fair Value  
Cash and cash equivalents:
                               
Cash
  $ 53,266     $     $     $ 53,266  
Money market mutual funds
    85,342                   85,342  
Corporate notes and bonds
    63,997                   63,997  
 
                       
Total cash and cash equivalents:
    202,605                   202,605  
 
                       
Short-term investments:
                               
Corporate notes and bonds
    95,469       719       (13 )     96,175  
U.S. Government agency securities
    36,497       5       (66 )     36,436  
 
                       
Total short-term investments:
    131,966       724       (79 )     132,611  
 
                       
Total cash, cash equivalents and short-term investments
  $ 334,571     $ 724     $ (79 )   $ 335,216  
 
                       
Restricted cash equivalents and investments
  $ 13,700     $     $     $ 13,700  
 
                       
     Cash, cash equivalents, short-term investments, and restricted cash equivalents as of December 31, 2009 consist of the following (in thousands):
                                 
            Gross     Gross        
    Amortized     Unrealized     Unrealized     Estimated  
    Cost     Gains     Losses     Fair Value  
Cash and cash equivalents:
                               
Cash
  $ 53,121     $     $     $ 53,121  
Money market mutual funds
    223,909                   223,909  
 
                       
Total cash and cash equivalents
    277,030                   277,030  
 
                       
Short-term investments:
                               
Corporate notes and bonds
    72,731       732       (1 )     73,462  
U.S. Government agency securities
    34,560       5       (157 )     34,408  
 
                       
Total short-term investments
    107,291       737       (158 )     107,870  
 
                       
Total cash, cash equivalents and short-term investments
  $ 384,321     $ 737     $ (158 )   $ 384,900  
 
                       
Restricted cash equivalents and investments
  $ 13,700     $     $     $ 13,700  
 
                       
     At March 31, 2010 and December 31, 2009, restricted cash equivalents and investments represent cash equivalents and short-term investments pledged as collateral against two letters of credit for a total of $13.7 million in connection with two lease agreements.
     Realized gains or losses on sales of available-for-sale securities for the quarters ended March 31, 2010 and 2009 were not significant.
     Changes in estimated fair values of short-term investments are primarily related to changes in interest rates and are considered to be temporary in nature.
     The contractual maturities of available-for-sale investments at March 31, 2010 are as follows (in thousands):
                 
    Amortized     Estimated  
    Cost     Fair Value  
Within one year
  $ 52,185     $ 52,262  
Between one year and five years
    78,279       78,846  
Between five years and fifteen years
    1,502       1,503  
 
           
Total available-for-sale investments
  $ 131,966     $ 132,611  
 
           

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Note 7. Allowance for Doubtful Accounts Receivable and Sales Returns
     Activity in the allowance for doubtful accounts receivable and sales returns is as follows (in thousands):
                 
    Allowance For  
    Doubtful        
    Accounts     Sales  
    Receivable     Returns  
Balances, December 31, 2009
  $ 2,912     $ 1,012  
Additions charged to expenses
    835       1,178  
Amounts written off
    (359 )     (1,283 )
 
           
Balances, March 31, 2010
  $ 3,388     $ 907  
 
           
     Two customers accounted for 11% and 11% of trade accounts receivable, respectively, as of March 31, 2010. As of December 31, 2009, two customers accounted for 18% and 10% of trade accounts receivable. No one customer accounted for more than 10% of total revenue during the quarters ended March 31, 2010 and 2009.
Note 8. Equity Method Investments and Available for Sale Securities
     As of March 31, 2010 and December 31, 2009, the carrying value of the Company’s equity interest in publicly traded companies primarily relates to J-Stream Inc., a Japanese media services company, and LoEn Entertainment, Inc., a Korean digital music distribution company. These investments are classified as available for sale. The market for these investments is relatively limited and the share price is volatile. On March 31, 2010, the Company restructured its investment in Rhapsody, and as a result the Company treats its investment in Rhapsody as an equity method investment as of March 31, 2010. See Note 4. Rhapsody Joint Venture above for further discussion of the restructuring transactions. Although the carrying value of the equity method investments and available for sale securities was $50.7 million at March 31, 2010, there can be no assurance that any gain can be realized through the disposition of these shares.
     Summary of investments is as follows (in thousands):
                                 
    March 31, 2010     December 31, 2009  
            Carrying             Carrying  
    Cost     Value     Cost     Value  
Available for sale securities
  $ 10,765     $ 20,989     $ 10,765     $ 19,503  
Equity method investments
    30,150       29,700       500       50  
 
                       
Total investments
  $ 40,915     $ 50,689     $ 11,265     $ 19,553  
 
                       
Note 9. Other Intangible Assets
     Other intangible assets consist of the following (in thousands):
                         
    Gross     Accumulated        
    Amount     Amortization     Net  
Customer relationships
  $ 31,359     $ 23,510     $ 7,849  
Developed technology
    29,208       27,654       1,554  
Patents, trademarks and tradenames
    5,730       5,699       31  
Service contracts and other
    6,081       6,081        
 
                 
Total other intangible assets, March 31, 2010
  $ 72,378     $ 62,944     $ 9,434  
 
                 
Total other intangible assets, December 31, 2009
  $ 78,128     $ 67,478     $ 10,650  
 
                 
     Amortization expense related to other intangible assets during the quarter ended March 31, 2010 was $1.3 million. Amortization expense related to other intangible assets during the quarter ended March 31, 2009 was $2.3 million.
     As of March 31, 2010, estimated future amortization of other intangible assets is as follows (in thousands):
         
2010 (remaining nine months)
  $ 3,202  
2011
    2,306  
2012
    2,050  
2013
    1,637  
2014
    169  
Thereafter
    70  
 
     
Total
  $ 9,434  
 
     
     The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of such assets may not be recoverable. Recoverability of these assets is measured by comparing their carrying amount to future undiscounted cash flows the assets are expected to generate. If long-lived assets are considered to be impaired, the impairment to be recognized equals the amount by which the carrying value of the assets exceeds their fair market value. The Company did not record any impairments to long-lived assets during the quarters ended March 31, 2010 or 2009.

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Note 10. Accrued and Other Liabilities
     Accrued and other liabilities consist of (in thousands):
                 
    March 31,     December 31,  
    2010     2009  
Royalties and other fulfillment costs
  $ 42,679     $ 53,693  
Employee compensation, commissions and benefits
    20,983       20,077  
Sales, VAT and other taxes payable
    15,163       16,907  
Legal fees and contingent legal fees
    3,166       5,251  
Other
    20,058       29,006  
 
           
Total
  $ 102,049     $ 124,934  
 
           
Note 11. Loss on Excess Office Facilities
     The accrued loss of $2.1 million for estimated future losses on excess office facilities located near the Company’s corporate headquarters in Seattle Washington at March 31, 2010, is shown net of expected future sublease income of $1.4 million, which was committed under sublease contracts at the time of the estimate. The Company regularly evaluates the market for office space in the cities where it has operations. If the market for such space declines further in future periods, the Company may have to revise its estimates further, which may result in additional losses on excess office facilities.
     A summary of activity for accrued loss on excess office facilities is as follows (in thousands):
         
Accrued loss on excess office facilities, December 31, 2009
  $ 3,228  
Less amounts amortized from the accrued loss on excess office facilities
    (1,133 )
 
     
Accrued loss on excess office facilities, March 31, 2010
  $ 2,095  
 
     
Note 12. Earnings Per Share
     For periods beginning August 2007 through the quarter ended March 31, 2010, basic net income (loss) available to common shareholders per share is computed by dividing net income (loss) attributable to common shareholders less any accretion from MTVN’s preferred return in Rhapsody by the weighted average number of common shares outstanding during the period. Diluted net income (loss) available to common shareholders per share is computed by dividing net income (loss) attributable to common shareholders less any accretion from MTVN’s preferred return in Rhapsody by the weighted average number of common and dilutive potential common shares outstanding during the period. On March 31, 2010, the restructuring transactions involving Rhapsody were completed. After the completion of the restructuring transactions, MTVN no longer holds a preferred return in Rhapsody. Therefore, the total amount of the previously recognized accretions of $3.7 million was reversed in the quarter ended March 31, 2010. Basic and diluted net income available to common shareholders per share are calculated as follows (in thousands):
                 
    Quarters Ended  
    March 31,  
    2010     2009  
Net income (loss) available to common shareholders:
               
Net income (loss) attributable to common shareholders
  $ 3,228     $ (12,136 )
Less accretion of MTVN’s preferred return in Rhapsody
    3,700       (1,434 )
 
           
Net income (loss) available to common shareholders
  $ 6,928     $ (13,570 )
 
           
Weighted average common shares outstanding used to compute basic net income (loss) per share available to common shareholders
    135,130       134,380  
Dilutive potential common shares:
               
Stock options and restricted stock
    4,443        
 
           
Shares used to compute diluted net income (loss) per share available to common shareholders
    139,573       134,380  
 
           
Basic net income (loss) per share available to common shareholders
  $ 0.05     $ (0.10 )
Diluted net income (loss) per share available to common shareholders
  $ 0.05     $ (0.10 )
     During the quarters ended March 31, 2010, and 2009, 23.8 million and 39.3 million shares of common stock, respectively, potentially issuable from stock options were excluded from the calculation of diluted net income per share because of their antidilutive effect.

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Note 13. Commitments and Contingencies
     Borrowing Arrangements. The Company’s subsidiary, WiderThan, has entered into lines of credit with a Korean domestic bank with an aggregate maximum available limit of $0.9 million at interest rates of approximately 6% over the rate earned on the underlying deposits. During the quarter ended March 31, 2010, the Company did not draw on the line of credit and there was no balance outstanding as of March 31, 2010 or December 31, 2009.
     WiderThan uses corporate charge cards issued by a Korean domestic bank with an aggregate line of credit of up to $4.4 million. The charged amounts are generally payable in the following month depending on the billing cycle and are included in accounts payable in the accompanying unaudited condensed consolidated balance sheets. In general, the term of the arrangement is one year, with automatic renewal in April of each year. The arrangement may be terminated in writing by mutual agreement between the bank and the Company. The Company is not subject to any financial or other restrictive covenants under the terms of this arrangement.
     WiderThan has a letter of credit of up to $1.0 million with a Korean domestic bank for importing goods, with one-year maturity (renewable every April), which bears interest at 2.5% over the London Inter-Bank Offer Rate (LIBOR). Borrowings under this letter of credit are collateralized by import documents and goods being imported under such documentation. To the extent that the Company has any outstanding balance, the Company is subject to standard covenants and notice requirements under the terms of this facility, such as covenants to consult with the lender prior to engaging in certain events, which include, among others, mergers and acquisitions or sale of material assets or to furnish certain financial and other information. The Company is not, however, subject to any financial covenant requirements or other restrictive covenants that restrict the Company’s ability to utilize this facility or to obtain financing elsewhere. During the quarter ended March 31, 2010, the Company did not draw on the letter of credit and there was no balance outstanding as of March 31, 2010 or December 31, 2009.
     WiderThan has purchase guarantees amounting to $0.9 million from Seoul Guarantee Insurance which guarantees payments for one year under certain supply contracts the Company has with a customer in Korea.
     Litigation. On September 30, 2008, the Company filed a declaratory action against Disney Enterprises, Inc., Paramount Pictures Corp., Sony Pictures Entertainment, Inc., Twentieth Century Fox Film Corp., NBC Universal, Inc., Warner Bros. Entertainment, Inc., Viacom, Inc. (collectively, the “Studios”) and the DVD Copy Control Association (DVD CCA) in the U.S. District Court for the Northern District of California relating to the Company’s RealDVD product (the “RealDVD Litigation”), which, among other things, allows consumers to securely store DVD content on their hard drives. On the same day, various movie studios filed suit against the Company that alleged, among other things, that by offering the RealDVD product, the Company has violated the Digital Millennium Copyright Act and sought to enjoin the sale or distribution of the RealDVD product. In May 2009, the Company moved to amend its complaint against the Studios to add claims that the Studios and DVD CCA conspired to violate, and have violated, state and federal antitrust laws by, among other things, unlawfully eliminating competition in the market for technology that enables a consumer to make a lawful, secure backup copy of a DVD and made similar counterclaims against the DVD CCA. On August 11, 2009, the court in the Northern District of California granted the movie studios’ motion for preliminary injunction, which enjoined the Company from selling or otherwise distributing RealDVD to the public, which the Company appealed to the U.S. Court of Appeals for the Ninth Circuit. On March 1, 2010, the Company entered into a settlement agreement with the Studios and related entities as well as the DVD CCA with respect to the RealDVD Litigation. Under the terms of the settlement agreement, the Company paid $4.5 million to the Studios for the Studios’ fees and costs in connection with the RealDVD Litigation. In addition, the Company agreed to the terms of a consent judgment, as entered by the District Court in the Northern District of California on March 3, 2010, which, among other things, permanently enjoins the Company from distributing or offering RealDVD or any other technology, product, service or device that enables the duplication of, redistribution of, or unauthorized access to, copyrighted content protected by the Content Scramble System or technologies known as ARccOS or RipGuard. All claims and counterclaims in the RealDVD Litigation, including the Company’s claims of breach of federal antitrust laws against the Studios, were either resolved by the consent judgment or dismissed with prejudice, and the Company has withdrawn its appeal to the U.S. Court of Appeals for the Ninth Circuit relating to the preliminary injunction. The Company accrued the settlement obligation under the settlement agreement within its consolidated financial statements for the year ended December 31, 2009. The settlement obligation was paid in full during the quarter ended March 31, 2010.
     On April 25, 2007, a lawsuit was filed by Greenville Communications, LLC in the U.S. District Court for the Northern District of Mississippi against a number of cell phone carriers, including the Company’s partners T-Mobile USA, Inc. and Alltel Corporation, alleging that they infringe its patents by providing ringback tone services. The Company agreed to indemnify T-Mobile and Alltel against the claims based on an indemnity that is claimed to be owed by the Company’s subsidiary, WiderThan. On August 27, 2007, the Company’s motion to transfer this matter to the U.S. District Court for the District of New Jersey was granted. The parties have

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briefed claim construction, but the case has been stayed pending reexamination of the patents at issue. In December 2009, the U.S. Patent and Trademark Office (PTO) issued notice that it intends to review the patents at issue. The court lifted the stay on the litigation on January 29, 2010 and discovery has resumed. The Company disputes the plaintiff’s allegations regarding both the validity of its patents and its claims of infringement against the Company’s partners.
     The Company has also been involved in a proceeding in the U.S. District Court for the Southern District of New York to determine a royalty rate for the public performance of music contained in the American Society of Composers, Authors and Publishers (ASCAP) catalogue. In April 2008, the district court issued a preliminary ruling that sets forth, among other things, a methodology to be used to calculate the royalties owed to ASCAP and subsequently issued additional rulings. After working with ASCAP to make a final determination of amounts due under the court’s rulings, the Company reached a partial agreement with ASCAP on January 12, 2009. The Company believes it has sufficiently accrued for expected royalties under the agreement, but the Company and ASCAP appealed some aspects of the court’s rulings that underlie the agreement, which appeal remains pending before the U.S. Court of Appeals for the Second Circuit.
     From time to time the Company is, and expects to continue to be, subject to legal proceedings and claims in the ordinary course of business, including employment claims, contract-related claims, and claims of alleged infringement of third-party patents, trademarks and other intellectual property rights. These claims, including those described above, even if not meritorious, could force the Company to spend significant financial and managerial resources. The Company is not aware of any other legal proceedings or claims that the Company believes will have, individually or taken together, a material adverse effect on the Company’s business, prospects, financial condition or results of operations. However, the Company may incur substantial expenses in defending against third-party claims and certain pending claims are moving closer to trial. The Company expects that its potential costs of defending these claims may increase as the disputes move into the trial phase of the proceedings. In the event of a determination adverse to the Company, the Company may incur substantial monetary liability, and/or be required to change its business practices. Either of these could have a material adverse effect on the Company’s financial position and results of operations.
Note 14. Segment Information
     The Company reports four business segments based on factors such as how the Company manages its operations and how its Chief Operating Decision Maker reviews results. The Company’s Chief Operating Decision Maker is considered to be the Company’s CEO Staff (CEOS), which includes the Company’s Acting Chief Executive Officer, Chief Financial Officer, Executive Vice President and certain Senior Vice Presidents. The CEOS reviews financial information presented on both a consolidated basis and on a business segment basis, accompanied by disaggregated information about products and services and geographical regions for purposes of making decisions and assessing financial performance. The CEOS reviews discrete financial information regarding profitability of the Company’s TPS, MSS, Games, and Music segments and, therefore, the Company reports these as operating segments. The accounting policies used to derive segment results are generally the same as those described in Note 1, Summary of Business and Summary of Significant Accounting Policies.
     The TPS segment includes revenue and costs from: sales of application services such as ringback tones, music on demand, video on demand, messaging, and information services; sales of media delivery system software and licenses, including Helix system software and related authoring and publishing tools, directly to customers and indirectly through original equipment manufacturer channels; sales of support and maintenance services to customers who purchase software products; sales of broadcast hosting services; and sales of consulting and professional services. These products and services are primarily sold to corporate customers.
     The MSS segment primarily includes revenue from sales of the Company’s SuperPass premium subscription service; sales of RealPlayer Plus and related products; sales and distribution of third-party software products; and all advertising other than that related directly to the Company’s Music and Games businesses.
     The Games segment primarily includes revenue from the sale of individual games on the Company’s websites RealArcade.com, GameHouse.com and Zylom.com; the sale of games subscription services; advertising through the Company’s games websites; the sale of games through syndication on partner sites; and sales of games through wireless carriers.
     The Music segment includes the operations of Rhapsody as well as the aspects of the Company’s music business not included as part of Rhapsody. The revenue and costs from these businesses include: digital music subscription services, such as Rhapsody and RadioPass, and sales of digital music content and advertising. These products and services are sold and provided primarily through the Internet, and the Company charges customers’ credit cards at the time of sale. Billing periods for subscription services typically occur monthly, quarterly or annually, depending on the service purchased.

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     Amounts that are not included within the above segment descriptions are shown below as Reconciling Amounts. Included within these amounts are items such as interest income.
     Segment net income (loss) attributable to common shareholders for the quarter ended March 31, 2010 is as follows (in thousands):
                                                 
                    Media                    
                    Software and     Technology Products     Reconciling        
    Music     Games     Services     and Solutions     Amounts     Consolidated  
Net revenue
  $ 35,733     $ 30,236     $ 20,739     $ 41,892     $     $ 128,600  
Cost of revenue
    21,930       7,812       2,764       16,653             49,159  
 
                                   
Gross profit
    13,803       22,424       17,975       25,239             79,441  
Operating expenses
    19,673       27,793       14,364       26,620       5,653       94,103  
 
                                   
Operating income (loss)
    (5,870 )     (5,369 )     3,611       (1,381 )     (5,653 )     (14,662 )
Total non-operating income, net
    10,929                         479       11,408  
 
                                   
Income (loss) before income taxes
    5,059       (5,369 )     3,611       (1,381 )     (5,174 )     (3,254 )
Income taxes
                            3,572       3,572  
 
                                   
Net income (loss)
    5,059       (5,369 )     3,611       (1,381 )     (1,602 )     318  
 
                                   
Net income (loss) attributable to noncontrolling interest in Rhapsody
    2,910                               2,910  
 
                                   
Net income (loss) attributable to common shareholders
  $ 7,969     $ (5,369 )   $ 3,611     $ (1,381 )   $ (1,602 )   $ 3,228  
 
                                   
     Segment net income (loss) attributable to common shareholders for the quarter ended March 31, 2009 is as follows (in thousands):
                                                 
                    Media                    
                    Software     Technology Products     Reconciling        
    Music     Games     and Services     and Solutions     Amounts     Consolidated  
Net revenue
  $ 44,053     $ 32,823     $ 20,318     $ 43,579     $     $ 140,773  
Cost of revenue
    27,300       8,564       3,707       16,450             56,021  
 
                                   
Gross profit
    16,753       24,259       16,611       27,129             84,752  
Operating expenses
    29,516       26,846       19,882       26,216       832       103,292  
 
                                   
Operating income (loss)
    (12,763 )     (2,587 )     (3,271 )     913       (832 )     (18,540 )
Total non-operating income, net
                            1,520       1,520  
 
                                   
Income (loss) before income taxes
    (12,763 )     (2,587 )     (3,271 )     913       688       (17,020 )
Income taxes
                            (1,549 )     (1,549 )
 
                                   
Net income (loss)
    (12,763 )     (2,587 )     (3,271 )     913       (861 )     (18,569 )
 
                                   
Net income (loss) attributable to noncontrolling interest in Rhapsody
    6,433                               6,433  
 
                                   
Net income (loss) attributable to common shareholders
  $ (6,330 )   $ (2,587 )   $ (3,271 )   $ 913     $ (861 )   $ (12,136 )
 
                                   
     The Company’s customers consist primarily of end users located in the U.S., Europe and various foreign countries. Revenue by geographic region is as follows (in thousands):
                 
    Quarters Ended  
    March 31,  
    2010     2009  
United States
  $ 84,550     $ 96,666  
Europe
    22,482       22,665  
Rest of the World
    21,568       21,442  
 
           
Total net revenue
  $ 128,600     $ 140,773  
 
           
     Long-lived assets, consisting of equipment, software, leasehold improvements, other intangible assets, and goodwill by geographic region are as follows (in thousands):
                 
    March 31,     December 31,  
    2010     2009  
United States
  $ 42,536     $ 51,367  
Republic of Korea
    6,918       7,196  
Europe
    6,085       5,745  
Rest of the World
    3,186       3,456  
 
           
Total long-lived assets
  $ 58,725     $ 67,764  
 
           

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     Net assets by geographic location are as follows (in thousands):
                 
    March 31,     December 31,  
    2010     2009  
United States
  $ 332,232     $ 320,412  
Republic of Korea
    12,657       10,581  
Europe
    36,606       34,784  
Rest of the World
    12,738       10,034  
 
           
Total net assets
  $ 394,233     $ 375,811  
 
           
Note 15. Related Party Transactions
     Transactions with MTVN. As part of the initial formation of Rhapsody in 2007, MTVN contributed a $230 million five-year note payable in partial consideration for acquiring MTVN’s interest in the venture. In February 2009, RealNetworks and MTVN signed an amendment to the Rhapsody joint venture agreement which reduced the amount payable under the MTVN note to $213.8 million over the original five-year term. During the quarters ended March 31, 2010 and 2009, Rhapsody received $1.2 million and $7.7 million, respectively, in cash as note payments and spent $1.1 million and $7.4 million, respectively, in advertising with MTVN. The remainder of this marketing note was exchanged for a $33 million marketing commitment as part of the restructuring transactions that were completed on March 31, 2010. See Note 4. Rhapsody Joint Venture for more information on the restructuring transactions.
     For periods between August 2007 and March 31, 2010, the Company also provided various support services, including items such as facilities, information technology systems, personnel support and some overhead charges associated with the support services, directly to Rhapsody. The allocation of these and other support service costs were based on various measures depending on the service provided, including employee headcount, time employees spend on providing services to Rhapsody, server usage or number of users of a service. The allocations of these costs were billed directly to Rhapsody. Prior to March 31, 2010, the Company treated these allocations as intercompany transactions and all such transactions were eliminated in consolidation. As of March 31, 2010, the Company no longer consolidates these transactions. The $6.0 million balance of the related party receivable on the Company’s unaudited condensed consolidated balance sheet relates to the allocation of costs as mentioned above for the quarter ended March 31, 2010. Following the restructuring transactions, the Company is obligated to provide Rhapsody with a reduced amount of support services until December 31, 2010, unless earlier terminated by Rhapsody.
     Transactions with LoEn Entertainment, Inc. During the fourth quarter of 2008, the Company paid $9.9 million to acquire approximately 11% of the outstanding shares of LoEn Entertainment, Inc. (LoEn). The Company paid market price for approximately 2.8 million common shares of LoEn which are traded on the Korean Securities Dealers Automated Quotations. The Company’s investment in LoEn is treated as an equity investment of a public company and is marked-to-market each period with resulting gains/losses recognized in equity as unrealized holding gains/losses on investment. During the quarters ended March 31, 2010, and 2009, the Company recorded revenue from LoEn of approximately $3.7 million and $2.5 million, respectively. This revenue consisted primarily of sales of application service provider services, which includes sales of ringback tones, music-on-demand, video-on-demand, and inter-carrier messaging services. Associated with these transactions, RealNetworks also recorded accounts receivable of approximately $4.1 million as of March 31, 2010. Accounts payable and cost of revenue balances associated with LoEn as of and for the quarters ended March 31, 2010 and 2009 were nominal.
Note 16. Income Taxes
     As of March 31, 2010, there have been no material changes to the Company’s uncertain tax positions disclosures as provided in Note 15 to the Company’s audited financial statements included in the Company’s 2009 Annual Report on Form 10-K. The Company filed formal and informal refund claims with the Internal Revenue Service (“IRS”) in 2009 for the years 2001-2007, primarily related to Extraterritorial Income Exclusion and previously acquired net operating losses. In April 2010 the Company agreed to significant adjustments proposed by the IRS related to the formal and informal refund claims. Therefore, the Company believes it is reasonably possible that the total unrecognized tax benefits will be reduced significantly within the next twelve months. However, the Company does not believe that an estimate of the range of the reduction can be made at present.
     The Company files numerous consolidated and separate income tax returns in the United States federal, as well as state, local, and foreign jurisdictions. With few exceptions, the Company is no longer subject to United States federal, state, local, or foreign income tax examinations for years before 1993. The Company is currently under United States federal audit for the consolidated group RealNetworks, Inc. and Subsidiaries for the years ended December 31, 2005, 2006 and 2007. RealNetworks, Inc. and/or subsidiaries are also under audit by various states and foreign jurisdictions for certain tax years subsequent to 1993.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
     This Quarterly Report on Form 10-Q and the documents incorporated herein by reference contain forward-looking statements that have been made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on current expectations, estimates, and projections about RealNetworks’ industry, products, management’s beliefs, and certain assumptions made by management. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” and similar expressions are intended to identify forward-looking statements. All statements contained in this report that do not relate to matters of historical fact should be considered forward-looking statements. Forward-looking statements include statements with respect to:
    future revenues, income and other taxes, tax benefits, net income (loss) per diluted share, acquisition costs and related amortization, and other measures of results of operations;
 
    the effects of our past acquisitions and expectations for future acquisitions;
 
    plans, strategies and expected opportunities for future growth, increased profitability and innovation;
 
    the prospects for creation and growth of strategic partnerships and the resulting financial benefits from such partnerships;
 
    the expected financial position, performance, growth and profitability of our businesses and the availability of resources;
 
    our involvement in potential claims and legal proceedings, the expected course and costs of existing claims and legal proceedings, and the potential outcomes and effects of both existing and potential claims and legal proceedings on our business, prospects, financial condition or results of operations;
 
    our intention to separate our Games businesses and to restructure our remaining businesses;
 
    the expected benefits and other consequences from restructuring Rhapsody, separating our Games business and restructuring our remaining businesses;
 
    our expected introduction of new products and services across our businesses;
 
    the effects of legislation, regulations, administrative proceedings, court rulings, settlement negotiations and other factors that may impact music publishing royalty rates;
 
    the continuation and expected nature of certain customer relationships;
 
    impacts of competition and certain customer relationships on the future financial performance and growth of our businesses;
 
    the effects of U.S. and foreign income and other taxes on our business, prospects, financial condition or results of operations; and
 
    the effect of economic and market conditions on our business, prospects, financial condition or results of operations.
     These statements are not guarantees of future performance and actual actions or results may differ materially. These statements are subject to certain risks, uncertainties and assumptions that are difficult to predict, including those noted in the documents incorporated herein by reference. Particular attention should also be paid to the cautionary language in section Item 1 of Part II entitled “Legal Proceedings” and Item 1A of Part II entitled “Risk Factors.” RealNetworks undertakes no obligation to update publicly any forward-looking statements as a result of new information, future events or otherwise, unless required by law. Readers should, however, carefully review the risk factors included in other reports or documents filed by RealNetworks from time to time with the Securities and Exchange Commission, particularly the Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K.
Overview
     Our mission is to create the best products and services for people to enjoy their digital media everywhere. We pioneered the development of technology for streaming digital media over the Internet and have sustained our focus on creating and delivering

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digital media, technology, services and content such as music, games and video to consumers around the world. We provide easy-to-use and affordable software products and services that enable consumers to discover, save, store and access their digital media on many different devices. We distribute our products and services directly to consumers and also through wireless network operators, original equipment manufacturers and other communications companies who offer these products and services to their customers. Our direct to consumer activities and financial results are reflected in our Media Software and Services (MSS), Games and Music segments’ revenue and profit (loss), while our business to business activities and financial results are reflected in our Technology Products and Solutions (TPS) segment revenue and profit (loss). Each of these segments is described further below under “Revenue by Segment” and “Costs of Revenue by Segment.” Our Music business is conducted primarily through the Rhapsody joint venture (Rhapsody) we formed with the MTVN division of Viacom International, Inc. (MTVN) in 2007. While Rhapsody’s operations are included within our consolidated statement of operations for the quarter ended March 31, 2010, we will no longer be consolidating Rhapsody’s results in future periods, due to the completion of the restructuring transactions involving Rhapsody as of March 31, 2010. For more details on the restructuring transactions and the related financial impacts, see “Note 4. Rhapsody Joint Venture” to the Condensed Consolidated Financial Statements included within Part I, Item 1 of this report.
     Our strategy is to increase our focus on two key businesses: (1) our software as a service (SaaS) offerings of our TPS business segment (formerly referred to as our application service provider, or ASP, offerings) and (2) our RealPlayer media player software and related businesses. In addition to the recently completed restructuring of our Rhapsody joint venture, we also intend to simplify and restructure our company in 2010 by, among other things, separating the operations of our Games business from the rest of our business, discontinuing certain unprofitable products and services offerings and reducing overhead and other operating costs of our company. We believe the restructuring of our Rhapsody joint venture and our plan to separate our Games business will enable those businesses to operate more efficiently and to compete more effectively in their markets. We have not yet determined the structure of the separated Games business, including whether we will retain control of the business or enter into another strategic transaction involving the business.
     In the quarter ended March 31, 2010, our total revenue declined 8.7%, or $12.2 million, to $128.6 million compared with $140.8 million in the quarter ended March 31, 2009. This decrease was due to declines in revenue in our TPS, Games and Music segments totaling $1.7 million, $2.6 million and $8.3 million, respectively. We also recorded net income available to common shareholders of $3.2 million for the quarter ended March 31, 2010 compared with a net loss of $12.1 million for the quarter ended March 31, 2009. Net income available to common shareholders for the current quarter was significantly impacted by a one-time gain of $10.9 million on the deconsolidation of our Rhapsody joint venture. Our operating expenses for the quarter declined 9%, or $9.2 million, compared with the year-earlier period. The decline in operating expenses was a result of our continued focus on simplifying our business and reducing headcount. While we achieved a reduction in operating expenses, we also incurred a total of $5.6 million in restructuring charges compared with restructuring charges of $0.8 million in the quarter ended March 31, 2009, and we continued to invest in research and development of new and existing products. Cash, cash equivalents, restricted cash and short-term investments declined to $348.9 million from $398.6 million at December 31, 2009, principally due to the $18.0 million in cash used in connection with the restructuring of Rhapsody, the $20.7 million in cash used to pay Rhapsody-related payables and the $5.5 million in cash used to settle the RealDVD lawsuit and to pay related legal expenses, as well as ordinary course fluctuation in working capital. See “Results of Operations-Revenue by Segment” below for further explanations of changes in our segment revenue for the quarter ended March 31, 2010.
     For 2010, our businesses may continue to be affected by reduced consumer spending and a softness in the global economy. We intend to focus in 2010 on implementing the strategic initiatives described above that include the separation of our Games business and the execution of operating plans for our other businesses. Our overall reported revenue, cost of revenue and operating expenses will be lower beginning in the second quarter of 2010 primarily because Rhapsody’s financial results will no longer be consolidated with our consolidated financial statements. In addition, in conjunction with the execution of our strategic initiatives, we expect to continue to reduce our overall operating costs and potentially to record additional cash and non-cash charges associated these activities. Whether and to what extent we realize any benefits from the restructuring of Rhapsody, the expected separation of our Games business or the rationalization of our operating cost structure are subject to risks that are described in Item 1A of this report under Risks Related to Our Business in General.
Critical Accounting Policies and Estimates

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     The preparation of our financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported period. Our critical accounting policies and estimates are as follows:
    Revenue recognition;
 
    Estimating music publishing rights and music royalties;
 
    Estimating recoverability of deferred costs;
 
    Estimating allowances for doubtful accounts and sales returns;
 
    Estimating losses on excess office facilities;
 
    Determining whether declines in the fair value of investments are other-than-temporary and estimating fair market value of investments in privately held companies;
 
    Valuation of long-lived assets;
 
    Valuation of goodwill;
 
    Stock-based compensation;
 
    Noncontrolling interest;
 
    Accounting for gains on sale of subsidiary stock; and
 
    Accounting for income taxes.
     Revenue Recognition. We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collection is probable. Physical products are considered delivered to the customer once they have been shipped and title and risk of loss have been transferred. For online sales, the products or services are considered delivered at the time the product or services are made available, digitally, to the end user.
     We recognize revenue on a gross or net basis. In most arrangements, we contract directly with end user customers, are the primary obligor and carry all collectability risk. In such arrangements, we recognize revenue on a gross basis. In some cases, we utilize third-party distributors to sell products or services directly to end user customers and carry no collectability risk. In such instances, we recognize revenue on a net basis.
     In our direct to consumer business segments, which include Music, Games and MSS, we derive revenue through (1) subscriptions, (2) sales of content downloads, software and licenses and (3) the sale of advertising and the distribution of third-party products on our websites and in our games.
     Consumer subscription products are paid in advance, typically for monthly, quarterly or annual duration. Subscription revenue is recognized ratably over the related subscription time period. Revenue from sales of content downloads, software and licenses is recognized at the time the product is made available, digitally, to the end user. Revenue generated from advertising on our websites and from advertising and the distribution of third-party products included in our products is recognized as revenue at the time of delivery.
     Our business-to-business TPS segment generates revenue by providing services that enable wireless carriers to deliver audio and video content to their customers and through sales of software licenses and products and related support and other services.
     Revenue generated from services provided to wireless carriers that enable the delivery of audio and video content to their customers is recognized as the services are provided. Setup fees to build these services are recognized ratably upon launch of the service over the remaining expected term of the service.

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     Estimating Music Publishing Rights and Music Royalty Accruals. We must make estimates of amounts owed related to our music publishing rights and music royalties for our domestic and international music services. Material differences may impact the amount and timing of our expense for any period if management made different judgments or utilized different estimates. Under copyright law, we may be required to pay licensing fees for digital sound recordings and compositions we deliver. Copyright law generally does not specify the rate and terms of the licenses, which are determined by voluntary negotiations among the parties or, for certain compulsory licenses where voluntary negotiations are unsuccessful, by arbitration. There are certain geographies and agencies for which we have not yet completed negotiations with regard to the royalty rate to be applied to the current or historic sales of our digital music offerings. Our estimates are based on contracted or statutory rates, when established, or management’s best estimates based on facts and circumstances regarding the specific music services and agreements in similar geographies or with similar agencies. While we base our estimates on historical experience and on various other assumptions that management believes to be reasonable under the circumstances, actual results may differ materially from these estimates under different assumptions or conditions.
     Estimating Recoverability of Deferred Costs. We defer costs on projects for service revenue and system sales. Deferred costs consist primarily of direct and incremental costs to customize and install systems, as defined in individual customer contracts, including costs to acquire hardware and software from third parties and payroll costs for our employees and other third parties.
     We recognize such costs as a component of cost of goods sold in accordance with our revenue recognition policy by contract. For revenue recognized under the completed contract method, costs are deferred until the products are delivered, or upon completion of services or, where applicable, customer acceptance. For revenue recognized ratably over the term of the contract, costs are recognized ratably over the term of the contract, commencing on the date of revenue recognition. At each balance sheet date, we review deferred costs to ensure they are ultimately recoverable. Any anticipated losses on uncompleted contracts are recognized when evidence indicates the estimated total cost of a contract exceeds its estimated total revenue.
     Estimating Allowances for Doubtful Accounts and Sales Returns. We make estimates of the uncollectible portion of our accounts receivable. We specifically analyze the age of accounts receivable and historical bad debts, customer credit-worthiness and current economic trends when evaluating the adequacy of the allowance for doubtful accounts. Similarly, we make estimates of potential future product returns related to current period revenue. We analyze historical returns, current economic trends, and changes in customer demand and acceptance of our products when evaluating the adequacy of the sales returns allowance. Significant judgments and estimates are made and used in connection with establishing allowances for doubtful accounts and sales returns in any accounting period. Material differences may result in the amount and timing of our revenue for any period if we were to make different judgments or utilize different estimates or actual future experience was different from the judgments and estimates.
     Estimating Losses on Excess Office Facilities. We made significant estimates in determining the appropriate amount of accrued loss on excess office facilities. If we made different estimates, our loss on excess office facilities could be significantly different from that recorded, which could have a material impact on our operating results. Our original estimate has been revised in previous periods in response to changes in market conditions for commercial real estate in the area where the excess office facilities are located, or to reflect negotiated changes in sublease rates charged to occupying tenants.
     Impairment of Investments. We periodically evaluate whether any declines in the fair value of our investments are other-than-temporary. Significant judgments and estimates are made to assess whether an other-than-temporary decline in fair value of investments has occurred and to estimate the fair value of investments in privately held companies. Material differences may result in the amount and timing of any impairment charge if we were to make different judgments or utilize different estimates or actual future experience was different from the judgments and estimates.
     Valuation of Long-Lived Assets. Long-lived assets consist primarily of property, plant and equipment, as well as amortizable intangible assets acquired in business combinations. Long-lived assets are amortized on a straight line basis over their estimated useful lives. We review long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of such assets may not be recoverable. Recoverability of these assets is measured by comparison of their carrying amount to future

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undiscounted cash flows the assets are expected to generate. If long-lived assets are considered to be impaired, the impairment to be recognized equals the amount by which the carrying value of the assets exceeds their fair market value. The impairment analysis of long-lived assets is based upon estimates and assumptions relating to our future revenue, cash flows, operating expenses, costs of capital and capital purchases. These estimates and assumptions are complex and subject to a significant degree of judgment with respect to certain factors including, but not limited to, the cash flows of our long-term operating plans, market and interest rate risk, and risk-commensurate discount rates and cost of capital. Significant or sustained declines in future revenue or cash flows, or adverse changes in our business climate, among other factors, and their resulting impact on the estimates and assumptions relating to the value of our long-lived assets could result in the need to perform an impairment analysis in future interim periods which could result in a significant impairment. While we believe our estimates and assumptions are reasonable, due to their complexity and subjectivity, these estimates and assumptions could vary period to period.
     Valuation of Goodwill. We assess the impairment of goodwill on an annual basis, in our fourth quarter, or whenever events or changes in circumstances indicate that the fair value of the reporting unit to which goodwill relates is less than the carrying value. We consider a synthesis of the following important factors that could trigger an impairment review include the following:
    poor economic performance relative to historical or projected future operating results;
 
    significant negative industry, economic or company specific trends;
 
    market and interest rate risk;
 
    changes in the manner of our use of the assets or the plans for our business; and
 
    loss of key personnel.
     In addition, we perform a reconciliation of our market capitalization plus a reasonable control premium to the aggregated implied fair value of all of our reporting units.
     If we were to determine that the fair value of a reporting unit was less than its carrying value, including goodwill, based upon the annual test or the existence of one or more of the above indicators of impairment, we would measure impairment based on a comparison of the implied fair value of reporting unit goodwill with the carrying amount of goodwill. The implied fair value of goodwill is determined by allocating the fair value of a reporting unit to its assets (recognized and unrecognized) and liabilities in a manner similar to a purchase price allocation. The residual fair value after this allocation is the implied fair value of the goodwill of the reporting unit. To the extent the carrying amount of reporting unit goodwill is greater than the implied fair value of reporting unit goodwill, we would record an impairment charge for the difference. Judgment is required in determining our reporting units and assessing fair value of the reporting units.
     The impairment analysis of goodwill is based upon estimates and assumptions relating to our future revenue, cash flows, operating expenses, costs of capital and capital purchases. These estimates and assumptions are complex and subject to a significant degree of judgment with respect to certain factors including, but not limited to, the cash flows of our long-term operating plans, market and interest rate risk, and risk-commensurate discount rates and cost of capital.
     Stock-Based Compensation. Stock-based compensation cost is estimated at the grant date based on the award’s fair-value as calculated by the Black-Scholes option-pricing model and is recognized as expense over the requisite service period, which is the vesting period. The Black-Scholes model requires various assumptions including volatility in our common stock price and expected option life. If any of the assumptions used in the Black-Scholes model change significantly, stock-based compensation expense may differ materially in the future from the amounts recorded in our consolidated statement of operations. We are required to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. We use historical data to estimate pre-vesting option forfeitures and record stock-based compensation expense only for those awards that are expected to vest.
     Noncontrolling Interests. We record noncontrolling interest expense (benefit) which reflects the portion of the earnings (losses) of majority-owned entities which are applicable to the noncontrolling interest partners in the consolidated statement of operations. Redeemable noncontrolling interests that are redeemable at either fair value or are based on a formula that is intended to approximate fair value follow our historical disclosure only policy for the redemption feature. Redeemable noncontrolling interests that are redeemable at either a fixed price or are based on a formula that is not akin to fair value are reflected as an adjustment to income

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attributable to common shareholders based on the difference between accretion as calculated using the terms of the redemption feature and the accretion entry for a hypothetical fair value redemption feature with the remaining amount of accretion to redemption value recorded directly to equity. Noncontrolling interest expense (benefit) is included within the consolidated statements of operations and comprehensive income (loss). We applied this accounting policy to the noncontrolling interest in Rhapsody that was held by MTVN for periods beginning when Rhapsody was formed in August 2007 through the quarter ended March 31, 2010. Due to the completion of the restructuring of Rhapsody on March 31, 2010 which resulted in us holding approximately 47.5% of the outstanding shares of capital stock of Rhapsody, this accounting policy will no longer apply with respect to our investment in Rhapsody in future periods.
     Accounting for Gains on Sale of Subsidiary Stock. Effective January 1, 2009, we adopted Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment to ARB No. 51 (SFAS 160) which was primarily codified into FASB ASC 810 — Consolidation (ASC 810). Current guidance requires the difference between the carrying amount of the parent’s investment in a subsidiary and the underlying net book value of the subsidiary after the issuance of stock by the subsidiary to be recorded as equity transactions. We elected to recognize any such gain in our consolidated statement of operations prior to January 1, 2009 as was allowable under generally accepted accounting principles in place at that time if certain recognition criteria were met.
     Accounting for Income Taxes. We compute income taxes using the asset and liability method, under which deferred income taxes are provided for temporary differences between financial reporting basis and tax basis of our assets and liabilities and operating loss and tax credit carryforwards. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized. Deferred tax assets and liabilities and operating loss and tax credit carryforwards are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences and operating loss and tax credit carryforwards are expected to be recovered or settled.
Results of Operations
Revenue by Segment
     Revenue by segment is as follows (dollars in thousands):
                                         
    Quarter Ended     % Total     Quarter Ended     % Total        
    March, 31,     Net     March, 31,     Net        
    2010     Revenue     2009     Revenue     Change  
TPS
                                       
License
  $ 5,571             $ 4,522               23 %
Service
    36,321               39,057               (7 )
 
                                 
Total net revenue
  $ 41,892       33 %   $ 43,579       31 %     (4 )%
 
                                 
MSS
                                       
License
  $ 2,147             $ 2,052               5 %
Service
                                       
Subscriptions
    9,312               11,113               (16 )
Advertising and other
    9,280               7,153               30  
 
                                 
Total service revenue
    18,592               18,266               2  
 
                                 
Total net revenue
  $ 20,739       16 %   $ 20,318       15 %     2 %
 
                                 
Games
                                       
License
  $ 12,540             $ 14,011               (10 )%
Service
                                       
Subscriptions
    12,006               12,126               (1 )
Advertising and other
    5,690               6,686               (15 )
 
                                 
Total service revenue
    17,696               18,812               (6 )
 
                                 
Total net revenue
  $ 30,236       23 %   $ 32,823       23 %     (8 )%
 
                                 
Music
                                       
License
  $ 3,914             $ 5,594               (30 )%
Service
                                       
Subscriptions
    28,483               35,716               (20 )
Advertising and other
    3,336               2,743               22  
 
                                 
Total service revenue
    31,819               38,459               (17 )
 
                                 
Total net revenue
  $ 35,733       28 %   $ 44,053       31 %     (19 )%
 
                                 
Total net revenue
                                       
License
  $ 24,172             $ 26,179               (8 )%
Service
    104,428               114,594               (9 )
 
                                 
Total net revenue
  $ 128,600       100 %   $ 140,773       100 %     (9 )%
 
                                 

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     Technology Products and Solutions. TPS license revenue is derived from the sales of Helix system software and related authoring and publishing tools, OEM licenses installed on mobile platforms, and messaging gateways. TPS service revenue is derived from the sale of support and maintenance services related to our Helix license sales, sale of products and SaaS offerings that enable communications businesses to distribute digital media content to PCs, mobile phones, and other non-PC devices. SaaS revenue comprises revenue from sales of ringback tones (RBT), music on demand (MOD), video on demand (VOD), and inter-carrier messaging services, primarily sold to wireless carriers.
     Total TPS revenue declined $1.7 million, or 4%, in the quarter ended March 31, 2010, compared with the year-earlier period. This decline was primarily due to a one-time benefit recorded in the first quarter of 2009 from resolution of a dispute with a customer of approximately $2.9 million. Also contributing to the decline was a reduction in sales of our Helix-system services of approximately $0.9 million. These declines were partially offset by an increase in service revenue from our SaaS offerings of approximately $2.2 million. No other single factor contributed materially to the change in total TPS revenue during 2010.
     Media Software and Services. MSS license revenue primarily includes revenue from sales of RealPlayer Plus and related products. MSS service revenue primarily includes revenue from sales of our SuperPass premium subscription service, distribution of third-party software products, and all advertising other than that related directly to our Music and Games businesses.
     Overall, MSS revenue was materially unchanged during the quarter ended March 31, 2010, compared with the year-earlier period. Advertising and other revenue generated from the distribution of third-party products increased by approximately $2.2 million during the quarter ended March 31, 2010. This increase was partially offset by a decrease in revenue from our SuperPass subscription service of approximately $1.8 million due primarily to a decline of subscribers and related revenue from the service. No other single factor contributed materially to the change during the period.
     Games. Games license revenue primarily includes revenue from the sale of individual games on our websites GameHouse.com and Zylom.com; the sale of games through syndication on partner sites; and sales of games through wireless carriers. Games service revenue primarily includes revenue from the sales of games subscription services and advertising through our games websites.
     Total Games revenue decreased $2.6 million, or 8%, during the quarter ended March 31, 2010, compared with the year-earlier period. Total games sold during the period increased by approximately 5%, however prices for games declined largely due to competitive pressures and as a result, total license revenue from the sale of games declined $1.5 million, or 11%, compared with the year-earlier period. Games revenue from advertising decreased $1.0 million, or 15%, due primarily to a decline in demand for online advertising. No other single factor contributed materially to the change in total Games revenue during the period.
     Music. Music license revenue primarily includes revenue from sales of digital music content through Rhapsody’s MP3 music store. Music service revenue primarily includes revenue from the Rhapsody and RadioPass subscription services, and advertising from Rhapsody’s music websites.
     During the quarter ended March 31, 2010, total Music revenue decreased $8.3 million, or 19%, compared with the year-earlier period. Revenue from our subscription music services declined $7.2 million, or 20%, in the quarter ended March 31, 2010, compared with the year-earlier period. This decline in subscription revenue was primarily driven by a decrease in average number of subscribers during the quarter. A decrease in the number of digital music tracks sold during the quarter ended March 31, 2010, also contributed approximately $1.7 million to the decrease in revenue. The decrease in the number of tracks sold was due primarily to a decline in the average number of subscribers to our music service. No other single factor contributed materially to the change in total Music revenue during the period.

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Geographic Revenue
     Revenue by geographic region is as follows (dollars in thousands):
                         
    Quarters Ended  
    March 31,  
    2010     Change     2009  
United States
  $ 84,550       (13 )%   $ 96,666  
Europe
    22,482       (1 )     22,665  
Rest of the world
    21,568       1       21,442  
 
                   
Total net revenue
  $ 128,600       (9 )%   $ 140,773  
 
                   
     Revenue in the U.S. declined $12.1 million, or 13%, for the quarter ended March 31, 2010, compared with the year-earlier period. This decrease was due primarily to a reduction in revenue generated from our music subscription services, sales of music tracks and our SuperPass subscription service of approximately $6.3 million, $2.1 million and $1.7 million, respectively. See the sections “Revenue by Segment — Media Software and Services,” and “Revenue by Segment — Music” above for further discussion of these changes.
     Overall, revenue in Europe and in the rest of the world was materially unchanged during the quarter ended March 31, 2010, compared with the year-earlier period.
Cost of Revenue by Segment
     Cost of revenue by segment is as follows (dollars in thousands):
                                         
    Quarter             Quarter              
    Ended     % of     Ended     % of        
    March 31,     Segment     March 31,     Segment        
    2010     Revenue     2009     Revenue     Change  
TPS
                                       
License
  $ 10             $ 105               (90 )%
Service
    16,643               16,345               2  
 
                                 
Total cost of revenue
  $ 16,653       40 %   $ 16,450       38 %     1 %
 
                                 
MSS
                                       
License
  $ 707             $ 737               (4 )%
Service
    2,057               2,970               (31 )
 
                                 
Total cost of revenue
  $ 2,764       13 %   $ 3,707       18 %     (25 )%
 
                                 
Games
                                       
License
  $ 4,147             $ 4,464               (7 )%
Service
    3,665               4,100               (11 )
 
                                 
Total cost of revenue
  $ 7,812       26 %   $ 8,564       26 %     (9 )%
 
                                 
Music
                                       
License
  $ 2,685             $ 3,940               (32 )%
Service
    19,245               23,360               (18 )
 
                                 
Total cost of revenue
  $ 21,930       61 %   $ 27,300       62 %     (20 )%
 
                                 
Total cost of revenue
                                       
License
  $ 7,549             $ 9,246               (18 )%
Service
    41,610               46,775               (11 )
 
                                 
Total cost of revenue
  $ 49,159       38 %   $ 56,021       40 %     (12 )%
 
                                 
     Cost of Technology Products and Solutions. Cost of TPS license revenue includes amounts paid for licensed technology and costs of product media. Cost of TPS service revenue includes fees paid to mobile service carriers and third-party vendors for order fulfillment, cost of personnel providing support and consulting services, and expenses incurred in providing our SaaS hosting services.
     Overall, cost of TPS revenue was materially unchanged during the quarter ended March 31, 2010, compared with the year-earlier period. Cost of TPS revenue as a percentage of TPS revenue for the quarter ended March 31, 2010, increased primarily as a result of a higher revenue base in 2009 due to the impact of a one-time increase of $2.9 million resulting from the resolution of a customer dispute.
     Cost of Media Software and Services Revenue. Cost of MSS license revenue consists primarily of amounts paid for licensed technology and fees paid to third-party vendors. Cost of MSS service revenue consists primarily of cost of royalties and delivery of content included in our SuperPass subscription service offerings, and fees paid to third-party vendors for support services.
     Cost of MSS revenue declined $0.9 million, or 25%, for the quarter ended March 31, 2010, compared with the year-earlier period. Content costs for our SuperPass subscription service product declined primarily as a result of a reduction of content partners, which

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accounted for materially all of the decline in cost of MSS revenue. Cost of MSS revenue as a percentage of MSS revenue for the quarter ended March 31, 2010, decreased primarily as a result of increased revenue recognized related to our higher margin offerings such as the distribution of third-party products.
     Cost of Games Revenue. Cost of Games license revenue consists primarily of royalties paid on sales of games. Cost of Games service revenue consists primarily of costs incurred to provide our subscription service offerings and fees paid to third-party vendors for support services.
     Cost of Games revenue decreased $0.8 million, or 9%, during the quarter ended March 31, 2010, compared with the year-earlier period. A reduction in royalty costs in proportion to license revenue accounted for substantially all of the decline in cost of Games revenue during the period.
     Cost of Music Revenue. Cost of Music license revenue consists primarily of cost of royalties paid on sales of music tracks and hardware devices and accessories. Cost of Music service revenue consists primarily of cost of content and delivery of the content included in our music subscription service offerings and fees paid to third-party vendors for support services.
     Cost of Music revenue decreased $5.4 million, or 20%, during the quarter ended March 31, 2010 compared with the year-earlier period. The decrease was primarily due to the lower average number of subscribers to our Rhapsody music services during 2010, compared with the year-earlier period, resulting in decreased service content costs of approximately $3.1 million. A reduction in royalty costs in proportion to track sales accounted for approximately $1.3 million of the decline during the quarter ended March 31, 2010. No other single factor contributed materially to the change during the period.
Operating Expenses
Research and Development
     Research and development expenses consist primarily of salaries and related personnel costs, expense associated with stock-based compensation, and consulting fees associated with product development. To date, all research and development costs have been expensed as incurred because technological feasibility for software products is generally not established until substantially all development is complete. Research and developments costs and changes are as follows (dollars in thousands):
                         
    Quarters Ended
    March 31,
    2010   Change   2009
Research and development
  $ 34,675       21 %   $ 28,559  
As a percentage of total net revenue
    27 %             20 %
     Research and development expenses, including non-cash stock-based compensation, increased $6.1 million, or 21%, in the quarter ended March 31, 2010 compared with the year-earlier period. This increase was primarily due to an increase in research and development personnel and related costs of approximately $3.0 million as a result of an increase in average headcount working on new initiatives as well as an additional $1.4 million for the acceleration of depreciation expense due to an anticipated replacement of our Games information technology platform later in 2010. No other single factor contributed materially to these changes during the period. The increase in research and development expenses as a percentage of total net revenue from 20% in 2009 to 27% in 2010 is due primarily to our decision to continue to invest in the development of our products despite a decline in total net revenue.
Sales and Marketing
     Sales and marketing expenses consist primarily of salaries and related personnel costs, sales commissions, amortization of certain intangible assets capitalized in our acquisitions, credit card fees, subscriber acquisition costs, consulting fees, trade show expenses, advertising costs and costs of marketing collateral. Sales and marketing costs and changes are as follows (dollars in thousands):
                         
    Quarters Ended
    March 31,
    2010   Change   2009
Sales and marketing
  $ 37,827       (13 )%   $ 43,685  
As a percentage of total net revenue
    29 %             31 %

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     Sales and marketing expenses, including non-cash stock-based compensation, decreased $5.9 million, or 13%, in the quarter ended March 31, 2010 compared with the year-earlier period. The decrease was primarily due to cost reduction efforts including a decrease in sales and marketing headcount and marketing services expenses. The reduction in personnel and related costs resulted in a decline of approximately $1.7 million in sales and marketing expenses, and the decrease in marketing and other professional services expenses reduced costs by an additional $2.2 million during the quarter ended March 31, 2010 compared with the year-earlier period. The decrease in sales and marketing expenses as a percentage of total net revenue from 31% in 2009 to 29% in 2010 is due to a higher reduction in expenses relative to the decline in revenue. No other single factor contributed materially to these changes during the period.
Advertising with Related Party
     On August 20, 2007, RealNetworks and MTVN formed the Rhapsody joint venture. Under the original joint venture agreement, as amended, Rhapsody was obligated to purchase $213.8 million in advertising and related integrated marketing on MTVN cable channels over the term of the agreement. During the quarters ended March 31, 2010, and 2009, Rhapsody spent $1.1 million and $7.4 million in advertising with MTVN, respectively. On March 31, 2010, the restructuring transactions involving Rhapsody were completed. As part of the restructuring, MTVN contributed a $33 million advertising commitment and MTVN’s previous advertising obligation was cancelled.
General and Administrative
     General and administrative expenses consist primarily of salaries and related personnel costs, fees for professional and temporary services and contractor costs, stock-based compensation, and other general corporate costs. General and administrative costs and changes are as follows (dollars in thousands):
                         
    Quarters Ended
    March 31,
    2010   Change   2009
General and administrative
  $ 14,921       (35 )%   $ 22,831  
As a percentage of total net revenue
    12 %             16 %
     General and administrative expenses, including non-cash stock-based compensation, decreased $7.9 million, or 35%, in the quarter ended March 31, 2010 compared with the year-earlier period. The decrease was due primarily to a reduction in legal and other professional services expenses of approximately $5.0 million in the quarter ended March 31, 2010, compared with the year-earlier period. A majority of the decrease in legal and professional fees was a result of concluding the VeriSign arbitration and RealDVD lawsuits in 2009. A reduction in personnel and related costs of approximately $1.0 million also contributed to the overall decrease in general and administrative expenses during the period. No other single factor contributed materially to the increases during the periods. The decrease in general and administrative expenses as a percentage of total net revenue from 16% in 2009 to 12% in 2010 is due primarily to reduced legal expenses in 2010 as described above.
Restructuring and Other Charges
     Restructuring and other charges consist of costs associated with the realignment and reorganization of our operations and primarily include separation costs for employees, including severance, and other benefit costs as well as the impairment of certain long-lived assets. During the quarter ended March 31, 2010, we recorded $5.6 million in restructuring charges as part of our strategy to simplify and restructure our business. During the quarter ended March 31, 2009, we recorded approximately $0.8 million in restructuring charges.
Other Income (Expenses), Net
     Other income, net consists primarily of: interest income on our cash, cash equivalents, and short-term investments, which are net of interest expense from amortization of offering costs related to our convertible debt and equity in net loss of investments. Other income, net and quarter-over-quarter changes are as follows (dollars in thousands):
                         
    Quarters Ended  
    March 31,  
    2010     Change     2009  
Interest income, net
  $ 380       (68 )%   $ 1,183  
Equity in net loss of investments
          (100 )     (655 )
Gain on sale of equity investments, net
          (100 )     137  
Gain on deconsolidation of Rhapsody
    10,929       n/a        
Other income, net
    99       (88 )     855  
 
                   
Other income, net
  $ 11,408       651 %   $ 1,520  
 
                   

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     Other income (expense), net increased during the quarter ended March 31, 2010, due primarily to the gain recognized on the deconsolidation of Rhapsody. See “Note 4 — Rhapsody Joint Venture” to the Condensed Consolidated Financial Statements included within Part I, Item 1 of this report.
Income Taxes
     During the quarters ended March 31, 2010 and 2009, we recognized income tax benefit of $3.6 million and income tax expense $1.5 million, respectively, related to U.S. and foreign income taxes. The decrease in income tax expense and the change in income tax expense as a percentage of pre-tax income during the quarter ended March 31, 2010, was largely the result of the restructuring of Rhapsody and partial release of valuation allowance on international net operating losses.
     As of March 31, 2010, there have been no material changes to our uncertain tax positions disclosures as provided in Note 15 to our audited financial statements included in our 2009 Annual Report on Form 10-K. We filed formal and informal refund claims with the Internal Revenue Service (“IRS”) in 2009 for the years 2001-2007, primarily related to Extraterritorial Income Exclusion and previously acquired net operating losses. In April 2010, we agreed to significant adjustments proposed by the IRS related to the formal and informal refund claims. Therefore, we believe it is reasonably possible that the total unrecognized tax benefits will be significantly reduced within the next twelve months. However, we do not believe that an estimate of the range of the reduction can be made at present.
     We file numerous consolidated and separate income tax returns in the United States federal, as well as state, local, and foreign jurisdictions. With few exceptions, we are no longer subject to United States federal, state, local, or foreign income tax examinations for years before 1993. We are currently under United States federal audit for the consolidated group RealNetworks, Inc. and Subsidiaries for the years ended December 31, 2005, 2006 and 2007. RealNetworks, Inc. and /or subsidiaries are also under audit by the various states and foreign jurisdictions for certain tax years subsequent to 1993.
New Accounting Pronouncements
     See “Note 2 – Recent Accounting Pronouncements” to Condensed Consolidated Financial Statements included in Part I, Item 1 of this report for information regarding new accounting pronouncements.
Liquidity and Capital Resources
     The following summarizes working capital, cash, cash equivalents, short-term investments, and restricted cash (in thousands):
                 
    March 31,   December 31,
    2010   2009
Working capital
  $ 266,464     $ 278,198  
Cash, cash equivalents, and short-term investments
    335,216       384,900  
Restricted cash
    13,700       13,700  
     Cash, cash equivalents, and short-term investments decreased from December 31, 2009, primarily due to the $18.0 million in cash paid to Rhapsody, the $20.7 million in cash used to pay Rhapsody-related payables, and the payment of the settlement obligation and related legal expenses of $5.5 million relating to the RealDVD litigation that was accrued in the quarter ended December 31, 2009.
     The following summarizes cash flows (in thousands):
                 
    Quarter Ended
    March 31,
    2010   2009
Cash used in operating activities
  $ (32,456 )   $ 3,961  
Cash used in investing activities
    (41,564 )     (35,103 )
Cash provided by financing activities
    1,583       12,688  

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     Cash used in operating activities consisted of net loss adjusted for certain non-cash items including depreciation, amortization, stock-based compensation, deferred income taxes, gain on the deconsolidation of the Rhapsody joint venture, and the effect of changes in certain operating assets and liabilities, net of acquisitions and disposals.
     Cash used in operating activities in the quarter ended March 31, 2010, was $32.5 million and consisted of net income of $0.3 million, adjustments for cash provided by non-cash items of $3.4 million and cash used in activities related to changes in certain operating assets and liabilities, net of acquisitions and disposals, of $36.1 million. Adjustments for cash used in non-cash items primarily consisted of $10.9 million of gain related to the deconsolidation of the Rhapsody joint venture, partially offset by $7.3 million of depreciation and amortization expense and $3.9 million of stock-based compensation and $4.5 million for amounts accrued relating to our restructuring expenses incurred during the quarter.
     Changes in certain operating assets and liabilities, net of acquisitions, in the quarter ended March 31, 2010 primarily consisted of uses of cash from the decrease in accrued and other liabilities of $36.1 million. These decreases were related to reductions in accrued royalties and other fulfillment costs as well as a reduction in amounts payable to MTVN for related party advertising incurred during the quarter ended March 31, 2010 as compared to the quarter ended December 31, 2009. Also contributing to the decline was the payment of the legal settlement and related legal expenses attributable to the RealDVD litigation of $5.5 million that was accrued for in the quarter ended December 31, 2009.
     Cash provided by operating activities in the quarter ended March 31, 2009 was $4.0 million and consisted of a net loss of $18.6 million, adjustments for cash provided by non-cash items of $10.3 million and cash provided by activities related to changes in certain operating assets and liabilities, net of acquisitions, of $13.3 million. Adjustments for cash provided by non-cash items primarily consisted of $7.8 million of depreciation and amortization expense and $5.2 million of stock-based compensation, partially offset by $3.0 million for payments made related to our restructuring and other impairments, which were accrued for in the fourth quarter of 2008.
     Cash provided by changes in certain operating assets and liabilities, net of acquisitions, in the quarter ended March 31, 2009 primarily consisted of a decrease in accounts receivable of $7.1 million related to the timing of customer collections and an increase in accounts payable of $13.0 million related to the timing of payments made to certain third party content providers, partially offset by a decrease in accrued and other liabilities of $6.9 million related to a reduction in amounts payable to MTVN for related party advertising incurred during the quarter ended March 31, 2009 as compared to the quarter ended December 31, 2008.
     In the quarter ended March 31, 2010, investing activities used cash primarily for payments made in connection with the restructuring of Rhapsody of $18.0 million as well as purchases of equipment, software, and leasehold improvements of $4.7 million. These uses of cash were partially offset by the repayment of temporary funding upon the deconsolidation of Rhapsody of approximately $5.9 million. Purchases, net of sales and maturities, of short-term investments used cash of $24.7 million during 2010. In the quarter ended March 31, 2009, investing activities used cash primarily for purchases of equipment, software, and leasehold improvements of $3.0 million and acquisition costs of $3.2 million arising from the final payment of accrued anniversary and performance payments relating to the acquisition of Zylom. Purchases, net of sales and maturities of short-term investments used cash of $27.0 million during 2009.
     Financing activities provided cash from the proceeds of sales of interests in our Rhapsody joint venture of $1.2 million in 2010 and $12.7 million in 2009.
     We currently have no planned significant capital expenditures for 2010 other than those in the ordinary course of business. In the future, we may seek to raise additional funds through public or private equity financing, or through other sources such as credit facilities. The sale of additional equity securities could result in dilution to our shareholders. In addition, in the future, we may enter into cash or stock acquisition transactions or other strategic transactions that could reduce cash available to fund our operations or result in dilution to shareholders.
     The downturn in the economy could result in negative impacts to our liquidity arising from lower interest income in future periods due to the continued decline in interest rates, an increased risk that we may not be able to access cash balances held in U.S. or foreign financial institutions or that investments in debt securities issued by financial institutions may be rendered worthless due to the nationalization or failure of such financial institutions, and an increased inability to sell the securities and the institutional money market funds we hold as short-term investments. These risks and the potential impact of these risks on our financial condition and results of operations are discussed further below in “Risk Factors — Risks Related to Our Business in General.” If any of these risks are realized, we may experience a material adverse impact on our financial condition and results of operations in future periods.

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     Our contractual obligations include office leases and contractual payments due to content and other service providers. We believe that our current cash, cash equivalents, and short-term investments will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next 12 months.
     We do not hold derivative financial instruments or equity securities in our short-term investment portfolio. Our cash equivalents and short-term investments consist of high quality securities, as specified in our investment policy guidelines. The policy limits the amount of credit exposure to any one non-U.S. Government or non-U.S. Agency issue or issuer to a maximum of 5% of the total portfolio. These securities are subject to interest rate risk and will decrease in value if interest rates increase. Because we have historically had the ability to hold our fixed income investments until maturity, we do not expect our operating results or cash flows to be significantly affected by a sudden change in market interest rates in our securities portfolio.
     We conduct our operations primarily in five functional currencies: the U.S. dollar, the Korean won, the Japanese yen, the British pound and the Euro. Historically, neither fluctuations in foreign exchange rates nor changes in foreign economic conditions have had a significant impact on our financial condition or results of operations. We currently do not hedge the majority of our foreign currency exposures and are therefore subject to the risk of exchange rate fluctuations. We invoice our international customers primarily in U.S. dollars, except in Korea, Japan, Germany, France, the United Kingdom and Australia, where we invoice our customers primarily in won, yen, euros, pounds, and Australian dollars, respectively. We are exposed to foreign exchange rate fluctuations as the financial results of foreign subsidiaries are translated into U.S. dollars in consolidation. Our exposure to foreign exchange rate fluctuations also arises from intercompany payables and receivables to and from our foreign subsidiaries.
Off-Balance Sheet Arrangements
     Our only significant off-balance sheet arrangements relate to operating lease obligations for office facility leases and other contractual obligations related primarily to minimum contractual payments due to content and other service providers.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
     The following discussion about our market risk involves forward-looking statements. All statements that do not relate to matters of historical fact should be considered forward-looking statements. Actual results could differ materially from those projected in any forward-looking statements.
     Interest Rate Risk. Our exposure to interest rate risk from changes in market interest rates relates primarily to our short-term investment portfolio. We do not hold derivative financial instruments or equity investments in our short-term investment portfolio. Our short-term investments consist of high quality debt securities as specified in our investment policy. Investments in both fixed and floating rate instruments carry a degree of interest rate risk. The fair value of fixed rate securities may be adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Additionally, a declining rate environment creates reinvestment risk because as securities mature the proceeds are reinvested at a lower rate, generating less interest income. Due in part to these factors, our future interest income may be adversely impacted due to changes in interest rates. In addition, we may incur losses in principal if we are forced to sell securities that have declined in market value due to changes in interest rates. Because we have historically had the ability to hold our short-term investments until maturity and the substantial majority of our short-term investments mature within one year of purchase, we would not expect our operating results or cash flows to be significantly impacted by a sudden change in market interest rates. There have been no material changes in our investment methodology regarding our cash equivalents and short-term investments during the quarter ended March 31, 2010. Based on our cash, cash equivalents, short-term investments, and restricted cash equivalents at March 31, 2010, a hypothetical 10% increase/decrease in interest rates would increase/decrease our annual interest income and cash flows by approximately $0.1 million.
     Investment Risk. As of March 31, 2010, we had investments in voting capital stock of both publicly traded and privately-held technology companies for business and strategic purposes. Our investments in publicly traded companies are accounted for as available-for-sale, carried at current market value and are classified as long-term as they are strategic in nature. We periodically evaluate whether any declines in fair value of our investments are other-than-temporary based on a review of qualitative and quantitative factors. For investments with publicly quoted market prices, these factors include the time period and extent by which its accounting basis exceeds its quoted market price. We consider additional factors to determine whether declines in fair value are other-than-temporary, such as the investee’s financial condition, results of operations, and operating trends. The evaluation also considers publicly available information regarding the investee companies. For investments in private companies with no quoted market price, we consider similar qualitative and quantitative factors as well as the implied value from any recent rounds of financing completed by the investee. Based upon an evaluation of the facts and circumstances during the quarters ended March 31, 2010 and 2009, we determined that no additional other-than-temporary decline in fair value had occurred and therefore no impairment charges were recorded.

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     Foreign Currency Risk. We conduct business internationally in several currencies. As such, we are exposed to adverse movements in foreign currency exchange rates.
     Our exposure to foreign exchange rate fluctuations arise in part from: (1) translation of the financial results of foreign subsidiaries into U.S. dollars in consolidation; (2) the remeasurement of non-functional currency assets, liabilities and intercompany balances into U.S. dollars for financial reporting purposes; and (3) non-U.S. dollar denominated sales to foreign customers. A portion of these risks is managed through the use of financial derivatives, but fluctuations could impact our results of operations and financial position.
     Generally, our practice is to manage foreign currency risk for the majority of material short-term intercompany balances through the use of foreign currency swaps. These contracts require us to exchange currencies at rates agreed upon at the contract’s inception. Because the impact of movements in currency exchange rates on forward contracts offsets the related impact on the short-term intercompany balances, these financial instruments help alleviate the risk that might otherwise result from certain changes in currency exchange rates. We do not designate our foreign exchange forward contracts related to short-term intercompany accounts as hedges and, accordingly, we adjust these instruments to fair value through results of operations. However, we may periodically hedge a portion of our foreign exchange exposures associated with material firmly committed transactions, long-term investments, highly predictable anticipated exposures and net investments in foreign subsidiaries. Some of our unhedged exposures are reconciled through our statement of operations on a mark-to-market basis each quarter, so to the extent we continue to experience adverse economic conditions, we may record losses related to such unhedged exposures in future periods that may have a material adverse effect on our financial condition and results of operations.
     Our foreign currency risk management program reduces, but does not entirely eliminate, the impact of currency exchange rate movements.
     Foreign currency transaction gains and losses were not material for the quarters ended March 31, 2010 and 2009.
Item 4. Controls and Procedures
     (a) Evaluation of Disclosure Controls and Procedures. Based on an evaluation as of the end of the period covered by this report, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act (1) is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and (2) is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
     (b) Changes in Internal Controls. There have not been any changes in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended March 31, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
     See “Note 13 — Commitment and Contingencies” to Condensed Consolidated Financial Statements included in Part I, Item 1 of this report for information regarding legal proceedings.
Item 1A. Risk Factors
     You should carefully consider the risks described below together with all of the other information included in this quarterly report on Form 10-Q. The risks and uncertainties described below are not the only ones facing our company. If any of the following risks actually occurs, our business, financial condition or operating results could be harmed. In such case, the trading price of our common stock could decline, and investors in our common stock could lose all or part of their investment.
Risks Related to Our Technology Products and Solutions Business
Contracts with our carrier customers subject us to significant risks that could negatively impact our revenue or otherwise harm our operating results.

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     We derive a material portion of our revenue from our SaaS offerings we provide to carriers. Many of our SaaS contracts with carriers provide for revenue sharing arrangements, but we have little control over the pricing decisions of our carrier customers. Furthermore, most of these contracts do not provide for guaranteed minimum payments or usage levels. Because most of our carrier customer contracts are nonexclusive, it is possible that our wireless carriers could purchase similar services from third parties and cease to use our services in the future. As a result, our revenue derived under these agreements could be substantially reduced depending on the pricing and usage decisions of our carrier customers.
     In addition, none of our SaaS contracts with carriers obligates our carrier customers to market or distribute any of our SaaS offerings. Despite the lack of marketing commitments, revenue related to our SaaS offerings is, to a large extent, dependent upon the marketing and promotion activities of our carrier customers. In addition, many of our carrier contracts are short term and allow for early termination by the carrier with or without cause. These contracts are therefore subject to renegotiation of pricing or other key terms that could be adverse to our interests and leave us vulnerable to non-renewal by the carriers. The loss of carrier customers, a reduction in marketing or promotion of our SaaS offerings, or the termination, non-renewal or renegotiation of contract terms that are less favorable to us would likely result in the loss of future revenues from our SaaS offerings.
     Finally, certain of our carrier contracts obligate us to indemnify the carrier customer for certain liabilities and losses incurred by them, including liabilities resulting from third party claims for damages that arise out of the use of our technology. These indemnification terms provide us with certain procedural safeguards, including the right to control the defense of the indemnified party. We have accepted tenders of indemnification from two of our carrier customers related to one pending patent infringement proceeding, and we are vigorously defending them. This pending proceeding or future claims against which we may be obligated to defend our carrier customers could result in paying amounts pursuant to these obligations that could materially harm our operating results.
The mobile entertainment market is highly competitive.
     The market for mobile entertainment services, including RBT, MOD and VOD solutions, is highly competitive. Current and potential future competitors include major media companies, Internet portal companies, content aggregators, wireless software providers and other pure-play wireless entertainment publishers. In connection with MOD in particular, we may in the future compete with current providers of MOD services for online or other non-mobile platforms, some of which have greater financial resources than we do. In addition, the major music labels may demand more aggressive revenue sharing arrangements or impose an alternative business model less favorable to us. Furthermore, while most of our carrier customers do not offer internally developed services that compete with ours, if our carrier customers begin developing these services internally, we could be forced to lower our prices or increase the amount of service we provide in order to maintain our business with those carrier customers. Increased competition has in the past resulted in pricing pressure, forcing us to lower the selling price of our services.
A majority of the revenue that we generate in our Technology Products and Solutions business is dependent upon our relationship with a few customers, including SK Telecom and Verizon; any deterioration of these relationships could materially harm our business.
     We generate a significant portion of our revenue from sales of our mobile entertainment services to a few of our mobile carrier customers, including SK Telecom, a leading wireless carrier in South Korea. In the near term, we expect that we will continue to generate a significant portion of our total revenue from these customers, particularly SK Telecom and Verizon. If these customers fail to market or distribute our services or terminate their business contracts with us, or if our relationships with these customers deteriorate in any significant way, we may be unable to replace the affected business arrangements with acceptable alternatives. Furthermore, our relationship with SK Telecom may be affected by the general state of the economy of South Korea. Failure to maintain our relationships with these customers could have a material negative impact on our revenue and operating results.
Risks Related to Our Media Software and Services and Games Businesses
Our Media Software and Services and Games businesses face substantial competitive and other challenges that may prevent us from being successful in, and negatively impact future growth in, those businesses.
     Many of our current and potential competitors in our Media Software and Services and Games businesses have longer operating histories, greater name recognition, more employees and significantly greater resources than we do. Our competitors across the breadth of our product lines in these businesses include a number of large and powerful companies, such as Apple, Amazon.com and Microsoft. To effectively compete in the markets for our Media Software and Services and Games businesses, we may experience the following consequences, any of which would adversely affect our operating results and the trading price of our stock:

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    reduced prices or margins,
 
    loss of current and potential customers, or partners and potential partners who provide content we distribute to our customers,
 
    changes to our products, services, technologies, licenses or business practices or strategies,
 
    lengthened sales cycles,
 
    industry-wide changes in content distributions to customers,
 
    pressure to prematurely release products or product enhancements, or
 
    degradation in our stature and reputation in the market.
     In addition, we face the following competitive risks relating to our Media Software and Services and Games businesses:
     Media Software and Services. Our media software and services (primarily our SuperPass subscription service) face competition from existing competitive alternatives and other emerging services and technologies, such as user generated content services like Google’s YouTube service and alternative streaming media playback technologies including Microsoft Windows Media Player and Adobe Flash. Content owners are increasingly marketing their content on their own websites rather than licensing to other distributors such as us. We face competition in these markets from traditional media outlets such as television, radio, CDs, DVDs and others. We also face competition from emerging Internet media sources and established companies entering into the Internet media content market, including AOL, NBC Universal, Microsoft, Apple, Adobe, Yahoo! and broadband Internet service providers. We expect this competition to continue to be intense as the market and business models for Internet video content mature and more competitors enter these new markets. Competing services may be able to obtain better or more favorable access to compelling video content than us, may develop better offerings than us and may be able to leverage other assets or technologies to promote or distribute their offerings successfully. If we are unable to compete successfully, the future growth of our MSS business will be negatively impacted. In addition, our overall ability to sell subscription services depends in part on the use of RealNetworks’ formats on the Internet, and declines in the use of our formats may negatively affect our subscription revenue and increase costs of obtaining new subscribers. Both Microsoft and Adobe are aggressively seeking to grow their format usage.
     Games. Our RealArcade, GameHouse, Zylom and Atrativa branded services compete with other online aggregators and distributors of online, downloadable and social casual PC games. Some of these competitors have high volume distribution channels and greater financial resources than we do. Our Games business also competes with many other smaller companies that may be able to adjust to market conditions faster than us. We also face an increasingly price competitive casual games market, and some of our competitors may be able to compete on price more effectively than us. We expect competition to intensify in this market from these and other competitors and no assurance can be made that we will be able to continue to grow our revenue. Our development studios compete primarily with other developers of online, downloadable, mobile and social casual PC games and must continue to develop popular and high-quality game titles and to execute on opportunities to expand the play of our games on a variety of non-PC platforms, including social networks, to maintain our competitive position and help maintain the growth of our Games business.
The success of our subscription services businesses depends upon our ability to increase subscription revenue and to license compelling content on commercially reasonable terms.
     Our operating results could be adversely impacted by the loss of subscription revenue. Internet subscription businesses are a relatively new media delivery model, and we cannot predict with accuracy our long-term ability to maintain or increase subscription revenue. Subscribers may cancel their subscriptions to our services for many reasons, including a perception that they do not use the services sufficiently or that the service does not provide enough value, a lack of attractive or exclusive content generally or as compared with competitive service offerings (including Internet piracy), or because customer service issues are not satisfactorily resolved. In addition, we must continue to obtain compelling digital media content for our video and games services in order to maintain and increase usage and overall customer satisfaction for these products..
We may not be successful in maintaining and growing our distribution of digital media products.

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     We cannot predict whether consumers will continue to download and use our digital media products consistent with past usage, especially in light of the fact that Microsoft bundles its competing Windows Media Player with its Windows operating system and the popularity of the Adobe Flash format. Our inability to maintain continued high volume distribution of our digital media products could hold back the growth and development of related revenue streams from these market segments, including the distribution of third-party products and sales of our subscription services, and therefore could harm our business and our prospects. In addition, our revenue from the distribution of third party products is currently significantly dependent on a single customer contract. If that contract is not renewed and cannot be replaced by another similar customer contract, our financial results would be harmed.
Risks Related to Our Business in General
Our operating results are difficult to predict and may fluctuate, which may contribute to volatility in our stock price.
     The trading price for our common stock has been volatile, ranging from $2.23 to $5.41 per share during the 52-week period ended March 31, 2010. As a result of the rapidly changing markets in which we compete, our operating results may fluctuate from period-to-period, which may continue to contribute to the volatility of our stock price. In past periods, our operating results have been affected by personnel reductions and related charges, charges relating to losses on excess office facilities, and impairment charges for certain of our equity investments, goodwill and other long-lived assets. Our operating results may be adversely affected by similar or other charges or events in future periods, including, but not limited to:
    impairments of long-lived assets,
 
    integrating and operating newly acquired businesses and assets,
 
    the seasonality of our business, which has experienced increased revenues in the fourth quarter of our fiscal year, and
 
    the general difficulty in forecasting our operating results and metrics, which could result in actual results that differ significantly from expected results.
     Certain of our expense decisions (for example, research and development and sales and marketing efforts) are based on predictions regarding business and the markets in which we compete. Fluctuations in our operating results, particularly when experienced beyond what we expected, could cause the trading price of our stock to continue to fluctuate.
Uncertainty and adverse conditions in the economy could have a material adverse impact on our business, financial condition and results of operations.
     The national and global economic downturn has resulted in a decline in overall consumer and corporate spending, declines in consumer and corporate access to credit, fluctuations in foreign exchange rates, declines in the value of assets and increased liquidity risks, all of which could materially impact our business, financial condition and results of operations. We provide digital entertainment services to consumers, and payment for our products and services may be considered discretionary on the part of many of our current and potential customers. As a result, consumers considering whether to purchase our products or services may be influenced by macroeconomic factors that affect consumer spending such as unemployment, continuing increases in fuel costs, conditions in the residential real estate and mortgage markets and access to credit. To the extent conditions in the economy remain uncertain or the economy continues to deteriorate, our business could be impacted as customers choose to leave our services, to reduce their service level or to stop purchasing our products. In addition, our efforts to attract new customers may be adversely affected. Declines in consumer spending may also negatively impact our business customers, including our mobile carrier customers, who may experience decreases in demand for the services we provide that are offered to their subscribers. We are also experiencing a decline in advertising revenue as businesses are reducing their sales and marketing spending in response to the contracting economy. A significant decrease in the demand for our products or services or declines in our advertising revenue could have a material adverse impact on our operating results and financial condition.
     Uncertainty and adverse economic conditions may also lead to a decreased ability to collect payment for our products and services due primarily to a decline in the ability of consumers to use or access credit, including through credit cards, which is how most of our customers pay for our products and services. We also expect to continue to experience volatility in foreign exchange rates, which could negatively impact the amount of revenue and net assets we record in future periods. The functional currency of our foreign subsidiaries is the local currency of the country in which each subsidiary operates. We translate our subsidiaries’ revenues into U.S. dollars in our financial statements, and continued volatility in foreign exchange rates, particularly if the U.S. dollar strengthens

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against the euro or the Korean won, may result in lower reported revenue. If economic conditions continue to deteriorate or remain uncertain for a sustained period of time, we may also record additional impairments to our assets in future periods. Economic conditions may also negatively impact our liquidity due to (1) declines in interest income, (2) an increased risk that we may not be able to access cash balances held in U.S. or foreign financial institutions or that our investments in debt securities issued by financial institutions may become worthless due to the nationalization or failure of such financial institutions, and (3) decreased ability to sell the securities and the institutional money market funds we hold as short-term investments. In addition, the decline in the trading price of shares of our common stock may make it difficult to use our common stock as purchase price consideration for future acquisitions and to raise funds through equity financings. If any of these risks are realized, we may experience a material adverse impact on our financial condition and results of operations.
New products and services may not achieve market acceptance or may be subject to legal challenge that could negatively affect our operating results.
     The process of developing new, and enhancing existing, products and services is complex, costly and uncertain. Our business depends on providing products and services that are attractive to subscribers and consumers, which, in part, is subject to unpredictable and volatile factors beyond our control, including end-user preferences and competing products and services. Any failure by us to timely respond to or accurately anticipate consumers’ changing needs and emerging technological trends could significantly harm our current market share or result in the loss of market opportunities. In addition, we must make long-term investments, develop or obtain appropriate intellectual property and commit significant resources before knowing whether our predictions will accurately reflect consumer demand for our products and services, which may result in no return or a loss on our investments. Furthermore, new products and services may be subject to legal challenge. Responding to these potential claims may require us to enter into royalty and licensing agreements on unfavorable terms, require us to stop distributing or selling, or to redesign our products or services, or to pay damages.
We plan to implement significant strategic and operational initiatives to restructure and simplify our business and operations. If we are not successful in implementing these initiatives, our stock price and business may be adversely affected, our operating results and financial condition may be adversely affected by fixed costs we cannot easily reduce in the short-term, and we may not realize the anticipated benefits of these initiatives.
     Our current business and operational strategy involves restructuring the operating and overhead costs of, and taking other measure to simplify, our business and operations, including separating our Games businesses from our core operations. We have never before pursued initiatives to this extent and there is no assurance that our efforts will be successful. Our business and operations may be harmed to the extent there is customer or employee uncertainty surrounding the future direction of our product and service offerings and strategy for our businesses. In addition, restructuring activities may include implementing cost-cutting initiatives and recording non-cash charges, which could materially impact our operating results and financial condition. In addition, we may not be able to reduce some of our fixed operating costs in the short-term which could adversely impact our ability to generate a profit in future periods and result in other adverse consequences on our financial condition. If we do not effectively re-align the cost structure of our remaining businesses or our proposed Games separation transactions are not completed, we and our shareholders will not realize the anticipated financial, operational and other benefits from such initiatives.
The restructuring of Rhapsody may not yield the anticipated benefits to us or to Rhapsody.
     On March 31, 2010, we completed the restructuring transactions of our digital audio music service joint venture, Rhapsody America LLC (Rhapsody). As a result of the restructuring, we no longer have operational control over Rhapsody. We believe the restructuring will provide Rhapsody with the financial, intellectual property and other key assets and the operational flexibility to compete more effectively in the digital music market. In addition, in future periods we will not consolidate Rhapsody’s operating performance with our consolidated financial statements. However, for a period of time following closing, the newly structured joint venture may experience disruptions due to employee, partner and customer uncertainty and other operational challenges as it transitions to becoming an independent company. These disruptions or Rhapsody’s inability to operate and compete effectively as an independent company could adversely impact its financial condition and results of operations, which in turn could materially impact our reported net income (loss) in future periods. In addition, Rhapsody has generated losses since its inception, and the new structure may not alter this trend. If Rhapsody continues to incur losses, or if it otherwise experiences a significant decline in its business, we may incur a loss on our investment, which would have a material adverse effect on our financial condition and results of operations.
We depend upon our executive officers and key personnel, but may be unable to attract and retain them, which could significantly harm our business and results of operations.

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     Our success depends on the continued employment of certain executive officers and key employees. In January 2010, Rob Glaser, our founder and the only Chief Executive Officer in our history, resigned as Chief Executive Officer. Although Mr. Glaser remains the Chairman of our Board of Directors, we are now facing our first transition at the Chief Executive Officer level. We cannot provide assurance that we will effectively manage this transition, particularly in light of our proposed restructuring initiatives, which may impact our ability to retain our remaining key executive officers. The loss of the services of our key executive officers or employees could harm our business.
     Our success is also dependent upon our ability to identify, attract and retain highly skilled management, technical, and sales personnel, both in our domestic operations and as we expand internationally. Qualified individuals are in high demand and competition for such qualified personnel in our industry is intense, and we may incur significant costs to retain or attract them. Our ability to attract and retain personnel may also be made more difficult by our restructuring initiatives. There can be no assurance that we will be able to attract and retain the key personnel necessary to sustain our business or support future growth.
Acquisitions involve costs and risks that could harm our business and impair our ability to realize potential benefits from acquisitions.
     As part of our business strategy, we have acquired technologies and businesses in the past and expect that we will continue to do so in the future. The failure to adequately manage the costs and address the financial, legal and operational risks raised by acquisitions of technology and businesses could harm our business and prevent us from realizing the benefits of the acquisitions.
     Acquisition-related costs and financial risks related to completed and potential future acquisitions may harm our financial position, reported operating results, or stock price. Previous acquisitions have resulted in significant expenses, including amortization of purchased technology, amortization of acquired identifiable intangible assets and the incurrence of non-cash charges for the impairment of goodwill and other intangible assets, which are reflected in our operating expenses. New acquisitions and any potential additional future impairment of the value of purchased assets, including goodwill, could have a significant negative impact on our future operating results.
     Acquisitions also involve operational risks that could harm our existing operations or prevent realization of anticipated benefits from an acquisition. These operational risks include:
    difficulties and expenses in assimilating the operations, products, technology, information systems, and/or personnel of the acquired company;
 
    retaining key management or employees of the acquired company;
 
    entrance into unfamiliar markets, industry segments, or types of businesses;
 
    operating and integrating acquired businesses in remote locations;
 
    integrating and managing businesses based in countries in which we have little or no prior experience;
 
    diversion of management time and other resources from existing operations to integration activities for acquired businesses;
 
    impairment of relationships with employees, affiliates, advertisers or content providers of our business or acquired business; and
 
    assumption of known and unknown liabilities of the acquired company, including intellectual property claims.
We need to develop relationships and technical standards with manufacturers of non-PC media and communication devices and interoperability of our services with these devices to grow our business.
     Access to the Internet through devices other than a PC, such as cellular phones, smartphones, television set-top devices, game consoles, and other portable devices has increased dramatically and is expected to continue to increase. If a substantial number of alternative device manufacturers do not license and incorporate our technology and services into their devices, we may fail to capitalize on the opportunity to deliver digital media to non-PC devices which could harm our business prospects. If we do not successfully make our products and technologies compatible with emerging standards and the most popular devices used to access

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digital media or successfully design our service to interoperate with the music playback devices that our customers own, we may miss market opportunities and our business and results will suffer.
We may be unable to adequately protect our proprietary rights or leverage our patent portfolio, and may face risks associated with third-party claims relating to our intellectual property.
     Our ability to compete across our businesses partly depends on the superiority, uniqueness and value of our patent portfolio and other technology, including both internally developed technology and technology licensed from third parties. To protect our proprietary rights, we rely on a combination of patent, trademark, copyright and trade secret laws, confidentiality agreements with our employees and third parties, and protective contractual provisions. However, our efforts to protect our intellectual property rights may not assure our ownership rights in our intellectual property, protect or enhance the competitive position of our products and services or effectively prevent misappropriation of our technology. We also routinely receive challenges to our trademarks and other proprietary intellectual property that we are using in our business activities in China. As disputes regarding the validity and scope of patents or the ownership of technologies and rights associated with streaming media, digital distribution, and online businesses are common and likely to arise in the future, we may be forced to litigate to enforce or defend our patents and other intellectual property rights or to determine the validity and scope of other parties’ proprietary rights, enter into royalty or licensing agreements on unfavorable terms or redesign our product features and services. Any such dispute would likely be costly and distract our management, and the outcome of any such dispute could fail to improve our business prospects or otherwise harm our business.
     From time to time we receive claims and inquiries from third parties alleging that our technology may infringe the third parties’ proprietary rights, especially patents. Third parties have also asserted and most likely will continue to assert claims against us alleging infringement of copyrights, trademark rights, trade secret rights or other proprietary rights, or alleging unfair competition or violations of privacy rights. Currently we are investigating or litigating a variety of such pending claims, some of which are described in “Note 13 — Commitments and Contingencies” to Consolidated Financial Statements included in Part I, Item 1 of this report.
Our business and operating results will suffer if our systems or networks fail, become unavailable, unsecured or perform poorly so that current or potential users do not have adequate access to our products, services and websites.
     Our ability to provide our products and services to our customers and operate our business depends on the continued operation and security of our information systems and networks. A significant or repeated reduction in the performance, reliability, security or availability of our information systems and network infrastructure could harm our ability to conduct our business, and harm our reputation and ability to attract and retain users, customers, advertisers and content providers. We have on occasion experienced system errors and failures that caused interruption in availability of products or content or an increase in response time. Problems with our systems and networks could result from our failure to adequately maintain and enhance these systems and networks, natural disasters and similar events, power failures, HVAC failures, intentional actions to disrupt our systems and networks and many other causes. The vulnerability of a large portion of our computer and communications infrastructure is enhanced because much of it is located at a single leased facility in Seattle, Washington, an area that is at heightened risk of earthquake, flood, and volcanic events. Many of our services do not currently have fully redundant systems or a formal disaster recovery plan, and we may not have adequate business interruption insurance to compensate us for losses that may occur from a system outage.
The growth of our business is dependent in part on successfully managing our international operations.
     Our international operations involve risks inherent in doing business on an international level, including difficulties in managing operations due to distance, language, and cultural differences, local economic conditions, different or conflicting laws and regulations, taxes, and exchange rate fluctuations. Any of these factors could harm our operating results and financial condition. Our foreign currency exchange risk management program reduces, but does not eliminate, the impact of currency exchange rate movements.
We may be subject to market risk and legal liability in connection with the data collection capabilities of our products and services.
     Many of our products are interactive Internet applications that by their very nature require communication between a client and server to operate. To provide better consumer experiences and to operate effectively, our products send information to our servers. Many of the services we provide also require that a user provide certain information to us. We have an extensive privacy policy concerning the collection, use and disclosure of user data involved in interactions between our client and server products. Any failure by us to comply with our posted privacy policy and existing or new legislation regarding privacy issues could impact the market for our products and services, subject us to litigation, and harm our business.

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We may be subject to assessment of sales and other taxes for the sale of our products, license of technology or provision of services.
     Currently we do not collect sales, value-added tax (VAT), transactional or other taxes on the sale of our products, license of technology or provision of services in states and countries other than those in which we have offices, employees or other taxable presence. However, one or more states or foreign countries may seek to impose sales, VAT, transactional or other tax collection obligations on us in the future. A successful assertion by one or more states or foreign countries that we should be collecting sales, VAT, transactional or other taxes on the sale of our products, licenses of technology, provision of services or from our Internet commerce activities could result in substantial tax liabilities for past sales, discourage customers from purchasing our products from us or otherwise substantially harm our business.
     Currently, decisions by the U.S. Supreme Court restrict the ability of states to force remote sellers to collect state and local sales and use taxes. However, a number of states and the U.S. Congress have been considering various initiatives that could limit or supersede the Supreme Court’s position regarding sales and use taxes on products and services sold through the Internet. If these initiatives are successful, we could be required to collect and remit sales and use taxes in additional states. States are also continuing to define the taxability of digital goods. Taxation of digital goods is subject to complex evolving tax rules that could result in additional taxation of our products and services. The imposition of additional tax obligations related to our business activities by state and local governments could materially adversely affect our operating results, create administrative burdens for us and decrease our future sales.
     In those countries where we have taxable presence, we collect VAT on sales of “electronically supplied services” provided to European Union residents, including software products, games, data, publications, music, video and fee-based broadcasting services. The collection and remittance of VAT subjects us to additional currency fluctuation risks.
We may be subject to additional income tax assessments.
     We are subject to income taxes in the U.S. and numerous foreign jurisdictions. Significant judgment is required in determining our worldwide provision for income taxes, income taxes payable, and net deferred tax assets. In the ordinary course of business, there are many transactions and calculations where the ultimate tax determination is uncertain. Although we believe our tax estimates are reasonable, the final determination of tax audits and any related litigation could be materially different than that which is reflected in our historical financial statements. An audit or litigation can result in significant additional income taxes payable in the U.S. or foreign jurisdictions which could have a material adverse effect on our financial condition and results of operations.
Risks Related to the Securities Markets and Ownership of Our Common Stock
Our Chairman of the Board beneficially owns more than 38% of our stock, which gives him significant control over certain major decisions on which our shareholders may vote, may discourage an acquisition of us, and any significant sales of stock by our Chairman could have a negative effect on our stock price.
     Robert Glaser, our Chairman of the Board, beneficially owns more than 38% of our common stock. As a result, Mr. Glaser and his affiliates will have significant influence to:
    elect or defeat the election of our directors;
 
    amend or prevent amendment of our articles of incorporation or bylaws;
 
    effect or prevent a merger, sale of assets or other corporate transaction; and
 
    control the outcome of any other matter submitted to the shareholders for vote.
     The stock ownership of Mr. Glaser and his affiliates may discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of RealNetworks, which in turn could reduce our stock price or prevent our shareholders from realizing a premium over our stock price. In addition, Mr. Glaser’s significant ownership stake and influence may also affect our ability to recruit new directors and senior executives.

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Provisions of our charter documents, Shareholder Rights Plan, and Washington law could discourage our acquisition by a third-party.
     Our articles of incorporation provide for a strategic transaction committee of the board of directors. Without the prior approval of this committee, and subject to certain limited exceptions, the board of directors does not have the authority to:
    adopt a plan of merger;
 
    authorize the sale, lease, exchange or mortgage of assets representing more than 50% of the book value of our assets prior to the transaction or on which our long-term business strategy is substantially dependent;
 
    authorize our voluntary dissolution; or
 
    take any action that has the effect of any of the above.
     In addition, Mr. Glaser has special rights under our articles of incorporation to appoint or remove members of the strategic transaction committee at his discretion that could make it more difficult for RealNetworks to be sold or to complete another change of control transaction without Mr. Glaser’s consent. RealNetworks has also entered into an agreement providing Mr. Glaser with certain contractual rights relating to the enforcement of our charter documents and Mr. Glaser’s roles and authority within RealNetworks.
     We have adopted a shareholder rights plan, which was amended and restated in December 2008, which provides that shares of our common stock have associated preferred stock purchase rights. The exercise of these rights would make the acquisition of RealNetworks by a third-party more expensive to that party and has the effect of discouraging third parties from acquiring RealNetworks without the approval of our board of directors, which has the power to redeem these rights and prevent their exercise.
     Washington law imposes restrictions on some transactions between a corporation and certain significant shareholders. The foregoing provisions of our charter documents, shareholder rights plan, our agreement with Mr. Glaser, and Washington law, as well as our charter provisions that provide for a classified board of directors and the availability of “blank check” preferred stock, could have the effect of making it more difficult or more expensive for a third-party to acquire, or of discouraging a third-party from attempting to acquire, control of us. These provisions may therefore have the effect of limiting the price that investors might be willing to pay in the future for our common stock.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) Not applicable
(b) Not applicable
(c) Not applicable
Item 3. Default Upon Senior Securities
None
Item 4. Removed and Reserved
Reserved
Item 5. Other Information
None

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Item 6. Exhibits
Exhibits Required by Item 601 of Regulation S-K
     
Exhibit    
Number   Description
2.1
  Transaction, Contribution and Purchase Agreement dated as of February 9, 2010 among Rhapsody America LLC, RealNetworks, Inc., RealNetworks Digital Music of California, Inc., Viacom International Inc. and DMS Holdco Inc. (incorporated by reference from Exhibit 2.1 to RealNetworks’ Current Report on Form 8-K filed with the Securities and Exchange Commission on April 6, 2010)
 
   
10.1
  Stockholder Agreement dated as of March 31, 2010 among Rhapsody International Inc., RealNetworks, Inc., RealNetworks Digital Music of California, Inc., Viacom International Inc. and DMS Holdco Inc.
 
   
10.2†
  Form of MBO Plan Document under the RealNetworks, Inc. 2010 Executive Compensation Program
 
   
10.3†
  Retention Letter dated February 24, 2010 between RealNetworks, Inc. and Robert Kimball (incorporated by reference from Exhibit 10.1 to RealNetworks’ Current Report on Form 8-K filed with the Securities and Exchange Commission on February 26, 2010)
 
   
10.4†
  Retention Letter dated February 24, 2010 between RealNetworks, Inc. and Michael Eggers (incorporated by reference from Exhibit 10.2 to RealNetworks’ Current Report on Form 8-K filed with the Securities and Exchange Commission on February 26, 2010)
 
   
10.5†
  Retention Letter dated February 24, 2010 between RealNetworks, Inc. and Michael Lunsford (incorporated by reference from Exhibit 10.3 to RealNetworks’ Current Report on Form 8-K filed with the Securities and Exchange Commission on February 26, 2010)
 
   
10.6†
  Change in Control and Severance Agreement dated February 24, 2010 between RealNetworks, Inc. and Robert Kimball (incorporated by reference from Exhibit 10.4 to RealNetworks’ Current Report on Form 8-K filed with the Securities and Exchange Commission on February 26, 2010)
 
   
10.7†
  Form of Change in Control and Severance Agreement dated February 24, 2010 between RealNetworks, Inc. and each of Michael Eggers and Michael Lunsford (incorporated by reference from Exhibit 10.5 to RealNetworks’ Current Report on Form 8-K filed with the Securities and Exchange Commission on February 26, 2010)
 
   
31.1
  Certification of Robert Kimball, President and Acting Chief Executive Officer of RealNetworks, Inc., Pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
   
31.2
  Certification of Michael Eggers, Senior Vice President, Chief Financial Officer and Treasurer of RealNetworks, Inc., Pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
   
32.1
  Certification of Robert Kimball, President and Acting Chief Executive Officer of RealNetworks, Inc., Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
   
32.2
  Certification of Michael Eggers, Senior Vice President, Chief Financial Officer and Treasurer of RealNetworks, Inc., Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
  Executive compensation plan or agreement

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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, thereunto duly authorized, on May 7, 2010.
         
  REALNETWORKS, INC.
 
 
  By:   /s/ Michael Eggers    
    Michael Eggers   
    Title:   Senior Vice President,
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer) 
 
 

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INDEX TO EXHIBITS
     
Exhibit    
Number   Description
2.1
  Transaction, Contribution and Purchase Agreement dated as of February 9, 2010 among Rhapsody America LLC, RealNetworks, Inc., RealNetworks Digital Music of California, Inc., Viacom International Inc. and DMS Holdco Inc. (incorporated by reference from Exhibit 2.1 to RealNetworks’ Current Report on Form 8-K filed with the Securities and Exchange Commission on April 6, 2010)
 
   
10.1
  Stockholder Agreement dated as of March 31, 2010 among Rhapsody International Inc., RealNetworks, Inc., RealNetworks Digital Music of California, Inc., Viacom International Inc. and DMS Holdco Inc.
 
   
10.2†
  Form of MBO Plan Document under the RealNetworks, Inc. 2010 Executive Compensation Program
 
   
10.3†
  Retention Letter dated February 24, 2010 between RealNetworks, Inc. and Robert Kimball (incorporated by reference from Exhibit 10.1 to RealNetworks’ Current Report on Form 8-K filed with the Securities and Exchange Commission on February 26, 2010)
 
   
10.4†
  Retention Letter dated February 24, 2010 between RealNetworks, Inc. and Michael Eggers (incorporated by reference from Exhibit 10.2 to RealNetworks’ Current Report on Form 8-K filed with the Securities and Exchange Commission on February 26, 2010)
 
   
10.5†
  Retention Letter dated February 24, 2010 between RealNetworks, Inc. and Michael Lunsford (incorporated by reference from Exhibit 10.3 to RealNetworks’ Current Report on Form 8-K filed with the Securities and Exchange Commission on February 26, 2010)
 
   
10.6†
  Change in Control and Severance Agreement dated February 24, 2010 between RealNetworks, Inc. and Robert Kimball (incorporated by reference from Exhibit 10.4 to RealNetworks’ Current Report on Form 8-K filed with the Securities and Exchange Commission on February 26, 2010)
 
   
10.7†
  Form of Change in Control and Severance Agreement dated February 24, 2010 between RealNetworks, Inc. and each of Michael Eggers and Michael Lunsford (incorporated by reference from Exhibit 10.5 to RealNetworks’ Current Report on Form 8-K filed with the Securities and Exchange Commission on February 26, 2010)
 
   
31.1
  Certification of Robert Kimball, President and Acting Chief Executive Officer of RealNetworks, Inc., Pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
   
31.2
  Certification of Michael Eggers, Senior Vice President, Chief Financial Officer and Treasurer of RealNetworks, Inc., Pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
   
32.1
  Certification of Robert Kimball, President and Acting Chief Executive Officer of RealNetworks, Inc., Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
   
32.2
  Certification of Michael Eggers, Senior Vice President, Chief Financial Officer and Treasurer of RealNetworks, Inc., Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
  Executive compensation plan or agreement

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EX-10.1 2 v55756exv10w1.htm EX-10.1 exv10w1
Exhibit 10.1
EXECUTION VERSION
STOCKHOLDER AGREEMENT
among
RHAPSODY INTERNATIONAL INC.,
REALNETWORKS, INC.,
REALNETWORKS DIGITAL MUSIC OF CALIFORNIA, INC.,
VIACOM INTERNATIONAL INC.
and
DMS HOLDCO INC.
Dated as of March 31, 2010

 


 

TABLE OF CONTENTS
         
    Page  
ARTICLE I Definitions
    2  
Section 1.01. Certain Defined Terms
    2  
Section 1.02. Other Definitional Provisions
    5  
ARTICLE II Corporate Governance
    5  
Section 2.01. Board Composition
    5  
Section 2.02. Composition of Committees of the Board
    7  
ARTICLE III Transfer of Shares
    7  
Section 3.01. Restrictions on Transfer
    7  
Section 3.02. Permitted Transfers
    8  
Section 3.03. Compliance with Transfer Provisions
    8  
Section 3.04. Legend
    8  
Section 3.05. Right of First Offer
    9  
Section 3.06. Drag-Along Right
    10  
Section 3.07. Preemptive Right
    11  
ARTICLE IV Additional Covenants
    12  
Section 4.01. Actions Requiring Consent
    12  
Section 4.02. Registration Rights
    13  
Section 4.03. Information Rights
    13  
Section 4.04. Annual Audit
    14  
Section 4.05. Access Rights
    14  
ARTICLE V Term
    15  
Section 5.01. Term
    15  
ARTICLE VI General Provisions
    15  
Section 6.01. Notices
    15  
Section 6.02. Counterparts
    16  
Section 6.03. Integration
    16  
Section 6.04. No Third Party Beneficiaries
    16  
Section 6.05. Applicable Law; Consent to Jurisdiction
    17  
Section 6.06. Severability
    17  
Section 6.07. Amendment
    17  

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    Page  
Section 6.08. Headings
    17  
Section 6.09. Waiver of a Jury Trial
    18  
Section 6.10. Enforcement
    18  
Section 6.11. Waiver
    18  
Section 6.12. Confidentiality
    18  
Section 6.13. Other Stockholders
    19  
Section 6.14. Publicity
    19  
Section 6.15. Absence of Presumption
    19  
Section 6.16. Expenses
    19  

ii


 

     STOCKHOLDER AGREEMENT, dated as of March 31, 2010, among RHAPSODY INTERNATIONAL INC., a Delaware corporation (the “Company”), RealNetworks, Inc., a Washington corporation (“RN Parent”), RealNetworks Digital Music of California, Inc., a California corporation (“RN Sub”), Viacom International Inc., a Delaware corporation (“MTVN Parent”), on behalf of its MTV Networks Division, and DMS Holdco Inc., a Delaware corporation (“MTVN Sub” and together with RN Sub, the “Stockholders”).
RECITALS
          WHEREAS, the Company was first formed as a limited liability company under Delaware law on August 16, 2007 under the name “Rhapsody America LLC” and was converted to a corporation under the name “Rhapsody International Inc.” by the filing of its Certificate of Conversion and Certificate of Incorporation with the Secretary of State of the State of Delaware on March 31, 2010 (the “Conversion”);
          WHEREAS, the Stockholders have entered into the Transaction, Contribution and Purchase Agreement dated as of February 9, 2010 (the “Transaction Agreement”) to effect the transfer and contribution of certain additional assets to the Company;
          WHEREAS, immediately prior to the transactions contemplated by the Transaction Agreement, RN Sub owned a 51% membership interest in the Company and MTVN Sub owned a 49% membership interest in the Company;
          WHEREAS, by virtue of the Conversion, all outstanding membership interests of the Company were converted into equity interests in the Company;
          WHEREAS, as of the date hereof, MTVN Sub owns the Company’s Class A common stock, par value $0.01 per share (“Class A Stock”) and RN Sub owns the Company’s preferred stock, par value $0.01 per share (“Preferred Stock” and together with Class A Stock, “Voting Stock”) in the amounts set forth opposite its name on Schedule A attached hereto;
          WHEREAS, pursuant to the Charter (as defined below), holders of Voting Stock shall be entitled to one vote for each share of Voting Stock held by them on all matters properly presented to the stockholders, the holders of Class A Stock and the holders of Preferred Stock voting together as one class; and
          WHEREAS, each of the parties desires to enter into this Agreement (as defined below) in order to establish certain rights and obligations of RN Sub and MTVN Sub as holders of Voting Stock;
          NOW, THEREFORE, in consideration of the foregoing and the respective covenants and agreements set forth herein, and intending to be legally bound hereby, the parties hereto agree as follows:

 


 

ARTICLE I
Definitions
          Section 1.01. Certain Defined Terms. As used in this Agreement:
          “Adoption Agreement” has the meaning assigned to such term in Section 3.02(a)(i).
          “Affiliate” of any specified Person means any other Person directly or indirectly Controlling, Controlled by or under direct or indirect common Control with such specified Person; provided that the Company and its Subsidiaries shall not be deemed to be an Affiliate of any Stockholder or Parent, and provided, further, that “Affiliate”, when used with respect to MTVN Sub or MTVN Parent or any of their Affiliates, shall only mean Viacom Inc., a Delaware corporation, and any direct or indirect Subsidiaries of Viacom Inc. and shall not include any direct or indirect stockholder of Viacom Inc. or any of their Affiliates other than Viacom Inc. and any direct or indirect Subsidiaries of Viacom Inc.
          “Agreement” means this Stockholder Agreement, as it may be amended, supplemented, restated or modified from time to time.
          “Board” means the Board of Directors of the Company.
          “Business Day” means any day that is not a Saturday, a Sunday or a U.S. Federal holiday.
          “By-laws” means the By-laws of the Company, as amended or restated from time to time.
          “Charter” means the Certificate of Incorporation of the Company, as amended or restated from time to time.
          “Class A Stock” has the meaning set forth in the recitals of this Agreement.
          “Class B Stock” means the Company’s Class B common stock, par value $0.01 per share
          “Control” means, with respect to any Person, the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through ownership of securities or partnership, membership, limited liability company, or other ownership interests, by contract or otherwise, and the terms “Controlling” and “Controlled” have meanings correlative to the foregoing.
          “Conversion” has the meaning set forth in the recitals of this Agreement.
          “Director” means any member of the Board.
          “Drag-Along Notice” has the meaning assigned to such term in Section 3.06.

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          “Drag-Along Party” has the meaning assigned to such term in Section 3.06.
          “Drag-Along Price” has the meaning assigned to such term in Section 3.06.
          “Drag-Along Purchaser” has the meaning assigned to such term in Section 3.06.
          “Drag-Along Right” has the meaning assigned to such term in Section 3.06.
          “Drag-Along Terms” has the meaning assigned to such term in Section 3.06.
          “GAAP” means generally accepted accounting principles in the United States.
          “Indebtedness” means, with respect to any Person, all obligations of such Person (i) for borrowed money or funded indebtedness or issued in substitution for or exchange for borrowed money or funded indebtedness (including obligations with respect to principal, accrued interest, and any applicable prepayment charges or premiums and any unpaid fees, expenses or other monetary obligations in respect thereof); (ii) evidenced by notes, bonds, debentures, mortgages or similar instruments; and (iii) all obligations of the types described in clauses (i) and (ii) above of any other individual or entity, the payment of which is guaranteed or is subject to contingent guarantee, directly or indirectly, by such Person or is secured by a pledge, mortgage, encumbrance or other Lien of any kind or character on any property or asset of such Person (whether or not such obligation is assumed by such Person).
          “Independent Director” means a Director who (i) qualifies as an “independent director” of the Company under (a) NYSE Rule 303A(2), as such Rule may be amended, supplemented or replaced from time to time or (b) any comparable rule or regulation of a primary securities exchange or quotation system, (ii) is identified as independent upon the mutual agreement of RN Stockholder and MTVN Stockholder or (iii) is the Chief Executive Officer or the highest-ranking officer of the Company as set forth in the proviso to Section 2.01(a)(iii).
          “Initiating Stockholder” has the meaning assigned to such term in Section 3.05(a).
          “Initiator Notice” has the meaning assigned to such term in Section 3.05(a).
          “Lien” means any pledge, encumbrance, security interest, purchase option, call or similar right.
          “MTVN Designees” has the meaning assigned to such term in Section 2.01(a)(ii).
          “MTVN Music Group” has the meaning assigned to such term in the Audio Music Service Brand and Content License, Distribution and Advertising Agreement dated as of August 20, 2007, by and between MTVN Parent and the Company, as such agreement may be amended, supplemented, restated or modified from time to time.
          “MTVN Stockholder” means MTVN Sub and shall include any successor to MTVN Sub, or any assignee of MTVN Sub pursuant to Section 3.02(a)(i).

3


 

          “New Securities” has the meaning assigned to such term in Section 3.07(b).
          “Non-initiating Stockholder” has the meaning assigned to such term in Section 3.05(a).
          “Offer Price” has the meaning assigned to such term in Section 3.05(b).
          “Offered Stock” has the meaning assigned to such term in Section 3.05(a).
          “Original Stockholder” has the meaning assigned to such term in Section 3.06.
          “Other Stockholder” has the meaning assigned to such term in Section 6.13.
          “Parent” means (i) in the case of RN Sub, RN Parent, (ii) in the case of MTVN Sub, MTVN Parent, (iii) in the case of any other Stockholder, such Stockholder’s direct or indirect ultimate Controlling Person at the time such Stockholder becomes a Stockholder (except to the extent such Stockholder is an Affiliate of MTVN Parent, in which case the Parent of such Stockholder shall continue to mean MTVN Parent).
          “Participation Stockholder” has the meaning assigned to such term in Section 3.07(a).
          “Person” means any individual, firm, corporation, partnership, limited liability company, trust, joint venture, governmental authority or other entity.
          “Preferred Stock” has the meaning set forth in the recitals of this Agreement.
          “Public Offering” shall mean the completion of a sale of common stock pursuant to a registration statement which has become effective under the Securities Act (excluding registration statements on Form S-4, S-8 or similar limited purpose forms), in which some or all of the Common Stock or the common stock of any Subsidiary of the Company shall be listed and traded on a national exchange or on the NASDAQ National Market System.
          “Requesting Stockholder” has the meaning assigned to such term in Section 4.04.
          “Right of First Offer” has the meaning assigned to such term in Section 3.05(a).
          “RN Designees” has the meaning assigned to such term in Section 2.01(a)(i).
          “RN Stockholder” means RN Sub and shall include any successor to RN Sub, or assignee of RN Sub pursuant to Section 3.02(a)(i).
          “ROFO Notice” has the meaning assigned to such term in Section 3.05(b).
          “ROFO Notice Period” has the meaning assigned to such term in Section 3.05(b).
          “Sale Transaction” has the meaning assigned to such term in Section 3.02(b).

4


 

          “Securities Act” means the Securities Act of 1933 and the rules and regulations promulgated thereunder, as amended.
          “Stockholder” means MTVN Stockholder, RN Stockholder and any Other Stockholder.
          “Subsidiary” means, with respect to any Person, any other Person of which such Person (i) owns directly or indirectly more than fifty percent (50%) of the equity, membership interest or beneficial interest, on a consolidated basis, or (ii) owns directly or controls with power to vote, directly or indirectly through one or more Subsidiaries, shares of the equity, membership interest or beneficial interest having the power to elect more than fifty percent (50%) of the directors, trustees, managers or other officials having powers analogous to that of directors of a corporation.
          “Transaction Agreement” has the meaning set forth in the recitals of this Agreement.
          “Transfer” means, directly or indirectly, (i) to sell, transfer, assign or similarly dispose of, whether voluntarily, involuntarily or by operation of law, (ii) to enter into an agreement to vote, consent, grant a proxy or power of attorney or deposit shares into a voting trust, or the execution of a written consent, the grant of a proxy or power of attorney or the deposit of shares into a voting trust or (iii) to enter into a contract, option or other arrangement or understanding that upon consummation or foreclosure would effect a sale, transfer, assignment or similar disposition.
          “Voting Stock” has the meaning set forth in the recitals of this Agreement.
          Section 1.02. Other Definitional Provisions. (a) The words “hereof”, “herein” and “hereunder” and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and Article and Section references are to this Agreement unless otherwise specified. The words “include”, “includes” and “including” shall be deemed to be followed by the phrase “without limitation”.
          (b) The meanings given to terms defined herein shall be equally applicable to both the singular and plural forms of such terms.
ARTICLE II
Corporate Governance
          Section 2.01. Board Composition. (a) The number of Directors constituting the Board shall be fixed at the number that is the number of Directors that RN Stockholder and MTVN Stockholder are entitled to designate in the aggregate, from time to time, pursuant to Sections 2.01(a)(i), (ii) and (iii) below which number shall initially be five (5). The Board shall be composed as follows:
     (i) (A) two (2) Directors designated for election to the Board by RN Stockholder for so long as RN Stockholder continues to own shares of Voting Stock representing at

5


 

least twenty-five percent (25%) of the then outstanding shares of Voting Stock; or (B) if clause (A) is not applicable, one (1) director designated for election to the Board by RN Stockholder for so long as RN Stockholder continues to own shares of Voting Stock representing at least ten percent (10%) of the then outstanding shares of Voting Stock (in each case, the “RN Designees”); the initial RN Designees are set forth on Schedule B;
     (ii) (A) two (2) Directors designated for election to the Board by MTVN Stockholder for so long as MTVN Stockholder continues to own shares of Voting Stock representing at least twenty-five percent (25%) of the then outstanding shares of Voting Stock; or (B) if clause (A) is not applicable, one (1) director designated for election to the Board by MTVN Stockholder for so long as MTVN Stockholder continues to own shares of Voting Stock representing at least ten percent (10%) of the then outstanding shares of Voting Stock (in each case, the “MTVN Designees”); the initial MTVN Designees are set forth on Schedule C; and
     (iii) one Independent Director jointly designated by RN Stockholder and MTVN Stockholder (for so long as each of RN Stockholder and MTVN Stockholder is entitled to designate at least one Director pursuant to Sections 2.01(a)(i) and (ii)) who shall initially be the individual set forth on Schedule D hereto. If at any time RN Stockholder and MTVN Stockholder cannot agree upon the designee for Independent Director, the Independent Director shall be selected pursuant to the provision set forth in Schedule E hereto; provided, however, in the event that the existing Independent Director resigns or is removed from the Board or if the Independent Director seat is otherwise vacant, the Company’s Chief Executive Officer (excluding any Person serving as the Company’s interim Chief Executive Officer), or if the office of the Chief Executive Officer is vacant or not permanently filled, then the Company’s highest ranking officer, shall serve as the Independent Director during such interim period.
          (b) Each Stockholder agrees to vote or act by written consent with respect to (or cause to be voted or acted upon by written consent) all shares of Voting Stock then held of record by such Stockholder (x) in favor of the election to the Board of those individuals designated or nominated in accordance with Section 2.01(a) and (y) against the election to the Board of any individual not designated or nominated in accordance with Section 2.01(a); provided, however, that at the written request of either MTVN Stockholder or RN Stockholder with respect to a Director designated by such Stockholder pursuant to Section 2.01(a), each other Stockholder hereby agrees to vote or act by written consent with respect to (or cause to be voted or acted upon by written consent) all shares of Voting Stock then held of record by such Stockholder in favor of the removal from office of such Director at any meeting or upon any action by written consent called or taken for the purpose of removing such Director from office (and except as set forth in Section 2.01(d), otherwise shall not vote or act by written consent to cause the removal of such Director without cause).
          (c) In the event of any vacancy in the office of Director of an RN Designee or MTVN Designee, each Stockholder agrees to vote or act by written consent with respect to (or cause to be voted or acted upon by written consent) all shares of Voting Stock then held of record by such Stockholder in favor of the election to the Board of an individual designated in writing by RN Stockholder or MTVN Stockholder, as applicable, and against the election to the

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Board of any individual not designated by RN Stockholder or MTVN Stockholder, as applicable. The Company and the Stockholders shall use their best efforts to fill any vacancies of the Board as soon as practicable following the date such vacancy is created.
          (d) If at any time there is a reduction in the number of Directors a Stockholder has a right to designate pursuant to Sections 2.01(a)(i) and (ii), such Stockholder shall use its best efforts to cause such number of its designees to resign from the Board. If a designee fails to resign in accordance with the preceding sentence, each Stockholder agrees to vote or act by written consent with respect to (or cause to be voted or acted upon by written consent) all shares of Voting Stock then held of record by such Stockholder in favor of the removal of such Director without cause. The Company and the Stockholder shall use their best efforts to cause such action to be taken as soon as practicable following the date of decrease.
          Section 2.02. Composition of Committees of the Board. The Board may from time to time designate one or more committees, each committee to consist of two (2) or more members of the Board; provided, however, that at least one RN Designee (for so long as RN Stockholder has the right to designate a Director pursuant to Section 2.01(a)(i)) and at least one MTVN Designee (for so long as MTVN Stockholder has the right to designate a Director pursuant to Section 2.01(a)(ii)) shall be entitled to representation on each committee of the Board.
ARTICLE III
Transfer of Shares
          Section 3.01. Restrictions on Transfer. (a) Each Stockholder agrees that, until December 31, 2010, it will not Transfer any shares of Voting Stock now owned or hereafter acquired by such party (or any interest therein) to any other Person, except as expressly permitted by Section 3.02.
          (b) It shall be a condition to any Transfer not prohibited by this Article III that (i) such Transfer shall comply with the provisions of the Securities Act and applicable state securities laws and (ii) no such Transfer shall require the Company to file any report or other disclosure pursuant to the Securities Act or applicable state securities laws. Until the Transfer of any Voting Stock has been registered under the Securities Act, such Voting Stock may not be offered or sold except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act and applicable state securities laws.
          (c) It shall be a condition to any Transfer not prohibited by this Article III that no applicable law or judgment issued by any governmental entity which would prohibit such Transfer shall be in effect, and all consents of, or declarations or filings with, or expirations of waiting periods imposed by, any governmental entity necessary for the consummation of such Transfer shall have been obtained or filed or shall have occurred, and the Company and each Stockholder agree to reasonably cooperate with the transferring Stockholder, at such transferring Stockholder’s expense, to provide such information and make such filings as shall be necessary to satisfy as promptly as practicable the foregoing conditions in connection with a proposed

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Transfer; provided, however, that the Company shall not be required to make any filings pursuant to the Securities Act or any applicable state securities laws.
          Section 3.02. Permitted Transfers. (a) The following Transfers shall be permitted at any time and from time to time:
     (i) any Transfer by a Stockholder of all (but not less than all) of its Voting Stock to a wholly-owned Subsidiary of such Stockholder’s Parent so long as such transferee continues to remain so owned and executes a counterpart of this Agreement agreeing to be bound hereby to the same extent as the transferor (an “Adoption Agreement”); provided, however, that if at any time such transferee ceases to be a wholly-owned Subsidiary of such Stockholder’s Parent, then all Voting Stock held by such transferee shall be deemed to be automatically Transferred to such Parent or to another wholly-owned Subsidiary of such Parent designated by such Parent, which wholly-owned Subsidiary shall execute and deliver an Adoption Agreement; and
     (ii) any Transfer by a Stockholder with the prior written consent of each of MTVN Stockholder and RN Stockholder.
          (b) Notwithstanding anything to the contrary set forth herein, the restrictions on Transfer set forth in Section 3.01(a) shall not prohibit (i) any merger, consolidation or binding share exchange with a third party, (ii) sale or other disposition of all or substantially all of the equity securities or sale or other disposition of all or substantially all of the assets of RN Parent or MTVN Parent, or (iii) any transaction involving all or substantially all of the assets of the MTVN Music Group (each, a “Sale Transaction”); provided that (x) in the case of a Sale Transaction in which the Voting Stock of MTVN Stockholder is Transferred, the MTVN Stockholder following such Sale Transaction shall be an entity belonging to the MTVN Music Group; and (y) in the case of a Sale Transaction in which the Voting Stock of RN Stockholder is Transferred, the RN Stockholder following such Sale Transaction shall be RN Parent.
          Section 3.03. Compliance with Transfer Provisions. Any Transfer or deemed Transfer or attempted Transfer or deemed Transfer of Voting Stock in violation of any provision of this Agreement shall be void, and the Company shall not record such Transfer or deemed Transfer on its books or treat any purported transferee of such Voting Stock as the owner of such Voting Stock for any purpose.
          Section 3.04. Legend. (a) During the term of this Agreement, each certificate evidencing Voting Stock held of record or owned by the Stockholders shall bear the following legend:
“THE SECURITIES EVIDENCED BY THIS CERTIFICATE ARE SUBJECT TO AND TRANSFERABLE ONLY UPON COMPLIANCE WITH THE PROVISIONS OF A STOCKHOLDER AGREEMENT, DATED AS OF MARCH 31, 2010, AMONG RHAPSODY INTERNATIONAL INC., REALNETWORKS, INC., REALNETWORKS DIGITAL MUSIC OF CALIFORNIA, INC., VIACOM INTERNATIONAL INC. AND DMS HOLDCO

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INC. A COPY OF SUCH STOCKHOLDER AGREEMENT IS ON FILE AT THE PRINCIPAL OFFICE OF RHAPSODY INTERNATIONAL INC.”
          (b) Upon a Person ceasing to have rights and obligations under this Agreement pursuant to the terms hereof or upon termination of this Agreement, such Person may surrender to the Company any certificates held of record by such Person and bearing the legend set forth in Section 3.04(a), and upon surrender of such certificates, the Company shall reissue such certificates without such legend.
          Section 3.05. Right of First Offer. (a) Each of RN Stockholder and MTVN Stockholder and any Other Stockholder agrees that, until December 31, 2012, it will not Transfer its Voting Stock to any Person (other than pursuant to Section 3.02) without first offering to Transfer such Voting Stock to each of RN Stockholder or MTVN Stockholder, in each case so long as such RN Stockholder or MTVN Stockholder owns at least twenty-five percent (25%) of the then outstanding shares of Voting Stock (“Right of First Offer”) (such Stockholder desiring to make any such Transfer, the “Initiating Stockholder,” the subject shares that the Initiating Stockholder seeks to Transfer, the “Offered Stock,” and such Stockholder with the Right of First Offer, the “Non-initiating Stockholder”). The Initiating Stockholder shall give written notice (the “Initiator Notice”) to the Non-initiating Stockholder of its bona fide intention to sell the Offered Stock, setting forth (i) the number of shares of Offered Stock and (ii) the material terms and conditions (other than price) upon which the Initiating Stockholder proposes to Transfer the Offered Stock.
          (b) Upon receipt of the Initiator Notice, the Non-initiating Stockholder shall have a period of forty-five (45) days (“ROFO Notice Period”) to offer to purchase the Offered Stock by delivering a written notice (“ROFO Notice”) stating that it offers to purchase the Offered Stock on the terms specified in the Initiator Notice and designating the price that it is offering to pay, in cash, for the Offered Stock (“Offer Price”). A ROFO Notice shall be binding on the Non-initiating Stockholder upon delivery and irrevocable without the consent of the Initiating Stockholder. In the event that the Initiating Stockholder is an Other Stockholder, RN Stockholder and MTVN Stockholder shall each be entitled to purchase their pro rata portion of the Offered Stock; provided that, if either MTVN Stockholder or RN Stockholder elects not to exercise its Right of First Offer, the other may, at its option, offer to purchase all (but not less than all) of the Offered Stock. For purposes of this Section 3.05, “pro rata portion” is the product of (i) a fraction, the numerator of which is the number of outstanding shares of Voting Stock which RN Stockholder or MTVN Stockholder, as applicable, then owns and the denominator of which is the number of outstanding shares of Voting Stock which RN Stockholder and MTVN Stockholder then own, in the aggregate, multiplied by (ii) the number of shares of Offered Stock set forth in the Initiator Notice.
          (c) Within ten (10) Business Days after receipt of the ROFO Notice, the Initiating Stockholder shall indicate to the Non-initiating Stockholder whether the Initiating Stockholder has accepted the Non-initiating Stockholder’s offer. An acceptance shall be indicated by sending irrevocable written notice of such acceptance to the Non-initiating Stockholder, and the Non-initiating Stockholder shall then be obligated to purchase, and the Initiating Stockholder shall then be obligated to sell, the Offered Stock on the terms and conditions set forth in the Initiator Notice at the Offer Price.

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          (d) If the Initiating Stockholder does not accept any offer made by the Non-initiating Stockholder or if the Non-initiating Stockholder does not deliver a ROFO Notice in accordance with this Section 3.05, the Initiating Stockholder may, during the ninety (90)-day period following the expiration of the ROFO Notice Period and subject to the restrictions on Transfer contained in this Article III, enter into an agreement for the Transfer of all (but not less than all) Offered Stock with any Person (i) for a price, in cash, that is greater than the Offer Price and (ii) otherwise, on terms not more favorable in any material respect to the purchaser than those specified in the Initiator Notice.
          (e) If the Initiating Stockholder does not enter into an agreement for the Transfer of the Offered Stock within such ninety (90)-day period, the Right of First Offer provided hereunder shall be deemed to be revived and such Offered Stock shall not be Transferred unless first reoffered to the Non-initiating Stockholder in accordance with this Section 3.05. Notwithstanding the foregoing, the Initiating Stockholder shall not propose to Transfer the Offered Stock more than once in any twelve-month period.
          (f) The closing of the purchase and sale of any Offered Stock to be acquired by the original transferee named in the ROFO Notice shall be held at the offices of the Company on such date and time as the parties may agree but in all events within thirty (30) days following termination of the ROFO Notice Period (which thirty (30)-day period shall be extended solely to the extent needed to obtain any required governmental approvals). At the closing of such purchase and sale, the Initiating Stockholder shall deliver an assignment agreement transferring such Offered Stock, duly executed, free and clear of any Liens, against delivery of the purchase price therefor. Each party shall bear its own expenses in connection with a purchase and sale pursuant to this Section 3.05.
          Section 3.06. Drag-Along Right. In the event that RN Stockholder (for so long as such Stockholder owns at least twenty-five percent (25%) of the then outstanding shares of Voting Stock) and MTVN Stockholder (for so long as such Stockholder owns at least twenty-five percent (25%) of the then outstanding shares of Voting Stock) (for purposes of this Section 3.06, each, an “Original Stockholder”) shall have jointly entered into an agreement with any Person (such Person, a “Drag-Along Purchaser”) regarding the Transfer of all of their Voting Stock, an Original Stockholder shall be entitled, at its option, to require each Stockholder holding less than ten percent (10%) of the then outstanding shares of Voting Stock (the “Drag-Along Party”) to include all of its Voting Stock in such sale (the “Drag-Along Right”). The Drag-Along Right shall be exercised by written notice (the “Drag-Along Notice”) to the Drag-Along Party, at least thirty (30) days prior to closing of the proposed Transfer, of the identity of the Drag-Along Purchaser, the consideration offered for the transferring Stockholder’s Voting Stock (the “Drag-Along Price”), the terms of the Drag-Along Purchaser’s financing (if any and if known), the anticipated date of closing of the proposed Transfer and any other material terms and conditions of the proposed Transfer (the “Drag-Along Terms”). The Drag-Along Party shall be obligated to sell all of its Voting Stock to the Drag-Along Purchaser on the Drag-Along Terms at a price equal to the product of (x) the ratio of the percentage of ownership of Voting Stock then outstanding of the Drag-Along Party over the percentage of ownership of Voting Stock then outstanding of the transferring Stockholder and (y) the Drag-Along Price; provided, however, that the holders of shares of Preferred Stock shall be entitled to be paid the amount determined pursuant to Section 3(c) of Article IV of the

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Charter to the extent applicable. At the closing of such Transfer (which anticipated date, place and time shall be designated in the Drag-Along Terms), the Drag-Along Party shall deliver an assignment agreement transferring all of its Voting Stock, duly executed, free and clear of any Liens, against delivery of the purchase price therefor. Each party shall bear its own expenses in connection with a Transfer pursuant to this Section 3.06.
          Section 3.07. Preemptive Right. (a) The Company hereby grants to each of RN Stockholder and MTVN Stockholder (for purposes of this Section 3.07, each a “Participation Stockholder”), so long as it shall own at least ten percent (10%) of the then outstanding shares of Voting Stock, the right to purchase up to a pro rata portion of New Securities (as defined in paragraph (b) below) which the Company, from time to time, proposes to sell or issue following the date hereof. A Participation Stockholder’s pro rata portion, for purposes of this Section 3.07, is equal to the product of (i) a fraction, the numerator of which is the number of outstanding shares of Voting Stock which such Participation Stockholder then owns and the denominator of which is the total number of outstanding shares of Voting Stock then held by the Participation Stockholders, in the aggregate, multiplied by (ii) the number of New Securities the Company proposes to sell or issue.
          (b) “New Securities” shall mean any common stock or other equity securities of the Company whether now authorized or not, any rights, options or warrants to purchase common stock or other equity securities and any Indebtedness or preferred stock of the Company which is convertible into common stock or other equity securities (or which is convertible into a security which is, in turn, convertible into common stock or other equity securities); provided that the term “New Securities” does not include (i) Indebtedness of the Company which is not by its terms convertible into common stock; (ii) common stock issued as a stock dividend to all holders of Voting Stock and Class B Stock pro rata or upon any subdivision or combination of shares of common stock; (iii) common stock, or other equity capital exchangeable for or convertible into shares of common stock, issued to any employee or director and approved by the Board and any employee or director stock options approved by the Board; (iv) common stock issued for the acquisition of another corporation or other entity by the Company by stock purchase, merger, purchase of substantially all assets or other reorganization approved by the Board; (v) the issuance of common stock upon the exercise or conversion of any rights, options or warrants to purchase common stock outstanding prior to the issuance of New Securities; and (vi) common stock issuable in a Public Offering; and provided, further, that if any “New Securities” include common stock and other equity securities coupled as a package, “New Securities” shall mean the package of securities and not each class of securities individually.
          (c) In the event the Company proposes to issue New Securities, the Company shall give each Participation Stockholder written notice of such proposal, describing the type of New Securities and the price and the terms upon which the Company proposes to issue the same. For a period of fifteen (15) Business Days following the delivery of such notice by the Company, the Company shall be deemed to have irrevocably offered to sell to each Participation Stockholder its pro rata share of such New Securities for the price and upon the terms specified in the notice. Each Participation Stockholder may exercise its rights of participation hereunder by giving written notice to the Company and stating therein the quantity of New Securities to be purchased. Each Participation Stockholder shall also be entitled to indicate a desire to purchase all or a portion of any New Securities remaining after such pro rata allocation. If, as a result of

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such oversubscription right, such oversubscriptions exceed the total number of New Securities available in respect of such oversubscription right, the oversubscribing Participation Stockholders shall be cut back with respect to their oversubscriptions on a pro rata basis (based on the number of outstanding shares of Voting Stock held by them at such time) or as they may otherwise agree among themselves.
          (d) In the event that the Participation Stockholders fail to commit to purchase all of such New Securities within said fifteen (15)-Business Day period, the Company shall have ninety (90) days thereafter to sell the New Securities with respect to which the right of participation was not exercised, at a price and otherwise upon terms no more favorable to the purchasers thereof than specified in the Company’s notice given pursuant to Section 3.07(c).
          (e) The closing for any such issuance shall take place as proposed by the Company with respect to the New Securities to be issued (but in no event sooner than fifteen (15) Business Days after notice is given to each Participation Stockholder), at which closing the Company shall deliver certificates for the New Securities in the respective names of the purchasing Stockholders against receipt of payment therefor. Each party shall bear its own expenses in connection with any such issuance pursuant to this Section 3.07.
ARTICLE IV
Additional Covenants
          Section 4.01. Actions Requiring Consent. For so long as RN Stockholder owns shares of Voting Stock of the Company representing at least twenty-five percent (25%) of the then outstanding shares of Voting Stock, without the approval of RN Stockholder, and for so long as MTVN Stockholder owns shares of Voting Stock of the Company representing at least twenty-five percent (25%) of the then outstanding shares of Voting Stock, without the approval of the MTVN Stockholder, no action shall be taken by the Company or any Subsidiary thereof, or any director, officer, agent or employee of the Company or its Subsidiaries, which would cause or permit any:
          (a) amendment, modification, termination or waiver of any provision the Charter or By-laws, including any increase or decrease in the number of authorized shares of any class of the Company’s stock;
          (b) issuance, sale, repurchase or retirement of any equity security or options or rights to acquire any equity security of the Company or any Subsidiary of the Company, including all terms and conditions in respect thereof; provided that this provision shall not apply with respect to issuances pursuant to the Company’s equity compensation plan of up to 34,000,000 shares of Class B Stock;
          (c) incurrence or material modification of any Indebtedness of the Company or any Subsidiary of the Company, in the aggregate, in excess of $10 million in any fiscal year;
          (d) (i) merger, consolidation, share exchange or sale (in one or a related series of transactions) of all or substantially all of the assets of the Company and any Subsidiary of the Company or (ii) sale or acquisition (in one or a related series of transactions) by the Company or

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any Subsidiary of the Company of any businesses with a sale or acquisition price in excess of $10 million;
          (e) dissolution, liquidation, bankruptcy or reorganization of the Company or any Subsidiary of the Company;
          (f) change in the terms, designations, powers, classification, preferences or other special rights, or the qualifications, limitations or restrictions, of equity securities of the Company;
          (g) entrance into any transaction with (i) any Director or officer of the Company, (ii) RN Stockholder or any of its Affiliates, employees, directors or officers or (iii) MTVN Stockholder or any of its Affiliates, employees, directors or officers;
          (h) a Public Offering of the Company or any Subsidiary thereof or any successor entity thereof; or
          (i) entrance into any contract or taking of any action for the purpose of effecting any of the foregoing.
          Section 4.02. Registration Rights. In the event of a proposed initial Public Offering of the securities of the Company or any of its Subsidiaries or successors thereof, the parties agree to negotiate in good faith a customary registration rights agreement.
          Section 4.03. Information Rights. From and after the date hereof, for so long as MTVN Stockholder or RN Stockholder holds at least seven and one half percent (7.5%) of the then outstanding shares of Voting Stock, such Stockholder shall be entitled to receive from the Company the following information:
          (a) as soon as available after the end of each fiscal year of the Company, and in any event within fifty (50) days after the end of each fiscal year of the Company, an audited consolidated balance sheet of the Company and its Subsidiaries as at the end of such year and audited consolidated statements of income, retained earnings and cash flows of the Company and its Subsidiaries for such year, certified by certified public accountants of established national reputation selected by the Company, which shall initially be KPMG LLP, and prepared in accordance with GAAP;
          (b) as soon as available after the end of each fiscal quarter of the Company (other than the fourth quarter), and in any event within thirty (30) days after the end of each fiscal quarter of the Company (other than the fourth quarter), an unaudited consolidated balance sheet of the Company and its Subsidiaries as at the end of such quarter, and unaudited consolidated statements of income, retained earnings and cash flows of the Company and its Subsidiaries for such fiscal quarter and for the current fiscal year to the end of such fiscal quarter, prepared in accordance with GAAP (subject to normal year-end audit adjustments and the absence of notes thereto); and
          (c) as soon as available after the end of each calendar month and in any event (i) within five (5) Business Days thereafter, a preliminary unaudited consolidated balance sheet

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of the Company and its Subsidiaries as at the end of such month, and preliminary unaudited consolidated statement of income of the Company and its Subsidiaries for such month, prepared in accordance with GAAP (subject to normal year-end audit adjustments and the absence of notes thereto), (ii) within ten (10) Business Days thereafter, a final unaudited consolidated balance sheet of the Company and its Subsidiaries as at the end of such month, and final unaudited consolidated statement of income of the Company and its Subsidiaries for such month, prepared in accordance with GAAP (subject to normal year-end audit adjustments and the absence of notes thereto) and (iii) within twenty (20) days thereafter, a summary of the Company’s financial performance not to exceed one page in length in a form to be mutually agreed upon by the Company and the recipients promptly following execution of this Agreement.
          Section 4.04. Annual Audit. For so long as either MTVN Parent or RN Parent are required to include the Company’s audited financial statements in its filings or other reports with the U.S. Securities and Exchange Commission, each of MTVN Stockholder and RN Stockholder (the “Requesting Stockholder”) may, in the event that such Requesting Stockholder reasonably believes that the Company will not provide an audited consolidated balance sheet of the Company and its Subsidiaries within fifty (50) days of the end of any fiscal year of the Company as required by Section 4.03(a), at its sole option, elect to engage on behalf of the Company an auditor to perform an audit on the Company’s financial statements for such fiscal year, a copy of which shall be delivered to each of MTVN Stockholder and RN Stockholder. The Requesting Stockholder shall pay for the fees and expenses of such audit; provided, that if both MTVN Stockholder and RN Stockholder are required to include the Company’s audited financial statements in its filings with the U.S. Securities and Exchange Commission, each shall pay for one-half of the total fees and expenses of the audit. The Company shall, and shall cause its officers, directors, employees and other agents to, cooperate with the auditor engaged by the Requesting Stockholder in connection with the preparation of such audit, including by affording such auditor access at all reasonable times to the Company’s officers, employees, legal counsel, properties, offices, plants and other facilities and to all books and records of the Company.
          Section 4.05. Access Rights. The Company shall, and shall cause its officers, directors, employees, auditors and other agents to, in the case of RN Stockholder, until such time as RN Stockholder shall cease to each own at least seven and one half percent (7.5%) of the then outstanding shares of Voting Stock and, in the case of MTVN Stockholder, until such time as MTVN Stockholder shall cease to each own at least seven and one half percent (7.5%) of the then outstanding shares of Voting Stock, (a) afford the officers, employees, auditors and other agents of RN Stockholder and/or MTVN Stockholder, as applicable, during normal business hours and upon notice, access at all reasonable times to the Company’s officers, employees, auditors, legal counsel, properties, offices, plants and other facilities and to all books and records of the Company, and (b) afford RN Stockholder and/or MTVN Stockholder, as applicable, the opportunity to discuss the Company’s affairs, finances and accounts with the Company’s officers from time to time as each such Stockholder may reasonably request.

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ARTICLE V
Term
          Section 5.01. Term. This Agreement shall become effective on the date hereof and shall continue in effect until the earlier to occur of (a) an initial Public Offering of the Company and (b) such time as, pursuant to Transfers of Voting Stock permitted herein, there are not at least two Stockholders subject to the terms and conditions hereof; provided, however, that the rights and obligations of each Stockholder under this Agreement shall terminate as to such Stockholder upon the Transfer of all (but not less than all) Voting Stock owned by such Stockholder (so long as such Transfer is in accordance with the provisions of this Agreement).
ARTICLE VI
General Provisions
          Section 6.01. Notices. All notices, requests and other communications to any party hereunder shall be in writing (including a facsimile or similar writing) and shall be given to such party at the address or facsimile number set forth below or as such party shall hereafter specify for the purpose by notice to the other parties. Each such notice, request or other communication shall be effective (i) if given by facsimile, at the time such facsimile is transmitted and the appropriate confirmation is received (or, if such time is not during a Business Day, at the beginning of the next such Business Day), (ii) if given by mail, five (5) Business Days (or (x) if by overnight courier, one (1) Business Day, or (y) if to an address outside the United States, seven (7) Business Days) after such communication is deposited in the mails with first-class postage prepaid, addressed as aforesaid, or (iii) if given by any other means, when delivered at the address specified pursuant to this Section 6.01.
          (i) if to the Company, to:
Rhapsody International Inc.
2601 Elliott Avenue
Seattle, Washington 98121
Phone: 206-674-2700
Email: jirwin@real.com
Attention: Chief Operating Officer
          (ii) if to RN Sub or RN Parent, to:
2601 Elliott Avenue
Suite 1000
Seattle, WA 98121
Phone: 206-674-2700
Email: bkimball@real.com
Attention: Robert Kimball

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with a copy to:
Weil, Gotshal & Manges LLP
767 Fifth Avenue
New York, NY 10153
Phone: 212-310-8000
Fax: 212-310-8007
Email: ted.waksman@weil.com and steven.peck@weil.com
Attention: Ted S. Waksman and Steven M. Peck
          (iii) if to MTVN Sub or MTVN Parent, to:
1515 Broadway
New York, NY 10036
Phone: 212-258-6070
Fax: 212-258-6099
Email: michael.fricklas@viacom.com
Attention: Michael D. Fricklas
with a copy to:
Cravath, Swaine & Moore LLP
825 Eighth Avenue
New York, NY 10019
Phone: 212-474-1000
Fax: 212-474-3700
Email: fsaeed@cravath.com
Attention: Faiza J. Saeed
          (iv) if to any Other Stockholder, to such address as set forth on Schedule F.
          Section 6.02. Counterparts. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original and all of which, taken together, shall constitute one and the same instrument and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other parties.
          Section 6.03. Integration. This Agreement, the Transaction Agreement, the Transaction Documents (as defined in the Transaction Agreement) and all other written agreements contemporaneously entered into herewith by the parties constitute the entire agreement among the parties hereto pertaining to the subject matter hereof and supersede all prior agreements and understandings of the parties in connection herewith, and no covenant, representation or condition not expressed in this Agreement shall affect, or be effective to interpret, change or restrict, the express provisions of this Agreement.
          Section 6.04. No Third Party Beneficiaries. This Agreement shall be binding upon and inure to the benefit of all the parties hereto and their successors and assigns, and their legal representatives. No Stockholder may assign this Agreement or any of its rights, interests

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or obligations in connection with a Transfer of Voting Stock hereunder except to the extent such rights, interests and obligations relate to Voting Stock and the Transfer of such Voting Stock is in accordance with this Agreement and is provided for or contemplated herein.
          Section 6.05. Applicable Law; Consent to Jurisdiction. This Agreement shall be governed by and construed in accordance with the laws of the State of New York without giving effect to the conflicts of law principles thereof. The Company and each of the Stockholders, by its, his or her execution hereof, (i) hereby irrevocably submit to the exclusive jurisdiction of the state and Federal courts located within the borough of Manhattan of the City, County and State of New York for the purposes of any claim or action arising out of or based upon this Agreement or relating to the subject matter hereof, (ii) hereby waive, to the extent not prohibited by applicable law, and agree not to assert by way of motion, as a defense or otherwise, in any such claim or action, any claim that it, he or she is not subject personally to the jurisdiction of the above-named courts, that its, his or her property is exempt or immune from attachment or execution, that any such proceeding brought in the above-named courts is improper or that this Agreement or the subject matter hereof may not be enforced in or by such courts and (iii) hereby agree not to commence any claim or action arising out of or based upon this Agreement or relating to the subject matter hereof other than before the above-named courts nor to make any motion or take any other action seeking or intending to cause the transfer or removal of any such claim or action to any court other than the above-named courts whether on the grounds of inconvenient forum or otherwise. The Company and each of the Stockholders hereby consent to service of process in any such proceeding, and agree that service of process by registered or certified mail, return receipt requested, at its address specified pursuant to Section 6.01, is reasonably calculated to give actual notice.
          Section 6.06. Severability. Each provision of this Agreement shall be considered separable and if for any reason any provision or provisions hereof are determined to be invalid and contrary to any existing or future law, such invalidity shall not impair the operation of or affect those portions of this Agreement which are valid; provided, however, that in such case the Stockholders shall endeavor to amend or modify this Agreement to achieve to the extent reasonably practicable the purpose of the invalid provision or provisions.
          Section 6.07. Amendment. Any amendments, modifications, supplements, restatements to or waivers of, or the termination of, this Agreement shall require the consent of (i) RN Stockholder, for so long as RN Stockholder has a right to designate at least one Director pursuant to Section 2.01(a)(i); (ii) MTVN Stockholder, for so long as MTVN Stockholder has a right to designate at least one Director pursuant to Section 2.01(a)(ii); and (iii) the Company; provided that no such amendment, modification, supplement, restatement, waiver or termination shall have a disproportionate and materially adverse effect on the interests of a party hereunder or thereunder without the written consent of such party so affected.
          Section 6.08. Headings. The titles of the sections and subsections of this Agreement are for convenience of reference only and shall not be interpreted to limit or amplify the provisions of this Agreement.

17


 

          Section 6.09. Waiver of a Jury Trial. Each of the parties to this Agreement irrevocably waives any and all right to trial by jury in any legal proceeding arising out of or relating to this Agreement.
          Section 6.10. Enforcement. (a) Each party hereto acknowledges that the other parties would not have an adequate remedy at law for money damages in the event that any of the covenants or agreements of any of the other parties in this Agreement were not performed in accordance with its terms, and it is therefore agreed that each party hereto, in addition to and without limiting any other remedy or right it may have, will have the right to an injunction or other equitable relief in any court of competent jurisdiction, enjoining any such actual or potential breach and enforcing specifically the terms and provisions hereof, and each party hereto hereby waives (i) any and all defenses they may have on the ground of lack of jurisdiction or competence of the court to grant such an injunction or other equitable relief and (ii) the need to post any bond that may be required in connection with the granting of such an injunction or other equitable relief.
          (b) All rights, powers and remedies provided under this Agreement or otherwise available in respect hereof at law or in equity shall be cumulative and not alternative, and the exercise or beginning of the exercise of any thereof by any party shall not preclude the simultaneous or later exercise of any other such right, power or remedy by such party.
          Section 6.11. Waiver. No failure by any party to insist upon the strict performance of any covenant, agreement, term or condition of this Agreement or to exercise any right or remedy consequent upon a breach of such or any other covenant, agreement, term or condition shall operate as a waiver of such or any other covenant, agreement, term or condition of this Agreement. Any party by notice given in accordance with Section 6.01 may, but shall not be under any obligation to, waive any of its rights or conditions to its obligations hereunder, or any duty, obligation or covenant of any other party. No waiver shall affect or alter the remainder of this Agreement but each and every covenant, agreement, term and condition hereof shall continue in full force and effect with respect to any other then existing or subsequent breach.
          Section 6.12. Confidentiality. Each Stockholder expressly acknowledges that such Stockholder may receive confidential and proprietary information relating to the Company, including information relating to the Company’s financial condition and business plans, and that the disclosure of such confidential information to a third party would cause irreparable injury to the Company. Except with the prior written consent of the Company, no Stockholder shall disclose any such information to a third party (other than on a “need to know” basis to any Affiliate or any employee, agent, representative or contractor of such Stockholder or its Affiliates), and each Stockholder shall use reasonable efforts to preserve the confidentiality of such information. The obligations of each Stockholder under this Section 6.12 shall survive the termination of this Agreement for a period of two years. Information exchanged between Stockholders shall be non-confidential unless exchanged pursuant to a separate confidentiality agreement executed between such Stockholders. Notwithstanding the foregoing, a Stockholder shall not be bound by the confidentiality obligations in this Section 6.12 with respect to any information that is currently or becomes (a) required to be disclosed by such Stockholder pursuant to applicable law (but only to the

18


 

extent of such requirement), (b) publicly known or available without unlawful action or improper disclosure on the part of such Stockholder or (c) known or available to such Stockholder via legitimate means other than through or on behalf of the Company or the other Stockholders.
          Section 6.13. Other Stockholders. Subject to the restrictions on Transfers of Voting Stock contained herein and as otherwise provided on Schedule D, any Person who is not RN Stockholder or MTVN Stockholder acquiring Voting Stock (“Other Stockholder”), shall, on or before the transfer or issuance to it of Voting Stock and as a condition precedent thereto, sign an Adoption Agreement. Upon the Transfer of all (but not less than all) of the Voting Stock owned by RN Stockholder or MTVN Stockholder to an Other Stockholder, such Stockholder shall be assigned the rights, interests and obligations hereunder of RN Stockholder or MTVN Stockholder, as applicable, to the extent that RN Stockholder or MTVN Stockholder, as applicable, has rights, interests and obligations immediately prior to such Transfer. The name and address of each Other Stockholder shall be listed on Schedule F, as amended from time to time.
          Section 6.14. Publicity. Neither the Company nor any Stockholder shall issue any public release or make any press statement about the Company, its business or the transactions contemplated hereby without the consent of each Stockholder, except as otherwise required by applicable law.
          Section 6.15. Absence of Presumption. The parties hereto have participated jointly in the negotiation and drafting of this Agreement and, in the event of ambiguity or in the event that any question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by such parties and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any of the provisions of this Agreement.
          Section 6.16. Expenses. Each Stockholder shall be responsible for its own expenses incurred in connection with this Agreement.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

19


 

          IN WITNESS WHEREOF, each party has duly executed this Agreement as of the date first written above.
         
  RHAPSODY INTERNATIONAL INC.
 
 
  By   /s/ Jon Irwin    
    Name:   Jon Irwin   
    Title:   President   
 
[Signatures continue on the following page.]
Signature Page to the Stockholder Agreement

20


 

         
  REALNETWORKS, INC.
 
 
  By   /s/ Robert Kimball    
    Name:   Robert Kimball   
    Title:   President and Acting Chief Executive Officer   
 
  REALNETWORKS DIGITAL MUSIC OF CALIFORNIA, INC.
 
 
  By   /s/ Robert Kimball    
    Name:   Robert Kimball  
    Title:   Vice President   
 
[Signatures continue on the following page.]
Signature Page to the Stockholder Agreement

21


 

         
  VIACOM INTERNATIONAL INC.
 
 
  By   /s/ W. Keyes Hill-Edgar    
    Name:   W. Keyes Hill-Edgar   
    Title:   Senior Vice President & Assistant Secretary   
 
  DMS HOLDCO INC.
 
 
  By   /s/ W. Keyes Hill Edgar    
    Name:   W. Keyes Hill-Edgar   
    Title:   Senior Vice President & Assistant Secretary   
 
Signature Page to the Stockholder Agreement

22

EX-10.2 3 v55756exv10w2.htm EX-10.2 exv10w2
Exhibit 10.2
(REAL LOGO)
RealNetworks Inc, Executive MBO Incentive Program
 
Objective of the Plan
The objective of the RealNetworks’ FY 2010 Executive MBO Incentive Plan (the “Plan”) is to reward business leaders for their contribution to the Company’s success and ensure market competitiveness as we work to attract and retain executive-level talent. RealNetworks has adopted this plan to reward high performance consistent with our core business objectives.

 
Effective Date
This plan is effective January 1, 2010 through December 31, 2010.

 
Target Goals
Target goals for the plan are set semi-annually and approved by the Compensation Committee of the Board of Directors. Plan objectives for 2010 are intended to be transitional and are designed to recognize the following results: financial stability, effective execution of transformational strategy milestones, and outstanding performance of key executives driving business results.
Semi-annual assessment of goal attainment will be completed after the close of the six month period. Corresponding payout based on goal attainment will typically occur 30 to 45 days after the close of the six month period.
Goal alignment is illustrated in the table below. For business leaders who are assigned to a start-up division or business unit, the revenue and EBITDA metrics for the division or business unit segment will be replaced with operating expense and divisional or business unit milestones equally weighted, with the remaining fifty percent aligned to corporate financial and milestone objectives.
                                                 
                    Divisional              
    Corporate             Operating     Bus Unit        
Exec Level   Milestones     Financial     Revenue     EBITDA     Revenue     Discretionary  
President & EVPs
    25.00 %     75.00 %                                
G&A, Shared Services
    25.00 %     75.00 %                                
Divisional and Bus Unit VP level +
    12.50 %     37.50 %     25.00 %     25.00 %                
Bus Unit Sr Management
    6.25 %     18.75 %             37.50 %     37.50 %        
Divisional Sr Management
    6.25 %     18.75 %     37.50 %     37.50 %                
Finance – Chief Accounting Officer
                                            100.00 %
MBO Payout Mechanics
Financial Metrics:
—    In order to maintain financial stability, revenue and operating expense attainment below 90% will not be rewarded.
     
Revenue & Operating    
Expense Attainment   Incentive Payout
< 90%
  No Payout
90% +   Linear Payout
—    EBITDA payout for attainment in the first half of the plan year will be binary with no reward below target and a cap of 100% payout at or above target. Second half payout for EBITDA attainment will be a linear payout capped at 200% for Executive Vice Presidents and above and 160% for all other plan participants.
         
    Operating EBITDA    
Plan Period   Attainment   Incentive Payout
1 Half   < 100%   No Payout
  100% +   Capped at 100%
       
2 Half   0 – 100%+   Linear Payout
    Capped at 200% for EVP +
    Capped at 160% all others

 


 

(REAL LOGO)
Transformational Milestones:
—    The Compensation Committee of the Board of Directors will review and approve both the setting of the milestones at the beginning of the measurement period and the attainment of results at the end of the period. Milestones may include discretionary assessment of quality of completion towards goal and common sense adjustment.
Individual Performance Modifier:
—    To be used to reward exceptional individual contributions as well as adjust for below average contributions by multiplying the modifier to final payout calculation for plan participants. The Chief Executive Officer and senior staff will determine the individual contribution levels and recommend the performance modifier to the Compensation Committee of the Board for their approval. Executive officers of the company will be excluded.
     
Individual Performance   Modifier
Outstanding Contribution   125%
Full Contribution   100%
Less than Full Contribution   75%
Terms and Conditions
    MBO calculations are completed and payments are made every six months with payout timing approximately 30 – 45 days after the close of the six month period. In all circumstances, any payouts that are earned in the current plan year will be paid by March 15 of the next year at the latest.
 
    You must be in an eligible position on the first and last day of the quarter to participate in the MBO program for that quarter.
 
    Salary, eligible position changes and/or transfers from one eligible group to another within a quarter will be based on salary and change at the beginning of the quarter. Changes after the first day of the quarter will be reflected in the next quarter.
 
    In order to receive a payout from the plan you must be on the company’s payroll as of the last day of each six month period and on the company’s payroll as of the date the award is paid, subject to the following. If your employment terminates due to your total and permanent disability or death, you or your estate still may be eligible to receive any payout that otherwise was earned. If the Company terminates your employment other than for cause, you also may be eligible to receive any payout that otherwise was earned.
 
    Notwithstanding any other provision of the Plan, the Compensation Committee, in its sole discretion, may increase, reduce or eliminate a participant’s award at any time before it is paid, whether or not calculated on the basis of pre-established performance goals or formulas.
 
    The Compensation Committee has all power and discretion to interpret and administer the Plan, including (but not limited to) the power to determine who is eligible for the Plan and the size of any payouts.
 
    The Compensation Committee may delegate all or any part of its powers under the Plan to the company’s CEO and CFO, except that the CEO and CFO may not administer the Plan with respect to participants who are executive officers of the company. (For this purpose, an individual will be considered an executive officer of the company if his or her role at the company falls within the definition of “officer” under Rule 16a-1(f) promulgated under the Securities Exchange Act of 1934, as amended.)
       
RN Confidential    2 of 2   

 

EX-31.1 4 v55756exv31w1.htm EX-31.1 exv31w1
EXHIBIT 31.1
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Robert Kimball, certify that:
1.   I have reviewed this report on Form 10-Q of RealNetworks, Inc.;
 
2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.   The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
  a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
  b)   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
  c)   Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
  d)   Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.   The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
  a)   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
  b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: May 7, 2010
         
   
/s/ Robert Kimball    
Robert Kimball   
Title:   President and Acting Chief Executive Officer
(Principal Executive Officer) 
 

 

EX-31.2 5 v55756exv31w2.htm EX-31.2 exv31w2
         
EXHIBIT 31.2
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Michael Eggers, certify that:
1.   I have reviewed this report on Form 10-Q of RealNetworks, Inc.;
 
2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.   The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
  a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
  b)   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
  c)   Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
  d)   Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.   The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
  a)   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
  b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: May 7, 2010
         
   
/s/ Michael Eggers    
Michael Eggers   
Title:   Senior Vice President, Chief Financial
Officer and Treasurer (Principal Financial and
Accounting Officer) 
 

 

EX-32.1 6 v55756exv32w1.htm EX-32.1 exv32w1
         
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SECTION 1350)
     I, Robert Kimball, President and Acting Chief Executive Officer of RealNetworks, Inc., certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of RealNetworks, Inc. on Form 10-Q for the fiscal quarter ended March 31, 2010 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents in all material respects the financial condition and results of operations of RealNetworks, Inc.
Date: May 7, 2010
         
   
By:   /s/ Robert Kimball    
  Name:   Robert Kimball   
  Title:   President and Acting Chief Executive Officer
(Principal Executive Officer) 
 
 
A signed original of this written statement required by Section 906 has been provided to RealNetworks, Inc. and will be retained by RealNetworks, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

 

EX-32.2 7 v55756exv32w2.htm EX-32.2 exv32w2
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SECTION 1350)
     I, Michael Eggers, Senior Vice President, Chief Financial Officer and Treasurer of RealNetworks, Inc., certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of RealNetworks, Inc. on Form 10-Q for the fiscal quarter ended March 31, 2010 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents in all material respects the financial condition and results of operations of RealNetworks, Inc.
Date: May 7, 2010
         
   
By:   /s/ Michael Eggers    
  Name:   Michael Eggers    
  Title:   Senior Vice President, Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer) 
 
 
A signed original of this written statement required by Section 906 has been provided to RealNetworks, Inc. and will be retained by RealNetworks, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

 

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