Shareholders' Equity

12 Months Ended

Dec. 31, 2011

Shareholders' Equity

Note 13. Shareholders’ Equity

Preferred Stock.    Each share of Series A preferred stock entitles the holder to one thousand votes and dividends equal to one thousand times the aggregate per share amount of dividends declared on the common stock. There are no shares of Series A preferred stock outstanding.

Undesignated preferred stock will have rights and preferences that are determinable by the Board of Directors when determination of a new series of preferred stock has been established.

Shareholder Rights Plan.    On December 2, 2008, the Company and Mellon Investor Services LLC entered into an Amended and Restated Shareholder Rights Plan (Amended and Restated Rights Plan) which amended and restated the existing Shareholder Rights Plan dated December 4, 1998, as amended (Existing Rights Plan). In connection with the Existing Rights Plan, on October 16, 1998, the Company’s board of directors declared a dividend of a right to purchase one one-thousandth of a share of the Company’s Series A preferred stock (Right) for each outstanding share of the Company’s common stock on December 14, 1998 (Record Date). Each share of common stock issued after the Record Date will be issued with an attached Right. The Rights will not immediately be exercisable and detachable from the common stock. The Rights will become exercisable and detachable only following the earlier of the acquisition of the Company by a person or a group of 15 percent or more of the outstanding common stock or ten days following the announcement of a tender or exchange offer for 15 percent or more of the outstanding common stock (Distribution Date). Notwithstanding the foregoing, Robert Glaser, the Company’s Chairman of the Board of Directors, is excluded as a person who can trigger the Distribution Date so long as he does not increase his beneficial ownership of shares of the Company’s common stock above the number of shares he holds as of the date of the Amended and Restated Rights Plan, except for shares of the Company’s common stock he acquires from the exercise of stock options or from stock awards granted to him in connection with his employment with the Company. After the Distribution Date, each Right will entitle the holder to purchase for $120.00 (Exercise Price) one one-thousandth (1/1000th) of a share of the Company’s Series A preferred stock with economic terms similar to that of one share of the Company’s common stock. Upon a person or a group acquiring 15 percent or more of the outstanding common stock, each Right will allow the holder (other than the acquirer) to purchase common stock or securities of the Company having a then current market value of two times the Exercise Price of the Right. In the event that following the acquisition of 15 percent of the common stock by an acquirer, the Company is acquired in a merger or other business combination or 50 percent or more of the Company’s assets or earning power are sold, each Right will entitle the holder to purchase for the Exercise Price, common stock or securities of the acquirer having a then current market value of two times the Exercise Price. In certain circumstances, the Rights may be redeemed by the Company at a redemption price of $0.001 per Right. If not earlier exchanged or redeemed, the Rights will expire on December 2, 2018.

Equity Compensation Plans.    The Company has equity-based awards outstanding under five equity compensation plans (Plans) to compensate employees and Directors for past and future services. Generally, options vest based on continuous employment, over a two, four or five-year period. The options expire in either seven, ten, or twenty years from the date of grant and are exercisable at the fair market value of the common stock at the grant date.

Restricted Stock Units and Awards.    In 2011, 2010, and 2009, the Company granted restricted stock units and awards representing 520,199, 71,246, and 12,534 shares of common stock, respectively, pursuant to the Company’s 2005 Stock Incentive Plan (2005 Plan). In 2011, 2010 and 2009 restricted stock units and awards that vested totaled 94,361, 44,763 and 52,495, respectively. Non-vested restricted stock units and awards outstanding at the end of the December 31, 2011, 2010 and 2009 totaled 462,922, 86,511 and 117,857. Each restricted stock unit granted or cancelled either reduces or increases the shares available for grant under the 2005 Plan by a specified factor set forth in the 2005 Plan. This factor by which restricted stock units affect the shares available for grant was changed from 1.6 shares to 2.2 shares as of June 25, 2007 and was subsequently changed back to 1.6 shares, effective December 17, 2009.

A summary of stock options and restricted stock units activity is set forth in the table below. Prior to August 2011, amounts set forth in the table below reflect actual transactions that occurred as of the dates set forth and as a result are appropriately not adjusted for the special cash dividend paid in August 2011.

	Shares Available for Grant in (000’s)			Options Outstanding					Weighted Average Fair Value Grants
				Number of Shares in (000’s)			Weighted Average Exercise Price
Balances, December 31, 2008		1,928			9,884		$	29.64
Options granted at common stock price		(812	)		812			12.00		6.00
Stock awards and restricted stock units granted		(27	)							11.08
Stock awards and restricted stock units cancelled		56
Options cancelled as part of stock option exchange(1)		1,275			(4,735	)		31.60
Options granted as part of stock option exchange(1)		—			2,016			14.52
Options exercised		—			(9	)		5.96
Options cancelled		1,443			(1,443	)		30.04
Balances, December 31, 2009		3,863			6,525			24.44
Options granted at common stock price		(1,752	)		1,752			15.56		7.48
Stock awards and restricted stock units granted		(114	)							12.68
Stock awards and restricted stock units cancelled		112
Options exercised		—			(133	)		11.80
Options cancelled		2,585			(2,585	)		21.36
Balances, December 31, 2010		4,694			5,559			19.68
Options granted at common stock price		(2,250	)		2,250			9.54		5.08
Stock awards and restricted stock units granted		(831	)							9.40
Stock awards and restricted stock units cancelled		119
Increase in shares available to grant from special cash dividend(2)		1,843
Options exercised		—			(210	)		10.57
Options cancelled		1,234			(1,234	)		14.72
Balances, December 31, 2011		4,809			6,365			14.24

(1) The Company’s stock option exchange program and the amended and restated 2005 Stock Incentive Plan used a specific calculation to determine the number of shares available for grant immediately after the exchange. Based on this calculation, the number of shares available as of December 17, 2009 was 4.0 million shares. This resulted in an increase of the previously outstanding number available for grant by approximately 1.3 million shares.

(2) In connection with the Company’s special cash dividend of $1.00 per share of common stock paid in August 2011, and pursuant to the terms of the 2005 Plan, adjustments were made to the aggregate number of shares authorized for issuance under the 2005 Plan to reflect the special dividend. As a result of these adjustments, the previously outstanding number of shares authorized for issuance under the 2005 Plan was increased by approximately 1.8 million shares. Also in connection with the special cash dividend and one-for-four reverse stock split in August 2011, the Company made equitable adjustments to outstanding options and restricted stock units in accordance with the Company’s equity compensation plans. For all awards, the fair value of the award before and after the dividend and one-for-four reverse stock split remained the same, thus no incremental expense was recognized in the Company’s financial statements as a result of these equitable adjustments.

The following table summarizes information about stock options outstanding at December 31, 2011:

Exercise Prices	Options Outstanding				Weighted Average Exercise Price		Options Exercisable
	Number of Shares (in 000’s)		Weighted Average Remaining Contractual Life (Years)				Number of Shares (in 000’s)		Weighted Average Exercise Price
$0.04 — $7.00		208		4.11	$	3.94		181	$	3.58
$7.08 — $7.44		920		6.84		7.43		7		7.21
$7.48 — $10.20		647		5.76		8.37		193		8.29
$10.28 — $10.36		91		6.38		10.34		7		10.36
$10.40 — $10.52		1,128		4.80		10.51		1,071		10.52
$10.56 — $11.04		250		5.53		10.89		186		10.88
$11.08 — $11.36		761		5.79		11.36		116		11.34
$11.40 — $14.40		691		4.26		13.62		348		13.52
$14.56 — $20.36		692		3.51		18.83		669		18.82
$20.48 — $180.00		977		2.31		31.67		966		31.77
		6,365		4.76	$	14.24		3,744	$	17.35

The weighted average remaining contractual life of the exercisable options in the table above is 3.8 years. The aggregate intrinsic value of stock options exercised in 2011, 2010 and 2009 was $0.3 million, $0.5 million and $0.1 million. The aggregate intrinsic value of options outstanding and options exercisable as of December 31, 2011 was $0.8 million and $0.7 million, respectively.

Employee Stock Purchase Plan.    In 2007, the Company adopted the 2007 Employee Stock Purchase Plan (2007 ESPP) to replace the 1998 Employee Stock Purchase Plan, which expired on December 31, 2007 following the conclusion of the final offering period. There are 1.1 million shares of common stock reserved for issuance under the 2007 ESPP. Under the 1998 ESPP and the 2007 ESPP, an eligible employee may purchase shares of common stock, based on certain limitations, at a price equal to 85 percent of the fair market value of the common stock at the end of the semi-annual offering periods. Under the 2007 ESPP, 110,000, 90,250, and 127,750 shares at a weighted average fair value of the employee stock purchase rights of $1.53, $2.32, and $1.96 were purchased during the years ended December 31, 2011, 2010 and 2009, respectively.

Stock Option Exchange.    On September 21, 2009, RealNetworks’ shareholders approved a proposal to allow for a one-time stock option exchange program designed to provide eligible employees an opportunity to exchange certain outstanding underwater stock options for a lesser amount of new options to be granted with lower exercise prices. Stock options eligible for exchange were those with an exercise price per share greater than $13.92. On November 19, 2009, the Company commenced the option exchange program, which expired on December 17, 2009. A total of 4.7 million eligible stock options were tendered by employees, representing 72% of the total stock options eligible for exchange. Section 16 officers and directors of the Company were not eligible to participate in the exchange. On December 17, 2009, the Company granted an aggregate of 2.0 million new stock options in exchange for the eligible stock options surrendered. The exercise price of the new stock options was $10.52, which was the closing price of the Company’s common stock on December 17, 2009. The new stock options were granted under the 2005 Plan. No incremental stock option expense was recognized for the exchange because the fair value of the new options, using standard employee stock option valuation techniques, was not greater than the fair value of the surrendered options they replaced.