Exhibit 99.1
Pro Forma Consolidated Financial Information
Pro Forma Consolidated Financial Information
Introduction
On March 31, 2010, the restructuring transactions contemplated by the Transaction, Contribution and Purchase Agreement dated February 9, 2010 among RealNetworks, Inc. (“Real” or “RealNetworks”), RealNetworks Digital Music of California, Inc., a wholly owned subsidiary of Real, MTV Networks, a division of Viacom International Inc. (“MTVN”), DMS Holdco Inc., a wholly owned subsidiary of MTVN, and Rhapsody America LLC , the joint venture formed by Real and MTVN (“Rhapsody,” together with the other parties listed above, the “Parties”), were completed. At the closing, Rhapsody was converted from a limited liability company to a corporation, and Real, MTVN and two minority stockholders hold the outstanding shares of Rhapsody such that MTVN owns 47.5%, Real owns slightly less than 47.5% of such outstanding shares and the minority stockholders own the remainder. Real contributed $18 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 million preference upon certain liquidation events. A portion of Real’s cash contribution was used to repurchase the international radio business that was previously contributed to Rhapsody by Real. MTVN contributed a $33 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 Stockholder Agreement, dated as of August 20, 2007, between Real and Viacom International Inc., on behalf of MTVN, and the Limited Liability Company Agreement, dated as of August 20, 2007, among the Parties, were terminated, including the put and call rights held by Real and MTVN and MTVN’s rights to receive a preferred return in connection with the exercise of Real’s put right. At closing, the Parties entered into a Stockholder Agreement that contains provisions regarding the governance of Rhapsody, stock transfer restrictions and approval of certain corporate transactions. In addition, certain existing agreements were amended to, among other things, expand the technology and intellectual property licenses from Real to Rhapsody relating to the core technologies for the Rhapsody audio digital music service to provide worldwide, perpetual licenses and certain rights for use of the core technologies in business-to-business audio music services. Real will also provide certain operational transition services to Rhapsody until December 31, 2010, unless earlier terminated by Rhapsody.
As a result of the restructuring transactions Rhapsody is no longer a consolidated majority-owned subsidiary of RealNetworks, Inc. and is now an independent private company.
Pro Forma Information
The unaudited pro forma condensed consolidated statement of operations for the year ended December 31, 2009 treats the restructuring transactions of Rhapsody as if they occurred on December 31, 2008. The unaudited pro forma condensed consolidated balance sheet as of December 31, 2009 gives effect to the restructuring transactions of Rhapsody as if they occurred on December 31, 2009. The unaudited pro forma condensed consolidated financial statements are subject to the assumptions and adjustments set forth in the accompanying notes. Management believes that the assumptions used and the adjustments made are reasonable under the circumstances and given the information available. The adjustments are preliminary in nature and subject to change following the transaction based on refinements as actual data become available.
The amounts presented under the column “RealNetworks Consolidated Historical” in the accompanying unaudited pro forma consolidated statement of operations and unaudited pro forma consolidated balance sheet as of and for the year ended December 31, 2009 reflect the historical consolidated amounts as reported by RealNetworks in its Annual Report on Form 10-K for the year ended December 31, 2009 filed with the Securities and Exchange Commission on March 10, 2010.
The amount presented under the column “Deconsolidation of Rhapsody” represents the historical amounts of Rhapsody, previously consolidated by RealNetworks.
These unaudited pro forma consolidated financial statements are presented for illustrative purpose only and are not necessarily indicative of the operating results or the financial position that would have been achieved had the sales/divestitures discussed above been consummated as of the dates indicated or of the results that may be obtained in the future. These unaudited pro forma consolidated financial statements and accompanying notes should be read together with Real’s audited consolidated financial statements and accompanying notes as of and for the year ended December 31, 2009 and Management’s Discussion and Analysis included in Real’s Annual Report on Form 10-K for the year ended December 31, 2009.
RealNetworks, Inc. and Subsidiaries
Pro Forma Condensed Consolidated Balance Sheet
December 31, 2009
(Unaudited)
Pro Forma Condensed Consolidated Balance Sheet
December 31, 2009
(Unaudited)
RealNetworks | ||||||||||||||||
Consolidated | Deconsolidation | Pro Forma | ||||||||||||||
Historical | of Rhapsody(1) | Adjustments | Pro Forma | |||||||||||||
(in thousands) | ||||||||||||||||
ASSETS | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash and cash equivalents | $ | 277,030 | $ | 17,972 | $ | (18,000) | (2), (5) | $ | 241,058 | |||||||
Short-term investments | 107,870 | — | — | 107,870 | ||||||||||||
Trade accounts receivable, net | 60,937 | 7,354 | — | 53,583 | ||||||||||||
Related party receivable — Rhapsody | — | — | 8,538 | (3) | 8,538 | |||||||||||
Deferred costs, current portion | 5,192 | 616 | — | 4,576 | ||||||||||||
Prepaid expenses and other current assets | 30,624 | 669 | — | 29,955 | ||||||||||||
Total current assets | 481,653 | 26,611 | (9,462 | ) | 445,580 | |||||||||||
Equipment, software, and leasehold improvements, at cost: | ||||||||||||||||
Equipment and software | 151,951 | 584 | (5,669) | (4), (5) | 145,698 | |||||||||||
Leasehold improvements | 31,041 | — | — | 31,041 | ||||||||||||
Total equipment, software, and leasehold improvements | 182,992 | 584 | (5,669 | ) | 176,739 | |||||||||||
Less accumulated depreciation and amortization | 125,878 | 174 | — | 125,704 | ||||||||||||
Net equipment, software, and leasehold improvements | 57,114 | 410 | (5,669 | ) | 51,035 | |||||||||||
Restricted cash equivalents and investments | 13,700 | — | — | 13,700 | ||||||||||||
Equity investments | 19,553 | — | 29,650 | (5) | 49,203 | |||||||||||
Other assets | 4,030 | — | — | 4,030 | ||||||||||||
Deferred costs, non-current portion | 10,182 | 1,559 | — | 8,623 | ||||||||||||
Deferred tax assets, net, non-current portion | 10,001 | — | (2,645 | ) (5) | 7,356 | |||||||||||
Other intangible assets, net | 10,650 | 113 | — | 10,537 | ||||||||||||
Goodwill | — | — | — | — | ||||||||||||
Total assets | $ | 606,883 | $ | 28,693 | $ | 11,874 | $ | 590,064 | ||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Accounts payable | $ | 32,703 | $ | 1,895 | $ | — | $ | 30,808 | ||||||||
Accrued and other liabilities | 124,934 | 3,091 | (2,645 | ) (5) | 119,198 | |||||||||||
Deferred revenue, current portion | 31,374 | 9,742 | — | 21,632 | ||||||||||||
Related party payable — MTVN | 11,216 | 11,216 | — | — | ||||||||||||
Related party payable — RealNetworks | — | 8,538 | 8,538 | (3) | — | |||||||||||
Accrued loss on excess office facilities, current portion | 3,228 | — | — | 3,228 | ||||||||||||
Total current liabilities | 203,455 | 34,482 | 5,893 | 174,866 | ||||||||||||
Deferred revenue, non-current portion | 1,933 | 777 | — | 1,156 | ||||||||||||
Accrued loss on excess office facilities, non-current portion | — | — | — | — | ||||||||||||
Deferred rent | 4,464 | — | — | 4,464 | ||||||||||||
Deferred tax liabilities, net, non-current portion | 961 | — | 961 | |||||||||||||
Other long-term liabilities | 13,006 | — | — | 13,006 | ||||||||||||
Total liabilities | 223,819 | 35,259 | 5,893 | 194,453 | ||||||||||||
Noncontrolling interest in Rhapsody (A) | 7,253 | — | (7,253 | ) (5) | — | |||||||||||
Shareholders’ equity | 375,811 | (6,566 | ) | 13,234 | (5) | 395,611 | ||||||||||
Total liabilities and shareholders’ equity | $ | 606,883 | $ | 28,693 | $ | 11,874 | $ | 590,064 | ||||||||
(A) | Noncontrolling interest in Rhapsody reflects MTVN’s 49% ownership interest in the net assets of Rhapsody. |
RealNetworks, Inc. and Subsidiaries
Condensed Consolidated Statement of Operations
Year Ended December 31, 2009
(Unaudited)
Condensed Consolidated Statement of Operations
Year Ended December 31, 2009
(Unaudited)
RealNetworks | ||||||||||||||||
Consolidated | Deconsolidation | Pro Forma | ||||||||||||||
Historical | of Rhapsody(1) | Adjustments | Pro Forma | |||||||||||||
(in thousands, except per share data) | ||||||||||||||||
Net revenue | $ | 562,264 | $ | 159,561 | $ | 9,136 | (6) | $ | 411,839 | |||||||
Cost of revenue | 222,142 | 100,796 | 1,442 | (6) | $ | 122,788 | ||||||||||
Gross profit | 340,122 | 58,765 | 7,694 | 289,051 | ||||||||||||
Operating expenses: | ||||||||||||||||
Research and development | 119,448 | 16,143 | — | 103,305 | ||||||||||||
Sales and marketing | 165,856 | 45,772 | 1,217 | (6) | 121,301 | |||||||||||
Advertising with related party (A) | 33,292 | 33,292 | — | — | ||||||||||||
General and administrative | 79,164 | 16,668 | 1,600 | (6) | 64,096 | |||||||||||
Impairment of goodwill and long-lived assets | 175,583 | — | — | 175,583 | ||||||||||||
Restructuring and other charges | 4,017 | 610 | — | 3,407 | ||||||||||||
Total operating expenses | 577,360 | 112,485 | 2,817 | 467,692 | ||||||||||||
Operating loss | (237,238 | ) | (53,720 | ) | 4,877 | (178,641 | ) | |||||||||
Other income (expenses): | ||||||||||||||||
Interest income, net | 3,969 | 119 | — | 3,850 | ||||||||||||
Equity in net loss of investments | (1,313 | ) | 27,336 | 585 | (7) | (28,064 | ) | |||||||||
Gain (loss) on sale of equity investments, net | 688 | — | — | 688 | ||||||||||||
Impairment of equity investments | (5,020 | ) | — | — | (5,020 | ) | ||||||||||
Other income (expense), net | (794 | ) | — | — | (794 | ) | ||||||||||
Total other income (expense), net | (2,470 | ) | 27,455 | 585 | (29,340 | ) | ||||||||||
Loss before income taxes | (239,708 | ) | (26,265 | ) | 5,462 | (207,981 | ) | |||||||||
Income tax benefit (expense) | (3,321 | ) | — | (4,067) | (8) | (7,388 | ) | |||||||||
Net loss | (243,029 | ) | (26,265 | ) | 1,395 | (215,369 | ) | |||||||||
Net loss attributable to the noncontrolling interest in Rhapsody | 26,265 | 26,265 | — | — | ||||||||||||
Net loss attributable to common shareholders | $ | (216,764 | ) | $ | — | $ | 1,395 | $ | (215,369 | ) | ||||||
Basic net loss per share available to common shareholders | $ | (1.64 | ) | $ | (1.60 | ) | ||||||||||
Diluted net loss per share available to common shareholders | $ | (1.64 | ) | $ | (1.60 | ) | ||||||||||
Shares used to compute basic net loss per share available to common shareholders | 134,612 | 134,612 | ||||||||||||||
Shares used to compute diluted net loss per share available to common shareholders | 134,612 | 134,612 |
(A) | Consists of advertising purchased by Rhapsody from MTV Networks (MTVN). |
RealNetworks, Inc. and Subsidiaries
Earnings Per Share Reconciliation
Year Ended December 31, 2009
(Unaudited)
Earnings Per Share Reconciliation
Year Ended December 31, 2009
(Unaudited)
RealNetworks | ||||||||||||||||
Consolidated | Deconsolidation | Pro Forma | ||||||||||||||
Historical | of Rhapsody(1) | Adjustments | Pro Forma | |||||||||||||
(in thousands, except per share data) | ||||||||||||||||
Net loss attributable to common shareholders | $ | (216,764 | ) | $ | — | $ | 1,395 | $ | (215,369 | ) | ||||||
Less accretion of MTVN’s preferred return in Rhapsody | (3,700 | ) | (3,700 | ) | — | — | ||||||||||
Net loss available to common shareholders | $ | (220,464 | ) | $ | (3,700 | ) | $ | 1,395 | $ | (215,369 | ) | |||||
Shares used to compute basic net loss per share available to common shareholders | 134,612 | — | — | 134,612 | ||||||||||||
Dilutive potential common shares: | ||||||||||||||||
Stock options and restricted stock | — | — | — | — | ||||||||||||
Convertible debt | — | — | — | — | ||||||||||||
Shares used to compute diluted net loss per share available to common shareholders | 134,612 | — | — | 134,612 | ||||||||||||
Basic net loss per share available to common shareholders | $ | (1.64 | ) | $ | (1.60 | ) | ||||||||||
Diluted net loss per share available to common shareholders | $ | (1.64 | ) | $ | (1.60 | ) |
(1) | Reflects the elimination of the financial operations, assets, liabilities and accumulated other comprehensive income amounts associated with the deconsolidation of Rhapsody. | |
(2) | Reflects the cash contribution related to the restructure transactions of Rhapsody. | |
(3) | Reflects the related party receivables/payables between RealNetworks and Rhapsody. | |
(4) | Reflects the approximate amount of additional assets that were contributed to Rhapsody as part of the restructuring transaction. | |
(5) | Reflects the effects of the current transaction including the treatment of RealNetworks investment in Rhapsody on the equity method and the contributions made by RealNetworks to Rhapsody. | |
(6) | Reflects revenue and cost of sales related to international music business that was reacquired by RealNetworks from Rhapsody as part of the transaction. | |
(7) | Reflects the change in RealNetworks ownership percentage. | |
(8) | The pro forma income tax expense for the year ended December 31, 2009, is calculated based on RealNetworks consolidated results with and without the Rhapsody results of operations and for other adjustments resulting from the restructuring agreement including the conversion of Rhapsody from an LLC to a corporation. This results in a pro forma effective tax rate attributable to RealNetworks of approximately (3.5)%. |