1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported): DECEMBER 29, 2000
REALNETWORKS, INC.
(Exact name of registrant as specified in charter)
WASHINGTON
(State or other jurisdiction of incorporation)
0-23137
(Commission File Number)
91-1628146
(IRS Employer Identification No.)
2601 ELLIOTT AVENUE, SUITE 1000, SEATTLE, WA 98121 (Address of
principal executive offices) (Zip Code)
(206) 674-2700
(Registrant's telephone number, including area code)
NONE
(Former name or former address, if changed since last report)
2
Pursuant to an Agreement and Plan of Merger and Reorganization dated as
of December 29, 2000, by and among RealNetworks, Inc., a Delaware
corporation ("RealNetworks"), Aegisoft Corporation, a Delaware
corporation ("Aegisoft"), McKinley Acquisition Corp., a Delaware
corporation and a wholly-owned subsidiary of RealNetworks ("Merger
Sub"), certain stockholders of Aegisoft, Ji Shen,as Stockholder
Representative, and with respect to Articles VI and VIII only, Mellon
Investor Services LLC, as Escrow Agent, RealNetworks acquired all of the
outstanding capital stock of Aegisoft and Merger Sub merged with and
into Aegisoft, with Aegisoft as the surviving corporation (the "Aegisoft
Merger"). The purpose of this Amendment is to amend Items 7(a) and 7(b)
to provide certain historical and pro forma financial information with
respect to the Aegisoft Merger, which information was impractical to
provide at the time RealNetworks' filed the Current Report on Form 8-K
dated January 12, 2001.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) Financial Statements of Business Acquired
Financial Information Page
--------------------- ----
Report of Independent Public Accountants F-1
Balance Sheets, December 31, 1999 and 1998 and September 30, 2000 (unaudited) F-2
Statements of Operations for the Years Ended December 31, 1999 and 1998, the
nine months ended September 30, 1999 and 2000, the period from Inception
(August 4, 1997) through December 31, 1999, and the period from Inception
(August 4,1997) through September 30, 2000 F-3
Statement of Shareholders' Equity for the Years Ended December 31, 1999 and 1998 F-4
Statements of Cash Flows for the Years Ended December 31, 1999 and 1998, the
nine months ended September 30, 1999 and 2000, the period from Inception
(August 4, 1997) through December 31, 1999, and the period from Inception
(August 4,1997) through September 30, 2000 F-5
Notes to Financial Statements F-6
3
(b) Pro Forma Financial Information
Financial Information Page
--------------------- ----
Unaudited Pro Forma Condensed Consolidated Balance Sheet
as of September 30, 2000 F-14
Unaudited Pro Forma Condensed Consolidated Statement of Operations for
the Nine Months Ended September 30, 2000 F-15
Unaudited Pro Forma Condensed Consolidated Statement of Operations
for the Year Ended December 31, 1999 F-16
Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements F-17
(c) Exhibits
Exhibit Number Description
-------------- -----------
2.1 Agreement and Plan of Merger and Reorganization
dated as of December 29, 2000 among RealNetworks,
Inc., McKinley Acquisition Corp., Aegisoft
Corporation, certain stockholders of Aegisoft
Corporation, Ji Shen, as Stockholder
Representative, and with respect to Article VI and
Article VIII only, Mellon Investor Services LLC, as
Escrow Agent. (Incorporated by reference from
RealNetworks' current report on Form 8-K dated
January 12, 2001.)
23.1 Consent of Independent Public Accountants
99.1 Press Release dated January 15, 2001 regarding
acquisition of Aegisoft Corporation.
4
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of Aegisoft Corporation:
We have audited the accompanying Balance Sheets of Aegisoft Corporation (a
Delaware Corporation in the development stage) as of December 31, 1999 and 1998,
and for the period from inception (August 4, 1997) through December 31, 1999.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Aegisoft Corporation as of
December 31, 1999 and 1998, and the results of its operations and its cash flows
for the years ended December 31, 1999 and 1998, and for the period from
inception (August 4, 1997) through December 31, 1999, in conformity with
accounting principles generally accepted in the United States.
/s/ Arthur Andersen LLP
Baltimore, Maryland,
April 13, 2000
5
F-2
Aegisoft Corporation
Balance Sheets December 31, 1998
and 1999, and September 30, 2000
SEPTEMBER 30,
1999 1998 2000 (UNAUDITED)
----------- ----------- ----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,283,159 $ 645,549 $ 279,051
Accounts receivable 88,068 -- 138,068
Prepaid expenses 51,418 73,618 32,668
----------- ----------- -----------
Total Current Assets 1,422,645 719,167 449,787
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $24,104, $5,498 and $38,504,
respectively 48,560 38,416 47,273
INTANGIBLE ASSETS, net of accumulated
amortization of $9,925, $548 and $14,271
respectively 28,975 4,220 24,629
----------- ----------- -----------
Total assets $ 1,500,180 $ 761,803 $ 521,689
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 174,023 $ 10,341 $ 37,805
Accrued expenses 40,569 36,932 5,901
Current portion of capital lease obligations 4,183 3,838 1,046
Notes payable -- -- 800,000
----------- ----------- -----------
Total current liabilities 218,775 51,111 844,752
CAPITAL LEASE OBLIGATIONS, net of current portion 1,539 5,722 1,539
----------- ----------- -----------
Total liabilities 220,314 56,833 846,291
=========== =========== ===========
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $ 003 par value, 30,000,000
shares authorized, 11,180,001 shares issued and
outstanding 13,340 13,340 13,340
Series A Convertible Preferred stock, $.003 par value
(aggregate liquidation preference of $600,000),
3,000,000 shares authorized,
1,200,000 shares issued and outstanding 3,600 3,600 3,600
Series B Convertible Preferred Stock, $.003 par
value, 3,733,333 shares authorized, issued and
outstanding 11,200 -- 11,200
Additional paid-in capital 3,863,737 1,134,860 3,863,737
Warrants outstanding 116,173 -- 116,173
Deficit accumulated in development stage (2,728,184) (446,830) (4,332,652)
----------- ----------- -----------
Total stockholders' equity 1,279,866 704,970 (324,602)
----------- ----------- -----------
Total liabilities and stockholders' equity $ 1,500,180 $ 761,803 $ 521,689
=========== =========== ===========
Accompanying notes are integral to these financial statements.
6
F-3
Aegisoft Corporation
Statements of Operations for Years Ended December 31, 1999 and 1998,
Nine Months Ended September 30, 1999 and 2000, the Period from Inception
(August 4, 1997) Through September 30, 2000, and
the Period from Inception (August 4, 1997) Through December 31, 1999
Inception (August Nine months Nine months Inception (August
4, 1997) through ended September ended 4, 1997) through
December 31, 30, 1999 September 30, September 30,
1999 1998 1999 (unaudited) 2000 (unaudited) 2000 (unaudited)
----------- --------- ----------------- --------------- ---------------- -----------------
Revenues $ 96,758 $ 0 $ 96,758 $ 7,211 $ 469,587 $ 566,345
----------- ----------- ----------- ----------- ----------- -----------
Expenses:
Research and development 528,051 153,485 681,536 387,582 542,130 1,223,666
Sales and marketing 792,085 23,542 815,627 392,191 413,778 1,229,405
General and administrative 1,051,057 255,691 1,317,575 625,842 1,115,740 2,433,315
Depreciation and amortization 27,983 5,721 34,029 9,000 18,746 52,775
----------- ----------- ----------- ----------- ----------- -----------
Total expenses 2,399,176 438,439 2,848,767 1,414,615 2,090,394 4,939,161
----------- ----------- ----------- ----------- ----------- -----------
Loss from operations (2,302,418) (438,439) (2,752,009) (1,407,404) (1,620,807) (4,372,816)
Other income 9,013 -- 9,013 500 0 9,013
Interest income, net 12,051 2,761 14,812 8,234 16,339 31,151
----------- ----------- ----------- ----------- ----------- -----------
Net loss (2,281,354) (435,678) (2,728,184) (1,398,670) (1,604,468) (4,332,652)
----------- ----------- ----------- ----------- ----------- -----------
Accompanying notes are intergral to these financial statements
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F-4
Aegisoft Corporation
Statement of Shareholders' Equity
Shares Amount
------------------------------------ ----------------------------------
Series A Series B Series A Series B
Convertible Convertible Convertible Convertible
Preferred Preferred Common Preferred Preferred Common
Stock Stock Stock Stock Stock Stock
----------- ----------- ---------- ----------- ----------- --------
BALANCE, DECEMBER 31, 1997 -- -- 9,040,000 $ -- $ -- $ 6,920
Issuance of preferred stock 1,200,000 -- 2,140,001 3,600 -- 6,420
Net loss -- -- -- -- -- --
--------- --------- ---------- ------ ------- -------
BALANCE, DECEMBER 31, 1998 1,200,000 -- 11,180,001 3,600 -- 13,340
Issuance of preferred stock -- 3,733,333 -- -- 11,200 --
Accelerated vesting of
stock options -- -- -- -- -- --
Net loss -- -- -- -- -- --
--------- --------- ---------- ------ ------- -------
BALANCE, DECEMBER 31, 1999 1,200,000 3,733,333 11,180,001 $3,600 $11,200 $13,340
========= ========= ========== ====== ======= =======
Deficit
Accumulated
Additional in
Paid-in Warrants Development
Capital Outstanding Stage Total
---------- ----------- ------------ -----------
BALANCE, DECEMBER 31, 1997 $ 9,880 $ -- $ (11,152) $ 5,648
Issuance of preferred stock 1,124,980 -- -- 1,135,000
Net loss -- -- (435,678) (435,678)
---------- -------- ---------- ------------
BALANCE, DECEMBER 31, 1998 1,134,860 -- (446,830) 704,970
Issuance of preferred stock 2,672,627 116,173 -- 2,800,000
Accelerated vesting of
stock options 56,250 -- -- 56,250
Net loss -- -- (2,281,354) (2,281,354)
---------- -------- ------------ -----------
BALANCE, DECEMBER 31, 1999 $3,863,737 $116,173 $(2,728,184) $ 1,279,866
========== ======== =========== ===========
Accompanying notes are integral to these financial statements.
8
F-5
Aegisoft Corporation
Statements of Cash Flows for the Years Ended December 31, 1999 and
1998, the nine months ended September 30, 1999 and 2000, the period
from Inception (August 4, 1997) through December 31, 1999, and the
period from Inception (August 4, 1997) through September 30, 2000
Inception
(August 4,
Inception Nine months Nine months 1997)through
1997) through September September 30, September
December 31, 30, 1999 2000 30, 2000
1999 1998 1999 (unaudited) (unaudited) (unaudited)
----------- ---------- ------------- ----------- ------------- ------------
Cash flows from operating activities:
Net loss ($2,281,354) ($ 435,678) ($2,728,184) ($1,398,670) ($1,604,468) ($4,332,652)
Adjustments to reconcile net
loss to net cash flows used in
operating activities-
Depreciation and amortization 27,983 5,721 34,029 9,000 18,746 52,775
Noncash compensation expense 56,250 -- 56,250 -- -- 56,250
Changes in assets and liabilities:
Increase in accounts receivable (88,068) -- (88,068) (1,000) (50,000) (138,068)
Decrease (increase) in prepaid expenses 22,200 (73,618) (51,418) (9,800) 18,750 (51,418)
Increase (decrease) in accounts payable 163,682 10,341 174,023 2,659 (136,218) 37,805
Increase (decrease) in accrued expenses 3,637 34,420 40,569 (20,952) (34,668) 5,901
----------- ----------- ----------- ----------- ---------- -----------
Net cash flows used in operating activities (2,095,670) (458,814) (2,562,799) (1,418,763) (1,787,858) (4,350,657)
----------- ----------- ----------- ----------- ---------- -----------
Cash flows from investing activities:
Purchases of property and equipment (28,750) (29,212) (61,473) (26,198) (13,113) (74,586)
Payments for patent costs (34,132) -- (38,600) (34,132) -- (38,600)
Payments for organization costs -- -- (300) -- -- (300)
----------- ----------- ----------- ----------- ---------- -----------
Net cash flows used in investing (62,882) (29,212) (100,373) (60,330) (13,113) (113,486)
----------- ----------- ----------- ----------- ---------- -----------
Cash flows from financing activities:
Proceeds from notes payable -- -- -- -- 800,000 800,000
Proceeds from issuance of preferred
stock 2,800,000 600,000 3,400,000 1,500,000 -- 3,400,000
Proceeds from initial capitalization -- -- 6,800 -- -- 6,800
Proceeds from issuance of common stock -- 535,000 545,000 -- -- 545,000
Payments of capital lease obligations (3,838) (1,631) (5,469) -- (3,137) (8,606)
----------- ----------- ----------- ----------- ---------- -----------
Net cash flows provided by financing
activities 2,796,162 1,133,369 3,946,331 1,500,000 796,863 4,743,194
----------- ----------- ----------- ----------- ---------- -----------
Net increase in cash and cash equivalents 637,610 645,343 1,283,159 20,907 (1,004,108) 279,051
Cash and cash equivalents, beginning
of period 645,549 206 -- 645,549 1,283,159 --
----------- ----------- ----------- ----------- ---------- -----------
Cash and cash equivalents, end of period $ 1,283,159 $ 645,549 $ 1,283,159 $ 666,456 $ 279,051 $ 279,051
=========== =========== =========== =========== ========== ===========
Accompanying notes are integral to these financial statements.
9
F-6
Aegisoft Corporation
Notes to Financial Statements
1. Organization and Summary of Significant Accounting Policies:
Aegisoft Corporation (Aegisoft or the Company) was incorporated on July
29, 1997. Aegisoft specializes in the production and sales of software rental
products and services by utilizing its proprietary privacy prevention and usage
regulation technologies. The Company targets the personal computer software and
digital content rental markets by partnering with software publishers,
distribution channels and original equipment manufacturers with its
revenue-sharing model.
There are significant risks associated with the Company, including the
Company's limited operating history, the unpredictability of future revenues,
the reliance of continued growth of online commerce and system development
risks.
Intangible Assets
Intangible assets consist of patent costs for the Company's encryption
technology. Amortization is recorded over a useful life of 5 years.
Accrued Expenses
Accrued expenses consist principally of payroll liabilities and
accounting fees at December 31, 1999 and 1998.
Income Taxes
Income taxes are accounted for using an asset and liability approach that
requires the recognition of taxes payable or refundable for the current year and
deferred tax liabilities and assets for the future tax consequences of events
that have been recognized in the Company's financial statements or tax returns.
The measurement of current and deferred tax assets and liabilities are based on
provisions of the enacted tax law; the effects of future changes in tax laws or
rates are not anticipated. The measurement of deferred tax assets is reduced, if
necessary, by the amount of any tax benefits that, based on available evidence,
are not expected to be realized.
10
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses in the financial statements and in the disclosure of contingent
assets and liabilities. Actual results could differ from those estimates.
Revenue Recognition
Revenue from sales of printed business materials is recognized upon
shipment.
2. Cash and Cash Equivalents:
Cash and cash equivalents consist of operating cash accounts and U.S.
Treasury securities with a maturity of 90 days or less.
Cash and cash equivalents as of December 31, 1999 and 1998, are as
follows:
1999 1998
---------- --------
Operating cash $1,264,787 $242,275
U.S. Treasury notes 18,372 403,274
---------- --------
Cash and cash equivalents $1,283,159 $645,549
========== ========
3. Prepaid Expenses:
Prepaid expenses consist of the following at December 31, 1999 and 1998:
1999 1998
-------- -------
Prepaid license fee $25,000 $50,000
Prepaid rent deposit 26,418 23,618
-------- -------
Prepaid expenses $51,418 $73,618
======== =======
In December 1998, the Company entered into a software license agreement
with a third party. Under the license agreement, the Company received the right
to incorporate certain data security software into its software products. The
Company made an initial $50,000 prepayment of royalty license fees which will be
offset against per unit royalties accrued until the prepayment is exhausted. The
Company will remit a royalty equal to 1.5% of per use software rental revenue,
sales of software or compact disc sales to retail outlets.
11
4. Property and Equipment:
Property and equipment are carried at cost, less accumulated
depreciation. Depreciation is recorded using the straight-line method over the
estimated useful lives of the assets.
Property and equipment included the following as of December 31, 1999
and 1998:
Life 1999 1998
--------- -------- --------
Office furniture and equipment 3-5 years $ 30,287 $ 23,678
Computer hardware and software 3 years 42,377 20,236
-------- --------
72,664 43,914
Less - Accumulated depreciation (24,104) (5,498)
-------- --------
Property and Equipment, net $ 48,560 $ 38,416
======== ========
Depreciation expense for the years ended December 31, 1999 and 1998, was
$18,606 and $5,322, respectively.
5. Capital Lease Obligations:
The Company leases certain equipment under a capital lease. Future
minimum lease payments for assets under capital leases at December 31, 1999 are
as follows:
2000 $4,975
2001 1,638
------
Total payments 6,613
Less: amount representing interest 891
------
Future minimum lease payments 5,722
Less: current portion 4,183
------
Capital lease obligation, net of current portion $1,539
======
6. Income Taxes:
The Company follows the provisions of Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes," for financial reporting
purposes. Deferred tax assets or liabilities at
12
the end of each period are determined using the currently enacted tax rates to
apply to taxable income in the period in which the deferred tax asset or
liability is expected to be settled or realized.
A valuation allowance for the net deferred tax asset of approximately
$1,062,000 has been recorded due to the inherent uncertainties of realizability
related to a development stage company. The primary components of this asset are
represented by the tax net operating loss of the Company.
Substantially all of the gross deferred tax assets are comprised of net
operating loss carryforwards at December 31, 1999 and 1998.
As of December 31, 1999, the Company had approximately $2,600,000 of net
operating loss carryforwards for tax purposes, expiring between 2012 and 2018.
Upon a change in control of the Company's common stock, such loss carryforwards
may become restricted in use.
The statutory federal income tax rate, reconciled to the effective
income tax rate (benefit) provision is as follows:
1999 1998
------- -------
Statutory federal income tax rate (34.0)% (34.0)%
State income taxes, net of federal
income tax effect (5.3) (5.3)
Nondeductible expenses 0.1 0.4
Valuation allowance 39.2 38.9
----- -----
Total -- % -- %
===== =====
7. Stockholders' Equity:
In December 1998, the Company issued 1,200,000 shares of Series A
Preferred Stock (Series A Stock) at a price of $0.50 per share. Each share may
be converted at any time, at the option of the holder, into one share of Class A
Common Stock. The conversion ratio is adjustable if future shares of the
Company's Class A Common Stock are issued at a purchase price less than $0.50
per share. The Series A Stock will automatically convert into shares of Class A
Common Stock upon the affirmative vote of the holders of a majority of the
Series A Stock outstanding at the time of such vote or the completion of an
underwritten public offering of the Company's common stock. Each holder of
common and preferred stock is entitled to one vote for each share held.
In May 1999, the Company issued 2,000,000 shares of Series B Preferred
Stock (May 1999 Series B Stock) at a price of $0.75 per share. Each share may be
converted at any time, at the option of the holder, into one share of Class A
Common Stock. The conversion ratio is adjustable if future shares of the
Company's Class A Common Stock are issued at a purchase price less than $0.75
per share. The May 1999
13
Series B Stock will automatically convert into shares of Class A Common Stock
upon the affirmative vote of the holders of a majority of the May 1999 Series B
Stock outstanding at the time of such vote or the completion of an underwritten
public offering of the Company's outstanding stock. Each holder of May 1999
Series B Stock is entitled to one vote for each share held.
In December 1999, the Company issued 1,733,333 shares of Series B
Preferred Stock (December 1999 Series B Stock) at a price of $0.75 per share.
Each share may be converted at any time, at the option of the holder, into one
share of Class A Common Stock. The conversion ratio is adjustable if future
shares of the Company's Class A Common Stock are issued at a purchase price less
than $0.75 per share. The December 1999 Series B Stock will automatically
convert into shares of Class A Common Stock upon the affirmative vote of the
holders of a majority of the December 1999 Series B Stock outstanding at the
time of such vote or the completion of an underwritten public offering of the
Company's outstanding stock. Each holder of December 1999 Series B Stock is
entitled to one vote for each share held. In connection with the issuance of the
December 1999 Series B Stock, the Company issued 693,333 warrants (See note 9).
8. Stock Based Compensation:
Aegisoft has a stock option plan which allows the Board of Directors to
grant options to purchase up to 1,744,900 shares of common stock. Management and
the Board of Directors of the Company believe that all options have been granted
at prices which are not less than 100% of the fair market value at the date of
the option grant. Stock options expire ten years from date of grant.
As permitted under SFAS No. 123, "Accounting for Stock-Based
Compensation", the Company measures compensation expense for its stock-based
employee compensation plan using the intrinsic value method prescribed by
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued
to Employees", and provides pro forma disclosures of net income and earnings per
share as if the fair value-based method prescribed by SFAS 123 had been applied
in measuring compensation expense.
Had compensation expense for the Company's stock-based compensation
plans been determined based on the fair value of the option at the grant dates
for awards under the Plan consistent with the method of SFAS 123, the Company's
pro forma net loss would have been changed to the pro forma amounts indicated
below:
Net loss:
As reported $(2,281,354)
Pro forma $(2,407,499)
A summary of option transactions during the years ended December 31,
1999 and 1998, is as follows:
14
1999 1998
------------------------- ----------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
--------- --------- --------- --------
Outstanding, beginning of year 1,774,160 $0.077 1,145,000 $0.003
Granted 406,920 0.729 629,160 0.398
Forfeited 685,000 0.021 -- --
--------- --------- --------- --------
Outstanding, end of year 1,496,080 $0.362 1,774,160 $0.128
--------- --------- --------- --------
Exercisable, end of year 826,705 $0.199 477,000 $0.077
========= ========= ========= ========
The weighted-average fair value of qualified options granted to
employees during the year ended December 31, 1999, was $0.31 per
share. The following table summarizes information about stock
options outstanding at December 31, 1999:
Options Outstanding Options Exercisable
---------------------------------------- ------------------------
Weighted
Number Average Weighted Number Weighted
Outstanding Remaining Average Exercisable Average
December 31, Contractual Exercise at December Exercise
1999 Life Price 31, 1999 Price
------------ ----------- -------- ----------- --------
360,000 8.0 .003 360,000 .003
125,000 9.4 .05 75,000 .05
257,400 8.9 .25 159,600 .25
381,480 9.0 .50 216,105 .50
372,200 9.9 .75 16,000 .75
--------- ----- ------- -----
1,496,080 $.36 826,705 $.20
========= ===== ======= =====
The Company has computed, for pro forma disclosure purposes, the value of all
options granted during the year ended December 31, 1999, using these weighted
average assumptions:
Risk-free interest rate 5.65%
Expected life 10 years
Volatility 0%
Dividend rate 0%
15
The Company has elected to continue to account for options granted to
employees in accordance with APB Opinion No. 25. Compensation cost of options
granted during the year ended December 31, 1998, and the five months ended
December 31, 1997, as determined according to SFAS No. 123, was not material
and, therefore, has not been disclosed in these statements.
Option holders include officers, employees and directors of the Company.
In 1999, an officer of the Company was terminated. In connection with
the termination, Aegisoft accelerated the vesting of 125,000 options previously
granted to this employee, resulting in a change to compensation expense of
$56,250, which is reflected in general and administrative expenses in the
accompanying statement of operations for the year ended December 31, 1999.
9. Stock Purchase Warrants:
In connection with the issuance of preferred stock in December 1998,
Aegisoft issued 257,701 stock purchase warrants to certain stockholders of the
Company. The warrants entitle the holder to purchase shares of the Company's
common stock at an exercise price of $0.50 per share. The warrants are
immediately exercisable and expire five years from the date of issuance. As of
December 31, 1998, no warrants had been exercised by the Company's stockholders.
In connection with the issuance of preferred stock in December 1999,
Aegisoft issued 693,333 stock purchase warrants to certain stockholders of the
Company. The warrants entitle the holder to purchase shares of the Company's
common stock at an exercise price of $0.75 per share. The warrants are
immediately exercisable and expire five years from the date of issuance. As of
December 31, 1999, no warrants had been exercised by the Company's stockholders.
10. Operating Lease Commitment:
In 1999, Aegisoft leased office space under an agreement which expires
in 2001. Rent expense for the years ended December 31, 1999 and 1998, was
$70,725 and $4,192, respectively.
Future minimum lease payments under this lease are as follows:
2000 $ 69,669
2001 71,759
--------
Operating Lease Obligation $141,428
========
16
11. Notes Payable (unaudited)
Aegisoft entered into a bridge-loan financing agreement in September 2000.
The notes bear interest at 8% per annum, payable quarterly. Notes payable
were due on March 31, 2001, or, under certain circumstances, were
convertible to preferred stock at the option of the note holders. These
notes were converted into capital stock immediately prior to the
acquisition of Aegisoft by RealNetworks.
12. Unaudited Interim Financial Information
The interim financial data as of September 30, 2000 and for each of the
nine months ended September 30, 1999 and 2000 and for the period from
August 4, 1997 (inception) through September 30, 2000 is unaudited;
however, in the opinion of management, the interim data includes all
adjustments, consisting only of normal recurring adjustments, which are
necessary to present fairly the Company's financial position as of
September 30, 2000 and the results of its operations and cash flows for
each of the nine months ended September 30, 1999 and 2000 and for the
period from August 4, 1997 (inception) through September 30, 2000. The
interim financial statements should be read in conjunction with the
financial statements and accompanying notes. The results of operations for
the interim periods are not necessarily indicative of the results to be
expected for a full year.
F-13
Pro Forma Financial Information
RealNetworks' acquisition of Aegisoft Corporation ("Aegisoft") will be
accounted for under the purchase method of accounting. Under the purchase method
of accounting, the purchase price is allocated to the assets acquired and
liabilities assumed based on their estimated fair values. The estimated fair
values included herein are based upon preliminary estimates and may not be
indicative of the final allocation of purchase price consideration. The
acquisition is valued at approximately $12.6 million, including deferred
compensation, based on the closing price of RealNetworks' common stock on
December 29, 2000. The amount of the consideration issued to the former
shareholders and option holders of Aegisoft was determined by arms-length
negotiation between the parties.
The following Unaudited Pro Forma Condensed Consolidated Balance sheet
as of September 30, 2000 gives effect to the acquisition of Aegisoft as if it
had occurred on September 30, 2000 and the Unaudited Pro Forma Condensed
Consolidated Statements of Operations for the year ended December 31, 1999 and
the nine months ended September 30, 2000 ("Pro Forma Financial Statements") give
effect to the acquisition of Aegisoft as if it had occurred on January 1, 1999.
The Pro Forma Condensed Consolidated Statements of Operations are based on
historical results of operations of RealNetworks and Aegisoft for the year ended
December 31, 1999 and the nine months ended September 30, 2000. The Pro Forma
Financial Statements and the accompanying notes ("Pro Forma Financial
Information") should be read in conjunction with and are qualified by the
historical financial statements and notes thereto of RealNetworks and Aegisoft.
The Pro Forma Financial Information is intended for information purposes
only and is not necessarily indicative of the combined results that would have
occurred had the acquisition taken place on January 1, 1999, nor is it
necessarily indicative of results that may occur in the future.
17
F-14
RealNetworks, Inc. and Subsidiaries
Unaudited Pro Forma Condensed Consolidated Balance Sheet
September 30, 2000 (in thousands)
PRO FORMA
REALNETWORKS AEGISOFT ADJUSTMENTS PRO FORMA
------------ -------- ----------- -----------
ASSETS
Current assets:
Cash, cash equivalents,
and short-term investments $ 359,447 $ 279 $ -- $ 359,726
Trade accounts receivable,
net of allowances for doubtful
accounts and sales returns 12,964 138 -- 13,102
Prepaid expenses and other
current assets 6,585 33 -- 6,618
--------- ----- ------ ---------
Total current assets 378,996 450 379,446
Equipment and leasehold improvements,
at cost:
Equipment and software 32,382 86 (39) (c) 32,429
Leashold improvements 23,820 -- -- 23,820
--------- ----- ------ ---------
Total equipment and
leasehold improvements 56,202 86 (39) 56,249
Less accumulated depreciation
and amortization 16,426 39 (39) (c) 16,426
--------- ----- ------ ---------
Net equipment and
leasehold improvements 39,776 47 -- 39,823
--------- ----- ------ ---------
Goodwill, net 106,735 -- 11,353 (c) 118,088
Restricted cash equivalents 18,800 -- -- 18,800
Other assets 34,043 25 -- 34,068
--------- ----- ------ ---------
Total assets 578,350 522 11,353 590,225
========= ===== ====== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable 5,370 38 -- 5,408
Accrued and other liabilities 39,701 9 725 (c) 40,435
Deferred revenue, excluding
non-current portion 45,462 -- -- 45,462
Notes payable -- 800 -- 800
--------- ----- ------ ---------
Total current liabilities 90,533 847 725 92,105
--------- ----- ------ ---------
Deferred Rent 1,940 -- -- 1,940
Deferred Revenue, excluding
current portion 14,802 -- -- 14,802
Shareholders' equity
Preferred Stock -- 15 (15) (b) --
Warrants outstanding -- 116 (116) (b) --
Common stock 157 13 (13) (b)
1 (a) 158
Additional paid-in capital 668,570 3,864 (3,864) (b)
10,302 (a)
2,327 (e) 681,199
Deferred stock compensation (77,110) -- (2,327) (e) (79,437)
Accumulated deficit (111,640) (4,333) 4,333 (b) (111,640)
Accumulated other
comprehensive loss (8,902) -- -- (8,902)
--------- ----- ------ ---------
Total shareholders' equity 471,075 (325) 10,628 481,378
--------- ----- ------ ---------
Total liabilities and
shareholders' equity 578,350 522 11,353 590,225
========= ===== ====== =========
See notes to unaudited pro forma condensed financial statements.
18
F-15
RealNetworks, Inc. and Subsidiaries
Unaudited Pro Forma Condensed Consolidated Statement of Operations
Nine Months Ended September 30, 2000
(In thousands, except per share data)
PRO FORMA
REALNETWORKS AEGISOFT ADJUSTMENTS PRO FORMA
------------ -------- ----------- ---------
NET REVENUES:
Software license fees $ 111,850 $ 430 $ - $ 112,280
Service revenues 37,748 40 - 37,788
Advertising 33,710 - - 33,710
--------- -------- -------- ---------
Total net revenues 183,308 470 - 183,778
--------- -------- -------- ---------
COST OF REVENUES:
Software license fees 11,658 - - 11,658
Service revenues 9,899 - - 9,899
Advertising 6,709 - - 6,709
--------- -------- -------- ---------
Total cost of revenues 28,266 - - 28,266
--------- -------- -------- ---------
Gross profit 155,042 470 - 155,512
--------- -------- -------- ---------
OPERATING EXPENSES:
Research and development 41,019 542 - 41,561
Sales and marketing 77,152 414 - 77,566
General and administrative 21,182 1,135 - 22,317
Goodwill amortization,
acquisitions charges, and
stock based compensation 103,772 - 2,838 (d)
485 (e) 107,095
--------- -------- -------- ---------
Total operating expenses 243,125 2,091 3,323 248,539
--------- -------- -------- ---------
Operating loss (88,083) (1,621) (3,323) (93,027)
Other income, net 15,333 16 - 15,349
--------- -------- -------- ---------
Net loss before income tax provision (72,750) (1,605) (3,323) (77,678)
Income tax provision (benefit) 4,025 - (676) (g) 3,349
--------- -------- -------- ---------
Net loss $ (76,775) $ (1,605) $ (2,647) $ (81,027)
========= ======== ======== =========
Basic net loss per share $ (0.50) (f) $ (0.53)
========= =========
Diluted net loss per share $ (0.50) $ (0.53)
========= =========
Shares used to compute basic net loss per share 153,392 (f) 154,292
Shares used to compute diluted net loss per share 153,392 (f) 154,292
See notes to unaudited pro forma condensed consolidated financial statements.
19
F-16
RealNetworks, Inc. and Subsidiaries
Unaudited Pro Forma Condensed Consolidated Statement of Operations
Year Ended December 31, 1999
(In thousands, except per share data)
PRO FORMA
REALNETWORKS AEGISOFT ADJUSTMENTS PRO FORMA
------------ -------- ----------- ---------
NET REVENUES:
Software license fees $ 90,627 $ 97 $ -- $ 90,724
Service revenues 26,466 -- -- 26,466
Advertising 14,149 -- -- 14,149
------- ------- ------- --------
Total net revenues 131,242 97 -- 131,339
------- ------- ------- --------
COST OF REVENUES:
Software license fees 13,006 -- -- 13,006
Service revenues 6,579 -- -- 6,579
Advertising 2,906 -- -- 2,906
------- ------- ------- --------
Total cost of revenues 22,491 -- -- 22,491
------- ------- ------- --------
Gross profit 108,751 97 -- 108,848
------- ------- ------- --------
OPERATING EXPENSES:
Research and development 38,415 528 -- 38,943
Sales and marketing 53,465 792 -- 54,257
General and administrative 16,380 1,079 -- 17,459
Goodwill amortization, acquisitions
charges, and stock based compensation 3,531 -- 3,784 (d)
1,422 (e) 8,737
------- ------- ------- --------
Total operating expenses 111,791 2,399 5,206 119,396
------- ------- ------- --------
Operating loss (3,040) (2,302) (5,206) (10,548)
Other income, net 9,966 21 -- 9,987
------- ------- ------- --------
Net income (loss) 6,926 (2,281) (5,206) (561)
Basic net loss per share $ 0.05 (f) $ (0.00)
======= ========
Diluted net loss per share $ 0.04 (f) $ (0.00)
======= ========
Shares used to compute basic net loss per share 142,016 (f) 142,825
Shares used to compute diluted net loss per share 166,576 (f) 142,825
See notes to unaudited pro forma condensed consolidated financial statements.
20
F-17
RealNetworks, Inc. and Subsidiaries Notes to
Unaudited Pro Forma Condensed Consolidated Financial Statements
(In thousands)
(a) Reflects the issuance of approximately 1,212 shares (including options to
purchase shares) of RealNetworks' common stock to consummate the acquisition of
Aegisoft. Approximately 274 of those shares are subject to repurchase by
RealNetworks at a nominal repurchase price in certain circumstances.
(b) Represents the elimination of the historical shareholders' equity (deficit)
accounts of Aegisoft.
(c) To allocate the purchase price, including approximately $725 of transaction
costs incurred in the acquisition to assets and liabilities of Aegisoft, as of
September 30, 2000. The excess of the purchase price over the fair value of net
assets acquired is reflected as goodwill and is amortized using the
straight-line method over 3 years. The estimated fair values of assets acquired
and liabilities assumed are based upon preliminary estimates and may not be
indicative of the final allocation of purchase price consideration.
A summary of the purchase price for the acquisition is as follows:
Common Stock $10,303
Direct acquisition costs 725
Accrued liabilities assumed 847
-------
Total $11,875
=======
The purchase price was allocated as follows:
Cash acquired $ 279
Other current assets acquired 171
Equipment 47
Goodwill 11,353
Other assets 25
-------
Total $11,875
=======
Common stock issued to certain former employees of Aegisoft with a
value of $2,327 is recorded as deferred employee compensation in shareholders'
equity at the date of acquisition and recognized as employee compensation
expense over the related vesting period as described in note (e) below.
(d) Represents the amortization of goodwill for the nine month period ended
September 30, 2000 and year ended December 31, 1999 assuming the transaction
occurred on January 1, 1999.
21
(e) Represents non-cash charges associated with shares issued to employees of
Aegisoft. The Company is recognizing compensation costs for value of these
shares over the associated employment periods in which these shares vest and
will recognize non-cash charges of approximately $1,422 in 2001, $646 in 2002
and $259 in 2003.
(f) Pro forma basic and diluted net loss per share are computed by dividing the
pro forma net loss attributable to common shareholders by the pro forma weighted
average number of common shares outstanding. Potentially dilutive securities
were not taken into account because their effects would be anti-dilutive. A
reconciliation of shares used to compute historical basic and diluted net loss
per share to shares used to compute pro forma basic and diluted net loss per
share is as follows:
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, 2000 DECEMBER 31, 1999
------------------ -----------------
Shares used to compute historical
basic and diluted net loss per share 153,392 142,016
Vesting of restricted shares 91 --
Shares issued in acquisition 809 809
------- -------
Shares used to compute pro forma
basic and diluted net loss per share 154,292 142,825
======== ========
(g) Income Taxes
Represents the estimated income tax benefit resulting from Aegisoft's
results from operations from 1999 and for the nine months ended September
30, 2000 which would have reduced RealNetworks' consolidated income tax
expense had the companies been combined effective January 1, 1999.
(h) Other Information
The purchase price of approximately $10 million (based on the closing
price of RealNetworks' common stock on December 29, 2000, the date of closing of
the acquisition of Aegisoft) excludes approximately $2.3 million of
RealNetworks' shares issued to certain former stockholders of Aegisoft
which is subject to forfeiture for a period of 36 months after December 29,
2000.
22
F-18
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
REALNETWORKS, INC.
By: /s/ Paul Bialek
--------------------------------------
Paul Bialek
Senior Vice President, Finance and
Operations and Chief Financial Officer
Dated: February 6, 2001