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As filed with the Securities and Exchange Commission on February 7, 2001
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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REALNETWORKS, INC.
(Exact name of Registrant as specified in its charter)
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WASHINGTON 91-1628146
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2601 ELLIOTT AVENUE, SUITE 1000
SEATTLE, WASHINGTON 98121
(206) 674-2700
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
--------------------------
PAUL BIALEK
SENIOR VICE PRESIDENT--FINANCE AND
OPERATIONS AND CHIEF FINANCIAL OFFICER
REALNETWORKS, INC.
2601 ELLIOTT AVENUE, SUITE 1000
SEATTLE, WASHINGTON 98121
(206) 674-2700
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------------------
Copies to:
KELLY JO MACARTHUR PATRICK J. SCHULTHEIS, ESQ.
SENIOR VICE PRESIDENT, GENERAL COUNSEL CHRISTIAN E. MONTEGUT, ESQ.
AND CORPORATE SECRETARY WILSON SONSINI GOODRICH & ROSATI
REALNETWORKS, INC. PROFESSIONAL CORPORATION
2601 ELLIOTT AVENUE, SUITE 1000 5300 CARILLON POINT
SEATTLE, WASHINGTON 98121 KIRKLAND, WASHINGTON 98033-7356
(206) 674-2700 (425) 576-5800
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time to
time after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
========================================================================================================
TITLE OF EACH CLASS PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
OF SECURITIES TO AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING REGISTRATION
BE REGISTERED REGISTERED PER SHARE(1) PRICE(1) FEE
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Common Stock, $0.001 par value(2) ... 669,345 $8,563 $5,731,601.00 $1,433.00
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(1) Estimated solely for the purpose of computing the amount of the
registration fee, based on the average high and low trading price of the
Common Stock reported on the Nasdaq National Market on February 6, 2001
in accordance with Rule 457(c) under the Securities Act of 1933.
(2) Includes associated preferred stock purchase rights which, prior to the
occurrence of certain events, will not be exercisable or evidenced
separately from the Common Stock.
--------------------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the SEC, acting pursuant to said Section 8(a), may
determine.
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The information in this prospectus is not complete and may be changed. The
selling stockholders named herein may not sell these securities until the
registration statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these securities, and the
selling stockholders are not soliciting an offer to buy these securities in any
state where the offer or sale is not permitted.
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Subject to Completion February 7, 2001
PROSPECTUS
669,345 SHARES
REALNETWORKS, INC.
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COMMON STOCK
($0.001 PAR VALUE)
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This prospectus relates to the public offering, which is not being
underwritten, of up to 669,345 shares of our common stock which are held by some
of our current shareholders and may be offered and sold from time to time by the
selling shareholders described herein.
The prices at which such shareholders may sell the shares will be
determined by the prevailing market price for the shares or in negotiated
transactions. We will not receive any of the proceeds from the sale of the
shares.
Our common stock is traded on the Nasdaq National Market under the
symbol "RNWK." On February 6, 2001, the last reported sale price for our common
stock on the Nasdaq National Market was $8.375 per share.
SEE "RISK FACTORS" BEGINNING AT PAGE 6 TO READ ABOUT CERTAIN FACTORS YOU
SHOULD CONSIDER BEFORE BUYING SHARES OF OUR COMMON STOCK.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR STATE SECURITIES
REGULATORS HAVE APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF
THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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The date of this Prospectus is February __, 2001.
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TABLE OF CONTENTS
Page
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Special Note Regarding Forward-Looking Statements .......................... 3
RealNetworks ............................................................... 4
Recent Developments ........................................................ 5
Risk Factors ............................................................... 6
Use of Proceeds ............................................................ 30
Selling Shareholders ....................................................... 31
Plan of Distribution ....................................................... 33
Legal Matters .............................................................. 34
Experts .................................................................... 34
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. The selling shareholders are offering to sell, and
seeking offers to buy, shares of our common stock only in jurisdictions where
offers and sales are permitted. The information contained in this prospectus is
accurate only as of the date of this prospectus, regardless of the time of
delivery of this prospectus or of any sale of our common stock. In this
prospectus, "RealNetworks," "we," "us," and "our" refer to RealNetworks, Inc.
and its consolidated subsidiaries.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and
other information with the SEC. You may read and copy any document we file at
the SEC's public reference facilities in Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the regional offices of the SEC
located at 7 World Trade Center, Suite 1300, New York, New York 10048, and
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Please call the SEC at 1-800-SEC-0330 for further information on the public
reference rooms. Our SEC filings are also available to the public from the SEC's
web site at http://www.sec.gov.
The SEC allows us to "incorporate by reference" the information we file
with them, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
considered to be part of this prospectus, and later information filed with the
SEC will update and supersede this information. We incorporate by reference the
documents listed below and any future filings made with the SEC under Section
13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934 until our
offering is completed.
(1) Our Annual Report on Form 10-K for the year ended December 31,
1999;
(2) Our Quarterly Reports on Form 10-Q for the quarters ended March
31, 2000, June 30, 2000 and September 30, 2000;
(3) Our Current Reports on Form 8-K dated January 26, 2000, February
8, 2000 and January 12, 2001;
(4) Our Current Report on Form 8-K/A dated February 8, 2000;
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(5) Our Current Report on Form 8-K/A dated February 7, 2001;
(6) The description of our common stock contained in our
registration statement on Form 8-A dated September 26, 1997, including any
amendments or reports filed for the purpose of updating such description; and
(7) The description of our preferred stock purchase rights contained
in our registration statement on Form 8-A dated December 14, 1998 as amended on
June 16, 1999 and February 7, 2000, including any amendments or reports filed
for the purpose of updating such description.
You may request a copy of these filings, at no cost, by writing or
telephoning us at the following address:
RealNetworks, Inc.
Attn: Secretary
2601 Elliott Avenue, Suite 1000
Seattle, Washington 98121
(206) 674-2700
All documents subsequently filed by us pursuant to Sections 13(a),
13(c), 14 and 15(d) of the Securities Exchange Act of 1934, as amended, prior to
the filing of a post-effective amendment which indicates that all securities
registered have been sold or which deregisters all securities then remaining
unsold, shall be deemed to be incorporated by reference in this Registration
Statement and to be part hereof from the date of filing of such documents.
You should rely on the information incorporated by reference or provided
in this prospectus. We have authorized no one to provide you with different
information. We are not making an offer of these securities in any state where
the offer is not permitted. You should not assume that the information in this
prospectus is accurate as of any date other than the date on the front of the
document.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Forward-looking statements deal with our
current plans, intentions, beliefs and expectations and statements of future
economic performance. Statements containing terms such as "believes," "does not
believe," "plans," "expects," "intends," "estimates," "anticipates" and other
phrases of similar meaning are considered to contain uncertainty and are
forward-looking statements.
Forward-looking statements involve known and unknown risks and
uncertainties which may cause our actual results in future periods to differ
materially from what is currently anticipated. We make cautionary statements in
certain sections of this prospectus, including under "Risk Factors." You should
read these cautionary statements as being applicable to all related
forward-looking statements wherever they appear in this prospectus, in the
materials referred to in this prospectus, in the materials incorporated by
reference into this prospectus, or in our press releases.
No forward-looking statement is a guarantee of future performance, and
you should not place undue reliance on any forward-looking statement.
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REALNETWORKS
We are a leading provider of media delivery and digital distribution
solutions designed for the Internet. Our solutions enable consumers to
experience and content providers to deliver a broad range of multimedia content,
including audio, video, text and animation. We pioneered the development and
commercialization of "streaming media" systems that enable the creation,
real-time delivery and playback of multimedia content. We believe that we have
established a leadership position in the market for these systems. We have more
than 170 million unique registered users of our RealPlayer products and believe
that more than 85% of all Web content using streaming media uses our technology.
The broad acceptance of the Internet as a means of content delivery, combined
with recent technological advances, has greatly increased the practicality and
popularity of a number of new online media delivery formats. In response, we
have extended our media delivery platform to include a digital music management
system called RealJukebox.
Our solutions include a variety of integrated products and services for
consumers, content providers, service providers and advertisers. Our products
and services include:
- - REALSYSTEM IQ, an open and extensible advanced streaming media solution
that consists of our RealPlayer client software, through which users
experience multimedia content, and our RealServer software and related
software tools, which enable broadcasters and content providers to
create and deliver multimedia content.
- - REALSYSTEM PRODUCER 8.5, a streaming media creation tool that enables
content creators to encode content in RealAudio 8 and RealVideo 8 and
produce that content for use with RealSystem iQ, and makes it possible
for content creators to publish multiple live streams and support
multiple formats.
- - REALPLAYER, a digital media application that allows users to play
streaming media content served by a RealServer in addition to digital
media stored on an end user's computer.
- - REALJUKEBOX, a digital media application that allows consumers to
acquire, record, store, organize and play their personal music
collections on personal computers (PCs) and digital playback devices.
- - GOLDPASS, a subscription service that provides subscribers with access
to exclusive programming and content, as well as a variety of software
and services.
- - REAL BROADCAST NETWORK, a service based on a distributed multi-tier
network designed to enable content providers to reliably and
cost-effectively deliver high-quality streaming media over the Internet
to large audiences.
- - REAL.COM GUIDE, a guide to multimedia programming featuring listings of
streaming and downloadable content, listings of radio and television
stations, websites and live events.
From our inception, we have strategically chosen to offer our basic
RealPlayer and RealJukebox software to consumers free of charge. We believe that
this strategy promotes the widespread adoption of our software and encourages
the use of the Internet as a broadcast medium. We also sell premium versions of
both RealPlayer and RealJukebox. By achieving broad distribution of our products
to consumers, we believe that we have created a significant target audience for
content and advertising and other commerce opportunities.
Our principal executive offices are located at 2601 Elliott Avenue,
Suite 1000, Seattle, Washington 98121. Our telephone number is (206) 674-2700.
We maintain a Web site at www.realnetworks.com. Information contained on our Web
site does not constitute part of, nor is it incorporated by reference into, this
prospectus.
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RECENT DEVELOPMENTS
On January 30, 2001, RealNetworks announced unaudited operating results
for the quarter and the fiscal year ended December 31, 2000. Net revenues for
the fourth quarter were $58.2 million and cost of revenues for the same period
were $10.4 million. Gross profit for the fourth quarter was $47.8 million. The
Company reported pro forma (net of noncash goodwill amortization and
acquisition-related charges) net earnings for the fourth quarter of $3.9
million, or $0.02 per diluted share. Including noncash goodwill amortization and
acquisition-related charges, net loss was $33.3 million, or ($0.21) per share.
For the year ended December 31, 2000, net revenues were $241.5 million
and cost of revenues were $38.7 million. Gross profit for the year ended
December 31, 2000 was $202.9 million. Pro forma (net of noncash goodwill
amortization and acquisition-related charges) net earnings for the year were
$30.9 million, or $0.18 per diluted share. Including noncash goodwill
amortization and acquisition-related charges, net loss was $(110.1) million, or
($0.72) per share.
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RISK FACTORS
In addition to reviewing other information in this prospectus and our
Annual Report on Form 10-K and the other documents incorporated herein by
reference, you should consider carefully the following factors in evaluating us
and our business before purchasing shares of our common stock.
WE HAVE A LIMITED OPERATING HISTORY, WHICH MAKES IT DIFFICULT TO EVALUATE OUR
BUSINESS
We were incorporated in February 1994 and have a limited operating
history. We have limited financial results on which you can assess our future
success. Our prospects must be considered in light of the risks, expenses and
difficulties frequently encountered by growing companies in new and rapidly
evolving markets, such as streaming media software, media delivery systems and
electronic commerce.
To address the risks and uncertainties we face, we must:
- establish and maintain broad market acceptance of our products
and services and convert that acceptance into direct and
indirect sources of revenues;
- maintain and enhance our brand name;
- continue to timely and successfully develop new products,
product features and services and increase the functionality and
features of existing products;
- successfully respond to competition from Microsoft and others,
including emerging technologies and solutions; and
- develop and maintain strategic relationships to enhance the
distribution, features and utility of our products and services.
Our business strategy may be unsuccessful and we may be unable to
address the risks we face in a cost-effective manner, if at all. Our inability
to successfully address these risks will harm our business.
WE HAVE A HISTORY OF LOSSES
We have incurred significant losses since our inception. While we had
net income in 1999, we had a net loss for the nine-month period ended September
30, 2000 and we may not continue our historical growth or generate sufficient
revenues to be profitable on a quarterly or annual basis in the future. As of
September 30, 2000, we had an accumulated deficit of approximately $111.6
million. We devote significant resources to developing, enhancing, selling and
marketing our products and services. As a result, we will need to generate
significant revenues to be profitable in the future.
OUR OPERATING RESULTS ARE LIKELY TO FLUCTUATE SIGNIFICANTLY
As a result of our limited operating history and the rapidly changing
and uncertain nature of the markets in which we compete, our quarterly and
annual revenues and operating results are likely to fluctuate from
period-to-period, and period-to-period results are not likely to be meaningful.
These fluctuations may be caused by a number of factors, many of which are
beyond our control. These factors include the following, as well as others
discussed elsewhere in our SEC filings:
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- how and when we introduce new products and services and enhance
our existing products and services;
- our ability to retain existing customers, attract new customers
and satisfy our customers' demands;
- the timing and success of our brand-building and marketing
campaigns;
- our ability to establish and maintain strategic relationships;
- our ability to attract, train and retain key personnel;
- the demand for Internet advertising and sponsorships;
- the emergence and success of new and existing competition and
technological solutions;
- varying operating costs and capital expenditures related to the
expansion of our business operations and infrastructure,
domestically and internationally, including the hiring of new
employees;
- technical difficulties with our products, system downtime,
system failures or interruptions in Internet access;
- changes in the mix of products and services that we sell to our
customers;
- costs and effects related to the acquisition of businesses or
technology and related integration; and
- costs of litigation and intellectual property protection.
In addition, because the market for our products and services is
relatively new and rapidly changing, it is difficult to predict future financial
results. Our research and development and sales and marketing efforts, and
business expenditures generally, are partially based on predictions regarding
certain developments for media delivery and digital media distribution. To the
extent that these predictions prove inaccurate, our revenues and operating
expenses may fluctuate.
In recent periods, many Internet related companies have experienced
financial difficulties, in part as a result of their inability to access capital
from financial markets. This has impacted, either directly or indirectly, the
Internet ecosystem which directly impacts both our customers and prospective
customers. The result is that some of these companies have ceased operations,
some are continuing to experience financial difficulty, and sales cycles for
some of our customers and potential customers have taken longer to close than in
the past. In the event that a substantial number of our customers or potential
customers experience financial difficulties in the future, our ability to
increase or maintain sales to such customers will be adversely affected.
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Our future operating results could fall below the expectations of public
market analysts or investors and significantly reduce the market price of our
common stock. Fluctuations in our operating results will likely increase the
volatility of our stock price.
WE MAY BE UNABLE TO SUCCESSFULLY COMPETE WITH MICROSOFT AND OTHER COMPANIES IN
THE MEDIA DELIVERY MARKET
The market for software and services for media delivery over the
Internet is relatively new, constantly changing and intensely competitive. As
media delivery evolves into a central component of the Internet experience, more
companies are entering the market for, and expending increasing resources to
develop, media delivery software and services. We expect that competition will
continue to intensify. Increased competition could hurt our business and the
trading price of our stock.
Many of our current and potential competitors have longer operating
histories, greater name recognition, more employees and significantly greater
financial, technical, marketing, public relations and distribution resources
than we do. In addition, new competitors with potentially unique or more
desirable products or services are entering the market all the time. The
competitive environment may require us to make changes in our products, pricing,
licensing, services or marketing to maintain and extend our current brand and
technology franchise. Price concessions or the emergence of other pricing or
distribution strategies or technology solutions of competitors may diminish our
revenues, impact our margins or lead to a reduction in our market share, any of
which will harm our business.
We believe that the primary competitive factors in the media delivery
market include:
- the quality and reliability of the overall media delivery
solution;
- access to distribution channels necessary to achieve broad
distribution and use of products;
- the availability of content for delivery over the Internet and
access to necessary intellectual property rights;
- our ability to license or develop and support secure formats and
digital rights management systems for digital media delivery,
particularly music and video;
- our ability to license and support popular and emerging media
formats and digital rights management systems for digital media
delivery, particularly music and video, in a market where
competitors may control the intellectual property rights for
these formats and systems;
- the size of the active audience for streaming and digital media
and its appeal to content providers and advertisers;
- features for creating, editing and adapting content for the
Internet;
- ease of use and interactive user features in products;
- ease of finding and accessing content over the Internet;
- scalability of streaming media and media delivery technology and
cost per user;
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- pricing and licensing terms;
- compatibility with new and existing media formats;
- compatibility with the user's existing network components and
software systems;
- the build-out and deployment of broadband infrastructures and
technologies; and
- challenges caused by bandwidth constraints and other limitations
of the Internet infrastructure.
Our failure to adequately address any of the above factors could harm
our business strategy and operating results.
Microsoft is a principal competitor in the development and distribution
of streaming media and media distribution technology. Microsoft currently
competes with us in the market for streaming media server and player software
and recently began to compete in the market for digital distribution of media.
Microsoft's commitment to and presence in the media delivery industry has
increased and Microsoft will continue to increase competitive pressure in the
overall market for streaming media and media distribution.
Microsoft distributes its competing streaming media server and tools
products by bundling them with its Windows NT servers at no additional charge
and by making them available for download from its Web site for free. While we
also provide free downloads of certain of our products, including players,
servers and tools, Microsoft's practices have caused, and may continue to cause,
pricing pressure on our products. These practices have led in some cases, and
could continue to lead to, longer sales cycles, decreased sales, loss of
existing and potential customers and reduced market share. In addition, we
believe that Microsoft has used and may continue to use its monopoly position in
the computer industry and its financial resources to secure preferential or
exclusive distribution and bundling contracts for its streaming media products
with third parties such as Internet service providers (ISPs), content delivery
networks, online service providers, content providers, entertainment companies,
media companies, broadcasters, value added resellers (VARs) and original
equipment manufacturers (OEMs), including third parties with whom we have
relationships. In addition, Microsoft has invested significant sums of money in
certain of our current and potential customers and content suppliers, and we
expect this trend to continue, which may cause such customers to stop using or
reduce their use of our products and services, or withhold desirable media
content from us or end users of our products. Such arrangements, together with
Microsoft's aggressive marketing of Windows NT and of its streaming media
products, may reduce our share of the streaming media market.
Microsoft's Windows Media Player competes with our RealPlayer products.
The Windows Media Player is available for download from Microsoft's Web site for
free, and is integrated into Microsoft's Internet Explorer Web browser, the
Windows 98 and Windows 2000 operating systems and the new Windows Millennium
edition operating system, a significant focus of which is media delivery. In
addition, Microsoft has bundled certain audio capabilities into a radio toolkit
for Internet Explorer 5.0. Internet Explorer also includes Window Media Guide,
which provides links to multimedia content on the Internet, especially content
in Microsoft's streaming or digital media formats. We expect that by leveraging
its monopoly position in operating systems and tying streaming or digital media
into its operating systems and its Web browser, Microsoft will distribute
substantially more copies of the Windows Media Player in the future than it has
in the past and may be able to attract more users to its streaming or digital
media products.
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Currently, our RealPlayer has a high degree of market penetration: we have over
170 million unique registered users and estimate that more than 85% of all
streaming media Web pages use our technology. Our market position will be
difficult to sustain, particularly in light of Microsoft's efforts and dominant
position in operating systems.
Microsoft's Windows Media Player also competes with our RealJukebox
products, and Microsoft has invested in other digital distribution technologies
that compete with RealJukebox, like the MusicMatch Jukebox. The Windows Media
Player and MusicMatch Jukebox support the Windows Media format, but not
RealNetworks' media formats. Microsoft also licenses Windows Media Technologies
7, a platform for authoring, delivering and playing digital media intended to
compete with RealSystem. Microsoft also supports and promotes other third party
products competitive to our products. We expect Microsoft and other competitors
to devote significantly greater resources to product development in the jukebox
and digital media categories.
Microsoft also competes with us to attract broadcasters of high quality
or popular content to promote and deliver such content in Microsoft's formats,
in some cases on an exclusive or preferential basis. While we have rights to
play back certain content in Microsoft formats through our RealPlayer and
RealJukebox products, we may not secure necessary rights from Microsoft to
enable our products to play back all such content or content in Microsoft's
newest formats. Microsoft has entered into agreements with content providers
under which such content providers will make their music or other content
available in Windows Media formats using the Windows Media Digital Rights
Management technology. RealJukebox and/or RealPlayer may be disadvantaged if
they cannot play content in Windows Media formats or secured by the Windows
Media Digital Rights Management technology, or if such content providers do not
also make their content available in RealNetworks' media formats. In some cases,
we believe Microsoft uses its financial resources and monopoly leverage to
obtain rights to such content. We believe that Microsoft's commitment to and
presence in the media delivery industry has increased and that Microsoft will
continue to increase competitive pressure in the overall market for streaming
media and media distribution.
In addition to Microsoft, we face increasing competition from other
companies that are developing and marketing streaming media products. Apple
Computer offers the QuickTime streaming media technology, including a free media
player and a free streaming media server, and licenses for free source code to
the server under the conditions of Apple Computer's end user license agreement.
We expect that Apple Computer will devote more resources to developing and
marketing streaming media systems, and will seek to compete more vigorously with
us in the marketplace. Companies such as AOL and Yahoo! and many smaller
competitors offer various products that compete with our player and jukebox
products and more companies are attempting to develop competitive products all
the time. As more companies enter the market with products that compete with our
servers, players and tools, the competitive landscape could change rapidly to
our disadvantage.
We do not believe that clear standards have emerged with respect to
non-PC wireless and cable-based systems. Likewise, no one company has yet gained
a dominant position in the mobile device market. However, certain products and
services in these markets support our technology, and certain support our
competitors' technology, especially that of Microsoft, which can use its
monopoly position in the operating system business and other financial resources
to gain access to these markets, potentially to the exclusion of us. Other
companies' products and services or new standards may emerge in any of these
areas, and differing standards may emerge among different global markets, which
could reduce demand for our technology and products or render them obsolete.
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In addition, our media delivery products face competition from "fast
download" media delivery technologies such as AVI, QuickTime and MP3. We also
face competition from recently emergent and rapidly accepted peer-to-peer file
sharing services, which allow computer users to connect with each other and
directly access and copy many types of program files, including music and other
media, from one another's hard drives, such as Napster and Gnutella. Such
services allow consumers to directly access content without relying on content
providers to make the content available for streaming or digital download, and
without relying on products such as the RealPlayer or RealJukebox to be able to
play, record and store such content. Other fast download or non-streaming
IP-based content distribution methods are likely to emerge and could compete
with our products and services, which could harm our business.
WE MAY BE UNABLE TO SUCCESSFULLY COMPETE IN OTHER PARTS OF OUR BUSINESS
Media Hosting. Our media hosting service, the Real Broadcast Network,
competes with a variety of companies that provide streaming media hosting and
broadcast services. Some of these competitors offer other services which Real
Broadcast Network does not offer, such as web page hosting or broadcast hosting
in media formats not supported by Real Broadcast Network. We may not establish
or sustain our competitive position in this market segment. Some media hosting
competitors are also customers on whom we rely to help drive product download
traffic to our Web sites through their broadcast events. We also sell servers
and tools to companies that compete with Real Broadcast Network. As our
relationship becomes more competitive, such companies may choose to purchase
less or more of our products or services. Microsoft does not currently offer its
own media hosting services, but it does own investments in competitive hosting
services and it encourages customers who use Microsoft technology to use hosting
services that compete with Real Broadcast Network.
Web Site Destinations, Content and Advertising. The number of Web sites
competing for advertising revenues is growing. Our Web sites and the Real.com
Network compete for user traffic and Internet advertising revenues with a wide
variety of Web sites, Internet portals and ISPs. In particular, aggregators of
audio, video and other media, such as Yahoo! Broadcast Services and Microsoft's
Windows Media Guide, compete with our Real.com Guide. We also compete with
traditional media such as television, radio and print for a share of
advertisers' total advertising budgets. Our advertising sales force and
infrastructure are still in early stages of development relative to those of
many of our competitors. We cannot be certain that advertisers will place
advertising with us or that revenues derived from such advertising will be
meaningful. Certain recent slowdowns in funding for Internet-related companies
has had a negative effect on Internet advertising markets. If we lose
advertising customers, fail to attract new customers, are forced to reduce
advertising rates or otherwise modify our rate structure to retain or attract
customers, or if we lose Web site traffic, our business could be harmed.
Electronic Commerce and Subscription Services. The electronic commerce
features of our Web sites compete with a variety of other Web sites for consumer
traffic. To compete successfully in the electronic commerce market, we must
attract sufficient traffic to our Web sites by offering high-quality,
competitively priced, desirable merchandise in a compelling, easy-to-purchase
format. In addition, we must successfully leverage our existing user base to
develop the market for our products and services. We recently introduced the
RealPlayer GoldPass subscription service, which provides customers access to a
combination of premium software, services and content, updated monthly, in
exchange for a monthly fee. While we intend for GoldPass to create meaningful
opportunities for long-term recurring revenue and enable us to deepen our
relationship with our end users through personalization of services to their
interests, it is too early to predict its acceptance by consumers or potential
for success in the market. We may not compete successfully in the
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growing and rapidly changing market for electronic commerce and subscription
services. Our failure to do so could harm our business.
Increased competition may result in price reductions, reduced margins,
loss of customers, and a change in our business and marketing strategies, any of
which could harm our business.
WE MAY NOT BE SUCCESSFUL IN THE MARKET FOR DOWNLOADABLE MEDIA AND LOCAL MEDIA
DELIVERY
We do not yet know whether there is a sustainable market for products
such as RealJukebox. Even if that market exists, we may be unable to develop a
revenue model or sufficient demand to take advantage of the market opportunity.
While over 50 million copies of RealJukebox have been downloaded since
its beta release on May 3, 1999, it is too soon to determine whether consumers
will adopt RealJukebox as their primary application to play, record, download
and manage their digital music. Even if RealJukebox achieves a high degree of
market acceptance, it may not achieve a high level of use, which would lead to a
low rate of upgrade sales and electronic commerce opportunities. There are a
number of competitive products on the market that offer certain of the features
offered by RealJukebox. These products include WinAmp Player, MusicMatch
Jukebox, Sonique Player, Liquid Audio Player, a2b Player, AOL 6.0, Windows Media
Player and others. Because free versions are available for all of these
competing products, our ability to sell RealJukebox upgrades, and the prices we
charge, may be affected. Given the size and importance of the general market for
music distribution, competitors will likely release additional products that
directly compete with RealJukebox, which could harm our business. Our
competitors may develop new features and technology not available in
RealJukebox, including advanced codecs and digital rights management technology,
which could harm our business.
RealJukebox also faces competition from the emergence of widespread
peer-to-peer file sharing services and programs like Napster and Gnutella.
Napster recently announced an agreement under which Bertelsmann Music Group
would license its content to Napster for legal distribution as part of a
subscription program. Our inability to achieve widespread acceptance for
RealNetworks digital music architecture and RealJukebox or to create new revenue
streams from the new market segments, including digital music content, could
harm our business.
We have announced that RealJukebox supports or will support a variety of
audio formats, including RealAudio G2, MP3, Liquid Audio, Mjuice, Windows Media
Audio, IBM's EMMS, and a2b. However, technical formats and consumer preferences
evolve very rapidly, and we may be unable to adequately address consumer
preferences or fulfill the market demand to the extent it exists. In addition we
must provide digital rights management solutions and other security mechanisms
in order to address concerns of content providers, and we cannot be certain that
we can develop, license or acquire such solutions, or that consumers will accept
them.
We have had long-term relationships with recording companies, including
major record labels, many of which offer their streaming content in our formats.
However, recording companies, including those with whom we have a relationship,
may not make their desirable content available for download or playback in
formats supported by RealJukebox, may impose technical restrictions designed to
secure intellectual property rights that may impact the user experience or
demand for RealJukebox, or may refrain from or delay participating in
promotional opportunities with respect to RealJukebox.
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WE MAY NOT SUCCESSFULLY DEVELOP NEW PRODUCTS AND SERVICES
Our growth depends on our ability to continue to develop leading edge
media delivery and digital distribution products and services. Our business and
operating results would be harmed if we fail to develop products and services
that achieve widespread market acceptance or that fail to generate significant
revenues to offset development costs. We may not timely and successfully
identify, develop and market new product and service opportunities. If we
introduce new products and services, they may not attain broad market acceptance
or contribute meaningfully to our revenues or profitability.
Because the markets for our products and services are changing rapidly,
we must develop new offerings quickly. We have experienced development delays
and cost overruns in our development efforts in the past and we may encounter
such problems in the future. Delays and cost overruns could affect our ability
to respond to technological changes, evolving industry standards, competitive
developments or customer requirements. Our products also may contain undetected
errors that could cause increased development costs, loss of revenues, adverse
publicity, reduced market acceptance of the products or lawsuits by customers.
WE RELY ON CONTENT PROVIDED BY THIRD PARTIES TO INCREASE MARKET ACCEPTANCE OF
OUR PRODUCTS AND SERVICES
If third parties do not develop or offer compelling content to be
delivered over the Internet, or grant necessary licenses to us or our customers
to distribute or perform such content, our business will be harmed and our
products and services may not achieve or sustain broad market acceptance. We
rely on third-party content providers, such as radio and television stations,
record labels, media companies, Web sites and other companies, to develop and
offer content in our formats that can be delivered using our server products and
played back using our player products. We also rely on such content for our
GoldPass products. While we have a number of short-term agreements with third
parties to provide content from their Web sites in our formats, most third
parties are not obligated to develop or offer content using our technology. In
addition, some third parties have entered into and may in the future enter into
agreements with our competitors, principally Microsoft, to develop or offer all
or a substantial portion of their content in our competitors' formats. Microsoft
has more resources than us that may enable it to secure preferential and even
exclusive relationships with content providers. There could be less demand for
and use of our products if Microsoft or another competitor were to secure
preferential or exclusive relationships with the leading broadcasters, record
companies or Web sites. We cannot guarantee that third-party content providers
will continue to rely on our technology or offer compelling content in our
formats to encourage and sustain broad market acceptance of our products. Their
failure to do so would harm our business.
Our success also depends on the availability of third-party content,
especially music, that users of our RealJukebox product can lawfully and easily
access, record and play back. Our products may not achieve or sustain market
acceptance if third parties are unwilling to offer their content for free
download or purchase by users of RealJukebox. Current concerns regarding the
secure distribution of music over the Internet are causing content owners to
delay or refuse to make content available for distribution. Competitors could
secure exclusive distribution relationships with such content providers, which
would harm our business.
THE RATE STRUCTURE OF SOME OF OUR ADVERTISING AND SPONSORSHIP ARRANGEMENTS
SUBJECTS US TO FINANCIAL RISK
We generate advertising revenues in part through sponsored services and
placements by third parties in our products and on our Web sites, in addition to
banner advertising. We may receive sponsorship fees or a
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portion of transaction revenues in return for minimum levels of user impressions
to be provided by us. These arrangements expose us to potentially significant
financial risks in the event our usage levels decrease, including the following:
- the fees we are entitled to receive may be adjusted downwards;
- we may be required to "make good" on our obligations by
providing alternative services;
- the sponsors may not renew the agreements or may renew at lower
rates; and
- the arrangements may not generate anticipated levels of shared
transaction revenues, or sponsors may default on the payment
commitments in such agreements.
Accordingly, any leveling off or decrease of our user base or the
failure to generate anticipated levels of shared transaction revenues could
result in a meaningful decrease in our revenue levels.
To the extent that our advertisers are experiencing slow-downs in their
businesses or tighter resources to fund advertising, our anticipated revenue
results could be harmed.
WE DEPEND ON KEY PERSONNEL WHO MAY NOT CONTINUE TO WORK FOR US
Our success substantially depends on the continued employment of our
executive officers and key employees, particularly Robert Glaser, our founder,
chairman of the board and chief executive officer. The loss of the services of
Mr. Glaser or any of our other executive officers or key employees could harm
our business. Each of these individuals has acquired specialized knowledge and
skills with respect to RealNetworks and its operations. As a result, if certain
individuals were to leave RealNetworks, we could face substantial difficulty in
hiring qualified successors and could experience a loss in productivity while
any such successor obtains the necessary training and experience. Several of our
personnel have reached or will soon reach the five-year anniversary of their
RealNetworks hiring date and, as a result, will have become or will shortly
become fully vested in their initial stock option grants. While most personnel
are typically granted additional stock options, which will usually vest over a
period of five years, subsequent to their hire date to provide additional
incentive to remain at RealNetworks, the initial option grant is typically the
largest and an employee may be more likely to leave our employ upon completion
of the vesting period for the initial option grant. None of our executive
officers has a contract that guarantees employment. Other than a $2 million
insurance policy on the life of Mr. Glaser, we do not maintain "key person" life
insurance policies. If we do not succeed in retaining and motivating existing
personnel, our business could be harmed.
OUR FAILURE TO ATTRACT, TRAIN OR RETAIN HIGHLY QUALIFIED PERSONNEL COULD HARM
OUR BUSINESS
Our success also depends on our ability to attract, train and retain
qualified personnel in all areas, especially those with management and product
development skills. In particular, we must hire additional experienced
management personnel to help us continue to grow and manage our business, and
skilled software engineers to further our research and development efforts. At
times, we have experienced difficulties in hiring personnel with the proper
training or experience, particularly in technical areas. Competition for
qualified personnel is intense, particularly in high-technology centers such as
the Pacific Northwest, where our corporate headquarters are located. In making
employment decisions, particularly in the Internet and high-technology
industries, job candidates and even our current personnel often consider the
value of stock options they may receive in connection with their employment. As
a result of recent volatility
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in our stock price, we may be disadvantaged in competing with companies that
have not experienced similar volatility or that have not yet sold their stock
publicly. If we do not succeed in attracting new personnel or retaining and
motivating our current personnel, our business could be harmed.
WE MAY NOT SUCCESSFULLY MANAGE OUR GROWTH
We cannot successfully implement our business model if we fail to manage
our growth. We have rapidly and significantly expanded our operations
domestically and internationally and anticipate further expansion to take
advantage of market opportunities. We have increased the number of our full-time
employees from 325 on January 1, 1998 to 1,040 on December 31, 2000. Managing
this substantial expansion has placed a significant strain on our management,
operational and financial resources. If our growth continues, we will need to
continue to improve our financial and managerial control and reporting systems
and procedures.
We are in the process of implementing new management information
software systems. This will affect many aspects of our business, including our
accounting, operations, electronic commerce, customer service, purchasing, sales
and marketing functions. The purchase, implementation and testing of these
systems have resulted, and will result, in significant capital expenditures and
disruptions to our day-to-day operations. If these systems are not implemented
or do not operate as expected, our ability to provide products and services to
our customers on a timely basis will suffer and delays in the recording and
reporting of our operating results could occur.
POTENTIAL ACQUISITIONS INVOLVE RISKS WE MAY NOT ADEQUATELY ADDRESS
As part of our business strategy, we have acquired technologies and
businesses in the past, and intend to do so in the future. The failure to
adequately address the financial and operational risks raised by acquisitions of
technology and businesses could harm our business. Acquisition or business
combination transactions are accompanied by a number of significant risks.
Financial risks related to acquisitions include:
- potentially dilutive issuances of equity securities;
- use of cash resources;
- the incurrence of additional debt and contingent liabilities;
- large write-offs and the correct assessment of the relative
percentages of in-process research and development expense that
can be immediately written off as compared to the amount which
must be amortized over the appropriate life of the asset; and
- amortization expenses related to goodwill and other intangible
assets
Acquisitions also involve operational risks, including:
- difficulties in assimilating the operations, products,
technology, information systems and personnel of the acquired
company;
- diversion of management's attention from other business concerns
and the potential disruption of our ongoing business;
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- the difficulty of incorporating acquired technology or content
and rights into our products and services and unanticipated
expenses related to such integrations;
- impairment of relationships with our employees, affiliates,
advertisers and content providers;
- inability to maintain uniform standards, controls, procedures
and policies;
- the assumption of known and unknown liabilities of the acquired
company;
- entrance into markets in which we have no direct prior
experience; and
- loss of key employees of the acquired company.
THE GROWTH OF OUR BUSINESS DEPENDS ON THE INCREASED USE OF THE INTERNET FOR
COMMUNICATIONS, ELECTRONIC COMMERCE AND ADVERTISING
The growth of our business depends on the continued growth of the
Internet as a medium for communications, electronic commerce and advertising.
Our business will be harmed if Internet usage does not continue to grow,
particularly as a source of media information and entertainment and as a vehicle
for commerce in goods and services. Our success also depends on the efforts of
third parties to develop the infrastructure and complementary products and
services necessary to maintain and expand the Internet as a viable commercial
medium. The Internet may not ultimately be accepted as a viable commercial
medium for broadcasting multimedia content or media delivery for a number of
reasons which could inhibit the growth and use of the Internet, including:
- potentially inadequate development of the necessary
infrastructure to accommodate growth in the number of users and
Internet traffic;
- unavailability of compelling multimedia content;
- inadequate commercial support for Web-based advertising or
electronic commerce transactions; and
- delays in the development or adoption of new technological
standards and protocols, and increased governmental regulation,
or inconsistent regulations between state, federal and foreign
governments.
In addition, we believe that other Internet-related issues, such as
security, privacy, reliability, cost, speed, ease of use and access, quality of
service and necessary increases in bandwidth availability, remain largely
unresolved and may affect the amount and type of business that is conducted over
the Internet, and impact our ability to sell our products and services and
ultimately impact our business results.
If Internet usage grows, the Internet infrastructure may not be able to
support the demands placed on it by such growth, specifically the demands of
delivering high-quality media content. As a result, its performance and
reliability may decline. In addition, Web sites have experienced interruptions
in service as a result of outages, system attacks and other delays occurring
throughout the Internet network infrastructure. If
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these outages, attacks or delays occur frequently or on a broad scale in the
future, Internet usage, as well as the usage of our products, services and Web
sites, could grow more slowly or decline.
CHANGES IN NETWORK INFRASTRUCTURE, TRANSMISSION METHODS AND BROADBAND
TECHNOLOGIES POSE RISKS TO OUR BUSINESS
We believe that increased Internet use and especially the use of media
over the Internet may depend on the availability of greater bandwidth or data
transmission speeds (also known as broadband transmission). If broadband access
becomes widely available, although we believe it would present a substantial
opportunity it may also present a significant business challenge for us.
Internet access through cable television set-top boxes, digital subscriber lines
or wireless connections could dramatically reduce the demand for our products
and services by utilizing alternate technology that more efficiently transmits
data and media. This could harm our business as currently conducted.
Development of products and services for a broadband transmission
infrastructure involves a number of additional risks, including:
- changes in content delivery methods and protocols;
- the availability of compelling content that takes advantage of
broadband access and helps drive market acceptance of our
products and services;
- the emergence of new competitors, such as traditional broadcast
and cable television companies, which have significant control
over access to content, substantial resources and established
relationships with media providers;
- the development of relationships by our current competitors with
companies that have significant access to or control over the
broadband transmission infrastructure or content;
- the need to establish new relationships with non-PC based
providers of broadband access, such as providers of television
set-top boxes and cable television, some of which may compete
with us; and
- the general risks of new product and service development,
including the challenges to develop error-free products and
enhancements, develop compelling services and achieve market
acceptance for these products and services.
We depend on the efforts of third parties to develop and provide a
successful infrastructure for broadband transmission. Even if broadband access
becomes widely available, heavy use of the Internet may negatively impact the
quality of media delivered through broadband connections. If these third parties
experience delays or difficulties establishing a widespread broadband
transmission infrastructure or if heavy usage limits the broadband experience,
the release of our broadband products and services could be delayed. Even if a
broadband transmission infrastructure is developed for widespread use, our
products and services may not achieve market acceptance or generate sufficient
revenues to offset our development costs.
MORE INDIVIDUALS ARE UTILIZING NON-PC DEVICES TO ACCESS THE INTERNET AND WE MAY
NOT BE SUCCESSFUL IN DEVELOPING A VERSION OF OUR SERVICE THAT WILL GAIN
WIDESPREAD ADOPTION BY USERS OF SUCH DEVICES
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In the coming years, the number of individuals who access the Internet
through devices other than a personal computer, such as personal digital
assistants, cellular telephones and television set-top devices, is expected to
increase dramatically. Our products and services are primarily designed for
rich, graphical environments such as those available on personal and laptop
computers. The lower resolution, functionality and memory associated with
alternative devices may make the use of our products and services through such
devices difficult, and we may be unsuccessful in our efforts to modify our
current products and services to provide a compelling experience for users of
alternative devices. As we have limited experience to date in creating versions
of our products and services optimized for users of alternative devices, it is
difficult to predict the problems we may encounter in doing so and we may need
to devote significant resources to create, support and maintain such versions.
If we are unable to attract and retain a substantial number of alternative
device manufacturers to license and incorporate our technology into their
devices, we may fail to capture a sufficient share of an increasingly important
portion of the market for digital media delivery. Further, a failure to develop
revenue-generating relationships with enough device manufacturers whose products
are adopted by a significant number of device users could have a material
adverse effect on our business, operating results and financial condition.
WE COULD LOSE STRATEGIC RELATIONSHIPS THAT ARE ESSENTIAL TO OUR BUSINESS
The loss of certain current strategic relationships or key licensing
arrangements, the inability to find other strategic partners or the failure of
our existing relationships to achieve meaningful positive results for us could
harm our business. We rely in part on strategic relationships to help us:
- increase adoption of our products through distribution
arrangements;
- increase the amount and availability of compelling media content
on the Internet to help boost demand for our products and
services;
- enhance our brand;
- expand the range of commercial activities based on our
technology;
- expand the distribution of our streaming media content without a
degradation in fidelity; and
- increase the performance and utility of our products and
services.
We would be unable to accomplish many of these goals without the
assistance of third parties. We anticipate that the efforts of our strategic
partners will become more important as the multimedia experience over the
Internet matures. For example, we may become more reliant on strategic partners
to provide multimedia content, provide more secure and easy-to-use electronic
commerce solutions and build out the necessary infrastructure for media
delivery. We may not be successful in forming or managing strategic
relationships. In addition, the efforts of our strategic partners may be
unsuccessful. Furthermore, these strategic relationships may be terminated
before we realize any benefit.
OUR INDUSTRY IS EXPERIENCING CONSOLIDATION THAT MAY INTENSIFY COMPETITION
The Internet and media distribution industries have recently experienced
substantial consolidation and a proliferation of strategic transactions. We
expect this consolidation and strategic partnering to continue. Acquisitions or
strategic relationships could harm us in a number of ways. For example:
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- competitors could acquire or enter into relationships with
companies with which we have strategic relationships and
discontinue our relationship, resulting in the loss of
distribution opportunities for our products and services or the
loss of certain enhancements or value-added features to our
products and services;
- competitors could obtain exclusive access to desirable
multimedia content and prevent that content from being available
in our formats, thus decreasing the use of our products and
services to distribute and experience the content that audiences
most desire, and hurting our ability to attract advertisers to
our Web sites and product offerings;
- suppliers of important or emerging technologies could be
acquired by a competitor or other company which could prevent us
from being able to utilize such technologies in our offerings,
and disadvantage our offerings relative to those of competitors;
- a competitor could be acquired by a party with significant
resources and experience that could increase the ability of the
competitor to compete with our products and services; and
- other companies with related interests could combine to form
new, formidable competition, which could preclude us from
obtaining access to certain markets or content, or which could
dramatically change the market for our products and services.
OUR BUSINESS WILL SUFFER IF OUR SYSTEMS FAIL OR BECOME UNAVAILABLE
A reduction in the performance, reliability and availability of our Web
sites and network infrastructure will harm our ability to distribute our
products and services to our users, as well as our reputation and ability to
attract and retain users, customers, advertisers and content providers. Our
revenues depend in large part on the number of users that download our products
from our Web sites and access the content services on our Web sites. Our systems
and operations are susceptible to, and could be damaged or interrupted by,
outages caused by fire, flood, power loss, telecommunications failure, Internet
breakdown, earthquake and similar events. Our systems are also subject to human
error, security breaches, power losses, computer viruses, break-ins, "denial of
service" attacks, sabotage, intentional acts of vandalism and tampering designed
to disrupt our computer systems, Web sites and network communications. A sudden
and significant increase in traffic on our Web sites could strain the capacity
of the software, hardware and telecommunications systems that we deploy or use.
This could lead to slower response times or system failures. Our operations also
depend on receipt of timely feeds from our content providers, and any failure or
delay in the transmission or receipt of such feeds could disrupt our operations.
We depend on Web browsers, ISPs and online service providers to provide Internet
users access to our Web sites. Many of these providers have experienced
significant outages in the past, and could experience outages, delays and other
difficulties due to system failures unrelated to our systems. In addition,
certain ISPs have temporarily interrupted our Web site operations and ability to
communicate with certain customers in response to the heavy volume of e-mail
transmissions we generate and send to our large user base. These types of
interruptions could continue or increase in the future.
Our electronic commerce and digital distribution activities are managed
by sophisticated software and computer systems. Although we continually develop
and update these systems over time as our business and business needs grow and
change, these systems may not adequately address the current needs of our
business. We may encounter delays in developing these systems, and the systems
may contain undetected
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errors that could cause system failures. Any system error or failure that causes
interruption in availability of products or content or an increase in response
time could result in a loss of potential or existing business services
customers, users, advertisers or content providers. If we suffer sustained or
repeated interruptions, our products, services and Web sites could be less
attractive to such entities or individuals and our business would be harmed.
Real Broadcast Network's business is dependent on providing customers
with efficient and reliable services to enable such customers to broadcast
content to large audiences on an as-needed basis. Real Broadcast Network's
operations are also dependent in part upon transmission capacity provided by
third-party telecommunications network providers. Any failure of such network
providers to provide the capacity we require may result in a reduction in, or
interruption of, service to our customers. If we do not have access to
third-party transmission capacity, we could lose customers and if we are unable
to obtain such capacity on terms commercially acceptable to us, our business and
operating results could suffer.
Our computer and communications infrastructure is located at a single
leased facility in Seattle, Washington. We do not 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. Despite our efforts, our network infrastructure and systems could be
subject to service interruptions or damage and any resulting interruption of
services could harm our business, operating results and reputation.
OUR NETWORK IS SUBJECT TO SECURITY RISKS THAT COULD HARM OUR BUSINESS AND
REPUTATION AND EXPOSE US TO LITIGATION OR LIABILITY
Online commerce and communications depend on the ability to transmit
confidential information securely over public networks. Any compromise of our
ability to transmit confidential information securely, and costs associated with
preventing or eliminating any problems, could harm our business. Online
transmissions are subject to a number of security risks, including:
- our own or licensed encryption and authentication technology may
be compromised, breached or otherwise be insufficient to ensure
the security of customer information;
- we could experience unauthorized access, computer viruses,
system interference or destruction, "denial of service" attacks
and other disruptive problems, whether intentional or
accidental, that may inhibit or prevent access to our Web sites
or use of our products and services;
- a third party could circumvent our security measures and
misappropriate our, our partners' and our customer's proprietary
information or interrupt operations; and
- credit card companies could restrict online credit card
transactions.
The occurrence of any of these or similar events could damage our
business, hurt our ability to distribute products and services and collect
revenue, threaten the proprietary or confidential nature of our technology, harm
our reputation, and expose us to litigation or liability. For example, though we
have not personally been impacted by these events, in February 2000, many
commercial and governmental Web sites were the subject of intentional denial of
service attacks designed to disrupt or disable the operation of such Web sites.
Also, Microsoft recently announced that hackers had infiltrated its system and
may have accessed
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source code to certain of its products. We may be required to expend significant
capital or other resources to protect against the threat of security breaches or
hacker attacks or to alleviate problems caused by such breaches or attacks.
OUR INTERNATIONAL OPERATIONS INVOLVE RISKS
We operate subsidiaries in Australia, England, France, Germany, Japan,
Mexico, Brazil and Hong Kong, and market and sell products in several other
countries. We have also entered into joint ventures internationally. For the
quarter ended September 30, 2000, approximately 28% of our revenues were derived
from international operations.
A key part of our strategy is to develop localized products and services
in international markets through joint ventures, subsidiaries and branch
offices. To date, we have only limited experience in developing localized
versions of our products and services and marketing and operating our products
and services internationally, and we rely on the efforts and abilities of our
foreign business partners in such activities. We believe that in light of the
potential size of the customer base and the audience for content, and the
substantial anticipated competition, we need to continue to expand quickly into
international markets in order to effectively obtain and maintain market share.
International markets we have selected may not develop at a rate that supports
our level of investment. In particular, international markets typically have
been slower in adoption of the Internet as an advertising and commerce medium.
In addition to uncertainty about our ability to continue to generate revenues
from our foreign operations and expand our international presence, there are
certain risks inherent in doing business on an international level. We are
subject to the normal risks of doing business internationally, as well as risks
specific to Internet-based companies in foreign markets. These risks include:
- delays in the development of the Internet as a broadcast,
advertising and commerce medium in international markets;
- difficulties in managing operations due to distance, language
and cultural differences, including issues associated with
establishing management systems infrastructures in individual
markets;
- incompatible technology or distribution infrastructures, and
different or incompatible standards-based technologies;
- unexpected changes in regulatory requirements;
- export and import restrictions, including those restricting the
use of encryption technology;
- tariffs and trade barriers and limitations on fund transfers;
- longer payment cycles and problems in collecting accounts
receivable;
- potential adverse tax consequences;
- higher costs of doing business in foreign countries;
- seasonal reductions in business activity;
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- exchange rate fluctuations;
- increased risk of piracy and limits on our ability to enforce
our intellectual property rights;
- the need to comply with different and often conflicting laws and
regulations; and
- other legal and political risks.
Any of these factors could harm our future international operations, and
consequently our business, operating results and financial condition. We do not
currently hedge our foreign currency exposures.
WE MAY BE UNABLE TO ADEQUATELY PROTECT OUR PROPRIETARY RIGHTS AND MAY BE SUBJECT
TO INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS, WHICH ARE COSTLY TO DEFEND AND
COULD LIMIT OUR ABILITY TO USE CERTAIN TECHNOLOGIES IN THE FUTURE
Our inability to protect our proprietary rights, and the costs of doing
so, could harm our business. Our success and ability to compete partly depend on
the superiority, uniqueness or value of our 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. Despite our efforts to
protect our proprietary rights, unauthorized parties may copy or infringe
aspects of our technology, products, services or trademarks, or obtain and use
information we regard as proprietary. Our proprietary rights may be especially
difficult to protect in foreign countries, where unrelated third parties may
have registered our domain names and trademarks under their own names in an
attempt to prevent us from using the domain names and trademarks in those
countries without paying them a significant sum of money. This could prevent us
from using our valuable brands in those countries, and reduce the value of our
intellectual property.
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. These
efforts to protect our intellectual property rights may not be effective in
preventing misappropriation of our technology, or may not prevent the
development and design by others of products or technologies similar to or
competitive with, or superior to those we develop which could reduce the value
of our intellectual property. Effective trademark, copyright and trade secret
protection may not be available in every country in which our products and
services are distributed or made available through the Internet, and while we
attempt to ensure that the quality of our brand is maintained by our licensees,
our licensees may take action that could materially and adversely affect the
value of our proprietary rights or the reputation of our products and services.
Portions of the distinctive elements of our products and Web sites may not be
available under copyright law. We cannot guarantee that the steps we have taken
to protect our proprietary rights will be adequate. As with other software
products, our products are susceptible to unauthorized copying and uses that may
go undetected, and policing such unauthorized use is difficult.
As of December 31, 2000, we had 40 registered U.S. trademarks or service
marks, and had applications pending for an additional 25 U.S. trademarks. We
also have several unregistered trademarks. In addition, RealNetworks has several
foreign trademark registrations and pending applications. Many of our marks
begin with the word "Real" (such as RealSystem, RealAudio and RealVideo). We are
aware of other companies that use "Real" in their marks alone or in combination
with other words, and we do not expect to
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be able to prevent all third-party uses of the word "Real" for all goods and
services. In addition, the laws of some foreign countries do not protect our
proprietary rights to the same extent as the laws of the United States, and
effective patent, copyright, trademark and trade secret protection may not be
available in such jurisdictions.
As of December 31, 2000, we had 17 U.S. patents and numerous patent
applications on file relating to various aspects of our technology. We are
preparing additional patent applications on other features of our technology.
Patents with respect to our technology may not be granted and, if granted, may
be challenged or invalidated. Issued patents may not provide us with any
competitive advantages and may be challenged by third parties. In addition,
others could independently develop substantially equivalent intellectual
property.
Many of our current and potential competitors dedicate substantially
greater resources to protection and enforcement of their intellectual property
rights, especially patents. Many parties are actively developing streaming media
and digital distribution-related technologies, e-commerce and other Web-related
technologies, as well as a variety of online business methods and models. We
believe that these parties will continue to take steps to protect these
technologies, including, but not limited to seeking patent protection. As a
result, disputes regarding the ownership of these technologies and rights
associated with streaming media and digital distribution, and online businesses,
are likely to arise in the future. In addition to existing patents and
intellectual property rights, we anticipate that additional third-party patents
related to our products and services will be issued in the future. If a blocking
patent has issued or issues in the future, we would need to either obtain a
license or design around the patent. We may not be able to obtain such a license
on acceptable terms, if at all, or design around the patent.
Companies in the technology and content-related industries have
frequently resorted to litigation regarding intellectual property rights. We may
have to litigate to enforce our intellectual property rights, to protect our
trade secrets or to determine the validity and scope of other parties'
proprietary rights. In addition, we believe these industries are experiencing an
increased level of litigation to determine the applicability of current laws to,
and impact of new technologies on, the use and distribution of content over the
Internet and through new devices. The existence and/or outcome of such
litigation could involve us or affect our business.
From time to time we receive claims and inquiries from third parties in
the form of letters, lawsuits and other forms of communications, alleging that
our internally developed technology or technology we license from third parties
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. We are now investigating several of such pending claims. We
could be required to spend significant amounts of time and money to defend
ourselves against such claims. If any of these claims were to prevail, we could
be forced to pay damages, comply with injunctions, or stop distributing our
products and services while we re-engineer them or seek licenses to necessary
technology, which might not be available on reasonable terms. We could also be
subject to claims for indemnification resulting from infringement claims made
against our customers and strategic partners, which could increase our defense
costs and potential damages. Any of these events could require us to change our
business practices and harm our business.
In August 1998, Venson M. Shaw and Steven M. Shaw filed a lawsuit
against us and co-defendant Broadcast.com in the United States District Court
for the Northern District of Texas - Dallas Division. The plaintiffs allege that
we, individually and in combination with Broadcast.com, infringe on a certain
patent by making, using, selling and/or offering to sell software products and
services directed to media delivery
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systems for the Internet and corporate intranets. The plaintiffs seek to enjoin
us from the alleged infringing activity and to recover damages in an amount no
less than a reasonable royalty. We believe the allegations are without merit and
intend to vigorously defend ourselves against these claims. However, litigation
is inherently uncertain, and we may be unable to successfully defend ourselves
against this claim.
WE ARE SUBJECT TO RISKS ASSOCIATED WITH GOVERNMENTAL REGULATION AND LEGAL
UNCERTAINTIES
Few existing laws or regulations specifically apply to the Internet,
other than laws and regulations generally applicable to businesses. Certain U.S.
export controls and import controls of other countries, including controls on
the use of encryption technologies, may apply to our products. However, many
laws and regulations are pending and may be adopted in the United States,
individual states and local jurisdictions and other countries with respect to
the Internet. These laws may relate to areas such as content issues (such as
obscenity, indecency and defamation), copyright and other intellectual property
rights, encryption, use of key escrow data, caching of content by server
products, electronic authentication or "digital signatures," personal privacy,
advertising, taxation, electronic commerce liability, e-mail, gambling,
sweepstakes, promotions, content regulation, quality of products and services,
network and information security and the convergence of traditional
communication services with Internet communications, including the future
availability of broadband transmission capability. Other countries and political
organizations are likely to impose or favor more and different regulation than
that which has been proposed in the United States, thus furthering the
complexity of regulation. In addition, state and local governments may impose
regulations in addition to, inconsistent with, or stricter than federal
regulations. The adoption of such laws or regulations, and uncertainties
associated with their validity and enforcement, may affect the available
distribution channels for and costs associated with our products and services,
and may affect the growth of the Internet. Such laws or regulations may
therefore harm our business.
We do not know for certain how existing laws governing issues such as
property ownership, copyright and other intellectual property issues, taxation,
illegal or obscene content, retransmission of media, and personal privacy and
data protection apply to the Internet. The vast majority of such laws were
adopted before the advent of the Internet and related technologies and do not
address the unique issues associated with the Internet and related technologies.
Most of the laws that relate to the Internet have not yet been interpreted.
Changes to or the interpretation of these laws could:
- limit the growth of the Internet;
- create uncertainty in the marketplace that could reduce demand
for our products and services;
- increase our cost of doing business;
- expose us to significant liabilities associated with content
available on our Web sites or distributed or accessed through
our products or services, with our provision of products and
services, and with the features or performance of our products
and Web sites;
- lead to increased product development costs; or
- decrease the rate of growth of our user base and limit our
ability to effectively communicate with and market to our user
base.
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On October 28, 1998, the Digital Millennium Copyright Act (DMCA) was
enacted. The DMCA includes statutory licenses for the performance of sound
recordings and for the making of recordings to facilitate transmissions. Under
these statutory licenses, we and our broadcast customers may be required to pay
licensing fees for digital sound recordings we deliver in original and archived
programming and through retransmissions of radio broadcasts. The DMCA does not
specify the rate and terms of the licenses, which will be determined either
through voluntary inter-industry negotiations or arbitration. We plan to engage
in arbitration before a tribunal of the United States Copyright Office with the
Recording Industry Association of America during 2001 to determine what, if any,
licensee fee should be paid. Depending on the rates and terms adopted for the
statutory licenses, our business could be harmed both by increasing our own cost
of doing business, as well as by increasing the cost of doing business for our
customers.
The Child Online Protection Act and the Child Online Privacy Protection
Act (COPPA) were enacted in October 1998. The COPPA imposes civil and criminal
penalties on persons distributing material harmful to minors (e.g., obscene
material) over the Internet to persons under the age of 17, or collecting
personal information from children under the age of 13. We do not knowingly
collect and disclose personal information from such minors. The manner in which
the COPPA may be interpreted and enforced cannot be fully determined, and future
legislation similar to the COPPA could subject us to potential liability, which
in turn could harm our business. Such laws could also damage the growth of the
Internet generally and decrease the demand for our products and services.
There are a large number of legislative proposals before the United
States Congress and various state legislatures regarding privacy issues related
to our business. It is not possible to predict whether or when such legislation
may be adopted, and certain proposals, if adopted, could materially and
adversely affect our business through a decrease in user registration and
revenue, and influence how and whether we can communicate with our customers.
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
occasionally send information to servers at RealNetworks. Many of the services
we provide also require that a user provide certain information to us. We post
privacy policies concerning the use, collection and disclosure of our user data.
Any failure by us to comply with our posted privacy policies 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.
Between November 1999 and March 2000, fourteen lawsuits were filed
against us in federal and/or state courts in California, Illinois, Pennsylvania,
Washington and Texas. The plaintiffs have voluntarily dismissed all of the state
court cases with the exception of the case pending in California. The remaining
twelve actions, which seek to certify classes of plaintiffs, allege breach of
contract, invasion of privacy, deceptive trade practices, negligence, fraud and
violation of certain federal and state laws in connection with various
communications features of our RealPlayer and RealJukebox products. Plaintiffs
are seeking both damages and injunctive relief. We have filed answers denying
the claims and have filed suit in Washington state court to compel the state
court plaintiffs to arbitrate their claims as required by our End User License
Agreements. On February 10, 2000, the federal Judicial Panel on Multidistrict
Litigation transferred all pending federal cases to the federal district court
for the Northern District of Illinois. On the same day, that court granted
RealNetworks' motion to stay the court proceedings because the claims are
subject to
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arbitration under our End User License Agreement. Although no assurance can be
given as to the outcome of these lawsuits, we believe that the allegations in
these actions are without merit, and intend to vigorously defend ourselves. If
the plaintiffs prevail in their claims, we could be required to pay damages or
other penalties, in addition to complying with injunctive relief, which could
harm our business and our operating results.
WE MAY BE SUBJECT TO LEGAL LIABILITY FOR THE PROVISION OF THIRD-PARTY PRODUCTS,
SERVICES OR CONTENT
We periodically enter into arrangements to offer third-party products,
services or content under the RealNetworks brand or via distribution on our Web
sites, in products or service offerings. We may be subject to claims concerning
these products, services or content by virtue of our involvement in marketing,
branding, broadcasting or providing access to them, even if we do not ourselves
host, operate, provide, or provide access to these products, services or
content. While our agreements with these parties often provide that we will be
indemnified against such liabilities, such indemnification may not be adequate.
It is also possible that, if any information provided directly by us contains
errors or is otherwise negligently provided to users, third parties could make
claims against us, including, for example, for defamation, negligence, copyright
or trademark infringement, unlawful activity, or tort, including personal
injury, fraud, or other theories based on the nature and content of information
to which we provide links. Investigating and defending any of these types of
claims is expensive, even to the extent that the claims do not result in
liability. If the claims do result in liability, we could be required to pay
damages or other penalties, which could harm our business and our operating
results.
REALNETWORKS' DIRECTORS AND EXECUTIVE OFFICERS BENEFICIALLY OWN APPROXIMATELY
44.1% OF OUR STOCK; THEIR INTERESTS COULD CONFLICT WITH YOURS; SIGNIFICANT SALES
OR STOCK HELD BY THEM COULD HAVE A NEGATIVE EFFECT ON REALNETWORKS' STOCK PRICE;
SHAREHOLDERS MAY BE UNABLE TO EXERCISE CONTROL
As of December 31, 2000, our executive officers, directors and
affiliated persons beneficially owned approximately 44.1% of our common stock,
and Robert Glaser, our chief executive officer and chairman of the board,
beneficially owned approximately 33.6% of our common stock. As a result, our
executive officers, directors and affiliated persons 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.
As a result of their ownership and positions, our directors and
executive officers collectively are able to significantly influence all matters
requiring stockholder approval, including the election of directors and approval
of significant corporate transactions. In addition, sales of significant amounts
of shares held by RealNetworks directors and executive officers, or the prospect
of these sales, could adversely affect the market price of RealNetworks common
stock. Management's stock ownership 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.
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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 currently comprised of Messrs. Glaser,
Breyer and Kapor. 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:
(A) assets representing more than 50% of the book value of
our assets prior to the transaction; or
(B) any other asset or assets 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.
RealNetworks also entered into an agreement providing Mr. Glaser with a
direct contractual right to require RealNetworks to abide by and perform all
terms of the articles of incorporation with respect to the strategic
transactions committee. This agreement also provides that so long as Mr. Glaser
owns a specified number of shares, RealNetworks will use its best efforts to
cause him to be nominated to, elected to, and not removed from the board of
directors. In addition, the articles provide that Mr. Glaser will serve, or will
appoint another officer of RealNetworks to serve, as our policy ombudsman, with
the exclusive authority to adopt or change our editorial policies as reflected
on our Web sites or in other communications or media in which we have a
significant editorial or media voice. The provisions with respect to the
authority of the strategic transactions committee and the policy ombudsman may
be amended only with the approval of 90% of the shares entitled to vote on an
amendment to the articles.
We have adopted a shareholder rights plan that provides that shares of
our common stock have associated preferred stock purchase rights. These rights
become exercisable and detachable from the associated common stock only
following the acquisition by a person or a group of 15% or more of our
outstanding common stock or 10 days following the announcement of a tender or
exchange offer for 15% or more of our outstanding common stock. The rights
entitle our shareholders, other than the person or entity that has acquired or
made an exchange or tender offer for 15% or more of our outstanding common
stock, to acquire additional shares of our capital stock at a price equal to
one-half of the market price at the time of the event and, in certain
circumstances, would allow our shareholders to acquire capital stock in the
entity that has acquired or made an exchange or tender offer for 15% or more of
our outstanding common stock at a similar discount. 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 our
company 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. Chapter 23B.19 of the
Washington Business Corporation Act prohibits a "target
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corporation," with some exceptions, from engaging in certain significant
business transactions with an "acquiring person," which is defined as a person
or group of persons that beneficially owns 10% or more of the voting securities
of the target corporation, for a period of five years after such acquisition,
unless the transaction or acquisition of shares is approved by a majority of the
members of the target corporation's board of directors prior to the acquisition.
Such prohibited transactions include, among other things:
- a merger or consolidation with, disposition of assets to, or
issuance or redemption of stock to or from the acquiring person;
- termination of 5% or more of the employees of the target
corporation as a result of the acquiring person's acquisition of
10% or more of the shares; or
- allowing the acquiring person to receive any disproportionate
benefit as a shareholder.
After the five-year period, a "significant business transaction" may
occur, as long as it complies with certain "fair price" provisions of the
statute. A corporation may not opt out of this statute. This provision may have
the effect of delaying, deterring or preventing a change in control of
RealNetworks. The foregoing provisions of our charter documents, shareholder
rights plan and Washington law, as well as those relating to 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.
OUR STOCK PRICE HAS BEEN AND MAY CONTINUE TO BE VOLATILE
The trading price of our common stock has been and is likely to continue
to be highly volatile. For example, during the 52-week period ended December 31,
2000, the price of our common stock ranged from $5.188 to $96.00 per share. Our
stock price could continue to be subject to wide fluctuations in response to
factors such as:
- actual or anticipated variations in quarterly operating results;
- announcements of technological innovations, new products or
services by us or our competitors;
- changes in financial estimates or recommendations by securities
analysts;
- the addition or loss of strategic relationships or relationships
with our key customers;
- conditions or trends in the Internet, streaming media, media
delivery and online commerce markets;
- changes in the market valuations of other Internet, online
service or software companies;
- announcements by us or our competitors of significant
acquisitions, strategic partnerships, joint ventures or capital
commitments;
- legal, regulatory or political developments;
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- additions or departures of key personnel;
- sales of our common stock; and
- general market conditions.
The historical volatility of our stock price may make it more difficult
for you to resell shares when you want at prices you find attractive.
In addition, the stock market in general, and the Nasdaq National Market
and the market for Internet and technology companies in particular, have
experienced extreme price and volume fluctuations that have often been unrelated
or disproportionate to the operating performance of these companies. These broad
market and industry factors has and may in the future reduce our stock price,
regardless of our operating performance.
WE MAY BE SUBJECT TO ASSESSMENT OF SALES AND OTHER TAXES FOR THE SALE OF OUR
PRODUCTS, LICENSE OF TECHNOLOGY OR PROVISION OF SERVICES
We may have to pay past sales or other taxes that we have not collected
from our customers. We do not currently collect sales 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 or employees.
In October 1998, the Internet Tax Freedom Act (ITFA) was signed into
law. Among other things, the ITFA imposes a three-year moratorium on
discriminatory taxes on electronic commerce. Nonetheless, foreign countries or,
following the moratorium, one or more states, may seek to impose sales or other
tax obligations on companies that engage in such activities within their
jurisdictions. Our business would be harmed if one or more states or any foreign
country were able to require us to collect sales or other taxes from current or
past sales of products, licenses of technology or provision of services,
particularly because we would be unable to go back to customers to collect sales
taxes for past sales and may have to pay such taxes out of our own funds.
WE DONATE A PORTION OF NET INCOME TO CHARITY
For the year ended December 31, 2000, we were profitable (before
goodwill amortization, acquisition charges, and stock-based compensation) and
set aside 5% of our pretax net income for donations to charity. If we sustain
profitability, we intend to donate such 5% of our annual net income (before
goodwill amortization, acquisition charges, and stock-based compensation) to
charitable organizations. This will reduce our net income. We have recently
incorporated the non-profit RealNetworks Foundation to manage our charitable
giving efforts.
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USE OF PROCEEDS
The proceeds from the sale of the common stock offered pursuant to this
prospectus are solely for the account of the selling shareholders. Accordingly,
we will not receive any proceeds from the sale of the shares by the selling
shareholders.
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SELLING SHAREHOLDERS
The shares of common stock to be sold by the selling shareholders
pursuant to this prospectus represent shares issued to the selling shareholders
by us in connection with our acquisition of Aegisoft Corp. on December 29, 2000.
The following table sets forth the aggregate number of shares of our common
stock held by each selling shareholder and the aggregate number of shares of
common stock offered by each such selling shareholder. As of January 15, 2001,
there were 159,311,024 shares of common stock outstanding. Beneficial ownership
is determined according to the rules of the SEC, and includes shares subject to
options currently exercisable or exercisable within 60 days of January 15, 2001.
Shares subject to such options are deemed outstanding for computing the
percentage ownership of the person holding such options but not for computing
the percentage ownership of any other person.
OWNERSHIP PRIOR TO OFFERING OWNERSHIP AFTER OFFERING (1)
--------------------------- -----------------------------
NUMBER OF
SHARES
BENEFICIALLY PERCENTAGE NUMBER OF SHARES PERCENTAGE
OWNED OF COMMON NUMBER OF BENEFICIALLY OF COMMON
PRIOR TO STOCK SHARES BEING OWNED STOCK
NAME OF SELLING SHAREHOLDER OFFERING OUTSTANDING OFFERED AFTER OFFERING OUTSTANDING
- --------------------------------------- ------------- ------------ ------------ ---------------- ------------
FORMER AEGISOFT SHAREHOLDERS:
- -----------------------------
Abrams, Larry(2) ...................... 16,554 * 15,397 1,157 *
Aatz, Franz ........................... 30,581 * 30,581 -- *
Baker, James .......................... 16,609 * 16,609 -- *
Curacao Strategic Technologies, N.V. .. 30,414 * 30,414 -- *
Dou, Jinhui ........................... 1,941 * 1,941 -- *
Fan, Xiao-yan ......................... 1,941 * 1,941 -- *
Fang, Daniel .......................... 574 * 574 -- *
Hein, Oliver .......................... 39,872 * 39,872 -- *
Hu, James(3) .......................... 22,436 * 574 21,862 *
Hu, Jing Shan ......................... 359 * 359 -- *
Inozemtsev, Igor ...................... 862 * 862 -- *
Jamieson & Co. ........................ 6,542 * 6,542 -- *
Jia, Zheng Kevin ...................... 68,866 * 68,866 -- *
Klus, Judy(4) ......................... 1,941 * 1,684 257 *
Lee, Jeff ............................. 86 * 86 -- *
Li, Siqun ............................. 1,163 * 1,163 -- *
Li, Yi ................................ 719 * 719 -- *
Li, Yi and Hu, Jing Shan .............. 1,079 * 1,079 -- *
Lynch, William ........................ 107 * 107 -- *
McDonough, John ....................... 3,250 * 3,250 -- *
Trustees of the John P. McDonough
CRNA PC Profit Sharing Plan ........... 327 * 327 -- *
Oliver, Andrew ........................ 216 * 216 -- *
Pang, Chen-li ......................... 3,451 * 3,451 -- *
Reibling, Guenther .................... 10,635 * 10,635 -- *
Reibling, Lorenz ...................... 10,635 * 10,635 -- *
Rombach, Bernd ........................ 26,920 * 26,920 -- *
Saenger, Alexander(5) ................. 10,192 * 933 9,259 *
Schrader, Tamus(6) .................... 6,470 * 5,613 857 *
Shen, Ji .............................. 84,558 * 84,558 -- *
J and L Sherbloom Family LLC .......... 2,714 * 2,714 -- *
Shi, Song Tao and Zhang, Jing Wen ..... 43 * 43 -- *
Staedtler, Friedhart and Inge ......... 6,425 * 6,425 -- *
Strategic European
Technologies, N.V ..................... 257,161 * 257,161 -- *
Staubli, Thomas ....................... 1,204 * 1,204 -- *
Tan, Patrick .......................... 574 * 574 -- *
Tang, Chilung ......................... 35,316 * 35,316 -- *
TOTAL ............................. 702,737 -- 669,345 33,392 --
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- ----------
(1) Assumes the sale of all of the shares of common stock offered by each of
the selling shareholders. This Registration Statement also shall cover
any additional shares of common stock which become issuable in
connection with the shares registered for sale hereby by reason of any
stock dividend, stock split, recapitalization or other similar
transaction effected without receipt of consideration which results in
an increase in the number of RealNetworks' outstanding common stock.
(2) Includes 1,157 shares subject to warrants currently exercisable within
60 days of January 15, 2001.
(3) Includes 21,862 shares subject to options currently exercisable within
60 days of January 15, 2001.
(4) Includes 257 shares subject to warrants currently exercisable within 60
days of January 15, 2001.
(5) Includes 9,259 shares subject to options currently exercisable within 60
days of January 15, 2001.
(6) Includes 857 shares subject to warrants currently exercisable within 60
days of January 15, 2001.
* Less than 1% of the outstanding shares of common stock.
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PLAN OF DISTRIBUTION
The shares covered by this prospectus may be offered and sold from time
to time by the selling shareholders. The selling shareholders will act
independently of us in making decisions with respect to the timing, manner and
size of each sale. The selling shareholders may sell the shares being offered
hereby on the Nasdaq National Market, or otherwise, at prices and under terms
then prevailing or at prices related to the then current market price or at
negotiated prices. Shares may be sold by one or more of the following means of
distribution:
- Block trades in which the broker-dealer so engaged will attempt
to sell such shares as agent, but may position and resell a
portion of the block as principal to facilitate the transaction;
- Purchases by a broker-dealer as principal and resale by such
broker-dealer for its own account pursuant to this prospectus;
- Over-the-counter distributions in accordance with the rules of
the Nasdaq National Market;
- Ordinary brokerage transactions and transactions in which the
broker solicits purchasers; and
- Privately negotiated transactions.
To the extent required, this prospectus may be amended and supplemented
from time to time to describe a specific plan of distribution. In connection
with distributions of such shares or otherwise, the selling shareholders may
enter into hedging transactions with broker-dealers or other financial
institutions. In connection with such transactions, broker-dealers or other
financial institutions may engage in short sales of our common stock in the
course of hedging the positions they assume with the selling shareholders. The
selling shareholders may also sell our common stock short and redeliver the
shares to close out such short positions. The selling shareholders may also
enter into option or other transactions with broker-dealers or other financial
institutions which require the delivery to such broker-dealer or other financial
institution of the shares offered hereby, which shares such broker-dealer or
other financial institution may resell pursuant to this prospectus (as
supplemented or amended to reflect such transaction). The selling shareholders
may also pledge such shares to a broker-dealer or other financial institution,
and, upon a default, such broker-dealer or other financial institution, may
effect sales of such pledged shares pursuant to this prospectus (as supplemented
or amended to reflect such transaction). In addition, any such shares that
qualify for sale pursuant to Rule 144 may be sold under Rule 144 rather than
pursuant to this prospectus.
In effecting sales, brokers, dealers or agents engaged by the selling
shareholder may arrange for other brokers or dealers to participate. Brokers,
dealers or agents may receive commissions, discounts or concessions from the
selling shareholders in amounts to be negotiated prior to the sale. Such brokers
or dealers and any other participating brokers or dealers may be deemed to be
"underwriters" within the meaning of the Securities Act of 1933 in connection
with such sales, and any such commissions, discounts or concessions may be
deemed to be underwriting discounts or commissions under the Securities Act of
1933. We will pay all reasonable expenses incident to the registration of the
shares being offered hereby other than any commissions and discounts of
underwriters, dealers or agents.
In order to comply with the securities laws of certain states, if
applicable, the shares being offered hereby must be sold in such jurisdictions
only through registered or licensed brokers or dealers. In addition, in certain
states such shares may not be sold unless they have been registered or qualified
for sale in the applicable state or an exemption from the registration or
qualification requirement is available and there has been compliance thereof.
We have advised the selling shareholders that the anti-manipulation
rules of Regulation M under the Securities Exchange Act of 1934 may apply to
sales of shares in the market and to the activities of the selling
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35
shareholders and their affiliates. In addition, we will make copies of this
prospectus available to the selling shareholder and have informed them of the
need for delivery of copies of this prospectus to purchasers at or prior to the
time of any sale of the shares offered hereby. The selling shareholders may
indemnify any broker-dealer that participates in transactions involving the sale
of the shares against certain liabilities, including liabilities arising under
the Securities Act of 1933.
We will file a supplement to this prospectus, if required, pursuant to
Rule 424(b) under the Securities Act upon being notified by a selling
shareholder that any material arrangement has been entered into with a
broker-dealer for the sale of shares through a block trade, special offering,
exchange distribution or secondary distribution or a purchase by a broker or
dealer. Such supplement will disclose:
- the name of each such selling shareholder and of the
participating broker-dealer(s),
- the number of shares involved,
- the price at which such shares were sold,
- the commissions paid or discounts or concessions allowed to such
broker-dealer(s), where applicable
- that such broker-dealer(s) did not conduct any investigation to
verify the information set out or incorporated by reference in
this prospectus, and
- other facts material to the transaction.
We have agreed to indemnify the selling shareholders and any person or
persons controlling the selling shareholders against certain liabilities,
including liabilities under the Securities Act of 1933. The selling shareholders
have agreed to indemnify us and certain related persons against certain
liabilities, including liabilities under the Securities Act of 1933.
We have the right to suspend use of this registration statement for
certain periods of time under certain conditions. We have agreed with the
selling shareholders to keep the registration statement of which this prospectus
constitutes a part effective until the sooner to occur of (A) 5:00 p.m. Pacific
Time on the date that is six months after the date on which this registration
statement is declared effective by the SEC, or (B) the date on which all
registrable securities included within the registration statement have been
sold.
LEGAL MATTERS
Certain legal matters relating to the validity of the securities offered
hereby will be passed upon for us by Wilson Sonsini Goodrich & Rosati,
Professional Corporation, Kirkland, Washington.
EXPERTS
The consolidated balance sheets of RealNetworks, Inc., and subsidiaries
as of December 31, 1999 and 1998 and the consolidated statements of operations
and comprehensive income (loss), shareholders' equity, and cash flows for each
of the years in the three-year period ended December 31, 1999 and the related
financial statement schedule have been incorporated by reference herein and in
the registration statement in reliance upon the reports of KPMG LLP, independent
certified public accountants, incorporated by reference herein, and upon the
authority of said firm as experts in accounting and auditing.
The financial statements of NetZip, Inc. incorporated by reference in
this registration statement have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report dated January 21,
2000 with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in accounting and auditing in giving said
reports.
-34-
36
The financial statements of Aegisoft Corp. incorporated by reference in
this registration statement have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report dated April 13,
2000 with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in accounting and auditing in giving said
reports.
-35-
37
669,345 SHARES
REALNETWORKS, INC.
--------------------
COMMON STOCK
PROSPECTUS
__________, 2001
-36-
38
REALNETWORKS, INC.
REGISTRATION STATEMENT ON FORM S-3
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM
NUMBER
- ------
Item 14 OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth costs and expenses of the sale and
distribution of the securities being registered. All amounts except SEC fees are
estimates.
Registration Statement--SEC ..... $ 1,433
Printing expenses ............... $ 5,000
Accounting fees ................. $40,000
Legal fees ...................... $15,000
Miscellaneous ................... $ 9,567
Total ........................... $71,000
Item 15 INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Sections 23B.08.500 through 23B.08.600 of the Washington Business
Corporation Act (the "WBCA") authorize a court to award, or a corporation's
board of directors to grant, indemnification to directors and officers on terms
sufficiently broad to permit indemnification under certain circumstances for
liabilities arising under the Securities Act of 1933, as amended (the
"Securities Act"). The registrant's Restated Articles of Incorporation and
Amended and Restated Bylaws provide for indemnification of the registrant's
directors, officers, employees and agents to the maximum extent permitted by
Washington law. The directors and officers of the registrant also may be
indemnified against liability they may incur for serving in that capacity
pursuant to a liability insurance policy maintained by the registrant for such
purpose. Section 23B.08.320 of the WBCA authorizes a corporation to limit a
director's liability to the corporation or its shareholders for monetary damages
for acts or omissions as a director, except in certain circumstances involving
intentional misconduct, knowing violations of law or illegal corporate loans or
distributions, or any transaction from which the director personally receives a
benefit in money, property or services to which the director is not legally
entitled. The registrant's Amended and Restated Articles of Incorporation
contain provisions implementing, to the fullest extent permitted by Washington
law, such limitations on a director's liability to the registrant and its
shareholders. The registrant has entered into certain indemnification agreements
with its officers and directors. The indemnification agreements provide the
registrant's officers and directors with indemnification to the maximum extent
permitted by the WBCA.
39
Item 16 EXHIBITS.
Exhibit
Number
------
4.1 Registration Rights Agreement between RealNetworks, Inc. and
former stockholders of Aegisoft Corp. dated December 29,
2000
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation
23.1 Consent of KPMG LLP
23.2 Consent of Arthur Andersen LLP
23.3 Consent of Arthur Andersen LLP
23.4 Consent of Wilson Sonsini Goodrich & Rosati (included in
Exhibit 5.1)
24.1 Power of Attorney (included on signature page)
Item 17 UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement to include any
material information with respect to the plan of distribution not previously
disclosed in the registration statement or any material change to such
information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
The undersigned hereby undertakes that, for purposes of determining any
liability under the Securities Act, each filing of the registrant's annual
report pursuant to Section 13(a) or Section 15(d) of the Exchange Act (and,
where applicable, each filing of an employee benefit plan's annual report
pursuant to Section 15(d) of the Exchange Act) that is incorporated by reference
in the registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
as that time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the SEC such indemnification
is against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
40
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-3 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Seattle, State of Washington, on the 7th day of
February, 2001.
REALNETWORKS, INC.
By /s/ Robert Glaser
----------------------------
Robert Glaser
Chairman of the Board and
Chief Executive Officer
SIGNATURES AND POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Robert Glaser and Paul Bialek, joint and
severally, his or her attorneys-in-fact, each with the power of substitution,
for him and in his name, place and stead, in any and all capacities, to sign any
and all amendments to this Registration Statement on Form S-3 (including
post-effective amendments or any abbreviated registration statement and any
amendments thereto filed pursuant to Rule 462(b) increasing the number of
securities for which registration is sought), and to file the same, with all
exhibits thereto and all documents in connection therewith, with the Securities
and Exchange Commission, granting unto said attorneys-in-fact and agents, and
each of them, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that such attorneys-in-fact and agents or any of them, or his or
their substitute or substitutes, may lawfully do or cause to be done by virtue
hereof. Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities indicated below on the 7th day of February, 2001.
Signature Title
- --------------------------------- ------------------------------------------------
/s/ Robert Glaser Chief Executive Officer and Chairman of the Board
- --------------------------------- (Principal Executive Officer and
Robert Glaser Chairman of the Board)
/s/ Paul Bialek Senior Vice President, Finance and Operations,
- --------------------------------- Chief Financial Officer and Treasurer
Paul Bialek (Principal Financial and Accounting Officer)
/s/ Edward Bleier Director
- ---------------------------------
Edward Bleier
/s/ James W. Breyer Director
- ---------------------------------
James W. Breyer
/s/ Bruce Jacobsen Director
- ---------------------------------
Bruce Jacobson
/s/ Mitchell Kapor Director
- ---------------------------------
Mitchell Kapor
41
INDEX TO EXHIBITS
Exhibit
Number
------
4.1 Registration Rights Agreement between RealNetworks, Inc. and
former stockholders of Aegisoft Corp. dated December 29,
2000
5.1 Opinion of Wilson Sonsini Goodrich & Rosati
23.1 Consent of KPMG LLP
23.2 Consent of Arthur Andersen LLP
23.3 Consent of Arthur Andersen LLP
23.4 Consent of Wilson Sonsini Goodrich & Rosati (included in
Exhibit 5.1)
24.1 Power of Attorney (included on signature page)