10Q 2013 Q3



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2013
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission file number 0-23137
 
 RealNetworks, Inc.
 
 
(Exact name of registrant as specified in its charter)
 
Washington
 
91-1628146
(State of incorporation)
 
(I.R.S. Employer
Identification Number)
 
 
 
 
 
1501 First Avenue South, Suite 600
Seattle, Washington
 
98134
(Address of principal executive offices)
 
(Zip Code)
 
(206) 674-2700
 
 
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
 
¨
  
Accelerated filer
ý
 
 
 
 
Non-accelerated filer
 
¨  (Do not check if a smaller reporting company)
  
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No   ý
The number of shares of the registrant’s Common Stock outstanding as of October 31, 2013 was 35,733,174.




TABLE OF CONTENTS
 
 
Page
 
 

2



PART I. FINANCIAL INFORMATION
Item 1.
Financial Statements
REALNETWORKS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
 
September 30,
2013
 
December 31,
2012
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
134,879

 
$
163,198

Short-term investments
83,527

 
108,216

Trade accounts receivable, net of allowances
26,494

 
30,754

Deferred costs, current portion
1,622

 
825

Deferred tax assets, current
3,942

 
2,869

Prepaid expenses and other current assets
12,152

 
17,002

Total current assets
262,616

 
322,864

Equipment, software, and leasehold improvements, at cost:
 
 
 
Equipment and software
94,054

 
98,041

Leasehold improvements
3,516

 
22,767

Total equipment, software, and leasehold improvements, at cost
97,570

 
120,808

Less accumulated depreciation and amortization
73,105

 
91,492

Net equipment, software, and leasehold improvements
24,465

 
29,316

Restricted cash equivalents and investments
5,000

 
10,000

Equity method investment
12,656

 
19,204

Available for sale securities
34,485

 
34,334

Other assets
2,844

 
3,153

Deferred costs, non-current portion
1,032

 
531

Deferred tax assets, net, non-current portion
1,576

 
4,911

Other intangible assets, net
14,051

 
3,275

Goodwill
17,518

 
6,309

Total assets
$
376,243

 
$
433,897

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
20,562

 
$
19,013

Accrued and other current liabilities
58,024

 
57,530

Deferred revenue, current portion
7,604

 
8,675

Total current liabilities
86,190

 
85,218

Deferred revenue, non-current portion
167

 
169

Deferred rent
613

 
2,250

Deferred tax liabilities, net, non-current portion
3,166

 
432

Other long-term liabilities
492

 
3,100

Total liabilities
90,628

 
91,169

Commitments and contingencies

 

Shareholders’ equity:
 
 
 
Preferred stock, $0.001 par value, no shares issued and outstanding:
 
 
 
Series A: authorized 200 shares

 

Undesignated series: authorized 59,800 shares

 

Common stock, $0.001 par value authorized 250,000 shares; issued and outstanding 35,679 shares in 2013 and 35,324 shares in 2012
36

 
35

Additional paid-in capital
608,595

 
603,770

Accumulated other comprehensive loss
(26,959
)
 
(26,540
)
Retained deficit
(296,057
)
 
(234,537
)
Total shareholders’ equity
285,615

 
342,728

Total liabilities and shareholders’ equity
$
376,243

 
$
433,897

See accompanying notes to unaudited condensed consolidated financial statements.

3



REALNETWORKS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(In thousands, except per share data)
 
Quarters Ended
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
Net revenue (A)
$
48,958

 
$
59,088

 
$
155,601

 
$
191,578

Cost of revenue (B)
18,990

 
25,244

 
59,015

 
78,633

Gross profit
29,968

 
33,844

 
96,586

 
112,945

Sale of patents and other technology assets, net of costs (See Note 1)

 

 

 
116,353

Operating expenses:
 
 
 
 
 
 
 
Research and development
15,707

 
15,321

 
45,951

 
49,167

Sales and marketing
19,427

 
21,972

 
59,830

 
68,462

General and administrative
9,869

 
8,759

 
28,506

 
35,103

Restructuring and other charges
1,877

 
10,724

 
4,075

 
13,872

Lease exit and related charges

 
243

 
3,066

 
243

Loss on litigation settlements
11,525

 

 
11,525

 

Total operating expenses
58,405

 
57,019

 
152,953

 
166,847

Operating income (loss)
(28,437
)
 
(23,175
)
 
(56,367
)
 
62,451

Other income (expenses):
 
 
 
 
 
 
 
Interest income, net
166

 
164

 
992

 
1,033

Gain (loss) on sale of equity and other investments, net

 
2,210

 

 
5,288

Equity in net loss of Rhapsody investment
(2,629
)
 
(1,613
)
 
(6,209
)
 
(4,095
)
Other income (expense), net
(118
)
 
248

 
(146
)
 
1,674

Total other income (expenses), net
(2,581
)
 
1,009

 
(5,363
)
 
3,900

Income (loss) before income taxes
(31,018
)
 
(22,166
)
 
(61,730
)
 
66,351

Income tax expense (benefit)
357

 
48

 
(210
)
 
24,583

Net income (loss)
$
(31,375
)
 
$
(22,214
)
 
$
(61,520
)
 
$
41,768

Basic net income (loss) per share
$
(0.88
)
 
$
(0.63
)
 
$
(1.73
)
 
$
1.20

Diluted net income (loss) per share
$
(0.88
)
 
$
(0.63
)
 
$
(1.73
)
 
$
1.19

Shares used to compute basic net income (loss) per share
35,670

 
34,998

 
35,490

 
34,747

Shares used to compute diluted net income (loss) per share
35,670

 
34,998

 
35,490

 
35,000

Comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized investment holding gains (losses)
$
(1,043
)
 
$
5,407

 
$
(28
)
 
$
1,840

Foreign currency translation adjustments, net of reclassification adjustments
1,235

 
506

 
(391
)
 
(1,730
)
Total other comprehensive income (loss)
192

 
5,913

 
(419
)
 
110

Net income (loss)
(31,375
)
 
(22,214
)
 
(61,520
)
 
41,768

Comprehensive income (loss)
$
(31,183
)
 
$
(16,301
)
 
$
(61,939
)
 
$
41,878

(A) Components of net revenue:
 
 
 
 
 
 
 
License fees
$
10,503

 
$
11,957

 
$
33,494

 
$
41,137

Service revenue
38,455

 
47,131

 
122,107

 
150,441

 
$
48,958

 
$
59,088

 
$
155,601

 
$
191,578

(B) Components of cost of revenue:
 
 
 
 
 
 
 
License fees
$
2,062

 
$
3,226

 
$
6,377

 
$
9,143

Service revenue
16,928

 
22,018

 
52,638

 
69,490

 
$
18,990

 
$
25,244

 
$
59,015

 
$
78,633

See accompanying notes to unaudited condensed consolidated financial statements.

4



REALNETWORKS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 
Nine Months Ended
September 30,
 
2013
 
2012
Cash flows from operating activities:
 
 
 
Net income (loss)
$
(61,520
)
 
$
41,768

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
15,045

 
12,478

Stock-based compensation
5,671

 
6,419

Loss on disposal of equipment, software, and leasehold improvements

 
1,965

Equity in net loss of Rhapsody
6,209

 
4,095

Deferred income taxes, net
(1,238
)
 
22,399

Gain on sale of patent and other technology assets, net of costs

 
(116,353
)
Gain on sale of equity and other investments, net

 
(5,288
)
Realized translation gain
(35
)
 
(1,968
)
Other
51

 

Net change in certain operating assets and liabilities:
 
 
 
Trade accounts receivable
6,466

 
5,848

Prepaid expenses and other assets
4,772

 
(2,956
)
Accounts payable
26

 
3,683

Accrued and other liabilities
(3,750
)
 
(2,840
)
Net cash provided by (used in) operating activities
(28,303
)
 
(30,750
)
Cash flows from investing activities:
 
 
 
Purchases of equipment, software, and leasehold improvements
(5,798
)
 
(6,478
)
Proceeds from sale of patents and other technology assets, net of costs

 
116,353

Proceeds from sale of equity and other investments

 
7,244

Purchases of short-term investments
(85,670
)
 
(76,191
)
Proceeds from sales and maturities of short-term investments
110,359

 
51,885

Decrease (increase) in restricted cash equivalents and investments, net
5,000

 
103

Acquisitions of businesses, net of cash acquired
(22,480
)
 

Net cash provided by (used in) investing activities
1,411

 
92,916

Cash flows from financing activities:
 
 
 
Proceeds from issuance of common stock (stock options and stock purchase plan)
408

 
3,240

Tax payments from shares withheld upon vesting of restricted stock
(911
)
 
(964
)
Payment of contingent consideration
(828
)
 

Net cash provided by (used in) financing activities
(1,331
)
 
2,276

Effect of exchange rate changes on cash and cash equivalents
(96
)
 
(73
)
Net increase (decrease) in cash and cash equivalents
(28,319
)
 
64,369

Cash and cash equivalents, beginning of period
163,198

 
106,333

Cash and cash equivalents, end of period
$
134,879

 
$
170,702

Supplemental disclosure of cash flow information:
 
 
 
Cash received from income tax refunds
$
8,354

 
$
247

Cash paid for income taxes
$
2,988

 
$
2,015

Non-cash investing activities:
 
 
 
Increase (decrease) in accrued purchases of equipment, software, and leasehold improvements
$
1,096

 
$
116

See accompanying notes to unaudited condensed consolidated financial statements.


5



REALNETWORKS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 2013 and 2012
Note 1. Description of Business and Summary of Significant Accounting Policies
Description of Business. RealNetworks, Inc. and subsidiaries is a leading global provider of network-delivered digital media applications and services that make it easy to manage, play and share digital media. The Company also develops and markets software products and services that enable the creation, distribution and consumption of digital media, including audio and video.
Inherent in our business are various risks and uncertainties, including a limited history of certain of our product and service offerings. RealNetworks' success will depend on the acceptance of our technology, products and services and the ability to generate related revenue.
In this Quarterly Report on Form 10-Q for the quarter ended September 30, 2013 (10-Q or Report), RealNetworks, Inc. and Subsidiaries is referred to as “RealNetworks”, the “Company”, “we”, “us”, or “our”.
Basis of Presentation. The unaudited condensed consolidated financial statements include the accounts of RealNetworks and its wholly-owned subsidiaries. Intercompany balances and transactions have been eliminated in consolidation.
The unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal, recurring adjustments that, in the opinion of the Company’s management, are necessary for a fair presentation of the results of operations for the periods presented. Operating results for the quarter and nine months ended September 30, 2013 are not necessarily indicative of the results that may be expected for any subsequent period or for the year ending December 31, 2013. Certain information and disclosures normally included in financial statements prepared in conformity with accounting principles generally accepted in the United States of America (GAAP) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (SEC).
These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2012 (the 10-K).
Use of Estimates. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. In addition, current economic conditions may require the use of additional estimates, and certain estimates we make are subject to a greater degree of uncertainty as a result of the current economic conditions.
Reportable Segments. In the first quarter of 2013 we reorganized the management of our businesses and as a result, we changed our reportable segments. See Note 18, Segment Information, for details.
Accumulated Other Comprehensive Income (Loss). The components of accumulated other comprehensive income (loss), net of any applicable tax, were as follows (in thousands):
 
 
September 30,
2013
 
December 31,
2012
Unrealized gains on investments, net of tax effects of $(716) and $(846) at September 30, 2013 and December 31, 2012, respectively
$
26,657

 
$
26,685

Foreign currency translation adjustments
(53,616
)
 
(53,225
)
Accumulated other comprehensive income (loss)
$
(26,959
)
 
$
(26,540
)
In the quarter and nine months ended September 30, 2012 we liquidated the investment in certain of our foreign entities and recorded net pre-tax gains of $0.4 million and $2.0 million, respectively, in Other income (expense), net, in the consolidated statement of operations upon the reclassification of the same amount of cumulative foreign exchange translation adjustment from accumulated other comprehensive income (loss) on the balance sheet. The reclassification adjustments had no related income tax expense or benefit.
There were no material reclassification adjustments or related tax effects related to foreign exchange translation amounts in the nine months ended September 30, 2013.

6



In the quarter and nine months ended September 30, 2012 we realized pre-tax gains of $2.2 million and $4.3 million, respectively, in the consolidated statement of operations, within Gain (loss) on sale of equity and other investments, net, related to the sale of a portion of the equity shares we hold in LoEn Entertainment, Inc., with the same amounts reclassified from accumulated other comprehensive income (loss) on the balance sheet. The reclassification adjustment had no related income tax expense or benefit.
There were no reclassification adjustments or related tax effects related to unrealized gains on investments in the nine months ended September 30, 2013.
For the three months ended September 30, 2013 we recorded income tax expense of $0.6 million and for the nine months ended September 30, 2013 we recorded an income tax benefit of $0.1 million related to unrealized gains (losses) on investment securities, and recognized the corresponding amount as an increase or decrease to accumulated other comprehensive income.
2012 Sale of Patents and Other Technology Assets to Intel Corporation. In the second quarter of 2012, we completed the sale of certain patents, patent applications and related rights held by us, and certain of our assets relating to our next generation video codec technologies to Intel Corporation (Intel). The entire $120.0 million of cash proceeds we received, net of certain direct costs incurred, was recorded as a gain on our statement of operations in the quarter ending June 30, 2012, since the patent assets and other technology had a net book value of zero. The gain recognized of $116.4 million in the nine months ended September 30, 2012 was net of related direct costs for the sale transaction totaling $3.6 million incurred in the first and second quarters of 2012.
Note 2. Recent Accounting Pronouncements
    
There have been no recent accounting pronouncements or changes in accounting pronouncements during the nine months ended September 30, 2013 to be implemented that are of significance or potential significance to RealNetworks.
Note 3. Acquisitions
In the quarter ended June 30, 2013, we acquired 100% of the voting interests in Slingo, Inc., a social casino games company based in the U.S., for total cash consideration of $15.6 million. The tangible and intangible assets and liabilities recognized are reported within the Games segment. The identifiable intangible assets associated with the acquisition totaled $8.0 million. Of this total, $4.5 million is related to tradenames and trademarks determined to have indefinite useful lives and will be evaluated annually in our fourth quarter for impairment, or more frequently, if circumstances indicate an impairment may exist. The remaining $3.5 million includes developed game technology and existing customer relationships with finite lives, and will be amortized over their useful lives. We recorded a net deferred tax liability of $2.7 million related to the intangible assets acquired. Goodwill totaling $9.8 million was recorded, representing the intangible assets that do not qualify for separate recognition for accounting purposes, primarily related to the assembled workforce and expected synergies in the rapidly growing social casino games market. The goodwill is not deductible for income tax purposes. For the nine months ended September 30, 2013, the amount of revenue and income (loss) before income taxes from this acquired business was not significant.
In the quarter ended September 30, 2013, we acquired 100% of the voting interests in Muzicall Limited, a ringback tone company based in London, for total cash consideration of $6.7 million. The tangible and intangible assets and liabilities recognized are reported in the Mobile Entertainment segment. The identifiable intangible assets associated with the acquisition totaled $5.4 million, and include tradenames and trademarks, developed technology, user base and carrier relationships. All identifiable intangible assets from this acquisition have finite lives, and will be amortized over their useful lives. We recorded a net deferred tax asset of $3.4 million related to the assets acquired, and a full valuation allowance. Goodwill totaling $1.3 million was recorded, representing the intangible assets that do not qualify for separate recognition for accounting purposes, primarily related to the assembled workforce and expected synergies in the ringback tone industry. The goodwill is not deductible for income tax purposes. For the nine months ended September 30, 2013, the amount of revenue and income (loss) before income taxes from this acquired business was not significant. This acquisition is intended to accelerate our growth initiatives within the Mobile Entertainment segment.
Note 4. Stock-Based Compensation
Total stock-based compensation expense recognized in our consolidated statements of operations includes amounts related to stock options, restricted stock units, and employee stock purchase plans and was as follows (in thousands):

 

7



 
Quarters Ended
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
Total stock-based compensation expense
$
1,613

 
$
2,354

 
$
5,671

 
$
6,419

The fair value of options granted determined using the Black-Scholes model used the following weighted-average assumptions:
 
 
Quarters Ended
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
Expected dividend yield
0
%
 
0
%
 
0
%
 
0
%
Risk-free interest rate
0.96
%
 
0.48
%
 
0.82
%
 
0.51
%
Expected life (years)
3.8

 
4.1

 
4.0

 
4.1

Volatility
48
%
 
58
%
 
48
%
 
58
%

The total stock-based compensation amounts for 2013 and 2012 disclosed above are recorded in their respective line items within operating expenses in the consolidated statement of operations. No stock-based compensation was capitalized as part of the cost of an asset as of September 30, 2013 or December 31, 2012. As of September 30, 2013, we had $8.1 million of total unrecognized compensation cost, net of estimated forfeitures, related to stock awards. The unrecognized compensation cost is expected to be recognized over a weighted-average period of approximately 3 years.
Note 5. Rhapsody Joint Venture
RealNetworks initially formed in 2007 a joint venture with MTV Networks, a division of Viacom International Inc. (MTVN), to own and operate a business-to-consumer digital audio music service known as Rhapsody. Prior to March 31, 2010, we held a 51% interest in Rhapsody and MTVN owned the remaining 49%. On March 31, 2010, restructuring transactions involving Rhapsody were completed, and as a result, effective March 31, 2010 RealNetworks owned approximately 47% of Rhapsody. Subsequent to the restructuring transaction, we account for our investment in Rhapsody using the equity method of accounting for investments.
As of September 30, 2013 we owned approximately 45% of the issued and outstanding stock of Rhapsody.
RealNetworks continues to provide certain operational transition services to Rhapsody. These transition services are expected to be completed in 2013, and are discussed further in Footnote 19, Related Party Transactions.
We recorded our share of losses of Rhapsody of $2.6 million and $6.2 million for the quarter and nine months ended September 30, 2013, respectively. Our share of losses of Rhapsody for the quarter and nine months ended September 30, 2012 were $1.6 million and $4.1 million, respectively.
The carrying value of our Rhapsody investment was $12.7 million as of September 30, 2013.
Summarized financial information for Rhapsody, which represents 100% of their financial information (in thousands):
 
 
Quarters Ended
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
Net revenue
$
35,190

 
$
36,389

 
$
103,831

 
$
109,368

Gross profit
7,800

 
9,266

 
24,412

 
28,757

Net loss
(5,621
)
 
(3,424
)
 
(14,812
)
 
(9,031
)
Note 6. Fair Value Measurements
We measure certain financial assets at fair value on a recurring basis, including cash equivalents, short-term investments, and equity investments of publicly traded companies. The fair value of these financial assets was determined based on three levels of inputs:
Level 1: Quoted prices in active markets for identical assets or liabilities

8



Level 2: Directly or indirectly observed inputs for the asset or liability, including quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active
Level 3: Significant unobservable inputs that reflect our own estimates of assumptions that market participants would use
Items Measured at Fair Value on a Recurring Basis
The following table presents information about our financial assets that have been measured at fair value on a recurring basis as of September 30, 2013 and December 31, 2012, and indicates the fair value hierarchy of the valuation inputs utilized to determine such fair value (in thousands).
 
 
Fair Value Measurements as of
 
September 30, 2013
 
Total
 
Level 1
 
Level 2
 
Level 3
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
23,038

 
$
2

 
$
23,036

 
$

Corporate notes and bonds
72,493

 

 
72,493

 

Short-term investments:
 
 
 
 
 
 
 
Corporate notes and bonds
60,041

 

 
60,041

 

U.S. government agency securities
23,486

 
22,658

 
828

 

Restricted cash equivalents and investments
5,000

 

 
5,000

 

Equity investments in publicly traded securities
34,485

 
34,485

 

 

Total
$
218,543

 
$
57,145

 
$
161,398

 
$

 
Fair Value Measurements as of
 
December 31, 2012
 
Total
 
Level 1
 
Level 2
 
Level 3
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
10,680

 
$

 
$
10,680

 
$

Corporate notes and bonds
81,235

 

 
81,235

 

Short-term investments:
 
 
 
 
 
 
 
Corporate notes and bonds
65,502

 

 
65,502

 

U.S. government agency securities
42,714

 
42,113

 
601

 

Restricted cash equivalents and investments
10,000

 

 
10,000

 

Equity investments in publicly traded securities
34,334

 
34,334

 

 

Total
$
244,465

 
$
76,447

 
$
168,018

 
$

Our equity investments in publicly traded companies consist of J-Stream Inc., a Japanese media services company, and LoEn Entertainment, Inc., a Korean digital music distribution company. These equity investments are accounted for as available for sale. The aggregate cost basis of these securities totaled $8.6 million as of September 30, 2013 and $8.6 million at December 31, 2012.
Items Measured at Fair Value on a Non-recurring Basis
Certain of our assets and liabilities are measured at estimated fair value on a non-recurring basis, using Level 3 inputs. These instruments are subject to fair value adjustments only in certain circumstances (for example, when there is evidence of impairment). During the nine months ended September 30, 2013 and 2012, we did not record any impairments on those assets required to be measured at fair value on a non-recurring basis.
Note 7. Cash, Cash Equivalents, Short-Term Investments, Restricted Cash Equivalents and Investments
Cash and cash equivalents, short-term investments, and restricted cash equivalents and investments as of September 30, 2013, consisted of the following (in thousands):
 

9



 
Amortized
Cost
 
Estimated
Fair Value
Cash and cash equivalents:
 
 
 
Cash
$
39,348

 
$
39,348

Money market mutual funds
23,038

 
23,038

Corporate notes and bonds
72,494

 
72,493

Total cash and cash equivalents
134,880

 
134,879

Short-term investments:
 
 
 
Corporate notes and bonds
60,005

 
60,041

U.S. government agency securities
23,478

 
23,486

Total short-term investments
83,483

 
83,527

Total cash, cash equivalents and short-term investments
$
218,363

 
$
218,406

Restricted cash equivalents and investments
$
5,000

 
$
5,000

Cash and cash equivalents, short-term investments, and restricted cash equivalents and investments as of December 31, 2012 consisted of the following (in thousands):
 
 
Amortized
Cost
 
Estimated
Fair Value
Cash and cash equivalents:
 
 
 
Cash
$
71,283

 
$
71,283

Money market mutual funds
10,680

 
10,680

Corporate notes and bonds
81,237

 
81,235

Total cash and cash equivalents
163,200

 
163,198

Short-term investments:
 
 
 
Corporate notes and bonds
65,426

 
65,502

U.S. Government agency securities
42,693

 
42,714

Total short-term investments
108,119

 
108,216

Total cash, cash equivalents, and short-term investments
$
271,319

 
$
271,414

Restricted cash equivalents and investments
$
10,000

 
$
10,000

Restricted cash equivalents and investments amounts as of September 30, 2013, and December 31, 2012 relate to cash and investments pledged as collateral against letters of credit in connection with lease agreements.
Realized gains or losses on sales of short-term investment securities for the quarters and nine months ended September 30, 2013 and 2012 were not significant. Gross unrealized gains and gross unrealized losses on short-term investment securities as of September 30, 2013 and December 31, 2012 were not significant.

Investments with remaining contractual maturities of five years or less are classified as short-term because the investments are marketable and highly liquid and we have the ability to utilize them for current operations. Contractual maturities of short-term investments as of September 30, 2013 (in thousands):
 
 
Estimated
Fair Value
Within one year
$
57,321

Between one year and five years
26,206

Total short-term investments
$
83,527

Note 8. Allowance for Doubtful Accounts Receivable and Sales Returns
Activity in the allowance for doubtful accounts receivable and sales returns (in thousands):
 

10



 
Allowance For
 
Doubtful
Accounts
Receivable
 
Sales
Returns
Balances, December 31, 2012
$
1,010

 
$
653

Addition (reduction) to allowance
210

 
(47
)
Amounts written off
(61
)
 
(21
)
Foreign currency translation
20

 

Balances, September 30, 2013
$
1,179

 
$
585

One customer accounted for 13% of trade accounts receivable and one other customer accounted for 12% of trade accounts receivable, as of September 30, 2013. No one customer accounted for more than 10% of trade accounts receivable as of December 31, 2012.
One customer accounted for approximately 12%, or $6.0 million, and 14% or $21.1 million, of consolidated revenue during the quarter and nine months ended September 30, 2013, respectively. The revenue from this customer is reflected in our RealPlayer Group and Games segments. One other customer accounted for approximately 14%, or $6.8 million, and 11% or $17.3 million, of consolidated revenue during the quarter and nine months ended September 30, 2013, respectively, in our Mobile Entertainment segment. One customer accounted for 11%, or $6.4 million, of revenue during the quarter ended September 30, 2012. No one customer accounted for more than 10% of consolidated revenue during the nine months ended September 30, 2012.
Note 9. Other Intangible Assets
Other intangible assets (in thousands):
 
 
 
Gross
Amount
 
Accumulated
Amortization
 
Net
Amortizing intangible assets:
 
 
 
 
 
 
Customer relationships
$
34,753

 
$
30,168

 
$
4,585

 
Developed technology
28,949

 
24,554

 
4,395

 
Patents, trademarks and tradenames
3,965

 
3,558

 
407

 
Service contracts and other
5,637

 
5,473

 
164

 
 
$
73,304

 
$
63,753

 
$
9,551

Non-amortizing intangible assets:
 
 
 
 
 
 
Trademarks and tradenames
 
 
 
 
$
4,500

 
Total other intangible assets, September 30, 2013


 


 
$
14,051


For current year increases in other intangible assets, see Note 3, Acquisitions, for details on our acquisitions of Slingo, a social casino games business, in the quarter ended June 30, 2013, and Muzicall, a ringback tone business, in the quarter ended September 30, 2013.
Note 10. Goodwill
Changes in goodwill (in thousands):
 
Balance, December 31, 2012
$
6,309

Increases due to current year acquisitions
11,352

Effects of foreign currency translation
(143
)
Balance, September 30, 2013
$
17,518


Goodwill by segment (in thousands):
 

11



 
September 30,
2013
RealPlayer Group
$
580

Mobile Entertainment
2,115

Games
14,823

Total goodwill
$
17,518


For current year increases in goodwill, see Note 3, Acquisitions, for details on our acquisitions of Slingo, a social casino games business, in the quarter ended June 30, 2013, and Muzicall, a ringback tone business, in the quarter ended September 30, 2013.
Note 11. Accrued and Other Current Liabilities
Accrued and other current liabilities (in thousands):
 
 
September 30, 2013
 
December 31, 2012
Royalties and other fulfillment costs
$
16,648

 
$
19,435

Employee compensation, commissions and benefits
11,821

 
13,368

Accrued legal settlements
11,525

 

Sales, VAT and other taxes payable
8,449

 
10,959

Deferred tax liabilities—current
453

 
3,894

Accrued lease exit and related charges
591

 
2,463

Other
8,537

 
7,411

Total accrued and other current liabilities
$
58,024

 
$
57,530

Note 12. Restructuring Charges
Restructuring and other charges in 2013 and 2012 consist of costs associated with the ongoing reorganization of our business operations and focus on aligning our operating expenses with our revenue profile. The expense amounts in both years relate primarily to severance costs due to workforce reductions.
In the third quarter of 2012 we announced we would be eliminating approximately 160 positions worldwide. This action has been concluded as of the end of the second quarter of 2013. In the third quarter of 2013, we incurred restructuring charges as a result of reduced headcount from the termination of certain SaaS contracts. We expect this action to be completed within the first half of 2014. For the quarter and nine months ended September 30, 2013 we recorded $1.1 million and $2.9 million, respectively, of restructuring charges for employee separation costs related to these actions and for other actions taken in 2013.
In the second and third quarter of 2013 we also incurred restructuring charges related to the relocation of our Seattle headquarters. For the quarter and nine months ended September 30, 2013, we recorded $0.8 million and $1.2 million, respectively, of restructuring charges related to this action, which are classified as Asset Related and Other Costs in the table below.
Details of restructuring charges for the nine months ended September 30, 2013 and 2012 are in the table below. The amount accrued at September 30, 2013 for employee separation includes costs for those employees who were separated in the quarter ended September 30, 2013 and are expected to be paid out in the quarter ended December 31, 2013. The amount accrued for contract assignment is expected to be paid out by the end of 2013.
For details on costs associated with the termination of our Seattle headquarters lease see Note 13, Lease exit and related charges.
Restructuring charges by type of cost (in thousands):

12



 
 
 
 
Employee Separation Costs
Contract Assignment Costs
Asset Related and Other Costs
Total
Costs incurred and charged to expense for the nine months ended September 30, 2013
$
2,891


1,184

$
4,075

Costs incurred and charged to expense for the nine months ended September 30, 2012
$
8,099

3,629

2,144

$
13,872


Changes to the accrued restructuring cost liability (in thousands):

 
By Type of Cost
 
 
Employee Separation Costs
Contract Assignment Costs
Total
Accrued liability as of December 31, 2012
$
731

$
1,700

$
2,431

Costs incurred and charged to expense for the nine months ended September 30, 2013
2,891


2,891

Cash payments
(2,806
)

(2,806
)
Accrued liability as of September 30, 2013
$
816

$
1,700

$
2,516


Note 13. Lease Exit and Related Charges
As a result of the reduction in use of RealNetworks' office space, primarily in our former corporate headquarters in Seattle, Washington, and certain other locations, losses have been recognized representing rent and contractual operating expenses over the remaining life of the leases, and related write-downs of leasehold improvements to their estimated fair value.
In the second quarter of 2013, we entered into a new lease in a new location for our Seattle headquarters and concurrently entered into an amendment to our then-current headquarters office lease that provided for an early termination of such lease.
The new Seattle building lease is for an initial term of 11 years and commenced on August 15, 2013. We have the option to extend the lease for two additional five-year terms, with certain increases in base rent.
The amendment to our former headquarters office lease provided for an early termination of such lease effective in three stages, with the termination of a majority of the premises on August 31, 2013, and the final stage being complete by December 31, 2013. Prior to the execution of the amendment, the lease had been scheduled to expire in September 2014. In connection with the early termination of the lease, we agreed to pay the landlord termination fees totaling approximately $6.6 million in 2013. In the quarter and nine months ended September 30, 2013, we paid the landlord $3.1 million and $6.3 million, respectively, in termination fees. The initial payment of $3.2 million was expensed and paid within the second quarter of 2013, and is therefore not included in the rollforward below. The second payment of $3.1 million was accrued in the second quarter of 2013 and subsequently paid in the third quarter of 2013, and is included in the rollforward of the accrued loss below.
Changes to accrued lease exit and related charges (in thousands):
 
Accrued loss December 31, 2012
$
4,213

Additions and adjustments to the lease exit charges accrual, including sublease income estimate revision
1,331

Less amounts paid, net of sublease amounts
(4,953
)
Accrued loss September 30, 2013 (included in Accrued and other current liabilities)
$
591

Note 14. Income Taxes

13



As of September 30, 2013, there have been no material changes to RealNetworks’ uncertain tax positions disclosures as provided in Note 14 of the 10-K. We do not anticipate that our total unrecognized tax benefits will significantly change within the next twelve months.
We file numerous consolidated and separate income tax returns in the U.S including federal, state and local, as well as foreign jurisdictions. With few exceptions, we are no longer subject to U.S federal income tax examinations for tax years before 2008 or state, local, or foreign income tax examinations for years before 1993. We are currently under audit by various states and foreign jurisdictions for certain tax years subsequent to 1993.
Note 15. Earnings (Loss) Per Share
Basic net income (loss) per share (EPS) is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted EPS is computed by dividing net income (loss) by the weighted average number of common and dilutive potential common shares outstanding during the period. Basic and diluted EPS (in thousands, except per share amounts):
 
 
Quarters Ended
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
Net income (loss) available to common shareholders
$
(31,375
)
 
$
(22,214
)
 
$
(61,520
)
 
$
41,768

Weighted average common shares outstanding used to compute basic EPS
35,670

 
34,998

 
35,490

 
34,747

Dilutive effect of stock based awards

 

 

 
253

Weighted average common shares outstanding used to compute diluted EPS
35,670

 
34,998


35,490


35,000

Basic EPS
$
(0.88
)
 
$
(0.63
)
 
$
(1.73
)
 
$
1.20

Diluted EPS
$
(0.88
)
 
$
(0.63
)
 
$
(1.73
)
 
$
1.19

During the quarter and nine months ended September 30, 2013, respectively, 4.6 million and 4.4 million of potentially issuable shares from stock awards were excluded from the calculation of diluted EPS because of their antidilutive effect.
During the quarter and nine months ended September 30, 2012, respectively, 4.3 million and 5.3 million of potentially issuable shares from stock awards were excluded from the calculation of diluted EPS because of their antidilutive effect.
Note 16. Commitments and Contingencies
Commitments. See Note 13, Lease exit and related charges, for details on office lease commitments.
Litigation. In October 2013, we executed settlement agreements relating to certain of our outstanding litigation matters; specifically, the matters brought against us by VoiceAge Corporation and Callertone Innovations, Inc., which are more fully described below. During the fourth quarter of 2013 we paid an aggregate of $11.5 million, representing our total obligation under these settlements. This amount was accrued as of September 30, 2013, and is identified in our Condensed Consolidated Statements of Operations as "Loss on litigation settlements."
On July 3, 2012, a lawsuit was filed against us by VoiceAge Corporation in the Supreme Court of the State of New York, wherein VoiceAge asserted that we had breached our payment obligations under the terms of a patent license agreement between us and VoiceAge in respect of distribution of specified codec technology, and sought a material amount of damages. We removed the proceedings to New York federal court, and discovery took place from January 4 to May 15, 2013. In June 2013, VoiceAge submitted a motion for summary judgment, which was denied by the Supreme Court of the State of New York on August 5, 2013. On October 24, 2013, we executed a settlement agreement with VoiceAge to settle and dismiss with prejudice all outstanding claims in the lawsuit.
On October 28, 2011 and November 1, 2011, respectively, two lawsuits were filed by Callertone Innovations, LLC in the U.S. District Court for the District of Delaware. The first lawsuit was against T-Mobile USA, Inc. and the second lawsuit was against MetroPCS Wireless, Inc. and MetroPCS Communications, Inc., which we collectively refer to as MetroPCS. The lawsuits alleged that T-Mobile and MetroPCS, respectively, infringed Callertone's patents by providing ringback tone services. We agreed to indemnify each of T-Mobile and MetroPCS against the claims based on an indemnity that was claimed to be owed by us. The respective complaint was served on T-Mobile on January 16, 2012 and on MetroPCS on January 14, 2012. We filed our answers to each complaint on April 9, 2012. In each matter, we disputed the plaintiff's allegations regarding both the validity of its patents and its claims of infringement against T-Mobile and MetroPCS, respectively. A claims construction

14



hearing was held on September 6, 2013. On October 21, 2013, we executed a settlement agreement with Callertone to settle and dismiss with prejudice all outstanding claims in each of the lawsuits.
On April 25, 2007, a lawsuit was filed by Greenville Communications, LLC in Greenville, Mississippi against a number of cell phone carriers, including our partners T-Mobile USA, Inc. and Alltel Corporation, alleging that they infringed Greenville's patents by providing ringback tone services. We agreed to indemnify T-Mobile and Alltel against the claims based on an indemnity that was claimed to be owed by us. On August 27, 2007, our motion to transfer this matter to the U.S. District Court for the District of New Jersey was granted. The parties briefed claims construction, but the case was subsequently stayed pending reexamination of the patents at issue. On December 10, 2009, the U.S. Patent and Trademark Office issued notice of its intent to issue reexamination certificates for the patents in the suit. The District Court lifted the stay on the litigation on January 29, 2010 and discovery resumed. On September 28, 2011, the District Court held a claims construction hearing, and on May 10, 2012, the District Court issued a non-infringement judgment that was favorable to us and the other defendants. On December 4, 2012, Greenville appealed the claims construction order and the judgment, and the defendants filed a reply brief on January 28, 2013. On May 17, 2013, the U.S. Court of Appeals for the Federal Circuit affirmed the judgment of non-infringement of the District Court. Greenville has filed a petition for re-hearing with the U.S. Court of Appeals. Due to the uncertainties inherent in this matter, we are unable to estimate the range of possible loss that could result from this litigation.
Although the matters described above have been either settled, as in the lawsuits filed by VoiceAge and Callertone, or the appeals process has been nearly exhausted, as in the Greenville matter, we could in the future become subject to legal proceedings, governmental investigations and claims in the ordinary course of business, including employment claims, contract-related claims, and claims of alleged infringement of third-party patents, trademarks and other intellectual property rights. Such claims, even if not meritorious, could force us to expend significant financial and managerial resources. In addition, given the broad distribution of some of our consumer products, any individual claim related to those products could give rise to liabilities that may be material to us. In the event of a determination adverse to us, we could incur substantial monetary liability, and/or be required to change our business practices. Either of these could have a material adverse effect on our consolidated financial statements.  
Note 17. Guarantees
In the ordinary course of business, RealNetworks is subject to potential obligations for standard warranty and indemnification provisions that are contained within many of our customer license and service agreements. Our warranty provisions are consistent with those prevalent in our industry, and we do not have a history of incurring losses on warranties; therefore, we do not maintain accruals for warranty-related obligations. With regard to indemnification provisions, nearly all of our carrier contracts obligate us to indemnify our carrier customers for certain liabilities that may be incurred by them. We have in the past received claims for indemnification from some of our carrier customers. See Note 16, Commitments and Contingencies, for a discussion of current indemnification claims.
As discussed in Note 1, Description of Business and Summary of Significant Accounting Policies, we sold certain patents and other technology assets to Intel in the second quarter of 2012. We have specific obligations to indemnify Intel for breaches of the representations and warranties that we made and covenants that we agreed to in the asset purchase agreement executed in connection with the transaction, and for certain potential future intellectual property infringement claims brought by third parties against Intel. The amount of any potential liabilities related to our indemnification obligations to Intel will not be determined until a claim has been made, but we are obligated to indemnify Intel up to the amount of the gross purchase price that we received in the sale.  
Note 18. Segment Information
In the first quarter of 2013 we reorganized the management of our businesses and as a result, we now report the following three segments: (1) RealPlayer Group, which includes sales of our RealPlayer media player software and related products, such as the distribution of third party software products, advertising on RealPlayer websites, and sales of RealPlayer Plus software licenses to consumers, sales of intellectual property licenses, and consumer subscriptions such as SuperPass and our recently launched RealPlayer Cloud service; (2) Mobile Entertainment, which includes our SaaS services, systems integration, and professional services to mobile carriers, and sales of technology licenses of our software products such as Helix; and (3) Games, which includes all our games-related businesses, including sales of games licenses, online games subscription services, advertising on games sites and social network sites, microtransactions from online and social games, and sales of mobile games.
In addition, we now also allocate certain corporate expenses which are directly attributable to supporting the business to our reportable segments, rather than retaining those expenses in our corporate segment. These corporate expenses include but are not limited to a portion of finance, legal, human resources and headquarters facilities. Remaining expenses, which are not directly attributable to supporting the business, are retained in aggregate in our corporate segment. All restructuring, lease exit and related charges, and, for 2013, the loss on litigation settlements, are included in the corporate segment. In 2012, the sale of

15



patent and other technology assets, net of costs, was included in the corporate segment. The historical financial information presented has been recast to reflect the new segments and the new corporate expense presentation.
RealNetworks reports three reportable segments based on factors such as how we manage our operations and how our Chief Operating Decision Maker reviews results. Our Chief Operating Decision Maker is considered to be the CEO Staff (CEOS), which includes the interim Chief Executive Officer, Chief Financial Officer, President, Executive Vice President, General Counsel and certain Senior Vice Presidents. The CEOS reviews financial information presented on both a consolidated basis and on a business segment basis, accompanied by certain disaggregated information about products and services, geographical regions and corporate expenses for purposes of making decisions and assessing financial performance. The accounting policies used to derive segment results are the same as those described in Note 1, Description of Business and Summary of Significant Accounting Policies, in the 10-K.
Segment results for the quarters and nine months ended September 30, 2013 and 2012 (in thousands):
RealPlayer Group
 
 
Quarters Ended
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
Revenue
$
17,641

 
$
21,392

 
$
58,407

 
$
65,631

Cost of revenue
3,264

 
6,735

 
12,984

 
16,026

Gross profit
14,377

 
14,657

 
45,423

 
49,605

Operating expenses
14,449

 
13,082

 
44,656

 
41,849

Operating income (loss)
$
(72
)
 
$
1,575

 
$
767

 
$
7,756



Mobile Entertainment
 
 
Quarters Ended
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
Revenue
$
19,948

 
$
22,820

 
$
59,035

 
$
74,600

Cost of revenue
11,972

 
12,740

 
33,974

 
43,093

Gross profit
7,976

 
10,080

 
25,061

 
31,507

Operating expenses
9,453

 
11,936

 
26,976

 
40,591

Operating income (loss)
$
(1,477
)
 
$
(1,856
)
 
$
(1,915
)
 
$
(9,084
)


Games
 
 
Quarters Ended
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
Revenue
$
11,369

 
$
14,876

 
$
38,159

 
$
51,347

Cost of revenue
3,216

 
4,989

 
10,397

 
17,332

Gross profit
8,153

 
9,887

 
27,762

 
34,015

Operating expenses
11,513

 
12,023

 
35,120

 
39,962

Operating income (loss)
$
(3,360
)
 
$
(2,136
)
 
$
(7,358
)
 
$
(5,947
)


Corporate
 

16



 
Quarters Ended
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
Cost of revenue
$
538

 
$
780

 
$
1,660

 
$
2,182

Sale of patents and other technology assets, net of costs

 

 

 
116,353

Operating expenses
22,990

 
19,978

 
46,201

 
44,445

Operating income (loss)
$
(23,528
)
 
$
(20,758
)
 
$
(47,861
)
 
$
69,726

Our customers consist primarily of consumers and corporations located in the U.S., Europe and various foreign countries. Revenue by geographic region (in thousands):
 
 
Quarters Ended
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
United States
$
21,039

 
$
29,101

 
$
70,525

 
$
89,529

Europe
8,750

 
12,470

 
29,278

 
43,021

Rest of the world
19,169

 
17,517

 
55,798

 
59,028

Total net revenue
$
48,958

 
$
59,088

 
$
155,601

 
$
191,578

Long-lived assets, consisting of equipment, software, leasehold improvements, other intangible assets, and goodwill by geographic region (in thousands):
 
 
September 30,
2013
 
December 31,
2012
United States
$
41,634

 
$
27,915

Europe
8,830

 
2,350

Rest of the world
5,570

 
8,635

Total long-lived assets
$
56,034

 
$
38,900


Note 19. Related Party Transactions
Transactions with Rhapsody. See Note 5, Rhapsody Joint Venture, for details on the 2010 restructuring transaction involving Rhapsody. Subsequent to the restructuring transaction, we are obligated to provide Rhapsody with certain support services. These support services are expected to be completed in 2013. The support services include information technology and limited operational support provided directly to Rhapsody. The amount of these and other support service costs were based on various measures depending on the service provided, including vendor fees, an allocation of fixed costs and time employees spend on providing services to Rhapsody. RealNetworks allocates the cost of providing these support services and records such allocation as a reduction to the related expense in the period for which it was incurred. During the quarter and nine months ended September 30, 2013, we charged Rhapsody $0.2 million and $0.6 million, respectively, for the support services. During the quarter and nine months ended September 30, 2012, we charged Rhapsody $0.2 million and $0.7 million, respectively, for the support services.
Transactions with LoEn Entertainment, Inc. In 2008 RealNetworks acquired at market prices common shares of LoEn Entertainment, Inc., whose shares are traded on the Korean Securities Dealers Automated Quotations. As of September 30, 2013 we owned approximately 9% of the outstanding shares of LoEn. Our investment in LoEn is treated as an available for sale investment and is marked-to-market each period with resulting unrealized gains or losses recognized in accumulated other comprehensive income/loss. During the quarter and nine months ended September 30, 2013, we recorded revenue from LoEn of $6.8 million and $17.3 million, respectively. During the quarter and nine months ended September 30, 2012, we recorded revenue from LoEn of $4.0 million and $12.0 million, respectively. Revenue consisted primarily of sales of application service provider services, which include sales of ringback tones, music on demand, video on demand, and intercarrier messaging services. Associated with these transactions, we also recorded accounts receivable of $3.4 million as of September 30, 2013. Accounts payable and cost of revenue amounts associated with LoEn as of and for the periods ended September 30, 2013 and 2012 were nominal.

17




Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q and the documents incorporated herein by reference contain forward-looking statements that have been made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on current expectations, estimates, and projections about RealNetworks’ industry, products, management’s beliefs, and certain assumptions made by management. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” and similar expressions are intended to identify forward-looking statements. All statements contained in this report that do not relate to matters of historical fact should be considered forward-looking statements. Forward-looking statements include statements with respect to:
future revenues, operating expenses, income and other taxes, tax benefits, net income (loss) per diluted share available to common shareholders, acquisition costs and related amortization, and other measures of results of operations;
the effects of our past acquisitions and expectations for future acquisitions and divestitures;
plans, strategies and expected opportunities for future growth, increased profitability and innovation;
the prospects for creation and growth of strategic partnerships and the resulting financial benefits from such partnerships;
the expected financial position, performance, growth and profitability of, and investment in, our businesses and the availability of resources;
our involvement in potential claims, legal proceedings and government investigations, the expected course and costs of existing claims, legal proceedings and government investigations, and the potential outcomes and effects of both existing and potential claims, legal proceedings and governmental investigations on our business, prospects, financial condition or results of operations;
the expected benefits and other consequences of our growth plans, strategic initiatives, and restructurings;
our expected introduction of new and enhanced products, services and technologies across our businesses;
the effects of legislation, regulations, administrative proceedings, court rulings, settlement negotiations and other factors that may impact our businesses;
the continuation and expected nature of certain customer relationships;
impacts of competition and certain customer relationships on the future financial performance and growth of our businesses;
the effects of U.S. and foreign income and other taxes on our business, prospects, financial condition or results of operations; and
the effect of economic and market conditions on our business, prospects, financial condition or results of operations.
These statements are not guarantees of future performance and actual actions or results may differ materially. These statements are subject to certain risks, uncertainties and assumptions that are difficult to predict, including those noted in the documents incorporated herein by reference. Particular attention should also be paid to the cautionary language in Item 1A of Part II entitled “Risk Factors.” RealNetworks undertakes no obligation to update publicly any forward-looking statements as a result of new information, future events or otherwise, unless required by law. Readers should, however, carefully review the risk factors included in other reports or documents filed by RealNetworks from time to time with the Securities and Exchange Commission, particularly the Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K.
Overview
In the first quarter of 2013 we reorganized the management of our businesses and as a result, we now report the following three segments: (1) RealPlayer Group, (2) Mobile Entertainment, and (3) Games. Within our RealPlayer Group, revenue is derived from the sale of our RealPlayer media player software and related products, such as the distribution of third party software products, advertising on RealPlayer websites, and sales of RealPlayer Plus software licenses to consumers, sales of intellectual property licenses, and consumer subscriptions such as SuperPass and our recently launched RealPlayer Cloud service. The Mobile Entertainment business primarily includes revenue from SaaS services, systems integration, and professional services to mobile carriers, and sales of technology licenses of our software products such as Helix. The Games business primarily includes revenue from sales of games licenses, online games subscription services, advertising on games sites and social network sites, microtransactions from online and social games, and sales of mobile games.
In addition, we now also allocate certain corporate expenses which are directly attributable to supporting the business, including but not limited to a portion of finance, legal, human resources and headquarters facilities, to our reportable segments rather than retaining those expenses in our corporate segment. The allocation of these costs to the business units will increase accountability for financial and operational performance within each of our reportable segments. RealNetworks' most significant expenses relate to cost of revenue, compensating employees, and selling and marketing our products and services. The historical financial information presented has been recast to reflect the new segments and the new corporate expense presentation.

18



In the quarter and nine months ended September 30, 2013, our consolidated revenue declined by $10.1 million and $36.0 million, respectively, compared to the same periods in 2012, with each of our three segments suffering revenue declines. For the quarter, revenue fell by $3.8 million in our RealPlayer Group, $3.5 million in Games, and $2.9 million in Mobile Entertainment. For the year to date period, the overall decline was due to a $15.6 million decrease in Mobile Entertainment revenue, a $13.2 million decrease in Games revenue, and a $7.2 million decrease in RealPlayer Group revenue.

Revenue from our legacy products continues to decline as a result of certain changes in our businesses and market-driven factors. Our SaaS business within Mobile Entertainment continues to be negatively impacted by the proliferation of smartphone applications and services, some of which do not depend on our carrier customers for distribution to consumers. In addition, we are still experiencing pricing pressure from carriers for our intercarrier messaging services. In our Games segment, our business continues to be challenged as consumer game play continues to shift from downloadable PC games to social networks and mobile devices. Since 2011, we have been focusing on developing social and mobile games and monetizing those game play experiences.
Over the past twelve months we have developed a growth plan, implemented strategic initiatives, and executed certain restructuring efforts, all in an effort to grow our businesses, move towards profitability, and streamline our operations. In line with our growth plan, we continue to invest in each of our three business units. From an organic growth perspective, we have invested in the internal development of major new products, including the August 2013 launch from our Games business of GameHouse Casino Plus with the Golden Dreams Sweepstakes feature, and the September 2013 launch from our RealPlayer Group of our RealPlayer Cloud integrated video player and cloud service. Complementing these internal development efforts, we have made certain targeted acquisitions including the second quarter 2013 acquisition of U.S.-based Slingo, Inc., creator of a highly popular social casino game that combines bingo and slots, for total cash consideration of $15.6 million. We expect this acquisition to enhance our footprint in the social casino games arena. In addition, during the third quarter, we acquired U.K.-based Muzicall Limited, a provider of services for mobile carriers and media companies in Europe, for total cash consideration of $6.7 million. This acquisition is intended to accelerate our growth initiatives within the Mobile Entertainment segment. We expect to continue to invest in our growth initiatives.

One of our key strategic initiatives is to better align our operating expenses with our revenue profile. In line with this, during the third quarter of 2012 we initiated a restructuring that eliminated approximately 160 positions worldwide. During the third quarter of 2013, we moved our Seattle headquarters, which required certain one-time lease termination and move costs, but which will allow us to meaningfully reduce our future annual facilities cost. These and other restructuring efforts have contributed to an overall decline in our operating expenses. During the quarter and nine months ended September 30, 2013, our total operating expenses saw a $1.4 million increase and $13.9 million decrease, respectively, compared to the same periods in 2012. Excluding the impact of restructuring, lease exit and related charges, and the loss on litigation settlements discussed below, total operating expenses declined $1.0 million and $18.4 million in the quarter and nine months ended September 30, 2013, respectively, compared with the year-earlier periods.
In October 2013, we executed settlement agreements relating to our most significant outstanding litigation matters, as described in Note 16, Commitments and Contingencies. The settlements resulted in an aggregate payment during the fourth quarter of 2013 of $11.5 million, which was accrued and recorded in our financial statements in the third quarter of 2013.
Condensed consolidated results of operations were as follows (dollars in thousands):
 
 
Quarters Ended September 30,
 
Nine months ended September 30,
 
2013
 
2012
 
$ Change
 
% Change
 
2013
 
2012
 
$ Change
 
% Change
Total revenue
$
48,958

 
$
59,088

 
$
(10,130
)
 
(17
)%
 
$
155,601

 
$
191,578

 
$
(35,977
)
 
(19
)%
Cost of revenue
18,990

 
25,244

 
(6,254
)
 
(25
)%
 
59,015

 
78,633

 
(19,618
)
 
(25
)%
Gross profit
29,968

 
33,844

 
(3,876
)
 
(11
)%
 
96,586

 
112,945

 
(16,359
)
 
(14
)%
Gross margin
61
%
 
57
%
 
 
 
 
 
62
%
 
59
%
 
 
 
 
Sale of patent assets and other technology assets, net of costs

 

 

 
 %
 

 
116,353

 
(116,353
)
 
(100
)%
Operating expenses
58,405

 
57,019

 
1,386

 
2
 %
 
152,953

 
166,847

 
(13,894
)
 
(8
)%
Operating income (loss)
$
(28,437
)
 
$
(23,175
)
 
$
(5,262
)
 
(23
)%
 
$
(56,367
)
 
$
62,451

 
$
(118,818
)
 
(190
)%
In the third quarter of 2013, our total consolidated revenue declined by $10.1 million, compared with the year-earlier period. The reduction in revenue resulted from a decline of $3.8 million in our RealPlayer Group segment, a decline of $3.5

19



million in our Games segment, and a $2.9 million decline in our Mobile Entertainment segment, due to the factors described above. Gross margin increased to 61% from 57% for the year earlier quarter as a result of lower personnel and related costs in the third quarter of 2013 that resulted from our ongoing expense alignment efforts. Operating expenses increased by $1.4 million in the quarter ended September 30, 2013, compared with the prior year. Excluding the impact of restructuring, lease exit and related charges, and the loss on litigation settlements, operating expenses decreased by $1.0 million in the quarter ended September 30, 2013, compared to the same period of the prior year.
For the nine months ended September 30, 2013, our total consolidated revenue declined by $36.0 million, compared with the year-earlier period. The reduction in revenue resulted from a decline of $15.6 million in our Mobile Entertainment segment, a decline of $13.2 million in our Games segment, and a decline of $7.2 million in our RealPlayer Group segment, due to the factors described above. Gross margin increased to 62% from 59% for the year earlier quarter, primarily as a result of lower personnel and related costs in the first nine months of 2013 that resulted from our ongoing expense alignment efforts. Operating expenses decreased by $13.9 million in the nine months ended September 30, 2013, compared with the prior year, primarily due to reductions in personnel and related costs that resulted from our ongoing expense alignment efforts. Excluding the impact of restructuring, lease exit and related charges, and the loss on litigation settlements, operating expenses decreased by $18.4 million in the nine months ended September 30, 2013, compared to the same period of the prior year.
The 2012 gain from the sale of patents and other technology assets to Intel is net of certain direct expenses incurred for the sale transaction.
See “Segment Operating Results” below for more information and discussion regarding changes in the operating results for each of our reporting segments.
Segment Operating Results
RealPlayer Group
The RealPlayer Group segment primarily generates revenue and incurs costs from sales of RealPlayer and its related products, such as the distribution of third party software products, advertising on RealPlayer websites, and sales of RealPlayer Plus software licenses to consumers, sales of intellectual property licenses, and consumer subscriptions such as SuperPass. In addition, late in the third quarter, we launched RealPlayer Cloud, an integrated video player and cloud service which offers additional storage via subscription plans.
RealPlayer Group segment results of operations were as follows (dollars in thousands):
 
 
Quarters Ended September 30,
 
Nine months ended September 30,
 
2013
 
2012
 
$ Change
 
% Change
 
2013
 
2012
 
$ Change
 
% Change
Revenue
$
17,641

 
$
21,392

 
$
(3,751
)
 
(18
)%
 
$
58,407

 
$
65,631

 
$
(7,224
)
 
(11
)%
Cost of revenue
3,264

 
6,735

 
(3,471
)
 
(52
)%
 
12,984

 
16,026

 
(3,042
)
 
(19
)%
Gross profit
14,377

 
14,657

 
(280
)
 
(2
)%
 
45,423

 
49,605

 
(4,182
)
 
(8
)%
Gross margin
81
%
 
69
%
 
 
 
 
 
78
%
 
76
%
 
 
 
 
Operating expenses
14,449

 
13,082

 
1,367

 
10
 %
 
44,656

 
41,849

 
2,807

 
7
 %
Operating income (loss)
$
(72
)
 
$
1,575

 
$
(1,647
)
 
(105
)%
 
$
767

 
$
7,756

 
$
(6,989
)
 
(90
)%

Total RealPlayer Group revenue decreased by $3.8 million in the quarter ended September 30, 2013, compared with the year-earlier period. This decrease was primarily a result of lower subscriptions revenue of $3.4 million due to fewer subscribers, primarily attributable to our SuperPass product.
Total RealPlayer Group revenue decreased by $7.2 million for the nine months ended September 30, 2013, compared with the year-earlier period. This decrease was primarily a result of lower subscriptions revenue of $8.7 million due to fewer subscribers, primarily attributable to our SuperPass product. Partially offsetting this decrease was an increase in revenue of $2.5 million from distribution of third party software.
Gross margin during the quarter ended September 30, 2013 increased by 12 percentage points, due primarily to a higher proportion of lower margin revenue in the prior year.
Operating expenses increased by $1.4 million for the quarter ended September 30, 2013, compared with the year-earlier period. Personnel and related costs increased $1.3 million during the quarter ended September 30, 2013, primarily due to investment in our new RealPlayer Cloud service. Further contributing to the increase was an expense benefit of $1.1 million in

20



the third quarter of 2012 related to the investigation by the Washington State Attorney General's office, as disclosed in the 2012 10-K. Partially offsetting the increases during the quarter was a decrease of $2.1 million in marketing expense.
Operating expenses increased by $2.8 million for the nine months ended September 30, 2013, compared with the year-earlier period. Personnel and related costs increased $4.1 million, primarily due to investment in our new RealPlayer Cloud service. Further contributing to the increase was increased depreciation of $0.8 million. Partially offsetting these increases was a decrease of $1.3 million related to the expense in 2012 for the final settlement of the Washington State Attorney General's office matter, as disclosed in the 2012 10-K. Further offsetting the increases for the nine months ended September 30, 2013 was a decrease in marketing expense of $1.4 million.
Mobile Entertainment
The Mobile Entertainment segment primarily generates revenue and incurs costs from the sales of SaaS services, such as ringback tones, intercarrier messages, music on demand and video on demand; professional services and systems integration services to mobile carriers and mobile handset companies; and Helix software.
Mobile Entertainment segment results of operations were as follows (dollars in thousands):
 
 
Quarters Ended September 30,
 
Nine months ended September 30,
 
2013
 
2012
 
$ Change
 
% Change
 
2013
 
2012
 
$ Change
 
% Change
Revenue
$
19,948

 
$
22,820

 
$
(2,872
)
 
(13
)%
 
$
59,035

 
$
74,600

 
$
(15,565
)
 
(21
)%
Cost of revenue
11,972

 
12,740

 
(768
)
 
(6
)%
 
33,974

 
43,093

 
(9,119
)
 
(21
)%
Gross profit
7,976

 
10,080

 
(2,104
)
 
(21
)%
 
25,061

 
31,507

 
(6,446
)
 
(20
)%
Gross margin
40
%
 
44
%
 
 
 
 
 
42
%
 
42
%
 
 
 
 
Operating expenses
9,453

 
11,936

 
(2,483
)
 
(21
)%
 
26,976

 
40,591

 
(13,615
)
 
(34
)%
Operating income (loss)
$
(1,477
)
 
$
(1,856
)
 
$
379

 
20
 %
 
$
(1,915
)
 
$
(9,084
)
 
$
7,169

 
79
 %

In the quarter ended September 30, 2013, we acquired Muzicall, a ringback tone company based in London, for total cash consideration of $6.7 million. This acquisition is intended to accelerate our growth initiatives within the Mobile Entertainment segment.
Total Mobile Entertainment revenue decreased by $2.9 million in the quarter ended September 30, 2013, compared with the year-earlier period. The decline during the quarter was primarily due to reduced revenue from our SaaS offerings of $2.5 million, resulting from lost revenue upon the termination of certain SaaS contracts totaling $3.8 million over the last five quarters. Slightly offsetting this decrease was our purchase of Muzicall, which resulted in an increase of $1.1 million in ringback tones revenue.
Total Mobile Entertainment revenue decreased by $15.6 million in the nine months ended September 30, 2013, compared with the year-earlier period. The decline during the nine months ended September 30, 2013 was primarily due to reduced revenue from our SaaS offerings of $13.6 million. The decline in SaaS revenue was due to $10.2 million of lost revenue upon the termination of certain SaaS contracts over the last five quarters, $4.6 million lower revenue due to fewer subscribers on existing contracts, and pricing pressures from carriers across our tones business, intercarrier messaging, and other carrier services, during the nine months ended September 30, 2013. Slightly offsetting these decreases was an increase in ringback tones revenue of $1.1 million, resulting from our purchase of Muzicall.
Gross margin during the quarter ended September 30, 2013 declined by 4 percentage points, due primarily to a higher proportion of lower margin revenue in the current year.
Operating expenses declined by $2.5 million and $13.6 million for the quarter and nine months ended September 30, 2013, compared with the year-earlier periods, primarily due to reductions in personnel and related costs of $3.9 million and $13.7 million during the quarter and nine months ended September 30, 2013, respectively, that resulted from our ongoing expense alignment efforts. Partially offsetting these declines was an increase in total operating expense of $1.2 million during the quarter and nine months ended September 30, 2013, as a result of the acquisition of Muzicall during the quarter.
Games

21



The Games segment primarily generates revenue and incurs costs from the creation, distribution and sales of games licenses, online games subscription services, advertising on game sites and social network sites, games syndication services, and microtransactions from online and social games, and sales of mobile games.
Games segment results of operations were as follows (dollars in thousands):
 
 
Quarters Ended September 30,
 
Nine months ended September 30,
 
2013
 
2012
 
$ Change
 
% Change
 
2013
 
2012
 
$ Change
 
% Change
Revenue
$
11,369

 
$
14,876

 
$
(3,507
)
 
(24
)%
 
$
38,159

 
$
51,347

 
$
(13,188
)
 
(26
)%
Cost of revenue
3,216

 
4,989

 
(1,773
)
 
(36
)%
 
10,397

 
17,332

 
(6,935
)
 
(40
)%
Gross profit
8,153

 
9,887

 
(1,734
)
 
(18
)%
 
27,762

 
34,015

 
(6,253
)
 
(18
)%
Gross margin
72
%
 
66
%
 
 
 
 
 
73
%
 
66
%
 
 
 
 
Operating expenses
11,513

 
12,023

 
(510
)
 
(4
)%
 
35,120

 
39,962

 
(4,842
)
 
(12
)%
Operating income (loss)
$
(3,360
)
 
$
(2,136
)
 
$
(1,224
)
 
(57
)%
 
$
(7,358
)
 
$
(5,947
)
 
$
(1,411
)
 
(24
)%
In the quarter ended June 30, 2013, we acquired Slingo, a social casino games company based in the U.S., for total cash consideration of $15.6 million. This acquisition is intended to enhance our footprint in the social casino games arena. Associated with this will be incremental costs for investment in new products over the next year, which will directly impact our operating income (loss) before taxes.
Total Games revenue decreased by $3.5 million in the quarter ended September 30, 2013, compared with the year-earlier period. Lower revenue from license sales, our subscription products, and advertising contributed $1.9 million, $1.2 million, and $1.0 million respectively, to the decline during the period. Slightly offsetting these decreases was an increase of $0.7 million in games revenue as a result of the acquisition of Slingo.
Total Games revenue decreased by $13.2 million during the nine months ended September 30, 2013, compared with the year-earlier period. Lower revenue from license sales, subscription products, and advertising contributed $6.4 million, $4.6 million, and $2.7 million, respectively, to the decline during the period. Slightly offsetting these decreases was an increase of $1.4 million in games revenue as a result of the acquisition of Slingo.
Cost of revenue decreased by $1.8 million and $6.9 million during the quarter and nine months ended September 30, 2013, respectively, compared with the year-earlier periods. The decreases were due to the decrease in partner royalties expense, which has a direct correlation with the decrease in Games revenue. Gross margins increased during the quarter and nine months ended September 30, 2013 due to lower margin projects that occurred in the prior year periods.
Operating expenses declined by $0.5 million and $4.8 million during the quarter and nine months ended September 30, 2013, respectively, compared with the year-earlier period. During the quarter-ended September 30, 2013, the decrease was mainly due to reductions in personnel and related costs of $1.6 million, resulting from our ongoing expense alignment efforts. Partially offsetting this decline was an increase in total operating expense of $1.3 million as a result of the acquisition of Slingo during the quarter. During the nine months ended September 30, 2013, the decrease was primarily due to reductions in personnel and related costs of $4.4 million, and reductions in marketing expense of $1.8 million. Partially offsetting these declines was an increase in total operating expense of $2.1 million as a result of the acquisition of Slingo.
Corporate
We allocate certain corporate expenses which are directly attributable to supporting the business to our reportable segments, rather than retaining those expenses in our corporate segment. These allocated corporate expenses include but are not limited to a portion of finance, legal, human resources and headquarters facilities. Remaining expenses, which are not directly attributable to supporting the business, are retained in aggregate in our corporate segment. All restructuring, lease exit and related charges, and, for 2013, the loss on litigation settlements, are included in the corporate segment.

Corporate segment results of operations were as follows (dollars in thousands):
 

22



 
Quarters Ended September 30,
 
Nine months ended September 30,
 
2013
 
2012
 
$ Change
 
% Change
 
2013
 
2012
 
$ Change
 
% Change
Cost of revenue
$
538

 
$
780

 
$
(242
)
 
(31
)%
 
$
1,660

 
$
2,182

 
$
(522
)
 
(24
)%
Sale of patent and other technology assets, net of costs

 

 

 
N/A

 

 
116,353

 
(116,353
)
 
(100
)%
Operating expenses
22,990

 
19,978

 
3,012

 
15
 %
 
46,201

 
44,445

 
1,756

 
4
 %
Operating income (loss)
$
(23,528
)
 
$
(20,758
)
 
$
(2,770
)
 
(13
)%
 
$
(47,861
)
 
$
69,726

 
$
(117,587
)
 
(169
)%
The 2012 gain from the sale of patents and other technology assets to Intel Corporation of $116.4 million in the nine months ended September 30, 2012 reflects the cash proceeds of $120.0 million less $3.6 million of direct transaction expenses incurred during the first and second quarters.
Operating expenses increased by $3.0 million during the quarter ended September 30, 2013, compared with the year-earlier period. The increase during the quarter was primarily due to the litigation settlements of $11.5 million that were accrued during the quarter ended September 30, 2013, as discussed above. Partially offsetting this increase was a decrease in restructuring and lease exit and related costs of $9.1 million.
Operating expenses increased $1.8 million during the nine months ended September 30, 2013, compared with the year-earlier period. The increase during the nine months ended was primarily due to the litigation settlements of $11.5 million that were accrued during the quarter ended September 30, 2013, as discussed above. Partially offsetting this increase was a decrease in restructuring and lease exit and related costs of $7.0 million, in addition to reductions in personnel and related costs of $4.2 million, resulting from our ongoing expense alignment efforts.
Consolidated Operating Expenses
Our operating expenses consist primarily of salaries and related personnel costs including stock based compensation, consulting fees associated with product development, sales commissions, amortization of certain intangible assets capitalized in our acquisitions, professional service fees, advertising costs, and restructuring charges. Operating expenses were as follows (dollars in thousands):
 
 
Quarters Ended September 30,
 
Nine months ended September 30,
 
2013
 
2012
 
$ Change
 
% Change
 
2013
 
2012
 
$ Change
 
% Change
Research and development
$
15,707

 
$
15,321

 
$
386

 
3
 %
 
$
45,951

 
$
49,167

 
$
(3,216
)
 
(7
)%
Sales and marketing
19,427

 
21,972

 
(2,545
)
 
(12
)%
 
59,830

 
68,462

 
(8,632
)
 
(13
)%
General and administrative
9,869

 
8,759

 
1,110

 
13
 %
 
28,506

 
35,103

 
(6,597
)
 
(19
)%
Restructuring and other charges
1,877

 
10,724

 
(8,847
)
 
(82
)%
 
4,075

 
13,872

 
(9,797
)
 
(71
)%
Lease exit and related charges

 
243

 
(243
)
 
(100
)%
 
3,066

 
243

 
2,823

 
NM

Loss on litigation settlements
11,525

 

 
11,525

 
100
 %
 
11,525

 

 
11,525

 
100
 %
Total consolidated operating expenses
$
58,405

 
$
57,019

 
$
1,386

 
2
 %
 
$
152,953

 
$
166,847

 
$
(13,894
)
 
(8
)%
Research and development expenses increased by $0.4 million in the quarter ended September 30, 2013, compared with the year-earlier period, primarily due to investment in new products that were launched during the quarter.
Research and development expenses decreased by $3.2 million in the nine months ended September 30, 2013, compared with the year-earlier period. While we are investing in new products, we saw an overall decrease in the nine months ended September 30, 2013 due to a decrease in personnel and related costs of $4.3 million, resulting from our ongoing expense alignment efforts.
Sales and marketing expenses decreased by $2.5 million in the quarter ended September 30, 2013, compared with the year-earlier period. The decline was primarily due to a decrease in personnel and related costs of $1.4 million resulting from our ongoing expense alignment efforts, and to lower marketing expense of $1.4 million.
Sales and marketing expenses decreased by $8.6 million in the nine months ended September 30, 2013, compared with the year-earlier period. The decline was primarily due to a decrease in personnel and related costs of $6.2 million resulting from our ongoing expense alignment efforts.

23



General and administrative expenses increased by $1.1 million in the quarter ended September 30, 2013, compared with the year-earlier period. The increase was due to an expense benefit of $1.1 million in the third quarter of 2012 related to the investigation by the Washington State Attorney General's office, as disclosed in the 2012 10-K.
General and administrative expenses decreased by $6.6 million in the nine months ended September 30, 2013, compared with the year-earlier period. Contributing to the decrease for the period was a decrease in personnel and related costs of $4.4 million, and to $1.3 million related to the expense in 2012 for the final settlement of the Washington State Attorney General's office matter, as disclosed in the 2012 10-K.
Restructuring and other charges and Lease exit and related charges consist of costs associated with the ongoing reorganization of our business operations and our ongoing expense alignment efforts. The restructuring expense amounts in both years primarily relate to severance costs due to workforce reductions. We recorded expenses for Lease exit and related charges in the nine months ended September 30, 2013 of $3.1 million. For additional details on these charges see Note 12, Restructuring Charges and Note 13, Lease Exit and Related Charges.
Loss on litigation settlements recorded during the quarter ended September 30, 2013 relates to settlement agreements executed in October 2013, for which we paid in full an aggregate amount of $11.5 million during the fourth quarter of 2013, as discussed in Note 16, Commitments and Contingencies.
Other Income (Expenses)
Other income (expenses), net was as follows (dollars in thousands):
 
 
Quarters Ended September 30,
 
Nine months ended September 30,
 
2013
 
2012
 
$ Change
 
% Change
 
2013
 
2012
 
$ Change
 
% Change
Interest income, net
$
166

 
$
164

 
$
2

 
1
 %
 
$
992

 
$
1,033

 
$
(41
)
 
(4
)%
Gain (loss) on sale of equity investments, net

 
2,210

 
(2,210
)
 
(100
)%
 

 
5,288

 
(5,288
)
 
(100
)%
Equity in net loss of Rhapsody
(2,629
)
 
(1,613
)
 
(1,016
)
 
(63
)%
 
(6,209
)
 
(4,095
)
 
(2,114
)
 
(52
)%
Other income (expense), net
(118
)
 
248

 
(366
)
 
(148
)%
 
(146
)
 
1,674

 
(1,820
)
 
(109
)%
Total other income (expense), net
$
(2,581
)
 
$
1,009

 
$
(3,590
)