SECURITIES AND EXCHANGE COMMISSION
450 5th Street
Washington, D.C. 20549
FORM 8-K/A No. 1
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Date of Report: October 21, 1996
Date of Earliest
Event Reported: August 5, 1996
AMERICA ONLINE, INC.
(Exact name of registrant as specified in its charter)
Delaware 0-19836 54-1322110
(State of incorporation (Commission File Number) (IRS Employer
or organization) Identification No.)
22000 AOL Way, Dulles, Virginia 20166
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (703) 448-8700
Item 7 is hereby amended to state as follows:
Item 7. Financial Statements and Exhibits.
(a) Financial Statements of Business Acquired:
(1) The ImagiNation Network, Inc. December 31, 1995, 1994 and 1993,
Financial Statements.
(2) The ImagiNation Network, Inc. June 30, 1996 and 1995, Financial
Statements.
(b) Pro Forma Financial Information:
(1) Unaudited Pro Forma Combined Condensed Balance Sheet at June 30, 1996.
(2) Unaudited Pro Forma Combined Condensed Statement of Operations for the
year ended June 30, 1996.
(3) Notes to Unaudited Pro Forma Combined Condensed Financial Statements.
(c) Exhibits.
2.1. Stock Purchase Agreement by and between America Online, Inc., AT&T
Corp. and Imagination Network, Inc. dated as of August 5, 1996.*
23.1 Consent of Ernst & Young LLP.
99.1. Press Release dated August 6, 1996.*
* Filed as part of the Registrant's filing on Form 8-K filed August 20, 1996
(Commission file no. 0-19836) and incorporated herein by reference.
Financial Statements
The ImagiNation Network, Inc.
Years ended December 31, 1995, 1994 and 1993
with Report of Independent Auditors
The ImagiNation Network, Inc.
Financial Statements
Years ended December 31, 1995, 1994 and 1993
Contents
Report of Independent Auditors 1
Audited Financial Statements
Balance Sheets 2
Statements of Operations 3
Statement of Shareholders' Equity 4
Statements of Cash Flows 5
Notes to Financial Statements 6
Report of Independent Auditors
To the Board of Directors and Shareholder
The ImagiNation Network, Inc.
We have audited the accompanying balance sheets of The ImagiNation Network, Inc.
(a wholly owned subsidiary of AT&T Corporation) as of December 31, 1995 and
1994, and the related statements of operations, shareholders' equity and cash
flows for each of the three years in the period then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The ImagiNation Network, Inc.
as of December 31, 1995 and 1994, and the results of its operations and its cash
flows for each of the three years in the period then ended, in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
September 11, 1996
[CAPTION]
The ImagiNation Network, Inc.
Balance Sheets
<TABLE>
December 31,
1995 1994
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents $3,952,271 $1,126,713
Short-term investments 700,000 700,000
Accounts receivable, net of allowance for
doubtful accounts of $515,361, in 1995 and 1,121,265 1,534,298
$725,818 in 1994
Inventories 145,000 337,286
Prepaid expenses and other current assets 313,607 420,328
Total current assets 6,232,143 4,118,625
Property and equipment, net 4,262,927 3,112,253
Other assets 25,000 25,000
Goodwill, net of accumulated amortization of - 41,612,924
$249,179 in 1994
Total assets $10,520,070 $48,868,802
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $2,246,663 $1,224,620
Accrued payroll and related expenses 951,250 527,089
Other accrued expenses 1,063,062 2,433,702
Note payable - 1,000,000
Deferred revenue 352,526 396,152
Total current liabilities 4,613,501 5,581,563
Accrued rent 88,880 -
Shareholders' equity:
Common stock, $0.001 par value:
Authorized: 6,000,000 shares; Issued and
outstanding: 950,000 shares 950 950
Additional paid-in capital 99,775,934 73,899,568
Accumulated deficit (93,959,195) (30,613,279)
Total shareholders' equity 5,817,689 43,287,239
Total liabilities and shareholders' equity $10,520,070 $48,868,802
</TABLE>
[CAPTION]
The ImagiNation Network, Inc.
Statements of Operations
<TABLE>
Year ended December 31,
1995 1994 1993
<S> <C> <C> <C>
Revenue $12,765,557 $10,538,978 $7,164,076
Cost of revenue (8,960,283) (7,011,659) (4,907,675)
Gross profit 3,805,274 3,527,319 2,256,401
Operating costs and expenses:
Marketing 6,076,847 5,232,623 2,316,439
Product development 5,360,616 4,758,710 3,412,125
General and administrative 14,124,900 8,282,741 5,382,670
Amortization of goodwill 5,980,296 249,179 -
Write-down of goodwill 35,632,628 - -
Total operating costs and expenses 67,175,287 18,523,253 11,111,234
Operating loss (63,370,013) (14,995,934) (8,854,833)
Other income (expense):
Interest income 56,430 108,474 124,615
Interest expense (32,333) (340,613) (377,557)
Total other income (expense) 24,097 (232,139) (252,942)
Net loss $(63,345,91) $(15,228,07) $(9,107,775)
Net loss per share $ (66.68) $ (16.03) $ (9.34)
Weighted average common shares 950,000 950,000 975,000
outstanding
See accompanying notes.
</TABLE>
[CAPTION]
The ImagiNation Network, Inc.
Statement of Shareholders' Equity
<TABLE>
Total
Preferred Stock Common Stock
Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Balances as of
December 31, 1992 - - $1,000,000 $1,000
Issuance of
2,000,000 sharess
of Series A preferred
stock at $5.00 per
share,less issuance
costs of $66,667 2,000,000 2,000 - -
Conversion of related
party payable to 1,800,000
shares of Series A
preferred stock at $5.00
per share 1,800,000 1,800 - -
Contribution of common
stock by related party - - (50,000) (50)
Net loss - - - -
Balances as of December
31, 1993 3,800,000 3,800 950,000 (950)
Capital investment
Conversion of related
party advances to equity - - - -
Cancellation of preferred
stock in connection with
AT&T acquisition (3,800,000) (3,800) - -
Goodwill from AT&T
acquisition - - - -
Net loss
Balances as of December
31, 1994 - - 950,000 950
Capital contribution by
AT&T - - - -
Net loss - - - -
Balances as of December - - $ 950,000 $950
31, 1995
Total
Shareholder's
Additional Equity
Paid-In Accumulated (Net Capital
Capital Deficit Deficiency)
<S> <C> <C> <C>
Balances as of December
31, 1992 $169,000 $(6,277,431) $(6,107,431)
Issuance of 2,000,000
shares of Series A
preferred stock at $5.00
per share, less issuance
cost of $66,667 9,931,333 - 9,933,333
Conversion of related
party payable to 1,800,000
shares of Series A
preferred stock at $5.00
per share 8,998,200 - 9,000,000
Contribution of common
stock by related party 50 - -
Net Loss - (9,107,775) (9,107,775)
Balances as of December
31, 1993 19,098,583 (15,385,206) 3,718,127
Capital Investment 9,772,728 - 9,772,728
Conversion of related
party advanced to equity 3,162,354 - 3,162,354
Cancellation of preferred
stock in connection with
AT&T acquisition 3,800 - -
Goodwill from AT&T
acquisition 41,862,103 - 41,862,103
Net Loss - (15,228,073) (15,228,073)
Balances as of December
31, 1994 73,899,568 (30,613,279) 43,287,239
Capital contribution by
AT&T 25,876,366 - 25,876,366
Net Loss - (63,345,916) (63,345,916)
Balances as of December
31, 1995 99,775,934 (93,959,195) 5,817,689
See accompanying notes
</TABLE>
[CAPTION]
The ImagiNation Network, Inc.
Statements of Cash Flows
<TABLE>
Year ended December 31,
1995 1994 1993
Cash flows from operating activities
<S> <C> <C> <C>
Net loss $(63,345,916) $(15,228,073) $(9,107,775)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 1,906,864 1,454,295 622,913
Provision for bad debt 1,890,143 1,131,286 1,276,389
Amortization of goodwill 5,980,296 249,179 -
Write-down of goodwill 35,632,628 - -
Changes in operating assets and liabilities:
Accounts receivable (1,477,110) (1,797,534) (1,310,969)
Inventory 192,286 (244,426) 55,557
Prepaid expenses and other current assets 106,721 (57,340) (291,240)
Other assets - 16,639 (7,029)
Accounts payable 1,022,043 (380,328) 1,083,941
Accrued payroll and related expenses 424,161 361,909 165,180
Other accrued expenses (1,370,640) 3,351,039 245,017
Deferred revenue (43,626) 182,540 87,612
Accrued rent 88,880 - -
Net cash used in operating activities (18,993,270) (10,960,814) (7,180,404)
Cash flows from investing activities
Purchases of property and equipment (3,057,538) (2,843,118) (1,661,539)
Purchases (maturities) of short-term - 3,986,868 (4,686,868)
investments
Net cash (used in) provided by investing (3,057,538) 1,143,750 (6,348,407)
activities
Cash flows from financing activities
Capital contributions from AT&T 26,200,000 9,772,728 11,630,346
Repayments to AT&T (323,634) - -
Proceeds from issuance of promissory
note to Sierra On-Line - - 1,000,000
Repayment of promissory note to Sierra (1,000,000) - -
On-Line
Proceeds from loans from related parties - 3,944,368 -
Repayment of loans from related parties - (3,944,368) -
Proceeds from issuance of preferred stock - - 3,800
Advances from AT&T under development funding - - 2,000,000
agreement
Net cash provided by financing activities 24,876,366 9,772,728 14,634,146
Net increase (decrease) in cash and cash 2,825,558 (44,336) 1,105,335
equivalents
Cash and cash equivalents at beginning of 1,126,713 1,171,049 65,714
year
Cash and cash equivalents at end of year $3,952,271 $1,126,713 $1,171,049
Supplemental disclosures of cash flow
information
Cash paid for interest $ 144,904 $ 193,777 $ 213,517
Supplemental disclosure of noncash financing
activity
Assumption of original publishing
agreement liability by AT&T $ - $1,162,354 $ -
Conversion of related party payable to
preferred stock $ - $ - $8,998,200
Conversion of funding advances from
AT&T to equity $ - $2,000,000 $ -
See accompanying notes.
</TABLE>
The ImagiNation Network, Inc.
Notes to Financial Statements
December 31, 1995
1. Organization of the Company and Summary of Significant Accounting Policies
Organization of the Company
The ImagiNation Network, Inc. (the "Company") is a premier provider of
interactive on-line games and entertainment. Utilizing state-of-the-art
proprietary and off-the-shelf technology, the Company creates environments,
content, technology and delivery systems to build and support on-line
communities of interest.
The Company was incorporated in California in February 1991 as a wholly owned
subsidiary of Sierra-On-Line ("Sierra"). In July 1993, preferred stock was
issued to AT&T Corporation ("AT&T") and General Atlantic Partners ("GAP") for an
additional capital investment, thereby reducing Sierra's ownership percentage to
58% and giving AT&T and GAP 21% ownership percentages, respectively. In December
1994, AT&T acquired 100% ownership in the Company. On August 5, 1996, America
Online ("AOL") acquired all of the net assets of the Company and all of the
outstanding capital stock of the Company in a transaction accounted for under
the purchase method of accounting.
As shown in the accompanying financial statements, the Company has incurred
losses since inception and, as of December 31, 1995, has an accumulated deficit
of approximately $94 million ($52 million excluding the amortization and write-
down of goodwill). Since December 31, 1995, the Company has received
approximately $13.2 million in funding from AT&T. The cash and investment
balances as of December 31, 1995, together with the additional and expected
fundings, are expected to support the Company's operations until at least
December 31, 1997. However, the Company's operations are subject to certain
risks and uncertainties, including, among others, rapidly changing technology,
significant competition and continued funding by AOL.
Revenue Recognition
The Company earns revenue net of allowances from subscription fees and usage
fees. Subscription fees are typically billed in advance and usage fees are
billed in arrears. Fees are deferred and accrued as appropriate such that all
revenue is recognized over the period that the services are provided.
Property and Equipment
Property, equipment and leasehold improvements are stated at cost and
depreciated on a straight-line basis over estimated useful lives of three years
for computer equipment and software, five years for furniture and fixtures and
the length of the lease for leasehold improvements.
Inventories
Inventories consist of materials for product software kits and are stated at the
lower of cost (first-in, first-out method) or market.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original
maturity of 90 days or less to be cash equivalents. Substantially all cash and
cash equivalents are on deposit with two U.S. commercial banks and bear the
credit risk associated with these institutions.
Investments
The Company elected to adopt the provisions of Statement of Financial Accounting
Standards No, 115, "Accounting for Certain Investments in Debt and Equity
Securities" ("FAS 115") as of December 31, 1994. All marketable securities held
by the Company at December 31, 1994 were deemed by management to be available-
for-sale and are, therefore, reported at fair value. The investment, which
consists of a U.S. government bond, matures in July 1996 and is classified as
current based upon management's intent and ability to hold this investment to
maturity. Adoption of FAS 115 did not have a material effect on the Company's
financial statements. The difference between the amortized cost and market value
of the Company's investment was not material at December 31, 1994 and 1995.
Goodwill
Goodwill represents the excess of AT&T's purchase price of the Company's
tangible net assets over the estimated fair value of tangible net assets in
December 1994. Goodwill was initially amortized on a straight-line basis over a
period of seven years. However, in the fourth quarter of 1995, AT&T decided to
sell the Company. Based on the valuation of the Company as of December 1995,
AT&T determined that the unamortized goodwill had become impaired, and it wrote
off the remaining goodwill balance at that time. This treatment has also been
reflected in the Company's financial statements.
Research and Development Costs
Research and development costs are charged to operations as incurred and include
both internal and external costs to develop new products. Software development
costs meeting the requirements of Statement of Financial Accounting Standards
No. 86 have not been significant, and as a result, no such costs have been
capitalized.
Advertising Costs
Advertising costs are charged to operations as incurred. The amount of
advertising costs charged to expense in 1995, 1994 and 1993 were $1,294,864,
$971,282 and $1,053,654, respectively.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities as of the date of the
financial statements and revenues and expenses during the periods reported.
Actual results could differ from those estimates. Estimates are used for the
allowance for doubtful accounts, inventory reserves for lower of cost or market,
depreciation and the estimated useful lives of assets.
The Company's business is highly dependent upon revenues generated by the
distribution of its 3D virtual reality internet gaming platform. In the short
term, the Company expects a majority of its revenues to be generated by one
distributor. The Company also relies heavily on the services of Sierra and other
third parties to develop certain game content for use in the Company's platform.
Income Taxes
Under the asset and liability method of Statement of Financial Accounting
Standards No. 109 ("SFAS 109"), deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. Under
SFAS 109, the effect on deferred tax assets and liabilities of a change in tax
rates is recognized as income in the period that includes the enactment date.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amounts expected to be realized.
Net Loss Per Share
Net loss per share is computed using the weighted average number of common
shares outstanding. Common equivalent shares have been excluded from the
computation for each of the periods presented as their effect is antidilutive.
2. Property and Equipment
Property and equipment at December 31, 1995 and 1994, consists of the following:
<TABLE>
1995 1994
<S> <C> <C>
Computer equipment $5,665,701 $3,682,317
Software 1,224,380 719,235
Furniture and fixtures 1,112,733 665,291
Leasehold improvements 452,016 330,449
8,454,830 5,397,292
Less accumulated depreciation and amortization
(4,191,903) (2,285,039)
Net property and equipment $4,262,927 $3,112,253
</TABLE>
Depreciation expense for the years ended December 31, 1995, 1994 and 1993
amounted to $1,906,864, $1,454,295 and $617,077, respectively.
3. Long-Term Debt
During 1994, AT&T converted a $1,052,632 note payable entered into on April 22,
1994, $3,500,000 of advances under a Demand Promissory Note entered into on
October 14, 1994, and $75,468 of accrued interest into equity. The converted
debt has been recorded in additional paid-in capital.
Long-term debt at December 31, 1994 consisted of a convertible note payable to
Sierra of $1,000,000. The note bore interest at the prime rate and was repaid in
cash in 1995.
4. Related Party Transactions
In July 1993, the Company entered into a Development Funding Agreement with
AT&T. Under the agreement, the Company was to have received $3,000,000 over two
years to fund the development of new platform versions of selected software. The
Company had received $2,000,000 under the development funding agreement. The
Agreement was terminated in 1994 when AT&T became the owner of 100% of the
Company's stock. The $2,000,000 of cash previously received was treated as a
contribution of capital as no software was developed under the agreement.
The Company and Sierra, have entered into various agreements whereby Sierra
performs services for the Company at negotiated rates. These services include
the replication of starter kits provided to new customers which include disks to
initiate the Company's operating system, certain promotional items, and
warehousing of certain of the Company's product. The Company paid Sierra
$1,293,968 for these services in 1994.
The Company and Sierra also have entered into other technology sharing and cross
promotion arrangements. Obligations under these arrangements to date have not
been significant.
The Company and AT&T have entered into various transactions primarily for the
provisioning of telecommunications services from AT&T. In 1995, AT&T forgave
approximately $364,000 of billings to the Company for Proprietary
Telecommunications Networking ("PTN2") services. Expenses for other
telecommunications services obtained from AT&T were $1,011,351 and $674,751 for
1995 and 1994, respectively.
In 1995, AT&T has also paid to Sierra $625,000 as an advance against future
royalties under the publishing agreement between AT&T and Sierra under which
Sierra was developing software gaming application products that AT&T had the
discretion to use in the Company's gaming platform.
5. Commitments and Contingencies
Leases
The Company leases its facilities and certain equipment under noncancelable
operating leases expiring between 1996 and 2000. Future minimum lease payments
and commitments under these arrangement are as follows:
<TABLE>
Year ending December 31,
<S> <C>
1996 $550,464
1997 464,109
1998 424,779
1999 429,279
2000 178,866
Total minimum payments required $2,047,497
</TABLE>
Rental expense for the years ended December 31, 1995, 1994, and 1993 amount to
$563,022, $256,911 and $109,556 respectively.
Legal Proceedings
In 1995, the Company was party to a lawsuit whereby the plaintiff alleged that
the Company breached a marketing agreement for the bundling of service
offerings. The Company accrued approximately $140,000 relating to this action in
the financial statements based on the probability of a loss from this lawsuit.
This lawsuit was settled by the Company on June 25, 1996. The Company paid
$127,757 to the plaintiff in full satisfaction of the complaint.
The Company is subject to other legal proceedings, claims and liabilities, which
arise in the ordinary course of its business. In the opinion of Management, the
amount of ultimate liability with respect to these actions will not materially
affect the financial position of the Company.
6. Shareholders' Equity
Common Stock
In 1993, Sierra contributed 50,000 shares of the Company's common stock to the
Company for no consideration. These shares were treated by the Company as
retired stock and the par value of $50 was transferred to additional paid-in
capital.
On April 4, 1996, the board of directors resolved to cancel all shares of the
Company's common stock, other than those held by AT&T.
Preferred Stock
In July 1993, the board of directors approved the sale of up to $10,000,000 of
Series A convertible preferred stock. As a result, the Company sold a total of
2,000,000 shares at $5.00 per share to AT&T and GAP.
Also in 1993, the Company converted $9,000,000 in accounts payable to Sierra
into 1,800,000 shares of Series A convertible preferred stock at $5.00 a share.
In December 1994, all 3,800,000 shares of outstanding Series A convertible
preferred stock were canceled and the par value of $3,800 was transferred to
additional paid-in capital.
7. Income Taxes
Due to operating losses and the inability to recognize an income tax benefit
therefrom, there is no provision for income taxes for 1995, 1994 or 1993. The
difference between the provision for income taxes and the amount computed by
applying the federal statutory rate to net loss before taxes is explained below:
<TABLE>
Year ended December 31,
1995 1994 1993
<S> <C> <C> <C>
Tax at U.S. statutory rate $(21,537,612) $(5,177,545) $(3,096,644)
)
Operating losses not benefited 7,389,219 5,092,824 3,096,644
Nondeductible goodwill charges 14,148,393 84,721 -
$ - $ - $ -
</TABLE>
Significant components of the Company's deferred tax assets as of December 31,
1995 and 1994 are as follows:
<TABLE>
1995 1994
Deferred tax assets:
<S> <C> <C>
Accruals and reserves not currently deductible
for tax purposes $193,707 $260,358
Fixed assets 559,461 497,355
Other - 2,092
Total deferred tax assets 753,168 759,805
Valuation allowance (753,168) (759,805)
Net deferred tax assets $ - $ -
</TABLE>
Realization of deferred tax assets is dependent upon future earnings, the timing
and amount of which are uncertain. Accordingly, management has established a
valuation allowance, in an amount equal to the net deferred tax asset at
December 31, 1995 and 1994, to reflect these uncertainties. The change in
valuation allowance was an immaterial amount for the years ended December 31,
1995, 1994 and 1993.
The Company filed a consolidated tax return with members of the AT&T controlled
group while it was a wholly owned subsidiary of AT&T. The Company's lack of net
operating loss carryforward differs from its accumulated deficit due to
nondeductible charges related to goodwill as well as net operating losses
utilized or retained by the Company's former parent, AT&T.
Under the stock purchase agreement in which AOL acquired the stock of the
Company from AT&T, any tax allocation or sharing agreement which was in effect
while the Company was a wholly owned subsidiary of AT&T is terminated and has no
force or effect for all periods subsequent to the closing date of the sale.
Therefore, no amounts are due to or from AT&T as of December 31, 1995 or 1994
and no current or deferred tax expense or benefit has been allocated to the
Company for the years ended December 31, 1995 or 1994.
8. Defined Contribution Plan
The Company sponsors a defined contribution plan covering substantially all of
its full time employees. The plan was adopted on July 1, 1994. Employees are
allowed to make pretax contributions to the plan in accordance with
Section 401(K) of the Internal Revenue Code. Under the Plan, employees may
contribute amounts not to exceed the statutory prescribed annual limit. The
Company makes discretionary matches equal to the lesser of 6% of the
participant's compensation or $1,500. The Company's expense under this plan was
$25,786 and $8,718 for 1995 and 1994, respectively.
9. Subsequent Event
From March 1996 to May 1996, the Company entered into several three-year lease
agreements to purchase computer equipment to support its host system. The leases
will be accounted for as capital leases and future minimum lease payments under
the lease aggregate $1,542,000.
In August 1996, the Company announced plans to terminate support for its
proprietary network-based games service in order to prepare the launch of its
new 3D virtual reality Internet gaming platform.
In August 1996, AOL acquired all of the net assets of the Company and all of the
outstanding capital stock of the Company in a transaction accounted for under
the purchase method of accounting.
Financial Statements
The ImagiNation Network, Inc.
For the six months ended June 30, 1996 and 1995
(Unaudited)
Contents
Balance Sheet .................. ................1
Statements of Operations ........................2
Statements of Cash Flows ........................3
Notes to Unaudited Financial Statements ..........4
[CAPTION]
The ImagiNation Network, Inc.
Balance Sheet
(Unaudited)
<TABLE>
June 30,
1996
Assets
Current Assets:
<S> <C>
Cash and cash equivalents $ 1,604,778
Accounts receivable (net) 635,817
Prepaid expensess and other
current assets 689,260
Total Current Assets 2,929,855
Property and equipment, net 5,450,545
Other assets 25,000
Total Assets $ 8,405,400
Liabilities and Shareholders' Equity
Current Liabilities
Accounts Payable $ 581,896
Accrued Payroll and related expenses 1,248,656 1,248,656
Other accrued expenses 1,414,112
Deferred revenue 187,433
Total current liabilities 3,432,097
Deferred rent 78,956
Capital lease obligation 865,418
Shareholders' Equity
Common Stock 950
Additional paid-in capital 107,790,191
Accumulated deficit (103,762,212)
Total Shareholders' Equity 4,028,929
Total Liabilities and Shareholders'
Equity $ 8,405,400
See accompanying notes.
</TABLE>
[CAPTION]
The ImagiNation Network, Inc.
Statements of Operations
(Unaudited)
<TABLE>
For the six months ended June 30,
1996 1995
<S> <C> <C>
Revenue $4,472,524 $7,226,958
Cost of revenue 3,309,080 4,212,225
Gross Profit 1,163,444 3,014,733
Operating costs and
expenses:
Marketing 1,390,217 4,400,965
Product Development 3,746,388 2,757,105
General and 5,901,799 4,777,554
Administrative
Amortization of - 2,400,000
Goodwill
Total Costs and 11,038,404 14,335,624
Expenses
Operating Loss (9,874,960) (11,320,891)
Other Income(Expense) 71,943 (8,520)
Net loss ($9,803,017) ($11,329,411)
See accompanying notes.
</TABLE>
[CAPTION]
The ImagiNation Network, Inc.
Statements of Cash Flows
(Unaudited)
<TABLE> For the six months ended June 30,
1996 1995
Cash flows from operating
activities:
<S> <C> <C>
Net Loss ($9,803,017) ($11,329,411)
Adjustments to reconcile net
loss to net cash
used in operating
activities:
Depreciation & amortization 1,253,664 3,213,535
Provision for bad debt 454,544 187,233
Changes in operating assets &
liabilities
Accounts receivable 30,904 (884,763)
Prepaid expenses and other
current assets (375,653) (139,402)
Inventory 145,000 297,367
Accounts payable (1,644,767) 871,178
Accrued payroll and related
expenses 297,406 (284,881)
Other accrued expenses (231,862) (1,442,358)
Deferred revenue (165,093) (150,185)
Accrued rent (9,924) -
Net cash (used in) operating
activities (10,068,798) (9,661,687)
Cash flows from investing
activities:
Purchase of Property &
Equipment (898,986) (1,043,063)
Cash flows from financing
activities:
Capital Contributions from
AT&T 8,140,392 11,600,000
Payments for AT&T (126,135)
Principal payments under
capital lease obligations (93,966)
Sierra Note Paydown (1,000,000)
Net cash provided by
financing activities 7,920,291 10,600,000
Net (decrease) in cash (3,047,493) (104,750)
Cash at beginning of period 4,652,271 1,826,713
Cash at end of period $1,604,778 $1,721,963
See accompanying notes.
</TABLE>
The ImagiNation Network, Inc.
Notes to Unaudited Financial Statements
June 30, 1996
1. The financial statements include the accounts of The ImagiNation Network,
Inc. without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. Although the Company believes that the disclosures are
adequate to make the information presented not misleading, it is suggested
that these financial statements be read in connection with the audited
financial statements and notes thereto included in the Form 8-K/A filing filed
with the Securities and Exchange Commission on October 21, 1996
In the opinion of the Company, the accompanying unaudited financial
statements contain all adjustments necessary to present fairly the financial
position, results of operations, and cash flows for the periods presented.
2. Subsequent Event
In August 1996, the Company announced plans to terminate support for its
proprietary network-based games service in order to prepare the launch of its
new 3D virtual reality Internet game platform
In August 1996, America Online, Inc. acquired all of the net assets of the
Company and all of the outstanding capital stock of the Company in a
transaction accounted for under the purchase method of accounting.
PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
(Unaudited)
On August 5, 1995 America Online, Inc. (AOL) purchased 100% of the
outstanding stock of The ImagiNation Network, Inc. (INN). The unaudited pro
forma combined condensed balance sheet assumes that the transaction took place
on June 30, 1996. The unaudited pro forma combined condensed statement of
operations assumes that the transaction occurred on July 1, 1995. The unaudited
pro forma combined condensed balance sheet reflects the combination of AOL's
balance sheet with INN's balance sheet as of June 30, 1996. The unaudited pro
forma combined statement of operations reflects the combination of AOL's and
INN's statements of operations for the year ended June 30, 1996.
The pro forma information is presented for illustrative purposes only and does
not purport to be indicative of the operating results or financial position that
would actually have occurred if the transaction had been in effect on the dates
indicated, nor is it indicative of future operating results or financial
position. The pro forma adjustments are based upon available information and
assumptions that the Registrant believes are reasonable in the circumstances.
The pro forma information should be read in conjunction with the Company's June
30, 1996 financial statements and notes thereto contained in Form 10-K dated
September 30, 1996.
The transaction is accounted for under the purchase method of accounting. The
purchase price is allocated to the tangible and intangible assets purchased, as
well as liabilities assumed, based upon their respective fair values. The
allocation of the purchase price included in the pro forma condensed financial
information is preliminary. The final values may differ from those set forth
herein. The Registrant believes, however, that the final allocation will not be
materially different from the pro forma allocation.
[CAPTION]
America Online, Inc./ The ImagiNation Network, Inc.
Pro Forma Combined Condensed Balance Sheet
As of June 30, 1996
(In thousands)
(Unaudited)
<TABLE>
America ImagiNation Pro Forma Pro Forma
Online Network Adjustments Combined
ASSETS
Current assets:
<S> <C> <C> <C> <C>
Cash and cash equivalents $118,421 $1,604 $ $ 120,025
Short-term investments 10,712 10,712
Trade accounts receivable 42,939 636 43,575
Other receivables 29,674 8,641 <F2> 38,315
Prepaid expenses and other
current assets 68,832 689 69,521
Total current assets 270,578 2,929 282,148
Property and equipment at
cost, net 101,277 5,451 106,728
Other assets:
Product development costs,
net 44,330 44,330
Deferred subscriber
acquisition costs, net 314,181 314,181
License rights, net 4,947 4,947
Other assets 35,878 25 35,903
Deferred income taxes 135,872 135,872
Goodwill, net 51,691 2,419 <F2> 54,110
$ 958,754 $ 8,405 $ $ 978,219
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 105,904 $ 582 $ $ 106,486
Other accrued expenses and
liabilities 127,898 1,414 476 <F2> 129,788
Deferred revenue 37,950 187 38,137
Accrued Personnel Costs 15,719 1,249 16,968
Current portion of long-
term debt 2,435 2,435
Total current liabilities 289,906 3,432 293,814
Notes payable 19,306 19,306
Deferred income taxes 135,872 135,872
Other Liabilities 1,168 944 2,112
Total liabilities 446,252 4,376 451,104
Stockholders' equity:
Preferred stock 1 1
Common stock 926 1 3 <F1><F2> 930
Additional paid-in capital 519,342 107,790 (93,181)<F1><F2> 533,951
Accumulated deficit (7,767) (103,762) 103,762 <F2> (7,767)
Total stockholders' equity: 512,502 4,029 527,115
$ 958,754 $ 8,405 $ $ 978,219
See accompanying notes to unaudited pro forma combined condensed financial
statements.
</TABLE>
[CAPTION]
America Online, Inc./ The ImagiNation Network, Inc.
Pro Forma Combined Condensed Statement of Operations
Year Ended June 30, 1996
(In thousands. except per share data)
(Unaudited)
<TABLE>
America ImagiNation Pro Forma Pro Forma
Online Network Adjustments Combined
<S> <C> <C> <C> <C>
Revenues $1,093,854 $ 10,011 $(10,011)<F5> $1,093,854
Costs and expenses:
Cost of revenues 627,372 8,057 (8,057)<F5> 627,372
Marketing 212,710 8,855 (8,855)<F5> 212,710
Product development 53,817 7,482 61,299
General and administrative 110,653 8,188 (2,125)<F5> 116,716
Acquired research and
development 16,981 16,981
Write down of goodwill 35,632 (35,632)<F6>
Amortization of goodwill 7,078 2,990 (2,506)<F3><F6> 7,562
Total costs and expenses 1,028,611 71,204 1,042,640
Income (loss) from
operations 65,243 (61,193) 51,214
Other income, net (2,056) 89 (1,967)
Merger expenses (848) (848)
Income (loss) before
provision for income taxes 62,339 (61,104) 48,399
Provision for income taxes (32,523) 5,297<F4> (27,226)
Net income (loss) $ 29,816 $(61,104) $ $ 21,173
Net income per common
share $ 0.28 $ 0 .20
Weighted average shares
outstanding 108,097 108,460
See accompanying notes to unaudited pro forma combined condensed financial
statements.
</TABLE>
Notes to Unaudited Pro Forma Combined Condensed Financial Statements
Pro forma adjustments to reflect the acquisition of The ImagiNation Network
given effect to the following:
(1) To record the issuance of 362,500 shares of common stock.
(2) To allocate the purchase price of approximately $15 million to the
estimated fair value of assets and liabilities, and to record goodwill and
other acquisition related adjustments.
(3) Amortization of purchased goodwill.
(4) Aggregate tax effects of the losses of The ImagiNation Network on the
consolidated entity.
(5) To eliminate the operations of the proprietary online service operated by
INN and discontinued by AOL upon its purchase of INN. The adjustment includes
revenues and expenses directly associated with the proprietary online service.
(6) To eliminate the amortization and write-off of goodwill on the financial
statements of INN which will not have a continuing impact on the combined
entity.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: October 21, 1996
AMERICA ONLINE, INC.
By: /s/LENNERT J. LEADER
Lennert J. Leader
Senior Vice President and Chief
Financial Officer
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the
Registrations Statements listed below of our report dated
September 11, 1996, with respect to the financial statements
of The ImagiNation Network, Inc., included in America Online
Inc.'s Form 8-KA dated October 21, 1996, filed with the
Securities and Exchange Commission.
Form S-3
1) No. 333-13279
Form S-8
1) No. 33-46607 8) No. 33-91050
2) No. 33-48447 9) No. 33-94000
3) No. 33-78066 10) No. 33-94004
4) No. 33-86392 11) No. 333-00416
5) No. 33-86394 12) No. 333-02460
6) No. 33-86396 13) No. 333-07163
7) No. 33-90174 14) No. 333-07603
ERNST & YOUNG LLP
Palo Alto, California
October 21, 1996
