SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1996
Commission File Number- 0-19836
AMERICA ONLINE, INC.
(Exact name of registrant as specified in its charter)
Delaware 54-1322110
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
22000 AOL Way 20166-9323
Dulles, Virginia (zip code)
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (703) 448-8700
Securities registered pursuant to section 12(b) of the Act:
(Title of Each Class) (Name of Each Exchange on
Which Registered)
Common Stock, par value
$.01 per share New York Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange
Securities registered pursuant to section 12(g) of the Act: None
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 X No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of August 31, 1996, the aggregate market value of voting stock held by non-
affiliates of the registrant, based upon the closing sales price for the
registrant's common stock, as reported in the Nasdaq National Market, was
$2,194,994,117 (calculated by excluding shares owned beneficially by directors,
officers and stockholders owning more than 10% of outstanding stock from total
outstanding shares solely for the purposes of this response).
Number of shares of registrant's common stock outstanding as of August 31, 1996:
93,367,974.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents (or parts thereof) are incorporated by reference
into the following parts of this Form 10-K: Certain information required in
Part III of this Form 10-K is incorporated from the registrant's Proxy Statement
for its 1996 Annual Meeting of Stockholders.
PART I
Item 1. Business
General
America Online, Inc., including its subsidiaries ("America Online" or the
"Company"), is the global leader in the interactive services market, with nearly
$1.1 billion in revenue during fiscal 1996, and has led the development of a new
interactive medium. The Company has the largest subscriber base of any online
service provider, serving approximately 6.2 million members worldwide as of June
30, 1996, more than double the number of subscribers at the end of fiscal 1995.
The Company generates revenues principally through membership and usage fees, as
well as increasingly from advertising and merchandise sales, transaction fees,
royalties and the provision of network and production services to enterprises.
The Company's mission is to lead the development of a new interactive
medium that transcends traditional boundaries between people and places to
create a new kind of interactive global community that holds the potential to
change the way people obtain information, communicate with one another, buy
products and services, and learn. To accomplish this mission, the Company's
strategy is to continue investment in the growth of its subscriber base, pursue
related business opportunities and alternative revenue models, provide a full
range of interactive services and maintain technological flexibility.
Through its flagship AOL service, the Company offers its members a broad
range of features including e-mail, online conferences, entertainment, software,
computing support, an extensive "newsstand" of electronic magazines and
newspapers, seamless access to the Internet, a broad array of original
programming and informative content. The Company focuses on maximizing the
interactive nature of its service by encouraging members to share information
and ideas and provides numerous tools for members to customize the AOL service
to best suit their individual needs.
Over the past fiscal year, America Online has expanded its range of
products and services. Through strategic alliances with partners and
competitors, America Online is seeking to leverage resources to reach new
markets and improve products and services. The Company began offering its
online services in Europe and Canada, and will soon offer them in Japan. In the
fall of 1995, the Company introduced GNN, a stand-alone Internet access service.
The Company has launched Digital City, a local content and community programmer,
and formed AOL Enterprise, a unit designed to develop and market interactive
services for businesses. The Company has vastly increased the scope of AOLnet,
its proprietary data communication network, building the network during fiscal
1996 from 20,000 modems to 140,000 modems, resulting in increased network
capacity, higher speed access, and reduced data communication costs. The
portfolio of AOL networks has expanded to reach approximately 810 cities
worldwide with over 1400 local telephone numbers.
The Company has continued its investment in the development of engaging
content, through its own initiatives for original content, the creation of
original interactive content by entrepreneurs, and the provision of authoring
and production tools and services to assist individuals and businesses in
developing content for the AOL service and the Internet. AOL Productions, a
wholly-owned subsidiary, is a full featured multimedia production studio that
can handle all aspects of interactive content and design for the Company, its
advertisers and its media partners.
America Online was incorporated in Delaware on May 24, 1985. The Company's
principal executive offices are located at 22000 AOL Way, Dulles, Virginia
20166-9323. Its telephone number at that address is (703) 448-8700. Its
Internet address is AOL [email protected], and its America Online address is AOL IR.
Products and Services
The Company's flagship AOL service provides subscribers with a wide variety
of features including electronic mail, Internet access, news and magazines,
weather, sports, stock quotes and mutual fund transactions, software files,
computing support, online classes, and much more. A key feature of the AOL
service is the ease with which members with related interests can communicate
through real-time conferences, e-mail and bulletin boards. Members use these
interactive communications facilities to share information and ideas, exchange
advice and socialize. It is the Company's goal to continue developing and
adding new sources of information and content in support of these member
activities. The range of features offered by America Online includes the
following:
- Online Community - America Online promotes real-time online communication
by scheduling conferences or discussions on specific topics. E-mail services
allow members to send messages to other members' private electronic mailboxes,
or to non-subscribers via fax, U.S. mail or an international e-mail gateway.
Public bulletin boards allow members to share information and opinions on
subjects of general or specialized interest. With Buddy Lists, members can keep
an up-to-the moment account of whether fellow members are online (subject to a
blocking feature). America Online also offers an interactive area that serves
as the center or meeting place for America Online's online member community.
Members enter a "lobby" or "meeting room" and are able to participate in lively
interactive discussions with other members. Members can create public or
private "rooms" for teleconferencing, and can send messages that will be
received instantaneously, regardless of the recipient's location within the AOL
service. The Company takes extensive precautions to ensure the privacy of
member communications in e-mail, instant messages and private conference rooms,
subject to its compliance with laws and regulations governing the storage and
transmission of illegal information.
- Computing - America Online provides its members access to tens of
thousands of public domain and "shareware" software programs that members can
transfer to their own disks to keep and use. Members can get assistance from
more than 300 hardware and software developers which support their products
online by meeting with their customers in conferences and by answering questions
posted on electronic bulletin boards. Additionally, members can access
information from numerous computer magazines such as MacWorld, PC World and
Computer Life, talk to editors and interact with other members, and shop for
computers, peripherals and commercial software.
- News and Personal Finance - America Online offers a broad range of
information, investing and transaction services. Subscribers can access up-to-
date, reliable information on domestic and international news, weather, sports
reports, expert business analysis, global markets, mutual funds, and foreign
exchange data. For example, through content partnerships, America Online offers
subscribers a discount stock brokerage system to place trades and the ability to
transfer funds between bank accounts and to track personalized portfolio values.
America Online also provides a search capability which enables members to scan
the news wires quickly to locate stories of interest.
- Travel and Shopping - America Online offers various travel and shopping
reference materials and transaction services. For example, subscribers can send
customized greeting cards through Hallmark Connections, send flowers through 1-
800-Flowers, shop for CDs and tapes online at Tower Records, book vacation
packages with Preview Vacations, and access account data and travel information
and services with American ExpressNet.
- Entertainment, Games, and Children's Programming - America Online
provides various clubs and forums for topics such as games and sports, multi-
player games and other related content for both adults and children. In
addition, America Online works with various organizations to provide specialized
content and areas on its service.
- Internet Access and Service - The Company provides members with simple
access to and use of the Internet through integrated World Wide Web access
within the AOL service. The integrated approach allows the user to seamlessly
use the full suite of AOL features, including chat and e-mail, while exploring
the Internet, all under America Online's standard pricing structures. In
addition, America Online has incorporated advanced high-speed compression
technology developed by the Johnson-Grace Company into the browser to improve
Web access speed and graphic display performance. America Online's Internet
capabilities also include e-mail gateways and mailing lists, USENET Newsgroups,
file transfer protocol (FTP) and WAIS and Gopher databases. In addition, the
Company has formed alliances with AT&T, Microsoft, Netscape, and Apple to
leverage brand recognition in different markets and to offer AOL customers high-
quality Internet technology and tools and interactive programming.
GNN features national dial-up access, original web content and WebCrawler,
a leading Internet directory and search product. Additionally, GNN offers
members the Netscape Navigator browser (and also intends to offer Microsoft's
Internet Explorer as a future option). The GNN service features an open chat
environment with Virtual Places, web publishing with GNN ExPress and broad
network access -- with local dial availability in more than 700 cities -- and
the full America Online customer support infrastructure.
Digital City provides local programming, news, services, chat rooms, and
commerce to AOL members as well as to the Internet at large. To date, Digital
City has been launched nationally in cities including Washington, D.C., Boston,
Philadelphia, Atlanta, San Francisco and Los Angeles. Digital City plans to
expand to over 40 cities in fiscal 1997. Digital City, Inc. is owned by Digital
City L.P. The Company owns a majority ownership interest in that entity, and
the Tribune Company owns the remaining interest.
In addition to the content currently available on its online service,
America Online continues to add informative content through its strategic
alliances with information providers as well as through joint ventures with
major media companies. For example, the Company has formed alliances with the
Capital Cities/ABC Multimedia Group, Newsweek, The New York Times, and Hachette
Filipacchi Magazines to add original content and interactive programming.
To further stimulate the development of innovative and engaging new
content, America Online created the America Online Greenhouse to fund the
development of new programming. The first structured "talent studio" in
cyberspace, the America Online Greenhouse discovers innovative entrepreneurs and
creative talent and provides them with the marketing, productions, support, and
financial assistance to launch unique online content and interactive services
via the AOL service and the Internet. Greenhouse programs include an array of
special interest areas and entertainment properties covering topics ranging from
cooking and health to sports, Afrocentric culture and comedy. Through "Software
Greenhouse" and the Developers Studio, the Company is leveraging its own and
third-party developers to create new applications and services for members.
Network Services
America Online employs a diversified portfolio approach in designing,
structuring and operating its network services. America Online has launched
AOLnet, under which network services are provided by a number of different
entities, including Sprint Corporation, Advanced CO+RE Systems, Inc., a wholly-
owned subsidiary of America Online ("ANS"), and BBN Corporation. The Company's
previous network system prior to December 1995 relied predominantly on a single
network provider. AOLnet offers members in North America approximately 720
local telephone numbers in approximately 490 cities at speeds up to 28.8 kbps.
AOL Globalnet offers access in approximately 237 cities in 87 countries. In
total, America Online, through all of its network services, offers its
subscribers worldwide over 1400 local telephone numbers in approximately 810
cities. The ANS backbone network, which supports America Online's access to the
Internet and a portion of AOLnet, is among the largest and fastest public data
networks in the world.
America Online, through its ANS subsidiary, designs, develops and operates
high performance wide-area networks for business, research, education and
government organizations. The ANS backbone, built on the proprietary expertise
developed by ANS as the principal architect of the National Science Foundation
Backbone Network Service, was the first and remains one of the largest and
fastest public TCP/IP data networks in the world. Through this network, ANS
delivers Internet, Intranet and virtual private data network services to
enterprises. ANS operates, in addition to the UK and Canadian access networks,
an extensive and expanding international network in support of AOL international
operations.
Marketing and Distribution
The goals of the Company's marketing programs are to increase the general
visibility of the AOL service and to make it easy for consumers to trial and
subscribe to the AOL service. America Online aggressively markets its services
and products to consumers using a broad array of programs and strategies. The
Company attracts new subscribers through independent marketing programs, such as
direct mail, magazine onserts and inserts in publications, advertising, and a
variety of co-marketing efforts. The Company has entered into co-marketing
agreements with numerous computer hardware, software and peripheral production
companies. These companies bundle America Online software with their products,
thus facilitating easy trial use of the Company's services. The Company has
also entered into co-marketing agreements with certain of its media partners and
with affinity groups and associations to market directly to and cater to the
needs of specific audiences.
America Online utilizes specialized retention programs designed to increase
customer loyalty and satisfaction and to maximize customer subscription life.
These retention programs include regularly scheduled online events and
conferences; the regular addition of new content, services and software
programs; and online promotions of upcoming online events and new features. A
new program introduced by the Company is the establishment of "loyalty labs" to
test new and innovative approaches to increase member satisfaction and encourage
members to stay with AOL. The Company also provides a variety of support
mechanisms such as online support and telephone customer support services. In
addition, the Company expects to increase its brand awareness through, among
other means, national television and radio advertising campaigns.
Consumers can obtain the AOL software and a free trial membership at major
software retailers and bookstores, or by calling 800-827-6364. Additionally,
AOL has been preinstalled on most leading personal computers including those
offered by IBM, Apple, Compaq, AST, Tandy, NEC and Compudyne, and can soon be
accessed through an icon on the Windows 95 and Apple Macintosh desktops and
through Internet service providers such as the AT&T WorldNet service.
America Online's pricing is simple and affordable for consumers, with a
monthly fee of $9.95 providing access to all of the AOL services for up to 5
hours each month. America Online's "Value Plan" provides up to 20 hours of use
each month for $19.95. Additional hours are $2.95 for both plans. These rates
apply 24 hours a day, and include the cost of connecting to AOL via a local
phone call from more than 700 cities in the continental United States and
Canada.
International Expansion
America Online has forged significant partnerships with leading
international companies to create a global community of interactive services.
The Company's international strategy is to provide consumers with local services
in key international markets featuring local language, strong local content,
marketing and community. Each of these services is marketed under the AOL brand
name and provides seamless access to the U.S. and other international services
to extend the AOL community worldwide. Central to our strategy has been the
formation of strategic alliances with strong international partners and the
provision of high speed 28.8 for all members of international services. In
addition, U.S. subscribers have access to the content and communities offered on
all of the Company's global services via the AOL International Channel, which is
a convenient gateway featured on the new version AOL 3.0.
America Online intends to continue to aggressively expand its global
services through joint ventures and on its own, capitalizing on the growth of
consumer personal computer ownership in key world markets. For America Online
subscribers traveling abroad, and subscribers outside of the United States who
do not have local access to an AOL service, the company will continue the
expansion of international access to its services through AOL Globalnet which is
currently available in approximately 87 countries and 237 cities worldwide.
Europe
In April 1995, America Online entered into a joint venture with
Bertelsmann, one of the world's largest media companies, and subsequently
launched AOL services in Germany (November 1995), the United Kingdom (January
1996) and France (March 1996). Each of these services provides European
consumers with local content and communities via local access networks and is
interconnected with the other AOL services. Through this strategic partnership,
these services will be extended into various markets throughout Europe. The
joint venture consists of Bertelsmann and America Online each owning 50%.
Bertelsmann is a minority stockholder with approximately a 4% stake in America
Online representing an investment of approximately $54 million, and has
designated Dr. Middelhoff a member of the Company's Board of Directors.
Canada
AOL Canada was launched in January 1996 and features local Canadian content
and services. In October 1996, AOL Canada will offer Canadian members localized
client software, thirteen channels of Canadian content and billing in Canadian
dollars. The service also provides message boards, e-mail, and easy access to
the Internet through an integrated Web browser. AOL Canada's key partners
include Citytv, an internationally renowned broadcaster and program producer;
MuchMusic, Canada's first national music television channel; Shift Magazine,
Canada's hottest publication in media, entertainment and technology; Intuit
Canada, makers of the world's leading personal finance software, Quicken; and
Southam New Media, a wholly-owned subsidiary of Southam Inc., Canada's largest
news organization.
Japan
In May 1996, America Online announced a partnership with Mitsui & Co., one
of the world's largest international trading companies, and Nikkei, one of
Japan's leading media companies with respected business and computer
publications, that plans to offer interactive consumer services in Japan with a
broad range of localized Japanese language content in the next 12 months.
The joint venture consists of Mitsui & Co. owning 40%, Nikkei 10% and
America Online 50%. Mitsui and Nikkei contribute more than 120 years of
experience and credibility in the Japanese market, as well as a strong
management team and $56 million to fund the launch of the Japanese service.
America Online brings to the venture its leadership in developing, managing, and
executing interactive online services in the U.S. and Europe.
Multimedia
America Online has incorporated multimedia technologies into the AOL
service and in CD-ROM and Web-based properties. America Online believes that
multimedia and CD-ROM technologies provide a significant strategic opportunity
for the Company to develop innovative interactive marketing channels that meet
the needs of members, advertisers and media partners. To that end, the Company
in fiscal 1996 combined its key production areas to form AOL Productions, Inc.,
a wholly-owned subsidiary.
AOL Productions has emerged as a leading studio system with expertise in
all phases of interactive content development for online, worldwide web,
internet, and CD-ROM delivery. Working with America Online and its partners,
AOL Productions develops interactive programming designed specifically to create
communities that engage users in the online experience and provide new platforms
for advertising and commerce.
In February 1996, the Company merged with the Johnson-Grace Company, a
leading developer of compression technology and multimedia development and
delivery tools. Using the Johnson-Grace technology, America Online is able to
deliver the data-intensive graphics and audio and video capabilities using
narrow-band technologies, even over the slower speed modems currently used by
most AOL members. America Online continues to upgrade the multimedia capability
of its services and should be well positioned to offer seamless audio and video
capabilities online as true high-bandwidth connections become widely available.
In addition, the Company has formed an alliance with Macromedia, Inc. to bring
enhanced Internet multimedia technology and Web authoring to AOL customers and
to provide new interactive publishing tools and opportunities for content
developers.
AOL Enterprise
AOL Enterprise is driving the Company's expansion into business-to-business
markets. AOL Enterprise uses the extensive resources of AOL's network and
hosting infrastructure to provide customized network solutions to both
individual businesses and to professional communities and industries. These
private AOLs (the "PAOLs") offer the ease of use AOL is known for, as well as
customized features and functionality accessible only by pre-authorized users,
access to the fleet of AOL distribution platforms, secure communications and
information, the ability to create custom areas with AOL publishing tools, SDK
and design talent, and access to the Internet. The PAOLs generate membership
and usage fees, as well as alternative revenue streams such as transaction fees,
production development fees, and niche advertising sales. The Company offers
these products using a direct sales force and direct marketing, and through
OEMs, resellers and system integrators.
AOL Technologies
AOL Technologies is responsible for delivering research, development,
network/data center operations and member support to the other America Online
divisions, technology licensees and joint venture partners. This group is also
responsible for support functions -- including technical support, billing, and
sales. The Company has developed a flexible, scaleable architecture that enables
America Online to rapidly embrace new opportunities -- and to operate services
at a relatively low cost.
Today America Online supports a variety of software platforms, hardware
devices and conduits for delivery of the service. Software platforms include
Windows 3.1+ (which includes Windows 95), Macintosh and DOS. America Online is
also investing in the development of alternative technologies to deliver its
services. For example, America Online has entered into agreements with several
manufacturers of PDAs, including Sony, Motorola, Tandy and Casio, to bundle a
palmtop edition of America Online's client software with the PDAs sold by such
manufacturers. America Online is participating in early cable trials using cable
as the conduit into PCs, and has announced future support of ISDN and wireless.
In the paging market, America Online has entered into agreements with AT&T
Wireless Services and MobileMedia to provide their paging customers who
subscribe to AOL with mobile access to certain America Online services.
Competition
The online services market is highly competitive. Existing competitors
include, among others, CompuServe Corporation and Prodigy Services
Incorporation, the Microsoft Network, Internet access providers, such as long
distance and regional telephone companies, major newspapers that have created
local services, and other independent companies. Other competitors include
Internet directory services, including, among others, Yahoo! Inc., Excite Inc.,
Infoseek Corporation, and Lycos, Inc., and software providers such as Intuit
Inc. and Netscape Communications Corporation. In addition, various media
companies, including Time Warner Inc. and The Walt Disney Company, have entered
or announced plans to enter the online services market, resulting in greater
competition for the Company.
America Online believes the principal competitive factors in the consumer
online services industry include product features and quality, ease of use,
access to distribution channels, establishing strategic alliances, advertising,
brand recognition, reliability and price. America Online believes that it
currently competes effectively in these areas. For example, America Online has
broadened its appeal to businesses through AOL Enterprise, and has diversified
the design, stucture and operation of its network services to increase AOL
reliability and decrease costs.
Employees
As of June 30, 1996, America Online had 5,828 employees, including 1,058 in
software and content development, 3,271 in customer support, 199 in marketing,
1,009 in operations and 291 in corporate and finance. America Online believes
that its relations with its employees are good. None of America Online's
employees is represented by a labor union, and America Online has never
experienced a work stoppage.
Proprietary Rights
America Online relies upon a combination of contract provisions and patent,
copyright, trademark and trade secret laws to protect its proprietary rights in
its products. America Online distributes its products under agreements that
grant members a license to use America Online's products and services and relies
on the protections afforded by the copyright laws to protect against the
unauthorized reproduction of America Online's products. In addition, America
Online attempts to protect its trade secrets and other proprietary information
through agreements with employees and consultants. Although America Online
intends to protect its rights vigorously, there can be no assurance that these
measures will be successful.
America Online seeks to protect the source code of its products as a trade
secret and as an unpublished copyright work. America Online also has obtained
federal trademark registration of the name America Online, AOL and the Company's
triangle design logo and has trademark rights to many other proprietary names
including ANS, GNN, Digital City, AOL Enterprise, Johnson-Grace, AOL Greenhouse
and AOLnet.
America Online believes that due to the rapid pace of innovation within its
industry, factors such as the technological and creative skills of its personnel
are more important in establishing and maintaining a leadership position within
the industry than are the various legal protections of its technology.
America Online believes that its products, trademarks and other proprietary
rights do not infringe on the proprietary rights of third parties. From time to
time, however, America Online has received communications from third parties
asserting that features or contents of certain of its services may infringe
copyrights, patents and other rights of such parties. No litigation is pending
in this area that would have a material adverse effect on America Online's
ability to develop, market and sell its products or operate its services. There
can be no assurance that third parties will not assert infringement claims
against, America Online in the future with respect to current or future features
or contents of services or that any such assertion may not result in litigation
or require America Online to enter into royalty arrangements.
Government Regulation and Legal Uncertainties
In the United States, the Company is not currently subject to direct
regulation other than federal and state regulation applicable to businesses
generally. However, changes in the regulatory environment relating to the
telecommunications and media industry could have an effect on the Company's
business. Additionally, legislative proposals from international, federal and
state government bodies in the areas of content regulation, intellectual
property, privacy rights and state tax issues, could impose additional
regulations and obligations upon all online service providers.
Moreover, the applicability to online service and Internet access providers
of existing laws governing issues such as intellectual property ownership, libel
and personal privacy is uncertain. On an international level, laws governing
content as well as regulatory requirements, political risks, export
restrictions, export controls relating to encryption technology, tariffs and
other trade barriers, and issues regarding intellectual property and tax
consequences differ greatly from those in the United States. Recent events
relating to the use of online services for illegal activities has increased
public focus and could lead to increased pressure on legislatures to impose
regulations on online service providers such as the Company. The law relating
to the liability of online service companies and Internet access providers for
information carried on or disseminated through their systems is currently
unsettled and has been the subject of several recent private lawsuits. If
similar actions were to be initiated against the Company, costs incurred as a
result of such actions could have a material adverse effect on the Company's
business.
Item 2. Properties
America Online holds various properties at and near the Company's
headquarters facilities and under terms as set forth in the following chart and
holds various properties in other locations as described below:
LOCATION SIZE OWN/LEASE PURPOSE
Dulles, VA 300,000 Lease1 Corporate Headquarters
sq. ft.
Vienna, VA 100,000 Own2 Office Space
sq. ft.
Vienna, VA 28,000 Own2 Office Space
sq. ft.
Vienna, VA 170,000 Lease Office Space
sq. ft.
Reston, VA 265,000 Own2 Technology Center
sq. ft.
Herndon, VA 44,000 Lease Customer Support
sq. ft.
1 Following a series of transactions, in May 1996, the Company leased from a
limited partnership approximately 78 acres of unimproved land and approximately
39 acres of improved land for use as the Company's headquarters facilities. The
initial five-year term of the lease is non-cancelable. After the initial term,
the Company may purchase the property or arrange for the purchase of the
property by a third party and terminate the lease.
2 This property is held subject to a first mortgage.
The Company leases office space in the following locations for Customer
Call Centers: Tucson, AZ; Jacksonville, FL; Albuquerque, NM; Oklahoma, OK; and
Ogden, UT. In addition, the Company leases office space in the following
locations: San Mateo, CA; Santa Barbara, CA; Needham, MA; Elmsford, NY; Ann
Arbor, MI; Vero Beach, FL; San Francisco, CA; Berkeley, CA; and Irvine, CA.
Digital City, Inc., a subsidiary of the Company, leases office space in the
locations where it has launched its service.
Item 3. Legal Proceedings
From July 1995 through July 1996, thirteen class action suits were filed
against the Company in a number of state courts seeking unspecified damages for
alleged breach of contract, fraud and unfair trade practices arising from the
Company's billing practices. The primary substantive allegations in each case
involve claims that the Company did not adequately disclose charges to consumers
related to the costs the Company incurs in providing telecommunications
services. Twelve of the law suits were consolidated for purposes of settlement
in California. Judge Robertson, of Superior Court in San Francisco, has given
tentative approval to a settlement that calls for the Company to distribute 5.5
million free hours to all members as of July 8, 1996 and 1.38 million free hours
to "heavy users" who are still members, to establish a fund of $500,000 to
compensate former members, and to pay attorneys fees for the plaintiffs in the
amount of $2.75 million. The Company expects the judge to give final approval
shortly. An additional class action suit, Aronson v. America Online, Inc. was
filed against the Company in state court in Pennsylvania in July 1996. This
suit makes allegations similar to those made in the cases consolidated in
California and the Company does not believe this proceeding will have a material
adverse effect on the financial position of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
STOCKHOLDER INFORMATION
Market Price of Common Stock
The following table sets forth the range of high and low sale prices for
the Company's common stock:
<TABLE>
For the quarter ended: High Low
<S> <C> <C>
September 30, 1994 $ 10.28 $ 6.88
December 31, 1994 14.63 7.47
March 31, 1995 23.69 12.31
June 30, 1995 24.06 16.75
September 30, 1995 37.25 21.38
December 31, 1995 46.25 28.25
March 31, 1996 60.00 32.75
June 30, 1996 71.00 36.63
</TABLE>
The Company has never declared, nor has it paid, any cash dividends on its
Common Stock. The Company currently intends to retain its earnings to finance
future growth and, therefore, does not anticipate paying any cash dividends on
its Common Stock in the foreseeable future.
As of August 27, 1996, the approximate number of stockholders of record of
Common Stock was 2,306.
Exchange Information
The Company's Common Stock is traded on the New York Stock Exchange under
the symbol "AOL."
Options on the Company's stock are traded on the Chicago Board Options
Exchange, the American Stock Exchange, and the Pacific Stock Exchange.
Item 6. Selected Financial Data
<TABLE>
Selected Consolidated Financial and Other Data
<CAPTION>
(Amounts in thousands, except per share data) Year Ended June 30,
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Online service revenues $ 991,656 $ 344,309 $ 98,497 $ 37,648 $ 26,095
Other revenues 102,198 49,981 17,225 14,336 12,658
Total revenues 1,093,854 394,290 115,722 51,984 38,753
Income (loss) from operations 65,243 (21,449) 4,176 1,702 3,685
Income (loss) before extraordinary
item 29,816 (35,751) 2,154 246 2,344
Net income (loss) (1) 29,816 (35,751) 2,154 1,379 3,768
Income (loss) per common share:
Income (loss) before extraordinary
item $ 0.28 $ (0.51) $ 0.03 $ - $ 0.05
Net income (loss) $ 0.28 $ (0.51) $ 0.03 $ 0.02 $ 0.08
Weighted average
shares outstanding 108,097 69,550 69,035 58,572 45,656
As of June 30,
1996 1995 1994 1993 1992
Balance Sheet Data:
Working capital (deficiency) $ (19,328) $ 271 $ 38,679 $10,498 $12,363
Total assets 958,754 405,413 155,178 39,279 31,144
Total debt 22,519 21,856 9,341 2,959 2,672
Stockholders' equity 512,502 216,812 98,802 23,785 21,611
Other Data (at fiscal year end):
Worldwide subscribers 6,198 3,005 903 303 182
<FN>
<FN1> Net income in the fiscal year ended June 30, 1996, includes charges of
approximately $17.0 million for acquired research and development, $8.0 million
for the settlement of a class action lawsuit, and $0.8 million for merger
expenses. Net loss in the fiscal year ended June 30, 1995, includes charges
of approximately $50.3 million for acquired research and development and $2.2
million for merger expenses.
</FN>
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
The Company has experienced a significant increase in revenues over the past
three fiscal years. The higher revenues have been produced principally by
increases in the Company's subscriber base resulting from growth of the online
services market, aggressive subscriber acquisition marketing and the expansion
of its services and content. Additionally, revenues have increased as the
average monthly revenue per subscriber has risen during the past three years,
primarily as a result of an increase in the average monthly number of paid hours
of use per subscriber.
The Company's online service revenues are generated primarily from
subscribers paying a monthly membership fee and hourly charges based on usage in
excess of the number of hours of usage provided as part of the monthly fee.
Through December 31, 1994, the Company's standard monthly membership fee for its
AOL service, which includes five hours of service, was $9.95, with a $3.50
hourly fee for usage in excess of five hours per month. Effective January 1,
1995, the hourly fee for usage in excess of five hours per month decreased from
$3.50 to $2.95, while the monthly membership fee remained unchanged at $9.95.
In May 1996, the Company announced an additional pricing plan for its AOL
service to improve retention among its heavier users. The new pricing plan (the
"Value Plan"), which became effective July 1, 1996, includes 20 hours of service
for $19.95 per month, with a $2.95 hourly fee for usage in excess of 20 hours
per month. The Company expects that the Value Plan will result in an increased
number of hours of usage relative to revenues.
In October 1995, the Company launched its Internet service, Global Network
Navigator ("GNN"). The GNN service is aimed at the segment of online consumers
who seek a full-featured Internet-based service. The current standard monthly
membership fee for GNN, which includes 20 hours of service, is $14.95, with a
$1.95 hourly fee for usage in excess of 20 hours per month.
The Company's other revenues are generated primarily from the sale of
merchandise, data network services, online transactions and advertising,
marketing and production services and development and licensing fees. The growth
of other revenues is important to the Company's business objectives. In fiscal
1996, other revenues represented approximately 9% of total revenues. Among the
Company's business objectives are increasing the subscriber base and changing
its business model over time into one in which more revenues and profits are
generated from sources other than online service revenues, such as merchandise
sales, advertising, the provision of data network services and transaction fees.
The Company expects that the growth in other revenues, which generally carry
higher margins than online service revenues, will provide the Company with the
opportunity and flexibility to fund programs designed to grow the subscriber
base. If the growth in other revenues does not materialize to the extent the
Company expects, there can be no assurance that the Company will be able to meet
its business objectives.
In the near term the Company's revenue growth will continue to be driven
primarily by growth in its subscriber base. The growth of the subscriber base
is dependent upon the Company's ability to acquire and retain subscribers.
The Company acquires new subscribers to its services through an
introductory trial offer. The Company's ability to continue to acquire new
subscribers is dependent upon people continuing to register for its introductory
trial offer.
In fiscal 1997, the Company plans to spend more than in previous years on
subscriber acquisition marketing, and expects that the balance of deferred
subscriber acquisition costs will increase by an amount comparable to the
increase during fiscal 1996. In addition, the Company anticipates lower direct
response rates, and as a result, cost per registration for the AOL service is
expected to increase. The Company expects that the increased cost per
registration resulting from lower direct response rates will be partially offset
by lower cost registrations generated by bundling relationships with Microsoft,
Apple, AT&T and others, as well as increased word-of-mouth acquisitions
resulting from a larger subscriber base and an increased consumer awareness of
AOL. Marketing costs as a percentage of total revenues are anticipated to
increase in fiscal 1997 over fiscal 1996. This increase is expected to be
primarily attributable to an increase, in absolute dollars as well as a
percentage of total revenues, in the amortization of deferred subscriber
acquisition costs.
The Company experienced generally lower overall retention rates for the AOL
service during fiscal 1996 compared to fiscal 1995. Retention rates for AOL
subscribers who were early in their membership terms decreased more than the
overall retention rate, with the largest quarterly percentage decrease occurring
in the June 1996 quarter. The Company believes that factors contributing to
these decreases include: (1) competition from an increasing number of service
providers; (2) the availability of alternative pricing models from competitors,
including unlimited use pricing; and (3) an increase in less-qualified new
subscribers as a result of increased direct marketing to the mass consumer
audience. The Company believes that the introduction in July 1996 of the Value
Plan and the new version of AOL introduced in late fiscal 1996 address many of
the factors which most directly affect retention. In addition, the Company
plans to increase spending on programs designed to improve retention both as it
relates to increasing trial conversion rates and reducing cancellations among
longer-term users. Although the Company experienced somewhat higher monthly
retention rates in July and August 1996, the Company cannot predict the overall
future rate of retention.
The average total usage hours per member per month, for AOL subscribers, is
expected to increase in fiscal 1997 over fiscal 1996. The Company believes that
the principal factor contributing to this expected increase will be the
availability of the Value Plan, which will allow members to spend more time
online at less cost. Overall average monthly online service revenue per AOL
subscriber in fiscal 1997 is expected to be comparable to fiscal 1996.
The online services and Internet markets are highly competitive. The
Company believes that existing competitors, which include, among others,
commercial online services such as CompuServe and Prodigy, Internet-based
services, including, among others, the Microsoft Network, and Internet service
providers, including various national and local independent Internet service
providers as well as long distance and regional telephone companies, are likely
to enhance their service offerings. In addition, new competitors, including
Internet directory services and various media and telecommunication companies,
have entered or announced plans to enter the online services and Internet
markets, resulting in greater competition for the Company. The competitive
environment could have the following effects: require additional pricing
programs and increased spending on marketing, content procurement and product
development; limit the Company's opportunities to enter into and/or renew
agreements with content providers and distribution partners; limit the Company's
ability to grow its subscriber base; and result in increased attrition in the
Company's subscriber base. Any of the foregoing events could have an impact on
revenues and result in an increase in costs as a percentage of revenues. These
factors may have a material adverse effect on the Company's financial condition
and operating results.
Results of Operations
Fiscal 1996 Compared to Fiscal 1995
Online Service Revenues For fiscal 1996, online service revenues increased from
$344,309,000 to $991,656,000, or 188%, over fiscal 1995. This increase was
primarily attributable to a 93% increase in the number of AOL subscribers. The
percentage increase in online service revenues was greater than the percentage
increase in AOL subscribers principally due to an increase in the average
monthly online service revenue per AOL subscriber, which increased from $16.28
in fiscal 1995 to $17.96 in fiscal 1996.
Other Revenues Other revenues, consisting principally of the sale of
merchandise, data network services, online transactions and advertising,
marketing and production services and development and licensing fees, increased
from $49,981,000 in fiscal 1995 to $102,198,000 in fiscal 1996. This increase
is primarily attributable to an increase in the sale of merchandise, data
network services and online transactions and advertising, partially offset by a
decrease in revenues from marketing and productions services.
Cost of Revenues Cost of revenues includes network-related costs, consisting
primarily of data and voice communication costs, costs associated with operating
the data centers and providing customer support and royalties paid to
information and service providers. For fiscal 1996, cost of revenues increased
from $229,724,000 to $627,372,000, or 173%, over fiscal 1995, and decreased as a
percentage of total revenues from 58.3% to 57.4%.
The increase in cost of revenues was primarily attributable to an increase
in data communication costs, customer support costs and royalties paid to
information and service providers. Data communication costs increased primarily
as a result of the larger customer base and more usage by customers. Customer
support costs, which include personnel and telephone costs associated with
providing customer support, were higher as a result of the larger customer base
and a large number of new subscriber registrations. Royalties paid to
information and service providers increased as a result of a larger customer
base, more usage and the Company's addition of more service content to broaden
the appeal of the AOL service.
The decrease in cost of revenues as a percentage of total revenues is
primarily attributable to a decrease in costs associated with marketing and
production service revenues (as a percentage of total revenues) and a decrease
in data communication costs resulting from lower variable costs per hour, due to
a higher percentage of traffic generated on the Company's lower cost proprietary
network, AOLnet. The aforementioned decrease was partially offset by increases
in leased equipment costs, costs associated with providing data network services
to third parties, costs of merchandise sold and royalties paid to information
and service providers.
In late fiscal 1995, the Company launched AOLnet, a proprietary TCP/IP
network that is owned and operated by the Company. The Company is building
AOLnet in order to increase its network capacity, provide its members with more
reliable, higher speed access, and reduce the costs of data communication. As
the Company builds AOLnet, it is managing traffic to this network, and as of
June 1996, approximately 65% of network traffic was carried on AOLnet. The
buildout of AOLnet requires a substantial investment in telecommunications
equipment, which the Company is financing primarily through leasing. As the
size of AOLnet increases, and an increasingly higher percentage of overall
network traffic is carried on AOLnet, it is expected that the Company's data
communication costs will become more fixed in nature, rather than variable. The
overall per hour cost of providing data communications is expected to decrease.
Marketing Marketing expenses include the costs to acquire and retain
subscribers and other general marketing costs. The Company expenses the costs
of advertising as incurred, except direct response advertising, which is
classified as deferred subscriber acquisition costs. The deferred costs are
amortized, beginning the month after such costs are incurred, over a period
determined by calculating the ratio of current revenues related to direct
response advertising versus the total expected revenues related to this
advertising, or twenty-four months, whichever is shorter.
Effective July 1, 1995, the Company modified the components of subscriber
acquisition costs deferred, and changed the period over which it amortizes
subscriber acquisition costs. The period over which the Company amortizes
subscriber acquisition costs was changed from twelve and eighteen months to the
period described above in order to more appropriately match subscriber
acquisition costs with associated online service revenues. For additional
information regarding the accounting for deferred subscriber acquisition costs,
refer to Note 2 of the Notes to Consolidated Financial Statements.
For fiscal 1996, marketing expenses increased from $77,064,000 to
$212,710,000, or 176%, over fiscal 1995, and decreased as a percentage of total
revenues from 19.5% to 19.4%. The increase in marketing expenses was primarily
attributable to an increase in the size and number of marketing programs
designed to expand the Company's subscriber base and new branding programs that
began in August 1995.
Product Development Product development costs include research and development
costs, other product development costs and the amortization of software costs.
For fiscal 1996, product development costs increased from $14,263,000 to
$53,817,000, or 277%, over fiscal 1995, and increased as a percentage of total
revenues from 3.6% to 4.9%. The increases in product development costs, and
such costs as a percentage of total revenues, were primarily attributable to an
increase in personnel costs related to an increase in the number of technical
employees. Product development costs, before capitalization and amortization,
increased by 242%.
General and Administrative For fiscal 1996, general and administrative costs
increased from $42,700,000 to $110,653,000, or 159%, over fiscal 1995, and
decreased as a percentage of total revenues from 10.8% to 10.1%. The increase
in general and administrative costs was primarily attributable to higher
personnel, office and travel expenses related to an increase in the number of
employees. The decrease in general and administrative costs as a percentage of
total revenues was a result of the substantial growth in revenues, which more
than offset the additional general and administrative costs, combined with the
semi-variable nature of many of the general and administrative costs.
Acquired Research and Development Acquired research and development costs,
totaling $16,981,000 in fiscal 1996, relate to in-process research and
development purchased pursuant to the Company's acquisition of Ubique, Ltd. in
September 1995. Acquired research and development costs, totaling $50,335,000
in fiscal 1995, relate to in-process research and development purchased pursuant
to the Company's acquisitions of BookLink Technologies, Inc. ("Booklink") and
Navisoft, Inc. ("Navisoft").
Amortization of Goodwill Amortization of goodwill increased to $7,078,000 in
fiscal 1996 from $1,653,000 in fiscal 1995. The amortization of goodwill relates
primarily to the Company's fiscal 1995 acquisitions of Advanced Network &
Services, Inc. ("ANS") and Global Network Navigator, Inc., which resulted in
approximately $56 million of goodwill. The goodwill related to these
acquisitions is being amortized on a straight-line basis over periods ranging
from five to ten years. The increase in amortization of goodwill results from a
full year of goodwill being recognized in fiscal 1996 compared to only a partial
year of goodwill being recognized in fiscal 1995.
Other Income (Expense) Other income (expense) consists primarily of interest
expense and nonoperating charges net of investment income and nonoperating
gains. The Company had other expense of $2,056,000 in fiscal 1996 and other
income of $3,074,000 in fiscal 1995. The change in other income (expense) was
primarily attributable to a charge in fiscal 1996 related to the settlement of a
class action lawsuit partially offset by an increase in investment income.
Merger Expenses Nonrecurring merger expenses totaling $848,000 were recognized
in fiscal 1996 in connection with the merger of the Company with Johnson-Grace
Company. Nonrecurring merger expenses totaling $2,207,000 were recognized in
fiscal 1995 in connection with the mergers of the Company with Redgate
Communications Corporation ("RCC"), Wide Area Information Servers, Inc. ("WAIS")
and Medior, Inc. ("Medior").
Provision for Income Taxes The provision for income taxes was $32,523,000 and
$15,169,000 in fiscal 1996 and fiscal 1995, respectively. For additional
information regarding income taxes, refer to Note 8 of the Notes to Consolidated
Financial Statements.
Net Income Net income in fiscal 1996 totaled $29,816,000. The net income in
fiscal 1996 included charges of $16,981,000 for acquired research and
development, $8,000,000 related to the settlement of a class action lawsuit and
$848,000 for merger expenses.
Fiscal 1995 Compared to Fiscal 1994
Online Service Revenues For fiscal 1995, online service revenues increased from
$98,497,000 to $344,309,000, or 250%, over fiscal 1994. This increase was
primarily attributable to a 233% increase in the number of AOL subscribers. The
percentage increase in online service revenues in fiscal 1995 was greater than
the percentage increase in subscribers principally due to an increase in the
average monthly online service revenue per subscriber, which increased from
$14.50 in fiscal 1994 to $16.28 in fiscal 1995.
Other Revenues Other revenues, consisting principally of new media and
interactive marketing services, data network services, multimedia and CD-ROM
production services, and development and licensing fees, increased from
$17,225,000 in fiscal 1994 to $49,981,000 in fiscal 1995. This increase was
primarily attributable to data network revenues and multimedia and CD-ROM
production service revenues from companies acquired during fiscal 1995.
Cost of Revenues For fiscal 1995, cost of revenues increased from $69,043,000
to $229,724,000, or 233%, over fiscal 1994, and decreased as a percentage of
total revenues from 59.7% to 58.3%.
The increase in cost of revenues was primarily attributable to an increase
in data communication costs, customer support costs and royalties paid to
information and service providers. Data communication costs increased primarily
as a result of the larger customer base and more usage by customers. Customer
support costs, which include personnel and telephone costs associated with
providing customer support, were higher as a result of the larger customer base
and a large number of new subscriber registrations. Royalties paid to
information and service providers increased as a result of a larger customer
base and more usage and the Company's addition of more service content to
broaden the appeal of the America Online service.
The decrease in cost of revenues as a percentage of total revenues is
primarily attributable to a decrease in expenses related to marketing services
and personnel-related costs as a percentage of total revenues, partially offset
by an increase in data communication costs as a percentage of total revenues,
primarily resulting from an increase in higher baud speed usage at a higher
variable rate as well as lower hourly pricing for online service revenue which
became effective January 1, 1995.
Marketing For fiscal 1995, marketing expenses increased from $23,548,000 to
$77,064,000, or 227%, over fiscal 1994, and decreased as a percentage of total
revenues from 20.3% to 19.5%. The increase in marketing expenses was primarily
due to an increase in the number and size of marketing programs to expand the
Company's subscriber base. The decrease in marketing expenses as a percentage
of total revenues is primarily attributable to a decrease as a percentage of
total revenues in personnel-related costs.
Product Development For fiscal 1995, product development expenses increased
from $5,288,000 to $14,263,000, or 170%, over fiscal 1994, and decreased as a
percentage of total revenues from 4.6% to 3.6%. The increase in product
development costs was primarily attributable to an increase in personnel costs
related to an increase in the number of technical employees. The decrease in
product development costs as a percentage of total revenues was principally a
result of the substantial growth in revenues, which more than offset the
additional product development costs. Product development costs, before
capitalization and amortization, increased by 126% in fiscal 1995.
General and Administrative For fiscal 1995, general and administrative costs
increased from $13,667,000 to $42,700,000, or 212%, over fiscal 1994, and
decreased as a percentage of total revenues from 11.8% to 10.8%. The increase in
general and administrative expenses was principally attributable to higher
office and personnel expenses related to an increase in the number of employees.
The decrease in general and administrative costs as a percentage of total
revenues was a result of the substantial growth in revenues, which more than
offset the additional general and administrative costs, combined with the semi-
variable nature of many of the general and administrative costs.
Acquired Research and Development Acquired research and development costs,
totaling $50,335,000 in fiscal 1995, relate to in-process research and
development purchased pursuant to the Company's acquisitions of Booklink and
Navisoft.
Amortization of Goodwill Amortization of goodwill relates to the Company's
acquisition of ANS in fiscal 1995, which resulted in approximately $44 million
in goodwill. The goodwill related to the ANS acquisition is being amortized on
a straight-line basis over a ten-year period.
Other Income Other income consists primarily of investment and rental income
net of interest expense. For fiscal 1995, other income increased from
$1,810,000 to $3,074,000. This increase was primarily attributable to an
increase in interest income generated by higher levels of cash available for
investment, partially offset by a decrease in rental income and an increase in
interest expense.
Merger Expenses Nonrecurring merger expenses totaling $2,207,000 were
recognized in fiscal 1995 in connection with the mergers of the Company with
RCC, WAIS and Medior. No merger expenses were incurred in fiscal 1994.
Provision for Income Taxes The provision for income taxes was $15,169,000 and
$3,832,000 in fiscal 1995 and fiscal 1994, respectively. For additional
information regarding income taxes, refer to Note 8 of the Notes to Consolidated
Financial Statements.
Net Loss The net loss in fiscal 1995 totaled $35,751,000. The net loss in
fiscal 1995 included charges of $50,335,000 for acquired research and
development and $2,207,000 for merger expenses.
Liquidity and Capital Resources
The Company has financed its operations through cash generated from operations
and the sale of its capital stock. The Company has financed its investments in
facilities and telecommunications equipment principally through leasing. Net
cash provided by (used in) operating activities was $1,421,000, $17,260,000 and
$(66,727,000) for fiscal 1994, fiscal 1995 and fiscal 1996, respectively.
Included in operating activities were expenditures for deferred subscriber
acquisition costs of $37,424,000, $111,761,000 and $363,024,000 in fiscal 1994,
fiscal 1995 and fiscal 1996, respectively. Net cash used in investing
activities was $41,993,000, $87,272,000 and $79,066,000 in fiscal 1994, fiscal
1995 and fiscal 1996, respectively.
In December 1993, the Company completed a public stock offering of
8,000,000 shares of common stock (adjusted for stock splits) which generated net
cash proceeds of approximately $62.7 million.
In April 1995, the Company entered into a joint venture with Bertelsmann,
AG ("Bertelsmann") to offer interactive online services in Europe. In
connection with the agreement, the Company received approximately $54 million
through the sale of approximately 5% of its common stock to Bertelsmann.
In October 1995, the Company completed a public stock offering of 4,963,266
shares of common stock (adjusted for a stock split) which generated net cash
proceeds of approximately $139.5 million.
In May 1996, the Company entered into a joint venture with Mitsui & Co.,
Ltd. (Mitsui) and Nihon Keizai Shimbun, Inc. (Nikkei) to offer interactive
online services in Japan. In connection with the agreement, the Company
received approximately $28.0 million through the sale of convertible preferred
stock to Mitsui. The preferred stock has an aggregate liquidation preference of
approximately $28.0 million and accrues dividends at a rate of 4% per annum.
Accrued dividends can be paid in the form of additional shares of preferred
stock. During May 1998, the preferred stock, together with accrued but unpaid
dividends, automatically converts into shares of common stock based on the fair
market value of common stock at the time of conversion.
The Company leases the majority of its facilities and equipment under
noncancelable operating leases, and as part of its network portfolio strategy is
building AOLnet, its data communications network. The buildout of this network
requires a substantial investment in telecommunications equipment, which the
Company plans to finance principally through leasing. In addition, the Company
has guaranteed minimum commitments under certain data and voice communication
agreements. The Company's future lease commitments and guaranteed minimums are
discussed in Note 5 of the Notes to Consolidated Financial Statements.
The Company uses its working capital to finance ongoing operations and to
fund marketing and content programs and the development of its products and
services. The Company plans to continue to invest aggressively in subscriber
acquisition marketing and content programs to expand its subscriber base, as
well as in computing and support infrastructure. Additionally, the Company
expects to use a portion of its cash for the acquisition and subsequent funding
of technologies, products or businesses complementary to the Company's current
business. The Company anticipates that available cash and cash provided by
operating activities will be sufficient to fund its operations for the next
fiscal year.
Various legal proceedings have arisen against the Company in the ordinary
course of business. In the opinion of management, these proceedings will not
have a material effect on the financial position of the Company.
The Company believes that inflation has not had a material effect on its
results of operations.
Seasonality
In April 1996, the Company began to see the effects of seasonality in both
member acquisitions and in the amount of time spent by customers using its
services. The Company may have experienced the effects of seasonality in
previous periods, but the effects, if any, were not discernible due to the
masking effect resulting from the Company's substantial growth rates in those
periods. The Company expects that seasonality will have an effect in the
future. Member acquisition is expected to be highest in the second and third
fiscal quarters, when sales of new computers and computer software are highest
due to the holiday season. Customer usage is expected to be lower in the summer
months due largely to extended daylight hours and competing outdoor leisure
activities.
Forward-Looking Statements
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company wishes to caution readers that the
following important factors could cause the Company's actual results to differ
materially from those projected in forward-looking statements made by, or on
behalf of, the Company:
- - Factors related to increased competition from existing and new competitors,
including price reductions and increased spending on marketing and product
development; limitations on the Company's opportunities to enter into and/or
renew agreements with content providers and distribution partners; limitations
on its ability to develop new products and services; limitations on its ability
to continue to grow its subscriber base; increased membership acquisition costs;
lower average monthly revenue per subscriber and increased attrition in the
Company's subscriber base.
- - Risks related to the buildout of AOLnet, including the inability to expand
server and network capacity at a rate sufficient to satisfy subscriber demands;
the failure of any of the Company's network providers; the failure to obtain the
necessary financing for the buildout of AOLnet; and the risk that demand will
not develop for the capacity AOLnet will provide.
- - Any damage or failure to the Company's computer equipment and the information
stored in its data centers, such as damage by fire, power loss,
telecommunications failures, unauthorized intrusions and other events, that
causes interruptions in the Company's operations.
- - The Company's inability to manage its growth and to adapt its administrative,
operational and financial control systems to the needs of the expanded entity;
and the failure of management to anticipate, respond to and manage changing
business conditions.
- - The failure of the Company or its partners to successfully market, sell and
deliver its services in international markets; and risks inherent in doing
business on an international level, such as laws governing content that differ
greatly from those in the U.S., unexpected changes in regulatory requirements,
political risks, export restrictions, export controls relating to encryption
technology, tariffs and other trade barriers, fluctuations in currency exchange
rates, issues regarding intellectual property and potentially adverse tax
consequences.
- - A moderating growth rate in the sale of new computers in the U.S. and, to
some extent, internationally; general or specific economic conditions; the
ability and willingness of purchasers to substitute other services for AOL; the
perceived absolute or relative overall value of these services by the
purchasers, including the features, quality and pricing compared to other
competitive services; smaller market or slowing of market growth for such
services.
- - The amount and rate of growth in the Company's marketing and general and
administrative expenses; the implementation of new marketing programs and
promotional offers; the implementation of additional pricing programs; and the
impact of unusual items resulting from the Company's ongoing evaluation of its
business strategies, asset valuations and organizational structures.
- - Difficulties or delays in the development, production, testing and marketing
of products, including, but not limited to, a failure to ship new products and
technologies when anticipated, including, but not limited to, new client
software and new features and functionality, and the failure to develop new
technology or modify existing technology to incorporate new standards and
protocols.
- - The acquisition of businesses, fixed assets and other assets and acquisition
related risks, including successful integration and management of acquired
technology, operations and personnel, the loss of key employees of the acquired
companies, and diversion of management attention from other ongoing business
concerns; the making or incurring of any expenditures and expenses, including,
but not limited to, depreciation and significant charges for in-process research
and development or other matters; and any revaluation of assets or related
expenses.
- - The ability of the Company to diversify its sources of revenue through the
introduction of new products and services and through the development of new
revenue sources, such as advertising, transactions and merchandise sales.
- - The effects of, and changes in, trade, monetary and fiscal policies, laws and
regulations, other activities of governments, agencies and similar
organizations, and social and economic conditions, such as trade restrictions or
prohibitions, inflation and monetary fluctuations, import and other charges, or
federal, state, local and other taxes.
- - The loss of the services of executive officers and other key employees; and
the Company's continued ability to attract and retain highly skilled and
qualified personnel.
- - The costs and other effects of litigation, governmental investigations, legal
and administrative cases and proceedings (whether civil, such as environmental
and product-related, or criminal), settlements and investigations, claims, and
changes in those items, and developments or assertions by or against the Company
relating to intellectual property rights and intellectual property licenses.
- - Adoptions of new, or changes in, accounting policies, practices and estimates
and the application of such policies, practices and estimates.
- - The effects of any activities of parties with which the Company has an
agreement or understanding, including any issues affecting any investment or
joint venture in which the Company has an investment; the amount, type and cost
of the financing which the Company has, and any changes to that financing.
Item 8. Financial Statements and Supplementary Data
Reference is made to the financial statements listed under the heading "(a)
(1) Consolidated Financial Statements" of Item 14 hereof, which financial
statements are incorporated herein by reference in response to this Item 8.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
The response to this item is incorporated by reference from the Sections
titled "Management" and "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Registrant's Proxy Statement for its 1996 Annual Meeting of
Stockholders.
Item 11. Executive Compensation
The response to this item is incorporated by reference from the Section
titled "Executive Compensation," but not from the Sections titled "Executive
Compensation -- Performance Graph" and "Executive Compensation -- Report of
Compensation Committee on Executive Compensation," in the Registrant's Proxy
Statement for its 1996 Annual Meeting of Stockholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The response to this item is incorporated by reference from the Section
titled "Share Ownership" in the Registrant's Proxy Statement for its 1996 Annual
Meeting of Stockholders.
Item 13. Certain Relationships and Related Transactions
The response to this item is incorporated by reference from the Section
titled "Certain Relationships and Related Transactions" in the Registrant's
Proxy Statement for its 1996 Annual Meeting of Stockholders.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1) Consolidated Financial Statements
The following consolidated financial statements of America Online, Inc. and the
Report of Independent Auditors thereon are included in Item 8 above:
Report of Independent Auditors F-2
Consolidated Statements of Operations for the years
ended June 30, 1996, 1995, and 1994 F-3
Consolidated Balance Sheets as of June 30, 1996 and
1995 F-4
Consolidated Statements of Changes in Stockholders'
Equity for the years ended June 30, 1996, 1995,
and 1994 F-5
Consolidated Statements of Cash Flows for the years
ended June 30, 1996, 1995, and 1994 F-6
Notes to Consolidated Financial Statements F-7
(a) (2) Financial Statement Schedules
All financial statement schedules required by Item 14(a) (2) have been
omitted because they are inapplicable or because the required information
has been included in the Consolidated Financial Statements or Notes thereto.
(a) (3) Exhibits
The following Exhibits are incorporated herein by reference or are filed
with this report as indicated below. Copies of exhibits will be furnished, upon
request, to holders or beneficial owners of America Online, Inc. Common Stock
as of September 4, 1996, subject to payment in advance of a fee of 25 cents per
page to reimburse America Online, Inc. for reproduction costs.
EXHIBIT LIST
Exhibit No. Description
2.1 Agreement and Plan of Reorganization, dated May 11, 1994, as
amended, among America Online, Inc., RCC Acquisition Corporation and
RCC Communications Corporation (Filed as Annex A to the Company's
Registration Statement on Form S-4, Registration Statement
No. 33-82030, as filed on July 24, 1994 and incorporated herein by
reference.)
2.2 Agreement and Plan of Reorganization dated as of November 8,
1994, among America Online, Inc., BLT Acquisition Corporation, CMG
Information Services, Inc. and Booklink Technologies, Inc. (Filed as
Exhibit 1 to the Company's Current Report on Form 8-K, dated January
9, 1995 and incorporated herein by reference.)
2.3 Asset Purchase Agreement by and between America Online, Inc. and
Advanced Network & Services, Inc. dated as of November 25, 1994 (Filed
as Exhibit 1 to the Company's Current Report on Form 8-K, dated
February 28, 1995 and incorporated herein by reference.)
2.4 Agreement and Plan of Merger, dated as of December 20, 1995,
among America Online, Inc., Santa's Acquisition Corp. and Johnson-
Grace Company and its Principal Shareholders (Filed as Exhibit 2.1 to
the Company's Current Report on Form 8-K, dated February 14, 1996 and
incorporated herein by reference.)
2.5 Stock Purchase Agreement, dated as of August 5, 1996, among
America Online, Inc., The ImagiNation Network, Inc. and AT&T Corp.
(Filed as Exhibit 10 to the Company's Current Report on Form 8-K,
dated August 5, 1996, and incorporated herein by reference.)
3.1 Restated Certificate of Incorporation of America Online, Inc.
(Filed as Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1995 and incorporated herein by
reference.)
3.2 Restated By-Laws of America Online, Inc.
4.1 Article 4, Article 6 and Article 8 of the Restated Certificate of
Incorporation (see Exhibit 3.1)
4.2 Rights Agreement dated as of April 23, 1993, including Exhibit A
(Certificate of Designation setting forth the terms of Series A Junior
Participating Preferred Stock, $.01 par value), Exhibit B (Form of
Right Certificate) and Exhibit C (Summary of Rights to Purchase Series
A Junior Participating Preferred Shares). (Filed as Exhibit 1 to the
Company's Registration Statement on Form 8-A, as filed on
September 9, 1996 and incorporated herein by reference.)
4.3 First Amendment to the Rights Agreement dated as of January 31,
1995. (Filed as Exhibit 2 to the Company's Registration Statement on
Form 8-A, as filed on September 9, 1996 and incorporated herein by
reference.)
10.1 Series C Preferred Stock Purchase Agreement, dated as of
February 20, 1987, as amended, by and among America Online, Inc.,
Citicorp Venture Capital Ltd., Allstate Insurance Company, INCO
Securities Corporation, North American Partners Limited Partnership,
Merrill, Pickard, Anderson & Eyre II, Union Venture Corporation,
Excelsior II, Excelsior Venture Capital Holdings (Jersey) Ltd., H & Q
Ventures International C.V., Hamquist, H & Q Investors, H & Q Ventures
III, Hamco Capital Corporation and Daniel H. Case, III. (Filed as
Exhibit 10.4 to the Company's Registration Statement on Form S-1,
Registration Statement No. 33-45585, as filed on February 6, 1992 and
incorporated herein by reference.)
10.2 Amendment to Series C Preferred Stock Purchase Agreement, dated
September 10, 1987, by and among America Online, Inc., Kleiner,
Perkins, Caufield & Byers II, Citicorp Venture Capital Ltd., Allstate
Insurance Company, INCO Securities Corporation, North American
Partners Limited Partnership, Merrill, Pickard, Anderson & Eyre II,
Union Venture Corporation, Excelsior II, Excelsior Venture Capital
Holdings (Jersey) Ltd., H & Q Ventures International C.V., H & Q
Ventures III, H & Q Investors, Hamquist, Hamco Capital Corporation,
and Daniel H. Case, III. (Filed as Exhibit 10.5 to the Company's
Registration Statement on Form S-1, Registration Statement No. 33-
45585, as filed on February 6, 1992 and incorporated herein by
reference.)
10.3 Series D Preferred Stock Purchase Agreement, dated as of
September 27, 1991, as amended, between America Online, Inc. and
Tribune Company. (Filed as Exhibit 10.6 to the Company's Registration
Statement on Form S-1, Registration Statement No. 33-45585, as filed
on February 6, 1992 and incorporated herein by reference.)
10.4 Warrant Purchase Agreement, dated as of June 29, 1987, as amended, by
and among America Online, Inc., United States Portfolio Leasing, and
Hambrecht & Quist Leasing Partners. (Filed as Exhibit 10.7 to the
Company's Registration Statement on Form S-1, Registration Statement
No. 33-45585, as filed on February 6, 1992 and incorporated herein by
reference.)
10.5 Letter Agreement, dated August 14, 1991, between Tribune Company and
America Online, Inc. (Filed as Exhibit 10.17 to the Company's
Registration Statement on Form S-1, Registration Statement
No. 33-45585, as filed on February 6, 1992 and incorporated herein by
reference.) (Confidential treatment requested.)
10.6 Master Agreement for Data Communications Service, dated July 3, 1985,
as amended on May 13, 1991, and an order for Communications Service
Network Services pursuant thereto, dated January 15, 1992, between
America Online, Inc. and GTE Telenet Communications Corporation.
(Filed as Exhibit 10.18 to the Company's Registration Statement on
Form S-1, Registration Statement No. 33-45585, as filed on
February 6, 1992 and incorporated herein by reference.) (Confidential
treatment requested.)
10.7 The Company's Employee Stock Purchase Plan. (Filed as Exhibit 28.1 to
the Company's Registration Statement on Form S-8, Registration
Statement No. 33-48447, as filed on June 5, 1992 and incorporated
herein by reference.)
10.8 The Company's 1992 Employee, Director and Consultant Stock Option
Plan. (Filed as Exhibit 10. 24 to the Company's Registration
Statement on Form S-1, Registration Statement No. 33-45585, as filed
on February 6, 1992 and incorporated herein by reference.)
10.9 The Company's Incentive Stock Option Plan, 1987 Restatement. (Filed
as Exhibit 10.25 to the Company's Registration Statement on Form S-1,
Registration Statement No. 33-45585, as filed on February 6, 1992 and
incorporated herein by reference.)
10.10 The Company's 1987 Stock Incentive Plan. (Filed as Exhibit 10.26 to
the Company's Registration Statement on Form S-1, Registration
Statement No. 33-45585, as filed on February 6, 1992 and incorporated
herein by reference.)
10.11 Amendment No. 1 to the Company's 1987 Stock Incentive Plan. (Filed as
Exhibit 10.27 to the Company's Registration Statement on Form S-1,
Registration Statement No 33-45585, as filed on February 6, 1992 and
incorporated herein by reference.)
10.12 Master Agreement for Data Communications and Warrant Purchase
Agreement dated May 25, 1993 between Sprint Communications Company
L.P. and America Online, Inc. (Filed as Exhibit 10.23 to the
Company's Annual Report on Form 10-K for the year ended June 30, 1993
and incorporated herein by reference.)
10.13 First Amendment to Master Agreement for Data Communications, dated
June 30, 1994, between Sprint Communication Company L.P. and America
Online, Inc. (Filed as Exhibit 10.17 to the Company's Annual Report
on Form 10-K for the year ended June 30, 1994 and incorporated herein
by reference.)
21.1 List of Subsidiaries.
23.1 Consent of Ernst & Young
24.1 Powers of Attorney.
(b) Reports on Form 8-K
Form Item # Description Filing Date
8-K/A 7 Financial Statements of Business Acquired: April 15, 1996
(1) Johnson-Grace Company
March 31, 1995 and 1994, Financial
Statements
(2) Johnson-Grace Company
September 30, 1995 and 1994,
Financial Statements
Pro Forma Financial Information:
(1) Unaudited Pro Forma Combined
Condensed Balance Sheet at
September 30, 1995
(2) Unaudited Pro Forma Combined
Condensed Statements of Operations for
each year in the three year period
ended July 30, 1995
(3) Unaudited Pro Forma Combined
Condensed Statements of Operations for
the three months ended
September 30, 1995 and 1994
(4) Notes to Unaudited Pro Forma Combined
Condensed Financial Statements
8-K 7 Consolidated Financial Statements of June 28, 1996
America Online, Inc. as of June 30, 1995
and 1994 and for the three years ended
June 30, 1995 to reflect the acquisition of
Johnson-Grace Company on February 1, 1996
Selected Financial Data to reflect the
acquisition of Johnson-Grace Company
Management's Discussion and Analysis
of Financial Condition and Result of
Operation to reflect the acquisition of
Johnson-Grace Company
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on the 27th day of
September, 1996.
AMERICA ONLINE, INC.
By: /s/ LENNERT J. LEADER
Lennert J. Leader
Senior Vice President and Chief
Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on the 27th day of September, 1996.
<TABLE>
Signature Title Date
<S> <C> <C>
/s/ Stephen M. Case
Stephen M. Case Chairman of the Board, September 27, 1996
President, Chief Executive Officer
and Director
(principal executive officer)
*
James V. Kimsey Chairman Emeritus and Director September 27, 1996
/s/ Lennert J. Leader
Lennert J. Leader Senior Vice President, September 27, 1996
Chief Financial Officer
(principal financial and
accounting officer)
*
Frank J. Caufield Director September 27, 1996
*
Robert J. Frankenberg Director September 27, 1996
*
Alexander M. Haig, Jr. Director September 27, 1996
*
William N. Melton Director September 27, 1996
Thomas Middelhoff Director September __, 1996
Robert W. Pittman Director September __, 1996
*
Scott C. Smith Director September 27, 1996
</TABLE>
*By: /S/LENNERT J. LEADER
Lennert J. Leader, as Attorney-in-Fact
for each of the persons indicated
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors F-2
Consolidated Statements of Operations for the years
ended June 30, 1996, 1995, and 1994 F-3
Consolidated Balance Sheets as of June 30, 1996 and
1995 F-4
Consolidated Statements of Changes in Stockholders'
Equity for the years ended June 30, 1996, 1995,
and 1994 F-5
Consolidated Statements of Cash Flows for the years
ended June 30, 1996, 1995, and 1994 F-6
Notes to Consolidated Financial Statements F-7
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
America Online, Inc.
We have audited the accompanying consolidated balance sheets of America
Online, Inc. as of June 30, 1996 and 1995, and the related consolidated
statements of operations, changes in stockholders' equity, and cash flows for
each of the three years in the period ended June 30, 1996. 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 consolidated financial position of America Online,
Inc. at June 30, 1996 and 1995, and the consolidated results of their operations
and their cash flows for each of the three years in the period ended June 30,
1996, in conformity with generally accepted accounting principles.
Ernst & Young LLP
Vienna, Virginia
August 28, 1996
<TABLE>
Consolidated Statements of Operations
<CAPTION>
(Amounts in thousands, except per share data) Year ended June 30,
1996 1995 1994
<S> <C> <C> <C>
Revenues:
Online service revenues $ 991,656 $ 344,309 $ 98,497
Other revenues 102,198 49,981 17,225
Total revenues 1,093,854 394,290 115,722
Costs and expenses:
Cost of revenues 627,372 229,724 69,043
Marketing 212,710 77,064 23,548
Product development 53,817 14,263 5,288
General and administrative 110,653 42,700 13,667
Acquired research and development 16,981 50,335 -
Amortization of goodwill 7,078 1,653 -
Total costs and expenses 1,028,611 415,739 111,546
Income (loss) from operations 65,243 (21,449) 4,176
Other income (expense), net (2,056) 3,074 1,810
Merger expenses (848) (2,207) -
Income (loss) before provision for
income taxes 62,339 (20,582) 5,986
Provision for income taxes (32,523) (15,169) (3,832)
Net income (loss) $ 29,816 $ (35,751) $ 2,154
Earnings (loss) per share:
Net income (loss) $ 0.28 $ (0.51) $ 0.03
Weighted average shares outstanding 108,097 69,550 69,035
See accompanying notes.
</TABLE>
<TABLE>
Consolidated Balance Sheets
(Amounts in thousands, except share data) June 30,
1996 1995
<CAPTION>
Assets
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 118,421 $ 45,877
Short-term investments 10,712 18,672
Trade accounts receivable 42,939 32,176
Other receivables 29,674 11,381
Prepaid expenses and other current assets 68,832 25,527
Total current assets 270,578 133,633
Property and equipment at cost, net 101,277 70,919
Other assets:
Product development costs, net 44,330 18,949
Deferred subscriber acquisition costs, net 314,181 77,229
License rights, net 4,947 5,579
Other assets 35,878 9,121
Deferred income taxes 135,872 35,627
Goodwill, net 51,691 54,356
$ 958,754 $405,413
Liabilities and Stockholders' Equity
Current liabilities:
Trade accounts payable $ 105,904 $ 84,640
Other accrued expenses and liabilities 127,898 23,509
Deferred revenue 37,950 20,021
Accrued personnel costs 15,719 2,863
Current portion of long-term debt 2,435 2,329
Total current liabilities 289,906 133,362
Long-term liabilities:
Notes payable 19,306 17,369
Deferred income taxes 135,872 35,627
Other liabilities 1,168 2,243
Total liabilities 446,252 188,601
Stockholders' equity:
Preferred stock, $.01 par value;
5,000,000 shares authorized,
1,000 shares issued and outstanding 1 -
at June 30, 1996
Common stock, $.01 par value;
300,000,000 and 100,000,000
shares authorized, 92,626,000
and 76,728,268 shares issued
and outstanding at June 30,
1996 and 1995, respectively 926 767
Additional paid-in capital 519,342 252,668
Accumulated deficit (7,767) (36,623)
Total stockholders' equity 512,502 216,812
$ 958,754 $405,413
See accompanying notes.
</TABLE>
<TABLE>
Consolidated Statements of Changes in Stockholders' Equity
<CAPTION>
(Amounts in thousands, except share data)
Additional
Preferred Stock Common Stock Paid-in Accumulated
Shares Amount Shares Amount Capital Deficit Total
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at June 30,
1993 - - 49,562,136 $495 $26,992 $(3,550) $23,937
Common stock issued:
Exercise of options
and warrants - - 2,827,280 28 1,836 - 1,864
Sale of stock, net - - 10,713,760 107 66,149 - 66,256
Tax benefit related
to stock options - - - - 4,590 - 4,590
Net income - - - - - 2,154 2,154
Balances at June 30,
1994 - - 63,103,176 630 99,567 (1,396) 98,801
Effect of immaterial
poolings - - 2,062,756 21 1,032 524 1,577
Balances as Restated - - 65,165,932 651 100,599 (872) 100,378
Common stock issued:
Exercise of options - - 2,905,256 29 4,655 - 4,684
Business acquisitions - - 4,785,354 48 75,653 - 75,701
Sale of stock, net - - 3,871,726 39 56,998 - 57,037
Tax benefit related to
stock options - - - - 14,763 - 14,763
Net loss - - - - - (35,751) (35,751)
Balances at June 30,
1995 - - 6,728,268 767 252,668 (36,623) 216,812
Effect of pooling
restatement - - - - - (960) (960)
Balances as Restated - - 6,728,268 767 52,668 (37,583) 215,852
Common stock issued:
Exercise of options
and warrants - - 10,370,338 104 47,885 - 47,989
Business acquisi-
tions - - 465,502 5 16,632 - 16,637
Sale of stock, net - - 5,061,892 50 141,320 - 141,370
Sale of preferred
stock, net 1,000 $ 1 - - 28,314 - 28,315
Tax benefit related
to stock options - - - - 32,523 - 32,523
Net income - - - - - 29,816 29,816
Balances at June 30,
1996 1,000 $ 1 92,626,000 $926 $519,342 $ (7,767) $512,502
See accompanying notes.
</TABLE>
<TABLE>
Consolidated Statements of Cash Flows
<CAPTION>
(Amounts in thousands) Year ended June 30,
1996 1995 1994
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 29,816 $(35,751) $ 2,154
Adjustments to reconcile net income to
net cash (used in) provided by operating
activities:
Depreciation and amortization 33,366 12,266 2,822
Amortization of subscriber acquisition
costs 126,072 60,924 17,922
Loss on sale of property and equipment 44 37 5
Charge for acquired research and
development 16,981 50,335 -
Changes in assets and liabilities:
Trade accounts receivable (10,435) (14,373) (4,266)
Other receivables (18,293) (9,086) (626)
Prepaid expenses and other current
assets (43,305) (19,635) (2,873)
Deferred subscriber acquisition costs (363,024) (111,761) (37,424)
Other assets (26,938) (6,051) (2,542)
Trade accounts payable 21,150 60,805 10,224
Accrued personnel costs 12,856 1,850 397
Other accrued expenses and
liabilities 104,531 5,747 9,474
Deferred revenue 17,929 7,190 2,322
Deferred income taxes 32,523 14,763 3,832
Total adjustments (96,543) 53,011 (733)
Net cash (used in) provided by
operating activities (66,727) 17,260 1,421
Cash flows from investing activities:
Short-term investments 7,960 5,380 (18,947)
Purchase of property and equipment (50,262) (59,255) (18,010)
Product development costs (32,631) (13,054) (5,131)
Sale of property and equipment - 180 95
Purchase costs of acquired businesses (4,133) (20,523) -
Net cash used in investing activities (79,066) (87,272) (41,993)
Cash flows from financing activities:
Proceeds from issuance of common stock,
net 189,359 61,721 68,120
Proceeds from issuance of preferred
stock, net 28,315 - -
Principal and accrued interest
payments on line of credit and
long-term debt (935) (3,045) (7,795)
Proceeds from line of credit
and issuance of long-term debt 3,000 13,488 14,260
Principal payments under capital
lease obligations (1,402) (368) (83)
Net cash provided by financing activities 218,337 71,796 74,502
Net increase in cash and cash equivalents 72,544 1,784 33,930
Cash and cash equivalents at beginning
of period 45,877 44,093 10,163
Cash and cash equivalents at end of
period $ 118,421 $ 45,877 $ 44,093
Supplemental cash flow information
Cash paid during the period for:
Interest $ 1,659 $ 1,076 $ 577
Income taxes - - -
See accompanying notes.
</TABLE>
Notes to Consolidated Financial Statements
1 Organization
America Online, Inc. ("the Company") was incorporated in the State of Delaware
in May 1985. The Company, based in Dulles, Virginia, is the leading provider of
online services, offering its subscribers a wide variety of services, including
electronic mail, conferencing, entertainment, software, computing support,
interactive magazines and newspapers, and online classes, as well as easy and
affordable access to services of the Internet. In addition, the Company is a
provider of data network services and multimedia and CD-ROM production services.
2 Summary of Significant Accounting Policies
Principles of Consolidation The consolidated financial statements include the
accounts of the Company and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
Business Combinations Business combinations which have been accounted for
under the purchase method of accounting include the results of operations of the
acquired business from the date of acquisition. Net assets of the companies
acquired are recorded at their fair value to the Company at the date of
acquisition.
Other business combinations have been accounted for under the pooling of
interests method of accounting. In such cases, the assets, liabilities, and
stockholders' equity of the acquired entities were combined with the Company's
respective accounts at recorded values. Prior period financial statements have
been restated to give effect to the merger unless the effect of the business
combination is not material to the financial statements of the Company.
Revenue Recognition Online service revenues are recognized over the period
services are provided. Other revenues, consisting principally of the sale of
merchandise, data network services, online advertising and transactions,
production services and development and licensing fees are recognized as
services are rendered. Deferred revenue consists primarily of monthly
subscription fees billed in advance, and prepaid network and advertising fees.
Property and Equipment Property and equipment are depreciated or amortized
using the straight-line method over the estimated useful life of the asset,
which ranges from 5 to 40 years, or over the life of the lease.
Deferred Subscriber Acquisition Costs The Company expenses the costs of
advertising as incurred, except direct response advertising, which is classified
as deferred subscriber acquisition costs. Direct response advertising consists
solely of the costs of marketing programs which result in subscriber
registrations without further effort required by the Company. These costs,
which relate directly to subscriber solicitations, principally include the
printing, production and shipping of starter kits and the costs of obtaining
qualified prospects by various targeted direct marketing programs and from third
parties. To date all deferred subscriber acquisition costs have been incurred
for the solicitation of specifically identifiable prospects. No indirect costs
are included in deferred subscriber acquisition costs.
The deferred costs are amortized, beginning the month after such costs are
incurred, over a period determined by calculating the ratio of current revenues
related to direct response advertising versus the total expected revenues
related to this advertising, or twenty-four months, whichever is shorter. All
other costs related to the acquisition of subscribers, as well as general
marketing costs, are expensed as incurred.
On a quarterly basis, management reviews the estimated future operating results
of the Company's subscriber base in order to evaluate the recoverability of
deferred subscriber acquisition costs and the related amortization period. It
is possible that management's future assessments of the recoverability and
amortization period of deferred subscriber acquisition costs may change based
upon actual results and other factors.
Effective July 1, 1995, the Company modified the components of subscriber
acquisition costs deferred, and changed the period over which it amortizes
subscriber acquisition costs. The period over which the Company amortizes
subscriber acquisition costs was changed from twelve and eighteen months to the
period described previously in order to more appropriately match subscriber
acquisition costs with associated online service revenues. The effect of this
change in accounting estimate for the year ended June 30, 1996, was to increase
net income by $48,106,000 ($.45 per share).
Product Development Costs The Company capitalizes costs incurred for the
production of computer software used in the sale of its services. Costs
capitalized include direct labor and related overhead for software produced by
the Company and the costs of software purchased from third parties. All costs in
the software development process which are classified as research and
development are expensed as incurred until technological feasibility has been
established. Once technological feasibility has been established, such costs are
capitalized until the software is commercially available. To the extent the
Company retains the rights to software development funded by third parties, such
costs are capitalized in accordance with the Company's normal accounting
policies. Amortization is provided on a product-by-product basis, using the
greater of the straight-line method or current year revenue as a percent of
total revenue estimates for the related software product, not to exceed five
years, commencing the month after the date of product release.
<TABLE>
Product development costs consist of the following:
<CAPTION>
(in thousands) Year ended June 30,
<S> <C> <C>
1996 1995
Balance, beginning of year $ 18,949 $ 7,912
Costs capitalized 32,631 13,054
Costs amortized (7,250) (2,017)
Balance, end of year $ 44,330 $ 18,949
</TABLE>
The accumulated amortization of product development costs related to the
production of computer software totaled $15,152,000 and $7,902,000 at June 30,
1996 and 1995, respectively.
Included in product development costs are research and development costs
totaling $16,449,000, $5,277,000, and $2,453,000 and other product development
costs totaling $30,118,000, $6,969,000, and $1,050,000 in the years ended June
30, 1996, 1995 and 1994, respectively.
Investments The Company has various investments, including foreign joint
ventures, that are accounted for under the equity method of accounting. All
investments in which the Company has the ability to exercise significant
influence over the investee, but less than a controlling voting interest, are
accounted for under the equity method of accounting. Under the equity method of
accounting, the Company's share of the investee's earnings or loss is included
in consolidated operating results. To date, the Company's basis and current
commitments in its investments accounted for under the equity method of
accounting have been minimal. As a result, these investments have not
significantly impacted the Company's results of operations or its financial
position.
All other investments, for which the Company does not have the ability to
exercise significant influence and there is not a readily determinable market
value, are accounted for under the cost method of accounting. Dividends and
other distributions of earnings from investees, if any, are included in income
when declared. The Company periodically evaluates the carrying value of its
investments accounted for under the cost method of accounting and as of June 30,
1996, the fair value of these investments approximated cost.
Goodwill Goodwill consists of the excess of cost over the fair value of net
assets acquired and certain other intangible assets relating to purchase
transactions. Goodwill and intangible assets are amortized over periods ranging
from 5-10 years. As of June 30, 1996 and 1995, accumulated amortization was
$8,731,000 and $1,653,000, respectively. The Company periodically evaluates
whether changes have occurred that would require revision of the remaining
estimated useful life of the assigned goodwill or render the goodwill not
recoverable. If such circumstances arise, the Company would use an estimate of
the undiscounted value of expected future operating cash flows in relation to
its determination whether the goodwill is recoverable. Based on its review, the
Company does not believe that an impairment of its goodwill has occurred.
Cash, Cash Equivalents and Short-term Investments The Company considers all
highly liquid investments with an original maturity of three months or less to
be cash equivalents. In fiscal 1995, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." The adoption was not material to the Company's
results of operations or its financial position. The Company has classified all
debt and equity securities as available-for-sale. Available-for-sale securities
are carried at fair value, with unrealized gains and losses reported as a
separate component of stockholders' equity. Realized gains and losses and
declines in value judged to be other-than-temporary on available-for-sale
securities are included in other income. Available-for-sale securities at June
30, 1996 and 1995, consisted of U.S. Treasury Bills and other obligations of
U.S. Government agencies totaling $4,080,000 and $7,579,000 and U.S. corporate
debt obligations totaling $6,632,000 and $11,093,000, respectively. At June 30,
1996 and 1995, the estimated fair value of these securities approximated cost.
Net Income (Loss) per Common Share Net income (loss) per share is calculated by
dividing net income (loss) by the weighted average number of common and, when
dilutive, common equivalent shares outstanding during the period.
Reclassification Certain amounts in prior years' consolidated financial
statements have been reclassified to conform to the current year presentation.
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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Recent Pronouncements In October 1995, the Financial Accounting Standards
Board issued SFAS No. 123, "Accounting for Stock-Based Compensation," which is
effective for the Company's June 30, 1997, financial statements. SFAS No. 123
allows companies to account for stock-based compensation under either the new
provisions of SFAS No. 123 or under the provisions of APB Opinion No. 25,
"Accounting for Stock Issued to Employees," with additional pro forma
disclosures in the footnotes to the financial statements as if the measurement
provisions of SFAS No. 123 had been adopted. The Company intends to continue
accounting for its stock-based compensation in accordance with the provisions of
APB No. 25. As such, the adoption of SFAS No. 123 will not impact the Company's
results of operations or its financial position.
3 Business Combinations
Pooling Transaction In February 1996, the Company completed its merger with
Johnson-Grace Company ("Johnson-Grace"), in which Johnson-Grace became a wholly-
owned subsidiary of the Company. The Company exchanged 1,617,778 shares of
common stock for all the outstanding common and preferred stock of Johnson-
Grace. Additionally, 72,429 shares of the Company's common stock were reserved
for outstanding stock options issued by Johnson-Grace and assumed by the
Company. The merger was accounted for under the pooling of interests method of
accounting, and accordingly, the accompanying consolidated financial statements
have been restated to include the accounts and operations of Johnson-Grace for
all periods presented prior to the merger. In connection with the merger of the
Company and Johnson-Grace, merger expenses of $848,000 were recognized during
1996.
Johnson-Grace had a fiscal year end of March 31 and, accordingly, the Company's
retained earnings have been adjusted by $960,000 to reflect Johnson-Grace's
results of operations for the three months ended June 30, 1995, which are not
included in the Company's results of operations.
Johnson-Grace's revenues, adjusted for intercompany sales, during the nine
months ended March 31, 1996, and the years ended June 30, 1995 and 1994, were
minimal. During the nine months ended March 31, 1996, and the years ended June
30, 1995 and 1994, Johnson-Grace's net loss was $3,770,000, $2,104,000, and
$396,000, respectively.
Purchase Transaction In September 1995, the Company acquired Ubique, Ltd.
("Ubique"), an Israeli company, in a transaction accounted for under the
purchase method of accounting. A total of 388,532 shares of the Company's
common stock were issued and $1,500,000 was paid in exchange for all of the
outstanding equity and related rights of Ubique. Additionally, 43,896 shares of
the Company's common stock were reserved for outstanding stock options issued
by Ubique and assumed by the Company. Approximately $17 million of the
aggregate purchase price was allocated to in-process research and development
and was charged to the Company's operations at the time of the acquisition.
<TABLE>
4 Property and Equipment
Property and equipment consist of the following:
<CAPTION>
(in thousands) June 30,
1996 1995
<S> <C> <C>
Computer equipment $ 84,775 $ 57,940
Buildings and related improvements 34,479 20,084
Land 7,600 6,075
Leasehold improvements 6,068 3,074
Furniture and fixtures 5,701 5,222
138,623 92,395
Less accumulated depreciation
and amortization 37,346 21,476
Net property and equipment $ 101,277 $ 70,919
</TABLE>
5 Commitments and Contingencies
The Company leases facilities and equipment primarily under several long-term
operating leases. Future minimum payments under noncancelable operating leases
with initial terms of one year or more consist of the following:
<TABLE>
(in thousands)
Year ending June 30,
<CAPTION>
<S> <C>
1997 $ 72,264
1998 73,518
1999 57,123
2000 28,069
2001 11,266
Thereafter 50,998
$ 293,238
</TABLE>
The Company's rental expense under operating leases in the years ended June 30,
1996, 1995 and 1994, totaled approximately $47,844,000, $10,120,000 and
$2,910,000, respectively.
Communication Networks The Company has guaranteed monthly usage levels of data
and voice communications with one of its vendors. The remaining commitments are
$192,000,000, $142,000,000 and $131,500,000 for the years ending June 30, 1997,
1998 and 1999, respectively. The related expense for the years ended June 30,
1996, 1995 and 1994, was $278,513,000, $138,793,000 and $40,315,000,
respectively.
Contingencies Various legal proceedings have arisen against the Company in the
ordinary course of business. In the opinion of management, these proceedings
involve amounts which would not have a material effect on the financial position
of the Company if such proceedings were disposed of unfavorably.
6 Notes Payable
Notes payable at June 30, 1996, totaled approximately $20 million and consisted
primarily of amounts borrowed to finance two office buildings and certain
building improvements. The notes are collateralized by the respective assets.
Two of the notes have a variable interest rate equal to 105 basis points and 100
basis points above the 30 day London Interbank Offered Rate. One of the notes
has a fixed interest rate of 8.48% per annum. Aggregate maturities of notes
payable for the years ended June 30, 1997, 1998, 1999, 2000, 2001, and
thereafter are $1,029,000, $1,045,000, $1,062,000, $1,080,000, $1,100,000 and
$15,021,000, respectively.
7 Other Income
The following table summarizes the components of other income:
<TABLE>
(in thousands) Year ended June 30,
1996 1995 1994
<S> <C> <C> <C>
Interest income $ 6,901 $ 3,979 $ 1,658
Interest expense (1,404) (1,062) (577)
Other income (expense) (7,553) 157 729
$ (2,056) $ 3,074 $ 1,810
</TABLE>
Other income (expense) in the year ended June 30, 1996, includes an $8,000,000
charge related to the settlement of a class action lawsuit.
8 Income Taxes
The provision for income taxes is attributable to:
<TABLE>
(in thousands) Year ended June 30,
1996 1995 1994
<S> <C> <C> <C>
Income before provision for
income taxes $ 32,523 $ 15,169 $ 3,832
Current $ - $ - $ -
Deferred 32,523 15,169 3,832
$ 32,523 $ 15,169 $ 3,832
</TABLE>
The provision for income taxes differs from the amount computed by applying the
statutory federal income tax rate to income before provision for income taxes.
The sources and tax effects of the differences are as follows:
<TABLE>
(in thousands) Year ended June 30,
1996 1995 1994
<S> <C> <C> <C>
Income tax at the federal statutory
rate of 34% $ 21,195 $ (6,998) $ 2,035
State income tax, net of federal benefit 3,424 1,597 403
Nondeductible charge for purchased
research and development 5,773 17,114 -
Loss, for which no tax benefit was derived 1,437 2,347 1,394
Other 694 1,109 -
$ 32,523 $ 15,169 $ 3,832
</TABLE>
Deferred income taxes arise because of differences in the treatment of income
and expense items for financial reporting and income tax purposes, primarily
relating to deferred subscriber acquisition and product development costs.
As of June 30, 1996, the Company has net operating loss carryforwards of
approximately $415,000,000 for tax purposes which will be available to offset
future taxable income. If not used, these loss carryforwards will expire
between 2001 and 2011. To the extent that net operating loss carryforwards, when
realized, relate to stock option deductions, the resulting benefits will be
credited to stockholders' equity.
The Company's income tax provision was computed based on the federal statutory
rate and the average state statutory rates, net of the related federal benefit.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax liabilities and assets are as follows:
<TABLE>
(in thousands) June 30,
1996 1995
<S> <C> <C>
Deferred tax liabilities:
Capitalized software costs $ 16,801 $ 7,008
Deferred member acquisition costs 119,071 28,619
Net deferred tax liabilities $ 135,872 $ 35,627
Deferred tax assets:
Net operating loss carryforwards $ 157,000 $ 39,000
Total deferred tax assets 157,000 39,000
Valuation allowance for deferred
assets (21,128) (3,373)
Net deferred tax assets $ 135,872 $ 35,627
</TABLE>
9 Capital Accounts
Common Stock At June 30, 1996 and 1995, the Company's $.01 par value common
stock authorized was 300,000,000 and 100,000,000 shares, respectively, with
92,626,000 and 76,728,268 shares issued and outstanding, respectively. At June
30, 1996, 37,783,810 shares were reserved for the exercise of issued and
unissued common stock options and a warrant, and 478,813 shares were reserved
for issuance in connection with the Company's Employee Stock Purchase Plan.
Preferred Stock In February 1992, the Company's stockholders approved an
amendment and restatement of the certificate of incorporation which authorized
the future issuance of 5,000,000 shares of preferred stock, $.01 par value,
with rights and preferences to be determined by the Board of Directors.
During May 1996, the Company sold 1,000 shares of Series B convertible preferred
stock ("the Preferred Stock") for approximately $28,000,000. The Preferred
Stock has an aggregate liquidation preference of approximately $28,000,000 and
accrues dividends at a rate of 4% per annum. Accrued dividends can be paid in
the form of additional shares of Preferred Stock. During May 1998, the
Preferred Stock, plus accrued but unpaid dividends, automatically converts into
shares of common stock based on the fair market value of common stock at the
time of conversion.
Warrant In connection with an agreement with the Company's primary
communications provider, the Company has an outstanding warrant, exercisable
through March 31, 1999, subject to certain performance standards specified in
the agreement, to purchase 3,600,000 shares of common stock at a price of $3.91
per share.
Shareholder Rights Plan During fiscal 1993, the Company adopted a shareholder
rights plan and distributed a dividend of one preferred share purchase right (a
"Right") for each outstanding share of the Company's common stock. The Rights
become exercisable in certain limited circumstances involving a potential
business combination or change of control transaction of the Company. Each
Right initially entitles registered holders of the Company's common stock to
purchase one one-hundredth of a share of the Company's new Series A Junior
Participating Preferred Stock ("Series A Preferred Stock") at a price of $150.00
per one one-hundredth of a share of Series A Preferred Stock. Following certain
other events after the Rights have become exercisable, each Right entitles its
holder to purchase for $150.00 an amount of common stock of the Company or, in
certain circumstances, securities of the acquirer, having a then-current market
value of two times the exercise price of the Right. The Rights are redeemable
for one cent per Right at the option of the Board of Directors. Until a Right
is exercised, the holder of the Right, as such, has no rights as a shareholder
of the Company. The Rights expire on May 3, 2003, unless redeemed prior to that
date.
Stock Splits On November 25, 1994, April 27, 1995 and November 28, 1995, the
Company effected two-for-one splits of the outstanding shares of common stock.
Accordingly, all data shown in the accompanying consolidated financial
statements and notes has been retroactively adjusted to reflect the stock
splits.
10 Stock Plans
Options to purchase the Company's common stock under various stock option plans
have been granted to employees, directors and consultants of the Company at fair
market value at the date of grant. Generally, the options become exercisable
over periods ranging from one to four years and expire ten years from the date
of grant. A summary of stock option activity is as follows:
<TABLE>
Number of Option price
shares per share
<S> <C> <C>
Balance at June 30, 1993 14,362,008 $ .06 - $ 4.59
Granted 2,917,200 $ 4.65 - $ 9.12
Exercised (2,770,960) $ .06 - $ 3.75
Forfeited (218,800) $ 1.12 - $ 9.00
Balance at June 30, 1994 14,289,448 $ .06 - $ 9.12
Granted 23,587,196 $ 6.95 - $22.00
Exercised (2,677,232) $ .06 - $ 9.12
Forfeited (1,021,700) $ .25 - $18.84
Balance at June 30, 1995 34,177,712 $ .06 - $22.00
Granted 4,605,995 $22.12 - $55.50
Exercised (5,914,213) $ .06 - $33.50
Forfeited (2,155,078) $ 1.12 - $54.25
Balance at June 30, 1996 30,714,416 $ .06 - $55.50
</TABLE>
At June 30, 1996, 8,529,435 options were exercisable. There have been
17,356,437 options exercised under the above plans.
At June 30, 1996, the Company had 1,585,707 common stock options outstanding
under stock option plans which were assumed by the Company in connection with
various business combinations. The options are exercisable at prices ranging
from $0.01 to $44.75 and vest over the next four years. At June 30, 1996,
505,375 options were exercisable.
Employee Stock Purchase Plan In May 1992, the Company's Board of Directors
adopted an Employee Stock Purchase Plan ("the ESPP"). Under the ESPP, employees
of the Company who elect to participate are granted options to purchase common
stock at a 15 percent discount from the market value of such stock. The ESPP
permits an enrolled employee to make contributions to purchase shares of common
stock by having withheld from his or her salary an amount between 1 percent and
10 percent of compensation. The ESPP is administered by the Compensation
Committee of the Board of Directors. The total number of shares of common stock
that may be issued pursuant to options granted under the ESPP is 800,000. A
total of 321,187 shares of common stock has been issued under the ESPP.
11 Employee Benefit Plan
Savings Plan The Company has a savings plan ("the Savings Plan") that
qualifies as a deferred salary arrangement under Section 401(k) of the Internal
Revenue Code. Under the Savings Plan, participating employees may defer a
portion of their pretax earnings, up to the Internal Revenue Service annual
contribution limit. The Company matches 50% of each employee's contributions up
to a maximum matching contribution of 2% of the employee's earnings. The
Company's matching contribution to the Savings Plan was approximately
$1,126,000 and $358,000 in the years ended June 30, 1996 and 1995, respectively.
12 Subsequent Event
In August 1996, the Company purchased 100% of the outstanding stock of The
ImagiNation Network, Inc., an online games company. The Company paid $14.5
million in common stock in a transaction accounted for under the purchase method
of accounting.
EXHIBIT INDEX
Exhibit
No.
3.1 Restated By-Laws of America Online, Inc.
21.1 List of Subsidiaries
23.1 Consent of Ernst & Young
24.1 Powers of Attorney
Exhibit 3.2
AMERICA ONLINE, INC.
RESTATED BY-LAWS
ARTICLE I - STOCKHOLDERS
Section 1. Annual Meeting. An annual meeting of the stockholders, for
the election of directors to succeed those whose terms expire and for the
transaction of such other business as may properly come before the meeting,
shall be held at such place, on such date, and at such time as the board of
directors shall each year fix.
Section 2. Special Meetings. Special meetings of the stockholders, for
any purpose or purposes prescribed in the notice of the meeting, may be called
by the Chief Executive Officer or the board of directors, by the affirmative
vote of a majority of the Whole Board and shall be held at such place, on such
date, and at such time as shall be fixed by the board of directors or the person
calling the meeting. The term "Whole Board" shall mean the total number of
authorized directors, whether or not there exists any vacancies in previously
authorized directorships.
Section 3. Notice of Meetings. Written notice of the place, date, and
time of all meetings of the stockholders shall be given, not less than ten (10)
nor more than sixty (60) days before the date on which the meeting is to be
held, to each stockholder entitled to vote at such meeting, except as otherwise
provided herein or required by law (meaning, here and hereinafter, as required
from time to time by the Delaware General Corporation Law or the Certificate of
Incorporation of the Corporation, as amended and restated from time to time).
When a meeting is adjourned to another place, date or time, written notice
need not be given of the adjourned meeting if the place, date and time thereof
are announced at the meeting at which the adjournment is taken; provided,
however, that if the date of any adjourned meeting is more than thirty (30) days
after the date for which the meeting was originally noticed, or if a new record
date is fixed for the adjourned meeting, written notice of the place, date, and
time of the adjourned meeting shall be given in conformity herewith. At any
adjourned meeting, any business may be transacted that might have been
transacted at the original meeting.
Section 4. Quorum. At any meeting of the stockholders, the holders of
a majority of the voting power of the shares of the stock entitled to vote at
the meeting, present in person or by proxy, shall constitute a quorum for all
purposes, unless or except to the extent that the presence of a larger number
may be required by law. Where a separate vote by a class or classes, or series
thereof, is required, a majority of the voting power of the shares of such class
or classes, or series, present in person or represented by proxy shall
constitute a quorum entitled to take action with respect to that vote on that
matter.
If a quorum shall fail to attend any meeting, the chairman of the meeting
or the holders of a majority of the voting power of the shares of stock entitled
to vote who are present, in person or by proxy, may adjourn the meeting to
another place, date, or time.
Section 5. Organization. Such person as the board of directors may
have designated or, in the absence of such a person, the Chairman of the Board
or, in his absence, such person as may be chosen by the holders of a majority of
the shares entitled to vote who are present, in person or by proxy, shall call
to order any meeting of the stockholders and act as chairman of the meeting. In
the absence of the Secretary of the Corporation, the secretary of the meeting
shall be such person as the chairman of the meeting appoints.
Section 6. Conduct of Business. The chairman of any meeting of
stockholders shall determine the order of business and the procedure at the
meeting, including such regulation of the manner of voting and the conduct of
discussion as may seem to him in order. The date and time of the opening and
closing of the polls for each matter upon which the stockholders will vote at
the meeting shall be announced at the meeting.
Section 7. Notice of Stockholder Business and Nominations.
A. Annual Meetings of Stockholders.
(1) Nominations of persons for election to the board of directors and
the proposal of business to be considered by the stockholders may be made at an
annual meeting of stockholders (a) pursuant to the Corporation's notice of
meeting, (b) by or at the direction of the board of directors or (c) by any
stockholder of the Corporation who was a stockholder of record at the time of
giving of notice provided for in this Section, who is entitled to vote at the
meeting and who complies with the notice procedures set forth in this Section.
(2) For nominations or other business to be properly brought before an annual
meeting by a stockholder pursuant to clause (c) of paragraph (A)(1) of this
Section, the stockholder must have given timely notice thereof in writing to the
Secretary of the Corporation and such other business must otherwise be a proper
matter for stockholder action. To be timely, a stockholder's notice shall be
delivered to the Secretary at the principal executive offices of the Corporation
not later than the close of business on the sixtieth (60) day nor earlier than
the close of business on the ninetieth (90th) day prior to the first anniversary
of the preceding year's annual meeting; provided, however, that in the event
that the date of the annual meeting is more than thirty (30) days before or more
than sixty (60) days after such an anniversary date, notice by the stockholder
to be timely must be so delivered not earlier than the close of business on the
ninetieth (90) day prior to such annual meeting and not later than the close of
business on the later of the sixtieth (60th) day prior to such annual meeting or
the close of business on the tenth (10th) day following the day on which public
announcement of the date of such meeting is first made by the Corporation. Such
stockholder's notice shall set forth (a) as to each person whom the stockholder
proposes to nominate for election or reelection as a director all information
relating to such person that is required to be disclosed in solicitations of
proxies for election of directors, or is otherwise required, in each case
pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended
(the "Exchange Act") (including such person's written consent to being named in
the proxy statement as a nominee and to serving as a director if elected); (b)
as to any other business that the stockholder proposes to bring before the-
meeting, a brief description of the business desired to be brought before the
meeting, the reasons for conducting such business at the meeting and any
material interest in such business of such stockholder and the beneficial owner,
if any, on whose behalf the proposal is made; and (c) as to the stockholder
giving the notice and the beneficial owner, if any, on whose behalf the
nomination or proposal is made (i) the name and address of such stockholder, as
they appear on the Corporation's books, and of such beneficial owner and (ii)
the class and number of shares of the Corporation that are owned beneficially
and held of record by such stockholder and such beneficial owner.
(3) Notwithstanding anything in the second sentence of paragraph
(A)(2) of this Section to the contrary, in the event that the number of
directors to be elected to the board of directors of the Corporation is
increased and there is no public announcement by the corporation naming all of
the nominees for director or specifying the size of the increased board of
directors at least seventy (70) days prior to the first anniversary of the
preceding year's annual meeting (or, if the annual meeting is held more than
thirty (30) days before or sixty (60) days after such anniversary date, at least
seventy (70) days prior to such annual meeting), a stockholder's notice required
by this Section shall also be considered timely, but only with respect to
nominees for any new positions created by such increase, if it shall be
delivered to the Secretary at the principal executive office of the Corporation
not later than the close of business on the tenth (10th) day following the day
on which such public announcement is first made by the Corporation.
B. Special Meetings of Stockholders.
Only such business shall be conducted at a special meeting of
stockholders as shall have been brought before the meeting pursuant to the
Corporation's notice of meeting. Nominations of persons for election to the
board of directors may be made at a special meeting of stockholders at which
directors are to be elected pursuant to the Corporation's notice of meeting (a)
by or at the direction of the board of directors or (b) provided that the board
of directors has determined that directors shall be elected at such meeting, by
any stockholder of the Corporation who is a stockholder of record at the time of
giving of notice of the special meeting, who shall be entitled to vote at the
meeting and who complies with the notice procedures set forth in this Section.
In the event the Corporation calls a special meeting of stockholders for the
purpose of electing one or more directors to the board of directors, any such
stockholder may nominate a person or persons (as the case may be), for election
to such positions) as specified in the Corporation's notice of meeting, if the
stockholder's notice required by paragraph (A)(2) of this Section shall be
delivered to the Secretary at the principal executive offices of the Corporation
not earlier than the ninetieth (90th) day prior to such special meeting nor
later than the close of business of the sixtieth (60th) day prior to such
special meeting or the tenth (10th) day following the day on which public
announcement is first made of the date of the special meeting and of the
nominees proposed by the board of directors to be elected at such meeting.
C. General.
(1) Only such persons who are nominated in accordance with the
procedures set forth in this Section shall be eligible to serve as directors and
only such business shall be conducted at a meeting of stockholders as shall have
been brought before the meeting in accordance with the procedures set forth in
this Section. Except as otherwise provided by law or these by-laws, the
chairman of the meeting shall have the power and duty to determine whether a
nomination or any business proposed to be brought before the meeting was made or
proposed, as the case may be, in accordance with the procedures set forth in
this Section and, if any proposed nomination or business is not in compliance
herewith to declare that such defective proposal or nomination shall be
disregarded.
(2) For purposes of this Section, "public announcement" shall mean
disclosure in a press release reported by the Dow Jones News service, Associated
Press or comparable national news service or in a document publicly filed by the
Corporation with the Securities and Exchange Commission pursuant to Section 13,
14 or 15(d) of the Exchange Act.
(3) Notwithstanding the foregoing provisions of this Section
pertaining to notice requirements under Delaware corporate law for shareholders
to nominate persons for election to the Board and to bring proposals of other
business properly before other shareholders at an annual or special meeting of
shareholders, a shareholder shall comply with all applicable requirements of the
Exchange Act and the rules and regulations thereunder in order to have any such
proposal included in the proxy materials provided to shareholders in connection
with such meeting. Nothing in this Section shall be deemed to affect any rights
of shareholders to request inclusion of proposals in the Corporation's proxy
materials pursuant to Rule 14a-8 under the Exchange Act, provided that
shareholders comply with the requirements thereunder, or any rights of the
holders of any series of Preferred stock to elect directors under specified
circumstances.
Section 8. Proxies and Voting. At any meeting of the stockholders,
every stockholder entitled to vote may vote in person or by proxy authorized by
an instrument in writing or by a transmission permitted by law filed in
accordance with the procedure established for the meeting. Any copy, facsimile
telecommunication or other reliable reproduction of the writing or transmission
created pursuant to this Section may be substituted or used in lieu of the
original writing or transmission for any and all purposes for which the original
writing or transmission could be used, provided that such copy, facsimile
telecommunication or their reproduction shall be a complete reproduction of the
entire original writing or transmission.
All voting, including on the election of directors but excepting where
otherwise required by law, may be by voice vote. Any vote not taken by voice
shall be taken by ballots, each of which shall state the name of the stockholder
or proxy voting and such other information as may be required under the
procedure established for the meeting. The Corporation may, and to the extent
required by law, shall, in advance of any meeting of stockholders, appoint one
or more inspectors to act at the meeting and make a written report thereof. The
Corporation may designate one or more persons as alternate inspectors to replace
any inspector who fails to act. If no inspector or alternate is able to act at
a meeting of stockholders, the person presiding at the meeting may, and to the
extent required by law, shall, appoint one or more inspectors to act at the
meeting. Each inspector, before entering upon the discharge of his duties,
shall take and sign an oath faithfully to execute the duties of inspector with
strict impartiality and according to the best of his ability.
Except as otherwise provided in the terms of any class or series of
Preferred Stock of the Corporation, all elections shall be determined by a
plurality of the votes cast, and except as otherwise required by law, all other
matters shall be determined by a majority of the votes cast affirmatively or
negatively.
Section 9. Stock List. A complete list of stockholders entitled to
vote at any meeting of stockholders, arranged in alphabetical order for each
class of stock and showing the address of each such stockholder and the number
of shares registered in such stockholder's name, shall be open to the
examination of any such stockholder, for any purpose germane to the meeting,
during ordinary business hours for a period of at least ten (10) days prior to
the meeting either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held.
The stock list shall also be kept at the place of the meeting during the
whole time thereof and shall be open to the examination of any such stockholder
who is present. This list shall presumptively determine the identity of the
stockholders entitled to vote at the meeting and the number of shares held by
each of them.
ARTICLE II - BOARD OF DIRECTORS
Section 1. General Powers, Number and Term of Office
The business and affairs of the Corporation shall be under direction of its
board of directors. The number of directors who shall constitute the Whole
Board shall be such number as the board of directors shall from time to time
have designated. The board of directors shall be divided into three classes, as
nearly equal in number as possible. The term of office of the first class shall
expire at the 1992 annual meeting of stockholders or any special meeting in lieu
thereof, the term of office of the second class shall expire at the 1993 annual
meeting of stockholders or any special meeting in lieu thereof, and the term of
office of the third class shall expire at the 1994 annual meeting of
stockholders or any special meeting in lieu thereof. At each annual meeting of
stockholders or special meeting in lieu thereof following such initial
classification, directors elected to succeed those directors whose terms expire
shall be elected for a term of office to expire at the third succeeding annual
meeting of stockholders or special meeting in lieu thereof after their election
and until their successors are duly elected and qualified.
Section 2. Vacancies and Newly Created Directorships. Subject to the
rights of the holders of any class or series of Preferred Stock, and except as
otherwise determined by the board of directors or required by law, newly created
directorships resulting from any increase in the authorized number of directors
or any vacancies in the board of directors resulting from death, resignation,
retirement, disqualification, removal from office or other cause may be filled
only by a majority vote of the directors then in office, though less than a
quorum, or the sole remaining director; directors so chosen shall hold office
for a term expiring at the annual meeting of stockholders at which the term of
office of the class to which they have been elected expires, if applicable, and
if no such classes shall have been established, at the next annual meeting of
stockholders and until such director's successor shall have been duly elected
and qualified. No decrease in the number of authorized directors constituting
the board shall shorten the term of any incumbent director.
Section 3. Resignation. Any director may resign at any time upon
written notice to the Corporation at its principal place of business or to the
Chief Executive Officer or Secretary. such resignation shall be effective upon
receipt unless it is specified to be effective at some other time or upon the
happening of some other event.
Section 4. Regular Meetings. Regular meetings of the board of
directors shall be held at such place or places, on such date or dates, and at
such time or times as shall have been established by the board of directors and
publicized among all directors. A notice of each regular meeting shall not be
required.
Section 5. Special Meetings. Special meetings of the board of
directors may be called by a majority of the Whole Board or by the Chairman of
the Board or Chief Executive Officer and shall be held at such place, on such
date, and at such time as they or he shall fix. Notice of the place, date, and
time of each such special meeting shall be given each director by whom it is not
waived by mailing written notice not less than five (5) days before the meeting
or by telegraphing or telexing or by facsimile transmission of the same not less
than twenty-four (24) hours before the meeting. Unless otherwise indicated in
the notice thereof, any and all business may be transacted at a special meeting.
Section 6. Quorum. At any meeting of the board of directors, a
majority of the Whole Board shall constitute a quorum for all purposes. If a
quorum shall fail to attend any meeting, a majority of those present may adjourn
the meeting to another place, date, or time, without further notice or waiver
thereof.
Section 7. Participation in Meetings by Conference Telephone. Members
of the board of directors, or of any committee thereof, may participate in a
meeting of the board of directors or committee by means of conference telephone
or similar communications equipment by means of which all persons participating
in the meeting can hear each other and such participation shall constitute
presence in person at such meeting.
Section 8. Conduct of Business. At any meeting of the board of
directors, business shall be transacted in such order and manner as the board of
directors may from time to time determine, and all matters shall be determined
by the vote of a majority of the directors present, except as otherwise provided
herein or required by law. Action may be taken by the board of directors
without a meeting if all members of the board of directors who are then in
office consent thereto in writing, and the writing or writings are filed with
the minutes of proceedings of the board of directors.
Section 9. Powers. The board of directors may, except as otherwise
required by law, exercise all such powers and do all such acts and things as may
be exercised or done by the corporation, including, without limiting the
generality of the foregoing, the unqualified power:
(1) To declare dividends from time to time in accordance with law;
(2) To purchase or otherwise acquire any property, rights or privileges on
such terms as it shall determine;
(3) To authorize the creation, making and issuance, in such form as it may
determine, of written obligations of every kind, negotiable or non-negotiable,
secured or unsecured, to borrow funds and guarantee obligations, and to do all
things necessary in connection therewith;
(4) To remove any officer of the Corporation with or without cause, and
from time to time to devolve the powers and duties of any officer upon any other
person for the time being;
(5) To confer upon any officer of the Corporation the power to appoint,
remove and suspend subordinate officers, employees and agents;
(6) To adopt from time to time such stock option, stock purchase bonus or
other compensation plans for directors, officers, employees and agents of the
Corporation and its subsidiaries as it may determine;
(7) To adopt from time to time such insurance, retirement, and other
benefit plans for directors, officers, employees and agents of the Corporation
and its subsidiaries as it may determine; and
(8) To adopt from time to time regulations not inconsistent herewith, for
the management of the Corporation's business and affairs.
Section 10. Compensation of Directors. Directors, as such, may receive,
pursuant to resolution of the board of directors, fixed fees and other
compensation for their services as directors, including, without limitation,
their services as members of committees of the board of directors.
ARTICLE III - COMMITTEES
Section 1. Committees of the Board of Directors. The board of
directors, by a vote of a majority of the Whole Board, may from time to time
designate committees of the board of directors, with such lawfully delegable
powers and duties as it thereby confers, to serve at the pleasure of the board
of directors and shall, for those committees and any others provided for herein,
elect a director or directors to serve as the member or members, designating, if
it desires, other directors as alternate members who may replace any absent or
disqualified member at any meeting of a committee. Any committee so designated
may exercise the power and authority of the board of directors to declare a
dividend, to authorize the issuance of stock or to adopt a certificate of
ownership and merger pursuant to Section 253 of the Delaware General Corporation
Law if the resolution that designates the committee or a supplemental resolution
of the board of directors shall so provide. In the absence or disqualification
of any member of any committee and any alternate member in his place, the member
or members of the committee present at the meeting and not disqualified from
voting, whether or not he or they constitute a quorum, may by unanimous vote
appoint another member of the board of directors to act at the meeting in the
place of the absent or disqualified member.
Section 2. Conduct of Business. Each committee of the board of
directors may determine the procedural rules for meeting and conducting its
business and shall act in accordance therewith, except as otherwise provided
herein or required by law. Adequate provisions shall be made for notice to
members of all meetings of committees. One-third (1/3) of the members of any
committee shall constitute a quorum unless the committee shall consist of one
(1) or two (2) members, in which event one (1) member shall constitute a quorum;
and all matters shall be determined by a majority vote of the members present.
Action may be taken by any committee without a meeting if all members thereof
consent thereto in writing, and the writing or writings are filed with the
minutes of the proceedings of such committee.
ARTICLE IV - OFFICERS
Section 1. Generally. The officers of the Corporation shall consist of
a President, one or more Vice Presidents, a Secretary, a Treasurer and such
other officers as may from time to time be appointed by the board of directors,
including, without limiting the generality of the foregoing, a Chairman of the
Board, a Chief Executive officer and a Vice Chairman of the Board. officers
shall be elected by the board of directors, which shall consider that subject at
its first meeting after every annual meeting of stockholders. Each officer
shall hold office until his successor is elected and qualified or if earlier,
until he dies, resigns, is removed or becomes disqualified, unless a shorter
term is specified by the board of directors at the time of election of such
officer. Any number of offices may be held by the same person.
Section 2. Chief Executive Officer. The Chief Executive Officer shall
be the chief executive officer of the Corporation and shall, subject to the
direction of the board of directors, have general supervision and control of its
business. Unless otherwise provided by resolution of the board of directors,
the Chief Executive Officer shall preside at all meetings of the stockholders
and, in the absence of the Chairman of the Board, if any, at meetings of the
board of directors. The Chief Executive Officer shall have general supervision
and direction of all of the officers, employees and agents of the Corporation.
Section 3. Chairman of the Board. The Chairman of the Board, if any,
shall preside at all meetings of the board of directors at which he is present
and shall have such authority and perform such duties as may be prescribed by
these by-laws or from time to time determined by the board of directors. The
Chairman of the Board shall have power to sign all stock certificates, contracts
and other instruments of the Corporation which are authorized.
Section 4. Vice Chairman of the Board. The Vice Chairman of the Board,
if any, shall have such powers and duties as may be delegated to him by the
board of directors. To the extent not otherwise provided herein, the Vice
Chairman of the Board shall perform the duties and exercise the powers of the
Chairman of the Board in the event of the Chairman's absence or disability.
Section 5. President. Except for meetings at which the Chief Executive
Officer or the Chairman of the Board, if any, presides, the President shall, if
present, preside at all meetings of stockholders, and if a director, at all
meetings of the board of directors. The President shall, subject to the control
and direction of the Chief Executive Officer and the board of directors, have
and perform such powers and duties as may be prescribed by these by-laws or from
time to time be determined by the Chief Executive Officer or the board of
directors. The President shall have power to sign all stock certificates,
contracts and other instruments of the Corporation which are authorized.
Section 6. Vice President. Each Vice President shall have such powers
and duties as may be delegated to him by the board of directors, the Chief
Executive Officer and the President. One
(1) Vice President shall be designated by the board of directors to perform the
duties and exercise the powers of the President in the event of the President's
absence or disability.
Section 7. Treasurer. The Treasurer shall have the responsibility for
maintaining the financial records of the Corporation. The Treasurer shall make
such disbursements of the funds of the Corporation as are authorized and shall
render from time to time an account of all such transactions and of the
financial condition of the Corporation. The Treasurer shall also perform such
other duties as the board of directors may from time to time prescribe.
Section 8. Secretary. The Secretary shall issue all authorized notices
for, and shall keep minutes of, all meetings of the stockholders and the Board
of Directors. The Secretary shall have charge of the corporate books and shall
perform such other duties as the board of directors may from time to time
prescribe.
Section 9. Delegation of Authority. The board of directors may from
time to time delegate the powers or duties of any officer to any other officers
or agents, notwithstanding any provisions hereof.
Section 10. Removal. Any officer of the Corporation may be removed at
any time, with or without cause, by the board of directors or the Chief
Executive Officer.
Section 11. Resignation. Any officer may resign by giving written
notice of his resignation to the Chairman of the Board, if any, the President,
or the Secretary, or to the board of directors at a meeting of the board, and
such resignation shall become effective at the time specified therein.
Section 12. Bond. If required by the board of directors, any officer
shall give the Corporation a bond in such sum and with such surety or sureties
and upon such terms and conditions as shall be satisfactory to the board of
directors, including without limitation a bond for the faithful performance of
the duties of his office and for the restoration to the Corporation of all
books, papers, vouchers, money and other property of whatever kind in his
possession or under his control and belonging to the Corporation.
Section 13. Action with Respect to Securities of Other Corporations.
Unless otherwise directed by the board of directors, the President or the Chief
Executive officer or any officer of the Corporation authorized by the President
or the Chief Executive Officer shall have power to vote and otherwise act on
behalf of the corporation, in person or by proxy, at any meeting of stockholders
of or with respect to any action of stockholders of any other corporation in
which this Corporation may hold securities and otherwise to exercise any and all
rights and powers which this corporation may possess by reason of its ownership
of securities in such other corporation.
ARTICLE V - INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 1. Right to Indemnification. Each person who was or is made a
party or is threatened to be made a party to or is otherwise involved in any
action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that he is or was a director or an officer
of the Corporation or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation or of a partnership,
joint venture, trust or other enterprise, including service with respect to an
employee benefit plan (hereinafter an "Indemnitee"), whether the basis of such
proceeding is alleged action in an official capacity as a director, officer,
employee or agent or in any other capacity while serving as a director, officer,
employee or agent, shall be indemnified and held harmless by the Corporation to
the fullest extent authorized by the Delaware General Corporation Law, as the
same exists or may hereafter be amended (but, in the case of any such amendment,
only to the extent that such amendment permits the Corporation to provide
broader indemnification rights than such law permitted the Corporation to
provide prior to such amendment), against all expense, liability and loss
(including attorneys' fees, judgments, fines, ERISA excise taxes or penalties
and amounts paid in settlement) reasonably incurred or suffered by such
Indemnitee in connection therewith; provided, however, that, except as provided
in Section 3 of this Article with respect to proceedings to enforce rights to
indemnification, the Corporation shall indemnify any such Indemnitee in
connection with a proceeding (or part thereof) initiated by such Indemnitee only
if such proceeding (or part thereof) was authorized by the board of directors of
the Corporation.
Section 2. Right to Advancement of Expenses. The right to
indemnification conferred in section 1 of this Article shall include the right
to be paid by the Corporation the expenses (including attorney's fees) incurred
in defending any such proceeding in advance of its final disposition; provided,
however, that, if the Delaware General Corporation Law requires, an advancement
of expenses incurred by an Indemnitee in his capacity as a director or officer
(and not in any other capacity in which service was or is rendered by such
Indemnitee, including, without limitation, service to an employee benefit plan)
shall be made only upon delivery to the Corporation of an undertaking, by or on
behalf of such Indemnitee, to repay all amounts so advanced if it shall
ultimately be determined by final judicial decision from which there is no
further right to appeal that such Indemnitee is not entitled to be indemnified
for such expenses under this Section 2 or otherwise. The rights to
indemnification and to the advancement of expenses conferred in Sections 1 and 2
of this Article shall be contract rights and such rights shall continue as to an
Indemnitee who has ceased to be a director, officer, employee or agent and shall
inure to the benefit of the Indemnitee's heirs, executors and administrators.
Any repeal or modification of any of the provisions of this Article shall not
adversely affect any right or protection of an Indemnitee existing at the time
of such repeal or modification.
Section 3. Right of Indemnitees to Bring Suit. If a claim under
Section 1 or 2 of this Article is not paid in full by the corporation within
sixty (60) days after a written claim has been received by the Corporation,
except in the case of a claim for an advancement of expenses, in which case the
applicable period shall be twenty (20) days, the Indemnitee may at any time
thereafter bring suit against the Corporation to recover the unpaid amount of
the claim. If successful in whole or in part in any-such suit, or in a suit
brought by the Corporation to recover an advancement of expenses pursuant to the
terms of an undertaking, the Indemnitee shall also be entitled to be paid the
expenses of prosecuting or defending such suit. In (i) any suit brought by the
Indemnitee to enforce a right to indemnification hereunder (but not in a suit
brought by the Indemnitee to enforce a right to an advancement of expenses) it
shall be a defense that, and (ii) in any suit brought by the Corporation to
recover an advancement of expenses pursuant to the terms of an undertaking, the
Corporation shall be entitled to recover such expenses upon a final adjudication
that, the Indemnitee has not met any applicable standard for indemnification set
forth in the Delaware General Corporation Law. Neither the failure of the
corporation (including its board of directors, independent legal counsel, or its
stockholders) to have made a determination prior to the commencement of such
suit that indemnification of the Indemnitee is proper in the circumstances
because the Indemnitee has met the applicable standard of conduct set forth in
the Delaware General Corporation Law, nor an actual determination by the
Corporation (including its board of directors, independent legal counsel, or its
stockholders) that the Indemnitee has not met such applicable standard of
conduct, shall create a presumption that the Indemnitee has not met the
applicable standard of conduct or, in the case of such a suit brought by the
Indemnitee, be a defense to such suit. In any suit brought by the Indemnitee to
enforce a right to indemnification or to an advancement of expenses hereunder,
or brought by the Corporation to recover an advancement of expenses pursuant to
the terms of an undertaking, the burden of proving that the Indemnitee is not
entitled to be indemnified, or to such advancement of expenses, under this
Article or otherwise shall be on the Corporation.
Section 4. Non-Exclusivity of Rights. The rights to indemnification
and to the advancement of expenses conferred in this Article shall not be
exclusive of any other right which any person may have or hereafter acquire
under any statute, the Corporation's Certificate of Incorporation as amended
from time to time, these by-laws, any agreement, any vote of stockholders or
disinterested directors or otherwise.
Section 5. Insurance. The Corporation may maintain insurance, at its
expense, to protect itself and any director, officer, employee or agent of the
Corporation or another corporation, partnership, joint venture, trust or other
enterprise against any expense, liability or loss, whether or not the
Corporation would have the power to indemnify such person against such expense,
liability or loss under the Delaware General Corporation Law.
Section 6. Indemnification of Employees and Agents of the Corporation.
The Corporation may, to the extent authorized from time to time by the board of
directors, grant rights indemnification and to the advancement of expenses to
any employee or agent of the Corporation to the fullest extent of the provisions
of this Article with respect to the indemnification and advancement of expenses
of directors and officers of the Corporation.
ARTICLE VI - STOCK
Section 1. Certificates of Stock. Each stockholder shall be entitled
to a certificate signed by, or in the name of the Corporation by, the Chairman
or Vice-Chairman of the board of directors, the President or a Vice President,
and by the Secretary or an Assistant Secretary, or the Treasurer or an Assistant
Treasurer, certifying the number of shares owned by him. Any or all of the
signatures on the certificate may be by facsimile.
Section 2. Transfers of Stock. Transfers of stock shall be made only
upon the transfer books of the Corporation kept at an office of the Corporation
or by transfer agents designated to transfer shares of the stock of the
Corporation. Except where a certificate is issued in accordance with Section 4
of this Article, an outstanding certificate for the number of shares involved
shall be surrendered for cancellation before a new certificate is issued
therefor.
Section 3. Record Date. in order that the Corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholders, or
to receive payment of any dividend or other distribution or allotment of any
rights or to exercise any rights in respect of any change, conversion or
exchange of stock or for the purpose of any other lawful action, the board of
directors may fix a record date, which record date shall not precede the date on
which the resolution fixing the record date is adopted and which record date
shall not be more than sixty (60) nor less than ten (10) days before the date of
any meeting of stockholders, nor more than sixty (60) days prior to the time for
such other action as hereinbefore described; provided, however, that if no
record date is fixed by the board of directors, the record date for determining
stockholders entitled to notice of or to vote at a meeting of stockholders shall
be at the close of business on the day next preceding the day on which notice is
given or, if notice is waived, at the close of business on the day next
preceding the day on which the meeting is held, and, for determining
stockholders entitled to receive payment of any dividend or other distribution
or allotment of rights or to exercise any rights of change, conversion or
exchange of stock or for any other purpose, the record date shall be at the
close of business on the day on which the board of directors adopts a resolution
relating thereto.
A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the board of directors may fix a new record date for the
adjourned meeting.
Section 4. Lost, Stolen or Destroyed Certificates. In the event of the
loss, theft or destruction of any certificate of stock, another may be issued in
its place pursuant to such regulations as the board of directors may establish
concerning proof of such loss, theft or destruction and concerning the giving of
a satisfactory bond or bonds of indemnity.
Section 5. Regulations. The issue, transfer, conversion and
registration of certificates of stock shall be governed by such other
regulations as the board of directors may establish.
ARTICLE VII - NOTICES
Section 1. Notices. Except as otherwise specifically provided herein
or required by law, all notices required to be given to any stockholder,
director, officer, employee or agent shall be in writing and may in every
instance be effectively given by hand delivery to the recipient thereof, by
depositing such notice in the mails, postage paid, or by sending such notice by
prepaid telegram or mailgram. Any such notice shall be addressed to such
stockholder, director, officer, employee or agent at his last known address as
the same appears on the books of the Corporation. The time when such notice is
received, if hand delivered, or dispatched, if delivered through the mails or by
telegram or mailgram, shall be the time of the giving of the notice.
Section 2. Waivers. A written waiver of any notice, signed by a
stockholder, director, officer, employee or agent, whether before or after the
time of the event for which notice is to be given, shall be deemed equivalent to
the notice required to be given to such stockholder, director, officer, employee
or agent. Neither the business nor the purpose of any meeting need be specified
in such a waiver.
ARTICLE VIII - MISCELLANEOUS
Section 1. Facsimile Signatures. In addition to the provisions for use
of facsimile signatures elsewhere specifically authorized in these by-laws,
facsimile signatures of any officer or officers of the Corporation may be used
whenever and as authorized by the board of directors or a committee thereof.
Section 2. Corporate Seal. The board of directors may provide a
suitable seal, containing the name of the Corporation, which seal shall be in
the charge of the Secretary. if and when so directed by the board of directors
or a committee thereof, duplicates of the seal may be kept and used by the
Secretary or Treasurer or by an Assistant Secretary or Assistant Treasurer.
Section 3. Reliance upon Books, Reports and Records. Each director,
each member of any committee designated by the board of directors, and each
officer of the Corporation shall, in the performance of his duties, be fully
protected in relying in good faith upon the books of account or other records of
the Corporation and upon such information, opinions, reports or statements
presented to the Corporation by any of its officers or employees or committees
of the board of directors so designated, or by any other person as to matters
which such director or committee member reasonably believes are within such
other person's professional or expert competence and who has been selected with
reasonable care by or on behalf of the Corporation.
Section 4. Fiscal Year. The fiscal year of the Corporation shall be as
fixed by the board of directors.
Section 5. Time Periods. In applying any provision of these by-laws
that requires that an act be done or not be done a specified number of days
prior to an event or that an act be done during a period of a specified number
of days prior to an event, calendar days shall be used, the day of the doing of
the act shall be excluded, and the day of the event shall be included.
Section 6. Pronouns. Whenever the content may require, any pronouns
used in these by-laws shall include the corresponding masculine, feminine or
neuter forms.
Section 7. Approval of Expenditures. Any transaction entered into by
the Corporation which anticipates a total expenditure by the corporation in
excess of $250,000.00 shall be subject to the prior approval of the Board of
Directors.
ARTICLE IX - AMENDMENTS
These by-laws may be amended or repealed by the affirmative vote of a
majority of the Whole Board at any meeting or by the stockholders by the
affirmative vote of eighty percent (80%) of the outstanding voting power of the
then-outstanding shares of capital stock of the Corporation at any meeting at
which a proposal to amend or repeal these by-laws is properly presented.
Exhibit 21.1
SUBSIDIARIES OF AMERICA ONLINE, INC.
NAME JURISDICTION OF INCORPORATION
Redgate Communications Corporation Delaware
ANS CO+RE Systems, Inc. Delaware
AOL Productions, Inc. California
Global Network Navigator, Inc. Delaware
Websoft, Inc. Delaware
Johnson-Grace Newco, Inc. Delaware
AOL Ventures, Inc. Delaware
AOLV Hub, Inc. Delaware
AOLV Fashion Channel, Inc. Delaware
AOLV Healthy Living Channel, Inc. Delaware
ImagiNation Network, Inc. Delaware
Digital City, Inc. Delaware
Digital Marketing Services, Inc. Delaware
2Market, Inc. California
AOL (UK) Limited England & Wales
America Online France, S.a.r.l. Republic of France
America Online (Deutschland) GmbH Germany
America Online Holding B.V. The Netherlands
America Online (Japan), Inc. Japan
AOL Canada, Inc. Canada
Redgate Olivetti Com. - ROC B.V. The Netherlands
Ubique Limited Israel
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8) listed below of our report dated August 28, 1996, with respect to the
consolidated financial statements of America Online, Inc., included in the
Annual Report (Form 10-K) for the year ended June 30, 1996.
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
Vienna, Virginia
September 27, 1996
Exhibit 24.1
POWER OF ATTORNEY
I, Frank J. Caufield, whose signature appears below, constitute and appoint
Stephen M. Case, Lennert J. Leader and Sheila A. Clark, and each of them, my
true and lawful attorneys-in-fact and agents, with full power of substitution
and resubstitution in each of them, for him/her and in his/her name, place and
stead, and in any and all capacities, to sign the Form 10-K for the fiscal year
ended June 30, 1996, and any required amendments or supplements thereto, and to
file the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite or necessary to be done in or
about the premises, for all intents and purposes as he or she might or could do
in person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or any of them or their or his/her substitute or substitutes lawfully do
or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has caused this Power of Attorney to be
executed as of this 20th day of September, 1996.
/s/ Frank J. Caufield
Frank J. Caufield
POWER OF ATTORNEY
I, Robert J. Frankenberg, whose signature appears below, constitute and
appoint Stephen M. Case, Lennert J. Leader and Sheila A. Clark, and each of
them, my true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution in each of them, for him/her and in his/her
name, place and stead, and in any and all capacities, to sign the Form 10-K for
the fiscal year ended June 30, 1996, and any required amendments or supplements
thereto, and to file the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite or necessary to be done in
or about the premises, for all intents and purposes as he or she might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents or any of them or their or his/her substitute or substitutes lawfully
do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has caused this Power of Attorney to be
executed as of this 15th day of September, 1996.
/s/ Robert J. Frankenberg
Robert J. Frankenberg
POWER OF ATTORNEY
I, Alexander M. Haig, Jr., whose signature appears below, constitute and
appoint Stephen M. Case, Lennert J. Leader and Sheila A. Clark, and each of
them, my true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution in each of them, for him/her and in his/her
name, place and stead, and in any and all capacities, to sign the Form 10-K for
the fiscal year ended June 30, 1996, and any required amendments or supplements
thereto, and to file the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite or necessary to be done in
or about the premises, for all intents and purposes as he or she might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents or any of them or their or his/her substitute or substitutes lawfully
do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has caused this Power of Attorney to be
executed as of this 12th day of September, 1996.
/s/ Alexander M. Haig, Jr.
Alexander M. Haig, Jr.
POWER OF ATTORNEY
I, James V. Kimsey, whose signature appears below, constitute and appoint
Stephen M. Case, Lennert J. Leader and Sheila A. Clark, and each of them, my
true and lawful attorneys-in-fact and agents, with full power of substitution
and resubstitution in each of them, for him/her and in his/her name, place and
stead, and in any and all capacities, to sign the Form 10-K for the fiscal year
ended June 30, 1996, and any required amendments or supplements thereto, and to
file the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite or necessary to be done in or
about the premises, for all intents and purposes as he or she might or could do
in person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or any of them or their or his/her substitute or substitutes lawfully do
or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has caused this Power of Attorney to be
executed as of this 16th day of September, 1996.
/s/ James V. Kimsey
James V. Kimsey
POWER OF ATTORNEY
I, William N. Melton, whose signature appears below, constitute and appoint
Stephen M. Case, Lennert J. Leader and Sheila A. Clark, and each of them, my
true and lawful attorneys-in-fact and agents, with full power of substitution
and resubstitution in each of them, for him/her and in his/her name, place and
stead, and in any and all capacities, to sign the Form 10-K for the fiscal year
ended June 30, 1996, and any required amendments or supplements thereto, and to
file the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite or necessary to be done in or
about the premises, for all intents and purposes as he or she might or could do
in person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or any of them or their or his/her substitute or substitutes lawfully do
or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has caused this Power of Attorney to be
executed as of this 12th day of September, 1996.
/s/ William N. Melton
William N. Melton
POWER OF ATTORNEY
I, Scott C. Smith, whose signature appears below, constitute and appoint
Stephen M. Case, Lennert J. Leader and Sheila A. Clark, and each of them, my
true and lawful attorneys-in-fact and agents, with full power of substitution
and resubstitution in each of them, for him/her and in his/her name, place and
stead, and in any and all capacities, to sign the Form 10-K for the fiscal year
ended June 30, 1996, and any required amendments or supplements thereto, and to
file the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite or necessary to be done in or
about the premises, for all intents and purposes as he or she might or could do
in person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or any of them or their or his/her substitute or substitutes lawfully do
or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has caused this Power of Attorney to be
executed as of this 16th day of September, 1996.
/s/ Scott C. Smith
Scott C. Smith
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