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, 1997
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
Dulles, Virginia 20166-9323
(Address of principal executive offices) (zip code)
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 July 31, 1997, 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 New York Stock Exchange, was
approximately $5.85 billion (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 July 31,
1997: 100,716,429.
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 1997 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 communications and services
medium, with over $1.6 billion in revenue during fiscal 1997. The Company has
the largest subscriber base of any Internet online service, with approximately
8.6 million members worldwide as of June 30, 1997, an increase of over 40% from
last year. The Company generates revenues principally through membership and
usage fees, as well as increasingly from other revenues, which include
electronic commerce and advertising revenues. The Company offers its online
services in the U.S., Austria, Canada, France, Germany, Japan, Sweden,
Switzerland, and the United Kingdom and offers access to its AOL service in over
100 countries.
The Company's mission, through its three business units, AOL Networks, AOL
Studios, and ANS Communications, is to become the recognized brand leader in the
development of an interactive medium that transcends traditional boundaries
between people and places to create an interactive global community that holds
the potential to change the way people communicate, stay informed, learn, shop
and do business. To accomplish this mission, the Company's strategy is to
continue to improve and expand its service offerings by incorporating new,
scaleable technologies, build unique and engaging programming and content,
expand investment in network capacity in order to serve existing members and
support growth, and pursue related business opportunities, while maintaining
technological flexibility. The Company seeks to establish America Online and
AOL as recognized brand names and to build customer loyalty as a foundation for
growth in subscribers and revenues.
Through its AOL Networks unit, which oversees the Company's flagship
Internet online service, the Company offers its members a broad range of
original programming, features and tools through the AOL service and the AOL.com
web site (http://www.AOL.com). 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 and business needs. Offerings include electronic
mail, Buddy Lists, Instant Messages, interactive news and magazines,
entertainment, weather, sports, games, stock quotes, mutual fund transactions,
online shopping, Internet access with search capabilities, software files,
computing support, online classes and auditorium events, online meeting rooms
and conversations (chat), and parental and mail controls. By offering a broad
range of high quality Internet online products and services, AOL Networks seeks
to build its subscriber base as a platform for increasing subscription and non-
subscription based revenues, including from electronic commerce and advertising.
Through its AOL Studios unit, the Company creates, invests in and builds
original content for AOL and the Internet, focusing on branded properties in
categories of local content, multiplayer games, entertainment, romance, sports
and women. Under AOL Studios are Digital City, Inc. (owned by the Company and
the Tribune Company, and providing local, community-based interactive content
and services), Greenhouse Networks (a premier content developer for the mass
market), WorldPlay Entertainment (expanding online games into a social
entertainment experience) and AOL Ventures, Inc. (a content venture portfolio of
strategic minority investments).
ANS Communications, the Company's managed network services subsidiary,
deploys access infrastructure for AOL and the Internet services industry. ANS
provides large scale, high-speed network access to AOL's individual and business
subscribers. ANS is a primary supplier for AOLnet, the Company's proprietary
data communications network, which the Company expanded during fiscal 1997 from
143,000 modems to 350,000 modems, resulting in increased network capacity,
higher speed access, and reduced per-hour data communication costs. The
portfolio of AOL networks expanded during fiscal 1997 to reach approximately
1,300 cities worldwide. The Company has recently entered into an agreement with
WorldCom, Inc. to sell ANS, as described below in Business -- Recent
Developments.
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 AOL service provides subscribers with a wide variety of
content, features and tools, including electronic mail, Buddy Lists, Instant
Messages, bulletin boards, interactive news and magazines, entertainment,
weather, sports, games, stock quotes, mutual fund transactions, online shopping,
Internet access with search capabilities, software files, computing support,
online classes and auditorium events, meeting rooms and conversations (chat),
parental and mail controls, and more. 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 content, features, and tools 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), and Instant Messenger allows members to communicate online
instantaneously without having to access an electronic mailbox. America Online
also offers an interactive area that serves as the center or meeting place for
America Online's online member community. Members enter existing, or create
their own, public or private "meeting rooms" and are able to participate in
lively interactive discussions with other members. Celebrity interviews, with
participation by members, take place at live "auditorium" events. Through Mail
Controls, subscribers can limit who may send them e-mail and the Preferred Mail
feature allows members to block e-mail from known "junk" mailers in an effort to
reduce the amount of junk e-mail that a member receives.
The Company is expanding its online community beyond the AOL service to the
Internet community by making available (currently in beta) AOL Instant Messenger
and Buddy Lists to Internet users as well as AOL subscribers. The AOL.com web
site (http://www.AOL.com) reaches out to the Internet community by making
available AOL NetFind, an Internet search and ratings tool, to Internet users.
- 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. 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 - America Online offers a broad range of information on current
events with analysis in areas of domestic and international politics, business,
weather, sports, and entertainment. America Online also provides a search
capability which enables members to scan the news wires quickly to locate
stories of interest and permits members to receive stories of interest on an
ongoing basis into their electronic mailboxes.
- Personal Finance - Through the Personal Finance channel, members have
access to expert business analysis, stock, bond and commodity prices,
information on companies, industries and markets, and investing and transaction
services. For example, through content partnerships, America Online offers
subscribers a discount stock brokerage system to place trades and the ability to
track up-to-date personalized portfolio values. The AOL Banking Center offers
home banking services, including bill payment, account review, and funds
transfer, provided by over 20 financial institutions, and the Mutual Fund Center
provides reference and educational information, prospectus and product
information, applications and the ability to conduct mutual fund transactions
and to access accounts 24 hours a day.
- Shopping - In the AOL Shopping Channel, members have the ability to shop
online 24 hours a day at over 45 stores, including 1-800-FLOWERS, Barnes &
Noble, Lands' End, JC Penney, The Body Shop, Starbucks Coffee, Omaha Steaks,
Eddie Bauer, Hickory Farms, FAO Schwarz, Godiva, Hallmark, Sharper Image, and
American Greetings. During fiscal 1997, the Company agreed to make CUC
International Inc. an anchor tenant in the AOL Shopping Channel providing AOL
subscribers, after launch, with easy access to membership-based discount clubs
in a wide range of consumer categories, from clothing and accessories to retail
videos and software. The AOL service has implemented the AOL Certified
Merchants Program, under which participating merchants agree to abide by
customer service criteria, and the AOL Guarantee, which covers up to $50 of the
credit card deductible for fraudulent purchases, in order to improve customer
satisfaction and to encourage repeat business. Shopping opportunities also are
available throughout the different content areas on the AOL service. Outside of
its Shopping Channel, the Company has begun to offer shopping opportunities to
the Internet through a partnership with Amazon.com, the leading online
bookseller.
- Travel - In the AOL Travel channel, subscribers can check availability,
compare prices and purchase airline tickets and vacation packages, and make
hotel and rental car reservations. The Travel channel also provides destination
profiles, including maps and information on weather, currency, culture, history,
and current events.
- Sports - The AOL Sports channel informs and entertains members with
college and professional sports scores, statistics, events coverage and
analysis. Members also have available to them sports fantasy games and
contests, shopping opportunities and chat.
- Entertainment - In the Entertainment Channel, members learn about the
latest events in the entertainment industry, including television, movies and
the performing arts. Critics' reviews, celebrity photos, local movie listings,
gossip columns, and articles from George and Entertainment Weekly are some
highlights of this area.
- Games - The Games channel features online game shows, murder mysteries,
trivia and fantasy role-playing games and sports games. Players can move among
games, participate in sponsored tournaments, contests and other organized
activities and socialize with other players or spectators. The Company, through
WorldPlay Entertainment (acquired by the Company as the ImagiNation Network,
Inc., doing business as WorldPlay Entertainment), has recently begun to offer
premium games in categories of puzzle & board, cards, strategy & action and
adventure, for which subscribers pay $1.99 per hour in addition to the regular
membership fee and usage charges.
- Children's Programming and Parental Controls - The AOL service offers
content directed to children on the Kids Only Channel and throughout the service
through relationships with Nickelodeon, Marvel Comics, the Cartoon Network and
others. Through Parental Controls, parents can limit the level of access from
the AOL service to features and content on AOL and the Internet. Parents have
three levels of access to choose from: adult, teen or child (for children up to
age 12). Parental Controls also allow parents to limit their children's AOL e-
mail, Instant Messages, downloads, and chat. In an effort to protect children's
interests, the Company, its subsidiary Digital City, Inc. and the National
Center for Missing and Exploited Children launched a program in July 1997 to
post emergency alerts with photos of and information on missing children that
are the subject of local or national searches.
- 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 (acquired by the Company in
January 1996), 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 increase brand recognition in different
markets and to offer AOL customers high-quality Internet technology and tools
and interactive programming.
The Company launched its web site, AOL.com (http://www.AOL.com) in October
1995, where Internet users (who may not be AOL members) can use some of the same
tools available to AOL members, including AOLNetFind, an Internet search tool
that also rates Internet content, and Buddy Lists and Instant Messenger
(currently in beta), which allow Internet users to see their friends and
families online and to communicate real-time with them.
- Local Content - The Company's subsidiary, Digital City, Inc., provides
interactive content and services for and about local communities on the America
Online Service and on the Worldwide Web. Digital City has a network of distinct
local offerings in 14 major U.S. cities, including Atlanta, Boston, Chicago,
Dallas, Denver, Hampton Roads (VA), Los Angeles, Minneapolis, Orlando,
Philadelphia, San Diego, San Francisco, South Florida, and Washington, D.C. and
reaches over two million consumers per month. Digital City plans to expand to a
total of 21 major cities and has commenced the launch of its Web guides for
these and 29 other major cities throughout the United States. Digital City's
interactive product offers users original and third party local news, sports,
weather and other information, a local guide service with directory and
classified listings, and a forum for exchanging information, opinions and ideas.
Digital City, Inc. is owned by Digital City LLC. The Company owns a majority
ownership interest in that entity, and the Tribune Company owns the remaining
interest.
AOL Studios creates, markets and distributes original interactive titles,
properties and new channels on the AOL service and the World Wide Web, and
provides programming for AOL Networks and for other Internet access providers
through its business units and subsidiaries. Greenhouse Networks, a division of
the Company, is a content developer for the mass market; Digital City, Inc.
provides local, community-based interactive content and services, and WorldPlay
Entertainment (a wholly-owned subsidiary of the Company, ImagiNation Network,
Inc. doing business as WorldPlay Entertainment) expands online games into a
social entertainment experience; and AOL Ventures, Inc., a wholly-owned
subsidiary of the Company, is a content venture portfolio of strategic AOL
minority investments.
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 ABC
Sports, Capital Cities/ABC Inc., Newsweek, The New York Times, Warner Brothers
Online, and Hachette Filipacchi Magazines to add original content and
interactive programming.
Advertising Sales and Electronic Commerce
An important component of the Company's business strategy is to increase
non-subscription based revenues, including from advertising sales and
transaction fees associated with electronic commerce, and sale of merchandise,
which the Company believes are increasingly important to its growth and success.
The Company continues to establish a wide variety of relationships with
advertising and electronic commerce partners in order to grow its non-
subscription based revenues and to provide AOL subscribers with access to a
broad selection of competitively priced, easy to order products and services.
Advertising and electronic commerce revenues are an important part of the
Company's non-subscription based revenues. The Company offers its advertising
and electronic commerce partners certain marketing and promotional opportunities
and in return seeks cash payments, the opportunity for revenue sharing, and
competitive pricing and online conveniences for AOL subscribers. During fiscal
1997, the Company entered into agreements containing these features with Tel-
Save Holdings, Inc., CUC International Inc., and 1-800-FLOWERS. For example,
under the agreement with Tel-Save Holdings, Inc., Tel-Save will be the exclusive
provider of consumer long-distance telecommunications services to be marketed to
AOL members by the Company on the AOL service. The Company received $100
million in cash, and the parties have a revenue sharing arrangement that, based
upon subscriber usage levels of the Tel-Save product offering, provides the
Company with an opportunity to earn additional revenues. The agreement also
provides for a warrant to America Online to purchase Tel-Save common stock.
Tel-Save will offer AOL subscribers competitive pricing and the convenience
of online billing. The Company has entered into numerous other relationships
with advertisers and online merchants to promote their goods and services within
the AOL Shopping Channel (see Business -- Products and Services -- Shopping)
or elsewhere on the AOL service, including the following advertisers and
merchants: American Express, Barnes & Noble, Charles Schwab, JC Penney, and
Reebok. With its agreement with Amazon.com, Inc., the Company has
begun to extend opportunities for advertising and electronic commerce beyond
the AOL service to AOL's Internet-based properties. The Company seeks to
continue to expand the scope and number of, and revenues from, its
relationships with advertisers and electronic commerce partners.
The Company offers for sale to AOL subscribers a number of computer and
Internet online goods and services, including hardware and software products and
books, and AOL logo merchandise. The Company promotes its merchandise
principally by means of promotional "pop-up" screens and makes its merchandise
available in online stores, including in various channel stores and in
specialized seasonal or other targeted shops. The Company plans to continue to
expand its opportunities for merchandise sales in the future.
Network Services
America Online employs a diversified portfolio approach in designing,
structuring and operating its network services. America Online manages AOLnet,
a network of third party network service providers, including Sprint
Corporation, ANS Communications, Inc. ("ANS"), a wholly-owned subsidiary of
America Online, and BBN Corporation, a part of GTE Internetworking. The
Company's previous network system prior to December 1995 relied predominantly on
a single network provider. AOLnet offers members in North America approximately
880 local telephone numbers in approximately 571 cities at speeds up to 28.8
kbps (kilobits per second). AOL Globalnet offers access in approximately 305
cities in 102 countries. In total, America Online, through all of its network
services, offers its subscribers worldwide over 1600 local telephone numbers in
approximately 1,300 cities in more than 100 countries. The ANS backbone
network, which supports America Online's access to the Internet and a
significant portion of AOLnet, is among the largest and fastest public data
networks in the world. Through the expansion of the AOL network services during
fiscal 1997 from 143,000 to 350,000 modems, the service grew, at peak, to permit
over 384,000 simultaneous users, the exchange of up to 15 million e-mail
messages a day and up to 116 million Instant Messages a day. The Company has
recently entered into an agreement to sell ANS, as described below in Business -
- - Recent Developments.
Marketing and Distribution
The goals of the Company's marketing programs are to attract and retain
members. The Company seeks to build brand recognition and member loyalty and to
make it easy for consumers to try, and subscribe to, the AOL service. The
Company builds its brand name through a broad array of programs and strategies,
including broadcast advertising campaigns, direct mail, magazine inserts, and
increasingly from co-marketing, cross-promotion and bundling agreements. The
Company has 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, and has pursued cross-promotional
opportunities through expanding existing, and establishing new, partnerships.
Examples include agreements with ABC Sports, CBS SportsLine, CUC International
Inc., Tel-Save Holdings, Inc., and 1-800-Flowers, that provide for the Company
and its partners to jointly market, promote and advertise their products and
services. Additionally, AOL has been preinstalled on nearly all leading
personal computers for the consumer market, including those offered by Apple,
Compaq, Dell, Gateway 2000, HP, IBM, Packard Bell, and Toshiba, and can 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. The
Company's marketing strategy is expected to place a greater emphasis on these
cost-effective bundling agreements. Although the Company will continue to
market its products via direct mail programs, such programs are expected to
be more cost-efficient, as they will be directed to more narrowly targeted
consumer groups.
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. The
Company also provides a variety of support mechanisms such as online support and
telephone customer support services. The Company believes that the adoption of
flat-rate pricing will lead to increased subscriber acquisition and retention
rates as compared to rates achieved prior to flat-rate pricing.
America Online offers the following pricing alternatives for its AOL
service: (1) a standard monthly membership fee of $19.95, with no additional
hourly charges; subscribers can also choose to prepay for one year in advance at
the monthly rate of $17.95; (2) an alternative offering three hours for $4.95
per month, with additional time priced at $2.50 per hour; and (3) an alternative
offering of $9.95 per month for unlimited use -- for those subscribers who
already have an Internet connection and use this connection to access the AOL
service only. The Company has introduced premium games services, for which
members pay $1.99 per hour (after any free hours offered under promotional
programs) in addition to the regular monthly membership fee and hourly usage
charges. Consumers can obtain the AOL software and a free trial membership at
major software retailers and bookstores, or by calling 1-800-827-6364.
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, 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 the Company's strategy has
been the formation of strategic alliances with strong international partners and
the provision of high speed 28.8 kbps (kilobits per second) access for all
members of international services. In addition, U.S. and global subscribers can
access selected content and communities offered on the Company's other 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 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 AOL international subscribers
traveling outside of their home countries, the Company will continue the
expansion of international access to its services through its AOL Globalnet
network and AOL international country networks, which currently provide access
in more than 100 countries worldwide.
Europe
America Online, through a joint venture with Bertelsmann AG, one of the
world's largest media companies, has launched the AOL service in France,
Germany, and the United Kingdom. Each of these services provides European
consumers with local content and communities via local access networks and is
interconnected with the other AOL services. AOL also provides the U.K. service
to consumers in Sweden, and the German service to consumers in Switzerland and
Austria. Through this strategic partnership, the Company plans to extend these
services into additional markets throughout Europe. The joint venture, AOL
Europe, consists of Bertelsmann and America Online each owning 50%, except in
Germany, where Axel Springer Verlag, Germany's largest newspaper publisher,
holds a 10% equity participation. Bertelsmann is a minority stockholder in
America Online with approximately a 3% stake, representing an initial
investment of approximately $54 million, and has designated Dr. Middelhoff a
member of the Company's Board of Directors.
Canada
AOL Canada features local Canadian content and services, and offers
Canadian members localized client software, thirteen channels of Canadian
content and billing in Canadian dollars. The service also provides message
boards, discussion forums, e-mail, and easy access to the Internet through an
integrated Web browser. AOL Canada's key partners include Citytv, a broadcaster
and program producer; MuchMusic, Canada's first national music television
channel; Shift Magazine, a Canadian publication in media, entertainment and
technology; Green Line Investor Services, a division of TD Securities and
Canada's largest discount broker; and Reuters Online Canada (ROC), a 24-hour a
day multimedia online news service from the world's leading news and financial
information company.
Japan
In April 1997, America Online launched AOL Japan through a partnership with
Mitsui & Co., one of the world's largest international trading companies, and
Nihon Keizai Shinbun (Nikkei), a leading Japanese media company and a primary
business-information source for Japanese executives. AOL Japan offers
interactive consumer services in Japan with a broad range of localized Japanese
language content.
The joint venture, AOL Japan, Inc., consists of Mitsui & Co. owning 40%,
Nikkei 10% and America Online 50%. Mitsui and Nikkei contribute experience and
credibility in the Japanese market, as well as the equivalent of approximately
$52 million (in yen) 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.
AOL Technologies
AOL Technologies, a business unit under AOL Networks, is responsible for
delivering research, development, and network/data center operations to the
other America Online divisions, technology licensees and joint venture partners.
This group is also responsible for the Company's billing functions. 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
primarily Windows (3.1 and `95) and Macintosh. The Company is upgrading AOLnet
to support x2 and k56flex, which are the two competing standards for high speed
access, and is investing in the development of alternative technologies to
deliver its services, including cable modems, DSL access, and future ISDN and
wireless technologies.
Competition
The Company competes in the highly competitive businesses of online and
Internet services, advertising and electronic commerce. Online services and
Internet service providers, including CompuServe Corporation, the Microsoft
Network and Prodigy Services Company and various national and local independent
Internet service providers, such as NETCOM On-Line Communication Services, Inc.,
as well as long distance and regional telephone and cable companies, including,
among others, AT&T Corp., MCI Communications Corporation and various regional
Bell operating companies, @Home Network, and WebTV currently compete with the
Company for both subscribers and for advertising and electronic commerce
revenues. The Company also competes for advertising and electronic commerce
revenues with major Web sites operated by search services and other companies
such as Yahoo! Inc., Netscape Communications Corporation, Infoseek Corporation,
CNET, Inc., Lycos, Inc., and Excite, Inc., and media companies such as The Walt
Disney Company and Time Warner Inc. The Company has recently entered into an
agreement with WorldCom, Inc. to acquire the CompuServe Corporation's online
services businesses, as described below in Business -- Recent Developments.
Some of the present competitors and potential future competitors of the
Company may have greater financial, technical, marketing and/or personnel
resources than the Company. America Online believes the principal competitive
factors in the online and Internet services industries include, with respect to
competition for subscribers, product features and performance quality, ease of
use, access to distribution channels, strategic alliances, brand recognition,
reliability and price, and with respect to advertising and electronic commerce
revenues, numbers of visitors to an online or Internet site, duration and
frequency of visits, and demographics of visitors. America Online believes that
it currently competes effectively in these areas. For example, the Company
works continually to upgrade its service and content offerings, has expanded its
AOL.com web site and has introduced AOL NetFind, an Internet research and
navigation tool for AOL subscribers and Internet users.
Employees
As of June 30, 1997, America Online had 7,371 employees. 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. America Online has also
filed for several patents for technology relating to the Internet and online
industry. 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, Digital City, AOL Instant Messenger, AOLnet, Buddy List, and Instant
Message.
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.
Regulatory Environment; Public Policy
In the United States and most countries in which the Company conducts its
major operations, the Company is not currently subject to direct regulation
other than pursuant to laws applicable to businesses generally. Adverse changes
in the legal or regulatory environment relating to the interactive online
services and Internet industry in the United States or in Europe could have a
material adverse effect on the Company's business. A number of legislative and
regulatory proposals from various international bodies and foreign and domestic
governments in the areas of content regulation, consumer protection,
intellectual property, privacy, electronic commerce, and taxation, among others,
are now under consideration. The Company is unable at this time to predict
which, if any, of such proposals may be adopted and, if adopted, whether such
proposals would have an adverse effect on the Company's business.
Moreover, the manner in which existing domestic and foreign laws will or
may be applied to online service and Internet access providers is uncertain, as
is the effect on the Company's business given different possible applications.
The Company is unable to predict the effect on the Company should that Directive
be applied to prevent export of data from Europe to the United States,
Similarly, the Company is unable to predict the effect on the Company from the
potential future application of various domestic and foreign laws governing
content, export restrictions, privacy, export controls on encryption technology,
tariffs and other trade barriers, intellectual property and taxes.
The Company is seeking to educate industry, government and representatives
of public interest groups on the benefits to society of the new interactive
services medium and of the greater likelihood of society's achieving those
benefits through the approach outlined above. In the Company's view, such an
approach will provide a greater acceptance of the medium by consumers around the
world and a more favorable environment for the acceptance of the Company's
products and services. Some of the issues the Company is focusing on are the
protection of privacy, prosecution of online crimes, safeguarding of children,
enhancement of online security, education and learning, online community
activities, fostering citizen and parental education and involvement and
protection of intellectual property. The Company is unable at this time to
predict whether its approach will be adopted by government and whether the
positive regulatory environment being sought by this approach will be
forthcoming.
Recent Developments
On September 7, 1997, America Online entered into a Purchase and Sale
Agreement (the "Agreement") by and among America Online, ANS Communications,
Inc., a Delaware corporation and a wholly-owned subsidiary of America Online
("ANS"), and WorldCom, Inc., a Georgia corporation ("WorldCom"), pursuant to
which America Online agreed to transfer to WorldCom its ANS subsidiary and
WorldCom agreed to transfer to America Online all of the online services
businesses of CompuServe Corporation, a Delaware corporation ("CompuServe"), and
$175 million in cash, subject to certain adjustments (the "Purchase and Sale").
Consummation of the Purchase and Sale is subject to the satisfaction of certain
conditions, including, among others, the expiration or termination of any
applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended, and any foreign competition law or similar law, the receipt
of other required regulatory approvals, and the absence of certain adverse
changes. Consummation of the Purchase and Sale is also subject to the
consummation of WorldCom's acquisition of CompuServe pursuant to an Agreement
and Plan of Merger (the "Merger Agreement") dated September 7, 1997, by and
among H&R Block, Inc., a Missouri corporation ("H&R Block"), H&R Block Group,
Inc., a Delaware corporation, a wholly-owned subsidiary of H&R Block and the
majority shareholder of CompuServe, WorldCom, and Walnut Acquisition Company,
L.L.C., a Delaware limited liability company which is wholly-owned by WorldCom.
The closing of the Purchase and Sale is expected to occur on or before March 1,
1998, as soon as practicable after the satisfaction of the foregoing conditions.
The Agreement provides that upon closing of the Purchase and Sale, the
Company, WorldCom, and ANS will enter into a Master Agreement for Data Services,
and that the Company, UUNET Technologies, Inc. and CompuServe will enter
into a Network Services Agreement, each with an initial term to end in December
2002, subject to extension by the Company in certain circumstances
(together, the "Network Agreements"). The Network Agreements provide for
the Company to receive Internet access, additional modems for the Company's
dial-up member access network, network and modem maintenance and operations
services, and capacity on the CompuServe network in consideration for certain
minimum commitments and fees in amounts to be based on certain factors.
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 sq. ft. Lease(1) Corporate Headquarters
Vienna, VA 100,000 sq. ft. Lease Office Space
Vienna, VA 28,000 sq. ft. Lease Office Space
Vienna, VA 170,000 sq. ft. Lease Office Space
Reston, VA 265,000 sq. ft. Own Technology Center
Herndon, VA 44,000 sq. ft. Lease Customer Support
Washington, DC 3,923 sq. ft. Lease Office Space
_____________
(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.
The Company leases office space in the following United States locations
for Customer Call Centers: Tucson, AZ; Jacksonville, FL; Albuquerque, NM;
Oklahoma City, OK; and Ogden, UT. In addition, the Company leases office space
in the following United States locations: Scottsdale, AZ; Burlingame, CA; Culver
City, CA; Irvine, CA; Oakhurst, CA; San Francisco, CA; San Mateo, CA; Santa
Barbara, CA; Chicago, IL; Needham, MA; and New York, NY. Digital City, Inc. and
ANS Communications, Inc., subsidiaries of the Company, lease office space in the
United States locations where they have established their services.
The Company also leases office space in the following international
locations: London, England; Paris, France; Hamburg, Germany; Dublin, Ireland;
Rehovot, Israel; Tokyo, Japan; West Toronto, Ontario; and Baar, Switzerland.
Item 3. Legal Proceedings
The Company is involved in various legal proceedings, including pending
litigation. In February 1997, a class action lawsuit (Orman v. America Online,
Inc., et al.) was filed against the Company, its officers and directors and its
outside auditors alleging violations of the federal securities laws between
August 10, 1995 and October 29, 1996. In July 1997, the original complaint was
dismissed against all defendants. On August 11, 1997, an amended class action
complaint was filed against the Company, its Chief Executive Officer and its
Chief Financial Officer. A shareholder derivative suit related to the Orman
lawsuit has also been filed against the Company's directors in Delaware chancery
court. The Company believes that it has valid defenses to all litigation
pending against it, including the Orman case, and all cases against the Company
are, and will continue to be, vigorously defended. Management is unable to make
a meaningful estimate of the amount or range of loss that could result from an
unfavorable outcome of all pending litigation. It is possible that the
Company's results of operations or cash flows in a particular quarter or annual
period or its financial position could be materially affected by an ultimate
unfavorable outcome of certain pending litigation. Management believes,
however, that the ultimate outcome of all pending litigation should not have a
material adverse effect on the Company's financial position.
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.
Market Price of Common Stock
The following table sets forth the range of high and low sale prices for
the Company's common stock:
For the quarter ended: High Low
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
September 30, 1996 46.50 24.50
December 31, 1996 44.25 22.38
March 31, 1997 48.00 31.75
June 30, 1997 62.13 41.75
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 September 3, 1997, the approximate number of stockholders of record
of Common Stock was 2,670. This does not include the number of persons whose
stock is in nominee or "street name" accounts through brokers.
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.
Recent Sales of Unregistered Securities
On April 30, 1997, Asylum, Inc., a wholly-owned subsidiary of the Company,
acquired LightSpeed Media, Inc. in exchange for the issuance of 16,725 shares of
Company Common Stock and $850,000 in cash. The transaction was a private
placement to five purchasers and exempt from registration pursuant to Section
4(2) of the Securities Act of 1933.
On May 16, 1997, the Company sold 362,500 shares of Company common stock to
Legg Mason Value Trust for an aggregate offering price of $16,353,281, including
an underwriting commission of $163,533 to Alex Brown & Sons Incorporated. The
transaction was a private placement to an accredited investor and exempt from
registration pursuant to Rule 506 of Regulation D.
Item 6. Selected Financial Data
<TABLE>
Selected Consolidated Financial and Other Data
(Amounts in thousands, except per share data)
<CAPTION>
Year Ended June 30,
1997 1996 1995 1994 1993
Statement of Operations Data:
<S> <C> <C> <C> <C> <C>
Online service revenues $1,429,445 $ 991,656 $ 344,309 $ 98,497 $ 37,648
Other revenues 255,783 102,198 49,981 17,225 14,336
Total revenues 1,685,228 1,093,854 394,290 115,722 51,984
Income (loss) from operations (505,646) 65,243 (21,449) 4,176 1,702
Income (loss) before (499,347) 29,816 (35,751) 2,154 246
extraordinary item
Net income (loss) (1) (499,347) 29,816 (35,751) 2,154 1,379
Income (loss) per common
share:
Income (loss) before $ (5.22) $ 0.28 $ (0.51) $ 0.03 $ -
extraordinary item
Net income (loss) $ (5.22) $ 0.28 $ (0.51) $ 0.03 $ 0.02
Weighted average
shares outstanding 95,607 108,097 69,550 69,035 58,572
As of June 30,
1997 1996 1995 1994 1993
Balance Sheet Data:
Working capital (deficiency) $(230,997) $ (22,848) $ 271 $38,679 $10,498
Total assets 846,688 958,754 405,413 155,178 39,279
Total debt 51,899 22,519 21,856 9,341 2,959
Stockholders' equity 128,034 512,502 216,812 98,802 23,785
Other Data (at fiscal year end):
Worldwide members 8,636 6,198 3,005 903 303
<FN>
(1) Net loss in the fiscal year ended June 30, 1997, includes charges of
approximately $385.2 million for the write-off of deferred subscriber
acquisition costs, approximately $48.6 million for a restructuring charge,
approximately $24.2 million for legal settlements and approximately $24.5
million for contract termination charges. 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 approximately $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 approximately $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 generates two types of revenues, online service revenues and
other revenues. Online service revenues are generated by customers subscribing
to the Company's online services. Other revenues are non-subscription based and
are generated from the Company's base of subscribers as well as businesses.
Other revenues include electronic commerce and advertising revenues, which
consist of the sale of merchandise, advertising and related revenues, and
transaction fees associated with electronic commerce, as well as other revenues,
which consist primarily of data network service revenues.
Currently, the Company's online service revenues are generated primarily
from subscribers paying a monthly membership fee. Prior to December 1, 1996, a
significant portion of online service revenues were comprised of hourly charges
based on usage in excess of the number of hours of usage provided as part of the
monthly fee. With the introduction of flat-rate pricing, as described below,
the portion of online service revenues which are generated from hourly charges
has decreased substantially. The growth of the Company's online service
revenues, assuming such growth continues, is expected 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.
Effective December 1, 1996, the Company began offering several pricing
alternatives to the AOL service aimed at providing price points for a wide range
of consumers. These pricing alternatives are as follows:
* A standard monthly membership fee of $19.95, with no additional hourly
charges (the "Flat-Rate Plan"). Subscribers can also choose to prepay for one
year in advance at the monthly rate of $17.95.
* An alternative offering three hours for $4.95 per month, with additional
time priced at $2.50 per hour.
* An alternative offering of $9.95 per month for unlimited use - for those
subscribers who already have an Internet connection and use this connection to
access AOL.
Prior to December 1, 1996, the Company's standard monthly membership fee
for its AOL service, which included five hours of service, was $9.95 per month,
with a $2.95 hourly fee for usage in excess of five hours per month. Existing
members at December 1, 1996, could retain the $9.95 / five hour pricing upon
request. For the period July 1, 1996 through November 30, 1996, the Company
also offered a pricing plan which included 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
"Value Plan"). The Value Plan was discontinued upon the availability of the
Flat-Rate Plan on December 1, 1996.
As a result of the introduction of the Flat-Rate Plan as detailed above,
the Company's Internet service, Global Network Navigator ("GNN"), was
discontinued. The Company had launched GNN in October 1995.
Subsequent to the introduction of the Flat-Rate Plan, the Company
experienced a significant increase in average monthly subscriber usage, and an
attendant decrease in the average revenue per member-hour. The Company also
experienced higher cost of revenues relative to total revenues. The Company
plans to minimize the impact of the aforementioned changes by growing other
revenues as well as decreasing costs, on a relative basis (either on a per-hour
basis or as a percentage of total revenues), principally through network and
operating cost efficiencies.
An important component of the Company's business strategy is an increasing
reliance on other revenue sources including the sale of merchandise, advertising
and related revenues, and transaction fees associated with electronic commerce.
The Company recognizes that this reliance on other revenue sources carries a
higher degree of business risk than do the other strategy factors described
below, which are more directly within the Company's control. Another important
factor in the Company's business strategy is the further reduction of the costs
of operating the Company's data network, on a per-hour basis, through the
continuing build-out and efficient traffic management of AOLnet, the Company's
TCP/IP network. The Company also anticipates marketing expenses as a percentage
of revenues to be lower than they were in fiscal 1997 (absent the effects of
capitalization and amortization), primarily as a result of the improved value
proposition offered by flat-rate pricing, which is expected to provide improved
subscriber acquisition and retention rates, as compared to rates achieved prior
to flat-rate pricing. The Company's marketing strategy is expected to place a
greater emphasis on cost-effective bundling agreements, whereby the Company's
product is widely distributed with new personal computers and other peripheral
computer equipment. Although the Company will continue to market its products
via direct mail programs, such programs are expected to be more cost-efficient,
as they will be directed to more narrowly targeted consumer groups.
The growth of other revenues is important to the Company's business
objectives, as they provide an important contribution to the Company's operating
margins. In fiscal 1997, other revenues represented approximately 15% of total
revenues, compared to approximately 9% in fiscal 1996. Among the Company's
business objectives are increasing the subscriber base and continuing to
accelerate the change in its business model into one in which increasingly more
revenues and profits are generated from sources other than online service
subscription revenues, such as advertising and electronic commerce. The Company
expects that the growth in other revenues, assuming such growth continues, will
be the primary source of future profit growth, and will provide the Company with
the opportunity and flexibility to fund the costs associated with flat-rate
pricing as well as programs designed to grow the subscriber base and meet other
business objectives. Other revenues are generated primarily from electronic
commerce and advertising, and include the sale of merchandise by the Company
(principally computer hardware and software and AOL merchandise), as well as
fees received from the sale of advertising, fees received from companies who
market their products through the AOL service, and commission fees associated
with the Company's co-branded VISA credit card. Advertising revenues are
expected to grow in importance as the Company is able to leverage its large and
growing subscriber base. The Company is able to offer its advertising partners
a variety of customized programs, which may include guaranteed numbers of
impressions and select sponsorship of particular online areas for designated
time periods. In the past, electronic commerce revenues earned from companies
who marketed their products on the AOL service were generally commission-based.
In the future, the Company anticipates that a higher proportion of these types
of revenues will be derived from fixed fees charged to these merchants, rather
than being based on transaction levels. As merchants realize the value of
reaching the Company's large subscriber base, the Company expects to earn
additional revenues by offering selected merchants exclusive rights to market
their particular class of goods or services within the Company's online service.
The Company's operating margin declined in fiscal 1997, driven by the
impact of the Company's switch to flat-rate pricing in December 1996 and a
concomitant dramatic increase in member usage. Average monthly subscriber usage
in the first quarter of fiscal 1997, the last quarter before the introduction of
flat-rate pricing, was approximately 7 hours. In the fourth quarter of fiscal
year 1997, average monthly subscriber usage had increased to approximately 18
hours. Due to the lack of historical operating experience under a flat-rate
pricing structure, the Company is unsure whether these usage statistics will
continue to trend upward. If usage trends continue to increase, further
pressures on operating margins may result. The impact of increased usage on
operating margins, if it occurs, could be offset, in whole or in part, by
increases in other revenues, increased data network operating efficiencies,
reductions in marketing expenses, or other factors.
The Company competes in the highly competitive businesses of online and
Internet services, advertising and electronic commerce. Online services and
Internet service providers, including CompuServe Corporation, the Microsoft
Network and Prodigy Services Company and various national and local independent
Internet service providers, such as NETCOM On-Line Communication Services, Inc.,
as well as long distance and regional telephone and cable companies, including,
among others, AT&T Corp., MCI Communications Corporation and various regional
Bell operating companies, @Home Network, and WebTV currently compete with the
Company for both subscribers and for advertising and electronic commerce
revenues. The Company also competes for advertising and electronic commerce
revenues with major Web sites operated by search services and other companies
such as Yahoo! Inc., Netscape Communications Corporation, Infoseek Corporation,
CNET, Inc., Lycos, Inc., and Excite, Inc., and media companies such as The Walt
Disney Company and Time Warner Inc. The Company has recently entered into an
agreement with WorldCom, Inc. to acquire the CompuServe Corporation's online
services businesses, as described in Note 16 of the Notes to Consolidated
Financial Statements. Some of the present competitors and potential future
competitors may have greater financial, technical, marketing and/or personnel
resources than the Company. The Company believes the principal competitive
factors in the online and Internet services industries include, with respect
to competition for subscribers, product features and quality, ease of use,
access to distribution channels, strategic alliances, brand recognition,
reliability and price, and with respect to advertising and electronic commerce
revenues, numbers of visitors to an online or Internet site, duration and
frequency of visits, and demographics of visitors. The Company believes that
it currently competes effectively in these areas. The competitive environment
could have the following effects: require the Company to implement new pricing
programs that could result in lower prices and increased spending on marketing,
network capacity, content procurement and product development; limit the
Company's opportunities to enter into and/or renew agreements with content
providers and distribution partners; limit its ability to develop new products
and services; limit the Company's ability to grow its subscriber base; result
in increased attrition in the Company's subscriber base; and negatively impact
the Company's ability to meet its business objective of changing its business
model into one in which increasingly more revenues and profits are generated
from sources other than online service subscription revenues, such as
advertising and electronic commerce. 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 1997 Compared to Fiscal 1996
Online Service Revenues
For fiscal 1997, online service revenues increased from $991,656,000 to
$1,429,445,000, or 44%, over fiscal 1996. This increase was primarily
attributable to a 53% increase in the quarterly average number of AOL North
American subscribers for fiscal 1997, compared to fiscal 1996, offset by a 6%
decrease in the average monthly online service revenue per AOL North American
subscriber. The average monthly online service revenue per AOL North American
subscriber decreased from $17.96 in fiscal 1996 to $16.87 in fiscal 1997. This
decrease was principally attributable to the availability of the Value Plan from
July 1996 through November 1996, and the Flat-Rate Plan beginning in December
1996.
Other Revenues
Other revenues, consisting principally of electronic commerce and
advertising revenues, as well as data network service revenues, increased by
150%, from $102,198,000 in fiscal 1996 to $255,783,000 in fiscal 1997. This
increase was primarily attributable to an increase in electronic commerce and
advertising revenues, driven primarily by increases in the sale of merchandise
and more advertising on the Company's online service. Merchandise sales
increased by 152% from $43,418,000 in fiscal 1996 to $109,320,000 in fiscal
1997, reflecting the impact of an expanded number of products offered for sale
to the Company's larger membership base. Advertising and electronic commerce
transaction fees increased by 532%, from $12,436,000 in fiscal 1996 to
$78,645,000 in fiscal 1997. During the year additional companies entered into
advertising and marketing agreements with the Company, as the Company expanded
its inventory of available advertising and was able to deliver larger audiences
to its advertising partners due to the growth in the membership base. The
Company's co-branded VISA credit card, first introduced during fiscal 1997,
generated $18,967,000 in revenues during the year.
The Company entered into a 40-month electronic commerce agreement in
February 1997 (the "Agreement") with long distance telephone service provider
Tel-Save, Inc. Under the terms of the Agreement, the Company received $100
million in cash and warrants valued at $20 million (the "minimum contract
value") as consideration related to a Tel-Save product offering to the Company's
subscribers. The Agreement also contains a revenue-sharing arrangement that,
based upon subscriber usage levels of the Tel-Save product offering, provides
the Company with an opportunity to earn in excess of the $120 million minimum
contract value. The Company recognized $24,100,000 in other revenues during the
fiscal year ended June 30, 1997, pursuant to the Agreement. In the aggregate,
the Company expects to recognize approximately $50 million of revenue pursuant
to the Agreement during calendar year 1997, related principally to certain
market exclusivities, production and development performance milestones, the
prorated value of the warrants and other promotional commitments and
deliverables. The Tel-Save product offering is expected to launch prior to the
end of calendar year 1997. Given the evolving nature of transactions involving
electronic commerce, the Company cannot predict whether electronic commerce
agreements containing similar types of revenue-producing activities will become
frequent in the future.
Cost of Revenues
Cost of revenues includes network-related costs, consisting primarily of
data network costs, costs associated with operating the data centers and
providing customer support, royalties paid to information and service providers,
the costs of merchandise sold, and product development amortization expense.
For fiscal 1997, cost of revenues increased from $638,025,000 to $1,040,762,000,
or 63%, over fiscal 1996, and increased as a percentage of total revenues from
58.3% to 61.8%.
The increase in cost of revenues was primarily attributable to an increase
in data network costs, leased equipment costs, customer support costs, the costs
of merchandise sold, and royalties paid to information and service providers.
Data network costs increased primarily as a result of the larger customer base
and more usage by customers. Leased equipment costs increased primarily as a
result of additional host computer and network equipment. Customer support
costs, which include personnel and telephone costs associated with providing
customer support, were higher primarily as a result of the larger customer base
and network access problems encountered by subscribers upon the introduction of
the Flat-Rate Plan. The costs of merchandise sold increased as a result of an
increase in merchandise revenues. 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 AOL
service.
The increase in cost of revenues as a percentage of total revenues was
primarily attributable to increases in leased equipment costs, the costs of
merchandise sold and product development amortization expense. The
aforementioned increase was partially offset by a decrease in data network costs
resulting from a lower cost per hour, due to a higher percentage of the
Company's data traffic being carried on AOLnet.
The Company is building AOLnet, a TCP/IP data network, in order to increase
its network capacity, provide its members with higher speed access, and reduce
data network costs on a per- hour basis. As the Company rapidly builds AOLnet,
it plans to continue to manage an increasingly higher percentage of its total
traffic to this network, which would lead to a lower overall data network per
hour cost.
In September 1997, the Company announced that, in exchange for its ANS
Communications, Inc. subsidiary ("ANS"), it will acquire CompuServe
Corporation's worldwide online services business from WorldCom, Inc.
("WorldCom") and receive approximately $175 million in cash. The Company also
agreed that it will, upon closing of the aforementioned transaction, enter
into a five year network services agreement with WorldCom which will provide
the Company with significantly expanded network capacity for the Company's
online service at favorable prices, and higher speed access as it becomes
commercially available (refer to Note 16 of the Notes to Consolidated Financial
Statements). ANS is an important component of the portfolio of suppliers which
comprise AOLnet, and, under the network services agreement with WorldCom, will
continue to be so in the future. The network services agreement with WorldCom
is structured in such a manner that the Company anticipates its network costs
will be at a level no greater than the Company would expect to incur if it
continued to own ANS, thereby achieving a key benefit of ownership without the
potential risks associated with ownership. The Company has entered into this
transaction in order to realize the significant growth in the value of ANS and
to allow the Company to concentrate on its core competencies - interactive
services and content.
Marketing and Write-off of Deferred Subscriber Acquisition Costs
Marketing expenses include the costs to acquire and retain subscribers and
other general marketing costs. For fiscal 1997, marketing expenses increased
from $212,710,000 to $409,260,000, or 92%, over fiscal 1996, and increased as a
percentage of total revenues from 19.4% to 24.3%.
The increase in marketing expenses was primarily attributable to an
increase in subscriber acquisition costs, which was impacted by a change in
accounting estimate at September 30, 1996, that resulted in subscriber
acquisition costs being currently expensed for periods subsequent to the first
quarter of fiscal 1997, versus being capitalized and amortized over twenty-four
months in fiscal 1996 and in the first quarter of fiscal 1997. The increase in
marketing expenses as a percentage of total revenues was primarily attributable
to increases in subscriber acquisition costs and general marketing costs, which
include telemarketing and personnel. As a result of the aforementioned change
in accounting estimate, the balance of deferred subscriber acquisition costs as
of September 30, 1996, totaling $385,221,000, was written off. For additional
information regarding this change, refer to Note 3 of the Notes to Consolidated
Financial Statements.
For fiscal 1997, marketing expenses, before capitalization and
amortization, increased from $449,662,000 to $480,300,000, or 7%, over fiscal
1996, and decreased as a percentage of total revenues from 41.1% to 28.5%. The
increase in marketing expenses, before capitalization and amortization, was
primarily attributable to an increase in general marketing costs, including
telemarketing and personnel. The decrease in marketing expenses as a percentage
of total revenues, before capitalization and amortization, was primarily the
result of a slight decrease in subscriber acquisition costs, before
capitalization and amortization, combined with the substantial growth in
revenues.
Product Development
Product development costs include research and development expenses and
other product development costs. For fiscal 1997, product development costs
increased from $43,164,000 to $58,208,000, or 35%, over fiscal 1996, and
decreased as a percentage of total revenues from 3.9% to 3.5%. The increase in
product development costs was primarily due 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 primarily the
result of the substantial growth in revenues, which more than offset the
additional product development costs.
General and Administrative
For fiscal 1997, general and administrative costs increased from
$110,653,000 to $193,537,000, or 75%, over fiscal 1996, and increased as a
percentage of total revenues from 10.1% to 11.5%. The increase in general and
administrative costs, and such costs as a percentage of total revenues, was
principally attributable to higher office-related and personnel expenses, as a
result of an increase in the number of employees and expansion of the Company's
operations. The increase in office-related and personnel expenses included
costs associated with certain subsidiaries that were present in fiscal 1997
only, including Digital City, Inc. and Imagination Network, Inc. (doing business
as WorldPlay Entertainment, "WorldPlay").
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. ("Ubique") in September 1995.
Amortization of Goodwill
Goodwill is being amortized on a straight-line basis over periods ranging
from two to ten years. Amortization of goodwill decreased to $6,549,000 in
fiscal 1997 from $7,078,000 in fiscal 1996. The decrease in amortization of
goodwill is primarily attributable to a write-off of the goodwill associated
with GNN, partially offset by goodwill associated with various purchases made by
the Company, including WorldPlay, which occurred in fiscal 1997. In connection
with the fiscal 1997 restructuring charge (see Note 4 of the Notes to
Consolidated Financial Statements), the Company wrote-off approximately
$8,200,000 of capitalized goodwill associated with GNN.
Restructuring Charge
In connection with a restructuring plan adopted in the second quarter of
fiscal 1997, the Company recorded a $48,627,000 restructuring charge associated
with the Company's change in business model, the reorganization of the Company
into three operating units, the termination of approximately 300 employees, and
the shutdown of certain operating divisions and subsidiaries. The future impact
of the restructuring activities on the Company's results of operations is not
expected to be material. For additional information regarding this charge,
refer to Note 4 of the Notes to Consolidated Financial Statements.
Contract Termination Charge
In fiscal 1997, the Company recorded a contract termination charge of
$24,506,000, which consists of unconditional payments associated with
terminating certain information provider contracts which became uneconomic as a
result of the Company's introduction of flat-rate pricing in December 1996. For
additional information regarding the contract termination charge, refer to Note
5 of the Notes to Consolidated Financial Statements.
Settlement Charge
In fiscal 1997, the Company recorded a settlement charge of $24,204,000 in
connection with a legal settlement reached with various State Attorneys General
and a preliminary legal settlement reached with various class action plaintiffs,
to resolve potential claims arising out of the Company's introduction of flat-
rate pricing and its representation that it would provide unlimited access to
its subscribers. Pursuant to these settlements, the Company agreed to make
payments to subscribers, according to their usage of the AOL service, who may
have been injured by their reliance on the Company's claim of unlimited access.
These payments do not represent refunds of online service revenues, but are
rather the compromise and settlement of allegations that the Company's
advertising of unlimited access under its flat-rate plan violated consumer
protection laws.
Other Income (Expense)
Other income (expense) consists primarily of investment income and non-
operating gains net of interest expense and non-operating charges. The Company
had other income of $6,299,000 in fiscal 1997 and other expense of $2,056,000 in
fiscal 1996. The change in other income (expense) was primarily attributable to
the allocation of minority interest losses in fiscal 1997 and a charge in fiscal
1996 for the settlement of a class action lawsuit, partially offset by an
increase in fiscal 1997 of non-operating losses related to various investments.
Provision for Income Taxes
The provision for income taxes was $0 and $32,523,000 in fiscal 1997 and
fiscal 1996, respectively. For additional information regarding income taxes,
refer to Note 12 of the Notes to Consolidated Financial Statements.
Net Income (Loss)
The Company had a net loss in fiscal 1997 of $499,347,000 compared to net
income in fiscal 1996 of $29,816,000. The net loss in fiscal 1997 included
$385,221,000 for the write-off of deferred subscriber acquisition costs, a
restructuring charge of $48,627,000, a contract termination charge of
$24,506,000 and a settlement charge of $24,204,000. 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 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 160% increase in the quarterly average number of AOL North
American subscribers for fiscal 1996, compared to fiscal 1995, coupled with a
10% increase in the average monthly online service revenue per AOL North
American subscriber. The average monthly online service revenue per AOL North
American subscriber increased from $16.28 in fiscal 1995 to $17.96 in fiscal
1996.
Other Revenues
Other revenues, consisting principally of electronic commerce and
advertising revenues, data network service revenues, marketing and production
services and development and licensing fees, increased by 104%, from $49,981,000
in fiscal 1995 to $102,198,000 in fiscal 1996. This increase was primarily
attributable to an increase in electronic commerce and advertising revenues and
data network service revenues, partially offset by a decrease in revenues from
marketing and production services. Merchandise sales increased by 206% from
$14,190,000 in fiscal 1995 to $43,418,000 in fiscal 1996, reflecting the impact
of an expanded number of products offered for sale to the Company's larger
membership base. Data network services revenues increased by 177%, from
$8,614,000 in fiscal 1995 to $23,879,000 in fiscal 1996, due to growth of the
external customer base at the Company's ANS subsidiary. Advertising and
electronic commerce transaction fees were a new source of revenue to the Company
in fiscal 1996, and amounted to $12,436,000. Multimedia and CD-ROM production
services decreased by 39%, from $10,031,000 in fiscal 1995 to $6,126,000 in
fiscal 1996, and new media and interactive marketing services revenues decreased
by 60%, from $10,014,000 to $3,956,000, as the Company refocused the resources
at several of its subsidiaries from external sales to internal support.
Cost of Revenues
For fiscal 1996, cost of revenues increased from $232,318,000 to
$638,025,000, or 175%, over fiscal 1996, and decreased as a percentage of total
revenues from 58.9% to 58.3%.
The increase in cost of revenues was primarily attributable to an increase
in data network costs, customer support costs, leased equipment costs, and
royalties paid to information and service providers. Data network costs
increased primarily as a result of the larger customer base and more usage by
customers. Customer support costs were higher primarily as a result of the
larger customer base and a large number of new subscriber registrations. Leased
equipment costs increased primarily as a result of additional host computer and
network equipment. 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 network costs resulting from lower variable costs per hour, due to a
higher percentage of the Company's data traffic being carried on 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.
Marketing
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.
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 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. This change was made
in order to more appropriately match subscriber acquisition costs with
associated online service revenues. For additional information regarding the
accounting for subscriber acquisition costs, refer to Note 2 of the Notes to
Consolidated Financial Statements.
Product Development
For fiscal 1996, product development costs increased from $11,669,000 to
$43,164,000, or 270%, over fiscal 1995, and increased as a percentage of total
revenues from 3.0% to 3.9%. The increase in product development costs, and such
costs as a percentage of total revenues, was primarily attributable to an
increase in personnel costs related to an increase in the number of technical
employees.
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 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. and Navisoft, Inc.
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 in these periods
relates primarily to the Company's fiscal 1995 acquisitions of Advanced Network
& Services, Inc. and Global Network Navigator, Inc., which resulted in
approximately $56 million of goodwill. 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)
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, Wide Area Information Servers, Inc. and Medior, Inc.
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 12 of the Notes to Consolidated Financial Statements.
Net Income (Loss)
The Company had net income in fiscal 1996 of $29,816,000 compared to a net
loss in fiscal 1995 of $35,751,000. 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.
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 $17,260,000,
($55,694,000) and $123,049,000 for fiscal 1995, fiscal 1996 and fiscal 1997,
respectively. Included in operating activities were expenditures for deferred
subscriber acquisition costs of $111,761,000, $363,024,000 and $130,229,000 for
fiscal 1995, fiscal 1996 and fiscal 1997, respectively; and an increase in
deferred revenue of $214,097,000 in fiscal 1997 related to service revenues as
well as an increase in prepaid advertising, which grew, principally as a result
of agreements with Tel-Save, Inc., which included a $100,000,000 prepayment,
and CUC International, Inc., which included a $45,000,000 prepayment. Net cash
used in investing activities was $87,272,000, $90,099,000 and $196,594,000 in
fiscal 1995, fiscal 1996 and fiscal 1997, respectively. Net cash provided by
financing activities was $71,796,000, $218,337,000 and $79,464,000 in fiscal
1995, fiscal 1996 and fiscal 1997, respectively. Included in financing
activities was $15,000,000 in fiscal 1997 representing proceeds from the sale of
preferred stock in a subsidiary corporation, and approximately $139,500,000 in
fiscal 1996 representing proceeds from a public stock offering of common stock.
At June 30, 1997, the Company had a working capital deficiency of $230,997,000,
compared to a working capital deficiency of $22,848,000 at June 30, 1996. The
increase in working capital deficiency is due primarily to (1) an increase in
other accrued expenses and liabilities of $169,422,000, primarily related to
increases in telecommunications and other operating accruals driven by the
growth in the Company's business; and (2) an increase in deferred revenue of
$128,057,000, primarily related to an increase in deferred online service
revenues as well as an increase in prepaid advertising revenues, as discussed
above. Deferred online service revenues increased primarily as a result of the
introduction in fiscal 1997 of an upfront annual payment plan, as well as an
increase in the standard monthly membership fee from $9.95 to $19.95.
On September 8, 1997, the Company announced that, in exchange for its ANS
Communications, Inc. subsidiary, it will acquire CompuServe Corporation's
("CompuServe") worldwide online services business from WorldCom, Inc.
("WorldCom") and receive approximately $175 million in cash (the "Purchase and
Sale"). Upon completion of the Purchase and Sale, the Company's European
partner, Bertelsmann AG, will pay an additional $75 million to the Company and
each company will invest $25 million in an expanded joint venture to operate
CompuServe's European online service. The Company will generate approximately
$225 million in cash as a result of the aforementioned transactions. The
Company also agreed that it will, upon closing of the Purchase and Sale, enter
into a five-year network services agreement with WorldCom which will provide the
Company with significantly expanded network capacity for the Company's online
service at favorable prices. In connection with these transactions, the Company
expects to realize a gain of $300 million to $400 million, which will be
recognized over the five-year term of the network services agreement with
WorldCom. The transactions outlined above are subject to certain closing
conditions, including regulatory approvals, and are expected to close on or
before March 1, 1998.
In April 1995, the Company entered into a joint venture with Bertelsmann,
AG to offer interactive online services in Europe. In connection with the
agreement, the Company received approximately $54 million through the sale of
common stock to Bertelsmann, AG.
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 $28,000,000 through the sale of convertible preferred
stock to Mitsui. 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, 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 currently leases the majority of its facilities and equipment
under non-cancelable operating leases. The Company made significant investments
in fiscal 1997 in the buildout of AOLnet, its data communications network, and
in expanding its facilities, host server and data center capacity. The Company
plans to continue making significant investments in these areas. The Company
plans to fund these investments, which are anticipated to be between $600
million and $800 million in fiscal 1998, through a combination of leases, debt
financing and cash purchase.
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 in subscriber acquisition and
retention marketing and content programs to expand its subscriber base, as well
as in network, computing and support infrastructure. Additionally, the Company
expects to use a portion of its cash for the acquisition and subsequent funding
of technologies, content, 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.
The Company is involved in various legal proceedings, including pending
litigation. In February 1997, a class action lawsuit (Orman v. America Online,
Inc., et al.) was filed against the Company, its officers and directors and its
outside auditors alleging violations of the federal securities laws between
August 10, 1995 and October 29, 1996. In July 1997, the original complaint was
dismissed against all defendants. On August 11, 1997, an amended class action
complaint was filed against the Company, its Chief Executive Officer and its
Chief Financial Officer. A shareholder derivative suit related to the Orman
lawsuit has also been filed against the Company's directors in Delaware chancery
court. The Company believes that it has valid defenses to all litigation
pending against it, including the Orman case, and all cases against the Company
are, and will continue to be, vigorously defended. Management is unable to make
a meaningful estimate of the amount or range of loss that could result from an
unfavorable outcome of all pending litigation. It is possible that the
Company's results of operations or cash flows in a particular quarter or annual
period or its financial position could be materially affected by an ultimate
unfavorable outcome of certain pending litigation. Management believes,
however, that the ultimate outcome of all pending litigation should not have a
material adverse effect on the Company's financial position.
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. The growth in the subscriber base 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.
Forward-Looking Statements
Certain of the statements contained in the Company's periodic reports
filed with the Securities and Exchange Commission and otherwise made to the
public, including statements made in this Form 10-K, are forward-looking
statements within the meaning of the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995, including, without limitation,
statements regarding the growth of online services revenues, the growth of
other revenues, the reduction of data network costs on a per-hour basis,
marketing expenses as a percentage of revenues, subscriber acquisition and
retention rates, the impact of the foregoing factors on operating margins
and the Company's belief in the outcome of pending or possible litigation.
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 the 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, network
capacity, content procurement 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.
Factors related to the new standard monthly membership fee (the Flat-Rate
Plan), and other new pricing alternatives, which became available December 1,
1996, including uncertainty of the following: the effect on average cost-per-
subscriber acquisition and retention rates; the amount of time spent by members
using the AOL service under each pricing alternative; and the percentage of
members who sign up under each pricing alternative relative to their usage
patterns.
Risks and uncertainties associated with the development of a new medium and
industry and a new and evolving business model, and the related fluctuations in
pricing, revenues, costs, products and services, the ability to anticipate
customer demands and to respond quickly and effectively to market opportunities.
Risks related to the buildout of AOLnet and the expansion of host server
and data center capacity, including the inability to expand network, host server
and data center capacity at a rate and speed to sufficiently satisfy subscriber
demands, which accelerated substantially as a result of the introduction of
flat-rate pricing; the failure of any of the Company's network providers; the
failure to procure certain component parts required to expand AOLnet capacity,
including modems, circuits, routers and local exchange carrier lines from local
telephone companies; the failure to obtain the necessary financing for the
buildout of AOLnet and the expansion of host server and data center capacity;
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, or any interruptions or
service outages caused by software defects or server and network expansion.
The Company's inability to manage its growth and to adapt its
administrative, operational, customer support and financial control systems to
the needs of the expanded entity and subscriber base; 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.
The possibility of 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 electronic commerce and advertising.
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, judgments 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 1997 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 1997 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 1997 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 1997 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, 1997, 1996, and 1995 F-3
Consolidated Balance Sheets as of June 30, 1997 and
1996 F-4
Consolidated Statements of Changes in Stockholders'
Equity for the years ended June 30, 1997, 1996,
and 1995 F-5
Consolidated Statements of Cash Flows for the years
ended June 30, 1997, 1996, and 1995 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 3, 1997, 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.)
2.6 Purchase and Sale Agreement dated as of September 7, 1997 by and
among America Online, Inc., ANS Communications, Inc. and WorldCom,
Inc. (Filed as Exhibit 2 to the Company's Current Report on Form 8-K,
dated September 19,1997, and incorporated herein by reference.)
3.1 Restated Certificate of Incorporation of America Online, Inc.
3.2 Restated By-Laws of America Online, Inc. (Filed as Exhibit 3.2 to
the Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 1997 and incorporated herein by reference.)
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 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.)
10.6 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.)
10.7 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.)
10.8 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.)
10.9 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.)
10.10 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.)
10.11 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.)
10.12 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.)
10.13 Offer Letter to, and Employment Agreement with, Bruce R. Bond.
10.14 Employment Agreement entered into with Theodore J. Leonsis.
10.15 Employment Agreement and related agreements entered into with Robert
W. Pittman.
21.1 List of Subsidiaries.
23.1 Consent of Ernst & Young LLP
24.1 Powers of Attorney.
(b) Reports on Form 8-K
None
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 29th day of
September, 1997.
AMERICA ONLINE, INC.
By:/S/LENNERT J. LEADER
Lennert J. Leader
Senior Vice President,
Chief Financial Officer,
Treasurer, Chief Accounting Officer
and Assistant Secretary
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 29th day of September, 1997.
Signature Title Date
/S/STEPHEN M. CASE
Stephen M. Case Chairman of the Board, September 29, 1997
President, Chief Executive Officer
and Director
(principal executive officer)
*
James V. Kimsey Chairman Emeritus and Director September 29, 1997
/S/LENNERT J. LEADER
Lennert J. Leader Senior Vice President, Chief September 29, 1997
Financial Officer, Treasurer,
Chief Accounting Officer and
Assistant Secretary
(principal financial and
accounting officer)
*
Frank J. Caufield Director September 29, 1997
*
Robert J. Frankenberg Director September 29, 1997
*
Alexander M. Haig, Jr. Director September 29, 1997
*
William N. Melton Director September 29, 1997
*
Thomas Middelhoff Director September 29, 1997
/S/ROBERT W. PITTMAN
Robert W. Pittman Director September 29, 1997
*By:/S/LENNERT J. LEADER
Lennert J. Leader, as Attorney-in-
Fact for each of the persons indicated
AMERICA ONLINE, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors F-2
Consolidated Statements of Operations for the years
ended June 30, 1997, 1996, and 1995 F-3
Consolidated Balance Sheets as of June 30, 1997 and
1996 F-4
Consolidated Statements of Changes in Stockholders'
Equity for the years ended June 30, 1997, 1996,
and 1995 F-5
Consolidated Statements of Cash Flows for the years
ended June 30, 1997, 1996, and 1995 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, 1997 and 1996, 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, 1997. 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
misstatements. 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, 1997 and 1996, and the consolidated results of their operations
and their cash flows for each of the three years in the period ended June 30,
1997, in conformity with generally accepted accounting principles.
/S/Ernst & Young LLP
Vienna, Virginia
September 10, 1997
<TABLE>
<CAPTION>
Consolidated Statements of Operations
(Amounts in thousands, except per share data)
Year ended June 30,
1997 1996 1995
<S> <C> <C> <C>
Revenues:
Online service revenues $1,429,445 $ 991,656 $ 344,309
Other revenues 255,783 102,198 49,981
Total revenues 1,685,228 1,093,854 394,290
Costs and expenses:
Cost of revenues 1,040,762 638,025 232,318
Marketing
Marketing 409,260 212,710 77,064
Write-off of deferred subscriber
acquisition costs 385,221 - -
Product development 58,208 43,164 11,669
General and administrative 193,537 110,653 42,700
Acquired research and development - 16,981 50,335
Amortization of goodwill 6,549 7,078 1,653
Restructuring charge 48,627 - -
Contract termination charge 24,506 - -
Settlement charge 24,204 - -
Total costs and expenses 2,190,874 1,028,611 415,739
Income (loss) from operations (505,646) 65,243 (21,449)
Other income (expense), net 6,299 (2,056) 3,074
Merger expenses - (848) (2,207)
Income (loss) before provision for
income taxes (499,347) 62,339 (20,582)
Provision for income taxes - (32,523) (15,169)
Net income (loss) $ (499,347) $ 29,816 $ (35,751)
Earnings (loss) per share:
Net income (loss) $ (5.22) $ 0.28 $ (0.51)
Weighted average shares outstanding 95,607 108,097 69,550
See accompanying notes.
</TABLE>
<TABLE>
<CAPTION>
Consolidated Balance Sheets
(Amounts in thousands, except share data)
June 30,
1997 1996
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 124,340 $ 118,421
Short-term investments 268 10,712
Trade accounts receivable 65,306 49,342
Other receivables 26,093 23,271
Prepaid expenses and other current assets 107,466 65,290
Total current assets 323,473 267,036
Property and equipment at cost, net 233,129 111,090
Other assets:
Restricted cash 50,000 -
Product development costs, net 72,498 44,330
Deferred subscriber acquisition costs, net - 314,181
License rights, net 16,777 4,947
Other assets 84,618 29,607
Deferred income taxes 24,410 135,872
Goodwill, net 41,783 51,691
$ 846,688 $ 958,754
Liabilities and Stockholders' Equity
Current liabilities:
Trade accounts payable $ 69,703 $ 105,904
Other accrued expenses and liabilities 297,298 127,876
Deferred revenue 166,007 37,950
Accrued personnel costs 20,008 15,719
Current portion of long-term debt 1,454 2,435
Total current liabilities 554,470 289,884
Long-term liabilities:
Notes payable 50,000 19,306
Deferred income taxes 24,410 135,872
Deferred revenue 86,040 -
Minority interests 2,674 22
Other liabilities 1,060 1,168
Total liabilities 718,654 446,252
Stockholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares
authorized, 1,000 shares issued and outstanding 1 1
at June 30, 1997 and 1996
Common stock, $.01 par value; 300,000,000 shares
authorized, 100,188,971 and 92,626,000 shares
issued and outstanding at June 30, 1997
and 1996, respectively 1,002 926
Unrealized gain on available-for-sale securities 16,924 -
Additional paid-in capital 617,221 519,342
Accumulated deficit (507,114) (7,767)
Total stockholders' equity 128,034 512,502
$ 846,688 $ 958,754
See accompanying notes.
</TABLE>
<TABLE>
Consolidated Statements of Changes in Stockholders' Equity
(Amounts in thousands, except share data)
Preferred Stock Common Stock
Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Balances at June 30, 1994 - - 63,103,176 $ 630
Effect of immaterial poolings - - 2,062,756 21
Balances as Restated - - 65,165,932 651
Common stock issued:
Exercise of options - - 2,905,256 29
Business acquisitions - - 4,785,354 48
Sale of stock, net - - 3,871,726 39
Tax benefit related to stock options - - - -
Net loss - - - -
Balances at June 30, 1995 - - 76,728,268 767
Effect of pooling restatement - - - -
Balances as Restated - - 76,728,268 767
Common stock issued:
Exercise of options and warrants - - 10,370,338 104
Business acquisitions - - 465,502 5
Sale of stock, net - - 5,061,892 50
Sale of preferred stock, net 1,000 $ 1 - -
Tax benefit related to stock options - - - -
Net income - - - -
Balances at June 30, 1996 1,000 1 92,626,000 926
Common stock issued:
Exercise of options - - 6,933,261 69
Business acquisitions - - 379,225 4
Sale of stock, net - - 250,485 3
Sale of preferred stock, net - - - -
Unrealized gain on available-for-sale
securities - - - -
Net loss - - - -
Balances at June 30, 1997 1,000 $ 1 100,188,971 $1,002
Unrealized
gain on
Additional available-
Paid-in for-sale Accumulated
Capital securities Deficit Total
<S> <C> <C> <C> <C>
Balances at June 30, 1994 $ 99,567 - $(1,396) $ 98,801
Effect of immaterial poolings 1,032 - 524 1,577
Balances as Restated 100,599 - (872) 100,378
Common stock issued:
Exercise of options 4,655 - - 4,684
Business acquisitions 75,653 - - 75,701
Sale of stock, net 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 252,668 - (36,623) 216,812
Effect of pooling restatement - - (960) (960)
Balances as Restated 252,668 - (37,583) 215,852
Common stock issued:
Exercise of options and
warrants 47,885 - - 47,989
Business acquisitions 16,632 - - 16,637
Sale of stock, net 141,320 - - 141,370
Sale of preferred stock, net 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 519,342 - (7,767) 512,502
Common stock issued:
Exercise of options 70,152 - - 70,221
Business acquisitions 16,231 - - 16,235
Sale of stock, net 11,496 - - 11,499
Unrealized gain on available-
for-sale securities - $16,924 - 16,924
Net loss - - (499,347) (499,347)
Balances at June 30, 1997 $617,221 $16,924 $(507,114) $128,034
See accompanying notes.
</TABLE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
(Amounts in thousands)
Year ended June 30,
1997 1996 1995
Cash flows from operating activities:
<S> <C> <C> <C>
Net income (loss) $(499,347) $ 29,816 $(35,751)
Adjustments to reconcile net income to
net cash provided by (used in) operating
activities:
Write-off of deferred subscriber
acquisition costs 385,221 - -
Non-cash restructuring charges 22,478 - -
Depreciation and amortization 64,572 34,586 12,266
Amortization of subscriber acquisition
costs 59,189 126,072 60,924
Loss on sale of property and equipment - 44 37
Charge for acquired research and
development - 16,981 50,335
Changes in assets and liabilities:
Trade accounts receivable (16,418) (16,838) (14,373)
Other receivables 2,083 (11,890) (9,086)
Prepaid expenses and other current
assets (44,394) (39,763) (19,635)
Deferred subscriber acquisition costs (130,229) (363,024) (111,761)
Other assets (38,902) (20,667) (6,051)
Trade accounts payable (36,944) 21,150 60,805
Accrued personnel costs 2,979 12,856 1,850
Other accrued expenses and liabilities 139,134 104,226 5,703
Deferred revenue 214,097 17,929 7,190
Deferred income taxes - 32,523 14,763
Other liabilities (470) 305 44
Total adjustments 622,396 (85,510) 53,011
Net cash provided by (used in) operating
activities 123,049 (55,694) 17,260
Cash flows from investing activities:
Short-term investments 10,444 7,960 5,380
Purchase of property and equipment (149,768) (61,295) (59,255)
Product development costs (56,795) (32,631) (13,054)
Sale of property and equipment - - 180
Purchase costs of acquired businesses (475) (4,133) (20,523)
Net cash used in investing activities (196,594) (90,099) (87,272)
Cash flows from financing activities:
Proceeds from issuance of preferred stock
of subsidiary 15,000 - -
Proceeds from issuance of common stock, net 84,506 189,359 61,721
Proceeds from issuance of preferred stock,
net - 28,315 -
Principal and accrued interest payments on
line of credit and long-term debt (19,811) (935) (3,045)
Proceeds from line of credit
and issuance of long-term debt 50,000 3,000 13,488
Restricted cash (50,000) - -
Principal payments under capital lease
obligations (231) (1,402) (368)
Net cash provided by financing activities 79,464 218,337 71,796
Net increase in cash and cash equivalents 5,919 72,544 1,784
Cash and cash equivalents at beginning of
year 118,421 45,877 44,093
Cash and cash equivalents at end of year $124,340 $118,421 $ 45,877
Supplemental cash flow information
Cash paid during the year for:
Interest $ 1,567 $ 1,659 $ 1,076
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
Internet online services, offering its subscribers a wide variety of services,
including electronic mail, conferencing, software, computing support,
interactive magazines and newspapers, and online classes, as well as easy access
to services of the Internet. In addition, the Company provides businesses with
fully managed services that include Internet connections, remote dial access,
security solutions, Virtual Private Network and Web hosting 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
that services are provided. Other revenues, which consist principally of
electronic commerce and advertising revenues as well as data network service
revenues are recognized as the services are performed or when the goods are
delivered. Deferred revenue consists primarily of monthly and annual prepaid
subscription fees billed in advance and prepaid electronic commerce and
advertising fees.
Property and Equipment: Property and equipment are depreciated or amortized
using the straight-line method over the following estimated useful lives:
<TABLE>
<S> <C>
Computer equipment and internal software 3 to 5 years
Buildings and related improvements 15 to 40 years
Leasehold improvements 4 to 10 years
Furniture and fixtures 5 years
</TABLE>
Subscriber Acquisition Costs: The Company accounts for subscriber acquisition
costs pursuant to Statement of Position 93-7, "Reporting on Advertising Costs"
("SOP 93-7"). As a result of the Company's change in accounting estimate (see
Note 3), effective October 1, 1996, the Company began expensing all costs of
advertising as incurred.
Prior to October 1, 1996, the Company accounted for the cost of direct response
advertising as deferred subscriber acquisition costs to comply with the criteria
of SOP 93-7. These costs consist solely of the costs of marketing programs
which result in subscriber registrations without further effort required by the
Company. Direct response advertising costs relate directly to subscriber
solicitations and 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. These subscriber acquisition
costs have been incurred for the solicitation of specifically identifiable
prospects. The deferred costs were amortized, beginning the month after such
costs were 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
was shorter. All other costs related to the acquisition of subscribers, as well
as general marketing costs, were expensed as incurred. No indirect costs are
included in deferred subscriber acquisition costs.
On a quarterly basis, management reviewed 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.
Management's assessment of the recoverability and amortization period of
deferred subscriber acquisition costs was subject to 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 amortized
subscriber acquisition costs. The period over which the Company amortized
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's online service is comprised of
various features which contribute to the overall functionality of the service.
The overall functionality of the service is delivered primarily through the
Company's two products (AOL for Windows; AOL for Macintosh). The Company
capitalizes costs incurred for the production of computer software used in the
sale of its services. Capitalized costs include direct labor and related
overhead for software produced by the Company and the cost 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 has
completed beta testing and is generally 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, a cost of revenue, is provided on a product-by-product basis,
using the greater of the straight-line method or the 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.
Quarterly, the Company reviews and expenses the unamortized cost of any feature
identified as being impaired. The Company also reviews recoverability of the
total unamortized cost of all features and software products in relation to
estimated online service and relevant other revenues and, when necessary, makes
an appropriate adjustment to net realizable value.
Capitalized product development costs consist of the following:
<TABLE>
(in thousands) Year ended June 30,
1997 1996
<S> <C> <C>
Balance, beginning of year $ 44,330 $ 18,949
Costs capitalized 55,363 32,735
Costs amortized (27,195) (7,354)
Balance, end of year $ 72,498 $ 44,330
</TABLE>
The accumulated amortization of product development costs related to the
production of computer software totaled $42,654,000 and $15,152,000 at June 30,
1997 and 1996, respectively.
Included in product development costs are research and development costs
totaling $16,998,000, $16,345,000 and $5,299,000 and other product development
costs totaling $41,210,000, $26,819,000 and $6,370,000 in the years ended June
30, 1997, 1996 and 1995, 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 or for which 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, 1997, such investments are recorded at the lower of cost or estimated net
realizable value.
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 2-10 years. As of June 30, 1997 and 1996, accumulated amortization was
$12,360,000 and $8,731,000, 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 to determine
whether the goodwill is recoverable.
Cash, Cash Equivalents, Investments and Restricted Cash: 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, 1997 and 1996 include U.S.
Treasury Bills and obligations of other Government agencies totaling $268,000
and $4,080,000 and U.S. corporate debt obligations totaling $0 and $6,632,000,
respectively. At June 30, 1997 and 1996, the estimated fair value of these
securities approximated cost.
As of June 30, 1997, the Company had an additional available-for-sale equity
investment (classified in other long-term assets) in a public company with a
fair market value of $37,640,000 and a cost basis of $9,434,000. The unrealized
gain of $16,924,000, net of tax, has been recorded as a separate component of
stockholders' equity.
Restricted cash relates to a financial covenant required under the Company's
senior secured revolving credit facility ("Credit Facility"). For further
information on the Credit Facility, refer to Note 10.
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 February 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings per Share". SFAS No. 128 establishes a different method of computing
net income per share than is currently required under the provisions of
Accounting Principles Board Opinion No. 15. Under SFAS No. 128, the Company
will be required to present both basic net income per share and diluted net
income per share. Basic net income (loss) per share would have been ($5.22),
$0.35 and ($0.51) for the years ended June 30, 1997, 1996 and 1995,
respectively. The impact of SFAS No. 128 on the calculation of diluted net
income per share for the aforementioned periods would not have been material.
The Company plans to adopt SFAS No. 128 in its fiscal quarter ending December
31, 1997, and at that time all historical net income per share data presented
will be restated to conform to the provisions of SFAS No. 128.
Stock-Based Compensation: During 1997, the Company adopted Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123). The provisions of SFAS No. 123 allow companies
to either expense the estimated fair value of stock options or to continue to
follow the intrinsic value method set forth in APB Opinion 25, "Accounting for
Stock Issued to Employees" (APB 25) but disclose the pro forma effects on net
income (loss) had the fair value of the options been expensed. The Company has
elected to continue to apply APB 25 in accounting for its stock option
incentive plans (see Note 14).
3. Change in Accounting Estimate
As a result of a change in accounting estimate, the Company recorded a charge
of $385,221,000 ($4.03 per share), as of September 30, 1996, representing the
balance of deferred subscriber acquisition costs as of that date. The Company
previously had deferred the cost of certain marketing activities, to comply
with the criteria of Statement of Position 93-7, "Reporting on Advertising
Costs", and then amortized those costs 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 was shorter. For further information on subscriber acquisition
costs, refer to Note 2. The Company's changing business model, which includes
flat-rate pricing for its online service, increasingly is expected to reduce its
reliance on online service subscriber revenues for the generation of revenues
and profits. This changing business model, coupled with a lack of historical
experience with flat-rate pricing, created uncertainties regarding the level of
expected future economic benefits from online service subscriber revenues.
As a result, the Company believed it no longer had an adequate accounting basis
to support recognizing deferred subscriber acquisition costs as an asset.
4. Restructuring Charge
In connection with a restructuring plan adopted in the second quarter of fiscal
1997, the Company recorded a $48,627,000 restructuring charge associated with
the Company's change in business model, the reorganization of the Company into
three operating units, the termination of approximately 300 employees, and the
shutdown of certain operating divisions and subsidiaries.
The components of the restructuring charge are as follows:
<TABLE>
In Thousands
<S> <C>
Write-off of impaired assets and discontinued businesses $ 31,215
Severance and personnel related 8,734
Other expenses 8,678
Total restructuring charge $ 48,627
</TABLE>
Included in the category of write-off of impaired assets and discontinued
businesses are the costs associated with the termination of the Company's
Internet service, Global Network Navigator ("GNN"), and the write-off of the
related goodwill. Additionally, the write-off of impaired assets and
discontinued businesses category includes charges associated with unrealizable
software development costs and certain prepaid marketing materials which are no
longer usable under the Company's new business model which includes the flat-
rate pricing structure. The severance and personnel related category includes
the costs associated with terminating approximately 300 employees. The other
expenses category consists primarily of costs incurred as a result of the
requirements made by various regulatory bodies in connection with the Company's
termination of its former pricing program.
The following table summarizes the activity in the restructuring accrual during
the year ended June 30, 1997. The balance of the restructuring accrual at June
30, 1997, is included in other accrued expenses and liabilities and is
anticipated to be paid in fiscal 1998.
<TABLE>
In thousands
<S> <C>
Restructuring Charge $ 48,627
Payments (24,180)
Non-cash adjustments (22,478)
Restructuring accrual at June 30, 1997 $ 1,969
</TABLE>
5. Contract Termination Charge
In fiscal 1997, the Company recorded a contract termination charge of
$24,506,000, which consists of unconditional payments associated with
terminating certain information provider contracts which became uneconomic as a
result of the Company's introduction of flat-rate pricing in December 1996.
Approximately 58% of the contract termination payments are due upon signing,
with most of the remainder payable in the first three quarters of fiscal 1998,
and lesser amounts payable in the succeeding two quarters. The contract
termination charge is recorded at the gross value of the contract termination
payments, rather than the present value of such payments, as the implicit
interest in the payments is not material. The balance of the accrued
contract termination charge at June 30, 1997, is $14,644,000 and is included
in other accrued expenses and liabilities. Subsequent to the contract
terminations, the Company entered into new agreements with these information
providers.
6. Settlement Charge
In fiscal 1997, the Company recorded a settlement charge of $24,204,000 in
connection with a legal settlement reached with various State Attorneys General
and a preliminary legal settlement reached with various class action plaintiffs,
to resolve potential claims arising out of the Company's introduction of
flat-rate pricing and its representation that it would provide unlimited access
to its subscribers. Pursuant to these settlements, the Company agreed to make
payments to subscribers, according to their usage of the AOL service, who may
have been injured by their reliance on the Company's claim of unlimited access.
These payments do not represent refunds of online service revenues, but are
rather the compromise and settlement of allegations that the Company's
advertising of unlimited access under its flat-rate plan violated consumer
protection laws. The balance of the accrued settlement charge at June
30, 1997, is $5,036,000 and is included in other accrued expenses and
liabilities.
7. 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 year ended June
30, 1995, Johnson-Grace's net loss was $3,770,000 and $2,104,000, respectively.
Purchase Transactions: In August 1996, the Company purchased 100% of the
outstanding common stock of the ImagiNation Network, Inc. ("INN"), by issuing
362,500 shares of its common stock for a total purchase price of approximately
$14.5 million. The acquisition was accounted for under the purchase method of
accounting and accordingly, the assets and liabilities were recorded based upon
their fair values at the date of acquisition. The pro forma effect on the year
ended June 30, 1997, is immaterial. The effect on the year ended June 30, 1996,
would have reduced net income and earnings per share to $16,995,000 and $0.16,
respectively.
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.
8. Property and Equipment
Property and equipment consist of the following:
<TABLE>
(in thousands) June 30,
1997 1996
<S> <C> <C>
Land $ 4,023 $ 7,600
Buildings and related improvements 37,755 34,479
Leasehold and network improvements 49,651 15,881
Furniture and fixtures 10,513 5,701
Computer equipment and internal software 159,512 84,775
Construction in progress 28,462 -
289,916 148,436
Less accumulated depreciation
and amortization 56,787 37,346
Net property and equipment $233,129 $111,090
</TABLE>
9. Commitments and Contingencies
The Company leases facilities and equipment primarily under several long-term
operating leases. Future minimum payments under non-cancelable operating leases
with initial terms of one year or more consist of the following:
<TABLE>
(in thousands)
Year ending June 30,
<S> <C>
1998 $ 192,842
1999 167,139
2000 109,269
2001 42,704
2002 13,339
Thereafter 58,082
$ 583,375
</TABLE>
The Company's rental expense under operating leases in the years ended June 30,
1997, 1996 and 1995, totaled approximately $142,935,000, $47,844,000 and
$10,120,000, respectively.
The Company has guaranteed monthly usage levels of data and voice communications
with some of its network providers and commitments related to the construction
of an additional data center. The remaining commitments are $483,389,000,
$466,920,000, $335,420,000 and $31,167,000 for the years ending June 30, 1998,
1999, 2000 and 2001, respectively. The related expense for the years ended June
30, 1997, 1996 and 1995, was $405,154,000, $278,513,000 and $119,798,000,
respectively.
The Company is involved in various legal proceedings, including pending
litigation. In February 1997, a class action lawsuit (Orman v. America
Online, Inc., et al.) was filed against the Company, its officers and directors
and its outside auditors alleging violations of the federal securities laws
between August 10, 1995 and October 29, 1996. In July 1997, the original
complaint was dismissed against all defendants. On August 11, 1997, an amended
class action complaint was filed against the Company, its Chief Executive
Officer and its Chief Financial Officer. A shareholder derivative suit related
to the Orman lawsuit has also been filed against the Company's directors in
Delaware chancery court. The Company believes that it has valid defenses to all
litigation pending against it, including the Orman case, and all cases against
the Company are, and will continue to be, vigorously defended. Management is
unable to make a meaningful estimate of the amount or range of loss that could
result from an unfavorable outcome of all pending litigation. It is possible
that the Company's results of operations or cash flows in a particular quarter
or annual period or its financial position could be materially affected by an
ultimate unfavorable outcome of certain pending litigation. Management
believes, however, that the ultimate outcome of all pending litigation should
not have a material adverse effect on the Company's financial position.
10. Notes Payable
Notes payable at June 30, 1997, totaled $50 million and consists of a two year
senior secured revolving credit facility ("Credit Facility"). The Company
anticipates using the Credit Facility for the purpose of supporting its
continuing growth and network expansion. The interest rate on the Credit
Facility is 100 basis points above the London Interbank Offered Rate and
interest is paid periodically, but at least quarterly. The Credit Facility is
subject to certain financial covenants and is payable in full at the end of the
two year term, on July 1, 1999.
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 were collateralized by the respective assets.
These notes were repaid during fiscal 1997.
11. Other Income (Expense)
The following table summarizes the components of other income:
<TABLE>
(in thousands) Year ended June 30,
1997 1996 1995
<S> <C> <C> <C>
Interest income $ 6,954 $ 6,901 $ 3,979
Interest expense (1,567) (1,404) (1,062)
Allocation of minority losses 14,918 189 -
Other income (expense) (14,006) (7,742) 157
$ 6,299 $ (2,056) $ 3,074
</TABLE>
Other income (expense) in the year ended June 30, 1997, includes losses related
to equity investments and write-downs of other miscellaneous investments. 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.
12. Income Taxes
The provision for income taxes is attributable to:
<TABLE>
(in thousands) Year ended June 30,
1997 1996 1995
<S> <C> <C> <C>
Income before provision for income taxes $ - $ 32,523 $ 15,169
Current $ - $ - $ -
Deferred - 32,523 15,169
$ - $ 32,523 $ 15,169
</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,
1997 1996 1995
<S> <C> <C> <C>
Income tax at the federal statutory
rate of 35% $ (174,771) $21,195 $(6,998)
State income tax, net of federal benefit (14,981) 3,424 1,597
Nondeductible charge for purchased
research and development - 5,773 17,114
Loss, for which no tax benefit was derived 186,952 1,437 2,347
Other 2,800 694 1,109
$ - $32,523 $15,169
</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 product development costs and, prior to fiscal 1997, deferred
subscriber acquisition costs.
As of June 30, 1997, the Company has net operating loss carryforwards of
approximately $790,000,000 for tax purposes which will be available to offset
future taxable income. If not used, these carryforwards will expire between
2001 and 2012 . 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,
1997 1996
<S> <C> <C>
Deferred tax liabilities:
Capitalized software costs $ 24,410 $ 16,801
Deferred subscriber acquisition costs - 119,071
Net deferred tax liabilities $ 24,410 $135,872
Deferred tax assets:
Net operating loss carryforwards $ 300,200 $157,000
Other 8,227 -
Total deferred tax assets 308,427 157,000
Valuation allowance for deferred assets (284,017) (21,128)
Net deferred tax assets $ 24,410 $135,872
</TABLE>
The valuation allowance for deferred assets increased by $262,889,000 in fiscal
1997 as a result of the Company's tax loss for the year as well as a substantial
decrease in deferred tax liabilities, primarily caused by the write-off of
deferred subscriber acquisition costs. In accordance with SFAS No. 109, the
Company's history of tax losses and expected future tax deductions from stock
options require that the Company account for deferred tax assets on the basis
that it is more likely than not that the Company will not realize the tax
benefits from the deferred tax assets.
13. Capital Accounts
Common Stock: At June 30, 1997 and 1996, the Company's $.01 par value common
stock authorized was 300,000,000 shares with 100,188,971 and 92,626,000 shares
issued and outstanding, respectively. At June 30, 1997, 34,115,560 shares
were reserved for the exercise of issued and unissued common stock options and a
warrant, and 293,306 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 one of the Company's
communications providers, 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.
14. 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. The effect of applying SFAS No. 123 on 1997 and 1996 pro forma net
income (loss) as stated below is not necessarily representative of the effects
on reported net income (loss) for future years due to, among other things, the
vesting period of the stock options and the fair value of additional stock
options in future years. Had compensation cost for the Company's stock option
plans been determined based upon the fair value at the grant date for awards
under the plans consistent with the methodology prescribed under SFAS No. 123,
the Company's net income (loss) in 1997 and 1996 would have been approximately
($540.9) million and $15.1 million, or ($5.66) per share and $0.14 per share,
respectively. The fair value of the options granted during 1997 and 1996 are
estimated as $9.00 and $16.35 per share, respectively, on the date of grant
using the Black-Scholes option-pricing model with the following assumptions: no
dividend yield, volatility of 65%, risk-free interest rate of 5.69% for 1997 and
5.38% for 1996, and expected life of 0.45 years from date of vesting. A summary
of stock option activity is as follows:
<TABLE>
Number of Weighted average
shares exercise price
<S> <C> <C>
Balance at June 30, 1994 15,249,650 $ 2.72
Granted 24,385,513 $12.20
Exercised (2,905,256) $ 1.61
Forfeited (1,050,378) $10.51
Balance at June 30, 1995 35,679,529 $ 9.05
Granted 5,202,859 $34.06
Exercised (6,435,338) $ 5.51
Forfeited (2,145,257) $19.15
Balance at June 30, 1996 32,301,793 $13.11
Granted 6,415,963 $29.94
Exercised (6,933,261) $ 9.91
Forfeited (3,107,935) $23.49
Balance at June 30, 1997 28,676,560 $16.53
</TABLE>
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Weighted-
Average
Remaining Weighted Number Weighted-
Number Contractual Average Exercisable Average
Range of Outstanding Life Exercise as of Exercise
Exercise as (in Years) Price 6/30/97 Price
Price of 6/30/97
<S> <C> <C> <C> <C> <C>
$ 0.01 to $ 6.71 5,303,305 5.2 $ 2.88 4,619,027 $ 2.74
$ 6.87 to $ 7.62 6,146,528 7.1 $ 7.17 2,272,489 $ 7.13
$ 7.65 to $17.25 5,517,845 7.6 $ 14.12 2,049,418 $ 13.91
$17.37 to $26.25 5,612,686 8.4 $ 21.75 1,042,612 $ 18.90
$26.88 to $42.75 4,784,250 9.1 $ 30.88 471,366 $ 33.67
$43.25 to $70.00 1,311,946 9.1 $ 50.96 229,241 $ 48.32
$ 0.01 to $70.00 28,676,560 7.5 $ 16.53 10,684,153 $ 9.74
</TABLE>
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 506,694 shares of common stock has been issued under the ESPP.
15 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 3% of the employee's earnings. The
Company's matching contribution to the Savings Plan was approximately $2,657,000
and $1,126,000 in the years ended June 30, 1997 and 1996, respectively.
16 Subsequent Event
On September 8, 1997, the Company announced that, in exchange for its ANS
Communications, Inc. subsidiary, it will acquire CompuServe Corporation's
("CompuServe") worldwide online services business from WorldCom, Inc.
("WorldCom") and receive approximately $175 million in cash (the "Purchase and
Sale"). Upon completion of the Purchase and Sale, the Company's European
partner, Bertelsmann AG, will pay an additional $75 million to the Company and
each company will invest $25 million in an expanded joint venture to operate
CompuServe's European online service. The Company also agreed that it will,
upon closing of the Purchase and Sale, enter into a five year network services
agreement with WorldCom which will provide the Company with significantly
expanded network capacity for the Company's online service at favorable prices,
and higher speed access as it becomes commercially available. In connection
with the aforementioned transactions, the Company expects to realize a gain
of $300 million to $400 million, which will be recognized over the five year
term of the network services agreement with WorldCom. The transactions
outlined above are subject to certain closing conditions, including regulatory
approvals, and are expected to close on or before March 1, 1998.
<TABLE>
<CAPTION>
Quarterly Information (unaudited)
(Amounts in thousands, except per share data)
Quarter Ended
September December March June Total
30, 31, 31, 30,
<S> <C> <C> <C> <C> <C>
Fiscal 1997 (1) (2) (3)
Online service revenues $ 311,132 $ 351,220 $ 381,486 $385,607 $1,429,445
Other revenues 38,850 58,192 68,605 90,136 255,783
Total revenues 349,982 409,412 450,091 475,743 1,685,228
Loss from operations (356,144) (127,738) (6,715) (15,049) (505,646)
Net loss (353,689) (129,105) (4,734) (11,819) (499,347)
Net loss per share $ (3.80) $ (1.37) $ (0.05) $ (0.12) $ (5.22)
Fiscal 1996 (2) (4)
Online service revenues $ 178,479 $ 224,525 $ 285,481 $ 303,171 $ 991,656
Other revenues 19,423 24,620 26,859 31,296 102,198
Total revenues 197,902 249,145 312,340 334,467 1,093,854
Income (loss) from
operations (6,803) 14,994 24,720 32,332 65,243
Net income (loss) (10,907) 9,530 15,127 16,066 29,816
Net income (loss) per
share $ (0.14) $ 0.09 $ 0.14 $ 0.14 $ 0.28
<FN>
(1) Net loss in the fiscal year ended June 30, 1997, includes charges of
approximately $385.2 million in the quarter ended September 30, 1996, for the
write-off of deferred subscriber acquisition costs, approximately $48.6 million
in the quarter ended December 31, 1996, for a restructuring charge, $24.3
million in the quarter ended December 31, 1996, for a legal settlement and
approximately $24.5 million in the quarter ended June 30, 1997, for contract
termination charges.
(2) The sum of per-share earnings (loss) does not equal earnings (loss) per
share for the year due to equivalent share calculations which are impacted by
the Company's loss in the first quarter of 1996 and by fluctuations in the
Company's common stock market prices in 1997 and 1996.
(3) The Company recorded a benefit of approximately $5.8 million in cost of
revenues in the quarter ended June 30, 1997, resulting from the retroactive
application of beneficial rates contained in certain new information provider
contracts consummated in that quarter.
(4) Net income in the fiscal year ended June 30, 1996, includes charges of
approximately $17.0 million in the quarter ended September 30, 1995, for
acquired research and development, $8.0 million in the quarter ended June 30,
1996, for the settlement of a class action lawsuit, and approximately $0.8
million in the quarter ended March 31, 1996, for merger expenses.
</FN>
</TABLE>
RESTATED CERTIFICATE OF INCORPORATION
OF
AMERICA ONLINE, INC.
(Formerly Quantum Computer Services, Inc.)
Pursuant to Section 245
of the General Corporation Law of the State of Delaware
____________________________
Original Certificate of Incorporation
filed with the Secretary of State
of the State of Delaware May 24, 1985
__________________________
FIRST: The name of the corporation is America Online, Inc.
(hereinafter referred to as the "Corporation").
SECOND: The address of the registered office of the Corporation in the
State of Delaware is, 1013 Centre Road, Wilmington, County of New Castle. The
name of its registered agent at such address is The Prentice-Hall Corporation
System, Inc.
THIRD: The purpose of the Corporation is to engage in any lawful act or
activity or carry on any business for which corporations may be organized under
the Delaware General Corporation Law or any successor statute.
FOURTH: A. The total number of shares of all classes of stock which the
Corporation shall have authority to issue is 305,000,000 shares, divided into
two classes, consisting of:
300,000,000 shares of Common Stock, par value one cent ($0.01) per share
(the "Common Stock"); and
5,000,000 shares of Preferred Stock, par value one cent ($0.01) per share
(the "Undesignated Preferred Stock").
B. The following is a statement of the designations, powers, preferences
and rights, and qualifications, limitations or restrictions of the Common Stock
and the Preferred Stock. All cross references in this ARTICLE FOURTH refer to
other paragraphs, sections or subsections in this ARTICLE FOURTH unless
otherwise indicated.
SECTION 1 - Common Stock
All shares of Common Stock will be identical and will entitle the
holders thereof to the same rights and privileges.
1.1. Voting Rights. The holders of Common Stock will be entitled to one
vote per share on all matters to be voted on by the Corporation's stockholders,
except as otherwise required by law. There shall be no cumulative voting.
1.2. Dividends. Dividends may be declared and paid on the Common Stock
from funds lawfully available therefor as and when determined by the Board of
Directors, subject to any provision of this Restated Certificate of
Incorporation, as amended from time to time, and subject to the relative rights
and preferences of any shares of Preferred Stock authorized and issued
hereunder.
1.3. Liquidation Rights. In the event of any liquidation, dissolution or
winding up of the Corporation, whether voluntary or involuntary, the holders of
Common Stock shall be entitled, subject to the rights and preferences, if any,
of any shares of Preferred Stock authorized and issued hereunder, to share,
ratably according to the number of shares of Common Stock held by them, in the
remaining assets of the Corporation available for distribution to its
stockholders.
SECTION 2 - Undesignated Preferred Stock
The Board of Directors is authorized, subject to any limitations prescribed
by law, to provide for the issuance of shares of Undesignated Preferred Stock in
series, and by filing a certificate pursuant to the applicable law of the State
of Delaware (such certificate being hereinafter referred to as a "Preferred
Stock Designation"), to establish from time to time the number of shares to be
included in each such series, and to fix the designation, powers, preferences
and rights of the shares of each such series and any qualifications, limitations
or restrictions thereof. The number of authorized shares of Undesignated
Preferred Stock may be increased by the affirmative vote of the holders of a
majority of the Common Stock, without a vote of the holders of the Preferred
Stock, or of any series thereof, unless a vote of any such holders is required
pursuant to the terms of any Preferred Stock then outstanding, subject in any
event to the provisions of Article ELEVENTH of this Restated Certificate of
Incorporation.
Pursuant to the authority conferred by this Article FOURTH, the following
series of Preferred Stock have been designated, each such series consisting of
such number of shares, with such voting powers and with such designations,
preferences and relative, participating, optional or other special rights, and
qualifications, limitations or restrictions thereof as are stated and expressed
in the exhibit with respect to such series attached hereto as specified below
and incorporated herein by reference:
Exhibit A Series A Junior Participating Preferred Stock
Exhibit B Series B Convertible Preferred Stock
FIFTH: The following provisions are inserted for the management of the
business and the conduct of the affairs of the Corporation, and for further
definition, limitation and regulation of the powers of the Corporation and of
its directors and stockholders:
A. The business and affairs of the Corporation shall be managed by or
under the direction of the board of directors. In addition to the powers and
authority expressly conferred upon them by statute or by this Restated
Certificate of Incorporation or the by-laws of the Corporation, the directors
are hereby empowered to exercise all such powers and do all such acts and things
as may be exercised or done by the Corporation.
B. The directors of the Corporation need not be elected by written ballot
unless the by-laws so provide.
C. Any action required or permitted to be taken by the stockholders of
the Corporation may be effected only (i) at a duly called annual or special
meeting of stockholders of the Corporation or (ii) by the unanimous written
consent of all stockholders entitled to vote with regard to such action.
SIXTH: A. Subject to the rights of the holders of any series of
Preferred Stock then outstanding to elect additional directors under specified
circumstances, the number of directors shall be fixed from time to time
exclusively by the board of directors pursuant to a resolution adopted by a
majority of the Whole Board. For purposes of this Restated Certificate of
Incorporation, the term "Whole Board" shall mean the total number of authorized
directors whether or not there exist any vacancies in previously authorized
directorships.
B. On or prior to the date on which the Corporation first provides notice
of an annual meeting of the stockholders following the date this Article Sixth
shall have become effective, the Board of Directors of the Corporation shall
divide the directors into three classes, as nearly equal in number as reasonably
possible, with the term of office of the first class to expire at the 1992
annual meeting of stockholders or any special meeting in lieu thereof, the term
of office of the second class to expire at the 1993 annual meeting of
stockholders or any special meeting in lieu thereof, and the term of office of
the third class to 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.
C. Subject to the rights of the holders of any series of Preferred Stock
then outstanding, 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 even though less than a quorum, or by a sole remaining director.
In the event of any increase or decrease in the authorized number of directors,
(i) each director then serving as such shall nevertheless continue as a director
of the class of which he is a member until the expiration of his current term or
his prior death, retirement, removal or resignation and (ii) the newly created
or eliminated directorships resulting from such increase or decrease shall if
reasonably possible be apportioned by the Board of Directors among the three
classes of directors so as to ensure that no one class has more than one
director more than any other class. To the extent reasonably possible,
consistent with the foregoing rule, any newly created directorships shall be
added to those classes whose terms of office are to expire at the latest dates
following such allocation and newly eliminated directorships shall be subtracted
from those classes whose terms of office are to expire at the earliest dates
following such allocation, unless otherwise provided for from time to time by
resolution adopted by a majority of the directors then in office, although less
than a quorum. In the event of a vacancy in the Board of Directors, the
remaining directors, except as otherwise provided by law, may exercise the
powers of the full Board of Directors until the vacancy is filled.
D. Advance notice of stockholder nominations for the election of
directors and of business to be brought by stockholders before any meeting of
the stockholders of the Corporation shall be given in the manner provided in the
by-laws of the Corporation.
E. Subject to the rights of the holders of any series of Preferred Stock
then outstanding, any director, or the entire Board of Directors, may be removed
from office at any time but only for cause by the affirmative vote of the
holders of at least eighty percent (80%) of the voting power of all of the then
outstanding shares of the Corporation entitled to vote generally in the election
of directors, voting together as a single class. As used in this Article Sixth,
"cause" shall mean only (i) conviction of a felony, (ii) declaration of unsound
mind by order of court, (iii) gross dereliction of duty, (iv) commission of an
action which constitutes intentional misconduct or a knowing violation of law if
such action in either event results both in an improper substantial personal
benefit and a material injury to the Corporation. A director may be removed for
cause only after a reasonable notice and opportunity to be heard before the body
proposing to remove him.
SEVENTH: The Board of Directors is expressly empowered to adopt, amend or
repeal by-laws of the Corporation. Any adoption, amendment or repeal of the by-
laws of the Corporation by the board of directors shall require the approval of
a majority of the Whole Board. The stockholders shall also have power to adopt,
amend or repeal the by-laws of the Corporation; provided, however, that, in
addition to any vote of the holders of any class or series of stock of the
Corporation required by law or by this Restated Certificate of Incorporation,
the affirmative vote of the holders of at least eighty percent (80%) of the
voting power of all of the then outstanding shares of the capital stock of the
Corporation entitled to vote generally in the election of directors, voting
together as a single class, shall be required to adopt, amend or repeal any
provision of the by-laws of the Corporation.
EIGHTH: A. In addition to any affirmative vote required by law or this
Restated Certificate of Incorporation, and except as otherwise expressly
provided in this Article EIGHTH:
1. any merger or consolidation of the Corporation or any Subsidiary
(as hereinafter defined) with (i) any Interested Stockholder (as
hereinafter defined) or (ii) any other corporation (whether or not itself
an Interested Stockholder) which is, or after such merger or consolidation
would be, an Affiliate (as hereinafter defined) of an Interested
Stockholder who was an Interested Stockholder immediately prior to such
merger or consolidation; or
2. any sale, lease, exchange, mortgage, pledge, transfer or other
disposition (in one transaction or a series of transactions) to or with any
Interested Stockholder, or any Affiliate of any Interested Stockholder, of
any assets of the Corporation or any Subsidiary (as hereinafter defined)
having an aggregate Fair Market Value (as hereinafter defined) equaling or
exceeding ten percent (10%) or more of the assets of the corporation; or
3. the issuance or transfer by the Corporation or any Subsidiary (in
one transaction or a series of transactions) of any securities of the
Corporation or any Subsidiary to any Interested Stockholder or any
Affiliate of any Interested Stockholder in exchange for cash, securities or
other property (or a combination thereof) having an aggregate Fair Market
Value (as hereinafter defined) equaling or exceeding ten percent (10%) of
the combined Fair Market Value of the then-outstanding shares of stock of
the Corporation entitled to vote generally in the election of directors
(for purposes of this Article EIGHTH, the "Voting Stock") of the
Corporation, except for any issuance or transfer pursuant to an employee
benefit plan of the Corporation or any Subsidiary thereof (including,
without limitation of the immediately foregoing, issuances pursuant to such
a plan to directors or consultants who are not employees); or
4. the adoption of any plan or proposal for the liquidation or
dissolution of the Corporation proposed by or on behalf of an Interested
Stockholder or any Affiliate of any Interested Stockholder; or
5. any reclassification of securities (including any reverse stock
split), or recapitalization of the Corporation, or any merger or
consolidation of the Corporation with any of its Subsidiaries or any other
transaction (whether or not with or into or otherwise involving an
Interested Stockholder) which has the effect, directly or indirectly, of
increasing the proportionate share of the outstanding shares of any class
of equity or convertible securities of the Corporation or any Subsidiary
which is directly or indirectly owned by any Interested Stockholder or any
Affiliate of any Interested Stockholder, except as a result of immaterial
changes due to fractional share adjustments;
shall require the affirmative vote of the holders of shares of voting stock of
the Corporation representing at least eighty percent (80%) of the voting power
of all the Voting Stock, voting together as a single class. Such affirmative
vote shall be required notwithstanding the fact that no vote may be required, or
that a lesser percentage may be specified, by law or by any other provision of
this Restated Certificate of Incorporation, as amended or restated from time to
time, or any Preferred Stock Designation or in any agreement with any national
securities exchange or otherwise.
The term "Business Combination" as used in this Article EIGHTH shall mean
any transaction which is referred to in any one or more of paragraphs 1 through
5 of Section A of this Article EIGHTH.
B. The provisions of Section A of this Article EIGHTH shall not be
applicable to any particular Business Combination, and such Business Combination
shall require only the affirmative vote of the majority of the outstanding
shares of capital stock entitled to vote, or such vote; if any, as is otherwise
required by law or by this Restated Certificate of Incorporation, if, in the
case of any Business Combination that does not involve any cash or other
consideration being received by the stockholders of the Corporation solely in
their capacity as stockholders of the Corporation, the condition specified in
the following paragraph 1 is met or, in the case of any other Business
Combination, all of the conditions specified in either of the following
paragraphs 1 or 2 are met:
1. The Business Combination shall have been approved by a majority
of the Disinterested Directors (as hereinafter defined); provided, however,
that this condition shall not be capable of satisfaction unless there are
at least two Disinterested Directors.
2. All of the following conditions shall have been met:
(a) The aggregate amount of the cash and the Fair Market Value
as of the date of the consummation of the Business Combination of
consideration other than cash to be received per share by the holders
of Common Stock in such Business Combination shall at least be equal
to the higher of the following:
(1) (if applicable) the Highest Per Share Price (as
hereinafter defined), including any brokerage commissions,
transfer taxes and soliciting dealers' fees, paid by the
Interested Stockholder or any of its Affiliates for any shares of
Common Stock acquired by it (i) within the two year period
immediately prior to the first public announcement of the
proposal of the Business Combination (the "Announcement Date"),
or (ii) in the transaction in which it became an Interested
Stockholder, whichever is higher.
(2) the Fair Market Value per share of Common Stock on the
Announcement Date or on the date on which the Interested
Stockholder became an Interested Stockholder (such latter date is
referred to in this Article EIGHTH as the "Determination Date"),
whichever is higher.
(b) The aggregate amount of the cash and the Fair Market Value as of
the date of the consummation of the Business Combination of consideration
other than cash to be received per share by holders of shares of any class
of outstanding Voting Stock, other than Common Stock or Excluded Preferred
Stock (as hereinafter defined), shall be at least equal to the highest of
the following (it being intended that the requirements of this subparagraph
(b) shall be required to be met with respect to every such class of
outstanding Voting Stock, whether or not the Interested Stockholder has
previously acquired any shares of a particular class of Voting Stock):
(1) (if applicable) the Highest Per Share Price (as hereinafter
defined), including any brokerage commissions, transfer taxes and
soliciting dealers' fees, paid by the Interested Stockholder for any
shares of such class of Voting Stock acquired by it (i) within the
two-year period immediately prior to the Announcement Date, or (ii) in
the transaction in which it became an Interested Stockholder,
whichever is higher;
(2) (if applicable) the highest preferential amount per share to
which the holders of shares of such class of Voting Stock are entitled
in the event of any voluntary or involuntary liquidation, dissolution
or winding up of the Corporation; and
(3) the Fair Market Value per share of such class of Voting
Stock on the Announcement Date or on the Determination Date, whichever
is higher.
(c) The consideration to be received by holders of a particular
class of outstanding Voting Stock (including Common Stock and other than
Excluded Preferred stock) shall be in cash or in the same form as the
Interested Stockholder has previously paid for shares of such class of
Voting Stock. If the Interested Stockholder has paid for shares of any
class of Voting Stock with varying forms of consideration, the form of
consideration to be received per share by holders of shares of such class
of Voting Stock shall be either cash or the form used to acquire the
largest number of shares of such class of Voting Stock previously acquired
by the Interested Stockholder. The price determined in accordance with
subparagraph B.2 of this Article EIGHTH shall be subject to appropriate
adjustment in the event of any stock dividend, stock split, combination of
shares or similar event.
(d) After such Interested Stockholder has become an Interested
Stockholder and prior to the consummation of such Business Combination:
(1) except as approved by a majority of the Disinterested Directors there
shall have been no failure to declare and pay at the regular date therefor
any full quarterly dividends (whether or not cumulative) on any outstanding
stock having preference over the Common Stock as to dividends or
liquidation; (2) there shall have been (i) no reduction in the annual rate
of dividends paid on the Common Stock (except as necessary to reflect any
subdivision of the Common Stock), except as approved by a majority of the
Disinterested Directors, and (ii) an increase in such annual rate of
dividends as necessary to reflect any reclassification (including any
reverse stock split), recapitalization, reorganization or any similar
transaction which has the effect of reducing the number of outstanding
shares of the Common Stock, unless the failure to so increase such annual
rate is approved by a majority of the Disinterested Directors, and (3)
neither such Interested Stockholder nor any of its Affiliates shall have
become the beneficial owner of any additional shares of Voting Stock except
as part of the transaction which results in such Interested Stockholder
becoming an Interested Stockholder; provided, however, that no approval by
Disinterested Directors shall satisfy the requirements of this subparagraph
(d) unless at the time of such approval there are at least two
Disinterested Directors.
(e) After such Interested Stockholder has become an Interested
Stockholder, such Interested Stockholder shall not have received the
benefits directly or indirectly (except proportionately as a stockholder),
of any loans, advances, guarantees, pledges or other financial assistance
or any tax credits or other tax advantages provided by the Corporation,
whether in anticipation of or in connection with such Business Combination
or otherwise.
(f) A proxy or information statement describing the proposed Business
Combination and complying with the requirements of the Securities Exchange
Act of 1934 and the rules and regulations thereunder (or any subsequent
provisions replacing such Act, rules or regulations) shall be mailed to
stockholders of the Corporation at least thirty (30) days prior to the
consummation of such Business Combination (whether or not such proxy or
information statement is required to be mailed pursuant to such Act or
subsequent provisions).
C. For the purposes of this Article EIGHTH:
1. "Person" means any individual, corporation, partnership,
association, bank, joint stock company, trust, syndicate, unincorporated
organization or similar company, or a group of "persons" acting or agreeing
to act together for the purpose of acquiring, holding, voting or disposing
of securities or their voting or other interest in the capital stock or
other securities of the Corporation for a common purpose, pursuant to any
contract, understanding, relationship, agreement or other arrangement,
whether written or otherwise; provided, that a group of "persons" shall not
include the Board of Directors of the Corporation in its solicitation of
proxies under Regulation 14A of the General Rules and Regulations under the
Securities Exchange Act of 1934 or under applicable state law.
2. "Interested Stockholder" shall mean any Person (other than the
Corporation or any holding company or Subsidiary thereof) who or which:
(a) is the beneficial owner, directly or indirectly, of more
than fifteen percent (15%) of the voting power of the outstanding
Voting Stock; or
(b) is an Affiliate of the Corporation and at any time within
the two-year period immediately prior to the date in question was the
beneficial owner, directly or indirectly, of fifteen percent (15%) or
more of the voting power of the then outstanding Voting Stock; or
(c) is an assignee of or has otherwise succeeded to any shares
of Voting Stock which were at any time within the two-year period
immediately prior to the date in question beneficially owned by any
Interested Stockholder, if such assignment or succession shall have
occurred in the course of a transaction or series of transactions not
involving a public offering within the meaning of the Securities Act
of 1933, as amended (or any successor statute).
3. "Beneficial Ownership" shall be determined pursuant to Rule 13d-3
of the General Rules and Regulations under the Securities Exchange Act of
1934 (or any successor rule or statutory provision), or, if said Rule 13d-3
shall be rescinded and there shall be no successor rule or statutory
provision thereto, pursuant to said Rule 13d-3 as in effect on the date of
filing of this Restated Certificate of Incorporation; provided, however,
that a Person shall, in any event, also be deemed the "beneficial owner" of
any Voting Stock:
(a) which such Person or any of its Affiliates beneficially
owns, directly or indirectly; or
(b) which such Person or any of its Affiliates has (i) the right
to acquire (whether such right is exercisable immediately or only
after the passage of time), pursuant to any agreement, arrangement or
understanding (but shall not be deemed to be the beneficial owner of
any voting shares solely by reason of an agreement, contract, or other
arrangement with the Corporation to effect any transaction which is
described in any one or more of clauses 1 through and including 5 of
Section A of this Article EIGHTH) or upon the exercise of conversion
rights, exchange rights, warrants, or options or otherwise, or (ii)
sole or shared voting or investment power with respect thereto
pursuant to any agreement, arrangement, understanding, relationship or
otherwise (but shall not be deemed to be the beneficial owner of any
voting shares solely by reason of a revocable proxy granted for a
particular meeting of stockholders, pursuant to a public solicitation
of proxies for such meeting, with respect to shares of which neither
such Person nor any such Affiliate is otherwise deemed the beneficial
owner); or
(c) which are beneficially owned, directly or indirectly, by
any other Person with which such first mentioned Person or any of its
Affiliates acts as a partnership, limited partnership, syndicate or
other group pursuant to any agreement, arrangement or understanding
for the purpose of acquiring, holding, voting or disposing of any
shares of capital stock of the Corporation; and provided further,
however, that (1) no director or officer of the Corporation (or any
Affiliate of any such director or officer) shall, solely by reason of
any or all of such directors or officers acting in their capacities as
such, be deemed, for any purposes hereof, to beneficially own any
Voting Stock beneficially owned by any other such director or officer
(or any Affiliate thereof), and (2) neither any employee stock
ownership or similar plan of the Corporation or any Subsidiary of the
Corporation, nor any trustee with respect thereto or any Affiliate of
such trustee (solely by reason of such capacity of such trustee),
shall be deemed, for any purposes hereof, to beneficially own any
Voting Stock held under any such plan. For purposes of computing the
percentage beneficial ownership of Voting Stock of a Person, the
outstanding Voting Stock shall include shares deemed owned by such
Person through application of this subsection but shall not include
any other Voting Stock which may be issuable by the Corporation
pursuant to any agreement, or upon exercise of conversion rights,
warrants or options, or otherwise. For all other purposes, the
outstanding Voting Stock shall include only voting Stock then
outstanding and shall not include any Voting Stock which may be
issuable by the Corporation pursuant to any agreement, or upon the
exercise of conversion rights, warrants or options, or otherwise.
4. "Affiliate" shall have the meaning ascribed to that term in Rule
12b-2 of the General Rules and Regulations under the Securities Exchange
Act of 1934, as in effect on the date of filing of this Restated
Certificate of Incorporation.
5. "Subsidiary" means any corporation of which a majority of any
class of equity security is owned, directly or indirectly, by the
Corporation; provided, however, that for the purposes of the definition of
Interested Stockholder set forth in Paragraph 2 of this Section C, the term
"Subsidiary" shall mean only a corporation of which a majority of each
class of equity security is owned, directly or indirectly, by the
Corporation.
6. "Disinterested Director" means any member of the board of
directors who is unaffiliated with the Interested Stockholder and was a
member of the board of directors prior to the time that the Interested
Stockholder became an Interested Stockholder, and any director who is
thereafter chosen to fill any vacancy on the board of directors or who is
elected and who, in either event, is unaffiliated with the Interested
Stockholder and in connection with such directors' initial assumption of
office is recommended for appointment or election by a majority of
Disinterested Directors then on the board of directors.
7. "Fair Market Value" means: (a) in the case of stock, the highest
closing sales price of the stock during the 30-day period immediately
preceding the date in question of a share of such stock on the National
Association of Securities Dealers Automated Quotation System or any system
then in use, or, if such stock is admitted to trading on a principal United
States securities exchange registered under the Securities Exchange Act of
1934, Fair Market Value shall be the highest sale price reported during the
30-day period preceding the date in question, or, if no such quotations are
available, the Fair Market Value on the date in question of a share of such
stock as determined by a majority of the Disinterested Directors in good
faith, in each case with respect to any class of stock, appropriately
adjusted for any dividend or distribution in shares of such stock or any
stock split or reclassification of outstanding shares of such stock into a
greater number of shares of such stock or any combination or
reclassification of outstanding shares of such stock into a smaller number
of shares of such stock, and (b) in the case of property other than cash or
stock, the Fair Market Value of such property on the date in question as
determined by a majority of the Disinterested Directors in good faith.
8. Reference to "Highest Per Share Price" shall in each case with
respect to any class of stock reflect an appropriate adjustment for any
dividend or distribution in shares of such stock or any stock split or
reclassification of outstanding shares of such stock into a greater number
of shares of such stock or any combination or reclassification of
outstanding shares of such stock into a smaller number of shares of such
stock.
9. In the event of any Business Combination in which the Corporation
survives, the phrase "consideration other than cash to be received" as used
in subparagraphs (a) and (b) of paragraph 2 of Section B of this Article
EIGHTH shall include the shares of Common Stock and/or the shares of any
other class of outstanding Voting Stock retained by the holders of such
shares.
10. "Excluded Preferred Stock" means any series of Preferred Stock
with respect to which the Preferred Stock Designation creating such series
expressly provides that the provisions of this Article EIGHTH shall not
apply.
D. A majority of the Disinterested Directors of the Corporation shall
have the power and duty to determine for the purposes of this Article EIGHTH, on
the basis of information known to them after reasonable inquiry: (a) whether a
Person is an Interested Stockholder; (b) the number of shares of Voting Stock
beneficially owned by any Person; (c) whether a Person is an Affiliate of
another; and (d) whether the assets which are the subject of any Business
Combination have, or the consideration to be received for the issuance or
transfer of securities by the Corporation or any Subsidiary in any Business
Combination has an aggregate Fair Market Value equaling or exceeding ten percent
(10%) of the assets of the Corporation or equaling or exceeding ten percent
(10%) of the combined Fair Market Value of the voting Stock of the Corporation.
A majority of the Disinterested Directors shall have the further power to
interpret all of the terms and provisions of this Article EIGHTH.
E. Nothing contained in this Article EIGHTH shall be construed to relieve
any Interested Stockholder from any fiduciary obligation imposed by law.
NINTH: 1. To the fullest extent permitted by the Delaware General
Corporation Law as the same now exists or may hereafter be amended, the
Corporation shall indemnify, and advance expenses to, its directors and officers
and any person who is or was serving at the request of the Corporation as a
director or officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise. The Corporation, by action of its
board of directors, may provide indemnification or advance expenses to employees
and agents of the Corporation or other persons only on such terms and conditions
and to the extent determined by the board of directors in its sole and absolute
discretion.
2. The indemnification and advancement of expenses provided by, or
granted pursuant to, this Article Ninth shall not be deemed exclusive of any
other rights to which those seeking indemnification or advancement of expenses
may be entitled under any By-law, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in his official capacity
and as to action in another capacity while holding such office.
3. The Corporation shall have the power to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the Corporation, or is or was serving at the request of the Corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against any liability asserted against
him and incurred by him in any such capacity, or arising out of his status as
such, whether or not the Corporation would have the power to indemnify him
against such liability under this Article Ninth.
4. The indemnification and advancement of expenses provided by, or
granted pursuant to, this Article Ninth shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a director
or officer and shall inure to the benefit of the heirs, executors and
administrators of such officer or director. The indemnification and advancement
of expenses that may have been provided to an employee or agent of the
Corporation by action of the board of directors, pursuant to the last sentence
of Paragraph 1 of this Article Ninth, shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be an employee
or agent of the Corporation and shall inure to the benefit of the heirs,
executors and administrators of such a person, after the time such person has
ceased to be an employee or agent of the Corporation, only on such terms and
conditions and to the extent determined by the board of directors in its sole
discretion.
TENTH: To the fullest extent permitted by the Delaware General
Corporation law as the same now exists or may hereafter be amended, a director
of the Corporation shall not be liable to the Corporation or its stockholders
for monetary damages for breach of fiduciary duty as a director. Any repeal or
modification of this Article TENTH by the stockholders of the Corporation only
shall be applied prospectively, to the extent that such repeal or modification
would, if applied retrospectively, adversely affect any limitation on the
personal liability of a director of the Corporation existing immediately prior
to such repeal or modification.
ELEVENTH: The Corporation reserves the right to amend or repeal any
provision contained in this Restated Certificate of Incorporation in the manner
prescribed by the laws of the State of Delaware and all rights conferred upon
stockholders are granted subject to this reservation, provided, however, that in
addition to the vote of the holders of any class or series of stock of the
Corporation required by law or by this Restated Certificate of Incorporation,
the affirmative vote of the holders of shares of voting stock of the Corporation
representing at least eighty percent (80%) of the voting power of all of the
then outstanding shares of the capital stock of the Corporation entitled to vote
generally in the election of directors, voting together as a single class, shall
be required to (i) reduce or eliminate the number of authorized shares of Common
Stock or the number of authorized shares of Preferred Stock set forth in Article
FOURTH or (ii) amend or repeal, or adopt any provision inconsistent with,
Section 2 of Article FOURTH and Articles FIFTH, SIXTH, SEVENTH, EIGHTH, NINTH,
TENTH and this Article ELEVENTH of this Restated Certificate of Incorporation.
I, Lennert J. Leader, Senior Vice President, Chief Financial Officer, Chief
Accounting Officer, Treasurer and Assistant Secretary of the aforesaid
Corporation, hereby certify that the foregoing Restated Certificate of
Incorporation of the said Corporation was duly adopted by its Board of Directors
in accordance with the provisions of Section 245 of the General Corporation Law
of the State of Delaware; that the said Restated Certificate of Incorporation
only restates and integrates and does not further amend the provisions of the
said Corporation's Certificate of Incorporation as heretofore amended or
supplemented; and that there is no discrepancy between such provisions and the
provisions of the said Restated Certificate of Incorporation.
IN WITNESS WHEREOF, I have executed this Restated Certificate of
Incorporation, under the seal of the said Corporation, this 25th day of
September, 1997.
AMERICA ONLINE, INC.
By:/S/LENNERT J. LEADER
Lennert J. Leader,
Senior Vice President, Chief Financial
Officer, Chief Accounting Officer,
Treasurer and Assistant Secretary
Exhibit A
AMERICA ONLINE, INC.
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
The preferences, privileges and restrictions granted to or imposed on the
Corporation's Series A Junior Participating Preferred Stock, par value $.01 per
share, or the holders thereof, are as follows:
Section 1. Designation and Amount. The shares of such series shall be
designated as "Series A Junior Participating Preferred Stock" (the "Series A
Preferred Stock") and the number of shares constituting the Series A Preferred
Stock shall be two hundred thousand (200,000). Such number of shares may be
increased or decreased by Resolution of the Board of Directors; provided, that
no decrease shall reduce the number of shares of Series A Preferred Stock to a
number less than the number of shares then outstanding plus the number of shares
reserved for issuance upon the exercise of outstanding options, rights or
warrants or upon the conversion of any outstanding securities issued by the
corporation convertible into Series A Preferred Stock.
Section 2. Dividends and Distributions.
(A) Subject to the rights of the holders of any shares of any series of
Preferred Stock (or any similar stock) ranking prior and superior to the Series
A Preferred Stock with respect to dividends, the holders of shares of Series A
Preferred Stock, in preference to the holders of Common Stock, $.01 par value
(the "Common Stock"), of the Corporation, and of any other junior stock, shall
be entitled to receive, when, as and if declared by the Board at Directors out
of funds legally available for the purpose, quarterly dividends payable in cash
on the first day of March, June, September and December in each year (each such
date being referred to herein as a "Quarterly Dividend Payment Date"),
commencing on the first Quarterly Dividend Payment Date after the first issuance
of a share or fraction of a share of Series A Preferred Stock, in an amount per
share (rounded to the nearest cent) equal to the greater of (a) $1 or (b)
subject to the provision for adjustment hereinafter set forth, 100 times the
aggregate per share amount of all cash dividends, and 100 times the aggregate
per share amount (payable in kind) of all non-cash dividends or other
distributions, other than a dividend payable in shares of Common Stock or a
subdivision of the outstanding shares of Common Stock (by reclassification or
otherwise), declared on the Common Stock since the immediately preceding
Quarterly Dividend Payment Date or, with respect to the first Quarterly Dividend
Payment Date, since the first issuance of any share or fraction of a share of
Series A Preferred Stock. In the event the Corporation shall at any time
declare or pay any dividend on the Common Stock payable in shares of Common
Stock, or effect a subdivision or combination or consolidation of the
outstanding shares of Common Stock (by reclassification or otherwise than by
payment of at dividend in shares of Common Stock) into a greater or lesser
number of shares of Common Stock, then in each such case the amount to which
holders of shares of Series A Preferred Stock were entitled immediately prior to
such event under clause (b) of the preceding sentence shall be adjusted by
multiplying such amount by a fraction, the numerator of which is the number of
shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(B) The Corporation shall declare a dividend or distribution on the Series
A Preferred Stock as provided in paragraph (A) of this section immediately after
it declares a dividend or distribution on the Common Stock (other than a
dividend payable in shares of Common Stock); provided that, in the event no
dividend or distribution shall have been declared on the Common Stock during the
period between any Quarterly Dividend Payment Date and the next subsequent
Quarterly Dividend Payment Date, a dividend of $1 per share on the Series A
Preferred Stock shall nevertheless be payable on such subsequent Quarterly
Dividend Payment Date.
(C) Dividends shall begin to accrue and be cumulative on outstanding
shares of Series A Preferred Stock from the Quarterly Dividend Payment Date next
preceding the date of issue of such shares, unless the date of issue of such
shares is prior to the record date for the first Quarterly Dividend Payment
Date, in which case dividends on such shares shall begin to accrue from the date
of issue of such shares, or unless the date of issue is a Quarterly Dividend
Payment Date or is a date after the record date for the determination of holders
of shares of Series A Preferred Stock entitled to receive a quarterly dividend
and before such Quarterly Dividend Payment Date, in either of which events such
dividends shall begin to accrue and be cumulative from such Quarterly Dividend
Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends
paid on the shares of Series A Preferred Stock in an amount less than the total
amount of such dividends at the time accrued and payable on such shares shall be
allocated pro rata an a share-by-share basis among all such shares at the time
outstanding. The Board of Directors may fix a record date for the determination
of holders of shares of Series A Preferred Stock entitled to receive payment of
a dividend or distribution declared thereon, which record date shall be not more
than 60 days prior to the date fixed for the payment thereof.
Section 3. Voting Rights. The holders of shares of Series A Preferred
Stock shall have the following voting rights:
(A) Subject to the provision for adjustment hereinafter set forth, each
share of Series A Preferred Stock shall entitle the holder thereof to 100 votes
on all matters submitted to a vote of the stockholders of the Corporation. In
the event the Corporation shall at any time declare or pay any dividend on the
Common Stock payable in shares of Common Stock, or effect a subdivision or
combination or consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares of Common
Stock) into a greater or lesser number of shares of Common Stock, then in each
such case the number of votes per share to which holders of shares of Series A
Preferred Stock were entitled immediately prior to such event shall be adjusted
by multiplying such number by a fraction, the numerator of which is the number
of shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(B) Except as otherwise provided herein, in any other Certificate of
Designation creating a series of Preferred Stock or any similar stock, or by
law, the holders of shares of Series A Preferred Stock and the holders of shares
of Common Stock and any other capital stock of the Corporation having general
voting rights shall vote together as one class on all matters submitted to a
vote of stockholders of the Corporation.
(C) Except as set forth herein, or as otherwise provided by law, holders
of Series A Preferred Stock shall have no special voting rights and their
consent shall not be required (except to the extent they are entitled to vote
with holders of Common Stock as set forth herein) for taking any corporate
action.
Section 4. Certain Restrictions.
(A) Whenever quarterly dividends or other dividends or distributions
payable on the Series A Preferred Stock as provided in Section 2 are in
arrears, thereafter and until all accrued and unpaid dividends and
distributions, whether or not declared, on shares of Series A Preferred Stock
outstanding shall have been paid in full, the Corporation shall not:
(i) declare or pay dividends, or make any other distributions, on any
shares of stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series A Preferred Stock;
(ii) declare or pay dividends, or make any other distributions, on any
shares of stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series A Preferred Stock,
except dividends paid ratably on the Series A Preferred Stock and all such
parity stock on which dividends are payable or in arrears in proportion to
the total amounts to which the holders of all such shares are then
entitled;
(iii) redeem or purchase or otherwise acquire for consideration
shares of any stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series A Preferred Stock,
provided that the Corporation may at any time redeem, purchase or otherwise
acquire shares of any such junior stock in exchange for shares of any stock
of the Corporation ranking junior (either as to dividends or upon
dissolution, liquidation or winding up) to the Series A Preferred Stock; or
(iv) redeem or purchase or otherwise acquire for consideration any
shares of Series A Preferred Stock, or any shares of stock ranking on a
parity with the Series A Preferred Stock, except in accordance with a
purchase offer made in writing or by publication (as determined by the
Board of Directors) to all holders of such shares upon such terms as the
Board or Directors, after consideration of the respective annual dividend
rates and other relative rights and preferences of the respective series
and classes, shall determine in good faith will result in fair and
equitable treatment among the respective series or classes.
(B) The Corporation shall not permit any subsidiary of the Corporation to
purchase or otherwise acquire for consideration any shares of stock of the
Corporation unless the Corporation could, under paragraph (A) of this Section 4,
purchase or otherwise acquire such shares at such time and in such manner.
Section 5. Reacquired Shares. Any shares of Series A Preferred Stock
purchased or otherwise acquired by the Corporation in any manner whatsoever
shall be retired and canceled promptly after the acquisition thereof. All such
shares shall upon their cancellation become authorized but unissued shares of
Preferred Stock and may be reissued as part of a new series of Preferred Stock
subject to the conditions and restrictions on issuance set forth herein, in the
Restated Certificate of incorporation, or in any other Certificate of
Designation creating a series of Preferred Stock or any similar stock or as
otherwise required by law.
Section 6. Liquidation, Dissolution or Winding Up. Upon any
liquidation, dissolution or winding up of the Corporation, no distribution shall
be made (1) to the holders of shares of stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) to the Series A
Preferred Stock unless, prior thereto, the holders of shares of Series A
Preferred Stock shall have received $100 per share, plus an amount equal to
accrued and unpaid dividends and distributions thereon, whether or not declared,
to the date of such payment, provided that the holders of shares of Series A
Preferred Stock shall be entitled to receive an aggregate amount per share,
subject to the provision for adjustment hereinafter set forth, equal to 100
times the aggregate amount to be distributed per share to holders of shares of
Common Stock, or (2) to the holders of shares stock ranking on a parity (either
as to dividends or upon liquidation, dissolution or winding up) with the Series
A Preferred Stock, except distributions made ratably on the Series A Preferred
Stock and all such parity stock in proportion to the total amounts to which the
holders of all such shares are entitled upon such liquidation, dissolution or
winding up. In the event the corporation shall at any time declare or pay any
dividend on the Common Stock payable in shares of Common Stock, or effect a
subdivision or combination or consolidation of the outstanding shares of Common
Stock (by reclassification or otherwise then by payment of a dividend in shares
of Common Stock) into a greater or lesser number of shares of Common Stock, then
in each such came the aggregate amount to which holders of shares of Series A
Preferred Stock were entitled immediately prior to such event under the proviso
in clause (1) of the preceding sentence shall be adjusted by multiplying such
amount by a fraction the numerator of which is the number of shares of Common
Stock outstanding immediately after such event and the denominator of which is
the number of shares of Common Stock that were outstanding immediately prior to
such event.
Section 7. Consolidation, Merger, etc. In case the Corporation shall
enter into any consolidation, merger, combination or other transaction in which
the shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case each share of
Series A Preferred Stock shall at the same time be similarly exchanged or
changed into an amount per share, subject to the provision for adjustment
hereinafter set forth, equal to 100 times the aggregate amount of stock,
securities, cash and/or any other property (payable in kind), as the case may
be, into which or for which each share of Common Stock is changed or exchanged.
In the event the Corporation at any time declares or pays any dividend on the
Common Stock payable in shares of Common Stock, or effects a subdivision or
combination or consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares of Common
Stock) into a greater or lesser number of shares of Common Stock, then in each
such case the amount set forth in the preceding sentence with respect to the
exchange or change of shares of Series A Preferred Stock shall be adjusted by
multiplying such amount by a fraction, the numerator of which is the number of
shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
Section 8. No Redemption. The shares of Series A Preferred Stock shall
not be redeemable.
Section 9. Rank. The Series A Preferred Stock shall rank junior with
respect to the payment of dividends and the distribution of assets to all other
series of the Corporation's Preferred Stock.
Section 10. Amendment. The Restated Certificate of Incorporation of the
Corporation shall not be amended in any manner which would materially alter or
change the powers, preferences or special rights of the Series A Preferred Stock
so as to affect them adversely without the affirmative vote of the holders of at
least two-thirds of the outstanding shares of Series A Preferred Stock, voting
together as a single class.
Exhibit B
AMERICA ONLINE, INC.
SERIES B CONVERTIBLE PREFERRED STOCK
The preferences, privileges and restrictions granted to or imposed on the
Corporation's Series B Convertible Preferred Stock, par value $.01 per share, or
the holders thereof, are as follows:
Section 1. Designation and Amount. The shares of such series shall be
designated as "Series B Convertible Preferred Stock" (the "Series B Preferred
Stock") and the number of shares constituting the Series B Preferred Stock shall
be one thousand (1,000). Such number of shares may be increased or decreased by
resolution of the Board of Directors; provided that no decrease shall reduce the
number of shares of Series B Preferred Stock to a number less than the number of
shares then outstanding plus the number of shares reserved for issuance upon the
exercise of outstanding options, rights or warrants or upon the conversion of
any outstanding securities issued by the Corporation convertible into Series B
Preferred Stock.
Section 2. Liquidation, Dissolution or Winding Up. In the event of the
voluntary or involuntary liquidation, dissolution or winding up of the
Corporation, or in the event of its insolvency, before any distribution or
payment is made to any holders of any shares of Common Stock or any other class
or series of capital stock of the Corporation designated to be junior to the
Series B Preferred Stock, and subject to the pari passu or senior liquidation
rights and preferences of any class or series of Preferred Stock designated to
be on parity with the Series B Preferred Stock, the holders of outstanding
Series B Preferred Stock shall be entitled to have set apart for them, or to be
paid first out of the assets of the Corporation available for distribution to
holders of the Corporation's capital stock of all classes, an amount equal to
$28,315.2430 per share of Series B Preferred Stock (which amount shall be
subject to equitable adjustment whenever there shall occur a stock dividend,
distribution, combination of shares, reclassification or other similar event
with respect to Series B Preferred Stock and, as so adjusted from time to time,
is hereinafter referred to as the "Base Liquidation Price") plus all Series B
Dividends (as defined below) thereon accrued but unpaid, to and including the
date full payment shall be tendered to the holders of Series B Preferred Stock
with respect to such liquidation, dissolution or winding up. If, upon any
voluntary or involuntary liquidation, dissolution or winding up of the
Corporation, the assets of the Corporation available for distribution to
stockholders shall be insufficient to set aside for or to pay such amounts to
the holders of shares of Series B Preferred Stock, the total amount of the
Corporation's assets which is available to be paid to stockholders of the
Corporation shall be distributed pro rata among the holders of the Series B
Preferred Stock, subject to the liquidation rights and preferences of any class
or series of Preferred Stock designated to be on a parity with the Series B
Preferred Stock, and no distribution shall be made to or set apart for the
holders of Common Stock or any other class or series of capital stock of the
Corporation which at such time is junior to the Series B Preferred Stock as to
liquidation rights and preferences. If the assets of the Corporation available
for distribution to stockholders exceed such amounts, the balance of such assets
shall be paid to or set aside for payment ratably among the holders of Common
Stock and the holders of any class or series of Preferred Stock designated to be
junior to the Series B Preferred Stock, in accordance with their relative rights
and preferences.
Section 3. Dividend Rights.
(a) From and after the date on which shares of Series B Preferred
Stock are first issued (the "Original Issue Date"), dividends shall accrue
on each share of the Series B Preferred Stock, whether or not funds are
legally available therefor and whether or not declared by the Board of
Directors, at the rate equal to four percent (4%) per annum on the Base
Liquidation Price of such share of Series B Preferred Stock, compounded
annually (the "Series B Dividends"). From time to time the Board of
Directors of the Corporation may declare and pay dividends or distributions
on shares of the Common Stock or on any other class or series of capital
stock of the Corporation, but only if all accrued Series B Dividends shall
have been paid in full prior to the date of any such declaration, payment
or distribution. Series B Dividends may, at the discretion of the Board of
Directors, be paid by the issuance to each holder of a share of Series B
Preferred Stock of the number of additional shares of Series B Preferred
Stock determined by dividing (y) the amount of Series B Dividends payable
to such holder by (z) the Conversion Price (as defined in Section 5(c)
hereof) that would apply if such shares were to be converted on the date of
such issuance.
(b) In the event the Board of Directors of the Corporation shall
declare a dividend payable upon the then outstanding shares of Common Stock
(other than a dividend payable entirely in shares of Common Stock of the
Corporation), the Board of Directors shall declare at the same time a
dividend upon the then outstanding shares of the Series B Preferred Stock,
payable at the same time as the dividend paid on the Common Stock, in an
amount equal to the amount of dividends per share of Series B Preferred
Stock as would have been payable on the largest number of whole shares of
Common Stock into which each share of Series B Preferred Stock would have
been converted if the Series B Preferred Stock had been converted to Common
Stock pursuant to the provisions of Section 5 hereof as of the record date
for the determination of holders of Common Stock entitled to receive such
dividends.
Section 4. Voting Rights.
(a) Except as set forth herein or in the Restated Certificate of
Incorporation of the Corporation, or as otherwise provided by law, the
Series B Preferred Stock shall be non-voting, the holders of Series B
Preferred Stock shall have no special voting rights and their consent shall
not be required for taking any corporate action.
(b) To the extent that the Series B Preferred Stock is entitled to
vote or required to consent as provided by law or as set forth herein or in
the Restated Certificate of Incorporation of the Corporation, the Series B
Preferred Stock shall vote on the following basis:
(i) Holders of Series B Preferred Stock shall have one vote
per share;
(ii) Except as otherwise provided by law or as set forth
herein or in the Restated Certificate of Incorporation of the Corporation,
the Series B Preferred Stock shall vote together with (A) all other classes
of Preferred Stock entitled to vote on such matter and (B) the Common
Stock, as a single class; and
(iii) The Corporation shall not without having obtained the
affirmative vote or written consent of the holders of not less than fifty
percent (50%) in voting power of the outstanding shares of Series B
Preferred Stock, voting as a separate class:
(A) amend, alter or repeal any provision of, or add
any provision to, the Corporation's Restated Certificate of
Incorporation or By-laws if such action would alter or change the
preferences, rights, privileges or powers of, or the restrictions
provided for the benefit of, the Series B Preferred Stock;
(B) reclassify any Common Stock into shares having any
preference or priority as to assets superior to or on a parity with
any such preference or priority of the Series B Preferred Stock; or
(C) issue any additional shares of Series B Preferred
Stock other than pursuant to Section 3(a) hereof.
(c) The holders of at least a majority of the aggregate number of
shares of Series B Stock outstanding may, by affirmative vote or consent,
agree to a change or alteration by the Corporation in the preferences,
voting powers, qualifications and special or relative rights and privileges
of the Series B Stock, or may waive the application thereof in any
particular instance.
Section 5. Conversion.
(a) Automatic Conversion on Second Anniversary. On the second anniversary
of the Original Issue Date, or if such date is not a Business Day (as defined
below) on the next succeeding Business Day, each share of Series B Preferred
Stock shall automatically be converted, without the payment of any additional
consideration or any further action by the holders of such shares and whether or
not the certificates representing such shares are surrendered to the Corporation
or its transfer agent, into such number of fully paid and non-assessable shares
of Common Stock as is determined by dividing (i) the Base Liquidation Price plus
all Series B Dividends thereon accrued but unpaid to and including the date of
conversion by (ii) the Conversion Price (as defined below), determined as
hereinafter provided, in effect on the date of conversion, calculated to four
decimal places; provided that the Corporation shall not be obligated to issue
certificates evidencing the shares of Common Stock issuable upon such conversion
unless certificates evidencing such shares of the Series B Preferred Stock so
converted are either delivered to the Corporation or its transfer agent, or the
holder notifies the Corporation or any transfer agent that such certificates
have been lost, stolen, or destroyed and executes an agreement satisfactory to
the Corporation to indemnify the Corporation from any loss incurred by it in
connection with such loss, theft or destruction. "Business Day" means any day
on which commercial banks are not authorized or required by law to close in New
York, New York.
(b) Conversion Following Triggering Event at Option of Holders.
(i) In the event that a Triggering Event (as defined below) has
occurred, then the holders of at least a majority of the aggregate number
of shares of Series B Stock outstanding may, by written notice to the
Corporation sent not later than sixty (60) days following the date of such
Triggering Event (a "Conversion Election Notice") elect to have each
outstanding share of Series B Preferred Stock converted, on the next
Business Day succeeding the date of such Conversion Election Notice,
without the payment of any additional consideration or any further action
by the holders of such shares and whether or not the certificates
representing such shares are surrendered to the Corporation or its transfer
agent, into such number of fully paid and non-assessable shares of Common
Stock as is determined by dividing (i) the Base Liquidation Price plus all
Series B Dividends thereon accrued but unpaid to and including the date of
conversion by (ii) the Conversion Price (as defined below), determined as
hereinafter provided, in effect on the date of conversion calculated to
four decimal places; provided that the Corporation shall not be obligated
to issue certificates evidencing the shares of Common Stock issuable upon
such conversion unless certificates evidencing such shares of the Series B
Preferred Stock so converted are either delivered to the Corporation or its
transfer agent, or the holder notifies the Corporation or any transfer
agent that such certificates have been lost, stolen, or destroyed and
executes an agreement satisfactory to the Corporation to indemnify the
Corporation from any loss incurred by it in connection with such loss,
theft or destruction.
(ii) As used herein, a "Triggering Event" shall mean (A)
termination of the Joint Venture Agreement dated as of May 8, 1996 (the
"JVA") between the Corporation, Mitsui & Co., Ltd. and the other parties
thereto, pursuant to the terms thereof; (B) delivery of a Buyout Notice (as
defined in the JVA) pursuant to the terms of the JVA; (C)the delivery of
any Buy/Sell Notice (as defined in the JVA) or notice of dissolution,
pursuant to Section 3.4.1 of the JVA; (D) timely delivery of a Launch
Software Buyout Notice (as defined in the JVA); (E) a consolidation or
merger of the Corporation as a result of which the Corporation is not the
surviving entity or the sale of all or substantially all of the assets of
the Corporation; (F)the Common Stock of the Corporation is neither: (x)
quoted on the National Association of Security Dealers Automatic Quotation
System ("NASDAQ"), (y) traded on a national securities exchange or (z) set
forth in the National Quotation Bureau sheet listing; or (G) the
stockholders of the Corporation shall have approved any plan or proposal
for the liquidation or dissolution of the Corporation.
(c) Determination of Conversion Price. The Conversion Price for purposes
of calculating the number of shares of Common Stock deliverable upon conversion
of Series B Preferred Stock (the "Conversion Price") shall, from time to time,
be equal to (i) the average closing sales price per share of Common Stock as
reported by NASDAQ, if the Common Stock is quoted on NASDAQ, (ii) the average
closing sales price per share on the primary exchange on which the Common Stock
is then traded, if the Common Stock is traded on a national securities exchange
or (iii) if the Common Stock is neither quoted on NASDAQ nor traded on a
national securities exchange, the average high bid price as set forth in the
National Quotation Bureau sheet listing, in each case for the twenty (20)
consecutive trading days ending on the date which is two (2) Business Days prior
to the date shares of Series B Preferred Stock are converted into shares of
Common Stock; provided that, in the event that any stock split, stock dividend,
stock combination, reclassification or similar event is effected during such
twenty (20) consecutive trading day period, calculation of such Conversion Price
shall be equitably adjusted to account for such stock split, stock dividend,
stock combination, reclassification or similar event.
(d) Conversion Mechanics. Upon the conversion of the Series B Preferred
Stock, the holders thereof shall surrender the certificate or certificates
representing such shares, duly endorsed, at the office of the Corporation or of
its transfer agent. Thereupon, there shall be issued and delivered to such
holder, promptly at such office and in such holder's name as shown on such
surrendered certificate or certificates, a certificate or certificates for the
aggregate number of shares of Common Stock into which the aggregate shares of
the Series B Preferred Stock surrendered were convertible on the date on which
such conversion occurred. No fractional shares of Common Stock shall be issued
upon conversion of the Series B Preferred Stock. In lieu of any fractional
shares to which the holder would otherwise be entitled, the Corporation shall
pay to such holder cash equal to such fraction multiplied by the then effective
Conversion Price.
(e) No Impairment. The Corporation shall not, by amendment of its
Restated Certificate of Incorporation or through any reorganization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities or any
other voluntary action, impair or avoid or seek to impair or avoid the
observance or performance of any of the terms to be observed or performed
hereunder by the Corporation but shall at all times in good faith assist in the
carrying out of all the provisions of this Section 5 and in the taking of all
such action as may be necessary or appropriate in order to effect the conversion
of the Series B Preferred Stock as set forth herein.
(f) Common Stock Reserved. The Corporation shall reserve and keep
available out of its authorized but unissued Common Stock such number of shares
of Common Stock as shall from time to time be sufficient to effect the
conversion of all convertible Series B Preferred Stock.
(g) Certain Taxes. The Corporation shall pay any issue or transfer taxes
payable in connection with the conversion of any shares of Series B Preferred
Stock; provided that the Corporation shall not be required to pay any tax which
may be payable in respect of any transfer to a name other than that of the
holder of such Series B Preferred Stock.
Section 6. No Reissuance of Series B Preferred Stock. No share or
shares of Series B Preferred Stock acquired by the Corporation by reason of
redemption, purchase, conversion or otherwise shall be reissued, and all such
shares shall be canceled, retired and eliminated from the shares which the
Corporation shall be authorized to issue.
Section 7. Residual Rights. All rights accruing to the outstanding
shares of the Corporation not expressly provided for to the contrary herein or
in the Resolution establishing the terms of the Series B Preferred Stock shall
be vested in the Common Stock.
Section 8. Rank. The Series B Preferred Stock shall rank superior with
respect to the payment of dividends and the distribution of assets to all other
series or classes of the Corporation's Preferred Stock, other than series or
classes of the Corporation's Preferred Stock specified to rank on parity with
the Series B Preferred Stock with respect to the payment of dividends and the
distribution of assets.
May 10, 1996
Mr. Bruce Bond
Dear Bruce:
I am pleased to offer you the position of President and Chief Executive Officer
of ANS CO+RE Systems, Inc. ("ANS" or the "Company"), a subsidiary of America
Online, Inc. ("AOL"). I have no doubt that with your talent and vision, you
will be able to build ANS into a global leader in the network services business.
In your capacity as President and CEO, you will report to the Board of Directors
of ANS. It is expected that the Board will initially be comprised of five
members, consisting of yourself, two directors designated by AOL and two
independent directors. I look forward to exploring candidates for the
independent directors together with you.
For so long as you continue to be employed as President and Chief Executive
Officer of the Company, AOL will agree to vote its shares in favor of your
election as a director of the Company. When you cease to be employed as
President and Chief Executive Officer, you agree to resign from the Board of
Directors if requested to do so by the Board.
Your compensation will be $400,000 per year, payable semi-monthly, subject to
customary deductions. In addition, you will be eligible to receive an annual
bonus equal to 75% of your annual salary, with an opportunity to earn up to 150%
of the base bonus amount with extraordinary performance. The performance
metrics for the bonus will be set by the ANS Board of Directors and will
initially be consistent with the parameters established by AOL for its executive
officers.
On or about your commencement date, you will be granted non-qualified stock
options (the "Non-Qualified Options") to purchase a 2% of the outstanding
capital stock of ANS, on a fully diluted basis, on the terms of a Non-Qualified
form of Stock Option Agreement. The Non-Qualified Options will have an
aggregate exercise price of $240,000 (the current fair market value of the
shares). The Non-Qualified Options will vest in equal annual installments over
a period of four years, subject to your continued employment.
On or about your commencement date, you will also be granted Incentive Stock
Option (the "ISO's" and, together with the Non-Qualified Options, the "ANS
Options") to purchase an additional 2% of the outstanding capital stock of ANS,
on a fully diluted basis, on the terms of an Incentive form of Stock Option
Agreement. The ISOs will have an aggregate exercise price of $240,000 (the
current fair market value of the shares). The ISOs will vest in equal annual
installments over a period of four years, subject to your continued employment.
In the event that ANS has not become a public company (or has otherwise achieved
liquidity) by the second anniversary of your employment, you may, at your
option, require ANS to acquire ("put") some or all of your vested shares at fair
market value less any amounts owed by you to ANS. The fair market value of the
shares will be determined by an independent appraiser, the cost of which will be
borne by the Company.
Following a change of control of the Company, if you remain with the Company (or
its successor) for one year thereafter or if you are terminated or your position
is downgraded following the change of control, all of the unvested ANS Options
will be accelerated as more specifically provided in the various Stock Option
Agreements.
Upon the start of your employment, you will receive a $500,000 loan which will
bear interest at the current prime rate and will be secured by your stock and
options. In addition, you will receive a $250,000 loan which will bear interest
at the current prime rate and will be secured by the equity in your new home
(subordinated to any mortgage). The principal and interest under both loans
will be payable in full upon the earlier of the fourth anniversary of your
commencement date and the IPO of the Company (or other liquidity event), and may
be paid by delivery of stock with a fair market value equal to the amount then
due. If necessary, fair market value of the shares will be determined by an
independent appraiser, the cost of which will be borne by the Company. Upon the
second anniversary of your commencement date, all outstanding principal and
interest may be pre-paid in full by delivery of any exercised option shares and
cancellation of any unexercised ANS Option if the IPO of the Company has not
occurred. In addition, the principal and interest under the loans will
accelerate in the event that your employment is terminated by the Company for
cause, or if you terminated your employment other than for cause.
Your employment at the Company is at will and you or the Company are free to
terminate the employment relationship at any time, with or without cause. We
understand that you will devote your full business time to the Company. In the
event that your employment is terminated without cause by the Company at any
time, the number of ANS Options that would have vested had you continued to be
employed for the balance of that year will immediately vest. In addition, in
the event that your employment is terminated without cause by the Company, you
will be paid an amount equal to twelve months of your then current salary as
additional severance.
As a condition to your employment, you will enter into a Confidentiality, Non-
Competition and Proprietary Rights Agreement in the form attached hereto as
Exhibit A.
In connection with your relocation, the Company will acquire, either directly or
through PHH, a service company retained by the Company, in accordance with
industry practice, your current home at fair market value, which will be
determined by PHH. In the event that the fair market value appraisal by PHH is
less than 600,000 BPS, the Company will pay you the amount of the difference.
In addition, the Company will pay reasonable expenses of your relocation,
including interim housing, travel expenses for you and your family, moving
expenses, and will pay you a one-time tax gross-up to cover relocation
reimbursements.
You and your family members will be eligible to participate in the ANS-sponsored
health and benefit plans in accordance with the Company's current eligibility
requirements. In addition, to the extent that you require additional medical
coverage during the pregnancy of your wife, you agree to use your best efforts
to continue your existing coverage, and the Company will reimburse you for the
cost of the premiums. In the event that you are unable to obtain such continued
coverage, the Company's current medical plan will cover up to $10,000 of such
pregnancy related expenses, the maximum coverage for pre-existing conditions.
The Company will reimburse you for reasonable expenses relating to your wife's
pregnancy which exceed $10,000 subject to customary co-insurance deductibles.
The Company will also work with you to obtain $2 million in term life insurance
through the Company's existing policies and through additional policies as
required, and will include the reasonable cost of obtaining such additional
policies as additional annual compensation. In addition the Company will
provide you with tax preparation assistance.
Attached as Exhibits B and C, respectively, are the Stock Option Agreements and
loan documents, which are subject to further review and revisions by the America
Online legal department. Please forward any comments you have to Ellen Kirsh,
our General Counsel. We hope to execute final documents by May 15, 1996.
This letter, together with the exhibits hereto, Stock Option Agreements, and
loan documents, is intended as our entire agreement with respect to your
employment and supersedes our prior discussions. Any modifications in the
future must be in writing and signed by both you and the Company.
If the terms of this letter are acceptable to you, please execute the enclosed
copy of this letter and return it to me. I look forward to a long and rewarding
relationship.
Very truly yours,
ANS CO+RE Systems, Inc.
By:/S/DAVID C. COLE
David C. Cole
Chairman
Agreed and Accepted:
/S/BRUCE BOND
Bruce Bond
Date: 15 May 1996
EMPLOYMENT AGREEMENT
ANS CO+RE Systems, Inc. ("ANS") and Bruce R. Bond ("Employee"), of ANS,
telephone number _________________________, hereby agree as follows:
1. ANS agrees to employ Employee, and Employee agrees to work diligently
for ANS on such tasks as may be assigned during such employment, which
shall commence on July 15, 1996.
2. The compensation to be paid by ANS to Employee will be at the rate set
forth in the ANS offer letter to Employee, a copy of which is appended
hereto, or such other rate as may be established later by ANS.
3. Employee will be entitled to participate in benefit programs as they
are set or altered from time to time, and to accrue vacation time, in
accordance with ANS policies and practices then applicable to persons
of his or her personnel level. Employee will gain vested rights in
these programs only to the extent that such program expressly provided
for vesting.
4. This agreement may be terminated by either party at any time for any
reason or for no reason at all, provided that two (2) weeks of notice
are given prior to the effective date of such termination. ANS may,
if it chooses, elect to pay compensation in lieu of giving prior notice.
5. Employee's Social Security number is _______________.
6. Employee hereby assigns to ANS his or her entire right, title and interest
in any idea, invention, design of a useful article, computer program and
related documentation, and other work of authorship (collectively
"Developments") hereafter during the period of employment by ANS, made or
conceived solely or jointly by Employee, or created wholly or in part by
Employee, whether or not such Developments are patentable, copyrightable
or susceptible to other forms of protection, and the Developments:
(a) relate to the actual or anticipated business or research or
development of ANS, or
(b) are suggested by or result from any task assigned to Employee or
work performed by Employee for or on behalf of ANS.
In the case of any "other work of authorship", such assignment shall be
limited to those works of authorship which meet both conditions (a) and
(b)above. Employee acknowledges that the copyright and any other
intellectual property right in ideas, inventions, designs, computer
programs and documentation, and other works of authorship, created
within his or her scope of employment with ANS belong to ANS by
operation of law.
In connection with any of the Developments assigned to ANS:
(a) Employee will disclose them promptly to ANS management, and
(b) Employee will, on ANS' request, promptly execute a specific
assignment of title to ANS, and do anything else reasonably necessary
to enable ANS to secure a patent, copyright or other form of protection
therefor in the United States and in other countries.
ANS is not required to designate Employee as an author of any design,
computer program or related documentation, or other work of authorship
herein assigned, when distributed publicly or otherwise, nor to make any
distribution at all. Employee waives and releases, to the extent
permitted by law, all rights which Employee might have respecting the
subject matter of this paragraph 6.
7. Without ANS's prior written permission, Employee will not disclose to
anyone outside of ANS or use in other than ANS's business, either during
or after his or her employment, any confidential information or material
of ANS or any information or material received in confidence by ANS. If
Employee leaves the employ of ANS, Employee will return all property of
ANS in his or her possession, including all confidential information or
materials such as drawings, notebooks, reports and other documents.
Confidential information or material of ANS is any information or material:
(a) generated or collected by or utilized in the operations of ANS that
relates to the actual or anticipated business or research or
development of ANS, or
(b) suggested by or resulting from any tasks assigned to Employee or
work performed by Employee for or on behalf of ANS and which has not
been made available generally to the public.
8. Employee will not disclose to ANS, use in its business, or cause it
to use, any information or material which is confidential to others.
9. Employee will comply, and do all things necessary for ANS to comply, with
all applicable laws and regulations, including laws and regulations that
relate to intellectual property or to the safeguarding of information.
10. Employee's duties and responsibilities hereunder shall apply equally to ANS
and to any subsidiary corporation(s) of ANS, and the rights and privileges
of each such subsidiary corporation(s) shall be the same as provided
hereunder to ANS, and references herein to ANS shall be to ANS and its
subsidiary corporation(s).
11. Employee's duties to ANS established pursuant to paragraphs 6, 7, 8, 9 and
13 of this Agreement will survive the termination of this Agreement, and
will continue until ANS shall have waived its rights to further compliance
with the terms of such provisions.
12. Employee claims to have intellectual property interests in, or obligations
relating to, the following subjects, and the referenced documents detail
the intellectual property with respect to which Employee has duties or
claims rights thereto:
Subject Document Reference
[None listed]
(Append an expanded listing if needed.)
13. Except as listed in paragraph 12 hereof or as described in paragraph 13,
employee acknowledges and agrees that he or she has no intellectual
property interests or obligations of any kind or nature.
Agreed this 24th day of July, 1996
Employee ANS CO+RE Systems, Inc.
Signed: /s/Bruce R. Bond /s/Sherri Adams
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement"), dated as of April 1, 1993, is
entered into between Redgate Communications Corporation, a Delaware corporation
(the "Company"), and Theodore J. Leonsis (the "Employee").
RECITAL
The Company desires to employ the Employee and the Employee is willing to
accept such employment, on the terms and subject to the conditions set forth in
this Agreement.
AGREEMENT
In consideration of the recital and of the mutual promises set forth in
this Agreement, the Company and the Employee agree as follows:
1. Termination of Prior Agreement. The Employment Agreement between the
Company and the Employee, dated April 1, 1991, is hereby superseded and
terminated in its entirety by this Agreement as of the date of this Agreement.
2. Employment. The Company shall employ the Employee and the Employee
accepts such employment, upon the terms and subject to the conditions set forth
in this Agreement.
3. Term and Termination. The Employee understands, acknowledges and
agrees that his employment with the Company is for an unspecified duration and
constitutes "at-will" employment. The Employee acknowledges and agrees that
this employment relationship may be terminated at any time, with or without
cause.
The Employee understands and agrees that his satisfactory performance of
the duties designated by the Company is the sole consideration for the salary
and benefits paid by the Company. The Employee further understands and agrees
that neither his job performance (whether satisfactory or exemplary) nor
promotions, commendations, bonuses, stock, stock rights, or the like from the
Company give rise to or establish an obligation on the part of either the
Company or the Employee to continue his employment or in any way serve as the
basis for modification, amendment, or extension, by implication or otherwise, of
this Employment Agreement. This Employment Agreement cannot be modified,
amended, or extended except in writing executed by the Company and by Employee.
4. Duties. During the term of this Agreement, the Employee shall serve
as the President and Chief Executive Officer of the Company as well as Chairman
of the Board of Directors and shall serve the Company in such other capacities
as may be determined by the Board of Directors of the Company from time to time,
and shall perform such administrative, managerial, development, production,
marketing, research and other duties as are reasonable and commensurate with the
Employee's position with the Company and as may be assigned to him by the Board
of Directors of the Company or a committee thereof from time to time. Except as
set forth in Schedule 4, the Employee shall devote his full time and energies to
the business and affairs of the Company and shall use his best efforts, skills
and abilities to perform his duties under this Agreement.
5. Compensation. During the term of this Agreement, the Employee shall
be compensated as set forth in this Section 5.
(a) Base Compensation. The Company shall pay to the Employee, and
the Employee shall accept from the Company, as compensation for the performance
of his duties under this Agreement, a salary at such rate as may be fixed from
time to time by the Board of Directors of the Company, but in no event less than
rate of $195,000 per year (the "Base Compensation"). The Employee's salary
shall be payable biweekly in substantially equal installments, or at more
frequent, or, in the event that the Company's other executive officers are paid
less frequently, less frequent, intervals, as the Board of Directors may
determine.
(b) Fringe Benefits. For so long as Employee is employed by the
Company, Employee shall be entitled to receive all standard fringe benefits,
including without limitation, vacation benefits, offered by the Company to all
employees. Employee shall further be entitled to continue to receive, and the
Company shall be obligated to continue to provide to Employee at the Company's
expense, all fringe benefits currently being received by Employee from the
Company which are set forth on Schedule 5(b).
6. Representation of Employee. The Employee represents and warrants that
the Employee is not a party to, or bound by, any agreement or commitment, or
subject to any restriction, including but not limited to agreements related to
previous employment containing confidentiality or noncompete covenants, which in
the future may have a possibility of adversely affecting the business of the
Company or the performance by the Employee of his duties under this Agreement.
7. Confidentiality. The Employee reaffirms the terms and conditions of
his Confidential information and Nondisclosure Agreement, of even date herewith,
with the Company.
8. Non-Competition. The Employee agrees that during the term of this
Agreement and for a period of one year following the termination of the
Employee's employment with the Company, the Employee will not, directly or
indirectly as long as the Company is paying Employee his termination benefits:
(a) as an individual proprietor, partner, stockholder, officer,
employee, director, consultant, agent, joint venturer, investor, lender, or in
any other capacity whatsoever, alone or in association with others, own, manage,
operate, control or participate in the ownership, management, operation or
control of, or work for or permit the use of his name by, or be connected in any
manner with, any business activity which is in competition with any business of
the Company or any of its subsidiaries in any state of the United States in
which the Company or any of its subsidiaries transacts business on the date of
the termination of this Agreement;
(b) recruit or otherwise solicit or induce any person (natural or
otherwise) who is at the time an employee of the Company to terminate his or her
employment with, or otherwise cease his or her relationship with, the Company or
any of its subsidiaries, or hire any such employee who has left the employ of
the Company within one year after termination of such employee's employment with
the Company; or
(c) solicit any person (natural or otherwise) who is or who had been
a customer of the Company or any of its subsidiaries at any time during the term
of this Agreement.
The restrictions against competition set forth above are considered by the
parties to be reasonable for the purposes of protecting the business of the
Company. If any such restriction is found by any court of competent
jurisdiction to be unenforceable because it extends for too long a period of
time or over too broad a range of activities or in too large a geographic area,
however, such restriction shall be interpreted to extend only over the maximum
period of time, range of activities or geographic area as to which it may be
enforceable.
9. Remedies. The Employee acknowledges that the Company would be
irreparably harmed and that monetary damages would not provide an adequate
remedy in the event of a breach of the provisions of Sections 7 or 8.
Accordingly, the Employee agrees that, in addition to any other remedies
available to the Company, the Company shall be entitled to specifically enforce
the provisions of Sections 7 or 8. In the event of such a breach, in addition
to any other remedies available to the Company, the Company shall be entitled to
receive from the Employee payment of, or reimbursement for, the Company's
reasonable attorneys' fees and disbursements incurred in enforcing any such
provision.
10. Termination. This Agreement may be terminated by the election of
either party hereto or upon the occurrence of any of the events set forth in and
subject to the terms of this Section 10.
(a) Death. This Agreement will terminate upon the death of the
Employee.
(b) Disability. This Agreement may be terminated at the Company's
option, immediately upon notice to the Employee, if the Employee shall suffer a
permanent disability. For the purposes of this Agreement, the term "permanent
disability" shall mean the Employee's inability to perform the Employee's duties
under this Agreement for a period of any six consecutive months due to illness,
accident or any other physical or mental incapacity.
(c) Without Cause. This Agreement may be terminated at either
party's option for any reason or no reason.
(d) Cause. This Agreement may be terminated at the Company's option,
immediately upon notice to the Employee, upon the Employee's: (i) breach of any
material provision of this Agreement; (ii) willful refusal to perform a duty
directed by the Board of Directors of the Company or a committee thereof which
is reasonably within the scope of the Employee's duties; (iii) substantive
misappropriation for personal use of assets or business opportunities of the
Company; (iv) commission of a felony; (v) gross negligence or willful
malfeasance in discharging the Employee's obligations under this Agreement; or
(vi) the good faith determination by the Board of Directors of the Company that
the Employee has failed or is unable to competently and adequately perform his
duties under this Agreement.
(e) Effect of Termination. In the event of any termination under
this Section 10, the Company shall have no further obligation under this
Agreement to make any payments to, or bestow any benefits on, the Employee from
and after the date of the termination, other than payments or benefits accrued
and due and payable to him prior to the date of the termination; provided,
however, that in the event of a termination under Sections 10(a) (b) or (c), the
Employee shall be entitled to continue to receive salary at his then current
base salary in accordance with the Provisions of Section 5 for the twelve-month
period beginning with the date of termination, and shall be provided the
opportunity to remain covered by any or all (at Employee's option) of the
Company's benefit plans applicable to Employee at the date of such termination,
including without limitation, any of the Company's group or individual insurance
plans, provided the Employee bears all expenses related to such continued
benefit plans (which expenses, at the Company's option, may be offset against
the foregoing severance payment or any other amount owed by the Company for the
account of the Employee), and provided that the terms of any such benefit plans
permit such continued insurance coverage of the Employee after such termination.
The Employee will also continue to receive his car allowance of $800 per month,
which is currently treated as income.
11. Miscellaneous.
(a) Survival. The provisions of Sections 7 and 8 shall survive the
termination of this Agreement.
(b) Entire Agreement. This Agreement sets forth the entire
understanding of the parties and merges and supersedes any prior or
contemporaneous agreements between the parties pertaining to the subject matter
hereof, including the prior employment agreement dated April 1, 1991 which, as
provided above in Section 1, is superseded and terminated in its entirety as of
the date of this Agreement.
(c) Modification. This Agreement may not be modified or terminated
orally, and no modification, termination or attempted waiver of any of the
provisions hereof shall be binding unless in writing and signed by the party
against whom the same is sought to be enforced; provided, however, that
Employee's compensation may be increased at any time by the Company without in
any way affecting any of the other terms and conditions of this Agreement, which
in all other respects shall remain in full force and effect.
(d) Waiver. Failure of a party to enforce one or more of the
provisions of this Agreement or to require at any time performance of any of the
obligations hereof shall not be construed to be a waiver of such provisions by
such party nor to in any way affect the validity of this Agreement or such
party's right thereafter to enforce any provision of this Agreement, nor to
preclude such party from taking any other action at any time which it would
legally be entitled to take.
(e) Successors and Assigns. Neither party shall have the right to
assign this personal Agreement, or any rights or obligations hereunder, without
the consent of the other party; provided, however, that upon the sale of all or
substantially all of the assets, business and goodwill of the Company to another
company, or upon the merger or consolidation of the Company with another
company, this Agreement shall inure to the benefit of, and be binding upon, both
Employee and the company purchasing such assets, business and good will, or
surviving such merger or consolidation, as the case may be, in the same manner
and to the same extent as though such other company were the Company. Subject
to the foregoing, this Agreement shall inure to the benefit of, and be binding
upon, the parties hereto and their legal representatives, heirs, successors and
assigns.
(f) Additional Acts. The Employee and the Company each agrees to
execute, acknowledge and deliver and file, or cause to be executed, acknowledged
and delivered and filed, any and all further instruments, agreements or
documents as may be necessary or expedient in order to consummate the
transactions provided for in this Agreement and do any and all further acts and
things as may be necessary or expedient in order to carry out the purpose and
intent of this Agreement.
(g) Communications. All notices, requests, other communications
under this Agreement shall be in writing and shall be deemed to have been given
at the time personally delivered or when mailed in any United States post office
enclosed in a registered or certified postage prepaid envelope and addressed to
the addresses set forth below, or to such other address as any party may specify
by notice to the other party; provided, however, that any notice of change of
address shall be effective only upon receipt.
To the Company: Redgate Communication Corporation
660 Beachland Boulevard
Vero Beach, Florida 32693
To the Employee: Theodore J. Leonsis
280 Sea Breeze Court
Town of Orchid
Vero Beach, Florida 32963
(h) Severability. If any provision of this Agreement is held to be
invalid or unenforceable by a court of competent jurisdiction, such invalidity
or unenforceability shall not affect the validity and enforceability of the
other provisions of this Agreement and the provision held to be invalid or
unenforceable shall be enforced as nearly as possible according to its original
terms and intent to eliminate such invalidity or unenforceability.
(i) Jurisdiction; Venue. Any suit, action or proceeding with respect
to this Agreement, or any judgment entered by any court in respect hereof may be
brought in the courts of the State of Florida or in the U.S. District Court for
the Southern District of Florida, and the parties hereby accept the nonexclusive
jurisdiction of those courts for the purpose of any suit, action or proceeding.
In addition, the parties hereto irrevocably waive, to the fullest extent
permitted by law, any objection which they may now or hereafter have to the
laying of venue of any suit, action or proceeding arising out of or relating to
this Agreement, or any judgment entered by any court in respect hereof brought
in the State of Florida, and further irrevocably waive any claim that any suit,
action or proceeding brought in the State of Florida has been brought in an
inconvenient forum.
(j) Governing Law. This Agreement is made and executed and shall be
governed by the laws of the State of Florida, excluding rules relating to
conflict of laws.
IN WITNESS WHEREOF, each of the parties hereto have duly executed this
Agreement as of the date set forth above.
REDGATE COMMUNICATION CORPORATION
By:/S/JOHN F. CUNNINGHAM
Its: Director, Chairman Compensation Committee
/S/THEODORE J. LEONSIS 2/12/94
Theodore J. Leonsis
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT, dated as of October 29, 1996, is by and between
America Online, Inc., a Delaware corporation with its principal offices at 22000
AOL Way, Dulles, Virginia 20166-9323 (the "Company") and Robert W. Pittman
("Executive").
WHEREAS the Company desires to employ the services of Executive as
President and Chief Executive Officer of America Online Networks ("AON"), a
division or subsidiary of the Company, for the period and upon the terms and
conditions hereinafter set forth; and
WHEREAS Executive desires to serve in such capacities upon the terms and
conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the covenants and agreements herein
contained, the Company and Executive hereby agree as follows:
1. Employment. (a) The Company will employ the Executive, and Executive
agrees to be employed by the Company, as President and Chief Executive Officer
of AON. Executive will report to the Company's Chief Executive Officer and will
also be a member of the Company's Office of the Chairman. Executive will be
responsible for the general operation, management and profitability of AON,
consistent with and subject to the business strategy and budgets of the Company
and AON, as approved from time to time by the Company's Board of Directors (the
"Board") and the Company's Chief Executive Officer. Executive shall have the
authority to make expenditures and personnel decisions with respect to
individuals whose duties lie solely within AON, subject to compliance with the
Company's guidelines as revised from time to time and the AON budget as approved
by the Board from time to time. Executive will also have such other
responsibilities, duties and authority, commensurate with Executive's position,
as may from time to time be assigned to him by the Company's Chief Executive
Officer.
(b) Executive agrees to devote substantially all of his full business time
and energies to the business and affairs of the Company and AON, provided,
however, that nothing contained in this Paragraph 1(b) shall be deemed to
prevent or limit his right to: (i) make wholly passive investments in the
securities of any entity which he does not control, directly or indirectly, and
which is not a "Competitive Business" (as defined in the Confidential
Information/ Noncompetition/Proprietary Rights Agreement attached hereto as
Exhibit A (the "Confidentiality Agreement") and (ii) serve in the capacities set
forth in Exhibit B, and in all other cases subject to the prior approval of the
Chief Executive Officer, to serve as a member on the Board of Directors, Board
of Trustees or other similar body of other corporations or entities which do not
compete with the Company, AON or any of their Affiliates, provided that his
duties in any such capacity shall be limited to that of a director of a public
corporation and shall not include any day to day management activities.
"Affiliates" as used herein shall mean corporations which for purposes of
Section 424 of the Internal Revenue Code of 1986, as amended (the "Code"), are
either a parent or subsidiary of the Company or AON, direct or indirect.
Notwithstanding the foregoing, Executive shall be permitted to make wholly
passive investments in any publicly-held Competitive Businesses, provided that
his direct and indirect ownership shall not exceed 1% of the outstanding voting
capital stock of any publicly-held Competitive Business.
(c) The Company and the Executive also agree that during the Employment
Term, Executive shall continue to serve as a director on the Board. In the
event of any termination of Executive's employment, Executive agrees to resign
from the Board if requested to do so by the Board.
2. Term of Employment. Executive's employment hereunder shall commence
on November 1, 1996 (the "Commencement Date") and continue until terminated in
accordance with the terms hereof (the "Employment Term").
3. Principal Location. The principal location at which Executive will
perform his duties will be the Company's principal offices, currently located in
Dulles, Virginia. Executive acknowledges that frequent and substantial travel
away from such offices will be required for the performance of his duties
hereunder.
4. Compensation. In consideration for Executive's services under this
Agreement during the Employment Term, Executive will be paid (i) a salary at an
annual rate of $500,000, subject to increase by the Board or the Compensation
Committee thereof, in its sole discretion (the "Base Salary") and (ii) a bonus
in such amount, if any, as the Board or the Compensation Committee thereof may
determine annually in its discretion, up to an amount equal to Executive's Base
Salary (the "Annual Bonus"). Executive's Base Salary shall be paid in periodic
installments at such times as salaries are generally paid to other senior
executives of the Company. Executive's Base Salary and Annual Bonus, if any,
shall be subject to required and voluntary withholding and deductions.
5. Benefits and Reimbursement of Expenses. During the Employment Term,
Executive shall be entitled to the following benefits and payments.
(a) Vacation. Executive shall be entitled to vacation commensurate with
senior executives of the Company.
(b) Employee Benefit Plans and Other Benefits. Executive shall also be
entitled to participate in such employee benefit plans which the Company
provides or may establish from time to time for the benefit of its senior
executives generally, subject to the terms of each such plan and subject to the
right of the Company to modify, revise or eliminate benefit plans from time to
time in its sole discretion.
(c) Reimbursement of Expenses. Executive shall be entitled to
reimbursement for all ordinary and reasonable out-of-pocket business expenses
which are reasonably incurred by him in furtherance of the Company's business,
in accordance with the policies adopted from time to time by the Company.
Executive will comply with the Company's travel policies as in effect from time
to time. If Executive reasonably determines that the easiest and safest method
to travel for AON business is to use his private aircraft, then the Company will
reimburse Executive $800 per flight hour and up to $250 per day for a co-pilot.
The Company will have no other obligation with respect to such flights,
Executive's private aircraft or use thereof.
(d) Housing and Relocation. For a period of up to two years, the Company
shall rent appropriate accommodations for Executive's use near the Company's
Dulles, Virginia headquarters for a monthly amount not to exceed $5,000. In
addition, the Company shall pay the reasonable expenses of relocating
Executive's family to the Dulles, Virginia area, including travel and moving
expenses, in accordance with the Company's executive relocation policy. The
Company will also pay Executive a tax gross up for all relocation expenses
incurred and reimbursed by the Company during the first two years of employment.
At any time while an employee of the Company, but not later than the second
anniversary of the Commencement Date, Executive may require the Company to
acquire, either directly or through a third party, Executive's current residence
at 148-152 Music Mountain Road, Falls Village, Connecticut 06031 at the fair
market value thereof as determined by an independent appraiser chosen by the
Company and reasonably acceptable to Executive.
6. Stock Options. A stock option to purchase an aggregate of 400,000
shares of the Company's common stock, $.01 par value (the "Common Stock"), with
an initial exercise price of $24.625 per share, has been granted to the
Executive in anticipation of and subject to his employment pursuant to this
Agreement. The terms and conditions of such option are set forth in the
Nonqualified Stock Option Agreement attached hereto as Exhibit C-1. In
addition, the Company shall promptly after the date hereof grant to Executive a
stock option to purchase an aggregate of 100,000 shares of Common Stock, with an
initial exercise price of $70 per share, subject to the terms and conditions set
forth in the Nonqualified Stock Option Agreement attached hereto as Exhibit C-2.
7. Termination upon Death or Disability. (a) Executive's employment by
the Company shall terminate upon his death, or upon the Company's written notice
if, by virtue of Disability, Executive is unable to perform his duties
hereunder. "Disability" shall mean permanent and total disability as defined in
Section 22(e)(3) of the Code.
(b) The Termination Date in the event of death shall be the date of death
and in the event of Disability shall be the date of the Company's written
notice.
(c) In the event of a termination of employment as a result of Executive's
death or Disability, the Company shall have no further obligations under this
Agreement except as provided in Paragraph 11 below and the stock option
agreements referred to in Paragraph 6 above.
8. Termination by the Executive. (a) Executive's employment may be
terminated by him, by giving a Notice of Termination, at any time by written
notice of thirty (30) days to the Company. Upon any such termination, the
Company may elect to relieve Executive of his duties, responsibilities and
authority hereunder during such thirty (30) day period, which shall not
constitute a termination for Good Reason.
(b) Executive's employment may also be terminated by him, by giving a
Notice of Termination, at any time for a "Good Reason" (as defined below),
provided such notice is given within ninety (90) days of the event or actions
constituting Good Reason and sets forth in reasonable detail the facts and
circumstances claimed to provide a basis for the termination, and provided,
further, the Company shall not have taken actions within thirty (30) days of
such Notice of Termination such that the circumstances constituting a Good
Reason have ceased. The Termination Date in the event of a termination under
this Paragraph 8 shall be the date set forth in the Notice of Termination, but
in any event not later than thirty (30) days after the date such notice is
given.
(c) As used herein, a "Good Reason" shall mean any of the following:
(i) a change in the location of the principal offices of AON to a location
outside Northern Virginia, without the consent of Executive;
(ii) failure to be nominated by the Board for election to the Board at any
time such nominations are made, failure of the Board to appoint Executive
as a member of the Office of the Chairman of the Company, or removal from
the Board, the Office of the Chairman of the Company, or as the President
and Chief Executive Officer of AON, provided that such failure or removal
is not in connection with a termination of Executive's employment hereunder
by the Company;
(iii) a material adverse change by the Company in Executive's duties,
authority, responsibilities or reporting relationship as President and
Chief Executive Officer of AON (including a change which results in
Executive no longer directly reporting to the Chief Executive Officer of
the Company) which causes his position with the Company to become of less
responsibility or authority than his position as of immediately following
the Commencement Date, provided that such change is not in connection with
a termination of Executive's employment hereunder by the Company;
(iv) the appointment of an individual other than Executive to serve as
President or Chief Operating Officer of the Company;
(v) a reduction in Executive's base compensation;
(vi) a material breach by the Company of a material provision of this
Agreement which has not been cured within thirty (30) days after written
notice thereof by Executive; or
(vii) failure to obtain the assumption, either explicitly or by operation
of law, of this Agreement by any successor to the Company.
9. Termination by the Company. (a) Executive's employment may be
terminated at any time by the Company (i) with Cause by a Notice of Termination
to Executive, effective immediately unless otherwise stated in such notice,
which date shall be the Termination Date therefor; provided, however, that such
termination must be approved or ratified by the affirmative vote of a majority
of the members of the Company's Board of Directors (excluding Executive) and
after giving Executive reasonable advance notice and an opportunity for
Executive to be heard before the Board, (ii) without Cause at any time, by a
Notice of Termination to Executive, effective immediately unless otherwise
stated in such notice, which date shall be the Termination Date therefor, or
(iii) for Disability in accordance with Paragraph 7.
(b) For purposes of this Agreement, the Company shall have "Cause" to
terminate Executive's employment hereunder in the event of Executive's (i)
conviction of a felony involving moral turpitude, (ii) willful and continued
failure to substantially perform his required duties under this Agreement which
failure has not been cured within ten (10) days after written notice thereof by
the Company, provided, however, that the Company shall only be required to give
notice pursuant to this Section 9(b)(ii) one time during the term of this
Agreement, (iii) intentional or repeated violation of the Confidentiality
Agreement which has not been cured within ten (10) days after written notice
thereof by the Company or (iv) intentional or repeated improper conduct
substantially prejudicial to the business of the Company, AON or any of their
Affiliates.
10. Effect of Termination for other than Death or Disability. (a) In the
event Executive's employment hereunder is terminated by Executive for a Good
Reason or by the Company other than for either Cause or Disability, Executive
shall, effective as of the Termination Date, become a consultant to the Company
for a term of two (2) years, subject to the terms and conditions set forth in
the Consulting Agreement (the "Consulting Agreement") attached as Exhibit A to
the Confidentiality Agreement.
(b) In the event the Company shall terminate Executive's employment for
Cause, or Executive shall terminate his employment for other than a Good Reason,
then Executive shall be entitled as of the Termination Date to no compensation
under this Agreement, except as provided in Paragraph 11. If the Company shall
terminate Executive's employment for Cause or Executive shall terminate his
employment for other than a Good Reason, then Executive shall be subject to the
terms and conditions set forth in the Consulting Agreement, unless in accordance
with the notice provisions thereof, the Company in its sole discretion shall
have elected to terminate such agreement.
11. Accrued Compensation. In the event of any termination of Executive as
an employee for any reason, Executive (or his estate) shall be paid such portion
of Executive's Base Salary as has accrued by virtue of his service during the
period prior to termination and has not yet been paid, together with any amounts
for expense reimbursement and similar items which have been properly incurred in
accordance with the provisions hereof prior to termination and have not yet been
paid.
12. Confidential Information/Noncompetition/Proprietary Rights. Executive
shall enter into the Confidentiality Agreement as of the date hereof.
13. General.
(a) Notices. All notices and other communications hereunder shall be in
writing, shall be addressed to the receiving party's address set forth below or
to such other address as a party may designate by notice hereunder, and shall be
either (i) delivered by hand, (ii) made by telecopy, (iii) sent by overnight
courier, or (iv) sent by certified mail, return receipt requested, postage
prepaid.
If to the Company: America Online, Inc.
22000 AOL Way
Dulles, Virginia 20166-9323
Attn: General Counsel
With a copy to: Kenneth J. Novack, Esq.
Mintz, Levin, Cohn, Ferris,
Glovsky and Popeo, P.C.
One Financial Center
Boston, MA 02111
If to Executive: Robert W. Pittman
148-152 Music Mountain Road
Falls Village, CT 06031
With a copy to: Robert A. Kindler, Esq.
Cravath, Swaine & Moore
825 Eighth Avenue
New York, New York 10019
All notices and other communications hereunder shall be deemed to have been
given either (i) if by hand, at the time of the delivery thereof to the
receiving party at the address of such party set forth above, (ii) if made by
telecopy, at the time that receipt thereof has been acknowledged by electronic
confirmation or otherwise, (iii) if sent by overnight courier, on the next
business day following the day such notice is delivered to the courier service,
or (iv) if sent by certified mail, on the fifth business day following the day
such mailing is made.
(b) Entire Agreement. This Agreement and the Exhibits hereto embody the
entire agreement and understanding between the parties hereto with respect to
the subject matter hereof and supersede all prior oral or written agreements and
understandings relating to the subject matter hereof. No statement,
representation, warranty, covenant or agreement of any kind not expressly set
forth in this Agreement or the Exhibits hereto shall affect, or be used to
interpret, change or restrict, the express terms and provisions of this
Agreement.
(c) Modifications and Amendments. The terms and provisions of this
Agreement may be modified or amended only by written agreement executed by the
parties hereto.
(d) Waivers and Consents. The terms and provisions of this Agreement may
be waived, or consent for the departure therefrom granted, only by written
document executed by the party entitled to the benefits of such terms or
provisions. No such waiver or consent shall be deemed to be or shall constitute
a waiver or consent with respect to any other terms or provisions of this
Agreement, whether or not similar. Each such waiver or consent shall be
effective only in the specific instance and for the purpose for which it was
given, and shall not constitute a continuing waiver or consent.
(e) Assignment. This Agreement shall inure to the benefit of and be
enforceable by Executive's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If
Executive should die while any amount would be payable to Executive hereunder if
Executive had continued to live, all such amounts, unless otherwise provided
herein, shall be paid in accordance with the terms of this Agreement to
Executive's devisee, legatee or other designee or, if there be no such designee,
to Executive's estate. Neither this Agreement nor any right arising hereunder
may be assigned or pledged by Executive.
(f) Governing Law; Consent to Jurisdiction. This Agreement and the rights
and obligations of the parties hereunder shall be construed in accordance with
and governed by the law of the Commonwealth of Virginia, without giving effect
to the conflict of law principles thereof. Any legal action or proceeding with
respect to this Agreement shall be brought in the courts of the Commonwealth of
Virginia or of the United States of America for the District of Virginia. By
execution and delivery of this Agreement, each of the parties hereto accepts for
such party and in respect of such party's property, generally and
unconditionally, the jurisdiction of the aforesaid courts. Each of the parties
hereto irrevocably consents to the service of process of any of the
aforementioned courts in any such action or proceeding by the mailing of copies
thereof by certified mail, postage prepaid, to the party at its address set
forth in Paragraph 13(a) hereof.
(g) Severability. The parties intend this Agreement to be enforced as
written. However, if any portion or provision of this Agreement shall to any
extent be declared illegal or unenforceable by a duly authorized court having
jurisdiction, then the remainder of this Agreement, or the application of such
portion or provision in circumstances other than those as to which it is so
declared illegal or unenforceable, shall not be affected thereby, and each
portion and provision of this Agreement shall be valid and enforceable to the
fullest extent permitted by law.
(h) Headings and Captions. The headings and captions of the various
subdivisions of this Agreement are for convenience of reference only and shall
in no way modify, or affect the meaning or construction of any of the terms or
provisions hereof.
(i) No Waiver of Rights, Powers and Remedies. No failure or delay by a
party hereto in exercising any right, power or remedy under this Agreement or
the Exhibits, and no course of dealing between the parties hereto, shall operate
as a waiver of any such right, power or remedy of the party. No single or
partial exercise of any right, power or remedy under this Agreement or any of
the Exhibits by a party hereto, nor any abandonment or discontinuance of steps
to enforce any such right, power or remedy, shall preclude such party from any
other or further exercise thereof or the exercise of any other right, power or
remedy hereunder. The election of any remedy by a party hereto shall not
constitute a waiver of the right of such party to pursue other available
remedies. No notice to or demand on a party not expressly required under this
Agreement or any of the Exhibits shall entitle the party receiving such notice
or demand to any other or further notice or demand in similar or other
circumstances or constitute a waiver of the rights of the party giving such
notice or demand to any other or further action in any circumstances without
such notice or demand.
(j) Counterparts. This Agreement may be executed in one or more
counterparts, and by different parties hereto on separate counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
14. No Conflicting Agreements. Except as set forth on Schedule A [we will
need to review any such agreements to confirm this proviso is appropriate],
Executive represents and warrants to the Company that he is not a party to or
bound by any agreement or obligation which would limit or prohibit his ability
to enter into and perform his obligations under this Agreement and the Exhibits
hereto or which would subject the Company to any liability.
IN WITNESS WHEREOF, the parties have executed this Employment Agreement as
of the day and year first above written.
AMERICA ONLINE, INC.
By:/S/STEPHEN M. CASE
Stephen M. Case
Chairman & Chief Executive Officer
/S/ROBERT W. PITTMAN
Robert W. Pittman
Confidentiality/Non-Competition/Proprietary Rights Agreement
In consideration for the agreement of America Online, Inc., and/or its
subsidiaries or affiliates (collectively "America Online") to employ me and as a
condition to my continued employment by America Online, I hereby agree as
follows:
1. I acknowledge that I may be furnished or may otherwise receive or have
access to information which relates to America Online's past, present or future
products, software, research, development, improvements, inventions, processes,
techniques, designs or other technical data, or regarding administrative,
management, financial, marketing or manufacturing activities of America Online
or of a third party which provided proprietary information to America Online on
a confidential basis. All such information, shall be considered by America
Online as proprietary and confidential ("Proprietary Information").
2. Both during and after the term of this Agreement, I agree to preserve and
protect the confidentiality of the Proprietary Information and all physical
forms thereof, whether disclosed to me before this Agreement is signed or
afterward. In addition, I shall not (i) disclose or disseminate the Proprietary
Information to any third party, including employees of America Online without a
need to know, (ii) remove Proprietary Information from America Online's
premises, or (iii) use Proprietary Information for my own benefit or for the
benefit of any third party.
3. The foregoing obligations shall not apply to any information which I can
establish to have (i) become publicly known without breach of this Agreement by
me; (ii) been given to me by a third party who is not obligated to maintain
confidentiality; or (iii) been developed by me prior to the date of this
Agreement is signed, as established by documentary evidence. If I receive
information with uncertain confidentiality, I agree to treat such information as
Proprietary Information until I have verification from management that such
information is neither confidential nor proprietary.
4. All Proprietary Information used or generated during the course of working
for America Online is the property of America Online except for such information
that was developed by me and was published or otherwise publicly disseminated
prior to the date hereof. I agree to deliver to America Online all documents
and other tangibles (including diskettes and other storage media) containing
Proprietary Information upon termination of my employment with America Online or
otherwise within (3) days after America Online so requests.
5. I acknowledge and agree that all writings or works of authorship,
including, without limitation, program codes or documentation, produced or
authored by me in the course of performing services for America Online, together
with any copyrights on those writings or works of authorship, are works made for
hire and the property of America Online. To the extent that any such writings
or works of authorship may not, by operation of law, be works made for hire,
this Agreement shall constitute an irrevocable assignment by me to America
Online of the ownership of, and all rights of copyright in such items, and
America Online shall have the right to obtain and hold in its own name, all
rights of copyright, copyright registrations and similar protections which may
be available in the works. I agree to give America Online or its assignees all
assistance reasonably required to perfect such rights.
6. I shall and hereby do assign to America Online my entire right, title and
interest in any invention, technique, process, device, discovery, improvement or
know-how patentable or not, hereafter made or conceived solely or jointly by me
while working for America Online, which relates in any manner to the actual or
anticipated business or research and development of America Online or is
suggested by or results from any task assigned to me or work performed by me for
or on behalf of America Online or for which America Online equipment, supplies,
facilities, information or materials are used. I shall disclose any such
invention, technique, process, device, discovery, improvement or know how
promptly, and execute a specific assignment of title to America Online, and do
anything else reasonably necessary to enable America Online to secure patent,
trade secret or any other proprietary rights in the United States or foreign
countries.
7. Any inventions I have made or conceived before my employment with America
Online are listed and described below. These items are excluded from this
Agreement.
8. I understand that I may continue to work on, and retain rights to, projects
of my own interest outside of America Online provided that (i) they do not fall
under paragraphs 5 or 6 above; (ii) they do not interfere in any way with my
time at work for America Online; and (iii) should any products with potential
commercial application result from any such project, America Online shall be
given the right of right refusal to purchase and market such products.
9. I shall not submit any article for publication that contains any
information relating to the business of the Company or that identifies me as an
employee or representative of the Company without receiving the prior written
consent of an officer of America Online. I will not deliver any public speech
that contains any information relating to the business of the company or that
identifies me as an employee or representative of the Company without receiving
the prior written consent of an officer of America Online if such speech would
disclose material nonpublic information concerning the Company or would
otherwise be adverse to the interests of the Company.
10. I represent and warrant that: (i) I am able to enter into this Agreement
and that such ability is not limited or restricted by any agreements or
understandings between me and other persons or companies; (ii) I will not
disclose to America Online or its clients, or induce America online to use or
disclose, any proprietary information or material belonging to others, except
with the written permission of the owner of such information or material; and
(iii) any information, materials or products I develop for, or any advice I
provide to, America Online shall not rely or in any way be based upon
confidential or proprietary information or trade secrets obtained or derived by
me from sources other than America Online. I hereby agree to indemnify and hold
America Online harmless from and against any and all damages, claims, costs and
expenses, including reasonable attorneys' fees, based on or arising, directly or
indirectly, from the breach of any agreement or understanding between me and
another person or company including, but not limited to, liability arising from
any confidential or proprietary information or trade secrets I have obtained
from sources other than America Online.
11. I will fully comply, and do all things necessary for America Online to
fully comply, with all appropriate U.S. Government laws and regulations, and
with the provisions of contracts between America Online and the agencies of the
U.S. Government or contractors, which relate to patent rights, technical data,
or to the safeguarding of information and material.
12. While working for America Online and for a period of one year after any
termination of my employment with America Online, I will not attempt, either
directly or indirectly, to induce or attempt to influence any employee of
America Online to leave America Online's employ.
13. While working for America Online and for a period of one year after any
termination of my employment with America Online, I will not solicit business
from any of America Online's customers, either directly or indirectly, for the
benefit of anyone other than America Online or participate or assist in any way
in the solicitation of business from any such customers as an employee of or
consultant to another entity, unless the business being solicited is not
competitive with the services provided by America Online to such customers.
14. I acknowledge and agree that:
a) (i) my contractual obligations under paragraphs 2, 10, 11, 13 and 14
have a unique and very substantial value to America Online, (ii) I have
sufficient assets and other skills to provide a reasonable livelihood for myself
while such paragraphs are in force, and (iii) I am subject to immediate
dismissal by America Online for any breach of those provisions and that such
dismissal shall not relieve me from my continuing obligations under this
Agreement or from the imposition by a court of any judicial remedies, such as
money damages or equitable enforcement of those provisions.
b) the terms and provisions of this Agreement are applicable to all
information and materials developed for, or any advice provided to, America
Online prior to the signing of this Agreement; and
(c) the termination of my employment with America Online, for any reason,
shall not relieve me from complying with the undertakings and agreements
contained herein, which call for performance prior or subsequent to the
termination date, including, but not limited to those undertakings and
agreements set forth in paragraphs 2, 4, 11, 12 and 13.
15. No act or failure to act by America Online will waive any right contained
herein. any waiver by America Online must be in writing and signed by an
officer of America Online to be effective.
16. This Agreement shall be binding on my heirs, executors and administrators
and on successors and assigns of America Online; however, I shall not have the
right to assign this Agreement.
17. In the event that any provision of this Agreement conflicts with the law
under which this Agreement is to be construed or if any such provision is held
invalid by a court with jurisdiction over the parties to this Agreement, such
provision shall be deemed to be restated to reflect as nearly as possible the
original intentions of the parties in accordance with applicable force and
effect.
18. This Agreement shall be governed by the laws of the Commonwealth of
Virginia as such laws are applied to contracts executed by Commonwealth of
Virginia residents and performed entirely within the Commonwealth of Virginia.
19. This document constitutes my entire Agreement with America Online with
respect to its subject matter, superseding any prior negotiations and
agreements. This Agreement may not be changed in any respect except by a
written agreement signed by both myself and an officer of America Online.
20. All remedies provided herein are cumulative and in addition to all other
remedies which may be available at law or in equity.
Witness Signature /S/ROBERT W. PITTMAN
Date Print Name Robert W. Pittman
Date
For America Online, Inc.
Signature /S/STEPHEN M. CASE
Title Chairman and Chief Executive Officer
Date
Prior inventions to be excluded from this Agreement are listed and briefly
described below:
[None Listed]
Addendum to
Confidentiality/Non-Competition/Proprietary Rights Agreement
dated as of October 29, 1996 between
America Online, Inc. and Robert W. Pittman
The following provisions are hereby added to, incorporated in and made a
part of the above-referenced Confidentiality/Non-Competition/Proprietary Rights
Agreement (the "Agreement") as if originally set forth therein in their entirety
(capitalized terms used and not otherwise defined in this Addendum have the
meanings given to them in the Agreement):
23. I hereby acknowledge that my employment with America Online is on an "at
will" basis. In the event that I am no longer employed by America Online as a
result of (i) the termination of my employment without "Cause" by America Online
pursuant to Section 9(a)(ii) of the Employment Agreement dated as of October 29,
1996 between me and America Online (the "Employment Agreement") or (ii) the
termination of my employment by me for "Good Reason" pursuant to Section 8(b) of
the Employment Agreement, I will be retained by America Online as an independent
consultant in accordance with the terms of the Consulting Agreement attached
hereto as Exhibit A. Further, in the event that I am no longer employed by
America Online as a result of my termination of employment pursuant to Section
8(a) of the Employment Agreement or if I am terminated for "Cause" by America
Online pursuant to Section 9(a)(i) of the Employment Agreement, I agree to be
retained by America Online as an independent consultant in accordance with the
terms of the Consulting Agreement attached hereto as Exhibit A, which Consulting
Agreement shall automatically become effective simultaneously with the
termination of my employment, unless America Online notifies me in writing
within thirty (30) days following such termination of employment that it elects
not to have the Consulting Agreement become effective and not to pay and provide
the Non-Compete Consideration (as defined in Section 24 below), in which event:
(i) the Consulting Agreement shall not become effective and shall cease and
terminate and be of no force or effect, (ii) the Non-Compete Consideration shall
not be paid or provided to me, and (iii) I shall not be subject to or bound by
the restrictive covenants contained in Sections 24 and 25 below following such
termination of employment.
24. During the period (the "Non-Compete Period") beginning with the start of
the term of my employment by America Online and ending at midnight on the second
anniversary of the effective date of the termination of my employment with
America Online, I will not anywhere in the United States or in any other country
in which America Online (directly or indirectly through any entity in which
America Online has a material ownership interest, other than solely for
investment purposes) or a licensee of America Online, in each case, is then
operating or preparing to operate, directly or indirectly own, manage, operate,
join, control, be employed by or participate in the ownership, management,
operation or control of, or be connected in any manner with, any business of the
type and character of the business then engaged in by America Online, or that is
then competitive with the business then engaged in by America Online (excluding
any company or business whose competitive business activities are wholly
incidental to the business of such company or business)(collectively, a
"Competitive Business"), whether such engagement shall be as an employer,
officer, director, owner, employee, partner, advisor, consultant, shareholder,
agent or other participant in any Competitive Business (or in any similar
capacity in which I may derive an economic benefit from a Competitive Business),
provided that during the period following the termination of my employment with
America Online through and including the expiration of the Non-Compete Period,
America Online shall in accordance with the terms of the Consulting Agreement:
(A) pay or cause to be paid to me an amount equal to the same base salary and
annual bonus, and provide the same benefits, as paid and provided to me by
America Online at the time of the termination of my employment with America
Online on the same terms, including timing of payments and otherwise, as said
amounts were paid and benefits provided to me during my employment with America
Online, provided that if America Online's benefit plans are modified generally
for current executive employees, America Online may elect to have such
modifications apply to me and (B) if my employment was terminated by America
Online without "Cause" pursuant to Section 9(a)(ii) of the Employment Agreement
or terminated by me for "Good Reason" pursuant to Section 8(b) of the Employment
Agreement, continue the vesting of my stock options on the same basis as such
stock options vested while I was employed by America Online (collectively, the
"Non-Compete Consideration") except as otherwise provided in the Stock Option
Agreements. Notwithstanding the foregoing, during the period of my employment
with America Online, I shall be permitted to make wholly passive investments in
any publicly-held Competitive Businesses provided that I shall not have a direct
ownership interest or knowingly have an indirect ownership interest of more than
1% of the outstanding voting capital stock of any publicly-held Competitive
Business. Further, during the period following the termination of my employment
with America Online through and including the expiration of the Non-Compete
Period, I shall be permitted to make wholly passive investments in any
privately-held Competitive Business provided that I shall not have a direct
or knowingly have an indirect ownership interest of more than 5% of the
outstanding voting capital stock of any privately-held Competitive Business and
provided further that I shall have no influence or control (either directly or
through control or influence over any investment vehicle investing in any such
privately-held business) over the business or management of such privately-held
business (including, but not limited to, influence or control as an employee,
consultant or director) other than the ability to vote securities owned. For
purposes of this Agreement, any business which advertises, markets or sells its
products through the Internet or other electronical mailing systems shall not,
solely by virtue of the use of such systems to advertise, market or sell its
products, be deemed a Competitive Business.
I understand and acknowledge that, as consideration for my agreement not to
compete during the Non-Compete Period after I am no longer employed by America
Online, America Online shall pay or cause to be paid and provide to me the Non-
Compete Consideration, and I acknowledge that upon the expiration of the
Consulting Agreement or in the event America Online elects not to have the
Consulting Agreement become effective in those instances provided in Section 23
above, my America Online stock options shall thereafter cease to vest in
accordance with the 1992 Employee, Director and Consultant Stock Option Plan and
the stock option agreements. In any event, my America Online stock options
shall continue to vest during the term of the Consulting Agreement only if my
employment was terminated by America Online without "Cause" pursuant to Section
9(a)(ii) of the Employment Agreement or terminated by me for "Good Reason"
pursuant to Section 8(b) of the Employment Agreement. I further understand and
acknowledge that, should I breach any of my obligations under this Section 24,
America Online will be entitled, in addition to any other damages and remedies,
to the return of all Non-Compete Consideration previously paid to me and I will
not be entitled to any further Non-Compete Consideration.
25. I agree that any breach or threatened breach of this Agreement by me could
cause irreparable damage and that in the event of such breach America Online
shall have, in addition to any and all remedies of law, the right to an
injunction, specific performance or other equitable relief to prevent the
violation of my obligations hereunder without the necessity of any proof of
actual damages or the posting of a bond or other security.
26. Section 15 of the Agreement is supplemented by adding Sections 23, 24, and
25 to, and deleting Section 10 from, the list of Sections of this Agreement set
forth in clauses (a)(i) and (c) of such Section 15.
IN WITNESS WHEREOF, the parties have executed this Addendum as of the
29th day of October, 1996.
/S/ROBERT W. PITTMAN
Witness Signature
Robert W. Pittman
Print Name
For America Online, Inc.
/S/STEPHEN M. CASE
Signature
Stephen M. Case
Print Name
Chairman and Chief Executive Officer
Title
Exhibit A
CONSULTING AGREEMENT
dated as of October 29, 1996
between AMERICA ONLINE, INC.,
a Delaware corporation (the "Company"),
and Robert W. Pittman (the "Consultant").
The Consultant and the Company have entered into an employment agreement
(the "Employment Agreement") and a Confidentiality/Non-Competition/Proprietary
Rights Agreement (the "Confidentiality Agreement") in connection with the
Consultant becoming an employee of the Company. In addition, the Consultant has
been granted by the Company options to purchase shares of common stock, $.01 par
value, of the Company, pursuant to stock option agreements between the
Consultant and the Company (the "Stock Option Agreements") under the Company's
1992 Employee, Director and Consultant Stock Option Plan. All capitalized terms
used but not defined herein shall have the meanings ascribed thereto in the
Confidentiality Agreement.
The Company and the Consultant agree (I) in the event the Consultant's
employment is terminated by the Company without "Cause" pursuant to Section
9(a)(ii) of the Employment Agreement or the Consultant's employment is
terminated by the Consultant for "Good Reason" pursuant to Section 8(b) of the
Employment Agreement, or (ii) at the Company's sole election, in the event the
Consultant's employment terminates as a result of the Consultant's termination
of employment pursuant to either Section 8(a) or 9(a)(i) of the Employment
Agreement, then from and after the effective date of the Consultant's
termination of employment (the "Termination Date"), the Consultant shall be
retained as a consultant to the Company, and the Consultant shall serve in such
capacity.
NOW, THEREFORE, in consideration of the premises set forth above and the
mutual covenants and agreements contained herein and for other good and valuable
consideration, the parties, intending to be legally bound, agree as follows:
1. Consulting Term. Subject to the provisions of Section 23 of the
Confidentiality Agreement, the Company agrees to engage the Consultant as a
consultant, and the Consultant agrees to be engaged as a consultant for the
Company, in accordance with the terms and provisions of this Agreement, for the
period commencing on the Termination Date and ending on the second anniversary
of the Termination Date (the "Consulting Term"), as follows:
(a) the nature of the consulting services to be performed by the
Consultant hereunder shall be such advisory and consultative services, in
connection with the business of the Company, as are requested of him from time
to time by the executive employees of the Company, subject to the following:
(i) during the consulting Term, the Consultant will, as requested by
the Company, render such services for up to five (5) days per annum, such
services to be rendered by the Consultant at such location(s) and time(s) as are
reasonably requested by the Company and agreed to by the Consultant;
(ii) for the purposes of computing the amount of services rendered by
the Consultant, there shall be counted (A) the actual time spent by the
Consultant at the Company's place of business at the Company's request, (B) the
actual time spent by the Consultant in telephone consultation with, or on behalf
of, the Company and (C) the actual time spent by the Consultant representing the
Company at any location as the Company shall have reasonable requested, and one
"day" of consulting services shall consist of one eight-hour period;
(iii) notwithstanding the foregoing, the Consultant will not be
required to render services during any period of illness which prevents him from
rendering such services;
(iv) the Consultant agrees to perform the consulting services assigned
to him by the Company hereunder to the best of his abilities; and
(v) the Consultant agrees to be bound by the Confidentiality
Agreement as if he remained an employee of the Company provided that Section
8(iii) of the Confidentiality Agreement shall not apply.
(b) notwithstanding the provisions hereof, the Company understands that
the Consultant may be an employee of other parties during the Consulting Term
and that any consulting services to be rendered by the Consultant hereunder
shall be subject to his reasonable availability from such employment;
(c) anything to the contrary contained herein notwithstanding, the Company
may terminate this Agreement at any time during the Consulting Term immediately
upon delivery of written notice to the Consultant provided that as and to the
extent provided in paragraph (d) below: (I) the Company shall remain obligated
to continue to pay and provide to the Consultant payments and benefits and (ii)
in the event the Consultant's employment was terminated without "Cause" by the
Company or by the Consultant for "Good Reason", the Consultant's stock options
shall continue to vest;
(d) as consideration for the Consultant's services rendered and for the
Consultant's other agreements hereunder, during the Consulting Term: (I) the
Company shall pay to the Consultant an amount equal to the same base salary and
annual bonus and provide to the Consultant the same benefits as paid and
provided to the Consultant by the Company at the time of termination of the
Consultant's employment, in each case on the same terms, including, timing of
payments and otherwise, as said amounts were paid and benefits provided during
the Consultant's employment with the Company provided that if the Company's
benefit plans are modified generally for current executive employees, the
Company may elect to have such modifications apply to the Consultant; and (ii)
in the event the Consultant's employment was terminated by the Company without
"Cause" pursuant to Section 9(a)(ii) of the Employment Agreement or terminated
by the Consultant for "Good Reason" pursuant to Section 8(b) of the Employment
Agreement, the stock options granted to the Consultant under the terms of the
Stock Option Agreements shall continue to vest during the Consulting Term on the
same basis as such stock options vested during the Consultant's employment with
the Company except as otherwise provided in the Stock Option Agreements; and
(e) during the Consulting Term, the Company will reimburse the Consultant
for all reasonable, documented expenses incurred in connection with the
performance of his services hereunder or at the Company's request.
2. Consent and Waiver. The waiver or consent by the Company of any
breach by the Consultant of any provision of this Agreement shall not operate as
or be construed as a waiver or consent of any subsequent breach thereof.
3. Amendments and Modifications. This Agreement may be amended,
modified, or terminated only by a written instrument executed by the parties
hereto.
4. Binding Effect and Assignment. This Agreement and all of the
provisions hereof shall be binding upon and inure to the benefit of the Company
and the Consultant and their respective successors and assigns; provided,
however, that neither this Agreement nor any rights, benefits or obligations
hereunder may be assigned by the Consultant. Anything contained herein to the
contrary notwithstanding, this Agreement shall be of no force or effect, and
neither party shall have any obligations hereunder, in the event this Agreement
does not become effective in accordance with Section 23 of the Confidentiality
Agreement.
5. Governing Law; Consent to Jurisdiction. This Agreement and the rights
and obligations of the parties hereunder shall be construed in accordance with
and governed by the law of the Commonwealth of Virginia, without giving effect
to the conflict of law principles thereof. Any legal action or proceeding with
respect to this Agreement shall be brought in the courts of the Commonwealth of
Virginia or of the United States of America for the District of Virginia. By
execution and delivery of this Agreement, each of the parties hereto accepts for
such party and in respect of such party's property, generally and
unconditionally, the jurisdiction of the aforesaid courts. Each of the parties
hereto irrevocably consents to the service of process of any of the
aforementioned courts in any such action or proceeding by the mailing of copies
thereof by certified mail, postage prepaid, to the party at its address set
forth in Paragraph 7 hereof.
6. Effect of Headings. The section and other headings herein are for
convenience only and shall not affect the construction or interpretation of this
Agreement.
7. Notices. All notices and other communications pursuant to this
Agreement shall be in writing and deemed to be sufficient if contained in a
written instrument and shall be deemed given if delivered personally,
telecopied, sent by nationally-recognized overnight courier or mailed by
registered or certified mail (return receipt requested), postage prepaid, to the
parties at the following address:
(i) if to the Company, to:
America Online, Inc.
22000 AOL Way
Dulles, VA 20166-9323
Attention: General Counsel
Telecopier: (703) 265-2208; and
(ii) if to the Consultant. to:
the address for notice
set forth on the last page hereof;
or to such other address as the party to whom notice is to be given may have
furnished to the other parties hereto in writing in accordance herewith. Any
such notice or communication shall be deemed to have been received (A) in the
case of personal delivery or delivery by telecopier, on the date of such
delivery, (B) in the case of nationally-recognized overnight courier, on the
next business day after the date when sent and (C) in the case of mailing, on
the third business day following that on which the piece of mail containing such
communication is posted.
8. Counterparts. This Agreement may be executed in one or more
counterparts, and by the parties hereto in separate counterparts, each of which
shall be an original, but all of which together shall constitute one and the
same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Consulting
Agreement to be executed and delivered as of the date first above written.
AMERICA ONLINE, INC.
By:/S/STEPHEN M. CASE
Name: Stephen M. Case
Title: Chairman and CEO
CONSULTANT
/S/ROBERT W. PITTMAN
Signature
Robert W. Pittman
Print Name
EXHIBIT 21.1
SUBSIDIARIES OF AMERICA ONLINE, INC.
NAME JURISDICTION OF INCORPORATION
Redgate Communications Corporation Delaware
ANS Communications, Inc. Delaware
ANS France S.a.r.l. France
ANS Japan, Inc. Japan
ANS Communications Europel Ltd. England
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
The ImagiNation Network, Inc., d/b/a
WorldPlay Entertainment, Inc. Delaware
Digital City, Inc. Delaware
Digital Marketing Services, Inc. Delaware
Cyber Leasing Corp. Delaware
AOL Community, Inc. Delaware
Asylum, Inc., d/b/a Entertainment Asylum California
AOL America Online Limited (Ireland) Ireland
AOL (UK) Limited England
AOL Bertelsmann Online LP England
America Online France, S.a.r.l. France
AOL Bertelsmann Online France S.N.C. France
AOL America Online (Deutschland) GmbH Germany
AOL Bertelsmann Online GmbH & Co KG Germany
America Online Holding B.V. The Netherlands
AOL Bertelsmann Europa GmbH Switzerland
AOL Bertelsmann Online Verwaltungs GmbH Germany
AOL Bertelsmann Service Operations Limited Ireland
AOL Bertelsmann Online (UK Management) Limited England
America Online (Japan), Inc. Japan
AOL (Japan) Inc. Japan
AOL Canada Services Inc. Canada
Ubique, Ltd. Israel
Ubique, Inc. Delaware
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registrations Statements
(Form S-8) listed below of our report dated September 10, 1997, 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, 1997.
1) No. 33-46607 8) No. 33-91050 15) No. 333-21921
2) No. 33-48447 9) No. 33-94000 16) No. 333-22027
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
/S/ERNST & YOUNG LLP
Vienna, Virginia
September 29, 1997
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, 1997, 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 26th day of September, 1997.
/S/FRANK J. CAUFIELD
Frank J. Caufield
<PAGE>
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, 1997, 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 26th day of September, 1997.
/S/ROBERT J. FRANKENBERG
Robert J. Frankenberg
<PAGE>
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, 1997, 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 26 th day of September, 1997.
/S/ALEXANDER M. HAIG, JR.
Alexander M. Haig, Jr.
<PAGE>
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, 1997, 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 26th day of September, 1997.
/S/JAMES V. KIMSEY
James V. Kimsey
<PAGE>
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, 1997, 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 26th day of September, 1997.
/S/WILLIAM N. MELTON
William N. Melton
<PAGE>
POWER OF ATTORNEY
I, Dr. Thomas Middelhoff, 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, 1997, 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 1st day of September, 1997.
/S/DR. THOMAS MIDDELHOFF
Dr. Thomas Middelhoff
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