As filed with the Securities and Exchange Commission on February 20, 1998
Registration No. 333-
SECURITIES AND EXCHANGE COMMISSION
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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 (703) 448-8700
(Address, including zip code, and telephone, including area code, of
registrant's principal executive offices)
Stephen M. Case
Chief Executive Officer
America Online, Inc.
22000 AOL Way
Dulles, Virginia 20166-9323
(703) 448-8700
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copy to:
Sheila A. Clark, Esquire
Vice President and
Deputy General Counsel
America Online, Inc.
22000 AOL Way
Dulles, Virginia 20166-9323
(703) 448-8700
Approximate date of commencement of proposed sale to public: As soon as
practicable after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box. [ ]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [ ]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the same
offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
<TABLE>
CALCULATION OF REGISTRATION FEE
Title of each class of Amount to Proposed Proposed Amount of
securities to be registered be maximum maximum registration
registered offering aggregate fee
price offering
per unit price
<S> <C> <C> <C> <C>
4% Convertible Subordinated
Notes due $350,000,000 100%(1)(2) $350,000,000(1) $103,250
November 15, 2002
Common Stock, par value $.01 3,352,895 -- -- -- (4)
per share(3) shares
Common Stock, par value $.01 48,279 $112.06(5) $ 5,410,145(5) $1,596
per share shares
Total -- -- $355,410,145 $104,846
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
in accordance with Rule 457(i) of the Securities Act of 1933.
(2) Exclusive of accrued interest and distributions, if any.
(3) Such shares of Common Stock are issuable upon conversion of the
Convertible Notes registered hereunder. Pursuant to Rule 416, this
Registration Statement also covers such shares as may be issued upon
conversion of the Convertible Notes as a result of anti-dilution adjustments.
(4) Pursuant to Rule 457(i) of the Securities Act of 1933, there is no
filing fee with respect to the shares of Common Stock issuable upon
conversion of the Notes because no additional consideration will be received
in connection with the exercise of the conversion privilege.
(5) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) of the Securities Act of 1933, based upon the average
of the high and low sale prices of the Common Stock as reported on the New
York Stock Exchange on February 18, 1998.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
PROSPECTUS
AMERICA ONLINE, INC.
$350,000,000
of 4% Convertible Subordinated Notes due November 15, 2002 and
the Shares of Common Stock Issuable upon Conversion thereof
and
48,279 Shares of Common Stock
This Prospectus relates to (i) the $350,000,000 principal amount of 4%
Convertible Subordinated Notes due November 15, 2002 (the "Notes") of America
Online, Inc., a Delaware corporation (the "Company" or "America Online"), held
by certain selling securityholders described herein (the "Note Selling
Securityholders"), and the shares of common stock, par value $.01 per share (the
"Common Stock"), of the Company issuable upon conversion of the Notes (the
"Conversion Shares") together with (ii) 48,279 shares of Common Stock unrelated
to the Notes (the "Resale Stock") held by certain selling securityholders
described herein (the "Stock Selling Securityholders," and together with the
Note Selling Securityholders, the "Selling Securityholders"). The Notes were
issued and sold on November 17, 1997 to the Initial Purchasers (as defined
herein) and were simultaneously sold by the Initial Purchasers in transactions
exempt from the registration requirements of the Securities Act of 1933, as
amended (the "Securities Act"), in the United States to persons reasonably
believed by the Initial Purchasers to be qualified institutional buyers as
defined in Rule 144A under the Securities Act, and outside the United States to
non-U.S. persons in offshore transactions in reliance on Regulation S under the
Securities Act.
The Notes, Conversion Shares and Resale Stock (collectively, the "Offered
Securities") may be offered and sold from time to time by the Selling
Securityholders pursuant to this Prospectus. The Offered Securities may be sold
by the Selling Securityholders from time to time directly to purchasers or
through agents, underwriters or dealers. See "Selling Securityholders" and "Plan
of Distribution." If required, the names of any such agents or underwriters
involved in the sale of the Offered Securities and the applicable agent's
commission, dealer's purchase price or underwriter's discount, if any, will be
set forth in an accompanying supplement to this Prospectus (the "Prospectus
Supplement"). The Selling Securityholders will receive all of the net proceeds
from the sale of the Offered Securities and will pay all underwriting discounts,
selling commissions and transfer taxes, if any, applicable to any such sale. The
Company is responsible for payment of all other expenses incident to the
registration of the Offered Securities. The Selling Securityholders and any
broker/dealers, agents or underwriters that participate in the distribution of
the Offered Securities may be deemed to be "underwriters" within the meaning of
the Securities Act, and any commission received by them and any profit on the
resale of the Offered Securities purchased by them may be deemed to be
underwriting commissions or discounts under the Securities Act. See "Plan of
Distribution" for a description of indemnification arrangements.
The Notes are convertible into shares of Common Stock of the Company at any
time prior to maturity, unless previously redeemed or repurchased, at a
conversion price of $104.3875 per share (equivalent to 9.5797 shares per $1,000
principal amount of Notes, subject to adjustment in certain events. The Common
Stock is quoted on the New York Stock Exchange ("NYSE") under the symbol AOL.
On February 13, 1998, the closing sale price of the Common Stock, as reported by
the NYSE, was $114.44 per share.
Interest on the Notes is payable semiannually on May 15 and November 15 of
each year, commencing on May 15, 1998. The Notes may be redeemed at the option
of the Company on or after November 15, 2000, in whole or in part at the
redemption prices set forth herein. See "Description of Notes--Optional
Redemption." The Notes are not entitled to any sinking fund.
In the event of a Change in Control (as defined in the Indenture pursuant
to which the Notes were issued), each holder of Notes may require the Company to
repurchase its Notes, in whole or in part, for cash or, at the Company's option,
Common Stock (valued at 95% of the average closing prices for the five trading
days immediately preceding and including the third trading day prior to the
repurchase date) at a repurchase price of 100% of the principal amount of Notes
to be repurchased, plus accrued interest to the repurchase date. See
"Description of Notes--Repurchase at Option of Holders Upon a Change in
Control."
The Notes are general, unsecured obligations subordinated in right of
payment to all existing and future Senior Debt (as defined herein) of the
Company and effectively subordinated in right of payment to all indebtedness and
other liabilities of the Company's subsidiaries. As of December 31, 1997, the
aggregate principal amount of outstanding Senior Debt of the Company (including
a credit facility) was approximately $572,510,000 and the aggregate amount of
indebtedness and other liabilities of the Company's subsidiaries was
approximately $88,738,000. See "Description of Notes." The Indenture does not
restrict the Company or its subsidiaries from incurring additional Senior Debt
or other indebtedness or liabilities.
THE NOTES AND COMMON STOCK OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 8 OF THIS PROSPECTUS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
No person is authorized in connection with any offering made hereby to give
any information or to make any representations other than as contained in this
Prospectus, and, if given or made, such information or representations must not
be relied upon as having been authorized by the Company. This Prospectus is not
an offer to sell, or a solicitation of an offer to buy, by any person in any
jurisdiction in which it is unlawful for such person to make such an offer or
solicitation. Neither the delivery of this Prospectus nor any sales made
hereunder shall under any circumstances create any implication that the
information contained herein is correct as of any time subsequent to the date
hereof.
The date of this Prospectus is , 1998.
AVAILABLE INFORMATION
The Company is subject to certain informational reporting requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports and other information with the Securities and
Exchange Commission (the "Commission"). These reports, proxy statements and
other information can be inspected and copied at the public reference facilities
maintained by he Commission at Room 1024 of the Commission's office at 450
Fifth Street, N.W., Judiciary Plaza, Washington, DC 20549, and at its regional
offices located at 7 World Trade Center, Suite 1300, New York, NY 10048 and
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, IL 60661. Copies
of such reports, proxy statements and other information can be obtained from the
Public Reference Section of the Commission at 450 Fifth Street, N.W., Judiciary
Plaza, Washington, DC 20549 at prescribed rates. The Commission also maintains
a Web site that contains reports, proxy and information statements and other
information regarding registrants (including America Online) that file
electronically with the Commission. The address of this site is
http://www.sec.gov. The Company's Common Stock is listed on the New York Stock
Exchange (the "NYSE") under the symbol "AOL" and reports, proxy and information
statements and other information concerning the Company may also be inspected at
the offices of the NYSE at 20 Broad Street, New York, NY 10005. Additional
updating information with respect to the securities covered herein may be
provided in the future to purchasers by means of appendices to this Prospectus.
The Company has filed with the Commission in Washington, DC a registration
statement (herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act with respect to the
securities offered or to be offered hereby. This Prospectus does not contain
all of the information included in the Registration Statement, certain items of
which are omitted in accordance with the rules and regulations of the
Commission. For further information about the Company and the securities
offered hereby, reference is made to the Registration Statement and the
exhibits thereto.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents filed by the Company with the Commission are
incorporated herein by reference:
(a) The Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 1997, filed pursuant to Section 13 or 15(d) of the Exchange Act
(File Number 0-19836).
(b) The Company's Quarterly Reports on Form 10-Q for the quarters
ended September 30, 1997 and December 31, 1997 filed pursuant to Section 13
or 15(d) of the Exchange Act (File Number 0-19836).
(c) The Company's Current Reports on Forms 8-K for events dated
September 7, 1997, November 12, 1997, November 17, 1997, January 31, 1998
and February 13, 1998 filed pursuant to Section 13 or 15(d) of the Exchange
Act (File No. 0-19836).
(d) The description of the Company's capital stock which is contained
in a registration statement on Form 8-A under the Exchange Act, including
any amendments or reports filed for the purpose of updating such
description.
All reports and other documents subsequently filed by the Company with the
Commission pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act,
prior to the termination of this offering, shall be deemed to be incorporated by
reference herein and to be a part hereof from the date of the filing of such
reports and documents.
The Company hereby undertakes to provide without charge to each person
to whom this Prospectus is delivered, on the written or oral request of such
person, a copy of any or all documents incorporated by reference herein, other
than exhibits to such documents (unless such exhibits are specifically
incorporated by reference therein). Requests for such copies should be directed
to: Sheila A. Clark, Vice President and Deputy General Counsel, America
Online, Inc., 22000 AOL Way, Dulles, Virginia 20166-9323, telephone number
(703) 448-8700.
TABLE OF CONTENTS
Page
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE 2
SUMMARY 4
RISK FACTORS 7
USE OF PROCEEDS 14
RATIO OF EARNINGS TO FIXED CHARGES 14
DESCRIPTION OF NOTES 14
DESCRIPTION OF CAPITAL STOCK 27
CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES 30
SELLING SECURITYHOLDERS 34
PLAN OF DISTRIBUTION 36
LEGAL MATTERS 36
EXPERTS 37
SUMMARY
The following summary of the business of the Company is qualified in its
entirety by and should be read together with the more detailed information and
financial statements included or incorporated by reference in this Prospectus.
The Company
America Online, including its subsidiaries, is a global leader in the
interactive communications and services medium, with over $1.6 billion in
revenue during fiscal 1997. The Company's AOL flagship Internet online Service
has approximately 11 million members worldwide as of January 1998, an increase
of almost 40% from the previous year. The Company recently acquired the
worldwide online services businesses of CompuServe Corporation, which has more
than 2 million members worldwide. The Company generates revenues principally
through subscription and usage fees, as well as increasingly from advertising,
commerce and other revenues. The Company offers its AOL online services in the
U.S. and Canada and, through joint ventures, in Austria, France, Germany, Japan,
Sweden, Switzerland and the United Kingdom, and offers access to its AOL service
in over 100 countries.
The Company's mission is to become the recognized leader in the global
interactive medium that is changing the way people communicate, stay informed,
are entertained, learn, shop and do business. To accomplish this mission, the
Company's strategy is to continue to improve and expand its service by building
unique and engaging programming and other content and services for delivery into
every home through every distribution means available. The Company seeks to
establish and build its brand names, among others, America Online, AOL, AOL
Studios, CompuServe, AOL.COM and AOL Instant Messenger. By offering a broad
range of high quality Internet online branded content, products and services,
the Company seeks to build its subscriber base as a platform for increasing
subscription and non-subscription based revenues, including from electronic
commerce and advertising.
The Company has recently announced the reorganization of its operations
into three interactive service and content brand groups, AOL Interactive
Services, CompuServe Interactive Services and AOL Studios. Through its AOL
Interactive Services group, which will oversee the Company's flagship AOL
Internet online service as well as the AOL.COM website and AOL Instant
Messenger, the Company offers its members a broad range of original programming,
features and tools. The AOL service includes five screennames for each account,
member service and support 24 hours a day, 7 days a week and personal tools
designed to encourage members to share information and ideas and 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, financial
services 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, mail and
marketing controls.
On January 31, 1998, the Company completed the acquistion of the worldwide
online services businesses of CompuServe Corporation, and entered into a joint
venture agreement to operate the CompuServe European online business in
partnership with Bertelsmann AG. The Company will operate the CompuServe online
services businesses for the United States and the rest of the world (other than
Europe) through a newly-formed, wholly-owned subsidiary, CompuServe Interactive
Services, Inc., a Delaware corporation, which will comprise the Company's
CompuServe Interactive Services group. The AOL Bertelsmann joint venture will
be operated through a newly-formed company, CompuServe Interactive Services
Ltd., an Irish company, owned 50% each by the Company and Bertelsmann. See
"Summary--Recent Developments."
Through its AOL Studios unit, the Company creates and builds original
content for current AOL online services (AOL Interactive Services, CompuServe
Interactive Services), future AOL services and AOL web based service offerings
(AOL.COM), focusing on branded properties in categories such as local content,
multiplayer games, entertainment, romance, sports and women's issues. AOL
Studios manages AOL's interest in Digital City, Inc. ("DCI"), which is owned
approximately 80% by the Company and 20% by the Tribune Company. DCI provides
local, community-based interactive content and services.
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.
Recent Developments
Disposition of ANS & Acquistion of CompuServe
On January 31, 1998 America Online completed the acquisition of the
worldwide online services business (the "COLS Business") of CompuServe
Corporation ("CompuServe") pursuant to the previously announced Purchase and
Sale Agreement (the "Agreement") dated as of September 7, 1997 by and among
America Online, ANS Communications, Inc., a Delaware corporation and a wholly-
owned subsidiary of America Online (prior to the consummation of the Purchase
and Sale) ("ANS"), and WorldCom, Inc., a Georgia corporation ("WorldCom"). In a
three-way transaction, America Online acquired the COLS Business and $175
million ($162 million in cash after purchase price adjustments made at closing),
subject to post-closing adjustments set forth in the Agreement, from WorldCom in
exchange for America Online's network services subsidiary, ANS, all of the
outstanding capital stock of which was transferred to WorldCom (the "Purchase
and Sale").
Immediately prior to America Online's acquisition of the COLS Business,
WorldCom acquired CompuServe pursuant to an Agreement and Plan of Merger by and
among H & R Block, Inc., H&R Block Group, Inc., a wholly-owned subsidiary of H&R
Block, Inc. (and the majority shareholder of CompuServe prior to the completion
of the merger), WorldCom, and Walnut Acquisition Company, LLC, a wholly-owned
limited liability company of WorldCom. In addition to the ANS network services
business acquired from America Online, WorldCom will retain and operate the
network services business of CompuServe.
Pursuant to the Agreement, America Online purchased the COLS Business and
the assets of CompuServe relating to the COLS Business and assumed certain
existing and future liabilities and obligations relating to the COLS Business
and such assets. In addition to the subscriber base of the COLS Business,
America Online acquired assets that included contracts, equipment and other
fixed assets and intellectual property. America Online also acquired title to
real property and the improvements thereon used by CompuServe in the COLS
Business located in Arlington and Dublin, Ohio. Subject to the reorganization
of the COLS Business announced on February 9, 1998 and the ongoing review of
management, America Online intends to use these properties and assets in the
operation of the COLS Business.
CompuServe Interactive Services, Inc. ("CompuServe Interactive"), a wholly-
owned subsidiary of America Online, will be headquartered in Columbus, Ohio and
will continue to operate the COLS Business as a separate CompuServe brand with
distinctive CompuServe services, including content, email service, features and
functionality both domestically and internationally through its foreign
subsidiaries.
In conjunction with this acquisition, America Online's European partner,
Bertelsmann AG, paid $75 million to America Online for a 50% interest in the
European component of the COLS Business (the "COLS European Business"). Each of
America Online and Bertelsmann have invested an additional $25 million to
operate the COLS European Business as part of an expanded joint venture
relationship between the parties.
In connection with the Purchase and Sale, America Online has entered into a
strategic relationship with WorldCom which will provide America Online with
significant network capacity. America Online, WorldCom and ANS have entered
into a Master Agreement for Data Communications, and America Online, UUNET
Technologies, Inc., a wholly-owned subsidiary of WorldCom, and CompuServe
Incorporated, an Ohio corporation and wholly-owned subsidiary of CompuServe,
have entered into a Network Services Agreement, each with an initial term ending
in December 2002, subject to possible extension by America Online under certain
circumstances.
In addition, Stephen M. Case, the Chairman and Chief Executive Officer of
America Online, has agreed to become a member of the Board of Directors of
WorldCom. See "Risk Factors--Acquisitions."
Reorganization of CompuServe Interactive
CompuServe Interactive Services, Inc. announced on February 9, 1998 the
reorganization of its U.S. operations. The reorganization includes the
following actions: suspending development of the "C" web-based service in favor
of fast-track development of its next-generation software; assessing the
strategic alternatives for its Internet service provider, SpryNet; and reducing
its work force by approximately 500 employees. See "Risk Factors--Changing
Business Conditions."
Price Increase
The Company announced on February 9, 1998 that it will increase the price
of its monthly flat-rate pricing plan for the AOL by $2 per month to $21.95 per
month, in order to fund continued improvement of members' online experience and
to keep pace with the cost of members' increased usage. The price increase will
become effective in April at the start of each member's monthly billing cycle.
Similarly, the price of the annual flat-rate pricing plan for those who choose
to pay for one year in advance will increase to the monthly rate of $19.95, a
$2.00 per month increase from the previous annual plan rate. Those subscribers
who are currently on the annual plan will not be subject to an increase until
their renewal date. The Company will continue to offer its other pricing plans
with no changes. See "Risk Factors--Increasing Usage and Costs; Effects of
Price Increase on Costs, Margins and Revenues" and "Risk Factors--Competition."
Increase in Authorized Shares
At a stockholders meeting held on February 6, 1998, the stockholders
approved an amendment to the Company's Restated Certificate of Incorporation to
increase the authorized number of shares of Common Stock from 300,000,000 to
600,000,000. The Board of Directors believed that it would be prudent to have
the additional shares of Common Stock available for general corporate purposes,
including acquisitions, equity financings, grants of stock options, payment of
stock dividends, stock splits or other recapitalizations, and recommended
stockholder approval of the amendment.
Stock Split
The Company announced on February 10, 1998 that the Board of Directors had
approved a two-for-one stock split, to be effected by dividending one additional
share for each shared owned on the record date, February 23, 1998. The payment
date for the stock split is March 16, 1998.
Reorganization of America Online, Inc.
The Company announced on February 9, 1998 a series of organizational and
management changes, including: organizing the Company's operations into three
brand groups supported by certain common infrastructure services; promoting
Robert W. Pittman to President and Chief Operating Officer of the Company; and
forming AOL Investments to manage the Company's investment portfolio, to execute
investment opportunities and to guide its merger and acquisition activity, and
promoting the Company's current Chief Financial Officer, Lennert J. Leader, to
President of this unit. In connection with the Company's reorganization into
three brand groups, the Company expects to incur a restructuring charge not to
exceed $25 million in the quarter ending March 31, 1998. Principal items
expected to be included in the charge are severance and related benefits for
staff reductions, lease and contract terminations, and other costs. See "Risk
Factors--Changing Business Conditions" and "Risk Factors--Reliance on Key
Personnel."
RISK FACTORS
An investment in the Notes and Common Stock being offered by this
Prospectus involves a high degree of risk. In addition to the other information
contained in this Prospectus or incorporated herein by reference, prospective
investors should carefully consider the following risk factors before purchasing
the Notes and Common Stock offered hereby. This Prospectus and other statements
made by the Company to the public contain and incorporate by reference forward-
looking statements within the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995. Reference is made in particular to the
discussion set forth under "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1997 (the "Form 10-K") and in the Company's
quarterly reports on Form 10-Q for the quarters ended September 30, 1997 and
December 31, 1997 and in "Business" in the Company's Form 10-K, incorporated by
reference into this Prospectus. Such statements are based on current
expectations that involve a number of uncertainties including those set forth in
the risk factors below. Actual results could differ materially from those
projected in the forward-looking statements.
Competition
The Company competes in a rapidly-changing marketplace with a wide range of
other companies in the communications, advertising, entertainment and
information, media, direct mail and commerce fields. Current competitors of the
Company for usage, subscribers, advertising and electronic commerce include
not only Internet service providers and online services (including the Microsoft
Network, Prodigy Services Company, and various national and local Internet
service providers, long distance and regional telephone and cable companies,
including, among others, AT&T Corp., MCI Communications Corporation and various
regional Bell operating companies), but also Web-based Internet service
providers using industry-standard browser and navigational software, telephone
companies who may offer competing services directly to their customers as part
of their telephone service and suppliers of operating systems who may
incorporate functional equivalents to the Company's services in their products.
The Company also competes for usage and 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., with global media companies such as
newspapers, radio and television stations and content providers, such as CBS
Corporation, The Walt Disney Company and Time Warner Inc., and with direct
marketing and telemarketing companies.
The development of midband and broadband distribution technologies,
including cable Internet access services offered by @Home Network, Road Runner
Group (owned by Time Warner Inc.) and MediaOne, Inc. (a subsidiary of US WEST
Media Group), advanced telephone-based access services offered through digital
subscriber line (DSL) technologies offered by local telecommunications companies
and other advanced digital services offered by broadcast and satellite
companies, is intensifying the competition to which the Company is subject.
Emerging convergent technologies offering combinations of television and
interactive computer services, such as those offered by WebTV and NetChannel,
offer yet an additional competitive alternative to the offerings of the Company.
The Company has recently acquired the CompuServe Corporation's online services
businesses. See "Summary--Recent Developments" and "Risk Factors--Changing
Technologies."
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. The competitive environment could (i) require price
reductions and increased spending on marketing, network capacity, content
procurement and product development, (ii) limit the Company's opportunities to
enter into and/or renew agreements with content providers and distribution
partners, (iii) limit its ability to develop new products and services, (iv)
limit its ability to continue to grow its subscriber base, (v) result in
increased attrition in the Company's subscriber base and (vi) 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 or result in an increase in costs as a percentage of
revenues, which could have a material adverse effect on the Company's business,
financial condition and operating results.
Network Capacity and Operations
Among other pricing plans, the Company has adopted a flat-rate pricing plan
which provides access to AOL for a flat monthly fee with no additional hourly
charges (the "Flat-Rate Plan"). Due to the rapid growth in subscriber usage
resulting from flat-rate pricing, the Company and its data communications access
providers have at times experienced difficulty in providing adequate server and
network capacity, respectively. As a result, members have at times encountered
difficulty in accessing and using the America Online service. In response to
such difficulties, the Company has increased its investments in system capacity,
including constructing a new data center and adding network modems, but there
can be no assurance that access problems will not recur.
America Online employs a diversified portfolio approach in designing,
structuring and operating its network services. America Online manages AOLnet,
a TCP/IP network of third-party network service providers, including Sprint
Corporation, BBN Corporation, a part of GTE Internetworking, and WorldCom,
Inc.'s wholly-owned subsidiaries ANS Communications, Inc. (recently acquired
from the Company) and UUNET Technologies, Inc. The Company anticipates
continuing to build AOLnet, in order to increase its network capacity, provide
its members with higher speed access, and reduce data network costs on a per-
hour basis. There can be no assurance that the AOLnet build-out or other
efforts to expand server and network capacity will be successful, or if they are
successful, that customer demand will develop for the capacity created, and the
failure to do so could have a material adverse effect on the Company's business,
financial condition and operating results. In addition, supply shortages exist
from time to time for local exchange carrier lines from local telephone
companies that the Company requires to expand network capacity. The buildout of
AOLnet requires a substantial investment in telecommunications equipment, which
the Company is financing principally through leasing and asset-backed debt
financing. Supply shortages or the failure to obtain the necessary financing
for the buildout of AOLnet could have a material adverse effect on the Company's
ability to expand network capacity. For a description of the Company's sale of
its ANS subsidiary to WorldCom, Inc., see "Summary--Recent Developments."
The Company's operations are dependent on its ability to protect its
computer equipment and the information stored in its data centers against damage
by fire, power loss, telecommunications failures, service failures by third
party network service providers, unauthorized intrusions and other events.
Although the Company believes it has taken prudent measures to reduce the risk
of interruption in its operations for such causes, there can be no assurance
that these measures will be sufficient. Any damage or failure that causes
interruptions in the Company's operations could have a material adverse effect
on its business, financial condition and operating results. Although the
Company carries property and business interruption insurance to cover its
operations, the coverage may not be adequate to compensate for losses that may
occur. Software defects and server and network expansion could also cause
service outages, and although the Company has made efforts to reduce outages,
there can be no assurance that its efforts to reduce outages will be successful,
and the failure to do so could have a material adverse effect on the Company's
business, financial condition and operating results.
Increasing Usage and Costs; Effects of Price Increase on Costs, Margins and
Revenues
The Company's business model relies both on online service revenues from
subscription fees and usage and on revenues generated from non-subscription
based sources such as advertising, electronic commerce and sales of merchandise.
Since the adoption of the Flat-Rate Plan in December 1996, the Company has
experienced greater increases than anticipated in the average total usage hours
per member per month (from 10.3 hours per member per month in the second quarter
of fiscal 1997 to 21.3 hours per member per month in the second quarter of
fiscal 1998). While the growth and management of AOLnet have provided overall
lower per hour data communications costs, such lower costs have been and are
expected to continue to be offset by the additional costs of network services
resulting from increased total usage hours.
In response to increasing usage and consequent data communications costs,
the Company has announced that effective April 1, 1998, it will increase the
monthly fee under the Flat-Rate Plan by $2.00 per month (the "Price Increase"),
in an effort to increase subscription-based revenues in an amount sufficient to
offset the additional costs associated with additional usage and to fund
continuing additional investments needed to maintain and enhance the member
experience. Before the Price Increase takes effect, the additional costs
resulting from increasing usage are expected to decrease gross and operating
margins below current levels. Even after the Price Increase takes effect, any
resulting increase in subscription-based revenues may not be sufficient to
offset increasing usage and data communications costs or to fund the investments
necessary to maintain and enhance the member experience.
In addition, the Price Increase may result in new competitive pricing
actions or offerings or cause existing competitive offerings to the AOL service
to become more attractive to AOL members. The Price Increase may have a
material adverse effect on the Company's performance by reducing demand for the
AOL service among existing or prospective subscribers, slowing or reversing
subscriber growth or reducing subscriber retention rates. If subscriber growth
slows or reverses or retention rates decrease, growth in the advertising,
commerce and other revenues may slow and may require that the Company increase
its marketing expenses. The Company believes that reduced growth in
advertising, commerce and other revenues or that increases in marketing expenses
would cause a reduction in gross and operating margins. Therefore, there can be
no assurance that the Price Increase will increase subscription-based revenues
or that the Price Increase will not lead to a significant decrease in non-
subscription based revenues. The described effects of the Price Increase on
costs, margins, revenues and competitive conditions could have a material
adverse effect on the Company's business, financial condition and operating
results.
Changing Business Conditions
The changing business model and resulting expansion of its business and
changes in its operations have placed significant demands on the Company's
administrative, operational and financial resources. The Company's future
performance will depend in part on its ability to manage its growth and to adapt
its administrative, operational and financial control systems to the needs of an
expanded and evolving entity. The failure of management to anticipate, respond
to and manage changing business conditions could have a material adverse effect
on the Company's business, financial condition and results of operations.
Seasonality
The growth in subscriber acquisitions and usage generally has been highest
in the second and third fiscal quarters, when sales of new computers and
computer software are highest due to the holiday season, and following the
holiday season, when new computer and software owners are discovering Internet
online services while spending more time indoors due to winter weather.
However, because of the Company's limited history with the Flat-Rate Plan (which
was adopted effective as of December 1, 1996), the Company does not know whether
such increases in subscriber acquisitions and usage are primarily attributable
to seasonal factors or to increased demand for Internet online services as a
result of the growing market demand and utility for such services.
Beginning with the second quarter of fiscal 1998, the Company believes it
has begun to see the effects of seasonality in securing advertising commitments.
The Company expects that advertising commitments will be highest in the second
fiscal quarter each year due to calendar-year budgeting cycles of many
advertisers. However, because of the Company's recent focus on developing
advertising revenues, the Company does not know whether increases in securing
advertising commitments are due to seasonal factors or to increased interest by
advertisers in the Company's medium and distribution channels or other factors.
Revenue from all such advertising commitments generally is recognized over the
term of the particular contract in accordance with the terms of the contract and
applicable accounting rules. The Company expects that seasonality in subscriber
acquisitions, usage and advertising commitments may continue to have an effect
in the future.
Relationships with Providers
As the marketplace in which the Company operates changes and as competition
intensifies in the online services markets, it may become more difficult or
expensive to secure and maintain relationships with electronic commerce,
advertising, marketing, technology and content providers. Although the Company
does not believe that any single relationship is material to its business,
financial condition, or results of operations, there can be no assurance that
the failure to establish new relationships or that the loss of a number of
relationships or significantly increased costs or decreased revenues, as the
case may be, to maintain relationships would not have a material adverse effect
on the Company's business, financial condition and operating results.
Acquisitions
Since the beginning of January 1996, the Company has acquired or merged
with, among others, the Johnson-Grace Company, the ImagiNation Network, Inc.
(doing business as WorldPlay Entertainment), LightSpeed Media, Inc., Extreme
Fans, Inc., Personal Library Software, Total New York, Inc. (which was acquired
by Digital City, Inc., an approximately 80%-owned subsidiary of the Company)
and, on January 31, 1998, the worldwide online services businesses of CompuServe
Corporation ("CompuServe Interactive"). There can be no assurance that
CompuServe Interactive can be successfully managed and operated by the Company.
See "Summary--Recent Developments." Acquisitions by the Company involve risks,
including successful integration and management of acquired technology,
operations and personnel. The integration of acquired businesses may also lead
to the loss of key employees of the acquired companies and diversion of the
attention of existing management from other ongoing business concerns. In
addition, acquisitions may result in significant charges for in-process research
and development or other matters. Any of these factors could have a material
adverse effect on the Company's business, financial condition and operating
results.
New Businesses, Operations and International Ventures
The Company pursues new products and services to leverage its technological
and other competencies. There can be no assurance that the Company will be able
to successfully develop, or achieve commercial acceptance for, these new
products and services. Demand for and market acceptance of new products and
services are subject to a high degree of uncertainty.
Critical issues concerning commercial activities via the Internet,
including security, reliability, cost, ease of use and access, remain
unresolved and may adversely impact the growth and development of the Company's
business.
The Company offers its online services in the United States and Canada, and
through joint ventures, in Austria, France, Germany, Japan, Sweden, Switzerland,
and the United Kingdom. The Company has recently announced its intention,
through a joint venture, to offer online services in Australia and Hong Kong in
1998. In addition, the Company's acquisition of CompuServe's business has
significantly expanded its presence in Europe and Japan. There can be no
assurance that the Company or its partners will be able to, or to continue to,
successfully market, sell and deliver its services in these markets. In
addition, there are certain significant risks inherent in doing business on an
international level, such as laws governing content that differ greatly from
those in the United States, 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, any or all of which could impact the Company's international
operations. See "Risk Factors--Government Regulation; Legal Uncertainties."
Changing Technologies
As the marketplace in which the Company operates continues to evolve, the
Company will be required to offer its existing services through advanced
distribution technologies such as cable, satellite, broadcast and enhanced
telephone distribution, and to offer advanced services such as voice and full-
motion video. Currently, Internet online services are accessed primarily
through standard telephone systems by personal computers via modems. As online
and interactive digital services, including Internet access, entertainment and
information services become accessible by cable, satellite, television or other
consumer electronic devices, and become commercially deliverable over other
wired conduits such as digital subscriber lines, coaxial and fiber optic cable,
the Company may have to develop new technology or modify its existing technology
to keep pace with these developments. Competitors of the Company have better
access to those technologies and could gain advantage by implementing new access
technologies more quickly and at lower cost than the Company. Pursuit of these
technological advances will require substantial expenditures, and there can be
no assurance that the Company will succeed in adapting its online service
business to alternate access devices and conduits as rapidly or successfully as
its competitors. See "Risk Factors--Competition."
Government Regulation; Legal Uncertainties
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, Europe, Japan or elsewhere
could have a material adverse effect on the Company's business, financial
condition and operating results. A number of legislative and regulatory
proposals from various international bodies and foreign and domestic governments
in the areas of telecommunication regulation, access charges, encryption
standards, 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, financial condition and operating
results. See also "Risk Factors--New Businesses and International Ventures."
Moreover, the manner in which existing domestic and foreign laws (including
Directive 95/46/EC of the European Parliament and of the European Council on the
protection of individuals with regard to the processing of personal data and on
the free movement of such data, to become effective in the individual member
states by October 24, 1998), 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. 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, consumer protection, export controls on encryption
technology, tariffs and other trade barriers, intellectual property and taxes.
Reliance on Key Personnel
The Company's success depends in part upon the performance of its executive
officers and other key employees. The loss of the services of one or more of its
key personnel could have a material adverse effect on the Company's business,
financial condition and operating results. The Company depends on its continued
ability to attract and retain highly skilled and qualified personnel.
Competition for such personnel is intense, and there can be no assurance that
the Company will be successful in attracting and retaining such personnel.
Volatility of Share Price
The market price of the Company's Common Stock has a history of volatility.
Factors such as quarterly variations in financial results and membership growth
and usage, new pricing strategies, the announcement of technological
innovations, mergers, acquisitions, strategic partnerships or new product
offerings by the Company or its competitors, the entrance of new competitors
into the online services market and changes in content providers may have a
significant impact on the market price of the Common Stock. Moreover, the
Common Stock could experience price volatility based on market conditions.
Litigation and Other Proceedings
The Company is a party to various litigation matters, investigations and
proceedings, including a lawsuit filed on behalf of shareholders against the
Company and its chief executive officer and chief financial officer alleging
violations of the federal securities laws. Such class action lawsuit was filed
in federal court in Alexandria, Virginia against the Company, its officers,
outside directors and its auditors in February 1997. In July 1997, the court
dismissed the complaint, finding that the allegations of the complaint were not
sufficiently specific. The plaintiffs filed an amended complaint in September
1997, this time naming the Company, its Chief Executive Officer and its Chief
Financial Officer as defendants. The court has declined to dismiss the amended
complaint and the case is scheduled to be tried in 1998. A shareholder
derivative suit related to such class action lawsuit has also been filed in
Delaware chancery court against certain current and former directors of the
Company.
The Company, one of its subsidiaries and two officers are named in a
lawsuit alleging, among other matters, that the Company breached an agreement
and has monopolized and attempted to monopolize an alleged market for online
games. The complaint seeks $100 million in damages and requests other relief.
In response to consumer complaints, the Company entered into an agreement
with 45 State Attorneys General in connection with the access problems
experienced by some members in the period from approximately December of 1996
through March of 1997, which agreement provided, among other things, for certain
refunds and credits to members. The settlement agreement has been given final
approval by the judge in the case, but could be appealed by objectors.
The Company has been in continuing discussions and negotiations with
representatives of the offices of State Attorneys General regarding its
advertising, consumer and marketing practices. The Company is unable at this
time to predict whether such discussions and negotiations may result in further
assurances of voluntary compliance or in claims by any or all of the State
Attorneys General.
The costs and other effects of pending or future litigation, governmental
investigations, legal and administrative cases and proceedings (whether civil or
criminal), settlements, judgments and investigations, claims and changes in
those matters (including those matters described above), and developments or
assertions by or against the Company relating to intellectual property rights
and intellectual property licenses, could have a material adverse effect on the
Company's business, financial condition and operating results.
Year 2000 Potential Problems
The Company utilizes a significant number of computer software programs and
operating systems across its entire organization, including applications used in
operating the AOL Service, the Company's proprietary software, member services,
network access, content providers, joint ventures and various administrative and
billing functions. To the extent the Company's software applications contain
source codes that are unable to appropriately interpret the upcoming calendar
year 2000, some level of modification, or even possibly replacement of such
applications, may be necessary. The Company has appointed a Year 2000 Task Force
to perform an audit to assess the scope of the Company's risks and bring its
applications into compliance. This Task Force is currently in the process of
completing its identification of applications that are not Year 2000 compliant.
In addition, the Company has begun to ask its vendors, joint venture partners
and content partners about their progress in identifying and addressing problems
that their computer systems may face in correctly processing date information
related to the Year 2000.
The Company is in the early stages of conducting its Year 2000 audit and
therefore is unable to make a reasonable estimate of the costs associated with
Year 2000 compliance. Accordingly, no assurance can be given that any or all of
the Company's or third party systems are or will be Year 2000 compliant or that
the costs required to address the Year 2000 issue or that the impact of the
Company's failure to achieve substantial Year 2000 compliance will not have a
material adverse effect on the Company's business, financial condition or
results of operations.
Future Sales of Common Stock
Sales of substantial amounts of Common Stock in the public market could
adversely affect prevailing market prices of the Common Stock. Shareholders of
approximately 4,586,000 shares of America Online Common Stock (outstanding or
issuable upon exercise of certain rights), in addition to the approximately
3,352,895 shares, subject to adjustment, issuable upon conversion of the Notes
registered hereunder, have rights of registration of their shares for resale.
In connection with a master data communications agreement, the Company has
issued a warrant to purchase 3,600,000 restricted shares of the Company's common
stock under the terms of which the Company would be required to register such
shares on Form S-3 within 45 days of a full exercise. Additional shares are
subject to registration statements on Form S-8 in connection with the Company's
stock option plans. The sales of any of the foregoing shares could have a
material adverse effect on the then-prevailing market price of Common Stock.
Anti-Takeover Defense Provisions
The Company's Restated Certificate of Incorporation and Restated By-laws
contain certain provisions that could have the effect of making it more
difficult for a third party to acquire, or of discouraging a third party from
attempting to acquire, control of the Company. Certain of such provisions allow
the Company to issue preferred stock with rights senior to those of its Common
Stock and impose various procedural and other requirements which could make it
more difficult for stockholders to effect certain corporate actions. In
addition, the Company has a stockholder rights plan pursuant to which holders of
Common Stock are entitled to one preferred share purchase right for each
outstanding share of Common Stock they hold, exercisable under certain defined
circumstances involving a potential change of control. The foregoing provisions
could limit the price that certain investors might be willing to pay in the
future for shares of Common Stock.
Subordination of the Notes
The Notes are unsecured and subordinated in right of payment in full to all
existing and future Senior Debt of the Company, including the Company's existing
revolving credit facility. As a result of such subordination, in the event of
the Company's liquidation or insolvency, payment default with respect to Senior
Debt, or upon acceleration of the Notes due to an event of default, the assets
of the Company will be available to pay obligations on the Notes only after all
Senior Debt has been paid in full, and there may not be sufficient assets
remaining to pay amounts due on any or all of the Notes then outstanding.
As of December 31, 1997, the Company had approximately $572,510,000 of
indebtedness and other liabilities (including a credit facility) that would have
constituted Senior Debt. As of December 31, 1997, the Company's subsidiaries
had approximately $88,738,000 of indebtedness and other liabilities (including
trade payables and excluding intercompany liabilities) as to which the Notes
would have been effectively subordinated. The Indenture does not prohibit or
limit the incurrence of Senior Debt or the incurrence of other indebtedness and
other liabilities by the Company or its subsidiaries. The incurrence of
additional indebtedness and other liabilities by the Company or its subsidiaries
could adversely affect the Company's ability to pay its obligations on the
Notes. The Company expects from time to time to incur additional indebtedness
and other liabilities, including Senior Debt, and also expects that its
subsidiaries will from time to time incur additional indebtedness and other
liabilities. See ''Description of Notes-Subordination''.
Absence of Market for the Notes; Transfer Restrictions on the Notes
There is no existing public trading market for the Notes (which currently
are registered to trade on the PORTAL System in the United States and the
Euroclear System outside the United States), and there can be no assurance as to
the liquidity of any such market that may develop, the ability of the holders of
Notes to sell such securities, the price at which the holders of Notes would be
able to sell such securities or whether a trading market, if it develops, will
continue. If such market were to exist, the Notes could trade at prices higher
or lower than their principal amount, depending on many factors, including
prevailing interest rates, the market for similar securities and the operating
results of the Company. The Company does not intend to apply for listing of the
Notes on any securities exchange or for inclusion of the Notes on any automated
quotation system.
USE OF PROCEEDS
The Company will not receive any proceeds from the sale by the Selling
Securityholders of the Notes, Conversion Shares or Resale Stock offered hereby.
See "Selling Securityholders."
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the ratio of earnings to fixed charges for
each of the last five fiscal years and for the six months ended December 31,
1997:
<TABLE>
Six Months Ended
December 31, Fiscal Year ended June 30,
1997 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to 2.01 (8.78) 4.63 (3.49) 5.24 4.63
Fixed Charges
</TABLE>
For purposes of computing the ratio of earnings to fixed charges, earnings
represent earnings from continuing operations before income taxes plus interest
expense on indebtedness, amortization of debt discount and premium and the
portion of rent expense deemed representative of an interest factor. Fixed
charges include interest on indebtedness (whether expensed or capitalized),
amortization of debt discount and premium and the portion of rent expense deemed
representative of an interest factor. For the years ended June 30, 1997 and
1995, the deficiency of earnings to fixed charges totaled $448.3 million and
$16.0 million, respectively.
DESCRIPTION OF NOTES
The Notes were issued under an Indenture, dated as of November 17, 1997
(the ''Indenture''), between the Company and State Street Bank and Trust
Company, as Trustee (the ''Trustee''), copies of which are available for
inspection at the Corporate Trust Office of the Trustee in Boston,
Massachusetts. In addition, the Trustee maintains an office or agency in the
Borough of Manhattan, The City of New York, where Notes may be surrendered for
registration of transfer or exchange, for payment or where notices and demands
to or upon the Trustee may be served. Wherever particular defined terms of the
Indenture (including the Notes and the various forms thereof) are referred to,
such defined terms are incorporated herein by reference (the Notes and various
terms relating to the Notes being referred to in the Indenture as
''Securities''). References in this section to the ''Company'' are solely to
America Online, Inc. and not to its subsidiaries. The following summaries of
certain provisions of the Indenture do not purport to be complete and are
subject to, and are qualified in their entirety by reference to, the detailed
provisions of the Notes and the Indenture, including the definitions therein of
certain terms.
General
The Notes are unsecured subordinated obligations of the Company, limited to
$350,000,000 aggregate principal amount, and mature on November 15, 2002.
Payment in full of the principal amount of the Notes is due on November 15,
2002. The Notes bear interest at the rate of 4% per annum from November 17,
1997, payable semiannually on May 15 and November 15 of each year, commencing on
May 15, 1998.
The Notes are convertible into shares of Common Stock initially at the
conversion price stated on cover page hereof, subject to adjustment upon the
occurrence of certain events described under
''--Conversion Rights'', at any time on or after March 12, 1998, prior to the
close of business on the maturity date, unless previously redeemed or
repurchased.
The Notes are redeemable under the circumstances and at the redemption
prices set forth below under ''--Optional Redemption'', plus accrued interest to
the redemption date. The Notes are also subject to repurchase by the Company at
the option of the Holders, as described below under ''Repurchase Option of
Holders Upon Change in Control''.
Form and Denomination
Except as provided below, Notes sold to Qualified Institutional Buyers
otherwise than in reliance on Regulation S are represented by one or more global
Notes in definitive, fully registered form without interest coupons
(collectively, the ''Restricted Global Note'') and were deposited with the
Trustee as custodian for DTC and registered in the name of a nominee of DTC.
The Restricted Global Note (and any Notes issued in exchange therefor) are
subject to certain restrictions on transfer set forth therein and in the
Indenture and bear the legend regarding such restrictions set forth under
''Notice to Investors''.
Notes issued pursuant to Regulation S (''Regulation S Notes'') are
represented by one or more global notes in fully registered form without
interest coupons (collectively, the ''Regulation S Global Note'' and, together
with the Restricted Global Note, the ''Global Notes'' or each individually, a
''Global Note'') registered in the name of a nominee of DTC and deposited with
the Trustee, for the accounts of the Euroclear System (''Euroclear'') and Cedel
Bank, societe anonyme (''CEDEL''). Until the 40th day after November 17, (such
period, the ''Restricted Period''), beneficial interests in the Regulation S
Global Note may be held only through Euroclear or CEDEL, unless delivery is made
through the Restricted Global Note in accordance with the certification
requirements described below. The Regulation S Global Note (and any Notes
issued in exchange therefor) bear the legend set forth in bold type on the cover
of the version of the Offering Circular used in connection with the offering of
the Regulation S Notes.
Prior to the expiration of the Restricted Period, a beneficial interest in
a Regulation S Global Note may be transferred to a person who takes delivery in
the form of an interest in the Restricted Global Note only upon receipt by the
Trustee of a written certification from the transferor (in the form provided in
the Indenture) to the effect that such transfer is being made to a person who
the transferor reasonably believes is purchasing for its own account or accounts
as to which it exercises sole investment discretion and that such person and
each such account is a Qualified Institutional Buyer, in each case in a
transaction meeting the requirements of Rule 144A and in accordance with any
applicable securities laws of any state of the United States or any other
jurisdiction (a ''Restricted Global Note Certificate''). After the expiration
of the Restricted Period, such certification requirements will no longer apply
to such transfers.
Beneficial interests in the Restricted Global Note may be transferred to a
person who takes delivery in the form of an interest in a Regulation S Global
Note, only upon receipt by the Trustee of a written certification from the
transferor (in the form provided in the Indenture) to the effect that such
transfer is being made in accordance with Rule 903 or Rule 904 of Regulation S
or Rule 144 under the Securities Act (a ''Regulation S Global Note
Certificate'') and that, if such transfer occurs prior to the expiration of the
Restricted Period, the interest transferred will be held immediately thereafter
through Euroclear or CEDEL. Any beneficial interest in one of the Global Notes
that is transferred to a person who takes delivery in the form of an interest in
the other Global Note will, upon transfer, cease to be an interest in such
Global Note and will become an interest in the other Global Note and,
accordingly, will thereafter be subject to all transfer restrictions and other
procedures applicable to beneficial interests in such other Global Note for as
long as it remains such an interest.
Except in the limited circumstances described below under ''--Global
Notes'', owners of beneficial interests in Global Notes will not be entitled to
receive physical delivery of certificated Notes. The Notes are not issuable in
bearer form.
The Notes were issued only in fully registered form, without exception. The
Notes were initially issued in minimum denominations of $1,000. No service
charge was made for any registration of transfer or exchange of Notes, but the
Company may require payment of a sum sufficient to cover any tax or other
government charge payable in connection therewith.
The Company initially appointed the Trustee at its corporate trust office
as paying agent, transfer agent, registrar and conversion agent for the Notes.
In such capacities, the Trustee will be responsible for, among other things, (i)
maintaining a record of the aggregate holdings of Notes represented by the
Regulation S Global Note and the Restricted Global Note and accepting Notes for
exchange and registration of transfer, (ii) ensuring that payments of principal,
premium, if any, and interest in respect of the Notes received by the Trustee
from the Company are duly paid to DTC or its nominees, (iii) transmitting to the
Company any notices from holders, (iv) accepting conversion notices and related
documents, and transmitting the relevant items to the Company and (v) delivering
certificates for Common Stock issued in conversion of the Notes.
The Company will cause each transfer agent to act as a registrar and will
cause to be kept at the office of each transfer agent a register in which,
subject to such reasonable regulations as it may prescribe, the Company will
provide for the registration of the Notes and registration of transfers of the
Notes. The Company may vary or terminate the appointment of any paying agent,
transfer agent or conversion agent, or appoint additional or other such agents
or approve any change in the office through which any such agent acts, provided
that there shall at all times be a paying agent, a transfer agent and a
conversion agent in the Borough of Manhattan, The City of New York, New York.
The Company will cause notice of any resignation, termination or appointment of
the Trustee or any paying agent, transfer agent or conversion agent, and of any
change in the office through which any such agent will act, to be provided to
Holders of the Notes.
Global Notes
The following description of the operations and procedures of DTC,
Euroclear and CEDEL is provided solely as a matter of convenience. These
operations and procedures are solely within the control of the respective
settlement systems and are subject to changes by them from time to time. The
Company takes no responsibility for these operations and procedures and urges
investors to contact the system or their participants directly to discuss these
matters.
Upon the issuance of the Regulation S Global Note and the Restricted Global
Note, DTC credited, on its internal system, the respective principal amount of
the individual beneficial interests represented by such Global Notes to the
accounts with DTC (''participants'') or persons who hold interests through
participants. Ownership of beneficial interests in the Global Notes will be
shown on, and the transfer of that ownership will be effected only through,
records maintained by DTC or its nominee (with respects to interests of
participants) and the records of participants (with respect to interest of
persons other than participants).
As long as DTC, or its nominee, is the registered Holder of a Global Note,
DTC or such nominee, as the case may be, will be considered the sole owner and
Holder of the Notes represented by such Global Note for all purposes under the
Indenture and the Notes. Unless DTC notifies the Company that it is unwilling or
unable to continue as depository for a Global Note, or ceases to be a ''Clearing
Agency'' registered under the Securities Exchange Act of 1934, as amended (the
''Exchange Act''), or announces an intention permanently to cease business or
does in fact do so, or an Event of Default has occurred and is continuing with
respect to a Global Note, owners of beneficial interests in a Global Note will
not be entitled to have any portions of such Global Note registered in their
names, will not receive or be entitled to receive physical delivery of Notes in
definitive form and will not be considered the owners or Holders of the Global
Note (or any Notes presented thereby) under the Indenture or the Notes. In
addition, no beneficial owner of an interest in a Global Note will be able to
transfer that interest except in accordance with DTC's applicable procedures (in
addition to those under the Indenture referred to herein and, if applicable,
those of Euroclear and CEDEL). In the event that owners of beneficial interests
in a Global Note become entitled to receive Notes in definitive form, such Notes
will be issued only in registered form in denominations of $1,000 and integral
multiples thereof.
Investors may hold their interests in the Regulation S Global Note through
CEDEL or Euroclear, if they are participants in such systems, or indirectly
through organizations which are participants in such systems. After the
expiration of the Restricted Period (but not earlier), investors may also hold
such interests through organizations other than CEDEL and Euroclear that are
participants in the DTC system. CEDEL and Euroclear will hold interests in the
Regulation S Global Note on behalf of their participants throughout customers'
securities accounts in their respective names on the books of their respective
depositories, which, in turn, will hold such interests in the Regulation S
Global Note in customers' securities accounts in the depositories' names on the
books of DTC. Investors may hold their interests in the Restricted Global Note
directly through DTC, if they are participants in such system. All interests in
a Global Note, including those held through Euroclear or CEDEL, may be subject
to the procedures and requirements of DTC. Those interests held through
Euroclear and CEDEL may also be subject to the procedures and requirements of
such system.
Payments of the principal of, premium, if any, and interest on Global Notes
will be made to DTC or its nominee as the registered owner thereof. Neither the
Company, the Trustee nor any of their respective agents will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in the Global Notes
or for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests.
Subject to the following considerations, beneficial interests in the Global
Notes will trade in DTC's Same-Day Funds Settlement System, and secondary market
trading activity in such interests will therefore settle in immediately
available funds. The Company expects that DTC or its nominee, upon receipt of
any payment of principal or interest in respect of a Global Note representing
any Notes held by it or its nominee, will immediately credit participants'
accounts with payment in amounts proportionate to their respective beneficial
interests in the principal amount of such Global Notes for such Notes as shown
on the records of DTC or its nominee. The Company also expects that payments by
participants to owners of beneficial interest in such Global Notes held through
such participants will be governed by standing instructions and customary
practices, as is now the case with securities held for the accounts of customers
registered in ''street name''. Such payments will be the responsibility of such
participants.
Transfers between participants in DTC will be effected in accordance with
DTC's procedures, and will be settled in same-day funds. Transfers between
participants in Euroclear and CEDEL will be effected in the ordinary way in
accordance with their respective rules and operating procedures.
Subject to compliance with the transfer restrictions applicable to the
Notes described above, cross-market transfers between DTC participants, on the
one hand, and Euroclear or CEDEL participants, on the other hand, will be
effected by DTC in accordance with DTC's rules on behalf of Euroclear or CEDEL,
as the case may be, by its respective depository; however, such cross-market
transactions will require delivery of instructions to Euroclear or CEDEL, as the
case may be, by the counterparty in such system in accordance with the rules and
procedures and within the established deadlines (Brussels time) of such system.
Euroclear or CEDEL, as the case may be, will, if the transaction meets its
settlement requirements, deliver instructions to its respective depository to
take action to effect final settlement on its behalf by delivering or receiving
interests in the relevant Global Note in DTC, and making or receiving payment in
accordance with normal procedures or same-day funds settlement applicable to
DTC. Euroclear participants and CEDEL participants may not deliver instructions
directly to the depositories for Euroclear or CEDEL.
Because of time zone differences, the securities account of a Euroclear or
CEDEL participant purchasing an interest in a Global Note from a DTC participant
will be credited, and any such crediting will be reported to the relevant
Euroclear or CEDEL participant, during the securities settlement processing day
(which must be a business day for Euroclear and CEDEL) immediately following the
DTC settlement date. Cash received on Euroclear or CEDEL as a result of sales of
interests in a Global Note by or through a Euroclear or CEDEL participant to a
DTC participant will be received with value on the DTC settlement date but will
be available in the relevant Euroclear or CEDEL cash account only as of the
business day for Euroclear or CEDEL following the DTC settlement date.
DTC has advised the Company that it will take any action permitted to be
taken by a holder of Notes (including the presentation of Notes for exchange as
described below) only at the direction of one or more participants to whose
account with DTC interests in the Global Notes are credited and only in respect
of such portion of the aggregated principal amount of the Notes as to which such
participant or participants has or have given such direction. However, if there
is an Event of Default (as defined below) under the Notes, DTC reserves the
right to exchange the Global Notes for legended Notes in certificated form, and
to distribute such Notes to its participants.
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a ''clearing corporation'' within the meaning of the
Uniform Commercial Code, as amended, and a ''Clearing Agency'' registered
pursuant to the provisions of Section 17A of the Exchange Act. DTC was created
to hold securities for its participants and facilitate the clearance and
settlement of securities transactions between participants through electronic
book-entry changes in accounts of its participants, thereby eliminating the need
for physical transfer and delivery of certificates. Participants include
securities brokers and dealers, banks, trust companies and clearing corporations
and may include certain other organizations. Indirect access to the DTC system
is available to other entities such as banks, brokers, dealers and trust
companies that clear through or maintain a custodial relationship with a
participant, either directly or indirectly (''indirect participants'').
Although DTC, Euroclear and CEDEL have agreed to the foregoing procedures
in order to facilitate transfers of beneficial ownership interests in the Global
Notes among participants of DTC, Euroclear and CEDEL, they are under no
obligation to perform or continue to perform such procedures, and such
procedures may be discontinued at any time. None of the Company, the Trustee nor
any of their respective agents will have any responsibility for the performance
by DTC, Euroclear and CEDEL, their participants or indirect participants of
their respective obligations under the rules and procedures governing their
operations, including maintaining, supervising or reviewing the records relating
to, or payments made on account of, beneficial ownership interests in Global
Notes.
Certificated Notes
If DTC is at any time unwilling or unable to continue as a depository for
the reasons set forth above under ''--Global Notes'', or in the case of a Global
Note held for an account of Euroclear or CEDEL, Euroclear or CEDEL (as the case
may be) is closed for business for 14 continuous days or announces an intention
to cease or permanently ceases business, the Company will issue certificates for
the Notes in definitive, fully registered, non-global form without interest
coupons in exchange for the Regulation S Global Note or Restricted Global Note,
as the case may be.
In the case of certificates for Notes in non-global form issued in exchange
for the Restricted Global Note, such certificates will bear the legend referred
to under ''--Notice to Investors'' (unless the Company determines otherwise in
accordance with applicable law), subject, with respect to such Notes, to the
provisions of such legend. The holder of a Note in non-global form may transfer
such Note, subject to compliance with the provisions of such legend, by
surrendering it at the office or agency maintained by the Company for such
purpose in the Borough of Manhattan, the City of New York, which initially will
be the office of the Trustee. Upon the transfer, exchange or replacement of
Notes bearing the legend, or upon specific request for removal of the legend on
a Note, the Company will deliver only Notes that bear such legend, or will
refuse to remove such legend, as the case may be, unless there is delivered to
the Company such satisfactory evidence, which may include an opinion of counsel,
as may reasonably be required by the Company that neither the legend nor the
restrictions on transfer set forth therein are required to ensure compliance
with the provisions of the Securities Act. Before any Note in non-global form
may be transferred to a person who takes delivery in the form of an interest in
any Global Note, the transferor will be required to provide the Trustee with a
Restricted Global Note Certificate or a Regulation S Global Note Certificate, as
the case may be.
Notwithstanding any statement herein, the Company and the Trustee reserve
the right to impose such transfer, certification, exchange or other
requirements, and to require such restrictive legends on certificates evidencing
Notes, as they may determine are necessary to ensure compliance with the
securities laws of the United States and the States therein and any other
applicable laws, to ensure that the Shelf Registration Statement or amendment
covering the Notes and the Common Stock is declared effective by the Commission
or as DTC, Euroclear or CEDEL may require.
Conversion Rights
The Holder of any Note has the right, at the Holder's option, to convert
any portion of the principal amount of a Registered Note that is an integral
multiple of $1,000, into shares of Common Stock at any time on or after March
12, 1998, and prior to the close of business on the maturity date, unless
previously redeemed or repurchased at a conversion rate of 9.5797 shares per
$1,000 principal amount of Notes (equivalent to a conversion price of $104.3875
per share) (subject to adjustment as described below). The right to convert a
Note called for redemption or delivered for repurchase will terminate at the
close of business on the redemption date or repurchase date for such Note.
The right of conversion attaching to any Note may be exercised by the
Holder by delivering the Note at the specified office of the Conversion Agent,
accompanied by a duly signed and completed notice of conversion, a copy of which
may be obtained from the Conversion Agent. The conversion date will be the date
on which the Note and the duly signed and completed notice of conversion are so
delivered, unless otherwise provided by such notice. As promptly as practicable
on or after the conversion date, the Company will issue and deliver to the
Trustee a certificate or certificates for the number of full shares of Common
Stock issuable upon conversion, together with payment in lieu of any fraction of
a share or, at the Company's option, rounded up to the next whole number of
shares; such certificate, and payment, if any, will be sent by the Trustee to
the Conversion Agent for delivery to the Holder. Any Note surrendered for
conversion during the period from the close of business on any Regular Record
Date to the opening of business on the next succeeding Interest Payment Date
(except Notes called for redemption on a Redemption Date or to be repurchased on
a Repurchase Date and as a result, the right to convert such Notes with respect
to which the Holder has exercised redemption or repurchase rights would
terminate during such period) must be accompanied by payment in New York
Clearing House Funds or other funds acceptable to the Company of an amount equal
to the interest payable on such Interest Payment Date on the principal amount of
such Notes being surrendered for conversion. In the case of any Note which has
been converted after any Regular Record Date but before the next Interest
Payment Date, interest the Stated Maturity of which is on such Interest Payment
Date shall be payable on such Interest Payment Date notwithstanding such
conversion, and such interest shall be paid to the Holder of such Note on such
Regular Record Date. As a result of the foregoing provisions, Holders that
surrender Notes for conversion on a date that is not an Interest Payment Date
will not receive any interest for the period from the Interest Payment Date next
preceding the date of conversion to the date of conversion or for any later
period, even if the Notes are surrendered after a notice of redemption (except
for the payment of interest on Notes called for redemption on a Redemption Date
or to be repurchased on a Repurchase Date for which the right to convert such
Notes would terminate during the period between a Regular Record Date and the
Interest Payment Date to which it relates). No other payment or adjustment for
interest, or for any dividends in respect of Common Stock, will be made upon
conversion. Holders of Common Stock issued upon conversion will not be entitled
to receive any dividends payable to holders of Common Stock as of any record
time before the close of business on the conversion date. No fractional shares
will be issued upon conversion but, in lieu thereof, the Company will calculate
an appropriate amount to be paid in cash based on the market price of Common
Stock at the close of business on the day of conversion. Such market price will
be calculated by the Company and shall be deemed to be the average of the daily
Closing Prices per share for the five consecutive Trading Days selected by the
Company commencing not more than 10 Trading Days before, and ending not later
than, the earlier of the day in question and the day before the ''ex'' date with
respect to an issuance or distribution requiring such computation. The term
''ex'' date, when used with respect to any issuance or distribution, means the
first date on which the Common Stock trades without the right to receive such
issuance or distribution. ''Closing Price Per Share'' means, for any day, the
last reported sales price per share on the NYSE. A ''Trading Day'' is any day on
which the NYSE is open for business.
A Holder delivering a Note for conversion will not be required to pay any
taxes or duties in respect of the issue or delivery of Common Stock on
conversion but will be required to pay any tax or duty which may be payable in
respect of any transfer involved in the issue or delivery of the Common Stock in
a name other than that of the Holder of the Note. Certificates representing
shares of Common Stock will not be issued or delivered unless the person
requesting such issue has paid to the Company the amount of any such tax or duty
or has established to the satisfaction of the Company that such tax or duty has
been paid.
The conversion rate is subject to adjustment in certain events, including:
(a) dividends (and other distributions) payable in Common Stock on shares of
capital stock of the Company, (b) the issuance to all holders of Common Stock of
rights, options or warrants entitling them to subscribe for or purchase Common
Stock at less than the then current market price (determined as provided in the
Indenture) of Common Stock, (c) subdivisions, combinations and reclassifications
of Common Stock, (d) distributions to all holders of Common Stock of evidences
of indebtedness of the Company, shares of capital stock, cash or assets
(including securities, but excluding those dividends, rights, options, warrants
and distributions referred to above, dividends and distributions paid
exclusively in cash and distributions upon mergers or consolidations to which
the next succeeding paragraph applies), (e) distributions consisting exclusively
of cash (excluding any cash portion of distributions referred to in (d) above,
or cash distributed upon a merger or consolidation to which the next succeeding
paragraph applies) to all holders of Common Stock in an aggregate amount that,
combined together with (i) other such all-cash distributions made within the
preceding 12 months in respect of which no adjustment has been made and (ii) any
cash and the fair market value of other consideration payable in respect of any
tender offer by the Company or any of its subsidiaries for Common Stock
concluded within the preceding 12 months in respect of which no adjustment has
been made, exceeds 12.5% of the Company's market capitalization (being the
product of the then current market price of the Common Stock and the number of
shares of Common Stock then outstanding) on the record date for such
distribution, and (f) the successful completion of a tender offer made by the
Company or any of its subsidiaries for Common Stock which involves an aggregate
consideration that, together with (i) any cash and other consideration payable
in a tender offer by the Company or any of its subsidiaries for Common Stock
expiring within the 12 months preceding the expiration of such tender offer in
respect of which no adjustment has been made and (ii) the aggregate amount of
any such all-cash distributions referred to in (e) above to all holders of
Common Stock within the 12 months preceding the expiration of such tender offer
in respect of which no adjustments have been made, exceeds 12.5% of the
Company's market capitalization on the expiration of such tender offer. The
Company reserves the right to make such increases in the conversion rate in
addition to those required in the foregoing provisions as it considers to be
advisable in order that any event treated for federal income tax purposes as a
dividend or distribution of stock or issuance of rights or warrants to purchase
or subscribe for stock will not be taxable to the recipients. No adjustment of
the conversion rate will be required to be made until the cumulative adjustments
amount to 1.0% or more of the conversion rate. The Company shall compute any
adjustments to the conversion price pursuant to this paragraph and will give
notice to the Holders of the Notes of any adjustments.
In case of any consolidation or merger of the Company with or into another
Person or any merger of another Person into the Company (other than a merger
which does not result in any reclassification, conversion, exchange or
cancellation of the Common Stock), or in case of any sale or transfer of all or
substantially all of the assets of the Company, each Note then outstanding will,
without the consent of the Holder of any Note or coupon, become convertible only
into the kind and amount of securities, cash and other property, if any,
receivable upon such consolidation, merger, sale or transfer by a holder of the
number of shares of Common Stock into which such Note was convertible
immediately prior thereto (assuming such holder of Common Stock failed to
exercise any rights of election and that such Note was then convertible).
If at any time the Company makes a distribution of property to its
stockholders which would be taxable to such stockholders as a dividend for
federal income tax purposes (e.g., distribution of evidences of indebtedness or
assets of the Company, but generally not stock dividends on Common Stock or
rights to subscribe for Common Stock) and, pursuant to the anti-dilution
provisions of the Indenture, the number of shares into which Notes are
convertible is increased, such increase may be deemed for federal income tax
purposes to be the payment of a taxable dividend to Holders of Notes. See ''--
Certain U.S. Federal Income Tax Consequences''.
Subordination
The payment of the principal of, premium, if any, and interest on, the
Notes and coupons will be subordinated in right of payment to the extent set
forth in the Indenture to the prior payment in full of all Senior Debt of the
Company. ''Senior Debt'' means the principal of (and premium, if any) and
interest (including all interest accruing subsequent to the commencement of any
bankruptcy or similar proceeding, whether or not a claim for post-petition
interest is allowable as a claim in any such proceeding) on, and all fees and
other amounts (including collection expenses, attorney's fees and late charges)
owing with respect to, the following, whether direct or indirect, absolute or
contingent, secured or unsecured, due or to become due, outstanding at the date
of execution of the Indenture or thereafter incurred, created or assumed: (a)
indebtedness of the Company for money borrowed or evidence by bonds, debentures,
notes or similar instruments, (b) reimbursement obligations of the Company with
respect to letters of credit, bankers' acceptances and similar facilities issued
for the account of the Company, (c) every obligation of the Company issued or
assumed as the deferred purchase price of property or services purchased by the
Company, excluding any trade payables and other accrued current liabilities
incurred in the ordinary course of business, (d) obligations of the Company as
lessee under leases required to be capitalized on the balance sheet of the
lessee under U.S. generally accepted accounting principles, (e) obligations of
the Company under interest rate and currency swaps, caps, floors, collars or
similar arrangements intended to protect the Company against fluctuations in
interest or currency exchange rates, (f) indebtedness of others of the kinds
described in the preceding clauses (a) through (e) that the Company has assumed,
guaranteed or otherwise assured the payment thereof, directly or indirectly,
and/or (g) deferrals, renewals, extensions and refundings of, or amendments,
modifications or supplements to, any indebtedness or obligation described in the
preceding clauses (a) through (f) whether or not there is any notice to or
consent of the Holders of Notes; provided, however, that the following shall not
constitute Senior Debt: (i) any particular indebtedness or obligation that is
owed by the Company to any of its direct and indirect Subsidiaries and (ii) any
particular indebtedness, deferral, renewal, extension or refunding if it is
expressly stated in the governing terms or in the assumption thereof that the
indebtedness involved is not senior in right of payment to the Notes or that
such indebtedness is pari passu with or junior to the Notes.
No payment on account of principal, premium, if any, or interest on, the
Notes or any coupon may be made if there shall have occurred (i) a default in
the payment of principal, premium, if any, or interest (including a default
under any repurchase or redemption obligation) with respect to any Senior Debt
or (ii) any other event of default with respect to any Senior Debt, permitting
the holders thereof to accelerate the maturity thereof, and such event of
default shall not have been cured or waived or shall not have ceased to exist
after written notice of such event of default shall have been given to the
Company and the Trustee by any holder of Senior Debt. Upon any acceleration of
the principal due on the Notes or payment or distribution of assets of the
Company to creditors upon any dissolution, winding up, liquidation or
reorganization, whether voluntary or involuntary, or in bankruptcy, insolvency,
receivership or other proceedings, all principal, premium, if any and interest
due on all Senior Debt must be paid in full before the Holders of the Notes are
entitled to receive any payment. By reason of such subordination, in the event
of insolvency, creditors of the Company who are holders of Senior Debt may
recover more, ratably, than the Holders of the Notes, and such subordination may
result in a reduction or elimination of payments to the Holders of the Notes.
As of December 31, 1997, the aggregate principal amount of outstanding
Senior Debt (including a credit facility) was approximately $572,510,000, and
the aggregate amount of indebtedness and other liabilities of the Company's
subsidiaries was approximately $88,738,000. In addition, the Notes are
structurally subordinated to all indebtedness and other liabilities (including
trade payable and lease obligations) of the Company's subsidiaries, as any right
of the Company to receive any assets of its subsidiaries upon their liquidation
or reorganization (and the consequent right of the Holders of the Notes to
participate in those assets) will be effectively subordinated to the claims of
that subsidiary's creditors (including trade creditors), except to the extent
that the Company itself is recognized as a creditor of such subsidiary, in which
case the claims of the Company would still be subordinate to any security
interest in the assets of such subsidiary and any indebtedness of such
subsidiary senior to that held by the Company.
The Indenture does not limit the Company's ability to incur Senior Debt or
any other indebtedness or liabilities.
Optional Redemption
The Notes may not be redeemed prior to November 15, 2000. Thereafter, the
Notes may be redeemed, in whole or in part, at the option of the Company, upon
not less than 30 nor more than 60 days' prior notice as provided under ''--
Notices'' below, at the redemption prices set forth below.
The redemption prices (expressed as a percentage of principal amount) are
as follows for the 12-month period beginning on November 15 of the following
years:
Redemption
Year Price
2000 101.6%
2001 100.8%
and thereafter at a redemption price equal to 100% of the principal amount, in
each case together with accrued interest to the date of redemption.
Repurchase at Option of Holders Upon a Change in Control
If a Change in Control (as defined) occurs, each Holder of Notes shall have
the right, at the Holder's option, to require the Company to repurchase all of
such Holder's Notes, or any portion of the principal amount thereof that is
equal to $1,000 or an integral multiple of $1,000 in excess thereof, on the date
(the ''Repurchase Date'') that is 45 days after the date of the Company Notice
(as defined), at a price equal to 100% of the principal amount of the Notes to
be repurchased (the ''Repurchase Price''), together with interest accrued to the
Repurchase Date.
The Company may, at its option, in lieu of paying the Repurchase Price in
cash, pay the Repurchase Price in Common Stock, the fair market value of which
Common Stock shall be equal to 95% of the average of the closing prices of the
Common Stock for the five consecutive Trading Days ending on and including the
third Trading Day preceding the Repurchase Date, provided that payment may not
be made in Common Stock unless such shares are listed on a national securities
exchange or traded on the Nasdaq National Market at the time of payment.
Within 30 days after the occurrence of a Change in Control, the Company is
obligated to give to all Holders of the Notes notice, as provided in the
Indenture (the ''Company Notice''), of the occurrence of such Change in Control
and of the repurchase right arising as a result thereof. The Company Notice
shall be sufficiently given to Holders of Notes if in writing and mailed, first
class postage prepaid, to each Holder of a Note affected by such event, at the
address of such Holder. The Company must also deliver a copy of the Company
Notice to the Trustee. To exercise the repurchase right, a Holder of Notes must
deliver on or before the 30th day after the date of the Company Notice
irrevocable written notice to the Trustee of the Holder's exercise of such
right, together with the Notes with respect to which the right is being
exercised. At least two business days prior to the Repurchase Date, the Company
must publish a notice in the manner described above specifying whether the
Company will pay the Repurchase Price in cash or in Common Stock.
A Change in Control shall be deemed to have occurred at such time after the
original issuance of the Notes as there shall occur:
(i) the acquisition by any Person of beneficial ownership, directly or
indirectly, through a purchase, merger or other acquisition transaction or
series of transactions, of shares of capital stock of the Company entitling
such Person to exercise 50% or more of the total voting power of all shares
of capital stock of the Company entitled to vote generally in elections of
directors, other than any such acquisition by the Company, any subsidiary of
the Company or any employee benefit plan of the Company; or
(ii) any consolidation of the Company with, or merger of the Company into,
any other Person, any merger of another person into the Company, or any sale
or transfer of all or substantially all of the assets of the Company to
another Person (other than (a) any such transaction (x) which does not result
in any reclassification, conversion, exchange or cancellation of outstanding
shares of Common Stock and (y) pursuant to which holders of Common Stock
immediately prior to such transaction have the entitlement to exercise,
directly or indirectly, 50% or more of the total voting power of all shares
of capital stock entitled to vote generally in the election of directors of
the continuing or surviving person immediately after such transaction and (b)
any merger which is effected solely to change the jurisdiction of
incorporation of the Company and results in a reclassification, conversion or
exchange of outstanding shares of Common Stock into solely shares of common
stock);
provided, however, that a Change in Control shall not be deemed to have occurred
if either (a) the closing price per share of the Common Stock for any five
Trading Days within the period of 10 consecutive Trading Days ending immediately
after the later of the Change in Control or the public announcement of the
Change in Control (in the case of a Change in Control under clause (i) above) or
ending immediately before the Change in Control (in the case of a Change in
Control under clause (ii) above) shall equal or exceed 105% of the Conversion
Price of the Notes in effect on each such Trading Day, or (b) all of the
consideration (excluding cash payments for fractional shares) in the transaction
or transactions constituting the Change in Control consists of common stock
traded on a national securities exchange or quoted on the Nasdaq National Market
and as a result of such transaction or transactions the Notes become convertible
solely into such common stock. ''Beneficial owner'' shall be determined in
accordance with Rule 13d-3 promulgated by the Commission under the Exchange Act,
as in effect on the date of original execution of the Indenture.
Any repurchase in connection with a Change in Control would, absent a
waiver from the holders of Senior Debt, be blocked by the subordination
provisions of the Notes. See ''--Subordination''. Failure by the Company to
repurchase the Notes when required would result in an Event of Default with
respect to the Notes whether or not such repurchase is permitted by the
subordination provisions. See ''--Events of Default''.
Rule 13e-4 under the Exchange Act requires the dissemination of certain
information to security holders in the event of an issuer tender offer and may
apply in the event that the repurchase option becomes available to Holders of
the Notes. The Company will comply with this rule to the extent applicable at
that time.
The foregoing provisions would not necessarily afford Holders of the Notes
protection in the event of highly leveraged or other transactions involving the
Company that may adversely affect Holders.
Mergers and Sales of Assets by the Company
The Company may not consolidate with or merge into any other Person or,
directly or indirectly, convey, transfer, sell, lease or otherwise dispose of
all or substantially all of its properties and assets to any Person (other than
a wholly owned subsidiary), and the Company may not permit any Person (other
than a wholly owned subsidiary) to consolidate with or merge into the Company or
convey, transfer, sell, lease or otherwise dispose of all or substantially all
of its properties and assets to the Company, unless (a) the Person formed by
such consolidation or into which the Company is merged or the Person to which
the properties and assets of the Company are so transferred or leased is a
corporation, limited liability company, partnership or trust organized and
existing under the laws of the United States, any State thereof or the District
of Columbia and has expressly assumed the due and punctual payment of the
principal of, premium, if any, and interest on the Notes and coupons and the
performance of the other covenants of the Company under the Indenture, (b)
immediately after giving effect to such transaction and treating any
indebtedness which becomes an obligation of the Company or a Subsidiary as a
result of such transaction as having been incurred by the Company or such
Subsidiary at the time of such transaction, no Event of Default, and no event
which, after notice or lapse of time or both, would become an Event of Default,
shall have occurred and be continuing, (c) if, as a result of any such
consolidation or merger or such conveyance, transfer or lease, properties or
assets of the Company would become subject to a mortgage, pledge, lien, security
interest or other encumbrance which would not be permitted by this Indenture,
the Company or such successor corporation or Person, as the case may be, shall
take such steps as shall be necessary effectively to secure the Securities
equally and ratably with (or prior to) all indebtedness secured thereby, and (d)
the Company has provided to the Trustee an Officers' Certificate and Opinion of
Counsel as provided in the Indenture.
Events of Default
The following will be Events of Default under the Indenture: (a) failure to
pay any interest (including Liquidated Damages) on any Note or coupon when due,
continuing for 30 days, whether or not such payment is prohibited by the
subordination provisions of the Indenture; (b) failure to pay the principal or
Redemption Price or Repurchase Price of any Note when due, whether or not such
payment is prohibited by the subordination provisions of the Indenture; (c)
default in the Company's obligation to provide notice of a Change in Control;
(d) failure to perform any other covenant or warranty of the Company in the
Indenture, continuing for 60 days after written notice to the Company by the
Trustee as provided in the Indenture; (e) default under any bond, debenture,
note or other evidence of Indebtedness of the Company or under any mortgage,
indenture or instrument under which there may be issued or by which there may be
secured or evidenced any Indebtedness of the Company (including the Notes),
whether such Indebtedness now exists or shall hereafter be created, which
default shall constitute a failure to pay an aggregate principal amount
exceeding $10,000,000 of such Indebtedness when due and payable after the
expiration of any applicable grace period with respect thereto and shall have
resulted in such Indebtedness in an aggregate principal amount exceeding
$10,000,000 becoming or being declared due and payable prior to the date on
which it would otherwise have become due and payable, without such Indebtedness
having been discharged, or such acceleration having been rescinded or annulled,
within a period of 10 days after written notice (a Notice of Default) is given
to the Company by the Trustee or to the Company and the Trustee as provided in
the Indenture, unless such default shall have been remedied, cured or waived as
provided in the Indenture; and (f) certain events of bankruptcy, insolvency or
reorganization. Subject to the provisions of the Indenture relating to the
duties of the Trustee in case an Event of Default shall occur and be continuing,
the Trustee will be under no obligation to exercise any of its rights or powers
under the Indenture at the request or direction of any of the Holders, unless
such Holders shall have offered to the Trustee reasonable indemnity. Subject to
such provisions for the indemnification of the Trustee, the Holders of a
majority in aggregate principal amount of the Outstanding Notes will have the
right to direct the time, method and place of conducting any proceeding for any
remedy available to the Trustee or exercising any trust or power conferred on
the Trustee.
If an Event of Default (other than an Event of Default specified in
subsection (f) above) occurs and is continuing, the Trustee or the Holders of
not less than 25% in principal amount of the Outstanding Notes may declare the
principal amount (or specified amount) of all the Notes to be due and payable
immediately, by a notice in writing to the Company (and to the Trustee if given
by Holders), and upon any such declaration such principal and any accrued
interest and any unpaid Liquidated Damages thereon will become immediately due
and payable. If an Event of Default specified in subsection (f) occurs and is
continuing, the principal and any accrued interest, together with any Liquidated
Damages thereon, on all of the Notes then Outstanding shall ipso facto become
due and payable immediately without any declaration or other Act on the part of
the Trustee or any Holder.
At any time after a declaration of acceleration has been made but before a
judgment or decree based on acceleration, the Holders of a majority in aggregate
principal amount of Outstanding Notes may, under certain circumstances, rescind
and annul such acceleration if all Events of Default, other than the nonpayment
of accelerated principal and interest have been cured or waived as provided in
the Indenture.
No Holder of any Note will have any right to institute any proceeding with
respect to the Indenture or for any remedy thereunder, unless such Holder shall
have previously given to the Trustee written notice of a continuing Event of
Default and unless also the Holders of at least 25% in aggregate principal
amount of the Outstanding Notes shall have made written request, and offered
reasonable indemnity, to the Trustee to institute such proceeding as trustee,
and the Trustee shall not have received from the Holders of a majority in
aggregate principal amount of the Outstanding Notes a direction inconsistent
with such request and shall have failed to institute such proceeding within 60
days. However, such limitations do not apply to a suit instituted by a Holder of
a Note for the enforcement of payment of the principal of, premium, if any, or
interest on such Note on or after the respective due dates expressed in such
Note or of the right to convert such Note in accordance with the Indenture.
The Company will be required to furnish to the Trustee annually a statement
as to the performance by the Company of certain of its obligations under the
Indenture and as to any default in such performance.
Modification and Waiver
The Indenture contains provisions permitting the Company and the Trustee to
enter into a supplemental indenture without the consent of the Holders, (a) to
evidence the succession of another Person to the Company and the assumption by
such successor of the covenants and obligations under the Indenture and the
Notes, (b) to add to the covenants for the benefit of the Holders or to
surrender any right or power conferred upon the Company under the Indenture, (c)
to secure the Notes, (d) to modify the restrictions on, and procedures for,
resale and other transfers of the notes pursuant to law, regulation or practice
relating to the resale or transfer of restricted securities generally, (e) to
make provision with respect to the conversion rights of Holders pursuant to the
Indenture, (f) to accommodate the issuance of Notes in book-entry or definitive
form and related matters not affecting adversely the interests of the Holders,
(g) to comply with the requirements of the Commission in order to effect and
maintain the qualification of the Indenture under the Trust Indenture Act of
1939, (h) to evidence and provide for the acceptance and appointment of a
successor trustee, or (i) to cure any ambiguity or correct or supplement any
provision of the Indenture, provided that such action shall not adversely affect
the interests of the Holders in any material respect. In addition, modifications
and amendments of the Indenture may be made, and certain past defaults by the
Company may be waived, with the written consent of the Holders of not less than
a majority in aggregate principal amount of the Notes at the time Outstanding.
However, no such modification or amendment may, without the consent of the
Holder of each Outstanding Note affected thereby, (a) change the Stated Maturity
of the principal of, or any installment of interest on, any Note, (b) reduce the
principal amount of, or the premium, if any, or rate of interest on, any Note,
(c) reduce the amount payable upon redemption or repurchase, (d) modify the
provisions with respect to the repurchase right of the Holders in a manner
adverse to the Holders, (e) change the coin or currency of payment of principal
of, premium, if any, or interest on, any Note or coupon, (f) impair the right to
institute suit for the enforcement of any payment on or with respect to any Note
or coupon, (g) adversely affect the right to convert Notes, (h) modify the
subordination provisions in a manner adverse to the Holders of the Notes, (i)
reduce the above-stated percentage of Outstanding Notes necessary to modify or
amend the Indenture, (j) reduce the percentage of aggregate principal amount of
Outstanding Notes necessary for waiver of compliance with certain provisions of
the Indenture or for waiver of certain defaults, (k) reduce the percentage in
aggregate principal amount of Notes Outstanding required for the adoption of a
resolution or the quorum required at any meeting of Holders of Notes at which a
Resolution is adopted, or (l) modify the obligation of the Company to deliver
information required under Rule 144A to permit resales of Notes and Common Stock
issuable upon conversion thereof in the event the Company ceases to be subject
to certain reporting requirements under the U.S. securities laws.
The Holders of a majority in aggregate principal amount of the Outstanding
Notes may waive compliance by the Company with certain restrictive provisions of
the Indenture. The Holders of a majority in aggregate principal amount of the
Outstanding Notes may waive any past default under the Indenture, except a
default in the payment of principal, premium, if any, or interest.
Transfer and Exchange
The Company has initially appointed the Trustee as security registrar and
transfer agent, acting through its office or agency in the City of New York. The
Company reserves the right to vary or terminate the appointment of the security
registrar or of any transfer agent or to appoint additional or other transfer
agents or to approve any change in the office through which any security
registrar or any transfer agent acts.
Purchase and Cancellation
The Company or any subsidiary may at any time and from time to time
purchase Notes at any price in the open market or otherwise.
All Securities and coupons surrendered for payment, redemption, repurchase,
registration of transfer or exchange or conversion shall, if surrendered to any
Person other than the Trustee, be delivered to the Trustee. All Securities so
delivered to the Trustee shall be canceled promptly by the Trustee. No
Securities shall be authenticated in lieu of or in exchange for any Securities
canceled except as provided in the Indenture. Unless otherwise requested by the
Company and confirmed in writing, the Trustee shall, from time to time but not
less than once annually, destroy all canceled Securities and coupons and deliver
to the Company a certificate of destruction, which certificate shall specify the
number, principal amount and, in the case of Securities, the form of each
canceled Security and coupon so destroyed.
Title
The Company and the Trustee may treat the registered owner (as reflected in
the Security Register) of any Note as the absolute owner thereof (whether or not
such Note shall be overdue) for the purpose of making payment and for all other
purposes.
Notices
Notice to Holders of the Notes will be given by mail to the addresses of
such Holders as they appear in the Security Register. Such notices will be
deemed to have been given on the date of the first such publication or on the
date of such mailing, as the case may be.
Notice of a redemption of Notes will be given at least once not less than
30 nor more than 60 days prior to the redemption date (which notice shall be
irrevocable) and will specify the redemption date.
Replacement of Notes
Notes that become mutilated, destroyed, stolen or lost will be replaced by
the Company at the expense of the Holder upon delivery to the Trustee or to a
transfer agent outside the United States of the mutilated Notes or evidence of
the loss, theft or destruction thereof satisfactory to the Company and the
Trustee. In the case of a lost, stolen or destroyed Note indemnity satisfactory
to the Trustee and the Company may be required at the expense of the Holder of
such Note before a replacement Note will be issued.
Payment of Stamp and Other Taxes
The Company shall pay all stamp and other duties, if any, which may be
imposed by the United States or the United Kingdom or any political subdivision
thereof or taxing authority thereof or therein with respect to the issuance of
the Notes. The Company will not be required to make any payment with respect to
any other tax, assessment or governmental charge imposed by any government or
any political subdivision thereof or taxing authority therein.
Governing Law
The Indenture, the Notes and the coupons will be governed by and construed
in accordance with the laws of the State of New York, United States of America.
The Trustee
The Trustee for the Holders of the Notes issued under the Indenture is
State Street Bank and Trust Company.
In case an Event of Default shall occur (and shall not be cured), the
Trustee will be required to use the degree of care of a prudent person in the
conduct of his own affairs in the exercise of its powers. Subject to such
provisions, the Trustee will be under no obligation to exercise any of its
rights or powers under the Indenture at the request of any of the Holders of
Notes, unless they shall have offered to the Trustee reasonable security or
indemnity.
DESCRIPTION OF CAPITAL STOCK
The statements set forth under this heading with respect to AOL's Restated
Certificate of Incorporation (the ''AOL Charter''), AOL's Restated By-laws (the
''AOL By-laws'') and the Delaware General Corporation Law (the ''DGCL''), are
brief summaries thereof and do not purport to be complete. Such statements are
subject to the detailed provisions of the AOL Charter, the AOL By-laws and the
DGCL.
The authorized capital stock of AOL consists of 600,000,000 shares of
Common Stock, $.01 par value (''Common Stock''), and 5,000,000 shares of
Preferred Stock, $.01 par value (''Preferred Stock''). As of January 31, 1998,
there were 105,105,940 shares of Common Stock outstanding (not giving effect to
a recently announced 2-for-1 stock split) and 1,000 shares of Series B
Convertible Preferred Stock outstanding. In April 1993, the Board of Directors
of the Company designated 200,000 shares of the Company's Preferred Stock as
Series A Junior Participating Preferred Stock in connection with the
establishment of a shareholder rights plan.
Common Stock
Holders of Common Stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Stockholders casting a plurality of votes of the stockholders entitled
to vote in an election of directors may elect those directors standing for
election. Holders of Common Stock are entitled to receive ratably such
dividends, if any, as may be declared by the Board of Directors out of funds
legally available therefore, subject to any preferential dividend rights of
Preferred Stock that may be issued at such future time or times. Upon the
liquidation, dissolution or winding up of the Company the holders of Common
Stock are entitled to receive ratably, according to the number of shares of
Common Stock held by them, the net assets of the Company available after the
payment of all debts and other liabilities and subject to the prior rights of
Preferred Stock that may be issued at such time. Holders of Common Stock have no
preemptive, subscription, redemption or conversion rights. The outstanding
shares of Common Stock are fully paid and nonassessable. The rights, preferences
and privileges of holders of Common Stock are subject to the rights of the
holders of shares of any series of Preferred Stock which the Company may
designate and issue in the future.
Preferred Stock
The Board of Directors is authorized, subject to any limitations prescribed
by law, without further stockholder approval, to issue from time to time up to
an aggregate of 5,000,000 shares of the Company's authorized class of
undesignated Preferred Stock, in one or more series. Each such series of
Preferred Stock shall have such number of shares, designations, preferences,
powers, qualifications and special or relative rights or privileges as shall be
determined by the Board of Directors, which may include, among others, dividend
rights, voting rights, redemption and sinking fund provisions, liquidation
preferences, conversion rights and preemptive rights.
The stockholders of the Company have granted the Board of Directors
authority to issue Preferred Stock and to determine its rights and preferences
to eliminate delays associated with a stockholder vote on specific issuances.
The rights of the holders of Common Stock will be subject to the rights of
holders of any Preferred Stock issued in the future. The issuance of Preferred
Stock, while providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of making it
more difficult for a third party to acquire, or of discouraging a third party
from acquiring, a majority of the outstanding voting stock of the Company.
During May 1996, the Company sold 1,000 shares of Series B convertible
preferred stock (''Series B Preferred Stock'') for approximately $28,000,000.
The Series B 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.
Charter Provisions
The Company's Restated Certificate of Incorporation and Restated By-Laws
provide for a classified Board of Directors. The Board of Directors currently
consists of eight members, classified into three classes. At each annual meeting
of stockholders, directors are elected for a full term of three years to succeed
those directors whose terms are expiring.
The Company's Restated Certificate of Incorporation includes provisions
eliminating the personal liability of the Company's directors for monetary
damages resulting from breaches of their fiduciary duty to the extent permitted
by Delaware law. The Company's Restated Certificate of Incorporation and
Restated By-Laws include provisions indemnifying the Company's directors and
officers to the fullest extent permitted by Delaware law, including under
circumstances in which indemnification is otherwise discretionary, and
permitting the Board of Directors to grant indemnification to employees and
agents to the fullest extent permitted by Delaware law.
The Company's Restated By-Laws require that nominations for the Board of
Directors made by the stockholder and proposals by stockholders seeking to have
any business conducted at a stockholders' meeting comply with particular notice
procedures. A notice by a stockholder of a planned nomination or of proposed
business must generally be given not later than 60 days nor earlier than 90 days
prior to the date of the meeting. A stockholder's notice of nomination must
include particular information about the stockholder, the nominee and any
beneficial owner on whose behalf the nomination is made, and a notice from a
stockholder proposing business to be brought before the meeting must describe
such business and include information about the stockholder making the proposal,
any beneficial owner on whose behalf the proposal is made, and any other
stockholder known to be supporting the proposal.
In addition, the Restated Certificate of Incorporation contains a ''fair
price'' provision (the ''Fair Price Provision'') providing that certain
''Business Combinations'' with any ''Interested Stockholder'' (as each term is
defined in the Fair Price Provision) may not be consummated without an 80%
stockholder vote, unless either approved by at least a majority of the
Disinterested Directors (as defined in the Fair Price Provision) or certain
minimum price and procedural requirements are met. An ''Interested Stockholder''
is defined to include any individual or entity who is, or is an affiliate and
during the prior two years was, the beneficial owner of more than 15% of the
voting stock of the Company. A ''Business Combination'' includes, among other
things, (i) a merger or consolidation, (ii) the sale or other disposition of 10%
or more of the Company's assets, (iii) the issuance of stock having a value in
excess of 10% of the fair market value of the Company's Common Stock, (iv) any
reclassification or recapitalization which increase the proportionate share
holdings of an Interested Stockholder and (v) the adoption of a plan of
liquidation or dissolution proposed by or on behalf of an Interested
Stockholder. A significant purpose of the Fair Price Provision is to deter a
purchaser from using two-tiered pricing and similar unfair or discriminatory
tactics in an attempt to acquire the Company. The affirmative vote of the
holders of 80% of the voting power of the Company is required to amend or repeal
the Fair Price Provision or adopt any provision inconsistent with it.
The Company's Restated Certificate of Incorporation and Restated By-Laws
provide that any action required or permitted to be taken by the stockholders of
the Company shall be taken only at a duly called annual or special meeting of
the stockholders, or by the unanimous written consent of all stockholders
entitled to vote. Special meetings may be called only by the Board of Directors
or the Chief Executive Officer of the Company. In addition, the Restated
Certificate of Incorporation provides that the Board of Directors may, from time
to time, fix the number of directors constituting the Board of Directors, and
only the directors are permitted to fill vacancies on the Board of Directors.
The General Corporation Law of Delaware provides generally that the
affirmative vote of a majority of the shares entitled to vote on any matter is
required to amend a corporation's certificate of incorporation or by-laws,
unless a corporation's certificate of incorporation or by-laws, as the case may
be, requires a greater percentage. The affirmative vote of the holders of at
least 80% of the outstanding voting stock of the Company is required to amend or
repeal certain provisions of the Company's Restated Certificate of
Incorporation, and to reduce the number of authorized shares of Common Stock and
Preferred Stock. Such 80% vote is also required for stockholders to amend or
repeal the Company's Restated By-Laws.
The provisions of the Restated Certificate of Incorporation and Restated
By-Laws discussed above could make more difficult or discourage a proxy contest
or the acquisition of control by substantial block of the Company's stock or the
removal of any incumbent member of the Board of Directors. Such provisions could
also have the effect of discouraging a third party from making a tender offer or
otherwise attempting to obtain control of the Company, even though such an
attempt might be beneficial to the Company and its stockholders.
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 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 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 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.
The Rights have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire the Company
on terms not approved by the Company's Board of Directors. The Rights should not
interfere with any merger or other business combination approved by the Board of
Directors since the Rights may be redeemed by the Board at the Redemption Price
(as defined in the Rights Agreement) prior to the time that a person or group
has acquired beneficial ownership of the Threshold Amount (as defined in the
Rights Agreements) or more of the Common Shares or has been determined to be an
Adverse Person (as defined in the Rights Agreement) or during the 10-day period
(which period may be extended in certain circumstances) following the public
announcement of such acquisition or following such determination by the Board of
Directors.
Change of Control
Section 203 of the DGCL prohibits generally a public Delaware corporation,
including AOL, from engaging in a Business Combination (as defined below) with
an Interested Stockholder (as defined below) for a period of three years after
the date of the transaction in which an Interested Stockholder became such,
unless: (i) the board of directors of such corporation approved, prior to the
date such Interested Stockholder became such, either such Business Combination
or such transaction; (ii) upon consummation of such transaction, such Interested
Stockholder owns at least 85% of the voting shares of such corporation
(excluding specified shares); or (iii) such Business Combination is approved by
the board of directors of such corporation and authorized by the affirmative
vote (at an annual or special meeting and not by written consent) of at least 66
2/3% of the outstanding voting shares of such corporation (excluding shares held
by such Interested Stockholder). A ''Business Combination'' includes (i)
mergers, consolidations and sales or other dispositions of 10% or more of the
assets of a corporation to or with an Interested Stockholder, (ii) certain
transactions resulting in the issuance or transfer to an Interested Stockholder
of any stock of such corporation or its subsidiaries and (iii) certain other
transactions resulting in a financial benefit to an Interested Stockholder. An
''Interested Stockholder'' is a person who owns (or, if such person is an
affiliate or associate of the corporation, within a three-year period did own)
15% or more of a corporation's stock entitled to vote generally in the election
of directors and, the affiliates and associates of such person.
CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES
The following is a general summary of certain U.S. Federal income and
estate tax consequences of the ownership and disposition to initial holders of
the Notes and the Common Stock held as capital assets. For purposes of this
summary, a ''U.S. Holder'' is (i) a citizen or resident of the U.S., (ii) a
corporation or other entity taxable as a corporation created or organized in the
U.S. or under the laws of the U.S. or of any political subdivision thereof,
(iii) an estate or trust whose income is includible in gross income for U.S.
Federal income tax purposes regardless of its source, or (iv) an individual or
entity otherwise subject to U.S. Federal income tax on its worldwide income on a
net income basis; and a ''Non-U.S. Holder'' is any holder other than a U.S.
Holder. This summary is based on the Internal Revenue Code of 1986, as amended
(the ''Code''), regulations, rulings, and decisions in effect or available on
the date of this Offering Circular. All of the foregoing are subject to change,
which change may apply retroactively and could affect the continued validity of
this summary. This summary does not address all aspects of U.S. Federal income
tax law that may be relevant to holders that may be subject to special treatment
under such laws (for example, insurance companies, tax-exempt organizations,
financial institutions, broker-dealers, holders whose ''functional'' currency is
not the U.S. dollar, or holders who engage in certain ''straddle'' or
''hedging'' transactions). Accordingly, prospective investors are urged to
consult with their tax advisors regarding the U.S. Federal, state, local,
foreign and other tax consequences of owning and disposing of the Notes and
Common Stock.
Tax Treatment of U.S. Holders
Dividends and Sale or Disposition
A U.S. Holder will not recognize gain or loss upon the conversion of the
Notes solely into Common Stock of the Company (except with respect to cash in
lieu of fractional shares). The U.S. Holder's basis in the Common Stock received
on conversion will be the same as the U.S. Holder's adjusted tax basis in the
Notes at the time of the conversion, and a U.S. Holder's holding period for the
Common Stock will include the U.S. Holder's holding period of the Notes that
were converted.
A U.S. Holder will recognize gain or loss upon the sale, redemption,
repurchase or other taxable disposition (collectively, a ''Disposition'') of the
Notes or Common Stock in an amount equal to the difference between the U.S.
Holder's adjusted tax basis in the Notes or Common Stock and the amount received
therefor (other than amounts attributable to accrued but unpaid interest on the
Notes which will be treated as interest). Such gain applicable to non-corporate
U.S. Holders generally will be long-term capital gain if the Notes or Common
Stock were held for more than one year (and will be subject to a further reduced
tax rate if the Notes or Common Stock were held for more than eighteen months).
The conversion price of the Notes is subject to adjustment under certain
circumstances. Under Section 305 of the Code and the Treasury regulations issued
thereunder, there may be a taxable constructive distribution to U.S. Holders of
Notes, resulting in ordinary income (subject to a possible dividends received
deduction for corporate holders) to the extent of the Company's current and
accumulated earnings and profits if, and to the extent that, certain adjustments
in the Conversion Price increase such U.S. Holders' proportionate interest in
the earnings and profits and assets of the Company. Such adjustment may occur in
limited circumstances (particularly an adjustment to reflect a taxable dividend
to U.S. Holders of Common Stock of the Company) and in such a case a
constructive distribution would arise, whether or not the U.S. Holders ever
convert the Notes. Generally, a U.S. Holder's tax basis in a Note will be
increased by the amount of any such constructive dividend.
Tax Treatment of Non-U.S. Holders
Interest and Sale or Disposition of the Notes
Payments on Notes to a Non-U.S. Holder, or gain realized on the Disposition
of the Notes by a Non-U.S. Holder, will not be subject to U.S. Federal income or
withholding tax, as the case may be, unless such income is effectively connected
with a trade or business conducted by such Non-U.S. Holder in the U.S., provided
that (A) in the case of payments of interest or principal, (i) the Non-U.S.
Holder or agent thereof satisfies certain certification requirements set forth
in Section 871(h) and Section 881(c) of the Code and the regulations thereunder,
(ii) the Non-U.S. Holder does not actually or constructively own 10% or more of
the total combined voting power of the Company within the meaning of Section
871(h)(3) of the Code and the regulations thereunder, (iii) the Non-U.S. Holder
is not a controlled foreign corporation that is related to the Company through
equity ownership, and (iv) the beneficial owner is not a bank whose receipt of
interest on a Note is described in Section 881(c)(3)(A) of the Code, or, (B) in
the case of gain, (i) such Non-U.S. Holder holds the Notes as a capital asset
and is not present in the U.S. for 183 days or more in the taxable year of
Disposition. A Non-U.S. Holder may also be subject to tax pursuant to the
provisions of U.S. tax law applicable to certain expatriates.
Dividends
In general, the gross amount of dividends paid to a Non-U.S. Holder will be
subject to U.S. withholding tax at a 30% rate (or any lower rate prescribed by
an applicable U.S. tax treaty) unless the dividends are effectively connected
with a U.S. trade or business conducted by the Non-U.S. Holder within the U.S.
In determining the applicability of a tax treaty that provides for a lower rate
of withholding, dividends paid to an address in a foreign country are presumed
under current Treasury regulations to be paid to a resident of that country.
However, under Treasury regulations released on October 6, 1997, which will
generally be effective for payments made on or after January 1, 1999, a Non-U.S.
Holder would be required to file certain forms in order to claim the benefit of
an applicable treaty rate. Dividends effectively connected to a trade or
business carried on by a Non-U.S. Holder within the U.S. generally will not be
subject to withholding (if the Non-U.S. Holder properly files the applicable
Internal Revenue Service (''IRS'') Form with the payor of the dividend) and
generally will be subject to U.S. Federal income taxation at ordinary U.S.
Federal income tax rates. Effectively connected income may be subject to
different treatment under an applicable tax treaty depending on whether such
dividends are attributable to a permanent establishment of the Non-U.S. Holder
in the U.S. In the case of a Non-U.S. Holder that is a corporation, effectively
connected income may be subject to the branch profits tax (which generally is
imposed upon a foreign corporation at a rate of 30% of the deemed repatriation
from the U.S. of ''effectively connected earnings and profits'') except to the
extent that an applicable tax treaty provides otherwise. A Non-U.S. Holder
eligible for a reduced rate of U.S. withholding tax pursuant to an income tax
treaty may obtain a refund of any excess amounts withheld by filing an
appropriate claim for refund with the IRS.
Sale or Disposition of Common Stock
Generally, a Non-U.S. Holder will not be subject to U.S. Federal income tax
on any gain realized upon the disposition of his Common Stock unless: (i) the
Company has been, or is a ''U.S. real property holding corporation'' for U.S.
Federal income tax purposes and certain other requirements are met, (ii) the
gain is effectively connected with the conduct of a trade or business carried on
by the Non-U.S. Holder within the U.S., or (iii) the Common Stock is disposed of
by a Non-U.S. Holder who holds the Common Stock as a capital asset and is
present in the U.S. for 183 days or more in the taxable year of Disposition. The
Company believes that it has not been, is not currently, and based upon its
current business plans, is not likely to become a U.S. real property holding
corporation. A Non-U.S. Holder may also be subject to tax pursuant to the
provisions of U.S. tax law applicable to certain expatriates. Non-U.S. Holders
should consult applicable tax treaties, which may exempt from U.S. Federal
income tax gains realized upon the Disposition of Common Stock in certain cases.
Estate Tax
A Note beneficially owned by an individual who at the time of death is a
Non-U.S. Holder will not be subject to U.S. Federal estate tax provided that (A)
such individual does not actually or constructively own 10% or more of the total
combined voting power of the Company within the meaning of Section 871(h)(3) of
the Code and the regulations thereunder and (B) such payments with respect to
the Note would not have been, if received at the time of such individual's
death, effectively connected with a trade or business carried on by such
individual within the U.S.
Common Stock owned or treated as owned by an individual Non-U.S. Holder at
the time of death will be includible in the individual's gross estate for U.S.
Federal estate tax purposes, unless an applicable treaty provides otherwise, and
may be subject to U.S. Federal estate tax.
Backup Withholding and Information Reporting
U.S. Holders
Under certain circumstances, a U.S. Holder who is an individual may be
subject to backup withholding (generally imposed at the rate of 31%) on
interest, dividends and principal payments made to, and the proceeds of sales
before maturity made by, certain U.S. Holders. This withholding generally
applies only if such individual U.S. Holder (i) fails to furnish his or her
taxpayer identification number (''TIN'') to the U.S. financial institution or
any other person responsible for the payment of dividends on the Common Stock,
(ii) furnishes an incorrect TIN, (iii) is notified by the IRS that he or she has
failed to properly report payments of interest and dividends and the IRS has
notified the Company that he or is subject to backup withholding, or (iv) fails,
under certain circumstances, to provide a certified statement, signed under
penalty of perjury, that the TIN provided is her or her correct number and that
he or she is not subject to backup withholding.
Non-U.S. Holders
The Company must report annually to the IRS and to each Non-U.S. Holder the
amount of dividends paid to, and the tax withheld, if any, with respect to, each
Non-U.S. Holder. These information reporting requirements apply regardless of
whether withholding was reduced or eliminated by an applicable tax treaty or if
withholding was not required because the dividends were effectively connected
with a trade or business carried on by the Non-U.S. Holder within the U.S.
Copies of these information returns may also be made available under the
provisions of a specific treaty or agreement with the tax authorities in the
country in which the Non-U.S. Holder resides or is established.
U.S. backup withholding (generally imposed at the rate of 31% on certain
payments to persons that fail to furnish the information required under the U.S.
information reporting requirements) and information reporting generally will not
apply (i) to dividends paid on Common Stock to a Non-U.S. Holder at an address
outside of the U.S., absent actual knowledge by the payor that the payee is not
a Non-U.S. Holder, or (ii) to dividends paid to Non-U.S. Holders that are either
subject to the U.S. withholding tax (whether at 30% or at a reduced treaty
rate), or (iii) that are exempt from such withholding because such dividends
constitute effectively connected income.
The payment of the proceeds from the Disposition of Common Stock to or
through a U.S. office of a broker will be subject to information reporting and
backup withholding unless the owner, under penalties of perjury, certifies,
among other things, its status as a Non-U.S. Holder, or otherwise establishes an
exemption. The payment of the proceeds from the Disposition of Common Stock to
or through a non-U.S. office of a non-U.S. broker generally will not be subject
to backup withholding and information reporting. Unless the broker has
documentary evidence in its files that the owner is a Non-U.S. Holder and
certain conditions are met or the holder otherwise establishes an exemption,
information reporting generally will apply to Dispositions through (a) a non-
U.S. office of a U.S. broker and (b) a non-U.S. office of a non-U.S. broker that
is either a ''controlled foreign corporation'' for U.S. Federal income tax
purposes or a person 50% or more of whose gross income from all sources for a
three year testing period was effectively connected with a U.S. trade or
business.
On October 6, 1997, the IRS released final regulations revising the
withholding tax, information reporting and backup withholding tax rules
described above, which will generally be effective for payments made on or after
January 1, 1999 (although transition rules will apply with respect to the
application of certain of the revised rules before and after that date) (the
''1999 Regulations''). In general, the 1999 Regulations require certain Non-U.S.
Holders to provide additional information in order to establish an exemption
from or reduce the rate of withholding tax or backup withholding tax. In
particular, the 1999 Regulations require that foreign partnerships and partners
of a foreign partnership provide certain information and comply with certain
certification requirements not required under prior law. In some circumstances,
a failure to comply with such requirements could subject the gross proceeds from
the sale of a Note or shares of Common Stock received by a Non-U.S.-holder to
backup withholding tax of 31%. Further, the 1999 Regulations generally apply
backup withholding and information reporting to dividends paid on Common Stock
to a Non-U.S. Holder at an address outside of the U.S. unless such Non-U.S.
Holder owner, under penalties of perjury, certifies, among other things, its
status as a Non-U.S. Holder or otherwise establishes an exemption. Each Non-U.S.
Holder should consult his or her tax advisor to review the application of the
1999 Regulations and the applicable information reporting and certification
requirements that will be imposed with respect to an investment in the Notes or
shares of Common Stock.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules will be refunded or credited against the Non-U.S.
Holder's U.S. Federal income tax liability, provided that the required
information is furnished to the IRS.
THE PRECEDING DISCUSSION OF CERTAIN U.S. FEDERAL TAX CONSEQUENCES IS FOR
GENERAL INFORMATION ONLY AND IS NOT TAX ADVICE. ACCORDINGLY, PROSPECTIVE
INVESTORS ARE URGED TO CONSULT WITH THEIR TAX ADVISORS REGARDING THE U.S.
FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF OWNING AND
DISPOSING OF THE NOTES AND COMMON STOCK.
SELLING SECURITYHOLDERS
Note Selling Securityholders
The Notes were originally issued by the Trustee and sold by Goldman Sachs &
Co., BT Alex. Brown Incorporated, Lehman Brothers Inc., and Cowen & Company (the
"Initial Purchasers"), in a transaction exempt from the registration
requirements of the Securities Act, to persons reasonably believed by such
Initial Purchasers to be "qualified institutional buyers" (as defined in Rule
144A under the Securities Act), or outside the United States to non-U.S. persons
in offshore transactions in reliance on Regulation S under the Securities Act.
The Note Selling Securityholders may from time to time offer and sell pursuant
to this Prospectus any or all of the Notes and Conversion Shares. The term Note
Selling Securityholders includes the holders listed below and the beneficial
owners of the Notes and their transferees, pledgees, donees or other successors.
Based upon information provided to the Company by the Note Selling
Securityholders, the table below sets forth information with respect to the Note
Selling Securityholders and the respective number of Notes and Conversion Shares
beneficially owned by each Note Selling Securityholder that may be offered
pursuant to this Prospectus.
Common Stock Issuable
Principal Amount of Notes Upon Conversion of
Owned Notes(1)
Selling Holder
Cede & Co.* $350,000,000 3,352,895
* The Registrant will amend the Registration Statement prior to effectiveness
to provide a current list of specific Note Selling Securityholders electing to
participate in the offering.
(1) Includes Conversion Shares based on a conversion price of $104.3875 per
share and a cash payment in lieu of any fractional interest. Pursuant to Rule
416, this Registration Statement also covers such shares as may be issued upon
conversion of the Notes as a result of anti-dilution adjustments.
Based upon information provided to the Company by the Note Selling
Securityholders, none of the identified Note Selling Securityholders has, or
within the past three years has had, any position, office or other material
relationship with the Company or any of its predecessors or affiliates. Because
the Note Selling Securityholders may, pursuant to this Prospectus, offer all or
some portion of the Notes or Conversion Shares, no estimate can be given as to
the amount of the Notes or Conversion Shares that will be held by the Note
Selling Securityholders upon termination of such sales. In addition, the Note
Selling Securityholders identified above may have sold, transferred or otherwise
disposed of all or a portion of their Notes since the date on which they
provided the information regarding their Notes, in transactions exempt from the
registration requirements of the Securities Act.
Stock Selling Securityholders
The table below sets forth certain information regarding the beneficial
ownership of Common Stock, as of January 31, 1998, by certain securityholders of
the Company who are offering Resale Stock pursuant to the Prospectus, both
before and after giving effect to this offering.
<TABLE>
Shares Shares
Beneficially Shares to Benefi-
Owned Prior be cially
to Sold in Owned After
the the the
Offering Offering Offering
(1)(2)
Number Percent Number Percent
<S> <C> <C> <C> <C> <C>
Scott C. Zakarin & Deborah 7,527 * 7,527 -- --
Mostow Zakarin
Laurie Plaksin 1,254 * 1,254 -- --
Richard Tackenberg 1,672 * 1,672 -- --
Carl P. Genberg 2,509 * 2,509 -- --
Troy Bolotnick 3,763 * 3,763 -- --
Eric Carbone(3) 15,777 * 15,777 -- --
Henry Adams(4) 15,777 * 15,777 -- --
</TABLE>
_______________________
* Represents ownership of less than 1% of the outstanding shares of Common
Stock.
(1) Unless otherwise noted, the persons named in the table, to the Company's
knowledge, have sole voting and investment power with respect to all shares of
Common Stock shown as beneficially owned by them, subject to the information
contained in the footnotes to this table. Assumes that each Stock Selling
Securityholder will sell all of the shares of Common Stock offered by him
hereunder. See "Plan of Distribution."
(2) Based on 105,105,940 shares of Common Stock outstanding on January 31,
1998.
(3) Mr. Carbone is Vice President, Sports Programming, Extreme Fans, Inc., a
wholly-owned subsidiary of AOL doing business as Real Fans ("Real Fans").
(4) Mr. Adams is Vice President of Brand Development, Real Fans.
PLAN OF DISTRIBUTION
The Offered Securities may be sold from time to time to purchasers directly
by the Selling Securityholders. Alternatively, the Selling Securityholders may
from time to time offer the Offered Securities to or through underwriters,
broker/dealers or agents, who may receive compensation in the form of
underwriting discounts, concessions or commissions from the Selling
Securityholders or the purchasers of such securities for whom they may act as
agents. The Selling Securityholders and any underwriters, broker/dealers or
agents that participate in the distribution of Offered Securities may be deemed
to be "underwriters" within the meaning of the Securities Act and any profit on
the sale of such securities and any discounts, commissions, concessions or other
compensation received by any such underwriter, broker/dealer or agent may be
deemed to be underwriting discounts and commissions under the Securities Act.
The Offered Securities may be sold from time to time in one or more
transactions at fixed prices, at prevailing market prices at the time of sale,
at varying prices determined at the time of sale or at negotiated prices. The
sale of the Offered Securities may be effected in transactions (which may
involve crosses or block transactions) (i) on any national securities exchange,
such as the NYSE, or quotation service on which the Offered Securities may be
listed or quoted at the time of sale, (ii) in the over-the-counter market, (iii)
in transactions otherwise than on such exchanges or services or in the over-the-
counter market or (iv) through the writing of options. In connection with sales
of the Offered Securities or otherwise, the Selling Securityholders may enter
into hedging transactions with broker/dealers, which may in turn engage in short
sales of the Offered Securities in the course of hedging the positions they
assume. The Selling Securityholders may also sell Offered Securities short and
deliver Offered Securities to close out such short positions, or loan or pledge
Offered Securities to broker/dealers that in turn may sell such securities. At
the time a particular offering of the Offered Securities is made, a Prospectus
Supplement, if required, will be distributed which will set forth the aggregate
amount and type of Offered Securities being offered and the terms of the
offering, including the name or names of any underwriters, broker/dealers or
agents, any discounts, commissions and other terms constituting compensation
from the Selling Securityholders and any discounts, commissions or concessions
allowed or reallowed or paid to broker/dealers.
To comply with the securities laws of certain jurisdictions, if applicable,
the Offered Securities will be offered or sold in such jurisdictions only
through registered or licensed brokers or dealers.
The Selling Securityholders will be subject to applicable provisions of the
Exchange Act and the rules and regulations thereunder, which provisions may
limit the timing of purchases and sales of any of the Offered Securities by the
Selling Securityholders. The foregoing may affect the marketability of such
securities.
Pursuant to agreements with the Selling Securityholders, all expenses of
the registration of the Offered Securities will be paid by the Company,
including, without limitation, Commission filing fees; provided, however, that
the Selling Securityholders will pay all underwriting discounts and selling
commissions, if any. The Selling Securityholders will be indemnified by the
Company against certain civil liabilities, including certain liabilities under
the Securities Act, or will be entitled to contribution in connection therewith.
The Company will be indemnified by the Selling Securityholders severally against
certain civil liabilities, including certain liabilities under the Securities
Act, or will be entitled to contribution in connection therewith.
LEGAL MATTERS
The validity of the Notes and the Common Stock offered hereby is
being passed upon for the Company by Mintz, Levin, Cohn, Ferris, Glovsky and
Popeo, P.C. An attorney at Mintz, Levin owns an aggregate of 200 shares of
Common Stock and options to purchase 146,000 shares of Common Stock.
EXPERTS
The consolidated financial statements of America Online, Inc. at June 30,
1997 and 1996 and for each of the three years in the period ended June 30, 1997,
appearing in its Annual Report (Form 10-K), have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report thereon included therein
and incorporated herein by reference. Such consolidated financial statements
are incorporated herein by reference in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution
The following sets forth the expenses that are expected to be incurred in
connection with the offering of the Notes, Conversion Shares and Resale Stock.
All such expenses shall be borne by the Company. All amounts set forth below
are estimates, other than the registration fee.
SEC Registration Fee $104,843
Legal Fees and Expenses 25,000
Accounting Fees and Expenses 20,000
Miscellaneous 10,000
TOTAL $159,843
The Selling Securityholders will bear the expense of their own legal
counsel and their own miscellaneous fees and expenses, if any.
Item 15. Indemnification of Officers and Directors
Section 145(a) of the General Corporation Law of the State of Delaware
("Delaware Corporation Law") provides, in general, that a corporation shall have
the power to indemnify any person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an action
by or in the right of the corporation), by reason of the fact that he is or was
a director or officer of the corporation. Such indemnity may be against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit or
proceeding, if the indemnified party acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation and if, with respect to any criminal action or proceeding, the
indemnified party did not have reasonable cause to believe his conduct was
unlawful.
Section 145(b) of the Delaware Corporation Law provides, in general, that a
corporation shall have the power to indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action or suit by or in the right of the corporation to procure a judgment in
its favor by reason of the fact that he is or was a director or officer of the
corporation, against any expenses (including attorneys' fees) actually and
reasonably incurred by him in connection with the defense or settlement of such
action or suit if he acted in good faith and in a manner he reasonably believed
to be in or not opposed to the best interests of the corporation.
Section 145(g) of the Delaware Corporation law provides, in general, that a
corporation shall have the power to purchase and maintain insurance on behalf of
any person who is or was a director or officer of the corporation against any
liability asserted against 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 the provisions of the law.
Pursuant to Section 102(b)(7) of the Delaware General Corporation Law (the
"Delaware Statute"), Article Ninth of the Registrant's Restated Certificate of
Incorporation (the "Certificate of Incorporation") (incorporated by reference
herein) provides that:
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.
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.
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.
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, 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.
In addition, Article Five of the Registrant's Restated By-Laws
(Incorporated by reference herein) provides that:
Right to Indemnification. Each person who was or is made a party or
is threatened to be made a party to or is otherwise involved in any action,
suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that he is or was a director or an
officer of the Corporation or is or was serving at the request of the
Corporation as a director, officer, employee or agent of another
corporation or of a partnership, joint venture, trust or other enterprise,
including service with respect to an employee benefit plan (hereinafter an
"Indemnitee"), whether the basis of such proceeding is alleged action in an
official capacity as a director, officer, employee or agent or in any other
capacity while serving as a director, officer, employee or agent, shall be
indemnified and held harmless by the Corporation to the fullest extent
authorized by the Delaware General Corporation Law, as the same exists or
may hereafter be amended (but, in the case of any such amendment, only to
the extent that such amendment permits the Corporation to provide broader
indemnification rights than such law permitted the Corporation to provide
prior to such amendment), against all expense, liability and loss
(including attorney's fees, judgments, fines, ERISA excise taxes or
penalties and amounts paid in settlement) reasonably incurred or suffered
by such Indemnitee in connection therewith; provided, however, that, except
as provided in the section "Right of Indemnitees to Bring Suit" of this
Article with respect to proceedings to enforce rights to indemnification,
the Corporation shall indemnify any such Indemnitee in connection with a
proceeding (or part thereof) initiated by such Indemnitee only if such
proceeding (or part thereof) was authorized by the board of directors of
the Corporation.
Right to Advancement of Expenses. The right to indemnification
conferred in Section 1 of this Article shall include the right to be paid
by the Corporation the expenses (including attorney's fees) incurred in
defending any such proceeding in advance of its final disposition;
provided, however, that, if the Delaware General Corporation Law requires,
an advancement of expenses incurred by an Indemnitee in his capacity as a
director or officer (and not in any other capacity in which service was or
is rendered by such Indemnitee, including, without limitation, service to
an employee benefit plan) shall be made only upon delivery to the
Corporation of an undertaking, by or on behalf of such Indemnitee, to repay
all amounts so advanced if it shall ultimately be determined by final
judicial decision from which there is no further right to appeal that such
Indemnitee is not entitled to be indemnified for such expenses under this
section or otherwise. The rights to indemnification and to the advancement
of expenses conferred in this section and the section "Right to
Indemnification" of this Article shall be contract rights and such rights
shall continue as to an Indemnitee who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of the
Indemnitee's heirs, executors and administrators. Any repeal or
modification of any of the provisions of this Article shall not adversely
affect any right or protection of an Indemnitee existing at the time of
such repeal or modification.
Right of Indemnitees to Bring Suit. If a claim under the sections
"Right to Indemnification" and "Right to Advancement of Expenses" of this
Article is not paid in full by the Corporation within sixty (60) days after
a written claim has been received by the Corporation, except in the case of
a claim for an advancement of expenses, in which case the applicable period
shall be twenty (20) days, the Indemnitee may at any time thereafter bring
suit against the Corporation to recover the unpaid amount of the claim. If
successful in whole or in part in any such suit, or in a suit brought by
the Corporation to recover an advancement of expenses pursuant to the terms
of an undertaking, the Indemnitee shall also be entitled to be paid the
expenses of prosecuting or defending such suit. In (i) any suit brought by
the Indemnitee to enforce a right to indemnification hereunder (but not in
a suit brought by the Indemnitee to enforce a right to an advancement of
expenses) it shall be a defense that, and (ii) in any suit brought by the
Corporation to recover an advancement of expenses pursuant to the terms of
an undertaking, the Corporation shall be entitled to recover such expenses
upon a final adjudication that, the Indemnitee has not met any applicable
standard for indemnification set forth in the Delaware General Corporation
Law. Neither the failure of the Corporation (including its board of
directors, independent legal counsel, or its stockholders) to have made a
determination prior to the commencement of such suit that indemnification
of the Indemnitee is proper in the circumstances because the Indemnitee has
met the applicable standard of conduct set forth in the Delaware General
Corporation Law, nor an actual determination by the Corporation (including
its board of directors, independent legal counsel, or its stockholders)
that the Indemnitee has not met such applicable standard of conduct, shall
create a presumption that the Indemnitee has not met the applicable
standard of conduct or, in the case of such a suit brought by the
Indemnitee, be a defense to such suit. In any suit brought by the
Indemnitee to enforce a right to indemnification or to an advancement of
expenses hereunder, or brought by the Corporation to recover an advancement
of expenses pursuant to the terms of an undertaking, the burden of proving
that the Indemnitee is not entitled to be indemnified, or to such
advancement of expenses, under this Article or otherwise shall be on the
Corporation.
Non-Exclusivity of Rights. The rights to indemnification and to the
advancement of expenses conferred in this Article shall not be exclusive of
any other right which any person may have or hereafter acquire under any
statute, the Corporation's Certificate of Incorporation as amended from
time to time, these By-Laws, any agreement, any vote of stockholders or
disinterested directors or otherwise.
Insurance. The Corporation may maintain insurance, at its expense, to
protect itself and any director, officer, employee or agent of the
Corporation or another corporation, partnership, joint venture, trust or
other enterprise against any expense, liability or loss, whether or not the
Corporation would have the power to indemnify such person against such
expense, liability or loss under the Delaware General Corporation Law.
Indemnification of Employees and Agents of the Corporation. The
Corporation may, to the extent authorized from time to time by the board of
directors, grant rights to indemnification and to the advancement of
expenses to any employee or agent of the Corporation to the fullest extent
of the provisions of this Article with respect to the indemnification and
advancement of expenses of directors and officers of the Corporation.
The directors and officers of the Registrant are covered by a policy of
liability insurance.
In addition, the Company's agreements with the Selling Securityholders
provide for indemnification by the Registrant of the Selling
Securityholders against certain liabilities under the Securities Act, the
Exchange Act, state securities laws or otherwise, and, in certain cases,
provide for indemnification by the Selling Securityholders of the
Registrant and its directors, its officers and certain control persons
against certain liabilities under the Securities Act, the 1934 Act, state
securities laws, or otherwise.
Item 16. Exhibits.
Exhibit No. Description
2.1 -- Agreement and Plan of Reorganization dated as of May 11,
1994, as amended, among he Registrant,
RCC Acquisition Corporation and RCC Communications
Corporation (Filed as Annex A to the
Registrant's Registration Statement on Form S-4,
Registration No. 33-82030, and incorporated herein by
reference.)
2.2 -- Agreement and Plan of Reorganization dated as of November 8,
1994, among the Registrant, BLT
Acquisition Corporation, CMG Information Services, Inc. and
Booklink Technologies, Inc. (Filed as
Exhibit 1 to the Registrant's Report on Form 8-K, filed
January 9, 1995 and incorporated herein by
reference.)
2.3 -- Asset Purchase Agreement by and between the Registrant and
Advanced Network & Services, Inc.
dated as of November 25, 1994 (Filed as exhibit 1 to the
Registrant's Report on Form 8-K, filed
February 28, 1995 and incorporated herein by reference.)
2.4 -- Agreement and Plan of Merger dated as of December 20, 1995,
among the Registrant, Santa's
Acquisition Corp. and Johnson-Grace Company and its
Principal Shareholders (Filed as Exhibit 2.1
to the Registrant's Report on Form 8-K, filed
February 14, 1996 and incorporated herein by
reference.)
2.5 -- Stock Purchase Agreement, dated as of August 5, 1996, among
the Registrant, The ImagiNation
Network, Inc. and AT&T Corp. (Filed as Exhibit 10 to the
Registrant's Report on Form 8-K, filed
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.)
4.1 -- Amendment of Section A of Article 4 of the Restated
Certificate of Incorporation of America Online, Inc.
4.2 -- Section B of Article 4, Article 6 and Article 8 of the
Restated Certificate of Incorporation of the
Registrant (Filed as part of Exhibit 3.1 to the
Registrant's Annual Report on Form 10-K for the year
ended June 30, 1997, and incorporated herein by reference.)
4.3 -- 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
Rights Certificate) and Exhibit C (Summary of Rights to
Purchase Series A Junior Participating
Preferred Shares) (Filed as Exhibit 1 to the Registrant's
Registration Statement on Form 8-A, filed on
September 9, 1996, and incorporated herein by reference.)
4.4 -- First Amendment to the Rights Agreement dated as of January
31, 1995 (Filed as Exhibit 2 to the
Registrant's Registration Statement on Form 8-A, filed on
September 9, 1996, and incorporated
herein by reference.)
4.5 -- Indenture, dated as of November 17, 1997 between America
Online, Inc., as issuer, and State Street
Bank and Trust Company, as trustee (Filed as Exhibit 4.1 to
the Registrant's Form 8-K, dated December
2, 1997 and incorporated herein by reference.)
4.6 -- Registration Rights Agreement, dated as of November 17, 1997
between America Online, Inc. and
Goldman, Sachs & Co., BT Alex. Brown Incorporated, Lehman
Brothers Inc. and Cowen & Company
(Filed as Exhibit 4.2 to the Registrant's Form 8-K, dated
December 2, 1997 and incorporated herein by
reference.)
4.7 -- Purchase Agreement, dated November 12, 1997 between America
Online, Inc. and Goldman, Sachs &
Co., BT Alex. Brown Incorporated, Lehman Brothers Inc. and
Cowen & Company (Filed as Exhibit 4.3
to the Registrant's Form 8-K, dated December 2, 1997 and
incorporated herein by reference.)
5.1 -- Opinion of Mintz, Levin, Cohn, Ferris, Glovsky & Popeo,
P.C., with respect to the legality of the
securities being registered
12.1 -- Computation of Ratio of Earnings to Fixed Charges
23.1 -- Consent of Ernst & Young LLP
23.2 -- Consent of Mintz, Levin, Cohn, Ferris, Glovsky & Popeo, P.C.
(included in Exhibit 5.1)
24.1 -- Powers of Attorney
25.1 -- Form T-1 Statement of Eligibility and Qualification of
Trustee
Item 17. Undertakings.
A. Rule 415 Offering
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended (the "Securities Act");
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the
effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
Provided, however, that paragraphs (1)(i) and (1)(ii) do not
apply if the registration statement is on Form S-3 or Form S-8, and
the information required to be included in a post-effective amendment
by those paragraphs is contained in periodic reports filed by the
registrant pursuant to Section 13 or Section 15(d) of the 1934 Act
that are incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
B. Filings Incorporating Subsequent Exchange Act Documents by Reference
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of Exchange Act, as amended (the "Exchange Act") (and,
where applicable, each filing of an employee benefit plan's annual report
pursuant to section 15(d) of the Exchange Act) that is incorporated by reference
in the registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
C. Request for Acceleration of Effective Date or Filing of Registration
Statement on Form S-8
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the County of Loudoun, Commonwealth of Virginia on February 20,
1998.
AMERICA ONLINE, INC.
By: /S/LENNERT J. LEADER
Lennert J. Leader
Senior Vice President and Chief
Financial Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signatures Title Date
* Chairman of the Board and Chief February 20, 1998
Stephen M. Case Executive Officer (principal
executive
officer)
* President, Chief Operating Officer February 20, 1998
Robert W. Pittman and Director
Senior Vice President and Chief February 20, 1998
/S/LENNERT J. Financial
LEADER Officer (principal financial and
Lennert J. Leader accounting officer)
* Director February 20, 1998
Daniel F. Akerson
Director
Frank J. Caufield
* Director February 20, 1999
Robert J.
Frankenberg
* Director February 20, 1998
Alexander M.
Haig, Jr.
* Director February 20, 1998
William N. Melton
* Director February 20, 1998
Thomas Middelhoff
*By: /S/LENNERT J. LEADER
Lennert J. Leader, Attorney-in-Fact
EXHIBIT INDEX
Exhibit No.
Description
4.1 -- Amendment of Section A of Article 4 of the Restated
Certificate of Incorporation of America Online, Inc.
5.1 -- Opinion of Mintz, Levin, Cohn, Ferris, Glovsky & Popeo, P.C.,
with respect to the legality of the securities being
registered
12.1 -- Computation of Ratio of Earnings to Fixed Charges
23.1 -- Consent of Ernst & Young LLP
24.1 -- Powers of Attorney
25.1 -- Form T-1 Statement of Eligibility and Qualification of Trustee
CERTIFICATE OF AMENDMENT
OF
RESTATED CERTIFICATE OF INCORPORATION
OF
AMERICA ONLINE, INC.
America Online, Inc., a Delaware corporation duly organized and existing
under the General Corporation Law of the State of Delaware (the "Corporation"),
does hereby certify:
FIRST: That Section A of Article FOURTH of the Restated Certificate of
Incorporation is hereby amended to read in its entirety as follows:
FOURTH: A. The total number of shares of all classes of stock
which the Corporation shall have authority to issue is 605,000,000
shares, divided into two classes, consisting of :
600,000,000 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").
SECOND: That said amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
IN WITNESS WHEREOF, America Online, Inc. has caused this Certificate of
Amendment to be signed by its duly authorized officer this 9th day of February,
1998.
/S/SHEILA A. CLARK
Sheila A. Clark
Assistant Secretary
Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
One Financial Center
Boston, Massachusetts 02111
701 Pennsylvania Avenue, N.W. Telephone: 617/542-6000
Washington, D.C. 20004 Fax: 617/542-2241
Telephone: 202/434-7300
Fax: 202/434-7400
February 20, 1998
America Online, Inc.
22000 AOL Way
Dulles, Virginia 20166-9323
Gentlemen:
We have acted as counsel to America Online, Inc., a Delaware
corporation (the "Company"), in connection with the preparation and
filing with the Securities and Exchange Commission (the "Commission")
of a Registration Statement on Form S-3 (the "Registration
Statement"), pursuant to which the Company is registering under the
Securities Act of 1933, as amended, a total of (i) $350,000,000
principal amount of 4% Convertible Subordinated Notes due November 15,
2002 (the "Notes") and the shares of common stock, $.01 par value per
share (the "Common Stock") issuable upon conversion thereof (the
"Conversion Shares") and (ii) 48,279 previously issued shares of
Common Stock unrelated to the Notes (the "Resale Shares," and together
with the Notes and Conversion Shares, the "Offered Securities"). The
Offered Securities are to be sold by certain securityholders of the
Company (the "Selling Securityholders"). The Company has not engaged
any underwriters in connection with the proposed filing of the
Registration Statement. This opinion is being rendered in connection
with the filing of the Registration Statement.
In connection with this opinion, we have examined the Company's
Restated Certificate of Corporation and Restated By-Laws, as amended
to date; such records of the corporate proceedings of the Company as
we deemed material; and the Registration Statement and the exhibits
thereto filed with the Commission.
In our examination, we have assumed the genuineness of all
signatures, the legal capacity of natural persons, the authenticity of
all documents submitted to us as originals, the conformity to original
documents of all documents submitted to us as certified or photostatic
copies and the authenticity of the originals of such copies. With respect
to our opinions below regarding the Resale Shares, we have relied entirely
upon the opinion of the Vice President, Deputy General Counsel of the
Company.
Based upon the foregoing, we are of the opinion that, (i) the
Notes, Conversion Shares and Resale Shares have been duly and validly
authorized by the Company, (ii) the Notes are duly and validly issued,
fully paid and non-assessable, and binding obligations of the Company,
(iii) the Conversion Shares will be duly and validly issued, fully paid
and non-assessable shares of the Common Stock, upon issuance and (iv) the
Resale Shares are duly and validly issued, fully paid and non-assessable
shares of the Common Stock.
<PAGE>
Our opinion is limited to the General Corporation Law of the State
of Delaware, and we express no opinion with respect to the laws of any
other jurisdiction. No opinion is expressed herein with respect to
the qualification of the Shares under the securities or blue sky laws
of any state or any foreign jurisdiction.
We understand that you wish to file this opinion as an exhibit to
the Registration Statement, and we hereby consent thereto. We hereby
further consent to the reference to us under the caption "Legal
Matters" in the prospectus included in the Registration Statement.
Very truly yours,
/s/ Mintz, Levin, Cohn, Ferris, Glovsky
and Popeo, P.C.
America Online, Inc. and Subsidiaries
Statements RE Computation of Ratios of Earnings to Fixed Charges
Six Months Ended December 31, 1997 and Years Ended
June 30, 1997, June 30, 1996, June 30, 1995, June 30, 1994
and June 30, 1993
<TABLE>
Six months Year Year Year Year Year
ended Ended Ended Ended Ended Ended
December 31, June 30, June 30, June 30, June 30, June 30,
1997 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
Fixed Charges
Interest Expense $ 4,177 $1,567 $ 1,659 $ 1,076 $ 309 $ 29
Interest Portion
(1) of Net Rental
Expense 61,623 49,487 15,528 3,504 1,197 603
Total Fixed Charges $65,800 $51,054 $17,187 $ 4,580 $1,506 $ 632
Income (Loss) Before
Income Taxes (2) $131,950 $(448,2930 $79,526 $(16,002) $7,888 $ 2,928
(3)(4) (5)
Ratio of Earnings 2.01 (8.78) 4.63 (3.49) 5.24 4.63
to Fixed Charges
</TABLE>
1) The interest portion of the net rental expense is estimated to be equal to
28% in year one, 18% in year two, 7% in year three and 5% in year four.
2) Net income in the six-months ended December 31, 1997 includes approximately
$1.3 million of income related to a restructuring charge and approximately $1.0
million of income related to a settlement charge.
3) Net Loss for the 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 charges, approximately $24.2
million for legal settlements and approximately $24.5 million for contract
termination charges.
4) Net income for the 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.
5) Net loss in the 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.
Consent of Ernst & Young LLP, Independent Auditors
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form S-3 No. 333-_____) and related Prospectus of
America Online, Inc. for the registration of $350,000,000 of 4% Convertible
Subordinated Notes due November 15, 2002, the 3,352,895 underlying shares of its
common stock and 48,279 shares of its common stock held by certain
securityholders and to the incorporation by reference therein of our report
dated September 10, 1997, with respect to the consolidated financial statements
of America Online, Inc. included in its Annual Report (Form 10-K) for the year
ended June 30, 1997, filed with the Securities and Exchange Commission.
Ernst & Young LLP
Vienna, Virginia
February 17, 1998
POWER OF ATTORNEY
I, Stephen M. Case, 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 Registration Statement on Form
S-3, and any required amendments or supplements thereto, (and any other
registration statement for the same offering that is to be effective upon filing
pursuant to Rule 462(b) under the Securities Act of 1933, as amended) 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 to 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 18th day of February, 1998.
/S/STEPHEN M. CASE
POWER OF ATTORNEY
I, Daniel F. Akerson, 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 Registration Statement on Form
S-3, and any required amendments or supplements thereto, (and any other
registration statement for the same offering that is to be effective upon filing
pursuant to Rule 462(b) under the Securities Act of 1933, as amended) 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 to 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 21st day of January, 1998.
/S/DANIEL F. AKERSON
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 Registration
Statement on Form S-3, and any required amendments or supplements thereto, (and
any other registration statement for the same offering that is to be effective
upon filing pursuant to Rule 462(b) under the Securities Act of 1933, as
amended) 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 to 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 21st day of January, 1998.
/S/ROBERT J. FRANKENBERG
POWER OF ATTORNEY
I, Alexander M. Haig, Jr., whose signature appears below, constitute and
appoint Stephen M. Case, Lennert J. Leader and Sheila A. Clark, and each of
them, my true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution in each of them, for him/her and in his/her
name, place and stead, and in any and all capacities, to sign the Registration
Statement on Form S-3, and any required amendments or supplements thereto, (and
any other registration statement for the same offering that is to be effective
upon filing pursuant to Rule 462(b) under the Securities Act of 1933, as
amended) 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 to 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 6th day of February, 1998.
/S/ALEXANDER M. HAIG, JR.
POWER OF ATTORNEY
I, William 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 Registration Statement on Form
S-3, and any required amendments or supplements thereto, (and any other
registration statement for the same offering that is to be effective upon filing
pursuant to Rule 462(b) under the Securities Act of 1933, as amended) 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 to 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 18th day of February, 1998.
/S/WILLIAM MELTON
POWER OF ATTORNEY
I, 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 Registration Statement on Form
S-3, and any required amendments or supplements thereto, (and any other
registration statement for the same offering that is to be effective upon filing
pursuant to Rule 462(b) under the Securities Act of 1933, as amended) 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 to 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 4th day of February, 1998.
/S/THOMAS MIDDELHOFF
POWER OF ATTORNEY
I, Robert Pittman, 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 Registration Statement on Form
S-3, and any required amendments or supplements thereto, (and any other
registration statement for the same offering that is to be effective upon filing
pursuant to Rule 462(b) under the Securities Act of 1933, as amended) 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 to 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 21st day of January, 1998.
/S/ROBERT PITTMAN
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM T-1
_________
STATEMENT OF ELIGIBILITY UNDER THE
TRUST INDENTURE ACT OF 1939 OF A
CORPORATION DESIGNATED TO ACT AS TRUSTEE
Check if an Application to Determine Eligibility
of a Trustee Pursuant to Section 305(b)(2) __
STATE STREET BANK AND TRUST COMPANY
(Exact name of trustee as specified in its charter)
Massachusetts 04-1867445
(Jurisdiction of incorporation or (I.R.S. Employer
organization if not a U.S. national bank) Identification No.)
225 Franklin Street, Boston, Massachusetts 02110
(Address of principal executive offices) (Zip Code)
John R. Towers, Esq. Executive Vice President and General Counsel
225 Franklin Street, Boston, Massachusetts 02110
(617) 654-3253
(Name, address and telephone number of agent for service)
AMERICA ONLINE, INC.
(Exact name of obligor 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
(Address of principal executive offices) (Zip Code)
4% Convertible Subordinated Notes Due November 15, 2002
(Title of indenture securities)
<PAGE>
GENERAL
Item 1. General Information.
Furnish the following information as to the trustee:
(a) Name and address of each examining or supervisory authority to which
it is subject.
Department of Banking and Insurance of The Commonwealth of
Massachusetts, 100 Cambridge Street, Boston, Massachusetts.
Board of Governors of the Federal Reserve System, Washington, D.C.,
Federal Deposit Insurance Corporation, Washington, D.C.
(b) Whether it is authorized to exercise corporate trust powers.
Trustee is authorized to exercise corporate trust powers.
Item 2. Affiliations with Obligor.
If the Obligor is an affiliate of the trustee, describe each such
affiliation.
The obligor is not an affiliate of the trustee or of its parent, State
Street Corporation.
(See note on page 2.)
Item 3. through Item 15. Not applicable.
Item 16. List of Exhibits.
List below all exhibits filed as part of this statement of eligibility.
1. A copy of the articles of association of the trustee as now in effect.
A copy of the Articles of Association of the trustee, as now in
effect, is on file with the Securities and Exchange Commission as
Exhibit 1 to Amendment No. 1 to the Statement of Eligibility and
Qualification of Trustee (Form T-1) filed with the Registration
Statement of Morse Shoe, Inc. (File No. 22-17940) and is incorporated
herein by reference thereto.
2. A copy of the certificate of authority of the trustee to commence
business, if not contained in the articles of association.
A copy of a Statement from the Commissioner of Banks of Massachusetts
that no certificate of authority for the trustee to commence business
was necessary or issued is on file with the Securities and Exchange
Commission as Exhibit 2 to Amendment No. 1 to the Statement of
Eligibility and Qualification of Trustee (Form T-1) filed with the
Registration Statement of Morse Shoe, Inc. (File No. 22-17940) and is
incorporated herein by reference thereto.
3. A copy of the authorization of the trustee to exercise corporate trust
powers, if such authorization is not contained in the documents
specified in paragraph (1) or (2), above.
A copy of the authorization of the trustee to exercise corporate trust
powers is on file with the Securities and Exchange Commission as
Exhibit 3 to Amendment No. 1 to the Statement of Eligibility and
Qualification of Trustee (Form T-1) filed with the Registration
Statement of Morse Shoe, Inc. (File No. 22-17940) and is incorporated
herein by reference thereto.
4. A copy of the existing by-laws of the trustee, or instruments
corresponding thereto.
A copy of the by-laws of the trustee, as now in effect, is on file
with the Securities and Exchange Commission as Exhibit 4 to the
Statement of Eligibility and Qualification of Trustee (Form T-1) filed
with the Registration Statement of Eastern Edison Company (File No.
33-37823) and is incorporated herein by reference thereto.
<PAGE>
5. A copy of each indenture referred to in Item 4. if the obligor is in
default.
Not applicable.
6. The consents of United States institutional trustees required by
Section 321(b) of the Act.
The consent of the trustee required by Section 321(b) of the Act is
annexed hereto as Exhibit 6 and made a part hereof.
7. A copy of the latest report of condition of the trustee published
pursuant to law or the requirements of its supervising or examining
authority.
A copy of the latest report of condition of the trustee published
pursuant to law or the requirements of its supervising or examining
authority is annexed hereto as Exhibit 7 and made a part hereof.
NOTES
In answering any item of this Statement of Eligibility which relates to
matters peculiarly within the knowledge of the obligor or any underwriter for
the obligor, the trustee has relied upon information furnished to it by the
obligor and the underwriters, and the trustee disclaims responsibility for the
accuracy or completeness of such information.
The answer furnished to Item 2. of this statement will be amended, if
necessary, to reflect any facts which differ from those stated and which would
have been required to be stated if known at the date hereof.
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, as
amended, the trustee, State Street Bank and Trust Company, a corporation
organized and existing under the laws of The Commonwealth of Massachusetts, has
duly caused this statement of eligibility to be signed on its behalf by the
undersigned, thereunto duly authorized, all in the City of Boston and The
Commonwealth of Massachusetts, on the January 21, 1998.
STATE STREET BANK AND TRUST COMPANY
By: /s/ Arthur J. MacDonald
NAME Arthur J. MacDonald
TITLE Assistant Vice President
<PAGE>
EXHIBIT 6
CONSENT OF THE TRUSTEE
Pursuant to the requirements of Section 321(b) of the Trust Indenture Act
of 1939, as amended, in connection with the proposed issuance by America Online,
Inc. of its 4% Convertible Subordinated Notes Due November 15, 2002, we hereby
consent that reports of examination by Federal, State, Territorial or District
authorities may be furnished by such authorities to the Securities and Exchange
Commission upon request therefor.
STATE STREET BANK AND TRUST COMPANY
By: /s/ Arthur J. MacDonald
NAME Arthur J. MacDonald
TITLE Assistant Vice President
Dated: January 21, 1998
<PAGE>
EXHIBIT 7
Consolidated Report of Condition of State Street Bank and Trust Company,
Massachusetts and foreign and domestic subsidiaries, a state banking institution
organized and operating under the banking laws of this commonwealth and a member
of the Federal Reserve System, at the close of business September 30, 1997,
published in accordance with a call made by the Federal Reserve Bank of this
District pursuant to the provisions of the Federal Reserve Act and in accordance
with a call made by the Commissioner of Banks under General Laws, Chapter 172,
Section 22(a).
<TABLE>
Thousands of
Dollars
ASSETS
<S> <C>
Cash and balances due from depository institutions:
Noninterest-bearing balances and currency and coin 1,380,475
Interest-bearing balances 8,821,855
Securities 10,461,989
Federal funds sold and securities purchased under agreements 6,085,138
to resell in domestic offices
of the bank and its Edge subsidiary
Loans and lease financing receivables:
Loans and leases, net of unearned income 5,597,831
Allowance for loan and lease losses 79,416
Allocated transfer risk reserve. 0
Loans and leases, net of unearned income and 5,518,415
allowances
Assets held in trading accounts 917,895
Premises and fixed assets 390,028
Other real estate owned 779
Investments in unconsolidated subsidiaries 34,278
Customers' liability to this bank on acceptances outstanding 83,470
Intangible assets. 227,659
Other assets 1,969,514
Total assets 35,891,495
LIABILITIES
Deposits:
In domestic offices 8,095,559
Noninterest-bearing 5,962,025
Interest-bearing 2,133,534
In foreign offices and Edge subsidiary 14,399,173
Noninterest-bearing 86,798
Interest-bearing 14,312,375
Federal funds purchased and securities sold under agreements 7,660,881
to repurchase in domestic offices of the bank and of its
Edge subsidiary
Demand notes issued to the US Treasury and Trading 1,107,552
Liabilities
Other borrowed money 589,733
Subordinated notes and debentures 0
Bank's liability on acceptances executed and outstanding 85,600
Other liabilities 1,830,593
Total liabilities 33,769,091
EQUITY CAPITAL
Perpetual preferred stock and related surplus 0
Common stock 29,931
Surplus 437,183
Undivided profits and capital reserves/Net unrealized holding 1,660,158
gains (losses)
Cumulative foreign currency translation adjustments (4,868)
Total equity capital 2,122,404
Total liabilities and equity capital 35,891,495
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I, Rex S. Schuette, Senior Vice President and Comptroller of the above named
bank do hereby declare that this Report of Condition has been prepared in
conformance with the instructions issued by the Board of Governors of the
Federal Reserve System and is true to the best of my knowledge and belief.
Rex S. Schuette
We, the undersigned directors, attest to the correctness of this Report of
Condition and declare that it has been examined by us and to the best of our
knowledge and belief has been prepared in conformance with the instructions
issued by the Board of Governors of the Federal Reserve System and is true and
correct.
David A. Spina
Marshall N. Carter
Truman S. Casner
