FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] Quarterly Report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended: March 31, 1998
OR
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission File Number:
0-19836
America Online, Inc.
(Exact name of registrant as specified in its charter)
Delaware 54-1322110
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
22000 AOL Way, Dulles, Virginia 20166-9323 (Address of
principal executive offices and zipcode)
Registrant's telephone number, including area code: (703) 448-8700
Former name, former address, and former year, if changed since last report:
Not applicable
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the Issuer's classes of
Common Stock, as of the latest practicable date.
Title of each class
Common stock $.01 par value
Shares outstanding on April 30, 1998.................................216,201,994
<PAGE>
AMERICA ONLINE, INC.
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets - March 31, 1998
and June 30, 1997 3
Condensed Consolidated Statements of Operations - Three
months ended March 31, 1998 and 1997 4
Condensed Consolidated Statements of Operations - Nine
months ended March 31, 1998 and 1997 5
Condensed Consolidated Statements of Cash Flows - Nine
months ended March 31, 1998 and 1997 6
Condensed Consolidated Statement of Changes in
Stockholders' Equity - Nine months ended
March 31, 1998 8
Notes to Condensed Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 16
PART II. OTHER INFORMATION 29
Signatures 30
<PAGE>
<TABLE>
<CAPTION>
AMERICA ONLINE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share data)
March 31, June 30,
1998 1997
---------------------- -------------------
ASSETS (unaudited)
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 924,080 $ 124,340
Trade accounts receivable, net 106,018 65,306
Other receivables 53,500 26,093
Prepaid expenses and other current assets 90,770 107,734
---------------------- -------------------
Total current assets 1,174,368 323,473
Property and equipment at cost, net 340,009 233,129
Other assets:
Restricted cash - 50,000
Product development costs, net 84,543 72,498
License rights, net 10,389 16,777
Investments including available-for-sale securities 271,666 48,267
Other assets 46,405 36,351
Deferred income taxes 78,806 24,410
Goodwill and other intangible assets, net 118,190 41,783
====================== ===================
Total assets $2,124,376 $ 846,688
====================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 84,294 $ 69,703
Other accrued expenses and liabilities 419,973 298,752
Deferred revenue 227,380 166,007
Accrued personnel costs 48,586 20,008
Deferred network services credit 76,218 -
---------------------- -------------------
Total current liabilities 856,451 554,470
Long-term liabilities:
Notes payable 374,773 50,000
Deferred income taxes 78,806 24,410
Deferred revenue 72,499 86,040
Other liabilities 1,125 3,734
Deferred network services credit 292,169 -
---------------------- -------------------
Total liabilities 1,675,823 718,654
Stockholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares
authorized, 1,000 shares issued and outstanding 1 1
Common stock, $.01 par value, 600,000,000 shares
authorized, 214,820,206 and 200,377,942 shares
issued and outstanding at March 31, 1998
and June 30, 1997, respectively 2,148 2,004
Additional paid-in-capital 788,593 616,219
Unrealized gain on available-for-sale securities 80,182 16,924
Accumulated deficit (422,371) (507,114)
---------------------- -------------------
Total stockholders' equity 448,553 128,034
====================== ===================
Total liabilities and stockholders' equity $ 2,124,376 $ 846,688
====================== ===================
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AMERICA ONLINE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except per share data)
(unaudited)
Three months ended
March 31,
--------------------------------------------------
--------------------------------------------------
1998 1997
---------------------- ---------------------
Revenues:
<S> <C> <C>
Online service revenues $ 575,692 $ 381,486
Advertising, commerce and other revenues 117,948 68,605
---------------------- ---------------------
Total revenues 693,640 450,091
Costs and expenses:
Cost of revenues 457,755 308,386
Marketing 84,188 92,809
Product development 27,304 21,466
General and administrative 59,535 32,843
Amortization of goodwill 4,227 1,398
Restructuring charge 35,102 -
Acquired research and development 9,700 -
Settlement charge - (96)
---------------------- ---------------------
Total costs and expenses 677,811 456,806
Income (loss) from operations 15,829 (6,715)
Other income, net 2,764 1,981
---------------------- ---------------------
Income (loss) before
income taxes 18,593 (4,734)
Income taxes - -
====================== =====================
Net income (loss) $ 18,593 $ (4,734)
====================== =====================
Earnings (loss) per share-diluted $ 0.08 $ (0.02)
Earnings (loss) per share-basic $ 0.09 $ (0.02)
Weighted average shares outstanding-diluted 245,506 192,566
Weighted average shares outstanding-basic 211,607 192,566
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AMERICA ONLINE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except per share data)
(unaudited)
Nine months ended
March 31,
-------------------------------------------------
-------------------------------------------------
1998 1997
---------------------- --------------------
Revenues:
<S> <C> <C>
Online service revenues $ 1,493,024 $ 1,043,838
Advertising, commerce and other revenues 314,250 165,647
---------------------- --------------------
Total revenues 1,807,274 1,209,485
Costs and expenses:
Cost of revenues 1,170,742 771,428
Marketing:
Marketing 278,810 323,787
Write-off of deferred subscriber acquisition costs - 385,221
Product development 66,751 59,805
General and administrative 164,509 82,103
Amortization of goodwill 8,064 4,907
Restructuring charge 33,796 48,627
Acquired research and development 9,700 -
Settlement charge (1,009) 24,204
---------------------- --------------------
Total costs and expenses 1,731,363 1,700,082
Income (loss) from operations 75,911 (490,597)
Other income, net 8,832 3,069
---------------------- --------------------
Income (loss) before
income taxes 84,743 (487,528)
Income taxes - -
====================== ====================
Net income (loss) $ 84,743 $(487,528)
====================== ====================
Earnings (loss) per share-diluted $ 0.35 $ (2.58)
Earnings (loss) per share-basic $ 0.41 $ (2.58)
Weighted average shares outstanding-diluted 243,109 189,133
Weighted average shares outstanding-basic 208,793 189,133
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AMERICA ONLINE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
(unaudited)
Nine months ended March 31,
------------------------------------------
1998 1997
-------------------- ------------------
Cash flows from operating activities:
<S> <C> <C>
Net income (loss) $ 84,743 $ (487,528)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Write-off of deferred subscriber acquisition costs - 385,221
Non-cash restructuring charges 10,514 22,478
Depreciation and amortization 88,599 45,517
Amortization of deferred network services credit (12,703) -
Charge for acquired research and development 9,700 -
Amortization of subscriber acquisition costs - 59,189
Compensatory stock options 25,510 -
Changes in assets and liabilities:
Trade accounts receivable (632) (9,443)
Other receivables (27,941) (6,953)
Prepaid expenses and other current assets 34,626 (12,767)
Deferred subscriber acquisition costs - (130,229)
Other assets (35,188) (36,627)
Trade accounts payable 18,054 (30,148)
Accrued personnel costs 14,537 (6,553)
Other accrued expenses and liabilities 115,621 117,197
Deferred revenue 44,963 199,303
Other liabilities (280) 2,351
-------------------- ------------------
Total adjustments 285,380 598,536
-------------------- ------------------
Net cash provided by operating activities 370,123 111,008
Cash flows from investing activities:
Purchase of property and equipment (253,399) (60,788)
Product development costs (36,440) (45,193)
Other investing activities (3,178) 9,987
Net proceeds from acquisition of CompuServe/disposition of ANS 207,438 -
-------------------- ------------------
Net cash used in investing activities (85,579) (95,994)
-------------------- ------------------
Cash flows from financing activities:
Proceeds from issuance of preferred stock in subsidiary - 15,000
Proceeds from issuance of common stock, net 82,225 50,017
Proceeds from sale and leaseback of property and equipment 62,472 -
Proceeds (payments) on long-term debt 631 (801)
Proceeds from notes payable, net 370,200 -
Net payments under capital lease obligations (332) (67)
Restricted cash 50,000 -
Payments on line of credit (50,000) -
-------------------- ------------------
Net cash provided by financing activities 515,196 64,149
-------------------- ------------------
Net increase in cash and cash equivalents 799,740 79,163
Cash and cash equivalents at beginning of period 124,340 118,421
-------------------- ------------------
Cash and cash equivalents at end of period $924,080 $197,584
==================== ==================
Supplemental cash flow information Cash paid during the period for:
Interest $8,981 $ 1,300
Income taxes - -
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
AMERICA ONLINE, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(amounts in thousands, except share data)
(unaudited)
Additional
Preferred stock Common stock paid-in
Shares Amount Shares Amount capital
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balances at June 30, 1997 1,000 $ 1 200,377,942 $ 2,004 $616,219
Common stock issued:
Exercise of options - - 13,984,994 140 81,854
Business acquisitions - - 322,782 3 13,343
Sale of stock, net - 134,488 1 2,986
Amortization of deferred compensation - - - - 25,232
Unrealized gain on available-for-sale securities,
including tax effect - - - - 48,959
Net income - - - - -
------------ ---------------------------- ------------- ------------
============ ============================ ============= ============
Balances at March 31, 1998 1,000 $ 1 214,820,206 $ 2,148 $788,593
============ ============================ ============= ============
============ ============================ ============= ============
Unrealized gain on
available-for-sale Accumulated
securities deficit Total
------------------------------------------------------------
------------------------------------------------------------
<S> <C> <C> <C>
Balances at June 30, 1997 $ 16,924 $ (507,114) $128,034
Common stock issued:
Exercise of options - - 81,994
Business acquisitions - - 13,346
Sale of stock, net - - 2,987
Amortization of deferred compensation - - 25,232
Unrealized gain on available-for-sale securities,
including tax effect 63,258 - 112,217
Net income - 84,743 84,743
----------------------- ---------------- -------------
======================= ================ =============
Balances at March 31, 1998 $ 80,182 $ (422,371) $448,553
======================= ================ =============
======================= ================ =============
See accompanying notes.
</TABLE>
<PAGE>
AMERICA ONLINE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements,
which include the accounts of America Online, Inc. (the "Company") and its
wholly and majority owned subsidiaries, have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments, consisting only of normal
recurring accruals (with the exception of the adjustment discussed in Note 2 of
the Notes to Condensed Consolidated Financial Statements), considered necessary
for a fair presentation, have been included in the accompanying unaudited
financial statements. All significant intercompany transactions and balances
have been eliminated in consolidation. Certain amounts in prior years'
consolidated financial statements have been reclassified to conform to the
current year presentation. Operating results for the three and nine months ended
March 31, 1998 are not necessarily indicative of the results that may be
expected for the full year ending June 30, 1998. For further information, refer
to the consolidated financial statements and notes thereto, included in the
Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1997.
In January 1997, the Securities and Exchange Commission issued new
rules requiring disclosure of the Company's accounting policies for derivatives
and market risk disclosure. The Company does not have any derivative financial
instruments as of March 31, 1998, and believes that the interest rate risk
associated with its borrowings and market risk associated with its
available-for-sale securities are not material to the results of operations or
financial position of the Company.
Note 2. Change in Accounting Estimate
As a result of a change in accounting estimate, the Company recorded a
charge of $385.2 million as of September 30, 1996, representing the balance of
deferred subscriber acquisition costs as of that date. The Company had
previously deferred the cost of certain marketing activities, to comply with the
criteria of Statement of Position 93-7 "Reporting on Advertising Costs", and
then amortized those costs over a period determined by calculating the ratio of
current revenues related to direct response advertising versus the total
expected revenues related to this advertising, or twenty-four months, whichever
was shorter. The Company's changing business model, which includes flat-rate
pricing for its AOL brand online service, is expected to reduce its reliance on
online service subscriber revenues for the generation of profits. This changing
business model, coupled with a lack of historical experience with flat-rate
pricing, created uncertainties regarding the level of expected future economic
benefits from online service subscriber revenues (See "Management's Discussion
and Analysis of Financial Condition and Results of Operations"). As a result,
the Company believed it no longer had an adequate accounting basis to support
recognizing deferred subscriber acquisition costs as an asset.
<PAGE>
Note 3. Income Taxes
The effective income tax rate varied from the federal statutory tax
rate as follows:
<TABLE>
Three Months Nine Months
Ended Ended
3/31/98 3/31/98
------------------- --------------------
<S> <C> <C>
Statutory rate 35.0% 35.0%
State income taxes - net of federal
income tax benefit 3.0 3.0
Acquired research and development 19.8 4.3
Other 4.1 2.2
Tax benefit of loss carryforwards (61.9) (44.5)
=================== ====================
Effective tax rate 0.0% 0.0%
=================== ====================
</TABLE>
As of March 31, 1998, the Company had net operating loss carryforwards
of approximately $826.6 million for tax purposes, which will be available,
subject to certain annual limitations, to offset future taxable income. If not
used, these loss carryforwards will expire between 2001 and 2013. To the extent
that net operating loss carryforwards and other deferred tax assets, when
realized, relate to stock option deductions, the resulting benefits will be
credited to stockholders' equity. (See Note 4, Change in Accounting for Income
Taxes).
Deferred income taxes arise because of differences in the treatment of
income and expense items for financial reporting and income tax purposes.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets as of March 31, 1998 and 1997
were as follows:
<TABLE>
March 31,
(In thousands) 1998 1997
-------------- --- ---------------
Deferred tax liabilities:
<S> <C> <C>
Capitalized software costs $ 29,848 $ 23,005
Unrealized gain on available-for-sale securities 48,958 -
============== ===============
Net deferred tax liabilities $ 78,806 $ 23,005
============== ===============
Deferred tax assets:
Net operating loss carryforwards $ 314,112 $ 258,066
Deferred network services credit 138,355 -
Other 20,348 10,411
-------------- ---------------
Total deferred tax assets 472,815 268,477
Valuation allowance for deferred assets (394,009) (245,472)
============== ===============
Net deferred tax assets $ 78,806 $ 23,005
============== ===============
</TABLE>
<PAGE>
Note 4. Change in Accounting for Income Taxes
The Company has net operating loss carryforwards for tax purposes
("NOLs") and other deferred tax benefits that are available to offset future
taxable income. Only a portion of the NOLs is attributable to operating
activities. The remainder of the NOLs is attributable to tax deductions related
to the exercise of stock options.
Prior to the third quarter of fiscal 1998, the Company followed the
practice of computing its income tax expense using the assumption that current
year stock option deductions were used first to offset its financial statement
income. NOLs could then offset any excess of financial statement income over
current year stock option deductions. Because stock option deductions are not
recognized as an expense for financial reporting purposes, the tax benefit of
stock option deductions must be credited to additional paid-in-capital with an
offsetting income tax expense recorded in the income statement.
For the first two quarters of fiscal 1998, the Company continued this
practice. During the third quarter of 1998, effective retroactive to July 1,
1997, the Company changed its accounting for income taxes to recognize the tax
benefits from current and prior year's stock option deductions after utilization
of NOLs from operations (i.e., NOLs determined without deductions for exercised
stock options) to reduce income tax expense. The Company believes that this
change is to a preferable method because the Company will not realize any tax
benefit from stock option deductions until it has fully utilized its current and
prior period net operating loss carryforwards from operations. Thus, this method
more accurately reflects the incremental effect of the Company's stock option
deductions in the appropriate accounting period.
Because stock option deductions would have been utilized for financial
accounting purposes in prior years under both accounting methods due to the
absence of NOLs from operations, this accounting change had no effect on 1997
and prior years' tax provisions or additional paid-in capital.
After restating the first and second quarters in fiscal 1998, the
effect of the accounting change for each quarter was to increase net income (in
thousands) and net income per share as follows:
Per Share
Total Basic Diluted
---------------------------------
First Quarter $ 12,502 $ 0.06 $ 0.05
Second Quarter $ 13,716 $ 0.07 $ 0.06
Furthermore, additional paid-in capital was reduced by approximately
$26 million and, as a result of this change in accounting method, retained
earnings was increased by $26 million.
The Company's deductible temporary differences related to operations
and exercised stock options amounted to (in millions):
March 31, 1998 June 30, 1997
Operations $685 $ 648
Stock options $561 $ 163
<PAGE>
Included in these amounts as of March 31, 1998 are net operating loss
carryforwards for tax purposes related to operations and the exercise of stock
options of $455 million and $372 million, respectively.
When realization of the deferred tax asset is more likely than not to
occur, the benefit related to the deductible temporary differences attributable
to operations will be recognized as a reduction of income tax expense. The
benefit related to the deductible temporary differences attributable to stock
option deductions will be credited to additional paid-in-capital.
Note 5. Legal Proceedings
The Company is involved in various legal proceedings, including pending
litigation. In February 1997, a class action lawsuit (Orman v. America Online,
Inc., et al.) was filed against the Company, its officers and directors and its
outside auditors alleging violations of the federal securities laws between
August 10, 1995 and October 29, 1996. In July 1997, the 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 only 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 during 1998. A shareholder derivative suit
related to the Orman 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. A
trial date has been set for late June, 1998.
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 anticipates settling
with the offices of the State Attorneys General on terms which will have no
material adverse effect on the financial statements or operations of the
Company.
The Company believes that it has valid defenses to all litigation
pending against it, and all cases against the Company are, and will continue to
be, vigorously defended. Management is unable to make a meaningful estimate of
the amount or range of loss that could result from an unfavorable outcome of all
pending litigation. It is possible that the Company's operating results or cash
flows in a particular quarter or annual period or its financial position could
be materially affected by an ultimate unfavorable outcome of certain pending
litigation. Management believes, however, that the ultimate outcome of all
pending litigation should not have a material adverse effect on the Company's
operating results, cash flows or financial position.
Note 6. Notes Payable
During September 1997, the Company borrowed $28.5 million in a
refinancing of one of its office buildings. The note is collateralized by the
Company's office building and carries interest at a fixed rate of 7.46%. The
note amortizes on a straight-line basis over a term of 25 years and if not paid
in full at the end of 10 years, the interest rate, from that point forward, is
subject to adjustment.
<PAGE>
On November 17, 1997, the Company sold $350 million of 4% Convertible
Subordinated Notes due November 15, 2002 (the "Notes"). The Notes are
convertible into the Company's common stock at a conversion rate of 19.15938
shares of common stock for each $1,000 principal amount of the Notes (equivalent
to a conversion price of $52.19375 per share), subject to adjustment in certain
events. 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 14, 2000, in whole or in part, at the
redemption prices set forth in the Notes.
Note 7. Commitments
The Company has guaranteed modem installation and monthly usage commitments
with certain of its data network providers. These commitments extend through
fiscal year 2003 and total approximately $3.4 billion.
Note 8. Earnings (Loss) Per Share
The following table sets forth the computation of basic and diluted
earnings per share for the three and nine months ended March 31, 1998 and 1997:
<TABLE>
(in thousands except for per share data) Three months ended March 31, Nine months ended March 31,
1998 1997 1998 1997
---- ---- ---- ----
Numerator for basic and diluted earnings per
share -
<S> <C> <C> <C> <C>
Income available to common stockholders 18,593 (4,734) 84,743 (487,528)
===============================================================
Denominator
Denominator for basic earning per share -
Weighted average shares
211,607 192,566 208,793 189,133
Effect of dilutive securities:
Employee stock options 26,507 - 26,994 -
Warrants 6,946 - 6,876 -
Convertible preferred stock 446 - 446 -
-----------------------------------------------------------
Dilutive potential common shares 33,899 - 34,316 -
-----------------------------------------------------------
Denominator for diluted earning per share -
Adjusted weighted average shares
and assumed conversions
245,506 192,566 243,109 189,133
===========================================================
Basic earnings (loss) per share $ 0.09 $ (0.02) $ 0.41 $ (2.58)
===========================================================
Diluted earnings (loss) per share $ 0.08 $ (0.02) $ 0.35 $ (2.58)
===========================================================
</TABLE>
Note 9. Subsequent Events
On May 6, 1998, the Company announced it will acquire NetChannel, Inc.,
a Web-enhanced television company, in a transaction that will be accounted for
under the purchase method of accounting. The total purchase price will be
approximately $29 million, comprised of approximately $17 million in cash and
$12 million of net assumed liabilities. In connection with this transaction, the
Company expects to record a charge for acquired in-process research and
development of approximately $20 million in the quarter ending June 30, 1998.
The Company adopted a new shareholder rights plan on May 12, 1998. The
new plan was implemented by declaring a dividend, distributable to shareholders
of record on June 1, 1998, of one preferred share purchase right for each
outstanding share of the Company's common stock. All rights granted under the
current shareholder rights plan will be redeemed in conjunction with the
implementation of the new plan. Each right under the new plan will entitle
holders of the Company's common stock to purchase one one-thousandth of a share
of a new series of junior participating preferred stock, at a purchase price of
<PAGE>
$900 per right, subject to adjustment. The rights will be exercisable only if a
person or group (i) acquires 15% or more of the Company's common stock or (ii)
announces a tender offer that would result in that person or group acquiring 15%
or more of the common stock. Once exercisable, and in some circumstances if
certain additional conditions are met, the new rights plan allows shareholders
(other than the acquiror) to purchase common stock in the Company or in the
acquiror at a substantial discount. The new rights will expire on May 12, 2008
unless redeemed by the Company prior to that date.
Note 10. Business Combinations
On January 7, 1998, the Company acquired Personal Library Software,
Inc., a developer of information indexing and search technologies, in a
transaction that was accounted for under the purchase method of accounting. The
total purchase price was approximately $15 million, comprised of approximately
$9 million in stock and $6 million in assumed liabilities. In connection with
this transaction, the Company recorded a charge for acquired in-process research
and development of $9.7 million in the quarter ended March 31, 1998.
On January 31, 1998, the Company consummated a Purchase and Sale
Agreement (the "Purchase and Sale") by and among the Company, ANS
Communications, Inc. ("ANS"), a then wholly-owned subsidiary of the Company, and
WorldCom, Inc. ("WorldCom") pursuant to which the Company transferred to
WorldCom all of the issued and outstanding capital stock of ANS in exchange for
the online services business of CompuServe Corporation, which was acquired by
WorldCom shortly before the consummation of the Purchase and Sale, and $147
million in cash (excluding $15 million in cash received as part of the
CompuServe online services business and after purchase price adjustments made at
closing). The Company entered into this transaction in order to realize the
significant growth in the value of ANS and allow the Company to concentrate on
its core competencies - interactive services and content. The transaction was
accounted for under the purchase method of accounting and, accordingly, the
assets and liabilities were recorded based upon their fair values at the date of
acquisition.
Prior to the sale, ANS was a data communications and network service
provider whose primary customer was AOL. AOL sold ANS and its network
infrastructure, related equipment and personnel capable of managing the network
and simultaneously executed a network services agreement (the "Services
Agreement") with WorldCom. The Service Agreement calls for WorldCom to provide
network management services and data communications services for a five-year
period. WorldCom will utilize the purchased ANS assets to provide such services
to AOL. The sale of ANS was an integral part of the Services Agreement.
The Services Agreement provides AOL with exclusive use during peak
usage periods of ANS's portion of AOL's analog dial up network sold with ANS
(the "Network") and provides that the title to the modems and related equipment
necessary to operate the Network will revert to AOL upon termination or
expiration of the Services Agreement. AOL will then pay an amount equal to book
value of the modems as set forth on ANS's financial statements and will assume
any operating lease arrangements for modems as of such date. The Services
Agreement provides AOL with significant continuing involvement and influence
over the ANS network assets sold.
<PAGE>
The excess of the cash and the fair value of the CompuServe business
received over the book value of ANS amounted to $381 million, which will be
amortized on a straight-line basis over the five-year term of the Services
Agreement as a reduction of network services expense within cost of revenues.
Such amount has been classified as a deferred network services credit on the
condensed consolidated balance sheet. During the quarter ended March 31, 1998,
the Company reduced cost of revenues by approximately $13 million due to the
amortization of the deferred network service credit.
In connection with the acquisition of CompuServe the Company recorded
approximately $106 million in goodwill and other intangible assets, which are
being amortized on a straight-line basis over periods of three to seven years.
Immediately after the consummation of the Purchase and Sale the
Company's European partner, Bertelsmann AG, paid $75 million to the Company for
a 50% interest in a newly created joint venture to operate the CompuServe
European online service. Both AOL and Bertelsmann AG invested an additional $25
million in cash in this joint venture. The Company will account for this
transaction under the equity method of accounting in accordance with the terms
of the securities issued in the joint venture.
The following unaudited pro forma information has been prepared
assuming that this acquisition had taken place at the beginning of the
respective periods. The pro forma financial information is not necessarily
indicative of the combined results that would have occurred had the acquisition
taken place at the beginning of the period, nor is it necessarily indicative of
results that may occur in the future.
<TABLE>
(Amounts in thousands, except Pro Forma
per share data)
Three months ended Three months Nine months ended Nine months
3/31/98 ended 3/31/97 3/31/98 ended 3/31/97
--------------------- ---------------- --------------------- ----------------
<S> <C> <C> <C> <C>
Revenue $712,141 $528,618 $1,941,714 $1,457,652
Income from operations 21,101 22,923 130,079 (456,988)
Net income $ 23,865 $ 24,904 $ 138,404 $ (453,919)
Earnings per share - diluted $ 0.10 $ 0.13 $ 0.56 $ (2.36)
Earnings per share - basic $ 0.11 $ 0.13 $ 0.65 $ (2.36)
</TABLE>
Based on the current level of commitments that the Company has with
WorldCom, aggregate modem payments under the Services Agreement will approximate
$1.6 billion over the term of the Services Agreement.
Note 11. Restructuring Charge
In connection with a restructuring plan adopted in the quarter ended
March 31, 1998, the Company recorded a $35.1 million restructuring charge
associated with the restructuring of its AOL Studios brand group. The
restructuring included the exiting of certain business activities, the
termination of approximately 160 employees, and the shutdown of certain
subsidiaries and facilities. The restructuring charge is comprised of costs to
terminate third party agreements associated with exiting certain business
activities totaling $14.7 million, severance-related costs of $10.8 million, the
write-off of impaired assets of $7.4 million, and facilities shutdown and other
costs of $2.2 million.
The following table summarizes the activity in the restructuring
accrual during the quarter ended March 31, 1998. The balance of the
restructuring accrual at March 31, 1998 is included in other accrued expenses
and liabilities on the balance sheet.
<PAGE>
(Amounts in millions)
Restructuring charge $ 35.1
Payments ( 7.9)
Non-cash adjustments (12.8)
Restructuring accrual at March 31, 1998 $ 14.4
Note 12. Capital Accounts
On February 6, 1998, the Company's 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.
In March 1998, the Company effected a two-for-one split of the
outstanding shares of common stock by dividending one additional share for each
share owned. Accordingly, all data shown in the accompanying consolidated
financial statements and notes have been retroactively adjusted to reflect the
stock split.
Note 13. Recent Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 130, "Reporting
Comprehensive Income," which requires companies to report by major components
and in total, the change in its net assets during the period from non-owner
sources. The FASB also issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which establishes annual and interim
reporting standards for a company's operating segments and related disclosures
about its products, services, geographic areas and major customers. Both
Statements are effective for fiscal years beginning after December 15, 1997.
Adoption of these standards will not impact the Company's consolidated financial
position, results of operations or cash flows, and any effect, while not yet
determined by the Company, will be limited to the presentation of its
disclosures.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations Overview
The following information should be read in conjunction with the
consolidated financial statements and the notes thereto included in Item 1 of
this Quarterly Report, and the condensed consolidated financial statements and
the notes thereto and Management's Discussion and Analysis of Financial
Condition and Results of Operations contained in the Company's Annual Report on
Form 10-K for the year ended June 30, 1997.
The Company generates two types of revenues, online service revenues
and advertising, commerce and other revenues. Online service revenues are
generated from customers subscribing to the Company's AOL service and, effective
February 1, 1998, the CompuServe service. Advertising, commerce and other
revenues are non-subscription based and are generated from the Company's base of
<PAGE>
subscribers as well as businesses. Advertising, commerce and other revenues
consist of advertising and related revenues, the sale of merchandise, and
transaction fees associated with electronic commerce, as well as other revenues,
which consist primarily of data network service revenues generated by ANS
(through January 1998 only) as well as royalty fees and development revenues.
Currently, the Company's online service revenues are generated
primarily from subscribers paying a monthly membership fee. Prior to December 1,
1996, a significant portion of online service revenues were comprised of hourly
charges based on usage in excess of the number of hours of usage provided as
part of the monthly fee. With the introduction of flat-rate pricing, as
described below, the portion of online service revenues which are generated from
hourly charges has decreased substantially.
The growth of the Company's online service revenues, assuming such
growth continues, is expected to be driven primarily by growth in its subscriber
base. The growth of the subscriber base is dependent upon the Company's ability
to acquire and retain subscribers.
Effective December 1, 1996, the Company began offering several pricing
alternatives to the AOL service aimed at providing price points for a wide range
of consumers. These pricing alternatives are as follows:
* A standard monthly membership fee of $19.95, with no additional hourly charges
(the "Flat-Rate Plan"). Subscribers can also choose to prepay for one year in
advance at the monthly rate of $17.95.
* An alternative offering three hours for $4.95 per month, with additional time
priced at $2.50 per hour.
* An alternative offering of $9.95 per month for unlimited use - for those
subscribers who already have an Internet connection and use this connection to
access AOL.
In July 1997, the Company introduced premium games services, for which
members pay $1.99 per hour (after any free hours offered under promotional
programs) in addition to the regular monthly membership fee and hourly usage
charges as set forth above.
The Company announced on February 9, 1998, that it would increase the
price of its Flat-Rate Plan for the AOL service by $2.00 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
became effective at the start of each member's monthly billing cycle in April
1998. In addition, members may choose to pay for one year in advance at 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.
Prior to December 1, 1996, the Company's standard monthly membership
fee for its AOL service, which included five hours of service, was $9.95 per
month, with a $2.95 hourly fee for usage in excess of five hours per month.
Existing members at December 1, 1996, could retain the $9.95 / five hour pricing
upon request. For the period July 1, 1996 through November 30, 1996, the Company
also offered a pricing plan which included 20 hours of service for $19.95 per
month, with a $2.95 hourly fee for usage in excess of 20 hours per month. This
plan was discontinued upon the availability of the Flat-Rate Plan on December 1,
1996.
<PAGE>
As a result of the introduction of the Flat-Rate Plan as detailed
above, the Company's Internet service, Global Network Navigator ("GNN"), was
discontinued. The Company had launched GNN in October 1995.
Effective February 1, 1998, the Company offered the following price
plans for the CompuServe Interactive service:
* A standard monthly membership offering five hours for $9.95 per month, with
additional time priced at $2.95 per hour.
* An alternative offering of $24.95 per month for unlimited use.
Subsequent to the introduction of the Flat-Rate Plan for the AOL
service, the Company experienced a significant increase in average monthly
subscriber usage, and an attendant decrease in the average revenue per
member-hour. The Company also experienced higher cost of revenues relative to
total revenues. The Company plans to minimize the impact of the aforementioned
changes by growing advertising, commerce and other revenues as well as by
pricing actions and by decreasing costs, on a relative basis (either on a
per-hour basis or as a percentage of total revenues), principally through
network, marketing and operating cost efficiencies.
An important component of the Company's business strategy is an
increasing reliance on advertising, commerce and other revenues, which include
advertising and related revenues, the sale of merchandise and transaction fees
associated with electronic commerce. Another important factor in the Company's
business strategy is the further reduction of the costs of operating the
Company's data network, on a per-hour basis, through increasing volume discounts
and efficient utilization of AOLnet, the Company's TCP/IP network. The Company's
marketing expenses as a percentage of revenues will be lower in fiscal 1998 than
they were in fiscal 1997, primarily as a result of the improved value
proposition offered by flat-rate pricing, which has resulted in improved
subscriber acquisition and retention rates, as compared to rates achieved prior
to flat-rate pricing. However, with the recently announced $2.00 per month price
increase for the standard monthly membership fee, the Company may have to spend
more on marketing, advertising and customer service than in recent quarters in
order to acquire and retain customers and combat potential competitive pressures
and responses. The Company's marketing strategy is expected to continue to
emphasize brand advertising as well as cost-effective bundling agreements,
whereby the Company's product is widely distributed with new personal computers,
the Windows operating system and other peripheral computer equipment, and the
Company will continue to market its products via direct mail programs.
The growth of advertising, commerce and other revenues is important to
the Company's business objectives, as those revenues provide an important
contribution to the Company's operating results. In the third quarter of fiscal
1998, advertising, commerce and other revenues totaled $117.9 million, an
increase of $49.3 million, or 72% over the comparable quarter in fiscal 1997.
Among the Company's business objectives are increasing the subscriber base and
continuing to accelerate the change in its business model into one in which more
profits are generated from sources other than online service revenues, such as
advertising and electronic commerce. The Company expects that the growth in
<PAGE>
advertising, commerce and other revenues, assuming such growth continues, will
provide the Company with the opportunity and flexibility to fund the costs
associated with the increased usage resulting from flat-rate pricing as well as
programs designed to grow the subscriber base and meet other business
objectives. Advertising, commerce and other revenues are generated primarily
from electronic commerce and advertising, and include fees received from the
sale of advertising, fees received from companies who market their products
through the Company's online services and the sale of merchandise by the Company
(principally computer hardware and software and AOL merchandise). Advertising
revenues are expected to grow in importance as the Company continues to leverage
its large, active and growing subscriber base. The Company is able to offer its
advertising partners a variety of customized programs, which may include
guaranteed numbers of impressions and select sponsorship of particular online
areas for designated time periods. As merchants realize the value of reaching
the Company's large and active subscriber base, the Company expects to earn
additional revenues by offering selected merchants exclusive rights to market
their particular class of goods or services within the Company's online service.
The Company's operating margin declined in fiscal 1997, driven by the
impact of the Company's switch to flat-rate pricing in December 1996 and a
concomitant dramatic increase in member usage. Average monthly subscriber usage
in the first quarter of fiscal 1997, the last quarter before the introduction of
flat-rate pricing, was approximately 7 hours. In the third quarter of fiscal
year 1998, average monthly subscriber usage had increased to approximately 23
hours. Due to the inadequacy of historical operating experience under a
flat-rate pricing structure, the Company is unable to predict whether usage will
continue to trend upward, and, if so, at what rate. The Company is also unable
to predict the impact on subscriber usage and retention patterns that will occur
as a result of the $2.00 per month price increase to its Flat-Rate Plan which
was implemented in the fourth quarter of fiscal 1998. If current usage trends
continue, further pressures on operating margins may result. The impact of
increased usage on operating margins, if it occurs, could be offset, in whole or
in part, by increases in advertising, commerce and other revenues, increased
data network operating efficiencies, reductions in marketing and other operating
expenses, pricing changes or other factors or actions.
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
online services (for example, the Microsoft Network and Prodigy Services
Company), various national and local Internet service providers using
industry-standard browser and navigational software, long distance and regional
telephone companies who may offer competing services directly to their customers
as part of their telephone service (among others, AT&T Corp., MCI Communications
Corporation and various regional Bell operating companies), cable companies, and
suppliers of operating systems or personal computer manufacturers 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. Recently announced strategic alliances
among certain of the Company's competitors (for example, Yahoo! with MCI, Excite
with each of AT&T and Netscape, and Lycos with AT&T) could strengthen the
Company's competition. On a broader scale, the Company competes 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
<PAGE>
interactive computer services, such as those offered by WebTV, offer yet an
additional competitive alternative to the offerings of the Company. The Company
has recently announced that it has agreed to acquire NetChannel, Inc., but there
can be no assurance that the acquisition will be consummated or that its
technology will become commercially successful.
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 adverse 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.
Results of Operations
Online Service Revenues
For the three months ended March 31, 1998, online service revenues
increased from $381.5 million to $575.7 million, or 51%, over the three months
ended March 31, 1997. This increase was comprised of an increase in AOL online
service revenues of $160.8 million as well as CompuServe online service revenues
of $33.4 million, which began in February 1998. The increase in AOL online
service revenues was primarily attributable to a 39% increase in the average
number of AOL North American subscribers for the quarter ended March 31, 1998,
compared to the prior year comparable quarter, as well as a 4% increase in the
average monthly online service revenue per AOL North American subscriber. The
average monthly online service revenue per AOL North American subscriber
increased from $17.02 in the three months ended March 31, 1997 to $17.65 in the
three months ended March 31, 1998. This increase was principally attributable to
a reduction in the amount of refunds/credits issued to subscribers in the
quarter ended March 31, 1998.
For the nine months ended March 31, 1998, online service revenues
increased from $1,043.8 million to $1,493.0 million, or 43%, over the nine
months ended March 31, 1997. This increase was comprised of an increase in AOL
online service revenues of $415.8 million as well as the aforementioned $33.4
million in CompuServe online service revenues. The increase in AOL online
service revenues was primarily attributable to a 38% increase in the average
number of AOL North American subscribers for the nine months ended March 31,
1998, compared to the prior year comparable period, as well as a 3% increase in
the average monthly online service revenue per AOL North American subscriber.
The average monthly online service revenue per AOL North American subscriber
increased from $16.94 in the nine months ended March 31, 1997 to $17.48 in the
nine months ended March 31, 1998. This increase was principally attributable to
a reduction in the amount of refunds/credits issued to subscribers in the nine
months ended March 31, 1998.
At March 31, 1998, the Company had 11,870,000 AOL brand subscribers,
including 10,715,000 in North America and 1,155,000 in the rest of the world.
Also at that date, the Company had 2,175,000 CompuServe brand subscribers,
including 1,100,000 in North America and 1,075,000 in the rest of the world.
<PAGE>
The Company is unable to predict the impact on online service revenues
resulting from the $2.00 per month price increase that was implemented on April
1. The Company anticipates that the increase in online service revenues
resulting from the price increase will be partially offset by the loss of some
number of subscribers and by some reduction in the growth of new subscribers.
The Company is unable to predict the amount of such offset.
Advertising, Commerce and Other Revenues
For the three months ended March 31, 1998, advertising, commerce and
other revenues, which consist principally of advertising and related revenues,
fees associated with electronic commerce and the sale of merchandise, increased
from $68.6 million to $117.9 million, or 72%, over the three months ended March
31, 1997. For the nine months ended March 31, 1998, advertising, commerce and
other revenues increased from $165.6 million to $314.3 million, or 90%, over the
nine months ended March 31, 1997. The increase in both the three and nine month
periods ended March 31, 1998 was driven primarily by more advertising on the
Company's AOL service as well as an increase in electronic commerce fees.
Advertising and electronic commerce fees increased by 207% and 218%,
respectively, in the three and nine month periods ended March 31, 1998, from
$24.3 million in the three months ended March 31, 1997, to $74.7 million in the
three months ended March 31, 1998, and from $53.1 million in the nine months
ended March 31, 1997 to $168.8 million in the nine months ended March 31, 1998.
A portion of the advertising and electronic commerce revenues recognized in the
quarter ended March 31, 1998 reflect revenues associated with Tel-Save, Inc.
("Tel-Save") warrants earned by the Company during that period as a result of
the sale of Tel-Save long-distance telephone service to AOL members. The value
of such warrants for revenue recognition purposes was calculated based upon,
among other variables, the average market price of Tel-Save common stock at the
end of the March 1998 quarter. Future revenues will be earned by the Company
based upon the growth in the number of Tel-Save long-distance telephone
subscribers and will be calculated using the number of warrants earned and the
value of those warrants. The value of future warrants earned by the Company will
be calculated using, among other variables, the average market price of Tel-save
common stock at the end of the quarter in which the warrants are earned.
Merchandise sales decreased by 21% and increased by 10%, respectively, in the
three and nine-month periods ended March 31, 1998, from $30.3 million in the
three months ended March 31, 1997 to $24.0 million in the three months ended
March 31, 1998, and from $73.6 million in the nine months ended March 31, 1997
to $81.3 million in the nine months ended March 31, 1998. At March 31, 1998, the
Company's advertising and electronic commerce backlog, representing the contract
value of advertising and electronic commerce agreements signed, less revenues
already recognized from these agreements, was approximately $427 million, up
from approximately $129 million at March 31, 1997.
The Company is unable to predict the effect of the $2.00 per month
price increase on subscriber acquisition and retention rates. Any effect on
subscriber acquisition and retention rates may impact the rate of growth in
advertising, commerce and other revenues.
Cost of Revenues
Cost of revenues includes network-related costs, consisting primarily
of data network costs, personnel and related costs associated with operating the
data centers, data network and providing customer support and billing, host
computer and network equipment costs, the costs of merchandise sold, and
royalties paid to information and service providers. For the three months ended
March 31, 1998, cost of revenues increased from $308.4 million to $457.8
million, or 48%, over the three months ended March 31, 1997, and decreased as a
percentage of total revenues from 68.5% to 66.0%. For the nine months ended
March 31, 1998, cost of revenues increased from $771.4 million to $1,170.7
million, or 52%, over the nine months ended March 31, 1997, and increased as a
percentage of total revenues from 63.8% to 64.8%.
<PAGE>
The increase in cost of revenues for the three and nine month periods
ended March 31, 1998 was primarily attributable to increases in data network
costs, host computer and network equipment costs and personnel and related costs
associated with operating the data centers, data network and providing customer
support and billing. Data network costs increased primarily as a result of the
larger customer base and more usage by customers. Host computer and network
equipment costs, consisting of lease, depreciation and maintenance expenses,
increased as a result of additional host computer and network equipment,
necessitated by the larger customer base and more usage by customers. Personnel
and related costs associated with operating the data centers, data network and
providing customer support and billing increased primarily as a result of the
requirements of supporting a larger data network, a larger customer base and
increased online service revenues.
The decrease in cost of revenues as a percentage of total revenues for
the three months ended March 31, 1998 was primarily attributable to a decrease,
as a percentage of total revenues, in personnel and related costs associated
with operating the data centers, data network and providing customer support and
billing as well as in royalties paid to information providers. These decreases
were partially offset by an increase, as a percentage of total revenues, in host
computer and network equipment costs. The increase in cost of revenues as a
percentage of total revenues for the nine month period ended March 31, 1998 was
primarily attributable to an increase, as a percentage of total revenues, in
host computer and network equipment costs partially offset by a decrease, as a
percentage of total revenues, in royalties paid to information and service
providers.
Several factors influence the Company's cost of revenues as a
percentage of total revenues. These factors include the rates of subscriber
acquisition and retention, average subscriber usage, the growth of advertising,
commerce and other revenues, and other costs of delivering the service. As
previously noted, the Company implemented a $2.00 per month price increase in
its Flat-Rate Plan beginning April 1, 1998. As a result of this price increase
the Company expects that cost of revenues as a percentage of total revenues will
be lower in the quarter ending June 30, 1998 than in the quarter ended March 31,
1998. The Company is unable to predict, however, the impact on cost of revenues
as a percentage of total revenues beyond the quarter ending June 30, 1998 which
will result from the combination of all the foregoing factors, including the
price increase.
The Company operates AOLnet, its TCP/IP data network, to provide
network capacity to its members. The Company manages and lowers its per-hour
data network costs by relying on increasing network volumes to negotiate lower
costs per network hour as well by efficiently utilizing the network.
Pursuant to the Purchase and Sale Agreement (the "Purchase and Sale")
by and among the Company, ANS Communications, Inc. ("ANS"), a then wholly-owned
subsidiary of the Company, and WorldCom, Inc. ("WorldCom"), the Company recorded
a deferred network services credit on the balance sheet of $381 million, which
is equivalent to the excess of the cash and the fair value of the CompuServe
business received over the book value of ANS. This deferred network services
credit will be amortized as a reduction of network service expense within cost
of revenues on a straight-line basis over the five year term of the network
services agreement entered into between the Company and Worldcom. During the
quarter ended March 31, 1998, the Company reduced cost of revenues by
approximately $13 million due to the amortization of the deferred network
services credit. For additional information regarding this transaction and the
deferred network services credit see Note 10 of the Notes to Condensed
Consolidated Financial Statements.
<PAGE>
Marketing and Write-off of Deferred Subscriber Acquisition Costs
Marketing expenses include the costs to acquire and retain subscribers
and other general marketing costs. For the three months ended March 31, 1998,
marketing expenses decreased from $92.8 million to $84.2 million, or 9%, over
the three months ended March 31, 1997, and decreased as a percentage of total
revenues from 20.6% to 12.1%. For the nine months ended March 31, 1998,
marketing expenses decreased from $323.8 million to $278.8 million, or 14%, over
the nine months ended March 31, 1997, and decreased as a percentage of total
revenues from 26.8% to 15.4%.
The decrease in marketing expenses for the three and nine month periods
ended March 31, 1998, and such expenses as a percentage of total revenues, was
primarily attributable to decreases in subscriber acquisition costs. The Company
made a change in the first quarter of fiscal 1997 which resulted in subscriber
acquisition costs being expensed for periods subsequent to the first quarter of
fiscal 1997, versus being capitalized and amortized over twenty-four months in
the first quarter of fiscal 1997 and prior. As a result of the aforementioned
change in accounting estimate, the balance of deferred subscriber acquisition
costs as of September 30, 1996, totaling $385.2 million, was written off. For
additional information regarding this change, refer to Note 2 of the Notes to
Condensed Consolidated Financial Statements.
For the nine months ended March 31, 1998, marketing expenses, before
capitalization and amortization, decreased from $394.8 million to $278.8
million, or 29%, over the nine months ended March 31, 1997, and decreased as a
percentage of total revenues from 32.6% to 15.4%. The decrease in marketing
expenses for the nine months ended March 31, 1998, before capitalization and
amortization, was primarily attributable to a decrease in subscriber acquisition
costs, offset in part by an increase in other general marketing expenses,
principally related to an increase in personnel costs. The decrease in marketing
expenses as a percentage of total revenues for the nine months ended March 31,
1998, before capitalization and amortization, was primarily attributable to a
decrease in subscriber acquisition costs.
Marketing expenses in the quarter ended March 31, 1998 were limited by
the Company. The Company expects that marketing expenses in the next several
quarters will likely be higher on an absolute basis, and may be higher as a
percentage of total revenues, than those experienced in the quarter ended March
31, 1998.
Product Development
Product development costs include research and development expenses and
other product development costs. For the three months ended March 31, 1998,
product development costs increased from $21.5 million to $27.3 million, or 27%,
over the three months ended March 31, 1997, and decreased as a percentage of
total revenues from 4.8% to 3.9%. For the nine months ended March 31, 1998,
product development costs increased from $59.8 million to $66.8 million, or 12%,
over the nine months ended March 31, 1997, and decreased as a percentage of
total revenues from 4.9% to 3.7%. The increase in product development costs was
primarily due to an increase in personnel costs resulting from the Company's
acquisition of CompuServe. The decrease in product development costs as a
percentage of total revenues was primarily a result of the substantial growth in
revenues.
<PAGE>
General and Administrative
For the three months ended March 31, 1998, general and administrative
expenses increased from $32.8 million to $59.5 million, or 81%, over the three
months ended March 31, 1997, and increased as a percentage of total revenues
from 7.3% to 8.6%. For the nine months ended March 31, 1998, general and
administrative expenses increased from $82.1 million to $164.5 million, or 100%,
over the nine months ended March 31, 1997, and increased as a percentage of
total revenues from 6.8% to 9.1%. The increase in general and administrative
costs for the three months ended March 31, 1998, and such costs as a percentage
of total revenues, was primarily attributable to higher personnel costs and
increases in professional fees, principally related to legal matters. The
increase in general and administrative costs for the nine months ended March 31,
1998, and such costs as a percentage of total revenues, was primarily
attributable to higher personnel costs, which included compensatory stock option
and other charges related to the sale of ANS, as well as increases in
professional fees, principally related to legal matters.
Amortization of Goodwill
Goodwill is being amortized on a straight-line basis over periods
ranging from two to ten years. Amortization of goodwill increased to $4.2
million in the three months ended March 31, 1998 from $1.4 million in the three
months ended March 31, 1997. Amortization of goodwill increased to $8.1 million
in the nine months ended March 31, 1998 from $4.9 million in the nine months
ended March 31, 1997. The increase in amortization of goodwill in the three and
nine month periods ended March 31, 1998 is primarily attributable to goodwill
associated with the acquisition of CompuServe in January 1998 as well as
purchases of various companies made by the Company subsequent to third quarter
of fiscal 1997, partially offset by a decrease in goodwill resulting from the
disposition of ANS in January 1998. In addition, the increase in amortization of
goodwill for the nine month period ended March 31, 1998 was partially offset by
a decrease in goodwill associated with GNN, which was written off in connection
with the Company's fiscal 1997 restructuring charge.
Restructuring Charge
In connection with a restructuring plan adopted in the third quarter of
fiscal 1998, the Company recorded a $35.1 million restructuring charge
associated with the restructuring of its AOL Studios brand group. The
restructuring included the exiting of certain business activities, the
termination of approximately 160 employees, and the shutdown of certain
subsidiaries and facilities. For additional information regarding this
restructuring, refer to Note 11 of the Notes to Condensed Consolidated Financial
Statements.
In connection with a restructuring plan adopted in the second quarter
of fiscal 1997, the Company recorded a $48.6 million restructuring charge
associated with the Company's change in business model, the reorganization of
the Company into three operating units, the termination of approximately 300
employees, and the shutdown of certain operating divisions and subsidiaries. As
of September 30, 1997, substantially all of the restructuring activities had
been completed and the Company reversed $1.3 million of the original
restructuring accrual in the September 1997 quarter.
Acquired Research and Development
Acquired research and development costs, totaling $9.7 million in the
quarter ended March 31, 1998, relate to in-process research and development
purchased pursuant to the Company's acquisition of Personal Library Software,
Inc. For additional information regarding this purchase, refer to Note 10 of the
Notes to Condensed Consolidated Financial Statements.
<PAGE>
Settlement Charge
In the nine month period ended March 31, 1997, the Company recorded a
charge of $24.3 million related to a legal settlement reached with various State
Attorneys General to resolve potential claims arising out of the Company's
introduction of flat-rate pricing and its representation that it would provide
unlimited access to subscribers. Pursuant to this legal settlement, the Company
agreed to make payments to subscribers, according to their usage of the AOL
service, who may have been injured by their reliance on the Company's claim of
unlimited access. These payments do not represent refunds of online service
revenues, but are rather the compromise and settlement of allegations that the
Company's advertising of unlimited access under its flat-rate pricing plan
violated consumer protections laws. In the quarter ended March 31, 1997, as a
result of a change in accounting estimate, the Company recorded a benefit of
$6.0 million related to the aforementioned legal settlement, representing the
Company's revised estimate of the total liability associated with this matter.
In the nine month period ended March 31, 1998, the Company further revised its
estimate of the total liability associated with this matter, and reversed an
additional $1.0 million of the original settlement accrual.
In the quarter ended March 31, 1997, the Company recorded a charge of
$5.9 million related to a preliminary legal settlement reached with various
class action plaintiffs which pertained to many of the same issues contained in
the legal settlement with the State Attorneys General in the preceding
paragraph. The preliminary legal settlement with the class action plaintiffs
extended and expanded the relief provided to qualifying subscribers under the
State Attorneys General settlement.
Other Income
Other income consists primarily of investment income and non-operating
gains net of interest expense and non-operating charges. The Company had other
income of $2.8 million and $2.0 million in the three months ended March 31, 1998
and 1997, respectively. The Company had other income of $8.8 million and $3.1
million in the nine months ended March 31, 1998 and 1997, respectively. The
increases in other income for the three and nine month periods ended March 31,
1998, are primarily attributable to the sale of certain available-for-sale
securities and increases in net interest income partially offset by decreases in
the allocation of minority interest losses and increases in non-operating losses
related to various investments.
Income Taxes
Income tax expense was zero in all periods reported. For additional
information regarding income taxes, refer to Notes 3 and 4 of the Notes to
Condensed Consolidated Financial Statements.
Liquidity and Capital Resources
The Company has financed its operations through cash generated from
operations, the sale of its capital stock and the sale of convertible notes. The
Company has financed its investments in facilities and telecommunications
equipment principally through leasing. Net cash provided by operating activities
was $370.1 million and $111.0 million in the nine months ended March 31, 1998
and 1997, respectively. Net cash used in investing activities was $85.6 million
and $96.0 million in the nine months ended March 31, 1998 and 1997,
respectively. Included in investing activities for the nine months ended March
31, 1998 was $253.4 million for the purchase of property and equipment and net
proceeds of $207.4 million from the Company's acquisition of CompuServe and
disposition of ANS. Net cash provided by financing activities was $515.2 million
and $64.1 million in the nine months ended March 31, 1998 and 1997,
respectively. Included in financing activities for the nine months ended March
31, 1998 were $341.7 million in proceeds from convertible notes issued and sold
<PAGE>
in November 1997 (see below), $28.5 million in proceeds from notes payable,
$62.5 million in proceeds from the sale and leaseback of property and equipment,
and $82.2 million in proceeds from the sale of common stock pursuant to employee
stock option and stock purchase plans. At March 31, 1998, the Company had
working capital of $317.9 million, compared to a working capital deficiency of
$231.0 million at June 30, 1997. The improvement in working capital was
primarily related to $341.7 million in net proceeds from convertible notes
issued in November 1997 and the net proceeds of $207.4 million related to the
acquisition of CompuServe and disposition of ANS.
On November 17, 1997, the Company sold $350 million of 4% Convertible
Subordinated Notes due November 15, 2002 (the "Notes"). The Notes are
convertible into the Company's common stock at a conversion rate of 19.15938
shares of common stock for each $1,000 principal amount of the notes (equivalent
to a conversion price of $52.19375 per share), subject to adjustment in certain
events. 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 14, 2000, in whole or in part, at the
redemption prices set forth in the Notes.
On January 31, 1998, the Company consummated the Purchase and Sale
pursuant to which the Company transferred to WorldCom all of the issued and
outstanding capital stock of ANS in exchange for the online services business of
CompuServe Corporation, which was acquired by WorldCom shortly before the
consummation of the Purchase and Sale, and $147 million in cash (excluding $15
million in cash received as part of the CompuServe online services business and
after purchase price adjustments made at closing). Immediately after the
consummation of the Purchase and Sale the Company's European partner,
Bertelsmann AG, paid $75 million to the Company for a 50% interest in a newly
created joint venture to operate the CompuServe European online service. Each
company invested an additional $25 million in cash in this joint venture. The
Company generated $207.4 million in net cash as a result of the aforementioned
transactions.
The Company enters into multiple-year data communications agreements in
order to support AOLnet. In connection with those agreements, the Company may
commit to purchase certain minimum data communications services. Should the
Company not require the delivery of such minimums, the Company's per hour data
communications costs may increase. For additional information regarding the
Company's commitments see Note 7 of the Notes to Condensed Consolidated
Financial Statements.
In May 1996, the Company entered into a joint venture with Mitsui &
Co., ("Mitsui") and Nihon Keizai Shimbun, Inc. ("Nikkei") to offer interactive
online services in Japan. In connection with the agreement, the Company received
approximately $28 million through the sale of convertible preferred stock to
Mitsui. The preferred stock has an aggregate liquidation preference of
approximately $28 million and accrues dividends at a rate of 4% per annum.
Accrued dividends can be paid in the form of additional shares of preferred
stock. During May 1998, the preferred stock, together with accrued but unpaid
dividends, was converted into shares of common stock based on the fair market
value of common stock at the time of conversion.
The Company leases the majority of its facilities and equipment under
non-cancelable operating leases, and is building AOLnet, its data communications
network, as well as expanding its data center capacity. The buildout of AOLnet
and the expansion of data center capacity requires a substantial investment in
telecommunications and server equipment, as well as facilities. The Company
plans to continue making significant investments in these areas. The Company is
funding these investments, which are anticipated to total approximately $800
million in fiscal 1998, through a combination of leases, debt financing and cash
purchases.
<PAGE>
The Company uses its working capital to finance ongoing operations and
to fund marketing and content programs and the development of its products and
services. The Company plans to continue to invest in subscriber acquisition,
retention and brand marketing and content programs to expand its subscriber
base, as well as in network, computing and support infrastructure. Additionally,
the Company expects to use a portion of its cash for the acquisition and
subsequent funding of technologies, content, products or businesses
complementary to the Company's current business. The Company anticipates that
available cash and cash provided by operating activities will be sufficient to
fund its operations for the next twelve months.
Seasonality
The growth in subscriber acquisitions and usage appears to be highest
in the second and third fiscal quarters, when sales of new computers and
computer software are highest due to the holiday season 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.
Year 2000 Compliance
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 CompuServe Service, their
proprietary software, member services, network access, content providers, joint
ventures and various administrative and billing functions. To the extent the
Company's and CompuServe'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.
<PAGE>
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 the
impact of a 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.
Inflation
The Company believes that inflation has not had a material effect on
its results of operations.
Forward-Looking Statements
This report and other oral and written statements made by the Company
to the public contain and incorporate by reference forward-looking statements
within the meaning of the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995. Such statements are based on management's current
expectations or beliefs and are subject to a number of factors and uncertainties
that could cause actual results to differ materially from those described in the
forward-looking statements. Such forward-looking statements address the
following subjects: future operating results; subscriber growth and retention;
increasing advertising and electronic commerce revenues; sustaining earnings'
growth and meeting profit targets; development and success of multiple brands in
the U.S. and internationally; AOL 4.0 and other new products (such as CompuServe
4.0 and Digital City 2.0) and services (such as in Hong Kong); marketing,
advertising and customer service spending; expansion and utilization of network
capacity; identification, testing and implementation of new access and
distribution technologies; and the Company's ability to shape public policy in,
for example, telecommunications, privacy and tax areas.
The following factors, among others, could cause actual results to
differ materially from that described in the forward-looking statements:
Factors related to increased competition from existing and new
competitors, including: price reductions and increased spending on marketing,
network capacity, content procurement and product development; limitations on
the Company's opportunities to enter into and/or renew agreements with content
providers and distribution partners; limitations on its ability to develop new
products and services; limitations on its ability to continue to grow its
subscriber base; increased attrition in the Company's subscriber base; and a
negative impact on the Company's ability to meet its business objective of
implementing its business model into one in which more revenues and profits are
generated from sources other than online service subscription revenues, such as
advertising and electronic commerce.
The risk that past difficulties of the Company and its data
communications access providers in providing adequate server and network
capacity will recur. Risks associated with the fixed costs and minimum
commitment nature of a substantial majority of the Company's network services,
such that a significant decrease in demand for online services would not result
in a corresponding decrease in network costs. Risks related to the buildout of
AOLnet and the expansion of server and network capacity: the risk that demand
will not develop for the capacity created; the risk that supply shortages for
local exchange carrier lines from local telephone companies could slow the
buildout; and the risk that the failure to obtain the necessary financing could
slow or halt the buildout.
Any damage or failure to the Company's computer equipment and the
information stored in its data centers, such as damage by fire, power loss,
telecommunications failures, service failures by third party network service
providers, unauthorized intrusions and other events, that causes interruptions
in the Company's operations, or any interruptions or service outages caused by
software defects or server and network expansion.
<PAGE>
The failure to increase revenues at a rate sufficient to offset the
increase in data communications costs resulting from increasing usage. Risks and
uncertainties associated with a recently announced price increase, including:
the risk that competitive offerings to the AOL service may become more
attractive to AOL members; the risk of decreased demand for the AOL service; the
risk of slowing or reversing subscriber growth or reducing subscriber retention
rates and the resulting impact on the Company's ability to generate advertising
revenues; and the risk that the Company may be required to increase marketing
expenses. The risk that gross and operating margins will decrease as a result of
a decrease in the rate of advertising, electronic commerce and other revenue
growth or an increase in marketing expenses.
The Company's inability to manage its growth and to adapt its
administrative, operational and financial control systems to the needs of an
expanded and evolving entity; and the failure of management to anticipate,
respond to and manage changing business conditions.
The risk that because of seasonal and other factors, the Company is
unable to predict growth in usage, subscriber acquisitions and advertising
commitments.
The failure of the Company to establish new relationships with
electronic commerce, advertising, marketing, technology and content providers or
the loss of a number of relationships with such providers or the risk of
significantly increased costs or decreased revenues needed, to maintain, or
resulting from the failure to maintain, such relationships, as the case may be.
The risk associated with accepting warrants in lieu of cash in certain
electronic commerce agreements, as the value of such warrants is dependent upon
the common stock price of the warrant issuer at the time the warrants are
earned.
The acquisition of businesses, fixed assets and other assets and
acquisition-related risks, including successful integration and management of
acquired technology, operations and personnel, the loss of key employees of the
acquired companies, and diversion of the Company's management's attention from
other ongoing business concerns; and the making or incurring of any expenditures
and expenses, including, but not limited to, significant charges for in-process
research and development.
The ability of the Company to leverage its technological and other
competencies through the introduction of new products and services; and its
ability to develop, or achieve commercial acceptance for, these new products and
services. The failure to resolve issues concerning commercial activities via the
Internet, including security, reliability, cost, ease of use and access.
The failure of the Company or its partners to successfully market, sell
and deliver its services in international markets; and risks inherent in doing
business on an international level, such as laws governing content that differ
greatly from those in the 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, privacy and
potentially adverse tax consequences.
<PAGE>
The Company's inability to offer its services through advanced
distribution technologies such as cable, satellite, broadcast and enhanced
telephone distribution and the inability to offer advanced services such as
voice and full motion video. The Company's ability to develop new technology or
modify its existing technology to keep pace with technological advances, and the
pursuit of these technological advances requiring substantial expenditures.
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
On January 7, 1998, the Company acquired Personal Library Software,
Inc. in exchange for the issuance of 255,334 shares of Company Common Stock. The
transaction was a private placement and exempt from registration pursuant to
Rule 506 of the Securities Act of 1933.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held a Special Meeting of Stockholders on February 6, 1998
to vote on the amendment of 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. Following are the results of such meeting:
Number of Shares
Matter Voted On For Against Abstain
Amendment of Restated Certificate
of Incorporation 84,028,201 2,724,752 78,772
Item 5. Other Events
Shareholder Rights Plan
Redemption of Old Rights and Dividend of New Rights
In 1993, the Board of Directors declared a dividend to holders of the
Company's Common Stock, $.01 par value per share ("Common Shares"), of rights
(the "Old Rights") to purchase shares of a series of the Company's preferred
stock (the "Old Preferred Stock"). Each Old Right entitled the registered holder
to purchase from the Company one one-hundredth of a share of Old Preferred Stock
upon the terms and subject to the conditions set forth in a Rights Agreement
dated as of April 23, 1993, between America Online, Inc. and Security Trust
Company, N.A., as amended by the Amendment to Rights Agreement between America
Online, Inc. and Chemical Bank, N.A. dated as of January 31, 1995 (the "Old
Plan"). On May 12, 1998, the Board of Directors directed the Company to redeem
the Old Rights, terminate the Old Plan and eliminate the Old Preferred Stock and
declared a dividend of one new preferred share purchase right (a "New Right")
for each outstanding Common Share of the Company. The redemption of the Old
Rights will be effective at the time the dividend of the New Rights is paid,
which is scheduled to be June 1, 1998 (the "Record Date"), and the payment of
the redemption price, as well as the dividend of the New Rights, shall be made
to the stockholders of record on that date. Each New Right entitles the
registered holder to purchase from the Company one one-thousandth of a share of
a new series of the Company's preferred stock (the "Preferred Shares"), at a
price of $900.00 per one one-thousandth of a Preferred Share (the "Purchase
Price"), subject to adjustment. Each one one thousandth of a share of Preferred
Stock has rights, privileges and preferences which make its value approximately
equal to the value of one Common Share. A full description of the terms of the
New Rights is set forth in a new shareholder rights agreement dated as of May
12, 1998 (the "New Rights Agreement"), between the Company and BankBoston, N.A.,
as Rights Agent (the "Rights Agent").
<PAGE>
Terms and conditions of New Rights and New Rights Agreement
Initially, the New Rights will be evidenced by the stock certificates
representing the Common Shares then outstanding, and no separate Right
Certificates, as defined, will be distributed. Until the earlier of (i) the
close of business on the tenth day following the day on which there is a public
announcement or public disclosure of facts indicating that a person, entity or
group of affiliated or associated persons (an "Acquiring Person") have acquired,
beneficial ownership of 15% or more of the outstanding Common Shares (other than
certain excluded persons) or (ii) the tenth business days (or such later date as
may be determined by action of the Board of Directors prior to such time as any
person or entity becomes an Acquiring Person) following the commencement of, or
announcement of an intention to make, a tender offer or exchange offer the
consummation of which would result in the beneficial ownership by a person or
group of 15% or more of such outstanding Common Shares (the earlier of such
dates being called the "Distribution Date"), the New Rights will be evidenced,
with respect to any of the Common Share certificates outstanding as of June 1,
1998, by such Common Share certificates.
The New Rights Agreement provides that, until the Distribution Date,
the New Rights will be transferred with and only with the Common Shares. Until
the Distribution Date (or earlier redemption or expiration of the New Rights),
new Common Share certificates issued after June 1, 1998, upon transfer or new
issuance of Common Shares, will contain a notation incorporating the New Rights
Agreement by reference. Until the Distribution Date (or earlier redemption or
expiration of the New Rights), the surrender or transfer of any certificates for
Common Shares outstanding as of June 1, 1998, even without such notation or a
copy of the Summary of Rights being attached thereto, will also constitute the
transfer of the New Rights associated with the Common Shares represented by such
certificate. As soon as practicable following the Distribution Date, separate
certificates evidencing the New Rights ("Right Certificates") will be mailed to
holders of record of the Common Shares as of the close of business on the
Distribution Date and such separate Right Certificates alone will evidence the
New Rights.
The New Rights are not exercisable until the Distribution Date. The New
Rights will expire on May 12, 2008 (the "Final Expiration Date"), unless the
Final Expiration Date is extended or unless the New Rights are earlier redeemed
by the Company, in each case, as described below.
The Purchase Price payable, and the number of Preferred Shares or other
securities or property issuable, upon exercise of the New Rights are subject to
adjustment from time to time to prevent dilution (i) in the event of a stock
dividend on, or a subdivision, combination or reclassification of, the Preferred
Shares, (ii) upon the grant to holders of the Preferred Shares of certain
rights, options or warrants to subscribe for or purchase Preferred Shares at a
price, or securities convertible into Preferred Shares with a conversion price,
less than the then current market price of the Preferred Shares or (iii) upon
the distribution to holders of the Preferred Shares of evidences of indebtedness
or assets (excluding regular periodic cash dividends paid out of earnings or
retained earnings or dividends payable in Preferred Shares) or of subscription
rights or warrants (other than those referred to above).
The number of outstanding New Rights and the number of one one
thousandths of a Preferred Share issuable upon exercise of each New Right are
also subject to adjustment in the event of a stock split of the Common Shares or
a stock dividend on the Common Shares payable in Common Shares or subdivisions,
consolidation or combinations of the Common Shares occurring, in any case, prior
to the Distribution Date.
Preferred Shares purchasable upon exercise of the New Rights will not
be redeemable. Each Preferred Share will be entitled to a minimum preferential
quarterly dividend payment of $1.00 but will be entitled to an aggregate
dividend of 1,000 times the dividend declared per Common Share. In the event of
liquidation, the holders of the Preferred Shares will be entitled to a minimum
preferential liquidation payment of $1,000 but will be entitled to an aggregate
payment of 1,000 times the payment made per Common Share. Each Preferred Share
will have 1,000 votes, voting together with the Common Shares. Finally, in the
event of any merger, consolidation or other transaction in which Common Shares
are exchanged, each Preferred Share will be entitled to receive 1,000 times the
amount of consideration received per Common Share. These rights are protected by
customary anti dilution provisions. Because of the nature of the Preferred
Shares' dividend and liquidation rights, the value of one one thousandth of a
Preferred Share should approximate the value of one Common Share.
<PAGE>
In the event that any person becomes an Acquiring Person, proper
provision shall be made so that each holder of a New Right, other than New
Rights beneficially owned by the Acquiring Person or an Associate or Affiliate
of such Acquiring Person or certain of their transferees (which Rights will
thereafter be void), will have the right to receive upon exercise that number of
Common Shares having a market value of two times the exercise price of the New
Right (or, if such number of shares is not and cannot be authorized, the Company
may issue Preferred Stock, cash, debt, stock or a combination thereof in
exchange for the New Rights).
In the event that the Company is acquired in a merger or other business
combination transaction or 50% or more of its consolidated assets or earning
power are sold, proper provision will be made so that each holder of a New Right
will thereafter have the right to receive, upon the exercise thereof at the then
current exercise price of the New Right, that number of shares of common stock
of the acquiring company which at the time of such transaction will have a
market value of two times the exercise price of the New Right.
At any time after the acquisition by a person or group of affiliated or
associated persons of beneficial ownership of 15% or more of the outstanding
Common Shares and prior to the acquisition by such person or group of 50% or
more of the outstanding Common Shares, the Board of Directors of the Company may
exchange the New Rights (other than New Rights owned by such person or group
which have become void), in whole or in part, at an exchange ratio of one Common
Share, or one one thousandth of a Preferred Share, per New Right (or, if the
number of shares is not and cannot be authorized, the Company may issue cash,
debt, stock or a combination thereof in exchange for the New Rights), subject to
adjustment.
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments require an adjustment of at least 1% in
such Purchase Price. No fractional Preferred Shares will be issued (other than
fractions which are integral multiples of the number of one one thousandths of a
Preferred Share issuable upon the exercise of one New Right, which may, at the
option of the Company, be evidenced by depository receipts), and in lieu
thereof, an adjustment in cash will be made based on the market price of the
Preferred Shares on the last trading day prior to the date of exercise.
At any time prior to the earlier of (i) the time that any person
becomes an Acquiring Person, or (ii) the Final Expiration Date, the Board of
Directors of the Company may redeem the New Rights in whole, but not in part, at
a price of $.001 per New Right (the "Redemption Price"). Following the
expiration of the above periods, the New Rights become nonredeemable.
Immediately upon any redemption of the New Rights, the right to exercise the New
Rights will terminate and the only right of the holders of New Rights will be to
receive the Redemption Price.
The Company may from time to time, and the Rights Agent will, if the
Company so directs, supplement or amend the New Rights Agreement without the
approval of any holders of Right Certificates in order to cure any ambiguity, to
correct or supplement any provision contained therein which may be defective or
inconsistent with any other provisions therein, or to make any change to or
delete any provision thereof or to adopt any other provisions with respect to
the Rights which the Company may deem necessary or desirable; provided, however,
that from and after such time as any Person becomes an Acquiring Person, the New
Rights Agreement may not be amended or supplemented in any manner which would
adversely affect the interests of the holders of Rights (other than an Acquiring
Person and its Affiliates and Associates).
<PAGE>
Until a New Right is exercised, the holder thereof, as such, will have
no rights as a stockholder of the Company, including, without limitation, the
right to vote or to receive dividends.
The New Rights have certain anti-takeover effects. The New 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 New
Rights should not interfere with any merger or other business combination
approved by the Board of Directors since the New Rights may be redeemed by the
Company at $.001 per New Right prior to the earlier of (i) the time prior to
such time as any person has become an Acquiring Person, or (ii) the Final
Expiration Date.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 3.1 Amendment of Section A of Article 4 of the Restated Certificate of
Incorporation of America Online, Inc. (Filed as to Exhibit 4.1 to the Company's
Registration Statement on Form S-3, Registration No. 333-46633 and incorporated
herein by reference and as Exhibit 3.1 to the Company's Form 10-K for the fiscal
year ended June 30, 1997)
Exhibit 4.1 Rights Agreement dated as of May 12, 1998, between America
Online, Inc. and BankBoston, N.A., as Rights Agent
Exhibit 18.1 Ernst & Young Letter dated May 15, 1998 regarding change in
accounting principles
Exhibit 99.1 Press Release dated May 14, 1998 announcing that America
Online, Inc. Board of Directors Approved a New Shareholder Rights Plan
<TABLE>
(b) Reports on Form 8-K
Form Item # Description Filing Date
<S> <C> <C> <C>
Form 8-K 5 Restatement of Earnings due to FASB Statement of February 13, 1998
Financial Accounting Standards No. 128
Form 8-K 2, 7 Completion of the Acquisition of the online February 17, 1998
services division of CompuServe Corporation in
Exchange for ANS Communications, Inc., the
Company's network services subsidiary
</TABLE>
<PAGE>
AMERICA ONLINE, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICA ONLINE, INC.
DATE: May 15, 1998 SIGNATURE:
/s/ Stephen M. Case
Stephen M. Case
Chief Executive Officer
DATE: May 15, 1998 SIGNATURE
/s/ Lennert J. Leader
Lennert J. Leader
Chief Financial Officer
(Principal Financial and Accounting Officer)
<PAGE>
Exhibit Index
Exhibit 4.1 Rights Agreement dated as of May 12, 1998, between America
Online, Inc. and BankBoston, N.A., as Rights Agent.
Exhibit 18.1 Ernst & Young Letter dated May 15, 1998 regarding change in
accounting principles
Exhibit 99.1 Press Release dated May 13, 1998 announcing that America
Online, Inc. Board of Directors Approved a New Shareholder Rights
Plan
<TABLE> <S> <C>
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<PERIOD-END> MAR-31-1998
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<ALLOWANCES> 0
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-----------------------------------------------------------
AMERICA ONLINE, INC.
AND
BANKBOSTON, N.A.
AS RIGHTS AGENT
RIGHTS AGREEMENT
DATED AS OF MAY 12, 1998
-----------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
Page
SECTION 1. CERTAIN DEFINITIONS................................................1
SECTION 2. APPOINTMENT OF RIGHTS AGENT........................................4
SECTION 3. ISSUE OF RIGHT CERTIFICATES........................................4
SECTION 4. FORM OF RIGHT CERTIFICATES.........................................5
SECTION 5. COUNTERSIGNATURE AND REGISTRATION..................................6
SECTION 6. TRANSFER, SPLIT UP, COMBINATION AND EXCHANGE OF RIGHT
CERTIFICATES; MUTILATED, DESTROYED, LOST OR STOLEN RIGHT
CERTIFICATES.......................................................6
SECTION 7. EXERCISE OF RIGHTS; PURCHASE PRICE; EXPIRATION DATE OF RIGHTS......7
SECTION 8. CANCELLATION AND DESTRUCTION OF RIGHT CERTIFICATES.................8
SECTION 9. AVAILABILITY OF PREFERRED SHARES...................................8
SECTION 10. PREFERRED SHARES RECORD DATE......................................9
SECTION 11. ADJUSTMENT OF PURCHASE PRICE, NUMBER OF SHARES OR NUMBER OF
RIGHTS............................................................9
SECTION 12. CERTIFICATE OF ADJUSTED PURCHASE PRICE OR NUMBER OF SHARES.......15
SECTION 13. CONSOLIDATION, MERGER OR SALE OR TRANSFER OF ASSETS OR EARNING
POWER............................................................15
SECTION 14. FRACTIONAL RIGHTS AND FRACTIONAL SHARES..........................18
SECTION 15. RIGHTS OF ACTION.................................................19
SECTION 16. AGREEMENT OF RIGHT HOLDERS.......................................19
SECTION 17. RIGHT CERTIFICATE HOLDER NOT DEEMED A STOCKHOLDER................19
SECTION 18. CONCERNING THE RIGHTS AGENT......................................20
SECTION 19. MERGER OR CONSOLIDATION OR CHANGE OF NAME OF RIGHTS AGENT........20
SECTION 20. DUTIES OF RIGHTS AGENT...........................................21
SECTION 21. CHANGE OF RIGHTS AGENT...........................................22
SECTION 22. ISSUANCE OF NEW RIGHT CERTIFICATES...............................23
SECTION 23. REDEMPTION.......................................................23
SECTION 24. EXCHANGE.........................................................24
SECTION 25. NOTICE OF CERTAIN EVENTS.........................................25
SECTION 26. NOTICES..........................................................26
<PAGE>
SECTION 27. SUPPLEMENTS AND AMENDMENTS.......................................26
SECTION 28. DETERMINATION AND ACTIONS BY THE BOARD OF DIRECTORS, ETC.........26
SECTION 29. SUCCESSORS.......................................................27
SECTION 30. BENEFITS OF THIS AGREEMENT.......................................27
SECTION 31. SEVERABILITY.....................................................27
SECTION 32. GOVERNING LAW....................................................27
SECTION 33. COUNTERPARTS.....................................................27
SECTION 34. DESCRIPTIVE HEADINGS.............................................27
Exhibit A - Certificate of Designation
Exhibit B - Form of Right Certificate
<PAGE>
RIGHTS AGREEMENT
RIGHTS AGREEMENT (THE "AGREEMENT"), dated as of May 12, 1998, between
AMERICA ONLINE, INC., a Delaware corporation (the "Company"), and BANKBOSTON,
N.A.. a national banking association ("Rights Agent").
The Board of Directors of the Company has authorized and declared a
dividend of one preferred share purchase right (a "Right") for each Common Share
(as hereinafter defined) of the Company outstanding at the close of business on
June 1, 1998 (the "Record Date"), each Right representing the right to purchase
one one-thousandth of a Preferred Share (as hereinafter defined), upon the terms
and subject to the conditions herein set forth, and has further authorized and
directed the issuance of one Right with respect to each Common Share that shall
become outstanding between the Record Date and the earliest of the Distribution
Date, the Redemption Date and the Final Expiration Date (as such terms are
hereinafter defined).
Accordingly, in consideration of the premises and the mutual agreements
herein set forth, the parties hereby agree as follows:
Section 1. Certain Definitions. For purposes of this Agreement, the
following terms have the meanings indicated:
(a) "Acquiring Person" shall mean any Person (as such term is
hereinafter defined) who or which, together with all Affiliates and Associates
(as such terms are hereinafter defined) of such Person, shall be the Beneficial
Owner (as such term is hereinafter defined) of 15% or more of the Common Shares
of the Company then outstanding. Notwithstanding the foregoing, (A) the term
Acquiring Person shall not include (i) the Company, (ii) any Subsidiary (as such
term is hereinafter defined) of the Company, (iii) any employee benefit plan of
the Company or any Subsidiary of the Company, (iv) or any entity holding Common
Shares for or pursuant to the terms of any such employee benefit plan and (B) no
Person shall become an "Acquiring Person" either (x) as the result of an
acquisition of Common Shares by the Company which, by reducing the number of
shares outstanding, increases the proportionate number of shares beneficially
owned by such Person to 15% or more of the Common Shares of the Company then
outstanding; provided, however, that, if a Person shall become the Beneficial
Owner of 15% or more of the Common Shares of the Company then outstanding by
reason of share acquisitions by the Company and shall, after such share
acquisitions by the Company, become the Beneficial Owner of any additional
Common Shares of the Company, then such Person shall be deemed to be an
"Acquiring Person" or (y) if the Board of Directors determines in good faith
that a Person who would otherwise be an "Acquiring Person," as defined pursuant
to the foregoing provisions of this paragraph (a), has become such
inadvertently, and such Person divests as promptly as practicable a sufficient
number of Common Shares so that such Person would no longer be an Acquiring
Person, as defined pursuant to the foregoing provisions of this paragraph (a),
then such Person shall not be deemed to be an "Acquiring Person" for any
purposes of this Agreement.
<PAGE>
(b) "Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as in
effect on the date of this Agreement; provided, however, that the limited
partners of a limited partnership shall not be deemed to be Associates of such
limited partnership solely by virtue of their limited partnership interests.
(c) A Person shall be deemed the "Beneficial Owner" of and shall be
deemed to "beneficially own" any securities:
(i) which such Person or any of such Person's Affiliates
or Associates beneficially owns, directly or indirectly;
(ii) which such Person or any of such Person's Affiliates or
Associates has (A) the right to acquire (whether such right is
exercisable immediately or only after the passage of time) pursuant to
any agreement, arrangement or understanding (other than customary
agreements with and between underwriters and selling group members with
respect to a bona fide public offering of securities) written or
otherwise, or upon the exercise of conversion rights, exchange rights,
rights (other than these Rights), warrants or options, or otherwise;
provided, however, that a Person shall not be deemed the Beneficial
Owner of, or to beneficially own, securities tendered pursuant to a
Tender Offer made by or on behalf of such Person or any of such
Person's Affiliates or Associates until such tendered securities are
accepted for purchase or exchange; or (B) the right to vote pursuant to
any agreement, arrangement or understanding; provided, however, that a
Person shall not be deemed the Beneficial Owner of, or to beneficially
own, any security if the agreement, arrangement or understanding to
vote such security (1) arises solely from a revocable proxy or consent
given to such Person in response to a public proxy or consent
solicitation made pursuant to, and in accordance with, the applicable
rules and regulations promulgated under the Exchange Act and (2) is not
also then reportable on Schedule 13D under the Exchange Act (or any
comparable or successor report); or
(iii) which are beneficially owned, directly or indirectly, by
any other Person with which such Person or any of such Person's
Affiliates or Associates has any agreement, arrangement or
understanding (other than customary agreements with and between
underwriters and selling group members with respect to a bona fide
public offering of securities) written or otherwise for the purpose of
acquiring, holding, voting (except to the extent contemplated by the
proviso to Section 1(c)(ii)(B) hereof) or disposing of any securities
of the Company.
Notwithstanding anything in this definition of Beneficial Ownership to the
contrary, the phrase, "then outstanding," when used with reference to a Person's
Beneficial Ownership of securities of the Company, shall mean the number of such
securities then issued and outstanding together with the number of such
securities not then actually issued and outstanding which such Person would be
deemed to own beneficially hereunder.
(d) "Board of Directors or the Board" shall mean the Board of Directors
of the Company.
<PAGE>
(e) Business Day" shall mean any day other than a Saturday, a Sunday,
or a day on which banking institutions in the Commonwealth of Massachusetts or
the State of New York are authorized or obligated by law or executive order to
close.
(f) "Close of Business" on any given date shall mean 5:00 p.m., Eastern
Standard time, on such date; provided, however, that if such date is not a
Business Day it shall mean 5:00 p.m., Eastern Standard time, on the next
succeeding Business Day.
(g) "Common Shares" when used with reference to the Company shall mean
the shares of common stock, par value $.01 per share, of the Company. "Common
Shares" when used with reference to any Person other than the Company shall mean
the capital stock (or equity interest) with the greatest voting power of such
other Person or, if such other Person is a Subsidiary of another Person, the
Person or Persons which ultimately control such first-mentioned Person.
(h) "Distribution Date" shall have the meaning set forth in Section 3
hereof.
(i) "Final Expiration Date" shall have the meaning set forth in Section
7(a) hereof.
(j) "Person" shall mean any individual, firm, corporation, partnership,
limited partnership, limited liability company, business trust, unincorporated
association or other entity, and shall include any successor (by merger or
otherwise) of such entity.
(k) "Preferred Shares" shall mean shares of Series A-1 Junior
Participating Preferred Stock, par value $.01 per share, of the Company having
the designations and the powers, preferences and rights, and the qualifications,
limitations and restrictions set forth in the Certificate of Designation
attached to this Agreement as Exhibit A.
(l) "Purchase Price" shall have the meaning set forth in Section 7(b)
hereof.
(m) "Redemption Date" shall have the meaning set forth in Section 7(a)
hereof.
(n) "Record Date" shall mean June 1, 1998.
(o) "Shares Acquisition Date" shall mean the earlier of the first date
of (i) the public announcement by the Company or an Acquiring Person that an
Acquiring Person has become such or (ii) the public disclosure of facts by the
Company or an Acquiring Person indicating that an Acquiring Person has become
such, provided, however, that if such Person is determined not to have become an
Acquiring Person pursuant to (y) of the last sentence of Section 1(a) hereof,
then no Shares Acquisition Date shall be deemed to have occurred.
(p) "Subsidiary" of any Person shall mean any Person of which a
majority of the voting power of the voting equity securities or equity interest
is owned, directly or indirectly, by such Person.
<PAGE>
(q) "Tender Offer" shall mean a tender or exchange offer made in
accordance with the provisions of the Exchange Act and the rules and regulations
promulgated thereunder (the "Rules and Regulations"), including the payment of
applicable fees, announcement of a tender offer and the dissemination of tender
offer materials (as those terms are defined respectively in the Rules and
Regulations) which the Board of Directors or a committee of the Board of
Directors authorized by the Board shall have determined to not be frivolous or
made in good faith; any such determination made promptly and in good faith to be
conclusive for the purposes of this Agreement.
Section 2. Appointment of Rights Agent. The Company hereby appoints the
Rights Agent to act as agent for the Company and the holders of the Rights (who,
in accordance with Section 3 hereof, shall prior to the Distribution Date also
be the holders of Common Shares) in accordance with the terms and conditions
hereof, and the Rights Agent hereby accepts such appointment. The Company may
from time to time appoint such co-Rights Agents as it may deem necessary or
desirable, upon ten (10) days' prior written notice to the Rights Agent. The
Rights Agent shall have no duty to supervise, and in no event be liable for, the
acts or omissions of any such co-Rights Agent..
Section 3. Issue of Right Certificates.
(a) Until the earlier of the Close of Business on (i) the tenth day
following the Shares Acquisition Date or (ii) the tenth business day (or such
later date as may be determined by action of the Board of Directors prior to
such time as any Person becomes an Acquiring Person) after the date of the
commencement (determined in accordance with Rule 14d-2 under the Exchange Act)
by any Person (other than the Company, any Subsidiary of the Company, any
employee benefit plan of the Company or of any Subsidiary of the Company or any
entity holding Common Shares for or pursuant to the terms of any such plan) of,
or of the first public announcement of the intention of any Person (other than
the Company, any Subsidiary of the Company, any employee benefit plan of the
Company or of any Subsidiary of the Company or any entity holding Common Shares
for or pursuant to the terms of any such plan) to commence, a tender or exchange
offer (which intention to commence remains in effect for five Business Days
after such announcement), the consummation of which would result in any Person
becoming an Acquiring Person (including any such date which is after the date of
this Agreement and prior to the issuance of the Rights, the earlier of such
dates being herein referred to as the "Distribution Date"), (x) the Rights will
be evidenced by (subject to the provisions of Section 3(b) hereof) the
certificates for Common Shares registered in the names of the holders thereof
(which certificates shall also be deemed to be Right Certificates) and not by
separate Right Certificates (as hereafter defined), and (y) the Rights (and the
right to receive Right Certificates therefor) will be transferable only in
connection with the transfer of Common Shares. As soon as practicable after the
Distribution Date, the Company will prepare and execute, the Rights Agent will
countersign, and the Company will send or cause to be sent (and the Rights Agent
will, if requested, send) by first-class, insured, postage-prepaid mail, to each
record holder of Common Shares as of the Close of Business on the Distribution
Date, at the address of such holder shown on the records of the Company, a Right
Certificate in substantially the form of Exhibit B hereto (a "Right
Certificate"), evidencing one Right for each Common Share so held. As of the
Close of Business on the Distribution Date, the Rights will be evidenced solely
by such Right Certificates.
<PAGE>
(b) On the Record Date, or as soon as practicable thereafter, the
Company will send a summary of the Rights and the Agreement (the "Summary of
Rights") by first-class, postage-prepaid mail, to each record holder of Common
Shares as of the Close of Business on the Record Date, at the address of such
holder shown on the records of the Company. With respect to certificates for
Common Shares outstanding as of the Record Date, until the Distribution Date,
the Rights will be evidenced by such certificates registered in the names of the
holders thereof together with a copy of the Summary of Rights attached thereto.
Until the Distribution Date (or the earlier of the Redemption Date or the Final
Expiration Date), the surrender for transfer of any certificate for Common
Shares outstanding on the Record Date, with or without a copy of the Summary of
Rights attached thereto, shall also constitute the transfer of the Rights
associated with the Common Shares evidenced thereby.
(c) Certificates for Common Shares which become outstanding (including,
without limitation, reacquired Common Shares referred to in the last sentence of
this paragraph (b)) after June 1, 1998 but prior to the earliest of the
Distribution Date, the Redemption Date or the Final Expiration Date shall have
impressed on, printed on, written on or otherwise affixed to them the following
legend:
This certificate also evidences and entitles the holder hereof to
certain rights (the "Rights") as set forth in a Rights Agreement between
America Online, Inc. and BankBoston, N.A., dated as of May 12, 1998, as
it may, from time to time, be amended (the "Rights Agreement"), the
terms of which are hereby incorporated herein by reference and a copy of
which is on file at the principal executive offices of America Online,
Inc. Under certain circumstances, as set forth in the Rights Agreement,
such Rights will be evidenced by separate certificates and will no
longer be evidenced by this certificate. America Online, Inc. will mail
to the holder of this certificate a copy of the Rights Agreement without
charge after receipt of a written request therefor. Under certain
circumstances, Rights that are or were acquired or beneficially owned by
an Acquiring Person or Associates or Affiliates thereof (as defined in
the Rights Agreement) may become null and void.
With respect to such certificates containing the foregoing legend, until the
Distribution Date, the Rights associated with the Common Shares represented by
such certificates shall be evidenced by such certificates alone, and the
surrender for transfer of any such certificate shall also constitute the
transfer of the Rights associated with the Common Shares represented thereby. In
the event that the Company purchases or acquires any Common Shares after the
Record Date but prior to the Distribution Date, any Rights associated with such
Common Shares shall be deemed canceled and retired so that the Company shall not
be entitled to exercise any Rights associated with the Common Shares which are
no longer outstanding.
<PAGE>
Section 4. Form of Right Certificates. (a) The Right Certificates (and
the form of election to purchase Preferred Shares, the form of assignment and
the form of certification to be printed on the reverse thereof) shall be
substantially the same as Exhibit B hereto and may have such marks of
identification or designation and such legends, summaries or endorsements
printed thereon as the Company may deem appropriate and as are not inconsistent
with the provisions of this Agreement, or as may be required to comply with any
applicable law or with any rule or regulation made pursuant thereto or with any
rule or regulation of any stock exchange on which the Rights may from time to
time be listed, or to conform to usage. Subject to the provisions of Section 23
and Section 24 hereof, the Right Certificates shall entitle the holders thereof
to purchase such number of one one-thousandths of a Preferred Share as shall be
set forth therein at the Purchase Price, but the number of such one
one-thousandths of a Preferred Share and the Purchase Price shall be subject to
adjustment as provided herein.
Section 5. Countersignature and Registration. The Right Certificates
shall be executed on behalf of the Company by its Chairman of the Board, its
Chief Executive Officer, its President, its Vice Chairman of the Board, its
Chief Financial Officer or any of its Vice Presidents, either manually or by
facsimile signature, shall have affixed thereto the Company's seal or a
facsimile thereof, and shall be attested by the Secretary or an Assistant
Secretary of the Company, either manually or by facsimile signature. The Right
Certificates shall be manually countersigned by the Rights Agent and shall not
be valid for any purpose unless countersigned. In case any officer of the
Company who shall have signed any of the Right Certificates shall cease to be
such officer of the Company before countersignature by the Rights Agent and
issuance and delivery by the Company, such Right Certificates, nevertheless, may
be countersigned by the Rights Agent and issued and delivered by the Company
with the same force and effect as though the person who signed such Right
Certificates had not ceased to be such officer of the Company; and any Right
Certificate may be signed on behalf of the Company by any person who, at the
actual date of the execution of such Right Certificate, shall be a proper
officer of the Company to sign such Right Certificate, although at the date of
the execution of this Rights Agreement any such person was not such an officer.
Following the Distribution Date, the Rights Agent will keep or cause to
be kept, at its office designated for such purpose, books for registration and
transfer of the Right Certificates issued hereunder. Such books shall show the
names and addresses of the respective holders of the Right Certificates, the
number of Rights evidenced on its face by each of the Right Certificates and the
date of each of the Right Certificates.
Section 6. Transfer, Split Up, Combination and Exchange of Right
Certificates; Mutilated, Destroyed, Lost or Stolen Right Certificates. Subject
to the provisions of Section 4(b), Section 11(a)(ii), Section 14 and Section 24
hereof, at any time after the Close of Business on the Distribution Date, and
prior to the Close of Business on the earlier of the Redemption Date or the
Final Expiration Date, any Right Certificate or Right Certificates may be
transferred, split up, combined or exchanged for another Right Certificate or
Right Certificates, entitling the registered holder to purchase a like number of
one one-thousandths of a Preferred Share as the Right Certificate or Right
Certificates surrendered then entitled such holder to purchase. Any registered
holder desiring to transfer, split up, combine or exchange any Right Certificate
or Right Certificates shall make such request in writing delivered to the Rights
Agent, and shall surrender the Right Certificate or Right Certificates to be
transferred, split up, combined or exchanged at the office of the Rights Agent
designated for such purpose. Neither the Rights Agent nor the Company shall be
obligated to take any action whatsoever with respect to the transfer of any such
surrendered Right Certificate until the registered holder shall have completed
and signed the certificate contained in the form of assignment on the reverse
side of such Right Certificate and shall have provided such additional evidence
<PAGE>
of the identity of the Beneficial Owner (or former Beneficial Owner) or
Affiliates or Associates thereof as the Company shall reasonably request.
Thereupon the Rights Agent shall, subject to Section 4(b), Section 11(a)(ii),
Section 14 and Section 24 hereof, countersign and deliver to the person entitled
thereto a Right Certificate or Right Certificates, as the case may be, as so
requested. The Company may require payment of a sum sufficient to cover any tax
or governmental charge that may be imposed in connection with any transfer,
split up, combination or exchange of Right Certificates.
Upon receipt by the Company and the Rights Agent of evidence reasonably
satisfactory to them of the loss, theft, destruction or mutilation of a Right
Certificate, and, in case of loss, theft or destruction, of indemnity or
security reasonably satisfactory to them, and, at the Company's request,
reimbursement to the Company and the Rights Agent of all reasonable expenses
incidental thereto, and upon surrender to the Rights Agent and cancellation of
the Right Certificate if mutilated, the Company will issue, execute and deliver
a new Right Certificate of like tenor to the Rights Agent for countersignature
and delivery to the registered holder in lieu of the Right Certificate so lost,
stolen, destroyed or mutilated.
Section 7. Exercise of Rights; Purchase Price; Expiration Date of Rights.
(a) The registered holder of any Right Certificate may exercise the
Rights evidenced thereby (except as otherwise provided herein) in whole or in
part at any time after the Distribution Date upon surrender of the Right
Certificate, with the form of election to purchase on the reverse side thereof
duly executed, to the Rights Agent at the office of the Rights Agent designated
for such purpose, together with payment of the Purchase Price for each one
one-thousandth of a Preferred Share (or such other number of shares or other
securities) as to which the Rights are exercised, at or prior to the earliest of
(iii) the Close of Business on May 12, 2008 (the "Final Expiration Date"), (iv)
the time at which the Rights are redeemed as provided in Section 23 hereof (the
"Redemption Date"), or (v) the time at which such Rights are exchanged as
provided in Section 24 hereof.
(b) The Purchase Price for each one one-thousandth of a Preferred Share
pursuant to the exercise of a Right shall initially be $900 (the "Purchase
Price"), shall be subject to adjustment from time to time as provided in
Sections 11 and 13 hereof and shall be payable in lawful money of the United
States of America in accordance with Section 7 (c) hereof.
(c) Upon receipt of a Right Certificate representing exercisable
Rights, with the form of election to purchase duly executed, accompanied by
payment of the Purchase Price for the shares to be purchased and an amount equal
to any applicable transfer tax required to be paid by the holder of such Right
Certificate in accordance with Section 9 hereof by certified check, cashier's
check, bank draft or money order payable to the order of the Company, the Rights
Agent shall thereupon promptly (i) (A) requisition from any transfer agent for
the Preferred Shares certificates for the number of Preferred Shares to be
purchased and the Company hereby irrevocably authorizes its transfer agent to
<PAGE>
comply with all such requests, or (B) if the Company, in its sole discretion,
shall have elected to deposit the Preferred Shares issuable upon exercise of the
Rights hereunder into a depository, requisition from the depository agent
depository receipts representing such number of one one-thousandths of a
Preferred Share as are to be purchased (in which case certificates for the
Preferred Shares represented by such receipts shall be deposited by the transfer
agent with the depository agent) and the Company hereby directs the depository
agent to comply with such request, (ii) when appropriate, requisition from the
Company the amount of cash to be paid in lieu of issuance of fractional shares
in accordance with Section 14 hereof, (iii) after receipt of such certificates
or depository receipts, cause the same to be delivered to or upon the order of
the registered holder of such Right Certificate, registered in such name or
names as may be designated by such holder and (iv) when appropriate, after
receipt, deliver such cash to or upon the order of the registered holder of such
Right Certificate. In the event that the Company is obligated to issue
securities of the Company other than Preferred Shares (including Common Shares)
of the Company pursuant to Section 11(a) hereof, the Company will make all
arrangements necessary so that such other securities are available for
distribution by the Rights Agent, if and when appropriate.
(d) In case the registered holder of any Right Certificate shall
exercise fewer than all the Rights evidenced thereby, a new Right Certificate
evidencing Rights equivalent to the Rights remaining unexercised shall be issued
by the Rights Agent to the registered holder of such Right Certificate or to his
duly authorized assigns, subject to the provisions of Section 14 hereof.
(e) The Company covenants and agrees that it will cause to be reserved
and kept available out of its authorized and unissued Preferred Shares or any
Preferred Shares held in its treasury, the number of Preferred Shares that will
be sufficient to permit the exercise in full of all outstanding Rights in
accordance with this Section 7.
(f) Notwithstanding anything in this Agreement to the contrary, neither
the Rights Agent nor the Company shall be obligated to undertake any action with
respect to a registered holder upon the occurrence of any purported exercise as
set forth in this Section 7 unless such registered holder shall have (i)
completed and signed the certification following the form of election to
purchase set forth on the reverse side of the Rights Certificate surrendered for
such exercise and (ii) provided such additional evidence of the identity of the
Beneficial Owner (or former Beneficial Owner) or Affiliates or Associates
thereof as the Company shall reasonably request.
Section 8. Cancellation and Destruction of Right Certificates. All
Right Certificates surrendered for the purpose of exercise, transfer, split up,
combination or exchange shall, if surrendered to the Company or to any of its
agents, be delivered to the Rights Agent for cancellation or in canceled form,
or, if delivered or surrendered to the Rights Agent, shall be canceled by it,
and no Right Certificates shall be issued in lieu thereof except as expressly
permitted by any of the provisions of this Rights Agreement. The Company shall
deliver to the Rights Agent for cancellation and retirement, and the Rights
Agent shall so cancel and retire, any other Right Certificate purchased or
acquired by the Company otherwise than upon the exercise thereof. The Rights
Agent shall deliver all canceled Right Certificates to the Company, or shall, at
the written request of the Company, destroy such canceled Right Certificates,
and in such case shall deliver a certificate of destruction thereof to the
Company.
<PAGE>
Section 9. Availability of Preferred Shares.
(a) The Company covenants and agrees that so long as the Preferred
Shares (and, after the time a person becomes an Acquiring Person, Common Shares
or any other securities) issuable upon the exercise of the Rights may be listed
on any national securities exchange or quotation system, the Company shall use
its best efforts to cause, from and after such time as the Rights become
exercisable, all shares reserved for such issuance to be listed on such exchange
or quotation system upon official notice of issuance upon such exercise.
(b) The Company covenants and agrees that it will take all such action
as may be necessary to ensure that all Preferred Shares (or Common Shares and
other securities, as the case may be) delivered upon exercise of Rights shall,
at the time of delivery of the certificates for such Preferred Shares (subject
to payment of the Purchase Price), be duly and validly authorized and issued and
fully paid and nonassessable shares or other securities.
(c) The Company further covenants and agrees that it will pay when due
and payable any and all federal and state transfer taxes and charges which may
be payable in respect of the issuance or delivery of the Right Certificates or
of any Preferred Shares upon the exercise of Rights. The Company shall not,
however, be required to pay any transfer tax which may be payable in respect of
any transfer or delivery of Right Certificates to a person other than, or the
issuance or delivery of certificates or depository receipts for the Preferred
Shares in a name other than that of, the registered holder of the Right
Certificate evidencing Rights surrendered for exercise or to issue or to deliver
any certificates or depository receipts for Preferred Shares upon the exercise
of any Rights until any such tax shall have been paid (any such tax being
payable by the holder of such Right Certificate at the time of surrender) or
until it has been established to the Company's reasonable satisfaction that no
such tax is due.
As soon as practicable after the Shares Acquisition Date, the Company
shall use its best efforts to:
(i) prepare and file a registration statement under the
Securities Act of 1933, as amended (the "Act"), with respect to the
securities purchasable upon exercise of the Rights on an appropriate
form, will use its best efforts to cause such registration statement to
become effective as soon as practicable after such filing and will use
its best efforts to cause such registration statement to remain
effective (with a prospectus at all times meeting the requirements of
the Act) until the Final Expiration Date; and
(ii) use its best efforts to qualify or register the Rights
and the securities purchasable upon exercise of the Rights under the
blue sky laws of such jurisdictions as may be necessary or appropriate.
Section 10. Preferred Shares Record Date. Each person in whose name any
certificate for Preferred Shares or other securities is issued upon the exercise
of Rights shall for all purposes be deemed to have become the holder of record
of the Preferred Shares or other securities represented thereby on, and such
certificate shall be dated, the date upon which the Right Certificate evidencing
such Rights was duly surrendered with the forms of election and certification
duly executed and payment of the Purchase Price (and any applicable transfer
<PAGE>
taxes) was made; provided, however, that if the date of such surrender and
payment is a date upon which the Preferred Shares or other securities transfer
books of the Company are closed, such person shall be deemed to have become the
record holder of such shares on, and such certificate shall be dated, the next
succeeding Business Day on which the Preferred Shares or other securities
transfer books of the Company are open. Prior to the exercise of the Rights
evidenced thereby, the holder of a Right Certificate, as such, shall not be
entitled to any rights of a holder of Preferred Shares for which the Rights
shall be exercisable, including, without limitation, the right to vote, to
receive dividends or other distributions or to exercise any preemptive rights,
and shall not be entitled to receive any notice of any proceedings of the
Company, except as provided herein.
Section 11. Adjustment of Purchase Price, Number of Shares or Number of
Rights. The Purchase Price, the number of Preferred Shares covered by each Right
and the number of Rights outstanding are subject to adjustment from time to time
as provided in this Section 11.
(a) (i) In the event the Company shall at any time after the date of
this Agreement (A) declare a dividend on the Preferred Shares payable in
Preferred Shares, (B) subdivide the outstanding Preferred Shares, (C) combine
the outstanding Preferred Shares into a smaller number of Preferred Shares or
(D) issue any shares of its capital stock in a reclassification of the Preferred
Shares (including any such reclassification in connection with a consolidation
or merger in which the Company is the continuing or surviving corporation),
except as otherwise provided in this Section 11(a), the Purchase Price in effect
at the time of the record date for such dividend or of the effective date of
such subdivision, combination or reclassification, and the number and kind of
shares of capital stock issuable on such date, shall be proportionately adjusted
so that the holder of any Right exercised after such time shall be entitled to
receive the aggregate number and kind of shares of capital stock which, if such
Right had been exercised immediately prior to such date and at a time when the
Preferred Shares transfer books of the Company were open, such holder would have
owned upon such exercise and been entitled to receive by virtue of such
dividend, subdivision, combination or reclassification; provided, however, that
in no event shall the consideration to be paid upon the exercise of one Right be
less than the aggregate par value of the shares of capital stock of the Company
issuable upon exercise of one Right. If an event occurs which would require an
adjustment under both Section 11(a)(i) and Section 11(a)(ii) hereof, the
adjustment provided for in this Section 11(a)(i) shall be in addition to, and
shall be made prior to any adjustment required pursuant to Section 11(a)(ii)
hereof.
(ii) Subject to Section 24 hereof, in the event any Person
shall become an Acquiring Person, each holder of a Right shall thereafter have a
right to receive, upon exercise thereof at a price equal to the then current
Purchase Price multiplied by the number of one one-thousandths of a Preferred
Share for which a Right is then exercisable, in accordance with the terms of
this Agreement and in lieu of Preferred Shares, such number of Common Shares of
the Company as shall equal the result obtained by (A) multiplying the then
current Purchase Price by the number of one one-thousandths of a Preferred Share
for which a Right is then exercisable and dividing that product by (B) 50% of
the then current per share market price of the Common Shares (determined
pursuant to Section 11(d) hereof) on the date such Person became an Acquiring
Person. In the event that any Person shall become an Acquiring Person and the
Rights shall then be outstanding, the Company shall not take any action which
would eliminate or diminish the benefits intended to be afforded by the Rights.
<PAGE>
Notwithstanding anything in this Agreement to the contrary, from and
after the time any Person becomes an Acquiring Person, any Rights beneficially
owned by (i) such Acquiring Person or an Associate or Affiliate of such
Acquiring Person, (ii) a transferee of such Acquiring Person (or of any such
Associate or Affiliate) who becomes a transferee after the Acquiring Person
became such, or (iii) a transferee of such Acquiring Person (or of any such
Associate or Affiliate) who becomes a transferee prior to or concurrently with
the Acquiring Person's becoming such and receives such Rights pursuant to either
(A) a transfer (whether or not for consideration) from the Acquiring Person to
holders of equity interests in such Acquiring Person or to any Person with whom
the Acquiring Person has any continuing agreement, arrangement or understanding
regarding the transferred Rights or (B) a transfer which the Board of Directors
of the Company has determined is part of a plan, arrangement or understanding
which has as a primary purpose or effect the avoidance of this Section
11(a)(ii), shall become null and void without any further action and no holder
of such Rights shall have any rights whatsoever with respect to such Rights,
whether under any provision of this Agreement or otherwise. The Company shall
use all reasonable efforts to insure that the provisions of this Section
11(a)(ii) and Section 4(b) hereof are complied with, but shall have no liability
to any holder of Right Certificates or other Person as a result of its failure
to make any determinations with respect to an Acquiring Person or its
Affiliates, Associates or transferees hereunder. No Right Certificate shall be
issued at any time upon the transfer of any Rights to an Acquiring Person or
transferee whose Rights would be void pursuant to the preceding sentence or any
Associate or Affiliate thereof or to any nominee of such Acquiring Person,
Associate or Affiliate; and any Right Certificate delivered to the Rights Agent
for transfer to an Acquiring Person whose Rights would be void pursuant to the
preceding sentence shall be canceled.
(iii) In the event that the number of Common Shares which are
authorized by the Company's Certificate of Incorporation and not outstanding or
subscribed for, or reserved or otherwise committed for issuance for purposes
other than upon exercise of the Rights, are not sufficient to permit the holder
of each Right to purchase the number of Common Shares to which he would be
entitled upon the exercise in full of the Rights in accordance with the
foregoing subparagraph (ii) of paragraph (a) of this Section 11, or should the
Board of Directors so elect, the Company shall: (A) determine the excess of (1)
the value of the Common Shares issuable upon exercise of a Right (calculated as
provided in the last sentence of this subparagraph (iii)) pursuant to Section
11(a)(ii) hereof (the "Current Value") over (2) the Purchase Price (such excess,
the "Spread"), and (B) with respect to each Right, make adequate provision to
substitute for such Common Shares, upon payment of the applicable Purchase
Price, any one or more of the following having an aggregate value determined by
the Board of Directors to be equal to the Current Value: (1) cash, (2) a
reduction in the Purchase Price, (3) Common Shares or other equity securities of
the Company (including, without limitation, shares, or units of shares, of
preferred stock which the Board of Directors of the Company has determined to
have the same value as shares of Common Stock (such shares of preferred stock,
"common stock equivalents")), (4) debt securities of the Company, or (5) other
assets; provided, however, if the Company shall not have made adequate provision
to deliver value pursuant to clause (B) above within thirty (30) days following
the first occurrence of an event triggering the rights to purchase Common Shares
described in Section 11(a)(ii) (the "Section 11(a)(ii) Trigger Date"), then the
Company shall be obligated to deliver, upon the surrender for exercise of a
<PAGE>
Right and without requiring payment of the Purchase Price, shares of Common
Stock (to the extent available) and then, if necessary, cash, which shares and
cash have an aggregate value equal to the Spread. If the Board of Directors of
the Company shall determine in good faith that it is likely that sufficient
additional Common Shares could be authorized for issuance upon exercise in full
of the Rights, the thirty (30) day period set forth above may be extended to the
extent necessary, but not more than ninety (90) days after the Section 11(a)(ii)
Trigger Date, in order that the Company may seek stockholder approval for the
authorization of such additional shares (such period, as it may be extended, the
"Substitution Period"). To the extent that the Company determines that some
action need be taken pursuant to the first and/or second sentences of this
Section 11(a)(iii), the Company (x) shall provide, subject to Section 7(f)
hereof and the last paragraph of Section 11(a)(ii) hereof, that such action
shall apply uniformly to all outstanding Rights, and (y) may suspend the
exercisability of the Rights until the expiration of the Substitution Period in
order to seek any authorization of additional shares and/or to decide the
appropriate form of distribution to be made pursuant to such first sentence and
to determine the value thereof. In the event of any such suspension, the Company
shall make a public announcement, and shall deliver to the Rights Agent a
statement, stating that the exercisability of the Rights has been temporarily
suspended. At such time as the suspension is no longer in effect, the Company
shall make another public announcement, and deliver to the Rights Agent a
statement, so stating. For purposes of this Section 11(a)(iii), the value of the
Common Shares shall be the current per share market price (as determined
pursuant to Section 11(d)(i) hereof) of the Common Shares on the Section
11(a)(ii) Trigger Date and the value of any common stock equivalent shall be
deemed to have the same value as the Common Shares on such date.
(b) In case the Company shall fix a record date for the issuance of
rights, options or warrants to all holders of Preferred Shares entitling them
(for a period expiring within 45 calendar days after such record date) to
subscribe for or purchase Preferred Shares (or shares having the same
designations and the powers, preferences and rights, and the qualifications,
limitations and restrictions as the Preferred Shares ("equivalent preferred
shares")) or securities convertible into Preferred Shares or equivalent
preferred shares at a price per Preferred Share or equivalent preferred share
(or having a conversion price per share, if a security convertible into
Preferred Shares or equivalent preferred shares) less than the then current
per-share market price of the Preferred Shares (as defined in Section 11(d)
hereof) on such record date, the Purchase Price to be in effect after such
record date shall be determined by multiplying the Purchase Price in effect
immediately prior to such record date by a fraction, the numerator of which
shall be the number of Preferred Shares outstanding on such record date plus the
number of Preferred Shares which the aggregate offering price of the total
number of Preferred Shares and/or equivalent preferred shares so to be offered
(and/or the aggregate initial conversion price of the convertible securities so
to be offered) would purchase at such current market price and the denominator
of which shall be the number of Preferred Shares outstanding on such record date
plus the number of additional Preferred Shares and/or equivalent preferred
shares to be offered for subscription or purchase (or into which the convertible
securities so to be offered are initially convertible); provided, however, that
in no event shall the consideration to be paid upon the exercise of one Right be
less than the aggregate par value of the shares of capital stock of the Company
issuable upon exercise of one Right. In case such subscription price may be paid
in a consideration part or all of which shall be in a form other than cash, the
value of such consideration shall be as determined in good faith by the Board of
Directors of the Company, whose determination shall be described in a statement
filed with the Rights Agent. Preferred Shares owned by or held for the account
<PAGE>
of the Company shall not be deemed outstanding for the purpose of any such
computation. Such adjustment shall be made successively whenever such a record
date is fixed; and in the event that such rights, options or warrants are not so
issued, the Purchase Price shall be adjusted to be the Purchase Price which
would then be in effect if such record date had not been fixed.
(c) In case the Company shall fix a record date for the making of a
distribution to all holders of the Preferred Shares (including any such
distribution made in connection with a consolidation or merger in which the
Company is the continuing or surviving corporation) of evidences of indebtedness
or assets (other than a regular quarterly cash dividend or a dividend payable in
Preferred Shares) or subscription rights or warrants (excluding those referred
to in Section 11(b) hereof), the Purchase Price to be in effect after such
record date shall be determined by multiplying the Purchase Price in effect
immediately prior to such record date by a fraction, the numerator of which
shall be the then current per share market price of the Preferred Shares (as
defined in Section 11(d) hereof) on such record date, less the fair market value
(as determined in good faith by the Board of Directors of the Company, whose
determination shall be described in a statement filed with the Rights Agent) of
the portion of the assets or evidences of indebtedness so to be distributed or
of such subscription rights or warrants applicable to one Preferred Share and
the denominator of which shall be such current per share market price of the
Preferred Shares; provided, however, that in no event shall the consideration to
be paid upon the exercise of one Right be less than the aggregate par value of
the shares of capital stock of the Company to be issued upon exercise of one
Right. Such adjustments shall be made successively whenever such a record date
is fixed; and in the event that such distribution is not so made, the Purchase
Price shall again be adjusted to be the Purchase Price which would then be in
effect if such record date had not been fixed.
(d) (i) For the purpose of any computation hereunder, the "current per
share market price" of any security (a "Security") for the purpose of this
Section 11(d)(i)) on any date shall be deemed to be the average of the daily
closing prices per share of such Security for the 30 consecutive Trading Days
(as such term is hereinafter defined) immediately prior to such date; provided,
however, that in the event that the current per-share market price of the
Security is determined during a period following the announcement by the issuer
of such Security of (A) a dividend or distribution on such Security payable in
shares of such Security or securities convertible into such shares, or (B) any
subdivision, combination or reclassification of such Security or securities
convertible into such shares, or (C) any subdivision, combination or
reclassification of such Security and prior to the expiration of 30 Trading Days
after the ex-dividend date for such dividend or distribution, or the record date
for such subdivision, combination or reclassification, then, and in each such
case, the current per-share market price shall be appropriately adjusted to
reflect the current market price per share equivalent of such Security. The
closing price for each day shall be the last sale price, regular way, or, in
case no such sale takes place on such day, the average of the closing bid and
asked prices, regular way, in either case as reported in the principal
consolidated transaction reporting system with respect to securities listed or
admitted to trading on the New York Stock Exchange or, if the Security is not
listed or admitted to trading on the New York Stock Exchange, as reported in the
principal consolidated transaction reporting system with respect to securities
listed on the principal national securities exchange on which the Security is
listed or admitted to trading or as reported on the Nasdaq National Market or,
if the Security is not listed or admitted to trading on any national securities
exchange or reported on the Nasdaq National Market, the last quoted price or, if
<PAGE>
not so quoted, the average of the high bid and low asked prices in the
over-the-counter market, as reported by the National Association of Securities
Dealers, Inc. Automated Quotations System ("Nasdaq") or such other system then
in use, or, if on any such date the Security is not quoted by any such
organization, the average of the closing bid and asked prices as furnished by a
professional market maker making a market in the Security selected by the Board
of Directors of the Company. The term "Trading Day" shall mean a day on which
the principal national securities exchange on which the Security is listed or
admitted to trading is open for the transaction of business or, if the Security
is not listed or admitted to trading on any national securities exchange, a
Business Day.
(ii) For the purpose of any computation hereunder, the
"current per-share market price" of the Preferred Shares shall be determined in
accordance with the method set forth in Section 11(d)(i) hereof. If the
Preferred Shares are not publicly traded, the "current per share market price"
of the Preferred Shares shall be conclusively deemed to be the current per-share
market price of the Common Shares as determined pursuant to Section 11(d)(i)
hereof (appropriately adjusted to reflect any stock split, stock dividend or
similar transaction occurring after the date hereof) multiplied by one thousand.
If neither the Common Shares nor the Preferred Shares are publicly held or so
listed or traded, "current per share market price" shall mean the fair value per
share as determined in good faith by the Board of Directors or a committee of
the Board of Directors authorized by the Board, whose determination shall be
described in a statement filed with the Rights Agent.
(e) No adjustment in the Purchase Price shall be required unless such
adjustment would require an increase or decrease of at least 1% in the Purchase
Price; provided, however, that any adjustments which by reason of this Section
11(e) are not required to be made shall be carried forward and taken into
account in any subsequent adjustment. All calculations under this Section 11
shall be made to the nearest cent or to the nearest one ten-millionth of a
Preferred Share or one ten-thousandth of any other share or security as the case
may be. Notwithstanding the first sentence of this Section 11(e), any adjustment
required by this Section 11 shall be made no later than the earlier of (i) three
years from the date of the transaction which requires such adjustment or (ii)
the date of the expiration of the right to exercise any Rights.
(f) If as a result of an adjustment made pursuant to Section 11(a)
hereof, the holder of any Right thereafter exercised shall become entitled to
receive any shares of capital stock of the Company other than Preferred Shares,
thereafter the number of such other shares so receivable upon exercise of any
Right shall be subject to adjustment from time to time in a manner and on terms
as nearly equivalent as practicable to the provisions with respect to the
Preferred Shares contained in Section 11(a) through (c) hereof, inclusive, and
the provisions of Sections 7, 9, 10, 13 and 14 hereof with respect to the
Preferred Shares shall apply on like terms to any such other shares.
(g) All Rights originally issued by the Company subsequent to any
adjustment made to the Purchase Price hereunder shall evidence the right to
purchase, at the adjusted Purchase Price, the number of one one-thousandths of a
Preferred Share purchasable from time to time hereunder upon exercise of the
Rights, all subject to further adjustment as provided herein.
<PAGE>
(h) Unless the Company shall have exercised its election as provided in
Section 11(i) hereof, upon each adjustment of the Purchase Price as a result of
the calculations made in Section 11(b) and (c) hereof, each Right outstanding
immediately prior to the making of such adjustment shall thereafter evidence the
right to purchase, at the adjusted Purchase Price, that number of one
one-thousandths of a Preferred Share (calculated to the nearest one
ten-millionth of a Preferred Share) obtained by (i) multiplying (x) the number
of one one-thousandths of a Preferred Share covered by a Right immediately prior
to this adjustment by (y) the Purchase Price in effect immediately prior to such
adjustment of the Purchase Price and (ii) dividing the product so obtained by
the Purchase Price in effect immediately after such adjustment of the Purchase
Price.
(i) The Company may elect on or after the date of any adjustment of the
Purchase Price to adjust the number of Rights, in substitution for any
adjustment in the number of one one-thousandths of a Preferred Share purchasable
upon the exercise of a Right. Each of the Rights outstanding after such
adjustment of the number of Rights shall be exercisable for the number of one
one-thousandths of a Preferred Share for which a Right was exercisable
immediately prior to such adjustment. Each Right held of record prior to such
adjustment of the number of Rights shall become that number of Rights
(calculated to the nearest one ten-thousandth) obtained by dividing the Purchase
Price in effect immediately prior to adjustment of the Purchase Price by the
Purchase Price in effect immediately after adjustment of the Purchase Price. The
Company shall make a public announcement of its election to adjust the number of
Rights, indicating the record date for the adjustment, and, if known at the
time, the amount of the adjustment to be made. This record date may be the date
on which the Purchase Price is adjusted or any day thereafter, but, if the Right
Certificates have been issued, shall be at least 10 days later than the date of
the public announcement. If Right Certificates have been issued, upon each
adjustment of the number of Rights pursuant to this Section 11(i), the Company
shall, as promptly as practicable, cause to be distributed to holders of record
of Right Certificates on such record date Right Certificates evidencing, subject
to Section 14 hereof, the additional Rights to which such holders shall be
entitled as a result of such adjustment, or, at the option of the Company, shall
cause to be distributed to such holders of record in substitution and
replacement for the Right Certificates held by such holders prior to the date of
adjustment, and upon surrender thereof, if required by the Company, new Right
Certificates evidencing all the Rights to which such holders shall be entitled
after such adjustment. Right Certificates so to be distributed shall be issued,
executed and countersigned in the manner provided for herein and shall be
registered in the names of the holders of record of Right Certificates on the
record date specified in the public announcement.
(j) Irrespective of any adjustment or change in the Purchase Price or
the number of one one-thousandths of a Preferred Share issuable upon the
exercise of the Rights, the Right Certificates theretofore and thereafter issued
may continue to express the Purchase Price and the number of one one-thousandths
of a Preferred Share which were expressed in the initial Right Certificates
issued hereunder.
(k) Before taking any action that would cause an adjustment reducing
the Purchase Price below one one-thousandth of the then par value, if any, of
the Preferred Shares issuable upon exercise of the Rights, the Company shall
take any corporate action which may, in the opinion of its counsel, be necessary
in order that the Company may validly and legally issue fully paid and
nonassessable Preferred Shares at such adjusted Purchase Price.
<PAGE>
(l) In any case in which this Section 11 shall require that an
adjustment in the Purchase Price be made effective as of a record date for a
specified event, the Company may elect to defer until the occurrence of such
event the issuing to the holder of any Right exercised after such record date of
the Preferred Shares and other capital stock or securities of the Company, if
any, issuable upon such exercise on the basis of the Purchase Price in effect
prior to such adjustment; provided, however, that the Company shall deliver to
such holder a due bill or other appropriate instrument evidencing such holder's
right to receive such additional shares upon the occurrence of the event
requiring such adjustment.
(m) The Company covenants and agrees that, after the Distribution Date,
it will not, except as permitted by Section 23, Section 24 or Section 27 hereof,
take (or permit any Subsidiary to take) any action the purpose of which is to,
or if at the time such action is taken it is reasonably foreseeable that the
effect of such action is to, materially diminish or eliminate the benefits
intended to be afforded by the Rights.
(n) Anything in this Section 11 to the contrary notwithstanding, the
Company shall be entitled to make such reductions in the Purchase Price, in
addition to those adjustments expressly required by this Section 11, as and to
the extent that it in its sole discretion shall determine to be advisable in
order that any consolidation or subdivision of the Preferred Shares, issuance
wholly for cash of any Preferred Shares at less than the current market price,
issuance wholly for cash of Preferred Shares or securities which by their terms
are convertible into or exchangeable for Preferred Shares, dividends on
Preferred Shares payable in Preferred Shares or issuance of rights, options or
warrants referred to hereinabove in Section 11(b) hereof, hereafter made by the
Company to holders of its Preferred Shares shall not be taxable to such
stockholders.
(o) In the event that at any time after the date of this Agreement and
prior to the Distribution Date, the Company shall (i) declare or pay any
dividend on the Common Shares payable in Common Shares or (ii) effect a
subdivision, combination or consolidation of the Common Shares (by
reclassification or otherwise than by payment of dividends in Common Shares)
into a greater or lesser number of Common Shares, then in any such case (A) the
number of one one-thousandths of a Preferred Share purchasable after such event
upon proper exercise of each Right shall be determined by multiplying the number
of one one-thousandths of a Preferred Share so purchasable immediately prior to
such event by a fraction, the numerator of which is the number of Common Shares
outstanding immediately before such event and the denominator of which is the
number of Common Shares outstanding immediately after such event, and (B) each
Common Share outstanding immediately after such event shall have issued with
respect to it that number of Rights which each Common Share outstanding
immediately prior to such event had issued with respect to it. The adjustments
provided for in this Section 11(o) shall be made successively whenever such a
dividend is declared or paid or such a subdivision, combination or consolidation
is effected.
(p) The exercise of Rights under Section 11(a)(ii) hereof shall only
result in the loss of rights under Section 11(a)(ii) hereof to the extent so
exercised and shall not otherwise affect the rights represented by the Rights
under this Rights Agreement, including the rights represented by Section 13
hereof.
<PAGE>
Section 12. Certificate of Adjusted Purchase Price or Number of Shares.
Whenever an adjustment is made as provided in Sections 11 and 13 hereof, the
Company shall promptly (a) prepare a certificate setting forth such adjustment,
and a brief statement of the facts accounting for such adjustment, (b) file with
the Rights Agent and with each transfer agent for the Common Shares or the
Preferred Shares a copy of such certificate and (c) mail a brief summary thereof
to each holder of a Right Certificate in accordance with Section 25 hereof. The
Rights Agent shall be fully protected in relying on any such certificate and on
any adjustment therein contained and shall not be deemed to have knowledge of
any adjustment unless and until it shall have received such certificate.
Section 13. Consolidation, Merger or Sale or Transfer of Assets or Earning
Power.
(a) In the event that, following the Shares Acquisition Date, directly
or indirectly (x) the Company shall consolidate with, or merge with and into,
any other Person, (y) any Person shall consolidate with the Company, or merge
with and into the Company, and the Company shall be the continuing or surviving
corporation of such merger (other than, in the case of either transaction
described in (x) or (y), a merger or consolidation which would result in all of
the voting power represented by the securities of the Company outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into securities of the surviving entity) all
of the voting power represented by the securities of the Company or such
surviving entity outstanding immediately after such merger or consolidation and
the holders of such securities not having changed as a result of such merger or
consolidation), or (z) the Company shall sell, mortgage or otherwise transfer
(or one or more of its Subsidiaries shall sell, mortgage or otherwise transfer),
in one or more transactions, assets or earning power aggregating more than 50%
of the assets or earning power of the Company and its Subsidiaries (taken as a
whole) to any other Person, (other than the Company or any Subsidiary of the
Company in one or more transactions each of which individually and the aggregate
does not violate Section 13(d) hereof) then, and in each such case, proper
provision shall be made so that (i) following the Distribution Date, each holder
of a Right, subject to Section 11(a)(ii) hereof, shall have the right to
receive, upon the exercise thereof at a price equal to the then current Purchase
Price multiplied by the number of one one-thousandths of a Preferred Share for
which a Right is then exercisable in accordance with the terms of this Agreement
and in lieu of Preferred Shares, such number of shares of freely tradeable
Common Shares of the Principal Party (as hereinafter defined), free and clear of
liens, rights of call or first refusal, encumbrances or other adverse claims, as
shall be equal to the result obtained by (A) multiplying the then current
Purchase Price by the number of one one-thousandths of a Preferred Share for
which a Right is then exercisable (without taking into account any adjustment
previously made pursuant to Section 11(a)(ii) hereof) and dividing that product
by (B) 50% of the then current per-share market price of the Common Shares of
such Principal Party (determined pursuant to Section 11(d) hereof) on the date
of consummation of such consolidation, merger, sale or transfer; (ii) such
Principal Party shall thereafter be liable for, and shall assume, by virtue of
such consolidation, merger, sale or transfer, all the obligations and duties of
the Company pursuant to this Agreement; (iii) the term "Company" shall
thereafter be deemed to refer to such Principal Party, it being specifically
intended that the provisions of Section 11 hereof shall apply to such Principal
Party; and (iv) such Principal Party shall take such steps (including, but not
limited to, the reservation of a sufficient number of its Common Shares in
<PAGE>
accordance with Section 9 hereof) in connection with such consummation as may be
necessary to assure that the provisions hereof shall thereafter be applicable,
as nearly as reasonably may be, in relation to its Common Shares thereafter
deliverable upon the exercise of the Rights.
(b) "Principal Party" shall mean:
(i) in the case of any transaction described in (x) or (y) of
the first sentence of Section 13(a) hereof, the Person that is the
issuer of any securities into which Common Shares of the Company are
converted in such merger or consolidation, and if no securities are so
issued, the Person that is the other party to the merger or
consolidation (including, if applicable, the Company, if it is the
surviving corporation); and
(ii) in the case of any transaction described in (z) of the
first sentence in Section 13(a) hereof, the Person that is the party
receiving the greatest portion of the assets or earning power
transferred pursuant to such transaction or transactions;
provided, however, that in any case, (1) if the Common Shares of such Person are
not at such time and have not been continuously over the preceding 12-month
period registered under Section 12 of the Exchange Act, and such Person is a
direct or indirect Subsidiary or Affiliate of another Person the Common Shares
of which are and have been so registered, "Principal Party" shall refer to such
other Person; (2) in case such Person is a Subsidiary, directly or indirectly,
or Affiliate of more than one Person, the Common Shares of two or more of which
are and have been so registered, "Principal Party" shall refer to whichever of
such Persons is the issuer of the Common Shares having the greatest aggregate
market value; and (3) in case such Person is owned, directly or indirectly, by a
joint venture formed by two or more Persons that are not owned, directly or
indirectly, by the same Person, the rules set forth in (1) and (2) above shall
apply to each of the chains of ownership having an interest in such joint
venture as if such party were a "Subsidiary" of both or all of such joint
venturers and the Principal Parties in each such chain shall bear the
obligations set forth in this Section 13 in the same ratio as their direct or
indirect interests in such Person bear to the total of such interests.
(c) The Company shall not consummate any such consolidation, merger,
sale or transfer unless the Principal Party shall have a sufficient number of
authorized shares of its Common Shares that have not been issued or reserved for
issuance to permit the exercise in full of the Rights in accordance with this
Section 13 and unless prior thereto the Company and each Principal Party and
each other Person who may become a Principal Party as a result of such
consolidation, merger, sale or transfer shall have executed and delivered to the
Rights Agent a supplemental agreement providing for the terms set forth in
paragraphs (a) and (b) of this Section 13 and further providing that, as soon as
practicable after the date of any consolidation, merger, sale or transfer of
assets mentioned in paragraph (a) of this Section 13, the Principal Party at its
own expense will:
(i) prepare and file a registration statement under the Act
with respect to the securities purchasable upon exercise of the Rights
on an appropriate form, will use its best efforts to cause such
<PAGE>
registration statement to become effective as soon as practicable after
such filing and will use its best efforts to cause such registration
statement to remain effective (with a prospectus at all times meeting
the requirements of the Act) until the Final Expiration Date;
(ii) use its best efforts to qualify or register the Rights
and the securities purchasable upon exercise of the Rights under the
blue sky laws of such jurisdictions as may be necessary or appropriate;
and
(iii) deliver to holders of the Rights historical financial
statements for the Principal Party and each of its Affiliates which
comply in all material respects with the requirements for registration
on Form 10 under the Exchange Act.
The provisions of this Section 13 shall similarly apply to successive mergers or
consolidations or sales or other transfers.
(d) After the Distribution Date, the Company covenants and agrees that
it shall not (i) consolidate with, (ii) merge with or into, or (iii) sell or
transfer to, in one or more transactions, assets or earning power aggregating
more than 50% of the assets or earning power of the Company and its Subsidiaries
taken as a whole, any other Person (other than a Subsidiary of the Company in a
transaction which does not violate Section 11(m) hereof), if (x) at the time of
or after such consolidation, merger or sale there are any charter or bylaw
provisions or any rights, warrants or other instruments or securities
outstanding, agreements in effect or any other action taken which would diminish
or otherwise eliminate the benefits intended to be afforded by the Rights or (y)
prior to, simultaneously with or immediately after such consolidation, merger or
sale, the stockholders of the Person who constitutes, or would constitute, the
APrincipal Party@ for purposes of Section 13(a) hereof shall have received a
distribution of Rights previously owned by such Person or any of its Affiliates
and Associates. The Corporation shall not consummate any such consolidation,
merger, sale or transfer unless prior thereto the Company and such other Person
shall have executed and delivered to the Rights Agent a supplemental agreement
evidencing compliance with this Section 13(d).
Section 14. Fractional Rights and Fractional Shares.
(a) The Company shall not be required to issue fractions of Rights or
to distribute Right Certificates which evidence fractional Rights. In lieu of
such fractional Rights, there shall be paid to the registered holders of the
Right Certificates with regard to which such fractional Rights would otherwise
be issuable, an amount in cash equal to the same fraction of the current market
value of a whole Right. For the purposes of this Section 14(a), the current
market value of a whole Right shall be the closing price of the Rights for the
Trading Day immediately prior to the date on which such fractional Rights would
have been otherwise issuable. The closing price for any day shall be the last
sale price, regular way, or, in case no such sale takes place on such day, the
average of the closing bid and asked prices, regular way, in either case as
reported in the principal consolidated transaction reporting system with respect
to securities listed or admitted to trading on the New York Stock Exchange or,
if the Rights are not listed or admitted to trading on the New York Stock
Exchange, as reported in the principal consolidated transaction reporting system
<PAGE>
with respect to securities listed on the principal national securities exchange
on which the Rights are listed or admitted to trading or as reported on the
Nasdaq National Market or, if the Rights are not listed or admitted to trading
on any national securities exchange or reported on the Nasdaq National Market,
the last quoted price or, if not so quoted, the average of the high bid and low
asked prices in the over-the-counter market, as reported by Nasdaq or such other
system then in use or, if on any such date the Rights are not quoted by any such
organization, the average of the closing bid and asked prices as furnished by a
professional market maker making a market in the Rights selected by the Board of
Directors of the Company or a committee of the Board of Directors authorized by
the Board. If on any such date no such market maker is making a market in the
Rights, the fair value of the Rights on such date as determined in good faith by
the Board of Directors of the Company shall be used.
(b) The Company shall not be required to issue fractions of Preferred
Shares (other than fractions which are integral multiples of one one-thousandth
of a Preferred Share) upon exercise of the Rights or to distribute certificates
which evidence fractional Preferred Shares (other than fractions which are
integral multiples of one one-thousandth of a Preferred Share). Fractions of
Preferred Shares in integral multiples of one one-thousandth of a Preferred
Share may, at the election of the Company, be evidenced by depository receipts;
provided, however, that holders of such depository receipts shall have all of
the designations and the powers, preferences and rights, and the qualifications,
limitations and restrictions to which they are entitled as beneficial owners of
the Preferred Shares represented by such depository receipts. In lieu of
fractional Preferred Shares that are not integral multiples of one
one-thousandth of a Preferred Share, the Company shall pay to the registered
holders of Right Certificates at the time such Rights are exercised as herein
provided an amount in cash equal to the same fraction of the current market
value of one Preferred Share. For the purposes of this Section 14(b), the
current market value of a Preferred Share shall be the current per share market
price of the Preferred Shares (as determined pursuant to the second sentence of
Section 11(d)(i) hereof) for the Trading Day immediately prior to the date of
such exercise (or, if not publicly traded, in accordance with Section 11(d)(ii)
hereof).
(c) Following the occurrence of one of the transactions or events
specified in Section 11 giving rise to the right to receive Common Shares,
common stock equivalents (other than Preferred Shares) or other securities upon
the exercise of a Right, the Company shall not be required to issue fractions of
Common Shares or units of such Common Shares, capital stock equivalents or other
securities upon exercise of the Rights or to distribute certificates which
evidence fractional Common Shares, capital stock equivalents or other
securities. In lieu of fractional Common Shares, capital stock equivalents or
other securities, the Company shall pay to the registered holders of Right
Certificates at the time such Rights are exercised as herein provided an amount
in cash equal to the same fraction of the current market value of one Common
Share or unit of such Common Shares, capital stock equivalents or other
securities. For purposes of this Section 14(c), the current market value shall
be the current per share market price (as determined pursuant to Section
11(d)(i) hereof) for the Trading Day immediately prior to the date of such
exercise and, if such capital stock equivalent is not traded, each such capital
stock equivalent shall have the value of one one-thousandth of a Preferred
Share.
(d) The holder of a Right by the acceptance of the Right expressly
waives his right to receive any fractional Rights or any fractional shares upon
exercise of a Right (except as provided above).
<PAGE>
Section 15. Rights of Action. All rights of action in respect of this
Agreement, excepting the rights of action given to the Rights Agent under
Sections 18 and 20 hereof, are vested in the respective registered holders of
the Right Certificates (and, prior to the Distribution Date, the registered
holders of the Common Shares) and any registered holder of any Right Certificate
(or, prior to the Distribution Date, of the Common Shares), without the consent
of the Rights Agent or of the holder of any other Right Certificate (or, prior
to the Distribution Date, of the Common Shares), may, in his own behalf and for
his own benefit, enforce, and may institute and maintain any suit, action or
proceeding against the Company to enforce, or otherwise act in respect of, his
right to exercise the Rights evidenced by such Right Certificate in the manner
provided in such Right Certificate and in this Agreement. Without limiting the
foregoing or any remedies available to the holders of Rights, it is specifically
acknowledged that the holders of Rights would not have an adequate remedy at law
for any breach of this Agreement and will be entitled to specific performance of
the obligations under, and injunctive relief against actual or threatened
violations of the obligations of any Person subject to, this Agreement.
Section 16. Agreement of Right Holders. Every holder of a Right, by
accepting the same, consents and agrees with the Company and the Rights Agent
and with every other holder of a Right that:
(a) prior to the Distribution Date, the Rights will be
transferable only in connection with the transfer of the Common Shares;
(b) after the Distribution Date, the Right Certificates are
transferable only on the registry books of the Rights Agent if surrendered at
the principal office of the Rights Agent, duly endorsed or accompanied by a
proper instrument of transfer; and
(c) the Company and the Rights Agent may deem and treat the
person in whose name the Right Certificate (or, prior to the Distribution Date,
the associated Common Shares certificate) is registered as the absolute owner
thereof and of the Rights evidenced thereby (notwithstanding any notations of
ownership or writing on the Right Certificates or the associated certificate
representing Common Shares of the Company made by anyone other than the Company
or the Rights Agent) for all purposes whatsoever, and neither the Company nor
the Rights Agent shall be affected by any notice to the contrary.
Section 17. Right Certificate Holder Not Deemed a Stockholder. No
holder, as such, of any Right Certificate shall be entitled to vote, receive
dividends or be deemed for any purpose the holder of the Preferred Shares or any
other securities of the Company which may at any time be issuable on the
exercise of the Rights represented thereby, nor shall anything contained herein
or in any Right Certificate be construed to confer upon the holder of any Right
Certificate, as such, any of the rights of a stockholder of the Company or any
right to vote for the election of directors or upon any matter submitted to
stockholders at any meeting thereof, or to give or withhold consent to any
corporate action, or to receive notice of meetings or other actions affecting
stockholders (except as provided in Section 25 hereof), or to receive dividends
or subscription rights, or otherwise, until the Right or Rights evidenced by
such Right Certificate shall have been exercised in accordance with the
provisions hereof.
<PAGE>
Section 18. Concerning the Rights Agent. The Company agrees to pay to
the Rights Agent reasonable compensation for all services rendered by it
hereunder and, from time to time, on demand of the Rights Agent, its reasonable
expenses and counsel fees and other disbursements incurred in the administration
and execution of this Agreement and the exercise and performance of its duties
hereunder. The Company also agrees to indemnify the Rights Agent for, and to
hold it harmless against, any loss, liability, or expense, incurred without
gross negligence, bad faith or willful misconduct on the part of the Rights
Agent, for anything done or omitted by the Rights Agent in connection with the
acceptance and administration of this Agreement, including the costs and
expenses of defending against any claim of liability in the premises. The
indemnity provided herein shall survive the expiration of the Rights and the
termination of this Agreement.
The Rights Agent shall be protected and shall incur no liability for,
or in respect of any action taken, suffered or omitted by it in connection with,
its administration of this Agreement in reliance upon any Right Certificate or
certificate for the Preferred Shares or Common Shares or for other securities of
the Company, instrument of assignment or transfer, power of attorney,
endorsement, affidavit, letter, notice, direction, consent, certificate,
statement, or other paper or document believed by it to be genuine and to be
signed, executed and, where necessary, verified or acknowledged, by the proper
person or persons, or otherwise upon the advice of counsel as set forth in
Section 20 hereof.
Section 19. Merger or Consolidation or Change of Name of Rights Agent.
Any corporation or other entity into which the Rights Agent or any successor
Rights Agent may be merged or with which it may be consolidated, or any
corporation resulting from any merger or consolidation to which the Rights Agent
or any successor Rights Agent shall be a party, or any corporation succeeding to
the shareholder services or corporate trust business of the Rights Agent or any
successor Rights Agent, shall be the successor to the Rights Agent under this
Agreement without the execution or filing of any paper or any further act on the
part of any of the parties hereto, provided, however that such corporation or
other entity would be eligible for appointment as a successor Rights Agent under
the provisions of Section 21 hereof. In case at the time such successor Rights
Agent shall succeed to the agency created by this Agreement any of the Right
Certificates shall have been countersigned but not delivered, any such successor
Rights Agent may adopt the countersignature of the predecessor Rights Agent and
deliver such Right Certificates so countersigned; and in case at that time any
of the Right Certificates shall not have been countersigned, any successor
Rights Agent may countersign such Right Certificates either in the name of the
predecessor Rights Agent or in the name of the successor Rights Agent; and in
all such cases such Right Certificates shall have the full force provided in the
Right Certificates and in this Agreement.
In case at any time the name of the Rights Agent shall be changed and
at such time any of the Right Certificates shall have been countersigned but not
delivered, the Rights Agent may adopt the countersignature under its prior name
and deliver Right Certificates so countersigned; and in case at that time any of
the Right Certificates shall not have been countersigned, the Rights Agent may
countersign such Right Certificates either in its prior name or in its changed
name; and in all such cases such Right Certificates shall have the full force
provided in the Right Certificates and in this Agreement.
<PAGE>
Section 20. Duties of Rights Agent. The Rights Agent undertakes the
duties and obligations imposed by this Agreement upon the following terms and
conditions, by all of which the Company and the holders of Right Certificates,
by their acceptance thereof, shall be bound:
(a) The Rights Agent may consult with legal counsel of its choice (who
may be legal counsel for the Company), and the opinion of such counsel shall be
full and complete authorization and protection to the Rights Agent as to any
action taken or omitted by it in good faith and in accordance with such opinion.
(b) Whenever in the performance of its duties under this Agreement the
Rights Agent shall deem it necessary or desirable that any fact or matter be
proved or established by the Company prior to taking or suffering any action
hereunder, such fact or matter (unless other evidence in respect thereof be
herein specifically prescribed) may be deemed to be conclusively proved and
established by a certificate signed by any one of the Chairman of the Board, the
Vice Chairman of the Board, the Chief Executive Officer, the President, the
Chief Financial Officer, any Vice President, the Treasurer or the Secretary of
the Company and delivered to the Rights Agent; and such certificate shall be
full authorization to the Rights Agent for any action taken or suffered in good
faith by it under the provisions of this Agreement in reliance upon such
certificate.
(c) The Rights Agent shall be liable hereunder to the Company and any
other Person only for its own gross negligence, bad faith or willful misconduct.
(d) The Rights Agent shall not be liable for or by reason of any of the
statements of fact or recitals contained in this Agreement or in the Right
Certificates (except its countersignature thereof) or be required to verify the
same, but all such statements and recitals are and shall be deemed to have been
made by the Company only.
(e) The Rights Agent shall not be under any responsibility in respect
of the validity of this Agreement or the execution and delivery hereof (except
the due execution hereof by the Rights Agent) or in respect of the validity or
execution of any Right Certificate (except its countersignature thereof); nor
shall it be responsible for any breach by the Company of any covenant or
condition contained in this Agreement or in any Right Certificate; nor shall it
be responsible for any change in the exercisability of the Rights (including the
Rights becoming void pursuant to Section 11(a)(ii) hereof) or any adjustment in
the terms of the Rights (including the manner, method or amount thereof)
provided for in Section 3, 11, 13, 23 or 24 hereof, or the ascertaining of the
existence of facts that would require any such change or adjustment (except with
respect to the exercise of Rights evidenced by Right Certificates after receipt
of a certificate pursuant to Section 12 hereof describing such change or
adjustment); nor shall it by any act hereunder be deemed to make any
representation or warranty as to the authorization or reservation of any
Preferred Shares to be issued pursuant to this Agreement or any Right
Certificate or as to whether any Preferred Shares will, when issued, be validly
authorized and issued, fully paid and nonassessable.
(f) The Company agrees that it will perform, execute, acknowledge and
deliver or cause to be performed, executed, acknowledged and delivered all such
further and other acts, instruments and assurances as may reasonably be required
by the Rights Agent for the carrying out or performing by the Rights Agent of
the provisions of this Agreement.
<PAGE>
(g) The Rights Agent is hereby authorized and directed to accept
instructions with respect to the performance of its duties hereunder from any
one of the Chairman of the Board, the Vice Chairman of the Board, the Chief
Executive Officer, the President, the Chief Financial Officer, any Vice
President, the Secretary or the Treasurer of the Company, and to apply to such
officers for advice or instructions in connection with its duties, and it shall
not be liable for any action taken or suffered by it in good faith in accordance
with instructions of any such officer or for any delay in acting while waiting
for those instructions. Any application by the Rights Agent for written
instructions from the Company may, at the option of the Rights Agent, set forth
in writing any action proposed to be taken or omitted by the Rights Agent with
respect to its duties or obligations under this Rights Agreement and the date on
and/or after which such action shall be taken or omitted and the Rights Agent
shall not be liable for any action taken or omitted in accordance with a
proposal included in any such application on or after the date specified therein
(which date shall not be less than three business days after the date indicated
in such application unless any such officer shall have consented in writing to
an earlier date) unless, prior to taking or omitting any such action, the Rights
Agent has received written instructions in response to such application
specifying the action to be taken or omitted.
(h) The Rights Agent and any stockholder, director, officer or employee
of the Rights Agent may buy, sell or deal in any of the Rights or other
securities of the Company or become pecuniarily interested in any transaction in
which the Company may be interested, or contract with or lend money to the
Company or otherwise act as fully and freely as though it were not Rights Agent
under this Agreement. Nothing herein shall preclude the Rights Agent from acting
in any other capacity for the Company or for any other legal entity.
(i) The Rights Agent may execute and exercise any of the rights or
powers hereby vested in it or perform any duty hereunder either itself or by or
through its attorneys or agents, and the Rights Agent shall not be answerable or
accountable for any act, default, neglect or misconduct of any such attorneys or
agents or for any loss to the Company resulting from any such act, default,
neglect or misconduct, provided reasonable care was exercised in the selection
and continued employment thereof.
(j) No provision of this Agreement shall require the Rights Agent to
expend or risk its own funds or otherwise incur any financial liability in the
performance of any of its duties hereunder or in the exercise of its rights if
there shall be reasonable grounds for believing that repayment of such funds or
adequate indemnification against such risk or liability is not reasonably
assured to it.
(k) If, with respect to any Right Certificate surrendered to the Rights
Agent for exercise or transfer, the certificate attached to the form of
assignment or form of election to purchase, as the case may be, has not been
executed, the Rights Agent shall not take any further action with respect to
such requested exercise of transfer without first consulting with the Company.
Section 21. Change of Rights Agent. The Rights Agent or any successor
Rights Agent may resign and be discharged from its duties under this Agreement
upon 30 days' notice in writing mailed to the Company and to each transfer agent
<PAGE>
for the Common Shares or Preferred Shares by registered or certified mail, and
to the holders of the Right Certificates by first-class mail. The Company may
remove the Rights Agent or any successor Rights Agent upon 30 days' notice in
writing, mailed to the Rights Agent or successor Rights Agent, as the case may
be, and to each transfer agent for the Common Shares or Preferred Shares by
registered or certified mail, and to the holders of the Right Certificates by
first-class mail. If the Rights Agent shall resign or be removed or shall
otherwise become incapable of acting, the Company shall appoint a successor to
the Rights Agent. If the Company shall fail to make such appointment within a
period of 30 days after giving notice of such removal or after it has been
notified in writing of such resignation or incapacity by the resigning or
incapacitated Rights Agent or by the holder of a Right Certificate (who shall,
with such notice, submit his Right Certificate for inspection by the Company),
then the registered holder of any Right Certificate may apply to any court of
competent jurisdiction for the appointment of a new Rights Agent. Any successor
Rights Agent, whether appointed by the Company or by such a court, shall be a
corporation organized and doing business under the laws of the United States or
of any other state of the United States which is authorized under such laws to
exercise corporate trust or stock transfer powers and is subject to supervision
or examination by federal or state authority and which has at the time of its
appointment as Rights Agent a combined capital and surplus of at least $1
billion. After appointment, the successor Rights Agent shall be vested with the
same powers, rights, duties and responsibilities as if it had been originally
named as Rights Agent without further act or deed; but the predecessor Rights
Agent shall deliver and transfer to the successor Rights Agent any property at
the time held by it hereunder, and execute and deliver any further assurance,
conveyance, act or deed necessary for the purpose. Not later than the effective
date of any such appointment the Company shall file notice thereof in writing
with the predecessor Rights Agent and each transfer agent for the Common Shares
or Preferred Shares, and mail a notice thereof in writing to the registered
holders of the Right Certificates. Failure to give any notice provided for in
this Section 21, however, or any defect therein, shall not affect the legality
or validity of the resignation or removal of the Rights Agent or the appointment
of the successor Rights Agent, as the case may be.
Section 22. Issuance of New Right Certificates. Notwithstanding any of
the provisions of this Agreement or of the Rights to the contrary, the Company
may, at its option, issue new Right Certificates evidencing Rights in such form
as may be approved by its Board of Directors to reflect any adjustment or change
in the Purchase Price and the number or kind or class of shares or other
securities or property purchasable under the Right Certificates made in
accordance with the provisions of this Agreement. In addition, in connection
with the issuance or sale of Common Shares following the Distribution Date and
prior to the earlier of the Redemption Date and the Final Expiration Date, the
Company (a) shall with respect to Common Shares so issued or sold pursuant to
the exercise of stock options or under any employee plan or arrangement, or upon
the exercise, conversion or exchange of securities, notes or debentures issued
by the Company (other than the Rights), and (b) may, in any other case, if
deemed necessary or appropriate by the Board of Directors of the Company, issue
Right Certificates representing the appropriate number of Rights in connection
with such issuance or sale; provided, however, that (i) the Company shall not be
obligated to issue any such Right Certificates if, and to the extent that, the
Company shall be advised by counsel that such issuance would create a
significant risk of material adverse tax consequences to the Company or the
Person to whom such Right Certificate would be issued, and (ii) no Right
Certificate shall be issued if, and to the extent that, appropriate adjustment
shall otherwise have been made in lieu of the issuance thereof.
<PAGE>
Section 23. Redemption.
(a) The Rights may be redeemed by action of the Board of Directors
pursuant to subsection (b) of this Section 23 and shall not be redeemed in any
other manner.
(b) The Board of Directors of the Company may, at its option, at any
time prior to the earlier of (i) the time that any Person becomes an Acquiring
Person; or (ii) the Final Expiration Date, redeem all but not less than all of
the then outstanding Rights at a redemption price of $.001 per Right,
appropriately adjusted to reflect any stock split, stock dividend or similar
transaction occurring after the date hereof (such redemption price being
hereinafter referred to as the "Redemption Price"). The redemption of the Rights
by the Board of Directors may be made effective at such time, on such basis and
subject to such conditions as the Board of Directors in its sole discretion may
establish.
(c) In case of a redemption permitted under Section 23(b) hereof,
immediately upon the action of the Board of Directors of the Company ordering
the redemption of the Rights pursuant to subsection (b) of this Section 23, and
without any further action and without any notice, the right to exercise the
Rights will terminate and the only right thereafter of the holders of Rights
shall be to receive the Redemption Price. The Company shall promptly give public
notice of any such redemption; provided, however, that the failure to give, or
any defect in, any such notice shall not affect the validity of such redemption.
Within 10 days after such action of the Board of Directors or such later date as
is determined by the Board of Directors ordering the redemption of the Rights
pursuant to subsection (b) the Company shall mail a notice of redemption to all
the holders of the then outstanding Rights at their last addresses as they
appear upon the registry books of the Rights Agent or, prior to the Distribution
Date, on the registry books of the transfer agent for the Common Shares. Any
notice which is mailed in the manner herein provided shall be deemed given,
whether or not the holder receives the notice. Each such notice of redemption
will state the method by which the payment of the Redemption Price will be made.
Neither the Company nor any of its Affiliates or Associates may redeem, acquire
or purchase for value any Rights at any time in any manner other than that
specifically set forth in this Section 23 or in Section 24 hereof, and other
than in connection with the purchase of Common Shares prior to the Distribution
Date.
(d) The Company may, at its option, at any time that the Rights may
otherwise be redeemed pursuant to subsection (b) hereof discharge all of its
obligations with respect to the Rights by (i) issuing a press release announcing
the manner of redemption of the Rights and (ii) mailing payment of the
Redemption Price to the registered holders of the Rights at their last addresses
as they appear on the registry books of the Rights Agent or, prior to the
Distribution Date, on the registry books of the transfer agent for the Common
Shares, and upon such action, all outstanding Right Certificates shall be null
and void without any further action by the Company.
Section 24. Exchange.
(a) The Board of Directors of the Company may, at its option, at any
time after any Person becomes an Acquiring Person, exchange all or part of the
then outstanding and exercisable Rights (which shall not include Rights that
<PAGE>
have become void pursuant to the provisions of Section 11(a)(ii) hereof) for
Common Shares at an exchange ratio of one Common Share per Right, appropriately
adjusted to reflect any stock split, stock dividend or similar transaction
occurring after the date hereof (such exchange ratio being hereinafter referred
to as the "Exchange Ratio"). Notwithstanding the foregoing, the Board of
Directors shall not be empowered to effect such exchange at any time after any
Person (other than the Company, any Subsidiary of the Company, any employee
benefit plan of the Company or any such Subsidiary, or any entity holding Common
Shares for or pursuant to the terms of any such plan), together with all
Affiliates and Associates of such Person, becomes the Beneficial Owner of 50% or
more of the Common Shares then outstanding.
(b) Immediately upon the action of the Board of Directors of the
Company ordering the exchange of any Rights pursuant to subsection (a) of this
Section 24 and without any further action and without any notice, the right to
exercise such Rights shall terminate and the only right thereafter of a holder
of such Rights shall be to receive that number of Common Shares equal to the
number of such Rights held by such holder multiplied by the Exchange Ratio. The
Company shall promptly give public notice of any such exchange; provided,
however, that the failure to give, or any defect in, such notice shall not
affect the validity of such exchange. The Company promptly shall mail a notice
of any such exchange to all of the holders of such Rights at their last
addresses as they appear upon the registry books of the Rights Agent. Any notice
which is mailed in the manner herein provided shall be deemed given, whether or
not the holder receives the notice. Each such notice of exchange will state the
method by which the exchange of the Common Shares for Rights will be effected
and, in the event of any partial exchange, the number of Rights which will be
exchanged. Any partial exchange shall be effected pro rata based on the number
of Rights (other than Rights which have become void pursuant to the provisions
of Section 11(a)(ii) hereof) held by each holder of Rights.
(c) In any exchange pursuant to this Section 24, the Company, at its
option, may substitute Preferred Shares or common stock equivalents for Common
Shares exchangeable for Rights, at the initial rate of one one-thousandth of a
Preferred Share (or an appropriate number of common stock equivalents) for each
Common Share, as appropriately adjusted to reflect adjustments in the voting
rights of the Preferred Shares pursuant to the terms thereof, so that the
fraction of a Preferred Share delivered in lieu of each Common Share shall have
the same voting rights as one Common Share.
(d) In the event that there shall not be sufficient Common Shares,
Preferred Shares or common stock equivalents authorized by the Company's
certificate of incorporation and not outstanding or subscribed for, or reserved
or otherwise committed for issuance for purposes other than upon exercise of
Rights, to permit any exchange of Rights as contemplated in accordance with this
Section 24, the Company shall take all such action as may be necessary to
authorize additional Common Shares, Preferred Shares or common stock equivalents
for issuance upon exchange of the Rights.
(e) The Company shall not be required to issue fractions of Common
Shares or to distribute certificates which evidence fractional Common Shares. In
lieu of such fractional Common Shares, the Company shall pay to the registered
<PAGE>
holders of the Right Certificates with regard to which such fractional Common
Shares would otherwise be issuable an amount in cash equal to the same fraction
of the current per share market value of a whole Common Share. For the purposes
of this paragraph (e), the current per share market value of a whole Common
Share shall be the closing price of a Common Share (as determined pursuant to
the second sentence of Section 11(d)(i) hereof) for the Trading Day immediately
prior to the date of exchange pursuant to this Section 24.
Section 25. Notice of Certain Events.
(a) In case the Company shall propose (i) to pay any dividend payable
in stock of any class to the holders of its Preferred Shares or to make any
other distribution to the holders of its Preferred Shares (other than a regular
quarterly cash dividend), (ii) to offer to the holders of its Preferred Shares
rights or warrants to subscribe for or to purchase any additional Preferred
Shares or shares of stock of any class or any other securities, rights or
options, (iii) to effect any reclassification of its Preferred Shares (other
than a reclassification involving only the subdivision of outstanding Preferred
Shares), (iv) to effect any consolidation or merger into or with, or to effect
any sale or other transfer (or to permit one or more of its Subsidiaries to
effect any sale or other transfer), in one or more transactions, of 50% or more
of the assets or earning power of the Company and its Subsidiaries, taken as a
whole, to any other Person, (v) to effect the liquidation, dissolution or
winding up of the Company, or (vi) to declare or pay any dividend on the Common
Shares payable in Common Shares or to effect a subdivision, combination or
consolidation of the Common Shares (by reclassification or otherwise than by
payment of dividends in Common Shares), then, in each such case, the Company
shall give to each holder of a Right Certificate, in accordance with Section 26
hereof, a notice of such proposed action, which shall specify the record date
for the purpose of such stock dividend, or distribution of rights or warrants,
or the date on which such reclassification, consolidation, merger, sale,
transfer, liquidation, dissolution, or winding up is to take place and the date
of participation therein by the holders of the Common Shares and/or the
Preferred Shares, if any such date is to be fixed, and such notice shall be so
given in the case of any action covered by clause (i) or (ii) above at least 10
days prior to the record date for determining holders of the Preferred Shares
for purposes of such action, and in the case of any such other action, at least
10 days prior to the date of the taking of such proposed action or the date of
participation therein by the holders of the Common Shares and/or the Preferred
Shares, whichever shall be the earlier.
(b) In case the event set forth in Section 11(a)(ii) hereof shall
occur, then the Company shall as soon as practicable thereafter give to each
holder of a Right Certificate, in accordance with Section 26 hereof, a notice of
the occurrence of such event, which notice shall describe the event and the
consequences of the event to holders of Rights under Section 11(a)(ii) hereof.
Section 26. Notices. Notices or demands authorized by this Agreement to
be given or made by the Rights Agent or by the holder of any Right Certificate
to or on the Company shall be sufficiently given or made if sent by first-class
mail, postage prepaid, addressed (until another address is filed in writing with
the Rights Agent) as follows:
AMERICA ONLINE, INC.
22000 AOL Way
Dulles, Virginia 20166
Attention: General Counsel
<PAGE>
Subject to the provisions of Section 21 hereof, any notice or demand authorized
by this Agreement to be given or made by the Company or by the holder of any
Right Certificate to or on the Rights Agent shall be sufficiently given or made
if sent by first-class mail, postage prepaid, addressed (until another address
is filed in writing with the Company) as follows:
BANKBOSTON, N.A.
c/o Boston EquiServe Limited Partnership
150 Royall Street
Canton, Massachusetts 02021
Attention: Client Administration
Notices or demands authorized by this Agreement to be given or made by the
Company or the Rights Agent to the holder of any Right Certificate shall be
sufficiently given or made if sent by first-class mail, postage prepaid,
addressed to such holder at the address of such holder as shown on the registry
books of the Company.
. The Company may from time to time, and the Rights Agent shall, if the Company
so directs, supplement or amend this Agreement without the approval of any
holders of Right Certificates in order to cure any ambiguity, to correct or
supplement any provision contained herein which may be defective or inconsistent
with any other provisions herein, or to make any change to or delete any
provision hereof or to adopt any other provisions with respect to the Rights
which the Company may deem necessary or desirable; provided, however, that from
and after such time that any Person becomes an Acquiring Person, this Agreement
shall not be amended or supplemented in any manner which would adversely affect
the interests of the holders of Rights (other than an Acquiring Person and its
Affiliates and Associates). Any supplement or amendment authorized by this
Section 27 will be evidenced by a writing signed by the Company and the Rights
Agent.
Section 28. Determination and Actions by the Board of Directors, etc.
The Board of Directors of the Company shall have the exclusive power and
authority to administer this Agreement and to exercise all rights and powers
specifically granted to the Board, or the Company, or as may be necessary or
advisable in the administration of this Agreement, including without limitation,
the right and power to (i) interpret the provisions of this Agreement, and (ii)
make all determinations and calculations deemed necessary or advisable for the
administration of this Agreement (including a determination to redeem or not
redeem the Rights or to amend the Agreement). All such actions, calculations,
interpretations and determinations (including, for purposes of clause (y) below,
all omissions with respect to the foregoing) which are done or made by the Board
in good faith, shall (x) be final, conclusive and binding on the Rights Agent
and the holders of the Right Certificates, and (y) not subject the Board to any
liability to the holders of the Right Certificates.
<PAGE>
Section 29. Successors. All the covenants and provisions of this Agreement
by or for the benefit of the Company or the Rights Agent shall bind and inure to
the benefit of their respective successors and assigns hereunder.
Section 30. Benefits of this Agreement. Nothing in this Agreement shall
be construed to give to any person or corporation other than the Company, the
Rights Agent and the registered holders of the Right Certificates (and, prior to
the Distribution Date, the Common Shares) any legal or equitable right, remedy
or claim under this Agreement; but this Agreement shall be for the sole and
exclusive benefit of the Company, the Rights Agent and the registered holders of
the Right Certificates (and, prior to the Distribution Date, the Common Shares).
Section 31. Severability. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction or
other authority to be invalid, void or unenforceable, the remainder of the
terms, provisions, covenants and restrictions of this Agreement shall remain in
full force and effect and shall in no way be affected, impaired or invalidated.
Section 32. Governing Law. This Agreement and each Right Certificate
issued hereunder shall be deemed to be a contract made under the law of the
State of Delaware and for all purposes shall be governed by and construed in
accordance with the law of such State applicable to contracts to be made and
performed entirely within such State without regard to its conflict of laws
principles.
Section 33. Counterparts. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and all such counterparts shall together constitute but one and
the same instrument.
Section 34. Descriptive Headings. Descriptive headings of the several
Sections of this Agreement are inserted for convenience only and shall not
control or affect the meaning or construction of any of the provisions hereof.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and their seals attested, all as of the day and year first above
written.
ATTEST: AMERICA ONLINE, INC.
By: /S/SHEILA A. CLARK By: /S/LENNERT J. LEADER
Lennert J. Leader
Title: Vice President, Deputy General
Counsel and Assistant Secretary
ATTEST: BANKBOSTON, N.A.
By: /S/LISA QUINN By: /S/KATHERINE ANDERSON
Katherine Anderson
Title: Account Manager
<PAGE>
EXHIBIT A
CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS
of
SERIES A-1 JUNIOR PARTICIPATING PREFERRED STOCK
of
AMERICA ONLINE, INC.
America Online, Inc., a corporation organized and existing under the
General Corporation Law of the State of Delaware (hereinafter called the
"Corporation"),
DOES HEREBY CERTIFY:
That, pursuant to authority conferred upon the Board of Directors of
this Corporation (the "Board of Directors") by the Restated Certificate of
Incorporation of this Corporation, and pursuant to the provisions of Section 151
of Title 8 of the Delaware Code, the Board of Directors, at a meeting of its
members held on May 12 , 1998, adopted a resolution providing for the
designations, preferences and relative, participating, optional or other rights,
and the qualifications, limitations or restrictions thereof, of five hundred
thousand (500,000) shares of the Corporation's Preferred Stock, par value one
cent ($.01) per share, which resolution is as follows:
RESOLVED: That pursuant to the authority granted to and vested in the
Board of Directors of this Corporation in accordance with the
provisions of the Restated Certificate of Incorporation, the
Board of Directors hereby designates a series of Preferred
Stock, par value $.01 per share, and hereby fixes the
designation and number of shares, and the relative rights,
preferences, and limitations thereof (in addition to any
provisions set forth in the Restated Certificate of
Incorporation which are applicable to preferred stock of all
classes and series) as follows:
Series A-1 Junior Participating Preferred Stock. The preferences, privileges and
restrictions granted to or imposed on the Corporation's Series A-1 Junior
Participating Preferred Stock, par value $.01 per share, or the holders thereof,
are as follows:
Section 1. Designation and Amount. The shares of such series shall be
designated as "Series A-1 Junior Participating Preferred Stock" (the "Series A-1
Preferred Stock") and the number of shares constituting the Series A-1 Preferred
Stock shall be five hundred thousand (500,000). Such number of shares may be
<PAGE>
increased or decreased by resolution of the Board of Directors; provided, that
no decrease shall reduce the number of shares of Series A-1 Preferred Stock to a
number less than the number of shares then outstanding plus the number of shares
reserved for issuance upon the exercise of outstanding options, rights or
warrants or upon the conversion of any outstanding securities issued by the
Corporation convertible into Series A-1 Preferred Stock.
Section 2. Dividends and Distributions.
(A) Subject to the rights of the holders of any shares of any
series of Preferred Stock (or any similar stock) ranking prior and
superior to the Series A-1 Preferred Stock with respect to dividends,
the holders of shares of Series A-1 Preferred Stock, in preference to
the holders of Common Stock, $.01 par value (the "Common Stock"), of
the Corporation, and of any other junior stock, shall be entitled to
receive, when, as and if declared by the Board of Directors out of
funds legally available for the purpose, quarterly dividends payable in
cash on the first day of March, June, September and December in each
year (each such date being referred to herein as a "Quarterly Dividend
Payment Date"), commencing on the first Quarterly Dividend Payment Date
after the first issuance of a share or fraction of a share of Series
A-1 Preferred Stock, in an amount per share (rounded to the nearest
cent) equal to the greater of (a) $1 or (b) subject to the provision
for adjustment hereinafter set forth, 1000 times the aggregate per
share amount of all cash dividends, and 1000 times the aggregate per
share amount (payable in kind) of all non-cash dividends or other
distributions, other than a dividend payable in shares of Common Stock
or a subdivision of the outstanding shares of Common Stock (by
reclassification or otherwise), declared on the Common Stock since the
immediately preceding Quarterly Dividend Payment Date or, with respect
to the first Quarterly Dividend Payment Date, since the first issuance
of any share or fraction of a share of Series A-1 Preferred Stock. In
the event the Corporation shall at any time declare or pay any dividend
on the Common Stock payable in shares of Common Stock, or effect a
subdivision or combination or consolidation of the outstanding shares
of Common Stock (by reclassification or otherwise than by payment of a
dividend in shares of Common Stock) into a greater or lesser number of
shares of Common Stock, then in each such case the amount to which
holders of shares of Series A-1 Preferred Stock were entitled
immediately prior to such event under clause (b) of the preceding
sentence shall be adjusted by multiplying such amount by a fraction,
the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which
is the number of shares of Common Stock that were outstanding
immediately prior to such event.
<PAGE>
(B) The Corporation shall declare a dividend or distribution
on the Series A-1 Preferred Stock as provided in paragraph (A) of this
Section immediately after it declares a dividend or distribution on the
Common Stock (other than a dividend payable in shares of Common Stock);
provided that, in the event no dividend or distribution shall have been
declared on the Common Stock during the period between any Quarterly
Dividend Payment Date and the next subsequent Quarterly Dividend
Payment Date, a dividend of $1 per share on the Series A-1 Preferred
Stock shall nevertheless be payable on such subsequent Quarterly
Dividend Payment Date.
(C) Dividends shall begin to accrue and be cumulative on
outstanding shares of Series A-1 Preferred Stock from the Quarterly
Dividend Payment Date next preceding the date of issue of such shares,
unless the date of issue of such shares is prior to the record date for
the first Quarterly Dividend Payment Date, in which case dividends on
such shares shall begin to accrue from the date of issue of such
shares, or unless the date of issue is a Quarterly Dividend Payment
Date or is a date after the record date for the determination of
holders of shares of Series A-1 Preferred Stock entitled to receive a
quarterly dividend and before such Quarterly Dividend Payment Date, in
either of which events such dividends shall begin to accrue and be
cumulative from such Quarterly Dividend Payment Date. Accrued but
unpaid dividends shall not bear interest. Dividends paid on the shares
of Series A-1 Preferred Stock in an amount less than the total amount
of such dividends at the time accrued and payable on such shares shall
be allocated pro rata on a share-by-share basis among all such shares
at the time outstanding. The Board of Directors may fix a record date
for the determination of holders of shares of Series A-1 Preferred
Stock entitled to receive payment of a dividend or distribution
declared thereon, which record date shall be not more than 60 days
prior to the date fixed for the payment thereof.
Section 3. Voting Rights. The holders of shares of Series A-1 Preferred
Stock shall have the following voting rights:
(A) Subject to the provision for adjustment hereinafter set
forth, each share of Series A-1 Preferred Stock shall entitle the
holder thereof to 1000 votes on all matters submitted to a vote of the
stockholders of the Corporation. In the event the Corporation shall at
any time declare or pay any dividend on the Common Stock payable in
shares of Common Stock, or effect a subdivision or combination or
consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares
of Common Stock) into a greater or lesser number of shares of Common
Stock, then in each such case the number of votes per share to which
holders of shares of Series A-1 Preferred Stock were entitled
immediately prior to such event shall be adjusted by multiplying such
number by a fraction, the numerator of which is the number of shares of
Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
<PAGE>
(B) Except as otherwise provided herein, in any other
Certificate of Designation creating a series of Preferred Stock or any
similar stock, or by law, the holders of shares of Series A-1 Preferred
Stock and the holders of shares of Common Stock and any other capital
stock of the Corporation having general voting rights shall vote
together as one class on all matters submitted to a vote of
stockholders of the Corporation.
(C) Except as set forth herein, or as otherwise provided by
law, holders of Series A-1 Preferred Stock shall have no special voting
rights and their consent shall not be required (except to the extent
they are entitled to vote with holders of Common Stock as set forth
herein) for taking any corporate action.
Section 4. Certain Restrictions.
(A) Whenever quarterly dividends or other dividends or
distributions payable on the Series A-1 Preferred Stock as provided in
Section 2 are in arrears, thereafter and until all accrued and unpaid
dividends and distributions, whether or not declared, on shares of
Series A-1 Preferred Stock outstanding shall have been paid in full,
the Corporation shall not:
(i) declare or pay dividends, or make any other
distributions, on any shares of stock ranking junior (either
as to dividends or upon liquidation, dissolution or winding
up) to the Series A-1 Preferred Stock;
(ii) declare or pay dividends, or make any other
distributions, on any shares of stock ranking on a parity
(either as to dividends or upon liquidation, dissolution or
winding up) with the Series A-1 Preferred Stock, except
dividends paid ratably on the Series A-1 Preferred Stock and
all such parity stock on which dividends are payable or in
arrears in proportion to the total amounts to which the
holders of all such shares are then entitled;
(iii) redeem or purchase or otherwise acquire for
consideration shares of any stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) to
the Series A-1 Preferred Stock, provided that the Corporation
may at any time redeem, purchase or otherwise acquire shares
of any such junior stock in exchange for shares of any stock
of the Corporation ranking junior (either as to dividends or
upon dissolution, liquidation or winding up) to the Series A-1
Preferred Stock; or
<PAGE>
(iv) redeem or purchase or otherwise acquire for
consideration any shares of Series A-1 Preferred Stock, or any
shares of stock ranking on a parity with the Series A-1
Preferred Stock, except in accordance with a purchase offer
made in writing or by publication (as determined by the Board
of Directors) to all holders of such shares upon such terms as
the Board of Directors, after consideration of the respective
annual dividend rates and other relative rights and
preferences of the respective series and classes, shall
determine in good faith will result in fair and equitable
treatment among the respective series or classes.
(B) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any
shares of stock of the Corporation unless the Corporation could, under
paragraph (A) of this Section 4, purchase or otherwise acquire such
shares at such time and in such manner.
Section 5. Reacquired Shares. Any shares of Series A-1 Preferred Stock
purchased or otherwise acquired by the Corporation in any manner whatsoever
shall be retired and canceled promptly after the acquisition thereof. All such
shares shall upon their cancellation become authorized but unissued shares of
Preferred Stock and may be reissued as part of a new series of Preferred Stock
subject to the conditions and restrictions on issuance set forth herein, in the
Restated Certificate of Incorporation, or in any other Certificate of
Designation creating a series of Preferred Stock or any similar stock or as
otherwise required by law.
Section 6. Liquidation, Dissolution or Winding Up. Upon any
liquidation, dissolution or winding up of the Corporation, no distribution shall
be made (1) to the holders of shares of stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) to the Series A-1
Preferred Stock unless, prior thereto, the holders of shares of Series A-1
Preferred Stock shall have received $1000 per share, plus an amount equal to
accrued and unpaid dividends and distributions thereon, whether or not declared,
to the date of such payment, provided that the holders of shares of Series A-1
Preferred Stock shall be entitled to receive an aggregate amount per share,
subject to the provision for adjustment hereinafter set forth, equal to 1000
times the aggregate amount to be distributed per share to holders of shares of
Common Stock, or (2) to the holders of shares of stock ranking on a parity
(either as to dividends or upon liquidation, dissolution or winding up) with the
Series A-1 Preferred Stock, except distributions made ratably on the Series A-1
Preferred Stock and all such parity stock in proportion to the total amounts to
which the holders of all such shares are entitled upon such liquidation,
dissolution or winding up. In the event the Corporation shall at any time
declare or pay any dividend on the Common Stock payable in shares of Common
Stock, or effect a subdivision or combination or consolidation of the
outstanding shares of Common Stock (by reclassification or otherwise than by
payment of a dividend in shares of Common Stock) into a greater or lesser number
<PAGE>
of shares of Common Stock, then in each such case the aggregate amount to which
holders of shares of Series A-1 Preferred Stock were entitled immediately prior
to such event under the proviso in clause (1) of the preceding sentence shall be
adjusted by multiplying such amount by a fraction the numerator of which is the
number of shares of Common Stock outstanding immediately after such event and
the denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
Section 7. Consolidation, Merger, etc. In case the Corporation shall
enter into any consolidation, merger, combination or other transaction in which
the shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case each share of
Series A-1 Preferred Stock shall at the same time be similarly exchanged or
changed into an amount per share, subject to the provision for adjustment
hereinafter set forth, equal to 1000 times the aggregate amount of stock,
securities, cash and/or any other property (payable in kind), as the case may
be, into which or for which each share of Common Stock is changed or exchanged.
In the event the Corporation at any time declares or pays any dividend on the
Common Stock payable in shares of Common Stock, or effects a subdivision or
combination or consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares of Common
Stock) into a greater or lesser number of shares of Common Stock, then in each
such case the amount set forth in the preceding sentence with respect to the
exchange or change of shares of Series A-1 Preferred Stock shall be adjusted by
multiplying such amount by a fraction, the numerator of which is the number of
shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
Section 8. No Redemption. The shares of Series A-1 Preferred Stock shall
not be redeemable.
Section 9. Rank. The Series A-1 Preferred Stock shall rank junior with
respect to the payment of dividends and the distribution of assets to all other
series of the Corporation's Preferred Stock.
Section 10. Amendment. The Restated Certificate of Incorporation of the
Corporation shall not be amended in any manner which would materially alter or
change the powers, preferences or special rights of the Series A-1 Preferred
Stock so as to affect them adversely without the affirmative vote of the holders
of at least two-thirds of the outstanding shares of Series A-1 Preferred Stock,
voting together as a single class.
<PAGE>
IN WITNESS WHEREOF, America Online, Inc. has caused this certificate to be
executed by its President this day of May, 1998.
-----------------------------
President
<PAGE>
EXHIBIT B
FORM OF RIGHT CERTIFICATE
CERTIFICATE NO. R- _____ RIGHTS
NOT EXERCISABLE AFTER MAY 12, 2008 OR EARLIER IF REDEMPTION OR EXCHANGE
OCCURS. THE RIGHTS ARE SUBJECT TO REDEMPTION AT $.001 PER RIGHT AND TO
EXCHANGE ON THE TERMS SET FORTH IN THE RIGHTS AGREEMENT.
RIGHT CERTIFICATE
AMERICA ONLINE, INC.
This certifies that ___________________ or registered assigns, is the
registered owner of the number of Rights set forth above, each of which entitles
the owner thereof, subject to the terms, provisions and conditions of the Rights
Agreement, dated as of May 12, 1998 (the "Rights Agreement"), between America
Online, Inc., a Delaware corporation (the "Company"), and BankBoston, N.A. (the
"Rights Agent"), to purchase from the Company at any time after the Distribution
Date (as such term is defined in the Rights Agreement) and prior to 5:00 P.M.,
Eastern Standard Time, on May 12, 2008 at the office of the Rights Agent
designated for such purpose, or at the office of its successor as Rights Agent,
one one-thousandth of a fully paid non-assessable share of Series A-1 Junior
Participating Preferred Stock, par value $.01 per share (the "Preferred
Shares"), of the Company, at a purchase price of $900 per one one-thousandth of
a Preferred Share (the "Purchase Price"), upon presentation and surrender of
this Right Certificate with the Form of Election to Purchase duly executed. The
number of Rights evidenced by this Right Certificate (and the number of one
one-thousandths of a Preferred Share which may be purchased upon exercise
hereof) set forth above, and the Purchase Price set forth above, are the number
and Purchase Price as of May 12, 1998 based on the Preferred Shares as
constituted at such date.
From and after the time any Person becomes an Acquiring Person, (as
such terms are defined in the Rights Agreement), if the Rights evidenced by this
Right Certificate are beneficially owned by (i) an Acquiring Person or an
Affiliate or Associate of any such Acquiring Person (as such terms are defined
<PAGE>
in the Rights Agreement), (ii) a transferee of any such Acquiring Person,
Associate or Affiliate who becomes a transferee after the Acquiring Person
becomes such, or (iii) under certain circumstances specified in the Rights
Agreement, a transferee of any such Acquiring Person, Associate or Affiliate who
becomes a transferee prior to or concurrently with the Acquiring Person becoming
such, such Rights shall become null and void and no holder hereof shall have any
right with respect to such Rights from and after the time any Person becomes an
Acquiring Person.
As provided in the Rights Agreement, the Purchase Price and the number
of one one-thousandths of a Preferred Share which may be purchased upon the
exercise of the Rights evidenced by this Right Certificate are subject to
modification and adjustment upon the happening of certain events.
This Right Certificate is subject to all of the terms, provisions and
conditions of the Rights Agreement, as amended from time to time, which terms,
provisions and conditions are hereby incorporated herein by reference and made a
part hereof and to which Rights Agreement reference is hereby made for a full
description of the rights, limitations of rights, obligations, duties and
immunities hereunder of the Rights Agent, the Company and the holders of the
Right Certificates. Copies of the Rights Agreement are on file at the principal
executive offices of the Company and the above-mentioned offices of the Rights
Agent.
This Right Certificate, with or without other Right Certificates, upon
surrender at the office of the Rights Agent designated for such purpose, may be
exchanged for another Right Certificate or Right Certificates of like tenor and
date evidencing Rights entitling the holder to purchase a like aggregate number
of Preferred Shares as the Rights evidenced by the Right Certificate or Right
Certificates surrendered shall have entitled such holder to purchase. If this
Right Certificate shall be exercised in part, the holder shall be entitled to
receive upon surrender hereof another Right Certificate or Right Certificates
for the number of whole Rights not exercised.
Subject to the provisions of the Rights Agreement, the Rights evidenced
by this Certificate (i) may be redeemed by the Company at a redemption price of
$.001 per Right or (ii) may be exchanged in whole or in part for shares of the
Company's Common Stock, par value $.01 per share, or other consideration as set
forth in the Rights Agreement.
No fractional Preferred Shares will be issued upon the exercise of any
Right or Rights evidenced hereby (other than fractions which are integral
multiples of one one-thousandth of a Preferred Share, which may, at the election
of the Company, be evidenced by depository receipts) but in lieu thereof a cash
payment will be made, as provided in the Rights Agreement.
No holder of this Right Certificate shall be entitled to vote or
receive dividends or be deemed for any purpose the holder of the Preferred
Shares or of any other securities of the Company which may at any time be
<PAGE>
issuable on the exercise hereof, nor shall anything contained in the Rights
Agreement or herein be construed to confer upon the holder hereof, as such, any
of the rights of a stockholder of the Company or any right to vote for the
election of directors or upon any matter submitted to stockholders at any
meeting thereof, or to give or withhold consent to any corporate action, or to
receive notice of meetings or other actions affecting stockholders (except as
provided in the Rights Agreement), or to receive dividends or subscription
rights, or otherwise, until the Right or Rights evidenced by this Right
Certificate shall have been exercised as provided in the Rights Agreement.
This Right Certificate shall not be valid or obligatory for any purpose
until it shall have been countersigned by the Rights Agent.
WITNESS the facsimile signature of the proper officers of the Company
and its corporate seal. Dated as of __________.
ATTEST: AMERICA ONLINE, INC.
By:
COUNTERSIGNED:
BANKBOSTON, N.A.
as Rights Agent
By:
Authorized Signature
<PAGE>
Form of Reverse Side of Right Certificate
FORM OF ASSIGNMENT
(To be executed by the registered holder if such
holder desires to transfer the Right Certificate.)
FOR VALUE RECEIVED ______________________________________ hereby sells,
assigns and transfers unto
- --------------------------------------------------------------
(Please print name and address of transferee)
______________________________________________________________ this Right
Certificate, together with all right, title and interest therein, and does
hereby irrevocably constitute and appoint ________________________ Attorney, to
transfer the within Right Certificate on the books of the within-named Company,
with full power of substitution.
Dated: ____________________
--------------------------------
Signature
Form of Reverse Side of Right Certificate -- continued
<PAGE>
Signature Guaranteed:
Signatures must be guaranteed by an "eligible guarantor institution" as
defined in Rule 17Ad-15 promulgated under the Securities Exchange Act of 1934,
as amended.
- --------------------------------------------------------------------------------
The undersigned hereby certifies that (1) the Rights evidenced by this
Right Certificate are not being sold, assigned or transferred by or on behalf of
a Person who is or was an Acquiring Person or an Affiliate or Associate thereof
(as defined in the Rights Agreement); and (2) after due inquiry and to the best
of the knowledge of the undersigned, the undersigned did not acquire the Rights
evidenced by this Right Certificate from any Person who is or was an Acquiring
Person, or an Affiliate or Associate thersuch terms are defined in the Rights
Agreement).
--------------------------------
Signature
<PAGE>
FORM OF ELECTION TO PURCHASE
(To be executed if holder desires to exercise Rights
represented by the Right Certificate.)
TO AMERICA ONLINE, INC.
The undersigned hereby irrevocably elects to exercise
___________________________ Rights represented by this Right Certificate to
purchase the Preferred Shares issuable upon the exercise of such Rights and
requests that certificates for such Preferred Shares be issued in the name of:
Please insert social security
or other identifying number: ______________
- --------------------------------------------------------------
(Please print name and address)
- --------------------------------------------------------------
If such number of Rights shall not be all the Rights evidenced by this Right
Certificate, a new Right Certificate for the balance remaining of such Rights
shall be registered in the name of and delivered to:
Please insert social security
or other identifying number: ______________
- --------------------------------------------------------------
(Please print name and address)
- --------------------------------------------------------------
Dated: _________________
--------------------------------
Signature
Form of Reverse Side of Right Certificate -- continued
Signature Guaranteed:
Signatures must be guaranteed by an "eligible guarantor institution" as
defined in Rule 17Ad-15 promulgated under the Securities Exchange Act of 1934,
as amended.
- --------------------------------------------------------------------------------
The undersigned hereby certifies that the Rights evidenced by this
Right Certificate are not being beneficially owned by nor are they being
exercised on behalf of (1) an Acquiring Person or an Affiliate or Associate
thereof (as defined in the Rights Agreement); and (2) after due inquiry and to
the best of the knowledge of the undersigned, the undersigned did not acquire
the Rights evidenced by this Right Certificate from any Person who is or was an
Acquiring Person or an Affiliate or Associate thereof (as such terms are defined
in the Rights Agreement).
--------------------------------
Signature
- --------------------------------------------------------------------------------
NOTICE
The signature in the Form of Assignment or Form of Election to
Purchase, as the case may be, must conform to the name as written upon the face
of this Right Certificate in every particular, without alteration or enlargement
or any change whatsoever.
In the event the certification set forth above in the Form of
Assignment or the Form of Election to Purchase, as the case may be, is not
completed, the Company and the Rights Agent will deem the beneficial owner of
the Rights evidenced by this Right Certificate to be an Acquiring Person or an
Affiliate or Associate thereof (as defined in the Rights Agreement) and such
May 15, 1998
Board of Directors
America Online, Inc.
Note 4 of Notes to Condensed Consolidated Financial Statements of America
Online, Inc., included in its Form 10-Q for the three months ended March 31,
1998, describes a change in the method of accounting for income taxes. Prior to
the third quarter of fiscal 1998, the Company followed the practice of computing
its tax provision on the assumption that current year stock option deductions
were used first to offset its financial statement income before utilizing NOLs.
Accordingly, because stock option deductions were not recognized as an expense
for financial reporting purposes, deferred tax expense was recognized and the
resulting tax benefit was credited to additional paid-in-capital in accordance
with APB Opinion No. 25, Accounting for Stock Issued to Employee, and FASB
Statement No. 109, Accounting for Income Taxes. For the first two quarters of
fiscal 1998, the Company continued this policy notwithstanding the existence of
significant net operating loss carryforwards. During the third quarter of fiscal
year 1998, the Company changed its accounting for income taxes to recognize the
tax benefits from current and unrealized prior years' stock option deductions
after recognition of net operating loss carryforwards (i.e., determined before
stock option deductions). You have advised us that you believe that the change
is to a preferable method in your circumstances because this method more
accurately reflects the incremental effect of the Company's stock option
deductions in the appropriate accounting period.
There is no specific authoritative criteria for determining a preferable method
of sequencing the utilization of net operating losses and stock option
deductions; however, based on the particular circumstance, we conclude that the
change in the method of accounting for income taxes is to an acceptable
alternative method which, based on your business judgment to make this change
for the reason cited above, is preferable in your circumstances. We have not
conducted an audit in accordance with generally accepted auditing standards of
any financial statements of the Company as of any date or for any period
subsequent to June 30, 1997 and, therefore, we do not express any opinion on any
financial statements of America Online, Inc. subsequent to that date.
Very truly yours,
/s/ Ernst & Young LLP
AMERICA ONLINE, INC.
NEWS RELEASE
AMERICA ONLINE, INC. BOARD OF DIRECTORS
APPROVES NEW SHAREHOLDER RIGHTS PLAN
Dulles, VA, May 14, 1998 -- America Online, Inc. (NYSE: AOL) today announced
that its Board of Directors has ordered the redemption of all rights granted
under its current shareholder rights plan and adopted a new shareholder rights
plan. In addition to certain other modifications, the new plan increases the
exercise price of the rights to $900, subject to adjustment, in order to reflect
the significant increase in the Company's stock price and long-term value since
the former rights plan was adopted in 1993. In adopting the new plan, the
Company stated that it was not doing so in response to any known effort to
acquire the Company but that the plan is designed to assure that all America
Online shareholders will receive fair and equal treatment in the event of any
unsolicited attempt to acquire the Company.
The new plan was implemented by declaring a dividend distribution of one
preferred share purchase right for each outstanding share of America Online's
common stock. The dividend will be distributed to shareholders of record on June
1, 1998 and will be payable as of the close of business on that date. The new
rights will expire on May 12, 2008 unless redeemed prior to that date. The
distribution of the preferred share purchase rights is not taxable to the
Company's shareholders.
Each right will entitle registered holders of the Company's common stock to
purchase one one-thousandth of a share of a new series of junior participating
preferred stock. The rights will be exercisable only if a person or group (i)
acquires 15% or more of the Company's common stock or (ii) announces a tender
offer the consummation of which would result in ownership by that person or
group of 15% or more of the common stock. Once exercisable, and in some
circumstances if certain additional conditions are met, the new rights plan
allows America Online shareholders (other than the acquiror) to purchase common
stock in America Online or in the acquiror at a substantial discount.
Prior to the acquisition by a person or group of beneficial ownership of 15% or
more of the Company's common stock, the Board of Directors of the Company may
redeem the Rights in whole, but not in part, at a price of $.001 per Right. The
redemption of the Rights may be made effective at such time, on such basis and
with such conditions as the Board of Directors in its sole discretion may
establish. Immediately upon any redemption of the Rights, the right to exercise
the Rights will terminate and the only right of the holders of Rights will be to
<PAGE>
receive the Redemption Price. A detailed description of the rights plan will be
mailed to shareholders at the time of the distribution.
America Online, Inc. [NYSE: AOL], based in Dulles, Virginia, is the world's
leader in branded interactive services and content. America Online operates two
worldwide Internet online services: AOL Interactive Services, with more than 12
million members; and CompuServe, with approximately 2 million members. America
Online also operates AOL Studios, the world's leading creator of original
interactive content. Other branded Internet services operated by America Online
include AOL.COM, the world's most accessed Web site from home; AOL Instant
Messenger, an instant communication tool available to everyone on both AOL and
the Internet; and AOL NetFind, AOL's comprehensive guide to the Internet.
