<PAGE> 1
File Pursuant to Rule 424B3
PROSPECTUS
$1,000,000,000
America Online, Inc.
[AMERICA ONLINE LOGO]
DEBT SECURITIES
PREFERRED STOCK
COMMON STOCK
------------------------
America Online, Inc., a Delaware corporation (the "Company," "AOL" or
"America Online") may offer from time to time (i) unsecured debt securities in
one or more series ("Debt Securities"), (ii) shares of preferred stock, par
value $.01 per share ("Preferred Stock"), in one or more series, or (iii) shares
of common stock, par value $.01 per share ("Common Stock") (the Debt Securities,
Preferred Stock and Common Stock are collectively referred to as "Securities"),
or any combination of the foregoing, at an aggregate initial public offering
price not to exceed $1,000,000,000 (or the equivalent thereof if Debt Securities
are denominated in one or more foreign currencies or foreign currency units), at
prices and on terms to be determined at or prior to the time of sale.
Specific terms of the Securities in respect of which this Prospectus is
being delivered will be set forth in an accompanying Prospectus Supplement (a
"Prospectus Supplement"), together with the terms of the offering of the
Securities, the initial public offering price and the net proceeds to the
Company from the sale thereof. The Prospectus Supplement will set forth, among
other matters, the following with respect to the particular Securities: (i) in
the case of Debt Securities, the specific designation, aggregate principal
amount, premium, authorized denominations, maturity, rate or method of
calculation of interest, if any, and dates for payment thereof, any redemption,
prepayment or sinking fund provisions, and the currency, currencies or currency
units in which principal, premium, if any, or interest, if any, is payable, (ii)
in the case of Preferred Stock, the designation, number of shares, liquidation
preference, dividend rate (or method of calculation thereof), dates on which
dividends shall be payable and dates from which dividends shall accrue, any
redemption or sinking fund provisions, any conversion or exchange rights, and
(iii) in the case of Common Stock, the number of shares of Common Stock offered.
The Company may sell Securities directly to purchasers or through agents
designated from time to time by the Company or to or through underwriters. If
any agents of the Company or any underwriters are involved in the sale of
Securities in respect of which this Prospectus is being delivered, the names of
such agents or underwriters and any applicable commission or discount will be
set forth in the applicable Prospectus Supplement. The net proceeds to the
Company from the sale of Securities will be the initial public offering price of
such Securities less such discount, in the case of an offering through an
underwriter, or the purchase price of such Securities less such commission, in
the case of an offering through an agent, and less, in each case, other expenses
of the Company associated with the issuance and distribution of such Securities.
This Prospectus may not be used to consummate the sale of any Securities
unless accompanied by a Prospectus Supplement.
------------------------
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 9 OF THIS PROSPECTUS.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
The date of this Prospectus is June 26, 1998.
<PAGE> 2
No person is authorized in connection with any offering made hereby to give
any information or to make any representations other than as contained or
incorporated by reference in this Prospectus, and, if given or made, such
information or representations must not be relied upon as having been authorized
by the Company. This Prospectus is not an offer to sell, or a solicitation of an
offer to buy, any Securities to any person in any jurisdiction in which it is
unlawful to make such an offer or solicitation. Neither the delivery of this
Prospectus nor any sales made hereunder shall under any circumstances create any
implication that the information contained herein is correct as of any time
subsequent to the date hereof.
AVAILABLE INFORMATION
The Company is subject to certain informational reporting requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports and other information with the Securities and
Exchange Commission (the "Commission"). These reports, proxy statements and
other information can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024 of the Commission's office at 450
Fifth Street, N.W., Judiciary Plaza, Washington, DC 20549, and at its regional
offices located at 7 World Trade Center, Suite 1300, New York, NY 10048 and
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, IL 60661. Copies
of such reports, proxy statements and other information can be obtained from the
Public Reference Section of the Commission at 450 Fifth Street, N.W., Judiciary
Plaza, Washington, DC 20549 at prescribed rates. The Commission also maintains a
Web site that contains reports, proxy and information statements and other
information regarding registrants (including America Online) that file
electronically with the Commission. The address of this site is
http://www.sec.gov. The Company's Common Stock is listed on the New York Stock
Exchange (the "NYSE") under the symbol "AOL" and reports, proxy and information
statements and other information concerning the Company may also be inspected at
the offices of the NYSE at 20 Broad Street, New York, NY 10005.
The Company has filed with the Commission in Washington, DC a registration
statement (herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act with respect to the
securities offered or to be offered hereby. This Prospectus does not contain all
of the information included in the Registration Statement, certain items of
which are omitted in accordance with the rules and regulations of the
Commission. For further information about the Company and the securities offered
hereby, reference is made to the Registration Statement and the exhibits
thereto. Any statements contained in this Prospectus concerning the provisions
of any document are not necessarily complete and, in each instance, reference is
made to the copy of such document filed as an exhibit to the Registration
Statement or otherwise filed with the Commission. Each such statement is
qualified in its entirety by such reference.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents filed by the Company with the Commission are
incorporated herein by reference:
(a) The Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 1997 (File Number 0-19836).
(b) The Company's Quarterly Reports on Form 10-Q for the quarters
ended September 30, 1997, December 31, 1997 (as amended) and March 31, 1998
(File Number 0-19836).
(c) The Company's Current Reports on Forms 8-K for events dated
September 7, 1997, November 12, 1997, November 17, 1997, January 31, 1998
(as amended on April 17, 1998), February 13, 1998 and June 5, 1998 (File
No. 0-19836).
(d) The description of the Company's capital stock, including
preferred share purchase rights, which is contained in registration
statements on Form 8-A under the Exchange Act, including any amendments or
reports filed for the purpose of updating such description.
2
<PAGE> 3
All reports and other documents subsequently filed by the Company with the
Commission pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act,
prior to the termination of this offering, shall be deemed to be incorporated by
reference herein and to be a part hereof from the date of the filing of such
reports and documents. Any statement contained herein or in a document
incorporated or deemed incorporated by reference herein shall be deemed to be
modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein, or in any subsequently filed document that also is
or is deemed to be incorporated by reference herein, modifies or supersedes such
statement. Any statement so modified or superseded will not be deemed, except as
so modified or superseded, to constitute a part of this Prospectus or the
Registration Statement.
The Company hereby undertakes to provide without charge to each person to
whom this Prospectus is delivered, on the written or oral request of such
person, a copy of any or all documents incorporated by reference herein, other
than exhibits to such documents (unless such exhibits are specifically
incorporated by reference therein). Requests for such copies should be directed
to: Sheila A. Clark, Vice President and Deputy General Counsel, America Online,
Inc., 22000 AOL Way, Dulles, Virginia 20166-9323, telephone number (703)
448-8700.
CERTAIN PERSONS PARTICIPATING IN AN OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SECURITIES, INCLUDING
OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN SUCH SECURITIES,
AND THE IMPOSITION OF A PENALTY BID, AND BIDDING FOR AND PURCHASING SHARES OF
THE COMMON STOCK IN THE OPEN MARKET DURING AND AFTER AN OFFERING.
3
<PAGE> 4
THE COMPANY
The following summary of the business of the Company is qualified in its
entirety by and should be read together with the more detailed information and
financial statements included or incorporated by reference in this Prospectus.
America Online, including its subsidiaries, is a global leader in
interactive services, with over $1.6 billion in revenues during fiscal 1997. The
Company's AOL Internet online service has approximately 12 million members
worldwide as of April 1998, a 100% increase from two years earlier. The Company
has acquired the worldwide online services businesses of CompuServe Corporation,
which has more than 2 million members worldwide as of April 1998. The Company
generates revenues principally through subscription fees, as well as
increasingly from advertising, commerce and other revenues. The Company offers
its AOL Internet online services in the U.S. and Canada and, through joint
ventures, in Austria, France, Germany, Japan, Sweden, Switzerland and the United
Kingdom, and offers access to its AOL service in over 100 countries.
The Company's mission is to become the recognized leader in the global
interactive medium that is changing the way people communicate, stay informed,
are entertained, learn, shop and do business. To accomplish this mission, the
Company's strategy is to continue to improve and expand its service by building
unique and engaging programming and other content and services for delivery into
every home through every distribution means available. The Company seeks to
establish and build its brand names, among others, America Online, AOL, AOL
Studios, CompuServe, AOL.COM and AOL Instant Messenger. By offering a broad
range of high quality Internet online branded content, products and services,
the Company seeks to build its subscriber base as a platform for increasing
subscription revenues and revenues from advertising and electronic commerce.
The Company has reorganized its operations into three interactive service
and content brand groups, AOL Interactive Services, CompuServe Interactive
Services and AOL Studios. Through its AOL Interactive Services group, which
oversees the Company's AOL Internet online service as well as the AOL.COM
website and AOL Instant Messenger, the Company offers its members a broad range
of original programming, features and tools. The AOL service includes five
screennames for each account, member service and support 24 hours a day, 7 days
a week and personal tools designed to encourage members to share information and
ideas and to customize the AOL service to best suit their individual and
business needs. Offerings include electronic mail, Buddy Lists, Instant
Messages, interactive news and magazines, entertainment, weather, sports, games,
stock quotes, financial services transactions, online shopping, Internet access
with search capabilities, software files, computing support, online classes and
auditorium events, online meeting rooms and conversations (chat), and parental,
mail and marketing controls.
On January 31, 1998, the Company completed the acquisition of the worldwide
online services businesses of CompuServe Corporation, and entered into a joint
venture agreement to operate the CompuServe European online business in
partnership with Bertelsmann AG. The Company operates the CompuServe online
services businesses for the United States and the rest of the world (other than
Europe) through a wholly-owned subsidiary, CompuServe Interactive Services,
Inc., a Delaware corporation, which comprises the Company's CompuServe
Interactive Services group. The AOL Bertelsmann joint venture is operated
through CompuServe Interactive Services Ltd., an Irish company, owned 50% each
by the Company and Bertelsmann.
Through its AOL Studios unit, the Company creates and builds original
content for current AOL online services (AOL Interactive Services and CompuServe
Interactive Services), future AOL services and AOL web based service offerings
(AOL.COM), focusing on branded properties in categories such as local content,
multiplayer games, entertainment, romance, sports and women's issues. AOL
Studios manages AOL's interest in Digital City, Inc. ("DCI"), which is owned
approximately 80% by the Company and 20% by the Tribune Company. DCI provides
local, community-based interactive content and services.
America Online was incorporated in Delaware on May 24, 1985. The Company's
principal executive offices are located at 22000 AOL Way, Dulles, Virginia
20166-9323. Its telephone number at that address is (703) 448-8700.
4
<PAGE> 5
RECENT DEVELOPMENTS
New Shareholder Rights Plan
The Company adopted a new shareholder rights plan on May 12, 1998 (the "New
Plan") that has been implemented by declaring a dividend, distributable to
shareholders of record on June 1, 1998, of one preferred share purchase right (a
"Right") for each outstanding share of Common Stock. All rights granted under
the Company's former shareholder rights plan were redeemed in conjunction with
the implementation of the New Plan. The Rights have the anti-takeover effect of
causing substantial dilution to a person or group that attempts to acquire the
Company on terms not approved by the Company's Board of Directors. The Rights
will expire on May 12, 2008 unless redeemed by the Company prior to that date.
See "Risk Factors -- Anti-Takeover Defense Provisions" and "Description of
Capital Stock -- New Shareholder Rights Plan."
Investment in the FamilyEducation Company
In April 1998, the Company and the FamilyEducation Company announced that
they entered into a strategic relationship to build online school communities.
The Company will invest in the FamilyEducation Company, and the FamilyEducation
Network (FEN) will become an anchor tenant within the Company's Research & Learn
and Families channels under a four-year exclusive carriage agreement. The
Company will promote FEN online and conduct a local parental awareness campaign
designed to involve Company members nationwide. See "Risk
Factors -- Relationships with Providers."
NetChannel Acquisition
In May 1998, the Company announced that it will acquire NetChannel, Inc., a
Web-enhanced television company. The acquisition, which was consummated on June
16, 1998, will allow the Company to use NetChannel's programming development
experience and technology in connection with the development of an AOL-branded
service to offer interactive content developed for the television medium. The
total purchase price was approximately $29 million, comprised of approximately
$17 million in cash and $12 million of net assumed liabilities.
NetChannel, Inc. is a Web-based personalized television company that was
founded in 1996. The NetChannel service, launched in September 1997, was
discontinued on May 3, 1998. It had approximately 10,000 subscribers. Its
hardware partner was Thomson Consumer Electronics, which supported the
NetChannel service on its RCA Network Computers. See "Risk
Factors -- Acquisitions."
Mirabilis Acquisition
The Company acquired Mirabilis Ltd, an Israel-based company, on June 5,
1998 pursuant to an Agreement of Purchase and Sale under which AOL acquired the
assets of Mirabilis, including its ICQ instant communications and chat
technology, for $287 million in cash and contingent payments starting in AOL's
fiscal year 2001 of up to $120 million over three years based on certain
specified growth performance standards. A substantial portion of the $287
million purchase payment is expected to be accounted for as in-process R&D in
the Company's fourth quarter ending June 30, 1998. The business will continue to
be based largely in Tel Aviv and operated as a free Web-based service with its
own brand identity. Launched in November 1996, ICQ's instant communications and
chat technology informs users when family, friends and business colleagues are
online and enables them to exchange messages in real-time. As of June 1998, more
than 12 million users have registered to use the technology. See "Risk
Factors -- Acquisitions."
PRO FORMA FINANCIAL INFORMATION
The following represents an update to the unaudited pro forma information
previously disclosed in the Company's Current Report on Form 8-K dated January
31, 1998, as amended by the Form 8-K/A filed on April 17, 1998 (the "Form 8-K"),
in connection with the transactions related to the Company's previously-
reported acquisition of the worldwide interactive services division of
CompuServe Corporation (the "COLS Business") and disposition of the Company's
network services subsidiary, ANS Communications, Inc.
5
<PAGE> 6
("ANS"), pursuant to a Purchase and Sale Agreement dated as of September 7, 1997
by and among the Company, ANS and WorldCom, Inc. (such transactions, the
"Purchase and Sale"). The unaudited pro forma combined statement of operations
data for the nine month period ended March 31, 1998 gives effect to the Purchase
and Sale as if it had occurred on July 1, 1997. The unaudited pro forma combined
statement of operations data for the nine month period ended March 31, 1998
combines the unaudited historical statement of operations of the Company for the
nine months ended March 31, 1998 with the unaudited historical statement of
operations of the COLS Business for the seven months ended January 31, 1998,
reflecting the pro forma adjustments for the transactions discussed in the notes
thereto.
The pro forma combined statement of operations is presented for
illustrative purposes only and does not purport to be indicative of the
operating results that would have actually occurred if the transactions
reflected therein had been in effect on the dates indicated, nor is it
indicative of the future operating results of the Company. The pro forma
adjustments are based upon information and assumptions available at the time of
the filing of this Prospectus. The pro forma information should be read in
conjunction with the Company's June 30, 1997 financial statements and notes
thereto contained in its Form 10-K dated September 29, 1997 and the description
of the Purchase and Sale contained in the Form 8-K.
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE 9 MONTH PERIOD ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
-------------------------- --------------------------------------------------------------------
SEVEN MONTHS
NINE MONTHS ENDED LESS
ENDED JANUARY 31, ----------------------
MARCH 31, 1998 COLS
1998 COLS EUROPEAN OTHER PRO FORMA
AOL BUSINESS(1) ANS(2) BUSINESS(3) SUBTOTAL ADJUSTMENTS(4) COMBINED
----------- ------------ -------- ----------- ---------- -------------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues.................. $1,807,274 $276,378 $28,356 $ 93,393 $1,961,903 $ (20,189)A $1,941,714
Costs and expenses:
Cost of revenues...... 1,170,742 220,755 5,928 74,326 1,311,243 (112,345)A,C,D 1,198,898
Marketing............. 278,810 60,443 17,437 15,355 306,461 (3,512)A 302,949
Product development... 66,751 7,734 -- 74,485 (175)A 74,310
General and
administrative...... 164,509 35,223 4,854 14,251 180,627 (4,002)A 176,625
Amortization of
goodwill............ 8,064 629 2,569 -- 6,124 10,242 B 16,366
Restructuring
charge.............. 33,796 -- -- -- 33,796 -- 33,796
Acquired research &
development......... 9,700 9,700 9,700
Settlement charge..... (1,009) -- -- -- (1,009) -- (1,009)
---------- -------- ------- -------- ---------- --------- ----------
Total costs and
expenses........ 1,731,363 324,784 30,788 103,932 1,921,427 (109,792) 1,811,635
---------- -------- ------- -------- ---------- --------- ----------
Income (loss) from
operations.............. 75,911 (48,406) (2,432) (10,539) 40,476 89,603 130,079
Other income, net......... 8,832 -- 507 -- 8,325 -- 8,325
---------- -------- ------- -------- ---------- --------- ----------
Income (loss) before
provision for income
taxes................... 84,743 (48,406) (1,925) (10,539) 48,801 89,603 138,404
Provision for income
taxes................... -- -- 228 -- (228) 228 E --
---------- -------- ------- -------- ---------- --------- ----------
Net income (loss)......... $ 84,743 $(48,406) $(1,697) $(10,539) $ 48,573 $ 89,831 $ 138,404
========== ======== ======= ======== ========== ========= ==========
Net income per common
share -- diluted........ $ 0.35 $ 0.56
Net income per common
share -- basic.......... $ 0.41 $ 0.65
Weighted average shares
outstanding -- diluted
(5)..................... 243,109 243,109
Weighted average shares
outstanding -- basic
(5)..................... 208,793 208,793
</TABLE>
6
<PAGE> 7
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
1. Reflects the results of operations of the COLS Business acquired by AOL for
the seven months ended January 31, 1998. The statement of operations of the
COLS Business includes the results of operations of CompuServe Corporation's
worldwide interactive services division including the results of operations
of its wholly-owned subsidiary Spry, Inc. (Spry).
Depreciation and amortization on the COLS Business statement of operations
has been included in general and administrative expense for purposes of these
pro formas.
2. Reflects the results of operations of the ANS business sold to WorldCom.
The pro forma statement of operations reflect the elimination of all
operating costs associated with the ANS business sold except for an estimate
of the costs associated with operating the network which provides access to
the Company's interactive service and which the Company expects to be an
ongoing cost of its business.
In generating third party revenues ANS primarily used the same personnel and
network infrastructure that it used to provide access to AOL's
internet/online service. Management has made its best estimate of the
incremental variable costs it believes ANS incurred to generate third party
revenues. General and administrative expenses incurred at ANS, including
compensatory stock option charges related to the sale of ANS of approximately
$8.9 million, have been allocated to AOL based on the ratio that ANS revenues
generated from AOL bear to total ANS revenues on a standalone basis.
3. Reflects the results of operations of the European component of the COLS
Business (the "COLS European Business"), a 50% interest in which was sold to
Bertelsmann, AG, AOL's European partner, concurrent with the Purchase and
Sale.
The statement of operations has been prepared as if the COLS European
Business had operated as an independent standalone entity for the period
presented. The financial statement includes allocations of corporate
administrative and network service costs. Management believes that these
allocations are reasonable. This financial statement is not necessarily
indicative of the financial position and results of operations that would
have occurred had the COLS European Business been an independent standalone
entity.
4. For purposes of these pro formas, the COLS Business has been valued at
approximately $280 million. The $280 million valuation is allocated $130
million to the domestic and rest-of-world online business, including the
assets of Spry, and $150 million to the COLS European Business, 50% of which
was sold by AOL to Bertelsmann concurrent with the Purchase and Sale.
A. Management intends to dispose of the net assets of Spry within one year of
the date of acquisition. Accordingly, the results of operations of Spry
have been eliminated from the pro forma statements of operations. A
portion of the $130 million purchase price has been allocated to Spry's
net assets based upon the estimated net realizable value, including the
expected operating results of Spry for the period prior to disposition.
B. Reflects the excess of the fair market value of the domestic and
rest-of-world interactive service business (other than the COLS European
Business) over the net book value of its historical assets and
liabilities, after the recording of valuation adjustments. This excess
represents intangible assets and goodwill of $80,904. The goodwill and
intangible assets will be amortized on a straight line basis over five
years.
C. Reflects the impact of the pricing contained in a Master Agreement for
Data Communications (the "Services Agreement") entered into in connection
with the Purchase and Sale, as well as the impact of the amortization of
the deferred network services credit. See Note 4D. The Company has
retroactively applied the pricing it obtained in the Services Agreement by
removing ANS's estimated historical cost of operating its portion of AOL's
dial up network and applying the pricing from the Services Agreement as if
the transaction was consummated at the beginning of each period presented
as required by
7
<PAGE> 8
Rule 11-02(b)(6) of Regulation S-X. The Company does not believe that the
benefit reflected in the cost of revenues is indicative of the impact the
Services Agreement will have on the future operations of the Company
because the Services Agreement is conditioned upon volume commitments
substantially greater than the Company's volume requirements in the pro
forma periods presented.
D. Reflects the amortization of the deferred network service credit on a
straight-line basis over the term of the Services Agreement as a reduction
to network service expense, which is included in cost of revenues. The
deferred network service credit reflects the excess of the fair market
value of assets received over the book value of the ANS business sold.
E. Reflects the adjustment of the pro forma combined tax provision to conform
the effective tax rate of the pro forma combined results of operations to
equal the effective tax rate of AOL on a standalone basis.
5. Certain amounts in the pro forma combined statement of operations for the
year ended June 30, 1997 have been reclassified to conform to current year
presentation. On March 16, 1998 the Company effected a two-for-one stock
split of the outstanding shares of common stock that was effected by
dividending one additional share for each share owned as of the record date,
February 23, 1998. Accordingly, all data shown in the accompanying unaudited
pro forma combined financial statements has been adjusted to effect the stock
split.
8
<PAGE> 9
RISK FACTORS
An investment in the Securities being offered by this Prospectus involves a
high degree of risk. In addition to the other information contained in this
Prospectus or incorporated herein by reference, prospective investors should
carefully consider the following risk factors before purchasing the Securities
offered hereby. This Prospectus contains and incorporates by reference
forward-looking statements within the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995. Reference is made in particular to the
discussion set forth under "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1997 (the "Form 10-K") and in the Company's
quarterly reports on Form 10-Q for the quarters ended September 30, 1997,
December 31, 1997 and March 31, 1998 and in "Business" in the Company's Form
10-K, incorporated by reference into this Prospectus. Such statements are based
on current expectations that involve a number of uncertainties including those
set forth in the risk factors below. Actual results could differ materially from
those projected in the forward-looking statements.
COMPETITION
The Company competes in a rapidly-changing marketplace with a wide range of
other companies in the communications, advertising, entertainment and
information, media, direct mail and commerce fields. Current competitors of the
Company for usage, subscribers, advertising and electronic commerce include
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
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. See "Summary -- Recent
Developments" and "Risk Factors -- Changing Technologies."
Some of the present competitors and potential future competitors of the
Company may have greater financial, technical, marketing and/or personnel
resources than the Company. The competitive environment could (i) require price
reductions and increased spending on marketing, network capacity, content
procurement and product development, (ii) limit the Company's opportunities to
enter into and/or renew agreements with content providers and distribution
partners, (iii) limit its ability to develop new products and services, (iv)
limit its ability to continue to grow its subscriber base, (v) result in
increased attrition in the Company's subscriber base and (vi) negatively impact
the Company's ability to meet its business objective of changing its business
model into one in which increasingly more revenues and profits are generated
from sources other than
9
<PAGE> 10
online service subscription revenues, such as advertising and electronic
commerce. Any of the foregoing events could have an impact on revenues or result
in an increase in costs as a percentage of revenues, which could have a material
adverse effect on the Company's business, financial condition and operating
results.
NETWORK CAPACITY AND OPERATIONS
Among other pricing plans, the Company has adopted a flat-rate pricing plan
which provides access to AOL for a flat monthly fee with no additional hourly
charges (the "Flat-Rate Plan"). Due to the rapid growth in subscriber usage
resulting from flat-rate pricing, the Company and its data communications access
providers have at times experienced difficulty in providing adequate server and
network capacity, respectively. As a result, members at times have encountered
difficulty in accessing and using the AOL service. In response to such
difficulties, the Company has increased its investments in system capacity,
including constructing a new data center and adding network modems, but there
can be no assurance that access problems will not recur.
America Online employs a diversified portfolio approach in designing,
structuring and operating its network services. America Online manages AOLnet, a
TCP/IP network of third-party network service providers, including Sprint
Corporation, BBN Corporation, a part of GTE Internetworking, and WorldCom,
Inc.'s wholly-owned subsidiaries ANS Communications, Inc. (acquired from the
Company) and UUNET Technologies, Inc. The Company anticipates continuing to
build AOLnet, in order to increase its network capacity, provide its members
with higher speed access, and reduce data network costs on a per-hour basis.
There can be no assurance that the AOLnet build-out or other efforts to expand
server and network capacity will be successful, or if they are successful, that
customer demand will develop for the capacity created, and the failure to do so
could have a material adverse effect on the Company's business, financial
condition and operating results. Also, a substantial majority of the Company's
network services are provided on a fixed cost or minimum commitments basis.
Accordingly, if the number of subscribers or usage significantly decreases,
network costs will not correspondingly decrease; as a result, any such decrease
in subscribers or usage could cause a material adverse effect on the Company's
business, financial condition and operating results.
In addition, supply shortages exist from time to time for local exchange
carrier lines from local telephone companies that the Company requires to expand
network capacity. The buildout of AOLnet requires a substantial investment in
telecommunications equipment, which the Company is financing principally through
leasing and asset-backed debt financing. Supply shortages or the failure to
obtain the necessary financing for the buildout of AOLnet could have a material
adverse effect on the Company's ability to expand network capacity.
The CompuServe Interactive Service relies on data network services provided
pursuant to a Network Services Agreement between AOL, CompuServe Incorporated, a
wholly-owned subsidiary of WorldCom, and UUNet Technologies, Inc., with an
initial term ending December 31, 2002, subject to possible extension by AOL
under certain circumstances. AOL has committed to use exclusively the network
services for the CompuServe service provided under such agreement through 1999
and for at least 66% of the usage under the CompuServe service for the remainder
of the initial term of the agreement. The smooth operation of and access
capacity on the CompuServe service are dependent on the network services
provided under the agreement and are subject to disruptions resulting from
service failures by the network services provider.
The Company's operations are dependent on its ability to protect its
computer equipment and the information stored in its data centers against damage
by fire, power loss, telecommunications failures, service failures by third
party network service providers, unauthorized intrusions and other events.
Although the Company believes it has taken prudent measures to reduce the risk
of interruption in its operations for such causes, there can be no assurance
that these measures will be sufficient. Any damage or failure that causes
interruptions in the Company's operations could have a material adverse effect
on its business, financial condition and operating results. Although the Company
carries property and business interruption insurance to cover its operations,
the coverage may not be adequate to compensate for losses that may occur.
Software defects and server and network expansion could also cause service
outages, and although the Company has made efforts to reduce outages, there can
be no assurance that its efforts to reduce outages will be successful,
10
<PAGE> 11
and the failure to do so could have a material adverse effect on the Company's
business, financial condition and operating results.
INCREASING USAGE AND COSTS; EFFECTS OF PRICE INCREASE ON COSTS, MARGINS AND
REVENUES
The Company's business model relies both on online service revenues from
subscription fees and on revenues generated from non-subscription based sources
such as advertising, electronic commerce and sales of merchandise. Since the
adoption of the Flat-Rate Plan in December 1996, the Company has experienced
greater increases than anticipated in the average total usage hours per member
per month (from less than 17 hours per member per month in the third quarter of
fiscal 1997 to over 23 hours per member per month in the third quarter of fiscal
1998). While the growth and management of AOLnet have provided overall lower per
hour data communications costs, such lower costs have been and are expected to
continue to be offset by the additional costs of network services resulting from
increased total usage hours.
In response to increasing usage and consequent data communications costs,
the Company has, effective April 1, 1998, increased the monthly fee under the
Flat-Rate Plan by $2.00 per month (the "Price Increase"), in an effort to
increase subscription-based revenues in an amount sufficient to offset the
additional costs associated with additional usage and to fund continuing
additional investments needed to maintain and enhance the member experience. Any
resulting increase in subscription-based revenues may not be sufficient to
offset increasing usage and data communications costs or to fund the investments
necessary to maintain and enhance the member experience.
The Price Increase may result in new competitive pricing actions or
offerings or cause existing competitive offerings to the AOL service to become
more attractive to AOL members. The Price Increase may have a material adverse
effect on the Company's performance by reducing demand for the AOL service among
existing or prospective subscribers, slowing or reversing subscriber growth or
reducing subscriber retention rates. If subscriber growth slows or reverses or
retention rates decrease, growth in the advertising, commerce and other revenues
may slow and may require that the Company increase its marketing expenses beyond
what may otherwise be anticipated. The Company believes that reduced growth in
advertising, commerce and other revenues or that increases in marketing expenses
would cause a reduction in gross and operating margins. Therefore, there can be
no assurance that the Price Increase will increase subscription-based revenues
or that the Price Increase will not lead to a significant decrease in
non-subscription based revenues. The described effects of the Price Increase on
costs, margins, revenues and competitive conditions could have a material
adverse effect on the Company's business, financial condition and operating
results.
CHANGING BUSINESS CONDITIONS
The changing business model and resulting expansion of its business and
changes in its operations have placed significant demands on the Company's
administrative, operational and financial resources. The Company's future
performance will depend in part on its ability to manage its growth and to adapt
its administrative, operational and financial control systems to the needs of an
expanded and evolving entity. The failure of management to anticipate, respond
to and manage changing business conditions could have a material adverse effect
on the Company's business, financial condition and results of operations.
SEASONALITY
The growth in subscriber acquisitions and usage 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.
11
<PAGE> 12
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.
RELATIONSHIPS WITH PROVIDERS
As the marketplace in which the Company operates changes and as competition
intensifies in the online services markets, it may become more difficult or
expensive to secure and maintain relationships with electronic commerce,
advertising, marketing, technology and content providers. Although the Company
does not believe that any single relationship is material to its business,
financial condition, or results of operations, there can be no assurance that
the failure to establish new relationships or that the loss of a number of
relationships or significantly increased costs or decreased revenues, as the
case may be, to maintain relationships would not have a material adverse effect
on the Company's business, financial condition and operating results. In
addition, the Company faces risks 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 issuer at the time the warrants are
earned.
ACQUISITIONS
Since the beginning of January 1996, the Company has acquired or merged
with, among others, the Johnson-Grace Company, the ImagiNation Network, Inc.
(doing business as WorldPlay Entertainment), LightSpeed Media, Inc., Extreme
Fans, Inc., Personal Library Software, Total New York, Inc. (which was acquired
by Digital City, Inc., an approximately 80%-owned subsidiary of the Company)
and, on January 31, 1998, the worldwide online services businesses of CompuServe
Corporation ("CompuServe Interactive"). The Company announced in May, 1998 that
it had agreed to acquire NetChannel, Inc., a Web-enhanced television company and
announced on June 8, 1998 that it had acquired the assets of Mirabilis,
including its ICQ instant communications and chat technology. There can be no
assurance that CompuServe Interactive, NetChannel and Mirabilis can be
successfully managed and operated by the Company. See "Summary -- Recent
Developments." Acquisitions by the Company involve risks, including successful
integration and management of acquired technology, operations and personnel. The
integration of acquired businesses may also lead to the loss of key employees of
the acquired companies and diversion of the attention of existing management
from other ongoing business concerns. In addition, acquisitions may result in
significant charges for in-process research and development or other matters.
Any of these factors could have a material adverse effect on the Company's
business, financial condition and operating results.
NEW BUSINESSES, OPERATIONS AND INTERNATIONAL VENTURES
The Company pursues new products and services to leverage its technological
and other competencies. There can be no assurance that the Company will be able
to successfully develop, or achieve commercial acceptance for, these new
products and services. Demand for and market acceptance of new products and
services are subject to a high degree of uncertainty.
Critical issues concerning commercial activities via the Internet,
including security, reliability, cost, ease of use and access, remain unresolved
and may adversely impact the growth and development of the Company's business.
The Company offers its online services in the United States and Canada, and
through joint ventures, in Austria, France, Germany, Japan, Sweden, Switzerland,
and the United Kingdom. The Company has recently announced its intention to
offer online services, through a joint venture, in Australia and, through a
license and distribution arrangement, in Hong Kong in 1998. In addition, the
Company's acquisition of CompuServe's business has significantly expanded its
presence in Europe and Japan. There can be no assurance that the Company or its
partners will be able to, or to continue to, successfully market, sell and
deliver its services in
12
<PAGE> 13
these markets. In addition, there are certain significant risks inherent in
doing business on an international level, such as laws governing content that
differ greatly from those in the United States, unexpected changes in regulatory
requirements, political risks, export restrictions, export controls relating to
encryption technology, tariffs and other trade barriers, fluctuations in
currency exchange rates, issues regarding intellectual property and potentially
adverse tax consequences, any or all of which could impact the Company's
international operations. See "Risk Factors -- Government Regulation; Legal
Uncertainties."
CHANGING TECHNOLOGIES
As the marketplace in which the Company operates continues to evolve, the
Company will be required to offer its existing services through advanced
distribution technologies such as cable, satellite, broadcast and enhanced
telephone distribution, and to offer advanced services such as voice and
full-motion video. Currently, Internet online services are accessed primarily
through standard telephone systems by personal computers via modems. As online
and interactive digital services, including Internet access, entertainment and
information services become accessible by cable, satellite, television or other
consumer electronic devices, and become commercially deliverable over other
wired conduits such as digital subscriber lines, coaxial and fiber optic cable,
the Company may have to develop new technology or modify its existing technology
to keep pace with these developments. Competitors of the Company have better
access to those technologies and could gain advantage by implementing new access
technologies more quickly and at lower cost than the Company. Pursuit of these
technological advances will require substantial expenditures, and there can be
no assurance that the Company will succeed in adapting its online service
business to alternate access devices and conduits as rapidly or successfully as
its competitors. See "Risk Factors -- Competition."
GOVERNMENT REGULATION; LEGAL UNCERTAINTIES
In the United States and most countries in which the Company conducts its
major operations, the Company is not currently subject to direct regulation
other than pursuant to laws applicable to businesses generally. Adverse changes
in the legal or regulatory environment relating to the interactive online
services and Internet industry in the United States, Europe, Japan or elsewhere
could have a material adverse effect on the Company's business, financial
condition and operating results. A number of legislative and regulatory
proposals from various international bodies and foreign and domestic governments
in the areas of telecommunication regulation, access charges, encryption
standards, content regulation, consumer protection, intellectual property,
privacy, electronic commerce, and taxation, among others, are now under
consideration. The Company is unable at this time to predict which, if any, of
such proposals may be adopted and, if adopted, whether such proposals would have
an adverse effect on the Company's business, financial condition and operating
results. See also "Risk Factors -- New Businesses, Operations and International
Ventures."
Moreover, the manner in which existing domestic and foreign laws (including
Directive 95/46/EC of the European Parliament and of the European Council on the
protection of individuals with regard to the processing of personal data and on
the free movement of such data, to become effective in the individual member
states by October 24, 1998) will or may be applied to online service and
Internet access providers is uncertain, as is the effect on the Company's
business given different possible applications. Similarly, the Company is unable
to predict the effect on the Company from the potential future application of
various domestic and foreign laws governing content, export restrictions,
privacy, consumer protection, export controls on encryption technology, tariffs
and other trade barriers, intellectual property and taxes.
RELIANCE ON KEY PERSONNEL
The Company's success depends in part upon the performance of its executive
officers and other key employees. The loss of the services of one or more of its
key personnel could have a material adverse effect on the Company's business,
financial condition and operating results. The Company depends on its continued
ability to attract and retain highly skilled and qualified personnel.
Competition for such personnel is intense, and there can be no assurance that
the Company will be successful in attracting and retaining such personnel.
13
<PAGE> 14
VOLATILITY OF SHARE PRICE
The market price of the Company's Common Stock has a history of volatility.
Factors such as quarterly variations in financial results and membership growth
and usage, new pricing strategies, the announcement of technological
innovations, mergers, acquisitions, strategic partnerships or new product
offerings by the Company or its competitors, the entrance of new competitors
into the online services market and changes in content providers may have a
significant impact on the market price of the Common Stock. Moreover, the Common
Stock could experience price volatility based on market conditions.
LITIGATION AND OTHER PROCEEDINGS
The Company is a party to various litigation matters, investigations and
proceedings, including a lawsuit filed on behalf of shareholders against the
Company and its chief executive officer and chief financial officer alleging
violations of the federal securities laws. Such class action lawsuit was filed
in federal court in Alexandria, Virginia against the Company, its officers,
outside directors and its auditors in February 1997. In July 1997, the court
dismissed the complaint, finding that the allegations of the complaint were not
sufficiently specific. The plaintiffs filed an amended complaint in September
1997, this time naming the Company, its chief executive officer and its chief
financial officer as defendants. Although the case is scheduled to be tried in
1998, the Company has entered into a preliminary agreement to settle the action,
subject to negotiation of final documentation and approval by the court. As part
of the settlement, the Company will make up to $35 million in payments, a
substantial portion of which it expects to be covered by insurance. A
shareholder derivative suit related to such class action lawsuit has also been
filed in Delaware chancery court against certain current and former directors of
the Company and remains pending. The Company has entered into a preliminary
agreement to settle the shareholder derivative suit, subject to negotiation of
final documentation and approval by the Delaware chancery court, on terms that
will not have a material adverse effect on the financial condition or results of
operations 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. While the complaint originally sought more than $100 million in damages
and requested injunctive relief, the parties are now engaged in settlement
discussions, the trial date has been deferred, and it appears likely that the
case will be settled on terms that will not have a material adverse effect on
the financial condition or results of operations of the Company.
In late May 1998, the Company entered into an Assurance of Voluntary
Compliance with representatives of the offices of 44 State Attorneys General
regarding the Company's advertising, consumer and marketing practices. The
settlement provides that the Company will provide additional disclosures in its
advertising and marketing materials and individualized notice to members of
material changes in the member agreement or increases in member fees. The
Assurance also requires the Company to make a $2.6 million payment to the states
to cover investigative costs and fund future Internet consumer protection and
education efforts and contains other terms which will not have a material
adverse effect on the financial condition or results of operations of the
Company.
The costs and other effects of pending or future litigation, governmental
investigations, legal and administrative cases and proceedings (whether civil or
criminal), settlements, judgments and investigations, claims and changes in
those matters (including those matters described above), and developments or
assertions by or against the Company relating to intellectual property rights
and intellectual property licenses, could have a material adverse effect on the
Company's business, financial condition and operating results.
YEAR 2000 POTENTIAL PROBLEMS
The Company utilizes a significant number of computer software programs and
operating systems across its entire organization, including applications used in
operating the AOL Service, the 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
14
<PAGE> 15
modification, or even possibly replacement of such applications, may be
necessary. The Company has appointed a Year 2000 Task Force to perform an audit
to assess the scope of the Company's risks and bring its applications into
compliance. This Task Force is currently in the process of completing its
identification of applications that are not Year 2000 compliant. In addition,
the Company has begun to ask its vendors, joint venture partners and content
partners about their progress in identifying and addressing problems that their
computer systems may face in correctly processing date information related to
the Year 2000.
The Company is conducting its Year 2000 audit, and 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.
FUTURE SALES OF COMMON STOCK
Sales of substantial amounts of Common Stock in the public market could
adversely affect prevailing market prices of the Common Stock. Shareholders of
approximately 5,419,834 shares of America Online Common Stock (outstanding or
issuable upon exercise of certain rights), as well as approximately 6,705,790
shares, subject to adjustment, issuable upon conversion of the Company's 4%
Convertible Subordinated Notes, have rights of registration of their shares for
resale. In connection with a master data communications agreement, the Company
has issued a warrant to purchase 7,200,000 restricted shares of the Company's
common stock under the terms of which the Company would be required to register
such shares on Form S-3 within 45 days of a full exercise. Additional shares are
subject to registration statements on Form S-8 in connection with the Company's
stock option plans. The sales of any of the foregoing shares could have a
material adverse effect on the then-prevailing market price of Common Stock.
ANTI-TAKEOVER DEFENSE PROVISIONS
The Company's Restated Certificate of Incorporation and Restated By-laws
contain certain provisions that could have the effect of making it more
difficult for a third party to acquire, or of discouraging a third party from
attempting to acquire, control of the Company. Certain of such provisions allow
the Company to issue preferred stock with rights senior to those of its Common
Stock and impose various procedural and other requirements which could make it
more difficult for stockholders to effect certain corporate actions. In
addition, the Company has a new shareholder rights plan pursuant to which
holders of Common Stock are entitled to one preferred share purchase right for
each outstanding share of Common Stock they hold, exercisable under certain
defined circumstances involving a potential change of control. The Rights have
the anti-takeover effect of causing substantial dilution to a person or group
that attempts to acquire the Company in terms not approved by the Company's
Board of Directors. See "Description of Capital Stock -- New Shareholder Rights
Plan." The foregoing provisions could limit the price that certain investors
might be willing to pay in the future for shares of Common Stock.
USE OF PROCEEDS
Except as set forth in the Prospectus Supplement for a specific offering,
the net proceeds from the sale of Securities will be applied by the Company for
general corporate purposes.
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the ratio of earnings to fixed charges for
the nine months ended March 31, 1998 and for each of the last five fiscal years.
<TABLE>
<CAPTION>
NINE MONTHS ENDED FISCAL YEAR ENDED JUNE 30,
MARCH 31, -----------------------------------
1998 1997 1996 1995 1994 1993
----------------- ---- ----- ---- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to Fixed Charges........ 1.88x -- 4.63x -- 4.98x 4.39x
</TABLE>
15
<PAGE> 16
For purposes of computing the ratio of earnings to fixed charges, earnings
represent earnings from continuing operations before income taxes plus interest
expense on indebtedness, amortization of debt discount and premium and the
portion of rent expense deemed representative of an interest factor. Fixed
charges include interest on indebtedness (whether expensed or capitalized),
amortization of debt discount and premium and the portion of rent expense deemed
representative of an interest factor. For the years ended June 30, 1997 and
1995, the deficiency of earnings to fixed charges totaled $448.3 million and
$16.0 million, respectively.
DESCRIPTION OF DEBT SECURITIES
The following statements with respect to the Debt Securities are summaries
of, and are subject to, the detailed provisions of an indenture (the
"Indenture") to be entered into by the Company and one or more commercial banks,
as trustee (the "Trustee"), a copy of which is filed as an exhibit to the
Registration Statement. The following summary of certain provisions of the
Indenture does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, all of the provisions of the Indenture, including
the definitions therein of certain terms. Wherever defined terms of the
Indenture are referred to herein or in a Prospectus Supplement, such defined
terms are incorporated herein or therein by reference.
The Debt Securities may be issued from time to time in one or more series.
The particular terms of each series of Debt Securities will be described in a
Prospectus Supplement relating to such series.
GENERAL
The Indenture does not limit the aggregate principal amount of Debt
Securities that can be issued thereunder. The Debt Securities may be issued in
one or more series as may be authorized from time to time by the Company. The
Debt Securities will be senior unsecured obligations of the Company.
The applicable Prospectus Supplement will describe the following terms of
the series of Debt Securities with respect to which this Prospectus is being
delivered:
(a) The title of the Debt Securities of the series;
(b) Any limit on the aggregate principal amount of the Debt Securities
of the series that may be authenticated and delivered under the Indenture;
(c) The person to whom any interest on a Debt Security shall be
payable, if other than the person in whose name that Debt Security is
registered on the Regular Record Date;
(d) The date or dates on which the principal and premium, if any, of
the Debt Securities of the series are payable;
(e) The rate or rates (which may be fixed or variable) at which the
Debt Securities will bear interest, if any, or the method of determining
the rate or rates, the date or dates from which such interest will accrue,
the Interest Payment Dates on which any such interest will be payable or
the method by which the dates will be determined, the Regular Record Date
for any interest payable on any Interest Payment Date and the basis upon
which interest will be calculated if other than that of a 360-day year of
twelve 30-day months;
(f) The place or places where the principal of and any premium and
interest on the Debt Securities of the series will be payable if other than
the Borough of Manhattan, The City of New York;
(g) The period or periods within which, the price or prices at which
and the terms and conditions upon which the Debt Securities of the series
may be redeemed, in whole or in part, at the option of the Company or
otherwise;
(h) The obligation of the Company, if any, to redeem, purchase or
repay the Debt Securities of the series pursuant to any sinking fund or
analogous provisions or at the option of the holders and the period or
periods within which, the price or prices at which and the terms and
conditions upon which such Debt
16
<PAGE> 17
Securities shall be redeemed, purchased or repaid, in whole or in part,
pursuant to such obligation, and any provisions for the remarketing of such
Debt Securities;
(i) The terms, if any, upon which the Debt Securities of the series
may be convertible into or exchanged for other Debt Securities of the
Company and the terms and conditions upon which the conversion or exchange
shall be effected, including the initial conversion or exchange price or
rate, the conversion or exchange period and any other additional
provisions;
(j) The denominations in which any Debt Securities will be issuable,
if other than denominations of $1,000 and any integral multiple thereof;
(k) The currency, currencies or currency units in which payment of
principal of and any premium and interest on Debt Securities of the series
shall be payable if other than United States dollars;
(l) Any index, formula or other method used to determine the amount of
payments of principal of and any premium and interest on the Debt
Securities;
(m) If the principal amount payable at the stated maturity of Debt
Securities of the series will not be determinable as of any one or more
dates prior to the stated maturity, the amount that will be deemed to be
the principal amount as of any date for any purpose, including the
principal amount thereof which will be due and payable upon any maturity
other than the stated maturity or which will be deemed to be outstanding as
of any date (or, in any such case, the manner in which the deemed principal
amount is to be determined), and if necessary, the manner of determining
the equivalent thereof in United States currency;
(n) If the principal of or any premium or interest on any Debt
Securities is to be payable, at the election of the Company or the holders,
in one or more currencies or currency units other than that or those in
which such Debt Securities are stated to be payable, the currency,
currencies or currency units in which payment of the principal of and any
premium and interest on such Debt Securities shall be payable, and the
periods within which and the terms and conditions upon which such election
is to be made;
(o) If other than the principal amount thereof, the portion of the
principal amount of the Debt Securities which will be payable upon
declaration of the acceleration of the maturity thereof or provable in
bankruptcy;
(p) The applicability of, and any addition to or change in, the
covenants and definitions then set forth in the Indenture or in the terms
then set forth in the Indenture relating to permitted consolidations,
mergers or sales of assets;
(q) Any changes or additions to the provisions of the Indenture
dealing with defeasance, including the addition of additional covenants
that may be subject to the Company's covenant defeasance option;
(r) Whether any of the Debt Securities are to be issuable in permanent
global form and, if so, the Depositary or Depositaries for such Global
Security and the terms and conditions, if any, upon which interests in such
Debt Securities in global form may be exchanged, in whole or in part, for
the individual Debt Securities represented thereby in definitive registered
form, and the form of any legend or legends to be borne by the Global
Security in addition to or in lieu of the legend referred to in the
Indenture;
(s) The Trustee and any authenticating or paying agents, transfer
agents or registrars;
(t) The terms, if any, of any guarantee of the payment of principal,
premium and interest with respect to Debt Securities of the series and any
corresponding changes to the provisions of the Indenture as then in effect;
(u) The terms, if any, of the transfer, mortgage, pledge or assignment
as security for the Debt Securities of the series of any properties,
assets, moneys, proceeds, securities or other collateral, including whether
certain provisions of the Trust Indenture Act are applicable and any
corresponding changes to provisions of the Indenture as then in effect;
17
<PAGE> 18
(v) Any addition to or change in the Events of Default with respect to
the Debt Securities of the series and any change in the right of the
Trustee or the holders to declare the principal, premium and interest with
respect to the Debt Securities due and payable; and
(w) Any other terms of the Debt Securities not inconsistent with the
provisions of the Indenture.
Debt Securities may be issued as Original Issue Discount Securities to be
sold at a substantial discount from their principal amount. United States
federal income tax consequences and other special considerations applicable to
any such Original Issue Discount Securities will be described in the Prospectus
Supplement relating thereto.
If any of the Debt Securities are sold for any foreign currency or currency
unit or if principal of, premium, if any, or interest, if any, on any of the
Debt Securities is payable in any foreign currency or currency unit, the
restrictions, elections, tax consequences, specific terms and other information
with respect to such Debt Securities and such foreign currency or currency unit
will be specified in the Prospectus Supplement relating thereto.
EXCHANGE, REGISTRATION, TRANSFER AND PAYMENT
Unless otherwise indicated in the applicable Prospectus Supplement, payment
of principal, premium, if any, and interest, if any, on the Debt Securities will
be payable, and the exchange of and the transfer of Debt Securities will be
registrable, at the office or agency of the Company maintained for such purpose
in the Borough of Manhattan, The City of New York and at any other office or
agency maintained for such purpose. Unless otherwise indicated in the applicable
Prospectus Supplement, the Debt Securities will be issued in denominations of
$1,000 or integral multiples thereof. No service charge will be made for any
registration of transfer or exchange of Debt Securities, but the Company may
require payment of a sum sufficient to cover any tax or other governmental
charge imposed in connection therewith.
All moneys paid by the Company to a Paying Agent for the payment of
principal, premium, if any, or interest, if any, on any Debt Security which
remain unclaimed for two years after such principal, premium or interest has
become due and payable may be repaid to the Company, and thereafter the holder
of such Debt Security may look only to the Company for payment thereof.
In the event of any redemption, the Company shall not be required to (a)
issue, register the transfer of or exchange Debt Securities of any series during
a period beginning at the opening of business 15 days before the day of the
mailing of a notice of redemption of Debt Securities of that series to be
redeemed and ending at the close of business on the day of such mailing or (b)
register the transfer of or exchange any Debt Security, or portion thereof,
called for redemption, except the unredeemed portion of any Debt Security being
redeemed in part.
BOOK-ENTRY SYSTEM
The provisions set forth below in this section headed "Book-Entry System"
will apply to the Debt Securities of any series if the Prospectus Supplement
relating to such series so indicates.
Unless otherwise indicated in the applicable Prospectus Supplement, the
Debt Securities of such series will be represented by one or more global
securities (collectively, a "Global Security") registered in the name of The
Depository Trust Company (the "Depositary") or a nominee of the Depositary
identified in the Prospectus Supplement relating to such series. Except as set
forth below, a Global Security may be transferred, in whole but not in part,
only to the Depositary or another nominee of the Depositary.
Upon the issuance of a Global Security, the Depositary will credit, on its
book-entry registration and transfer system, the respective principal amounts of
the Debt Securities represented by such Global Security to the accounts of
institutions that have accounts with the Depositary or its nominee
("participants"). The accounts to be credited will be designated by the
underwriters, dealers or agents. Ownership of beneficial interests in a Global
Security will be limited to participants or persons that may hold interests
through participants. Ownership of interests in such Global Security will be
shown on, and the transfer of those
18
<PAGE> 19
ownership interests will be effected only through, records maintained by the
Depositary (with respect to participants' interests) and such participants (with
respect to the owners of beneficial interests in such Global Security). The laws
of some jurisdictions may require that certain purchasers of securities take
physical delivery of such securities in definitive form. Such limits and laws
may impair the ability to transfer beneficial interests in a Global Security.
So long as the Depositary, or its nominee, is the registered holder and
owner of such Global Security, the Depositary or such nominee, as the case may
be, will be considered the sole owner and holder of the related Debt Securities
for all purposes of such Debt Securities and for all purposes under the
Indenture. Except as set forth below or as otherwise provided in the applicable
Prospectus Supplement, owners of beneficial interests in a Global Security will
not be entitled to have the Debt Securities represented by such Global Security
registered in their names, will not receive or be entitled to receive physical
delivery of Debt Securities in definitive form and will not be considered to be
the owners or holders of any Debt Securities under the Indenture or such Global
Security. Accordingly, each person owning a beneficial interest in a Global
Security must rely on the procedures of the Depositary and, if such person is
not a participant, on the procedures of the participant through which such
person owns its interest, to exercise any rights of a holder of Debt Securities
under the Indenture of such Global Security. The Company understands that under
existing industry practice, in the event the Company requests any action of
holders of Debt Securities or if an owner of a beneficial interest in a Global
Security desires to take any action that the Depositary, as the holder of such
Global Security is entitled to take, the Depositary would authorize the
participants to take such action, and that the participants would authorize
beneficial owners owning through such participants to take such action or would
otherwise act upon the instructions of beneficial owners owning through them.
The Depositary has advised the Company as follows: The Depositary is a
limited purpose trust company organized under the laws of the State of New York,
a member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code and a "clearing agency"
registered under the Exchange Act. The Depositary was created to hold securities
of its participants and to facilitate the clearance and settlement of securities
transactions among its participants in such securities through electronic
book-entry changes in accounts of the participants, thereby eliminating the need
for physical movement of securities certificates. The Depositary's participants
include securities brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations, some of whom (or their
representatives) own the Depositary. Access to the Depositary's book-entry
system is also available to others such as banks, brokers, dealers and trust
companies that clear through or maintain a custodial relationship with a
participant, either directly or indirectly. The Depositary agrees with and
represents to its participants that it will administer its book-entry system in
accordance with its rules and by-laws and requirements of law.
Payment of principal of and premium, if any, and interest, if any, on Debt
Securities represented by a Global Security will be made to the Depositary or
its nominee, as the case may be, as the registered owner and holder of such
Global Security.
The Company expects that the Depositary, upon receipt of any payment of
principal, premium, if any, or interest, if any, in respect of a Global
Security, will credit immediately participants' accounts with payments in
amounts proportionate to their respective beneficial interests in the principal
amount of such Global Security as shown on the records of the Depositary. The
Company expects that payments by participants to owners of beneficial interests
in a Global Security held through such participants will be governed by standing
instructions and customary practices, as is now the case with securities held
for the accounts of customers in bearer form or registered in "street name," and
will be the responsibility of such participant. Neither the Company nor the
Trustee nor any agent of the Company or the Trustee will have any responsibility
or liability for any aspect of the records relating to, or payments made on
account of, beneficial ownership interests in a Global Security or for
maintaining, supervising or reviewing any records relating to such beneficial
ownership interests or for any other aspect of the relationship between the
Depositary and its participants or the relationship between such participants
and the owners of beneficial interests in such Global Security owning through
such participants.
19
<PAGE> 20
Unless and until it is exchanged in whole or in part for Debt Securities in
definitive form, a Global Security may not be transferred except as a whole by
the Depositary to a nominee of such Depositary or by a nominee of such
Depositary to such Depositary or another nominee of such Depositary.
Unless otherwise provided in the applicable Prospectus Supplement, Debt
Securities represented by a Global Security will be exchangeable for Debt
Securities in definitive form of like tenor as such Global Security in
denominations of $1,000 and in any greater amount that is an integral multiple
thereof if (a) the Depositary notifies the Company and the Trustee that it is
unwilling or unable to continue as Depositary for such Global Security or if at
any time the Depositary ceases to be a clearing agency registered under the
Exchange Act and a successor Depositary is not appointed by the Company within
90 days, (b) the Company in its sole discretion determines not to have all of
the Debt Securities represented by a Global Security and notifies the Trustee
thereof or (c) there shall have occurred and be continuing an Event of Default
or an event which, with the giving of notice or lapse of time, or both, would
constitute an Event of Default with respect to the Debt Securities. Any Debt
Security that is exchangeable pursuant to the preceding sentence is exchangeable
for Debt Securities registered in such names as the Depositary shall instruct
the Trustee. It is expected that such instructions may be based upon directions
received by the Depositary from its participants with respect to ownership of
beneficial interests in such Global Security. Subject to the foregoing, a Global
Security is not exchangeable except for a Global Security or Global Securities
of the same aggregate denominations to be registered in the name of the
Depositary or its nominee.
COVENANTS OF THE COMPANY
The covenants, if any, that will apply to a particular series of Debt
Securities will be set forth in the Prospectus Supplement relating to such
series of Debt Securities. Except as otherwise provided in the applicable
Prospectus Supplement with respect to any series of Debt Securities, the Company
is not restricted by the Indenture from incurring, assuming or becoming liable
for any type of debt or other obligations, from paying dividends or making
distributions on its capital stock or purchasing or redeeming its capital stock.
The Indenture does not require the maintenance of any financial ratios or
specified levels of net worth or liquidity. In addition, the Indenture does not
contain any provision that would require the Company to repurchase or redeem or
otherwise modify the terms of any of its Debt Securities upon a change in
control or other events involving the Company that may adversely affect the
creditworthiness of the Debt Securities.
DEFEASANCE AND COVENANT DEFEASANCE
The Indenture provides that, if such provision is made applicable to the
Debt Securities of any series pursuant to the provisions of the Indenture, the
Company may elect (a) to defease and be discharged from any and all obligations
in respect of such Debt Securities except for certain obligations to register
the transfer or exchange of such Debt Securities, to replace temporary,
destroyed, stolen, lost or mutilated Debt Securities, to maintain paying
agencies and to hold monies for payment in trust ("defeasance") or (b) (i) not
to comply with certain restrictive covenants (including the covenants to be set
forth in the Prospectus Supplement relating to such Debt Securities) and (ii) to
deem the occurrence of any event referred to in clauses (d) and (e) under
"Events of Default" below not to be or result in an Event of Default if, in each
case with respect to the Outstanding Debt Securities of such series on or after
the date certain conditions are satisfied ("covenant defeasance"), in either
case upon the deposit with the Trustee (or other qualifying trustee), in trust,
of money or U.S. Government Obligations, which through the payment of interest
and principal with respect thereto in accordance with their terms will provide
money in an amount sufficient to pay the principal of and any premium and
interest on the Debt Securities of such series on the respective stated
maturities and any mandatory sinking fund payments or analogous payments on the
days payable, in accordance with the terms of the Indenture and the Debt
Securities of such series. Such a trust may only be established if, among other
things, the Company has delivered to the Trustee an opinion of counsel to the
effect that the holders of the outstanding Debt Securities of such series will
not recognize income, gain or loss for federal income tax purposes as a result
of such deposit, defeasance or covenant defeasance and will be subject to
federal income tax on the same amount, and in the same manner and at the same
times as would have been the case if such deposit, defeasance or covenant
defeasance had not occurred. Such opinion, in the case of defeasance under
20
<PAGE> 21
clause (a) above, must refer to and be based upon a ruling of the Internal
Revenue Service or a change in applicable federal income tax laws occurring
after the date of the Indenture. The Prospectus Supplement relating to a series
may further describe the provisions, if any, permitting such defeasance or
covenant defeasance with respect to the Debt Securities of a particular series.
EVENTS OF DEFAULT
The following events are defined in the Indenture as "Events of Default"
with respect to a series of Debt Securities (unless such event is specifically
inapplicable to a particular series as described in the Prospectus Supplement
relating thereto): (a) failure to pay any interest on any Debt Security of that
series when due, continued for 30 days; (b) failure to pay principal of or any
premium on any Debt Security of that series when due; (c) failure to deposit any
sinking fund payment, when due, in respect of any Debt Security of that series;
(d) with respect to each series of Debt Securities, failure to perform any other
covenant of the Company applicable to that series, continued for 90 days after
written notice to the Company by the Trustee or to the Company and the Trustee
by the Holders of at least 25% in principal amount of the outstanding Debt
Securities of that series specifying such failure, requiring it to be remedied
and stating that such notice is a "Notice of Default"; (e) (i) failure of the
Company to make any payment by the end of any applicable grace period after
maturity of indebtedness, which term as used in the Indenture means obligations
(other than Nonrecourse Obligations or the Debt Securities of such series) of
the Company for borrowed money or evidenced by bonds, debentures, notes or
similar instruments ("Indebtedness") in an amount in excess of $10,000,000 and
continuance of such failure, or (ii) the acceleration of Indebtedness in an
amount in excess of $10,000,000 because of a default with respect to such
Indebtedness without such Indebtedness having been discharged or such
acceleration having been cured, waived, rescinded or annulled, in the case of
(i) or (ii) above, for a period of 30 days after written notice to the Company
by the Trustee or to the Company and the Trustee by the holders of at least 25%
in principal amount of the outstanding Debt Securities of that series specifying
such failure or acceleration, requiring it to be remedied and stating that such
notice is a "Notice of Default"; provided, however, that if any such failure or
acceleration referred to in (i) or (ii) above shall cease or be cured, waived,
rescinded or annulled, then the Event of Default by reason thereof shall be
deemed not to have occurred; (f) certain events of bankruptcy, insolvency or
reorganization involving the Company; and (g) any other Event of Default
provided with respect to Debt Securities of that series.
Subject to the provisions of the Indenture relating to the duties of the
Trustee during default to act with the required standard of care, the Trustee
will be under no obligation to exercise any of its rights or powers under the
Indenture at the request or direction of any of the holders, unless such holders
shall have offered to the Trustee reasonable indemnity. Subject to such
provisions for the indemnification of the Trustee, the holders of a majority in
principal amount of the outstanding Debt Securities of any series will have the
right to direct the time, method and place of conducting any proceeding for any
remedy available to the Trustee, or exercising any trust or power conferred on
the Trustee, with respect to the Debt Securities of that series.
The Indenture provides that the Company will deliver to the Trustee, within
120 days after the end of each fiscal year, a brief certificate from the
principal executive, financial or accounting officer or treasurer of the Company
as to his or her knowledge of the Company's compliance (without regard to any
period of grace or requirement of notice) with all conditions and covenants of
the Indenture.
If an Event of Default with respect to Debt Securities of any series at the
time outstanding occurs and is continuing, either the Trustee or the holders of
at least 25% in principal amount of the outstanding Debt Securities of that
series by notice as provided in the Indenture may declare the principal amount
(or, if the Debt Securities of that series are Original Issue Discount
Securities, such portion of the principal amount as may be specified in the
terms of that series) of all the Debt Securities of that series to be due and
payable immediately. At any time after a declaration of acceleration with
respect to Debt Securities of any series has been made, but before a judgment or
decree for payment of money has been obtained by the Trustee, the holders of a
majority in principal amount of the outstanding Debt Securities of that series
may, under certain circumstances, rescind and annul such acceleration.
21
<PAGE> 22
No holder of any Debt Security of any series will have any right to
institute any proceeding with respect to the Indenture or for any remedy
thereunder, unless such holder shall have previously given to the Trustee
written notice of a continuing Event of Default and unless the holders of at
least 25% in principal amount of the outstanding Debt Securities of that series
shall have made written request, and offered reasonable indemnity, to the
Trustee to institute such proceeding as trustee, and the Trustee shall not have
received from the holders of a majority in principal amount of the outstanding
Debt Securities of that series a direction inconsistent with such request and
shall have failed to institute such proceeding within 60 days. Such limitations
generally do not apply, however, to a suit instituted by a holder of a Debt
Security for the enforcement of payment of the principal or interest on such
Debt Security on or after the respective due dates expressed in such Debt
Security.
MODIFICATION, WAIVER AND MEETINGS
The Company and the Trustee may enter into supplemental indentures without
the consent of the holders of Debt Securities for one or more of the following
purposes:
(a) To evidence the succession of another person to the Company
pursuant to the provisions of the Indenture relating to consolidations,
mergers and sales of assets and the assumption by the successor of the
covenants, agreements and obligations of the Company in the Indenture and
in the Debt Securities;
(b) To surrender any right or power conferred upon the Company by the
Indenture, to add to the covenants of the Company such further covenants,
restrictions, conditions or provisions for the protection of the holders of
all or any series of Debt Securities as the Board of Directors of the
Company shall consider to be for the protection of the holders of the Debt
Securities, and to make the occurrence, or the occurrence and continuance,
of a default in any of the additional covenants, restrictions, conditions
or provisions a default or an Event of Default under the Indenture
(provided, however, that with respect to any such additional covenant,
restriction, condition or provision, the supplemental indenture may provide
for a period of grace after default, which may be shorter or longer than
that allowed in the case of other defaults, may provide for an immediate
enforcement upon the default, may limit the remedies available to the
Trustee upon the default, or may limit the right of holders of a majority
in aggregate principal amount of any or all series of Debt Securities to
waive the default);
(c) To cure any ambiguity or omission or to correct or supplement any
provision contained in the Indenture, in any supplemental indenture or in
any Debt Securities that may be defective or inconsistent with any other
provision contained therein, to convey, transfer, assign, mortgage or
pledge any property to or with the Trustee, or to make such other
provisions in regard to matters or questions arising under the Indenture,
in each case as shall not adversely affect the interests of any holders of
Debt Securities of any series in any material respect;
(d) To modify or amend the Indenture in such a manner as to permit the
qualification of the Indenture or any supplemental indenture under the
Trust Indenture Act as then in effect;
(e) To add guarantees with respect to any or all of the Debt
Securities or to secure any or all of the Debt Securities;
(f) To make any change that does not adversely affect the rights of
any holder;
(g) To add to, change or eliminate any of the provisions of the
Indenture with respect to one or more series of Debt Securities, so long as
any such addition, change or elimination not otherwise permitted under the
Indenture shall (1) neither apply to any Debt Security of any series
created prior to the execution of the supplemental indenture and entitled
to the benefit of the provision nor modify the rights of the holders of any
Debt Security with respect to the provision, or (2) become effective only
when there is no such Debt Security outstanding;
(h) To evidence and provide for the acceptance of appointment by a
successor or separate Trustee with respect to the Debt Securities of one or
more series and to add to or change any of the provisions of
22
<PAGE> 23
the Indenture as shall be necessary to provide for or facilitate the
administration of the Indenture by more than one Trustee;
(i) To establish the form or terms of Debt Securities of any series;
and
(j) To provide for uncertificated Debt Securities in addition to or in
place of certificated Debt Securities (provided that the uncertificated
Debt Securities are issued in registered form for purposes of Section
163(f) of the Internal Revenue Code or in a manner such that the
uncertificated Debt Securities are described in Section 163(f)(2)(B) of
such code).
Modifications and amendments of the Indenture may be made by the Company
and the Trustee with the consent of the holders of a majority in principal
amount of the outstanding Debt Securities of each series affected by such
modification or amendment; provided, however, that no such modification or
amendment may, without the consent of the holder of each outstanding Debt
Security affected thereby, (a) change the stated maturity of the principal of,
or any installment of principal of or interest on, any Debt Security, (b) reduce
the principal amount of, rate of interest on or any premium payable upon the
redemption of any Debt Security, (c) reduce the amount of principal of an
Original Issue Discount Security payable upon acceleration of the maturity
thereof, (d) change the place of payment where, or the coin or currency in
which, any Debt Security or any premium or interest thereon is payable, (e)
impair the right to institute suit for the enforcement of any payment on or with
respect to any Debt Security after the stated maturity, redemption date or
repayment date, (f) reduce the percentage in principal amount of outstanding
Debt Securities of any series, the consent of whose holders is required for
modification or amendment of the Indenture or for waiver of compliance with
certain provisions of the Indenture or for waiver of certain defaults or (g)
modify any of the provisions set forth in this paragraph except to increase any
such percentage or to provide that certain other provisions of the Indenture may
not be modified or waived without the consent of the holder of each outstanding
Debt Security affected thereby.
The holders of a majority in principal amount of the outstanding Debt
Securities of each series may, on behalf of the holders of all the Debt
Securities of that series, waive, insofar as that series is concerned,
compliance by the Company with certain restrictive provisions of the Indenture.
The holders of a majority in principal amount of the outstanding Debt Securities
of each series may, on behalf of all holders of Debt Securities of that series
and any coupons appertaining thereto, waive any past default under the Indenture
with respect to Debt Securities of that series, except a default (a) in the
payment of principal of or any premium or interest on any Debt Security of such
series or (b) in respect of a covenant or provision of the Indenture which
cannot be modified or amended without the consent of each holder of outstanding
Debt Securities of the affected series.
The Indenture provides that in determining whether the holders of the
requisite principal amount of the outstanding Debt Securities have given any
request, demand, authorization, direction, notice, consent or waiver thereunder
or whether a quorum is present at a meeting of holders of Debt Securities (a)
the principal amount of an Original Issue Discount Security that shall be deemed
to be outstanding shall be the amount of the principal thereof that would be due
and payable as of the date of such determination upon acceleration of the
maturity thereof, (b) the principal amount of a Debt Security denominated in
other than U.S. dollars shall be the U.S. dollar equivalent, determined on the
date of original issuance of such Debt Security, of the principal amount of such
Debt Security (or, in the case of an Original Issue Discount Security, the U.S.
dollar equivalent on the date of original issuance of such Debt Security of the
amount determined as provided in (a) above of such Debt Security) and (c) Debt
Securities owned by the Company or any Subsidiary of the Company shall be
disregarded and deemed not to be Outstanding.
23
<PAGE> 24
CONSOLIDATION, MERGER AND SALE OF ASSETS
The Company may not consolidate with or merge with or into any person, or
convey, transfer or lease all or substantially all of its assets, or permit any
person to consolidate with or merge into the Company, unless the following
conditions have been satisfied:
(a) Either (1) the Company shall be the continuing person in the case
of a merger or (2) the resulting, surviving or transferee person, if other
than the Company (the "Successor Company"), shall be a corporation
organized and existing under the laws of the United States, any State or
the District of Columbia and shall expressly assume all the obligations of
the Company under the Debt Securities and the Indenture;
(b) Immediately after giving effect to the transaction (and treating
any indebtedness that becomes an obligation of the Successor Company or any
Subsidiary of the Company as a result of the transaction as having been
incurred by the Successor Company or the Subsidiary at the time of the
transaction), no default, Event of Default or event that, after notice or
lapse of time, would become an Event of Default under the Indenture would
occur or be continuing; and
(c) The Company shall have delivered to the Trustee an officers'
certificate and an opinion of counsel, each stating that the consolidation,
merger, transfer or lease complies with the Indenture.
Upon any consolidation by the Company with, or merger by the Company into,
any other person or any conveyance, transfer or lease of the properties and
assets of the Company as an entirety or substantially as an entirety as
described in the preceding paragraph, the Successor Company resulting from such
consolidation or into which the Company is merged or the transferee or lessee to
which such conveyance, transfer or lease is made, will succeed to, and be
substituted for, and may exercise every right and power of, the Company under
the Indenture, and thereafter, except in the case of a lease, the predecessor
(if still in existence) will be released from its obligations and covenants
under the Indenture and all outstanding Debt Securities.
NOTICES
Except as otherwise provided in the Indenture, notices to holders of Debt
Securities will be given by mail to the addresses of such holders as they appear
in the Debt Security Register.
TITLE
Prior to due presentment of a Debt Security for registration of transfer,
the Company, the Trustee and any agent of the Company or the Trustee may treat
the person in whose name such Debt Security is registered as the owner of such
Debt Security for the purpose of receiving payment of principal of and any
premium and any interest (other than defaulted interest or as otherwise provided
in the applicable Prospectus Supplement) on such Debt Security and for all other
purposes whatsoever, whether or not such Debt Security be overdue, and neither
the Company, the Trustee nor any agent of the Company or the Trustee shall be
affected by notice to the contrary.
REPLACEMENT OF DEBT SECURITIES
Any mutilated Debt Security will be replaced by the Company at the expense
of the Holder upon surrender of such Debt Security to the Trustee. Debt
Securities that become destroyed, stolen or lost will be replaced by the Company
at the expense of the Holder upon delivery to the Trustee of the Debt Security
or evidence of the destruction, loss or theft thereof satisfactory to the
Company and the Trustee. In the case of a destroyed, lost or stolen Debt
Security, an indemnity satisfactory to the Trustee and the Company may be
required at the expense of the holder of such Debt Security before a replacement
Debt Security will be issued.
GOVERNING LAW
The Indenture and the Debt Securities will be governed by, and construed in
accordance with, the laws of the State of New York.
24
<PAGE> 25
REGARDING THE TRUSTEE
The Company may appoint a separate Trustee for any series of Debt
Securities. As used herein in the description of a series of Debt Securities,
the term "Trustee" refers to the Trustee appointed with respect to the series of
Debt Securities.
The Indenture contains certain limitations on the right of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases or to realize for its own account on certain property received in
respect of any such claim as security or otherwise. The Trustee will be
permitted to engage in certain other transactions; however, if it acquires any
conflicting interest and there is a default under the Debt Securities of any
series for which the Trustee serves as trustee, the Trustee must eliminate such
conflict or resign.
The Trustee or its affiliate may provide certain banking and financial
services to the Company in the ordinary course of business.
DESCRIPTION OF CAPITAL STOCK
The statements set forth under this heading with respect to AOL's Restated
Certificate of Incorporation (the "AOL Charter"), AOL's Restated By-laws (the
"AOL By-laws") and the Delaware General Corporation Law (the "DGCL") are brief
summaries thereof and do not purport to be complete. Such statements are subject
to the detailed provisions of the AOL Charter, the AOL By-laws and the DGCL.
The authorized capital stock of the Company consists of 600,000,000 shares
of Common Stock, $.01 par value ("Common Stock"), and 5,000,000 shares of
Preferred Stock, $.01 par value ("Preferred Stock"). As of June 5, 1998, there
were 218,903,661 shares of Common Stock outstanding and no shares of Preferred
Stock outstanding. In May 1998, the Board of Directors designated 500,000 shares
of the Company's Preferred Stock as Series A-1 Junior Participating Preferred
Stock in connection with the establishment of a new shareholder rights plan. See
"-- New Shareholder Rights Plan."
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Stockholders casting a plurality of votes of the stockholders entitled
to vote in an election of directors may elect those directors standing for
election. Holders of Common Stock are entitled to receive ratably such
dividends, if any, as may be declared by the Board of Directors out of funds
legally available therefore, subject to any preferential dividend rights of
Preferred Stock that may be issued at such future time or times. Upon the
liquidation, dissolution or winding up of the Company the holders of Common
Stock are entitled to receive ratably, according to the number of shares of
Common Stock held by them, the net assets of the Company available after the
payment of all debts and other liabilities and subject to the prior rights of
Preferred Stock that may be issued at such time. Holders of Common Stock have no
preemptive, subscription, redemption or conversion rights. The outstanding
shares of Common Stock are fully paid and nonassessable. The rights, preferences
and privileges of holders of Common Stock are subject to the rights of the
holders of shares of any series of Preferred Stock which the Company may
designate and issue in the future.
PREFERRED STOCK
The Board of Directors is authorized, subject to any limitations prescribed
by law, without further stockholder approval, to issue from time to time up to
an aggregate of 5,000,000 shares of the Company's authorized class of
undesignated Preferred Stock, in one or more series. Each such series of
Preferred Stock shall have such number of shares, designations, preferences,
powers, qualifications and special or relative rights or privileges as shall be
determined by the Board of Directors, which may include, among others, dividend
rights, voting rights, redemption and sinking fund provisions, liquidation
preferences, conversion rights and preemptive rights.
25
<PAGE> 26
The stockholders of the Company have granted the Board of Directors
authority to issue Preferred Stock and to determine its rights and preferences
to eliminate delays associated with a stockholder vote on specific issuances.
The rights of the holders of Common Stock will be subject to the rights of
holders of any Preferred Stock issued in the future. The issuance of Preferred
Stock, while providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of making it
more difficult for a third party to acquire, or of discouraging a third party
from acquiring, a majority of the outstanding voting stock of the Company.
Terms
The specific terms of any Preferred Stock being offered (the "Offered
Preferred Stock") will be described in the Prospectus Supplement relating to
such Offered Preferred Stock. The preceding summaries of certain provisions of
the Preferred Stock are subject to, and are qualified in their entirety by
reference to, the Certificate of Incorporation and the Certificate of
Designation relating to the particular class or series of Preferred Stock.
Reference is made to the Prospectus Supplement relating to the Offered Preferred
Stock offered thereby for specific terms, including:
(a) The designation of such Preferred Stock.
(b) The number of shares of such Preferred Stock offered, the
liquidation preference per share and the initial offering price of such
Preferred Stock.
(c) The dividend rate(s), period(s) and/or payment date(s) or
method(s) of calculation thereof applicable to such Preferred Stock.
(d) The date from which dividends on such Preferred Stock shall
accumulate, if applicable.
(e) The procedures for any auction and remarketing, if any, of such
Preferred Stock.
(f) The provision of a sinking fund, if any, for such Preferred Stock.
(g) The provision for redemption, if applicable, of such Preferred
Stock.
(h) Any listing of such Preferred Stock on any securities exchange.
(i) The terms and conditions, if applicable, upon which such Preferred
Stock will be convertible into or exchangeable for Common Stock, and
whether at the option of the holder thereof or the Company.
(j) Whether such Preferred Stock will rank senior or junior to or on a
parity with any other class or series of Preferred Stock.
(k) The voting rights, if any, of such Preferred Stock.
(l) Any other specific terms, preferences, rights, limitations or
restrictions of such Preferred Stock.
(m) A discussion of Federal income tax considerations applicable to
such Preferred Stock.
WARRANT
In connection with an agreement with one of the Company's communications
providers, the Company has issued an outstanding warrant, exercisable through
March 31, 1999, subject to certain performance standards specified in the
agreement, to purchase 7,200,000 shares of Common Stock at a price of
approximately $1.95 per share.
CHARTER PROVISIONS
The Company's Restated Certificate of Incorporation and Restated By-Laws
provide for a classified Board of Directors. The Board of Directors currently
consists of eight members, classified into three classes. At each annual meeting
of stockholders, directors are elected for a full term of three years to succeed
those directors whose terms are expiring.
26
<PAGE> 27
The Company's Restated Certificate of Incorporation includes provisions
eliminating the personal liability of the Company's directors for monetary
damages resulting from breaches of their fiduciary duty to the extent permitted
by Delaware law. The Company's Restated Certificate of Incorporation and
Restated By-Laws include provisions indemnifying the Company's directors and
officers to the fullest extent permitted by Delaware law, including under
circumstances in which indemnification is otherwise discretionary, and
permitting the Board of Directors to grant indemnification to employees and
agents to the fullest extent permitted by Delaware law.
The Company's Restated By-Laws require that nominations for the Board of
Directors made by the stockholder and proposals by stockholders seeking to have
any business conducted at a stockholders' meeting comply with particular notice
procedures. A notice by a stockholder of a planned nomination or of proposed
business must generally be given not later than 60 days nor earlier than 90 days
prior to the date of the meeting. A stockholder's notice of nomination must
include particular information about the stockholder, the nominee and any
beneficial owner on whose behalf the nomination is made, and a notice from a
stockholder proposing business to be brought before the meeting must describe
such business and include information about the stockholder making the proposal,
any beneficial owner on whose behalf the proposal is made, and any other
stockholder known to be supporting the proposal.
In addition, the Restated Certificate of Incorporation contains a "fair
price" provision (the "Fair Price Provision") providing that certain "Business
Combinations" with any "Interested Stockholder" (as each term is defined in the
Fair Price Provision) may not be consummated without an 80% stockholder vote,
unless either approved by at least a majority of the Disinterested Directors (as
defined in the Fair Price Provision) or certain minimum price and procedural
requirements are met. An "Interested Stockholder" is defined to include any
individual or entity who is, or is an affiliate and during the prior two years
was, the beneficial owner of more than 15% of the voting stock of the Company. A
"Business Combination" includes, among other things, (i) a merger or
consolidation, (ii) the sale or other disposition of 10% or more of the
Company's assets, (iii) the issuance of stock having a value in excess of 10% of
the fair market value of the Company's Common Stock, (iv) any reclassification
or recapitalization which increases the proportionate share holdings of an
Interested Stockholder and (v) the adoption of a plan of liquidation or
dissolution proposed by or on behalf of an Interested Stockholder. A significant
purpose of the Fair Price Provision is to deter a purchaser from using
two-tiered pricing and similar unfair or discriminatory tactics in an attempt to
acquire the Company. The affirmative vote of the holders of 80% of the voting
power of the Company is required to amend or repeal the Fair Price Provision or
adopt any provision inconsistent with it.
The Company's Restated Certificate of Incorporation and Restated By-Laws
provide that any action required or permitted to be taken by the stockholders of
the Company shall be taken only at a duly called annual or special meeting of
the stockholders, or by the unanimous written consent of all stockholders
entitled to vote. Special meetings may be called only by the Board of Directors
or the Chief Executive Officer of the Company. In addition, the Restated
Certificate of Incorporation provides that the Board of Directors may, from time
to time, fix the number of directors constituting the Board of Directors, and
only the directors are permitted to fill vacancies on the Board of Directors.
The General Corporation Law of Delaware provides generally that the
affirmative vote of a majority of the shares entitled to vote on any matter is
required to amend a corporation's certificate of incorporation or by-laws,
unless a corporation's certificate of incorporation or by-laws, as the case may
be, requires a greater percentage. The affirmative vote of the holders of at
least 80% of the outstanding voting stock of the Company is required to amend or
repeal certain provisions of the Company's Restated Certificate of
Incorporation, and to reduce the number of authorized shares of Common Stock and
Preferred Stock. Such 80% vote is also required for stockholders to amend or
repeal the Company's Restated By-Laws.
The provisions of the Restated Certificate of Incorporation and Restated
By-Laws discussed above could make more difficult or discourage a proxy contest
or the acquisition of control by substantial block of the Company's stock or the
removal of any incumbent member of the Board of Directors. Such provisions could
also have the effect of discouraging a third party from making a tender offer or
otherwise attempting to obtain
27
<PAGE> 28
control of the Company, even though such an attempt might be beneficial to the
Company and its stockholders.
NEW SHAREHOLDER RIGHTS PLAN
The Company adopted a new shareholder rights plan on May 12, 1998 (the "New
Plan"). The New Plan was implemented by declaring a dividend, distributable to
shareholders of record on June 1, 1998, of one preferred share purchase right (a
"Right") for each outstanding share of Common Stock. All rights granted under
the Company's former shareholder rights plan were redeemed in conjunction with
the implementation of the New Plan. Each Right under the New Plan will initially
entitle registered holders of the Common Stock to purchase one one-thousandth of
a share of the Company's new Series A-1 Junior Participating Preferred Stock
("Series A-1 Preferred Stock") at a purchase price of $900 per one
one-thousandth of a share of Series A-1 Preferred Stock, subject to adjustment.
The Rights will be exercisable only if a person or group (i) acquires 15% or
more of the 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 Plan allows shareholders (other than the acquiror) to purchase Common
Stock or securities of the acquiror having a then-current market value of two
times the exercise price of the Right. The Rights are redeemable for $.001 per
Right (subject to adjustment) at the option of the Board of Directors. Until a
Right is exercised, the holder of the Right, as such, has no rights as a
shareholder of the Company. The Rights will expire on May 12, 2008 unless
redeemed by the Company prior to that date.
The Rights have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire the Company
on terms not approved by the Company's Board of Directors. The Rights should not
interfere with any merger or other business combination approved by the Board of
Directors since the Rights may be redeemed by the Company at $.001 per Right
prior to the earlier of (i) the time prior to such time as any person has become
an Acquiring Person (as defined in the Rights Agreement), or (ii) May 12, 2008.
The New Plan and the Rights will replace the rights issued pursuant to a
shareholder rights plan adopted by the Company in fiscal 1993. The Board of
Directors has approved the termination of such plan and the redemption of the
rights under the former plan effective as of June 1, 1998, as permitted under
the terms of the former plan. The former rights plan provided the registered
holders of Common Stock the right, in certain limited circumstances involving a
potential business combination or change of control transaction of the Company,
to acquire additional shares of Common Stock at a reduced price.
CHANGE OF CONTROL
Section 203 of the DGCL prohibits generally a public Delaware corporation,
including AOL, from engaging in a Business Combination (as defined below) with
an Interested Stockholder (as defined below) for a period of three years after
the date of the transaction in which an Interested Stockholder became such,
unless: (i) the board of directors of such corporation approved, prior to the
date such Interested Stockholder became such, either such Business Combination
or such transaction; (ii) upon consummation of such transaction, such Interested
Stockholder owns at least 85% of the voting shares of such corporation
(excluding specified shares); or (iii) such Business Combination is approved by
the board of directors of such corporation and authorized by the affirmative
vote (at an annual or special meeting and not by written consent) of at least
66 2/3% of the outstanding voting shares of such corporation (excluding shares
held by such Interested Stockholder). A "Business Combination" includes (i)
mergers, consolidations and sales or other dispositions of 10% or more of the
assets of a corporation to or with an Interested Stockholder, (ii) certain
transactions resulting in the issuance or transfer to an Interested Stockholder
of any stock of such corporation or its subsidiaries and (iii) certain other
transactions resulting in a financial benefit to an Interested Stockholder. An
"Interested Stockholder" is a person who owns (or, if such person is an
affiliate or associate of the corporation, within a three-year period did own)
15% or more of a corporation's stock entitled to vote generally in the election
of directors and, the affiliates and associates of such person.
28
<PAGE> 29
PLAN OF DISTRIBUTION
The Company may sell the Securities: (i) through underwriters or dealers;
(ii) directly to a limited number of purchasers or to a single purchaser; or
(iii) through agents. The Prospectus Supplement with respect to the Securities
being offered (the "Offered Securities") will set forth the terms of the
offering of the Offered Securities, including the name or names of any
underwriters or agents, the purchase price of the Offered Securities and net
proceeds to the Company from such sale, any underwriting discounts and other
items constituting underwriters' compensation, any initial public offering price
and any discounts or concessions allowed or reallowed or paid to dealers.
If underwriters are used in the sale, the Offered Securities will be
acquired by the underwriters for their own account and may be resold from time
to time in one or more transactions, including negotiated transactions, at a
fixed public offering price or at varying prices determined at the time of sale.
The Offered Securities may be offered to the public either through underwriting
syndicates represented by one or more managing underwriters or directly by one
or more underwriters. The underwriter or underwriters with respect to a
particular underwritten offering of Securities, or, if an underwriting syndicate
is used, the managing underwriter or underwriters, will be set forth on the
cover of the applicable Prospectus Supplement. Unless otherwise set forth in the
Prospectus Supplement relating thereto, the obligations of the underwriters to
purchase the Offered Securities will be subject to conditions precedent and the
underwriters will be obligated to purchase all of the Offered Securities if any
are purchased. Morgan Stanley & Co. Incorporated and Lehman Brothers Inc. may
act as underwriters in connection with offerings of shares of Common Stock sold
at varying prices determined at the time of sale.
If dealers are utilized in the sale of Offered Securities in respect of
which this Prospectus is delivered, and if so specified in the applicable
Prospectus Supplement, the Company will sell such Offered Securities to the
dealers as principals. The dealers may then resell such Offered Securities to
the public at varying prices to be determined by such dealers at the time of
resale. The names of the dealers and the terms of the transaction will be set
forth in the applicable Prospectus Supplement.
The Offered Securities may be sold directly by the Company or through
agents designated by the Company from time to time. Any agent involved in the
offer or sale of the Offered Securities in respect to which this Prospectus is
delivered will be named, and any commissions payable by the Company to such
agent will be set forth, in the Prospectus Supplement.
Underwriters, dealers and agents may be entitled under agreements entered
into with the Company to indemnification by the Company against certain civil
liabilities, including liabilities under the Securities Act, or to contribution
with respect to payments which the underwriters, dealers or agents may be
required to make in respect thereof. Underwriters, dealers and agents may be
customers of, may engage in transactions with, or perform services for, the
Company in the ordinary course of business.
LEGAL MATTERS
The validity of the Securities offered hereby is being passed upon for the
Company by Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. An attorney at
Mintz Levin, who is vice chairman of the Company in an honorary capacity, owns
an aggregate of 200 shares of Common Stock and options to purchase 344,000
shares of Common Stock.
EXPERTS
The consolidated financial statements of America Online, Inc. appearing in
its Annual Report (Form 10-K) for the year ended June 30, 1997, have been
audited by Ernst & Young LLP, independent auditors, as set forth in their report
thereon included therein and incorporated herein by reference. Such consolidated
financial statements are incorporated herein by reference in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
29
<PAGE> 30
The financial statements of Interactive Services Division of CompuServe
Corporation at April 30, 1997 and for the year then ended appearing in America
Online, Inc.'s Current Report on Form 8-K/A dated January 31, 1998 and filed
April 17, 1998 have been audited by Ernst & Young LLP, independent auditors, as
set forth in their report thereon included therein and incorporated herein by
reference. Such financial statements are incorporated herein by reference in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
30
