SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 1
TO
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Date of Report (Date of Earliest Event Reported): January 31, 1998
AMERICA ONLINE, INC.
(Exact Name of Registrant as Specified in Charter)
Delaware 0-19836 54-1322110
(State or Other Jurisdiction (Commission File Number) (IRS Employer
of Incorporation) Identification No.)
22000 AOL Way, Dulles, Virginia 20166
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (703) 448-8700
This 8-K/A filing amends an 8-K filed on February 17, 1998.
Item 7 is hereby amended to state as follows:
Item 7. Financial Statements, Pro Forma Financial Information
and Exhibits.
(a) Financial Statements of Businesses Acquired:
Interactive Services Division of CompuServe Corporation for
the six months ended October 31, 1997 and 1996 (unaudited)
Interactive Services Division of CompuServe Corporation for
the year ended April 30, 1997 with Report of Independent
Auditors
(b) Pro Forma Financial Information:
Pro Forma Combined Condensed Balance Sheet as of December
31, 1997 (unaudited)
Pro Forma Combined Statement of Operations for the six month
period ended December 31, 1996 (unaudited)
Pro Forma Combined Statement of Operations for the six month
period ended December 31, 1997 (unaudited)
Pro Forma Combined Statement of Operations for the year
ended June 30, 1997 (unaudited)
Notes to Unaudited Pro Forma Combined Financial Statements
(c) Exhibits:
The following exhibits are filed as part of this Current
Report pursuant to Item 601 of Regulation S-K:
Exhibit
Number Description
2.1 Purchase and Sale Agreement dated as of September 7,
1997, by and among America Online, Inc., ANS
Communications, Inc. and WorldCom, Inc. (incorporated
herein by reference to Exhibit 2 to the Company's Form
8-K, Commission File No. 0-19836, filed September 15,
1997).
23 Consent of Ernst & Young LLP
99 Press Release dated February 2, 1998 announcing
America Online, Inc.'s purchase of the worldwide
online services business of CompuServe Corporation
plus the receipt of approximately $175 million of cash
in exchange for the sale to WorldCom Inc., of ANS
Communications, Inc. and related matters (incorporated
herein by reference to Exhibit 99 to the Company's
Form 8-K, Commission File No. 0-19836, filed February
17, 1998).
Financial Statements
Interactive Services Division of CompuServe Corporation
For the six months ended October 31, 1997 and 1996
(Unaudited)
Contents
Balance Sheet 1
Statements of Operations 2
Statements of Cash Flows 3
Notes to Financial Statements 4
<TABLE>
Interactive Services Division of CompuServe Corporation
Balance Sheet
October 31, 1997
(Unaudited)
(in thousands)
Assets
<S> <C>
Current Assets:
Receivables, net $ 53,892
Prepaid expenses 21,590
Other current assets 3,259
TOTAL CURRENT ASSETS 78,741
Property and equipment, net 75,421
Other Assets:
Deferred subscriber acquisition costs, net 33,353
Intangible assets 6,074
Other assets 6,162
TOTAL OTHER ASSETS 45,589
TOTAL ASSETS $ 199,751
Liabilities and Division equity
Current Liabilities:
Accounts payable $ 22,021
Accrued taxes (129)
Accrued salaries, wages and payroll taxes 7,719
Accrued royalties 3,394
Deferred revenue 5,552
Other accrued expenses 21,398
TOTAL CURRENT LIABILITIES 59,955
TOTAL DIVISION EQUITY 139,796
TOTAL LIABILITIES & DIVISION EQUITY $ 199,751
See accompanying notes
</TABLE>
<TABLE>
Interactive Services Division of CompuServe Corporation
Statements of Operations
for the Six Month Periods Ended October 31, 1997 and 1996
(Unaudited)
(in thousands)
Six Months
Ended
10/31/97 10/31/96
<S> <C> <C>
REVENUES
Interactive Services revenues $240,363 $285,507
Other revenues 809 1,604
TOTAL REVENUES 241,172 287,111
COSTS AND EXPENSES
Costs of revenues 169,347 237,767
Marketing 58,373 117,137
General and administrative 10,648 12,195
Depreciation and amortization 13,421 13,017
Product development 10,451 12,319
Nonrecurring items - 25,563
TOTAL COSTS AND EXPENSES 262,240 417,998
OPERATING LOSS (21,068) (130,887)
INCOME TAX BENEFIT - 36,979
NET LOSS ($21,068) ($93,908)
See accompanying notes
</TABLE>
<TABLE>
Interactive Services Division of CompuServe Corporation
Statements of Cash Flows
For the Six Month Periods Ending October 31, 1997 and 1996
(Unaudited)
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES: Six Months Ended
10/31/97 10/31/96
<S> <C> <C>
Net loss $(21,068) $(93,908)
Adjustments to reconcile net loss to net cash
used in operating activities:
Noncash nonrecurring items - 10,156
Depreciation and amortization 13,421 13,017
Amortization of deferred subscriber acquisition costs 32,659 86,255
Deferred subscriber acquisition costs (22,053) (39,832)
Deferred tax benefit - (36,979)
Changes in:
Receivables 2,136 5,792
Prepaid expenses (8,832) (4,734)
Other current assets (468) 3,504
Accounts payable (7,362) (15,443)
Accrued salaries, wages and payroll taxes 270 (338)
Accrued taxes (2,354) (2,931)
Accrued royalties 224 39
Deferred revenue (272) 2,677
Other accrued expenses 1,693 10,668
Net cash used in operating activities (12,006) (62,057)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (6,262) (9,762)
Net cash used in investing activities (6,262) (9,762)
CASH FLOWS FROM FINANCING ACTIVITIES:
Contribution provided to Division from CompuServe, net 18,268 71,819
Net cash provided in financing activities 18,268 71,819
Net change in cash and cash equivalents $ - $ -
See accompanying notes
</TABLE>
1. On January 31, 1998, America Online, Inc. ("AOL") completed the acquisition
of the worldwide interactive services division of CompuServe Corporation
("CompuServe") including CompuServe's interactive services wholly-owned
subsidiaries, SPRY, Inc. ("SPRY") and CompuServe Works of Wonder ("WOW!")
(collectively, the "Division") and $147,000 in cash (excluding $15,000 in
cash received as part of the Division and after purchase price adjustments
made at closing)in cash pursuant to the previously announced Purchase and
Sale Agreement (the "Agreement") dated as of September 7, 1997. Pursuant
to the Agreement, AOL purchased the assets and assumed certain existing and
future liabilities and obligations of the Division.
2. The financial statements have been prepared, without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations.
The statements of operations and balance sheet have been prepared as if the
Division had operated as an independent stand-alone entity for the periods
presented. The financial statements include allocations of corporate
administrative and network services and computer operations costs.
Management believes that these allocations are reasonable. These financial
statements are not necessarily indicative of the financial position and
results of operations which would have occurred had the Division been an
independent entity. These financial statements should be read in
conjunction with the audited financial statements and notes thereto in the
Form 8-K/A filed with the Securities and Exchange Commission on April 17,
1998.
In the opinion of management, the accompanying financial statements include all
adjustments (which include only normal recurring adjustments) necessary to
present fairly the financial position as of October 31, 1997 and results of
operations and cashflows of the Division for the six months ended October 31,
1997 and 1996.
Audited Financial Statements
Interactive Services Division of
CompuServe Corporation
Year ended April 30, 1997
with Report of Independent Auditors
Contents
Report of Independent Auditors 1
Audited Financial Statements
Balance Sheet 2
Statement of Operations 3
Statement of Division Equity 4
Statement of Cash Flows 5
Notes to Financial Statements 6
Report of Independent Auditors
The Board of Directors of
America Online, Inc.
We have audited the accompanying balance sheet of the Interactive Services
Division of CompuServe Corporation as of April 30, 1997, and the related
statements of operations, division equity and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Interactive Services
Division of CompuServe Corporation at April 30, 1997, and the results of its
operations and its cash flows for the year then ended, in conformity with
generally accepted accounting principles.
March 26, 1998
Columbus, Ohio
<TABLE>
Interactive Services Division of CompuServe Corporation
Balance Sheet
April 30, 1997
(Dollars in Thousands)
Assets
Current assets:
<S> <C>
Trade accounts receivables, less allowance for
doubtful accounts of $7,670 $ 56,028
Prepaid expenses 12,758
Other current assets 2,791
Total current assets 71,577
Property and equipment, net 79,543
Other assets:
Deferred subscriber acquisition costs, net 43,959
Intangible assets, less accumulated amortization of $6,598 6,565
Other assets 4,529
Total other assets 55,053
$ 206,173
Liabilities and Division equity
Current liabilities:
Accounts payable 29,383
Accrued salaries, wages and payroll taxes 7,449
Accrued taxes 2,225
Accrued royalties 3,170
Deferred revenue 5,824
Other accrued expenses 19,705
Total current liabilities 67,756
Division equity 138,417
Total liabilities and Division equity $ 206,173
See accompanying notes.
</TABLE>
<TABLE>
Interactive Services Division of CompuServe Corporation
Statement of Operations
Year ended April 30, 1997
(Dollars in Thousands)
<S> <C>
Revenues
Interactive Services $ 554,578
Other 1,980
Total revenues 556,558
Costs and expenses
Costs of revenues 425,869
Marketing 194,427
Product development 25,563
General and administrative 26,273
Depreciation and amortization 26,814
Nonrecurring charges (Note 7) 32,784
Total costs and expenses 731,730
Loss before income tax benefit (175,172)
Income tax benefit 36,979
Net loss $ (138,193)
See accompanying notes.
</TABLE>
<TABLE>
Interactive Services Division of CompuServe Corporation
Statement of Division Equity
Year ended April 30, 1997
(Dollars in Thousands)
<S> <C>
Balance at May 1, 1996 $ 174,566
Net loss (138,193)
Contribution provided to Division from CompuServe, net 102,044
Balance at April 30, 1997 $ 138,417
See accompanying notes.
</TABLE>
<TABLE>
Interactive Services Division of CompuServe Corporation
Statement of Cash Flows
Year ended April 30, 1997
(Dollars in Thousands)
<S> <C>
Operating activities
Net loss $ (138,193)
Adjustments to reconcile net loss to
net cash used in operating activities:
Noncash, nonrecurring items 17,565
Depreciation and amortization 26,814
Amortization of deferred subscriber acquisition costs 120,836
Deferred subscriber acquisition costs (68,159)
Deferred tax benefit (36,979)
Changes in:
Receivables 5,619
Prepaid expenses (4,104)
Other current assets 6,426
Accounts payable (23,125)
Accrued salaries, wages and payroll taxes 291
Accrued taxes (576)
Accrued royalties (3,191)
Deferred revenue 2,852
Other accrued expenses 9,647
Net cash used in operating activities (84,277)
Investing activities
Purchases of property and equipment (17,767)
Net cash used in investing activities (17,767)
Financing activities
Contribution provided to Division from CompuServe, net 102,044
Net cash provided in financing activities 102,044
Net increase (decrease) in cash and cash equivalents $ -
See accompanying notes.
</TABLE>
Interactive Services Division of CompuServe Corporation
Notes to Financial Statements
April 30, 1997
(Dollars in Thousands)
1. Background and Basis of Presentation
Background
On January 31, 1998 America Online, Inc. ("AOL") completed the acquisition of
the worldwide interactive services division of CompuServe Corporation
("CompuServe") including CompuServe's online services wholly-owned subsidiaries,
SPRY, Inc, ("SPRY") and CompuServe Works of Wonder, Inc., ("WOW!") (collectively
the "Division") and $147,000 in cash (excluding $15,000 in cash received as part
of the Division and after purchase price adjustments made at closing) pursuant
to the previously announced Purchase and Sale Agreement (the "Agreement") dated
as of September 7, 1997. Pursuant to the Agreement, AOL purchased the assets
and assumed certain existing and future liabilities and obligations of the
Division.
In addition, in conjunction with this acquisition, AOL sold a 50% interest in
the European component of the Division. The European operations of the Division
represented $12,000 of total assets, $156,000 of revenues and $40,000 of the net
loss for the Division in 1997.
Effective January 31, 1997, the WOW! service was withdrawn from the market.
Refer to Note 7 for related exit costs associated with the withdrawal of WOW!
and the effect of WOW! on the Division's results of operations for 1997.
The Division provides computer-based information and communication services to
businesses and individual owners of personal computers. Revenues are generated
primarily from subscribers paying a monthly membership fee and charges based on
usage as well as from fees received from a licensee and distributors of the
Division's online service technology.
Basis of Presentation
The accompanying financial statements include the financial position and results
of operations of the Division. The financial statements are presented as if the
Division had operated as an independent, stand alone entity for the period
presented. Such financial statements have been prepared using the historical
basis in the financial position and results of operations of the Division. The
financial statements include allocations of corporate administrative, network
services and computer operations costs as described in Note 8. Management
believes these allocations are reasonable. These financial statements are not
necessarily indicative of the financial position and results of operations which
would have occurred had the Division been an independent entity.
2. Summary of Significant Accounting Policies
Management Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses during
the reporting periods. Actual results could differ from those estimates.
Revenues
Revenues are recorded in the period in which services are provided or performed.
Deferred revenue consists of monthly prepaid subscription fees billed in
advance.
The Division received approximately $204,077 of revenues from foreign sources
for the year ended April 30, 1997.
Property and Equipment
Buildings, computer hardware, furniture and equipment are recorded at cost and
depreciated over the estimated useful lives of the assets, ranging from 3 to 10
years for computer hardware, furniture and equipment and 45 years for buildings,
using the straight-line method. Leasehold improvements are amortized over the
period of the respective lease using the straight-line method. Maintenance and
repairs are expensed as incurred. Expenditures which significantly increase the
value of the assets or extend useful lives are capitalized.
Deferred Subscriber Acquisition Costs
Pursuant to Statement of Position 93-7, "Reporting on Advertising Costs"
(SOP 93-7), subscriber acquisition costs which result in a direct revenue-
generating response are capitalized and amortized over the period during which
future benefits are expected to be received.
Prior to October 1996, the Division amortized its subscriber acquisition costs
over a 24-month period, on an accelerated basis (60 per cent in the first twelve
months and 40 per cent in the subsequent year), to match subscriber acquisition
costs with associated online services revenues, beginning in the month
subsequent to the expenditure. In October 1996, the Division changed its rate of
amortization of deferred subscriber acquisition costs to more closely correlate
with the recent trends in subscriber retention rates and member net revenues.
The new rate of amortization is 50 per cent in the first 3 months, 30 per cent
in the next 9 months, and 20 per cent in the subsequent year. In conjunction
with this change in amortization rates, the Division accelerated amortization of
previously deferred subscriber acquisition costs with a writedown totaling
$34,500 as of October 31, 1996. Additionally, all previously deferred subscriber
acquisition costs totaling $8,300 for WOW! and $2,500 for SPRY were also written
off, reflecting the high costs to service this high usage, flat-priced service
The total $45,300 adjustment of deferred subscriber acquisition costs is
included in marketing expenses. Amortization of deferred subscriber acquisition
costs was $120,836 (including the $45,300 adjustment for deferred subscriber
acquisition costs) for the year ended April 30, 1997 and is included in
marketing costs. Direct response advertising costs incurred to obtain new online
service subscribers are recoverable from monthly revenues generated from those
subscribers within a short period of time after the related costs are incurred.
The Division expenses advertising costs not classified as direct response the
first time the advertising takes place.
Product Development Costs
The Division capitalizes costs incurred for the development of computer software
when the project has reached technological feasibility, and continues to
capitalize such costs until the product is available for release to the general
public. Capitalized costs include direct labor and related fringe benefits for
software produced by the Division and the costs of software purchased from third
parties. Research and development costs incurred prior to technological
feasibility are expensed as incurred. The Division amortizes product development
costs based upon the greater of the amount using (a) the rates that current
gross revenues for a product bears to the total of current and anticipated
future gross revenues for that product or (b) the straight-line method over the
remaining estimated life of the product commencing the month after the date of
product release. Unamortized product development costs of $2,814 are included
in intangible assets with amortization expense of $2,055 recorded for the year.
Intangible Assets
The excess cost of SPRY, Inc. over the fair value of net tangible assets
acquired and other intangibles is being amortized over 5 years on a straight-
line basis. Unamortized goodwill of $3,751 is included in intangible assets with
amortization expense recorded for the year of $1,574.
Asset Impairments
At each balance sheet date, a determination is made by management, in accordance
with Statement of Financial Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to Be Disposed Of," to ascertain whether
property and equipment, goodwill and other intangible assets have been impaired
based on the sum of expected future undiscounted cash flows from operating
activities. At year end, the Division believes that property and equipment,
deferred subscriber acquisition costs, and intangible assets at April 30, 1997
are realizable and the depreciation and amortization periods are appropriate.
Cash and Cash Equivalents
CompuServe provides a centralized cash management function; accordingly, the
Division does not maintain separate cash accounts and its cash disbursements and
collections are settled through Division equity.
Foreign Currency Translation
Assets and liabilities of the Division's foreign operations are translated into
U.S. dollars at exchange rates prevailing at the end of the period.
Substantially all revenues from foreign sources are billed and collected in U.S.
dollars. Expense transactions conducted in foreign currency are translated at
the average of exchange rates in effect during the period. Translation
adjustments are not significant and are included in Division equity.
Disclosures Regarding Financial Instruments
For all financial instruments, including receivables, accrued liabilities and
accounts payable, the carrying value is considered to approximate fair value due
to the relatively short maturity of the respective instruments.
Income Taxes
CompuServe filed consolidated Federal income tax returns with its parent company
on a calendar year basis. The income tax benefit included in these financial
statements has been calculated as if the Division were a stand alone taxpayer
not eligible to be included in the consolidated income tax return of
CompuServe's parent following the provisions of Financial Accounting Standards
No. 109, "Accounting for Income Taxes."
3. Property and Equipment
A summary of property and equipment at April 30, 1997 follows:
<TABLE>
<S> <C>
Land $ 840
Buildings 25,987
Computer equipment 91,528
Furniture and equipment 25,636
Leasehold improvements 3,683
147,674
Less accumulated depreciation and amortization (68,131)
$ 79,543
</TABLE>
Depreciation and amortization of property and equipment for the year ended April
30, 1997 amounted to $22,375. Software license fees with net unamortized values
of $3,459 are included in other assets. Amortization expense for the year ended
April 30, 1997 was $810.
4. Income Taxes
The income tax benefit recorded in these financial statements has been
calculated as if the Division were a stand alone taxpayer on a separate return
basis not eligible to be included in the consolidated income tax return of
CompuServe's parent. Accordingly, in lieu of a receivable from CompuServe's
parent, the current tax benefit for 1997 has been treated as an operating loss
carryforward subject to a valuation allowance at April 30, 1997 to reduce
deferred tax assets to amounts determined realizable under the provisions of
Financial Accounting Standards No. 109, "Accounting for Income Taxes."
The income tax benefit for the year ended April 30, 1997 is comprised of the
following:
<TABLE>
<S> <C>
Current benefit $ -
Deferred tax benefit 36,979
$36,979
</TABLE>
The following table reconciles the statutory U.S. Federal income tax benefit to
the actual income tax benefit recognized:
<TABLE>
Percentage
of
Amount pretax loss
<S> <C> <C>
Income tax benefit at the federal statutory rate $ 61,310 35.0%
Increase (decrease) in income tax benefit resulting from:
Goodwill amortization (2,694) (1.5%)
State income taxes, net of Federal tax benefit 4,050 2.3%
Loss, for which no tax benefit was derived (25,966) (14.8%)
Other 279 -
$ 36,979 21.0%
</TABLE>
4. Income Taxes
A summary of deferred income taxes at April 30, 1997 follows:
<TABLE>
<S> <C>
Deferred tax assets:
Difference between accrual and cash basis accounting $ 1,269
Deferred compensation 1,235
Impairment of non-performing assets 2,573
Net operating loss carryforwards 42,344
Other 114
Total deferred tax assets 47,535
Valuation allowance for deferred tax assets (25,966)
Net deferred tax assets $ 21,569
Deferred tax liabilities:
Depreciation $ 4,110
Deferred subscriber acquisition costs 16,173
Product development costs 1,286
Total deferred tax liabilities $ 21,569
</TABLE>
The net operating loss carryforwards included in deferred tax assets expire in
the year 2012.
5. Commitments
The Division leases facilities and equipment. The Division's rental expense
under operating leases totaled $8,434 in 1997. Future minimum payments under non
cancelable operating leases with initial terms of one year or more consist of
the following:
<TABLE>
<S> <C>
1998 $11,563
1999 9,544
2000 6,540
2001 2,323
2002 1,834
2003 and thereafter 3,050
Total $34,854
</TABLE>
6. Contingencies
During fiscal 1997, TeleTech Teleservices, Inc. and TeleTech Telecommunications,
Inc. (collectively, "TeleTech") commenced an action in the United States
District Court, Southern District of Ohio against CompuServe Incorporated for
alleged violations of certain outsourcing contracts between TeleTech and
CompuServe Incorporated related to the WOW! online service. TeleTech seeks
recovery under a liquidated damages provision and other compensatory damages.
CompuServe Incorporated has filed counterclaims alleging multiple breaches by
TeleTech of the outsourcing contracts, including breach of fiduciary duty,
breach of confidentiality, and breach of the non-compete and employee non-
solicitation provisions of the outsourcing contracts by TeleTech. Management
believes it has meritorious defenses and counterclaims, and is vigorously
pursuing this litigation.
CompuServe in the ordinary course of business is threatened with or named as a
defendant in various lawsuits related to the operations of the Division. It is
not possible to determine the ultimate disposition of these matters; however,
management is of the opinion that, except for the matters described herein, the
final resolution of any threatened or pending litigation is not likely to have a
material adverse effect on the financial statements of the Division.
7. Nonrecurring Charges
During fiscal year 1997, the Division incurred nonrecurring charges totaling
$32,784 relating to the sale of certain assets and business operations of the
corporate computer software group of SPRY, Inc.; the withdrawal of the family-
oriented WOW! Online service; the consolidation of U.S.-based staff functions
and office facilities; the renegotiation of certain third-party customer service
agreements; the write-off of certain obsolete software costs for billing and
customer service systems which are no longer being utilized and the write-off of
investments in certain content and technology providers due to their
deteriorated financial performance. Of the total charge, $15,219 requires the
outlay of cash. As of April 30, 1997, all employees who were included in the
employee severance accrual have been terminated by CompuServe.
The activity of these special charges is as follows:
<TABLE>
1997 Balance at
Provision Activity April 30, 1997
<S> <C> <C> <C>
Computer software group sale $ 9,192 $ 8,282 $ 910
WOW! discontinuation 7,914 7,301 613
Facilities consolidation 4,161 1,120 3,041
Employee severance 2,167 2,167 -
Writedown of assets 9,350 9,350 -
$ 32,784 $28,220 $ 4,564
</TABLE>
The balances in these restructuring reserves at April 30, 1997 are included in
other accrued expenses. Total revenues and operating losses for the computer
software group of SPRY were immaterial to the 1997 financial statements. Total
revenues for WOW! during fiscal year 1997 totaled $6,500. Direct operating
expenses attributable to WOW!, exclusive of allocable network and host computing
costs, totaled $33,900 for fiscal year 1997.
8. Allocations
CompuServe has not historically required the Division to reimburse it for the
following allocated expenses. Accordingly, the cancellation of liabilities
associated with allocations has been reflected as a contribution to the
Division.
Corporate Allocations
CompuServe operated two operating divisions, interactive services and network
services. The allocation of corporate overhead costs was based on the percentage
of Division revenues to total CompuServe revenues. This allocation basis also
approximated the percentage of Division total personnel in relation to total
CompuServe personnel. Allocable corporate overhead costs consist primarily of
salaries and benefits, other property costs, and professional fees. Corporate
overhead cost allocations totaling $35,113 are included in the Division's
statement of operations primarily as cost of revenues and general and
administrative expenses.
CompuServe sponsors a 401(k) Investment Plan for all U.S. based employees. The
Investment Plan allows for employees to defer up to 10 percent of their
compensation. CompuServe matches 50 percent of employee contributions, up to 6
percent, with such amounts vesting ratably over five years of service. Included
in total corporate allocations is $1,358 of charges to the Division for its
allocable portion of CompuServe's matching contribution.
Network Services and Computer Operations Allocations
Included in the statement of operations as cost of revenues are allocations from
CompuServe's Network Services Division and its computer operations support group
totaling $173,066. These allocated costs represent charges for the Division's
use of network, gateway and host services. The charges are allocated to the
Division primarily based on the total of allocable costs incurred by CompuServe
to administer and maintain its infrastructure multiplied by the percentage of
total usage hours used by the Division to total usage hours of CompuServe.
9. Year 2000 Compliance (Unaudited)
The Division utilizes a significant number of computer software programs and
operating systems across its entire organization, including applications used in
operating the CompuServe service, the Division's proprietary software, member
services, network access, content providers, joint ventures and various
administrative and billing functions. To the extent the Division's software
applications contain source codes that are unable to appropriately interpret the
upcoming calendar year 2000, some level of modification, or even possibly
replacement of such applications, may be necessary. The Division, in conjunction
with AOL, has appointed a Year 2000 Task Force to perform an audit to assess the
scope of the Division'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 Division 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 Division is in the early stages of conducting its Year 2000 audit and
therefore is unable to make a reasonable estimate of the costs associated with
Year 2000 compliance. Accordingly, no assurance can be given that any or all of
the Division's or third party systems are or will be Year 2000 compliant or that
the costs required to address the Year 2000 issue or that the impact of the
Division's failure to achieve substantial Year 2000 compliance will not have a
material adverse effect on the Division's business, financial condition or
results of operations.
PRO FORMA FINANCIAL INFORMATION
On January 31, 1998 America Online, Inc. ("AOL" or the "Company") completed the
acquisition of the interactive services division (the "COLS Business") of
CompuServe Corporation ("CompuServe") pursuant to the previously announced
Purchase and Sale Agreement (the "Agreement") dated as of September 7, 1997 by
and among AOL, ANS Communications, Inc., a wholly-owned subsidiary of AOL
(prior to the consummation of the Purchase and Sale)("ANS"), and WorldCom, Inc.,
("WorldCom"). In a three-way transaction, AOL acquired the COLS Business and
received approximately $147 million in cash (excluding $15 million in cash
received as part of the COLS Business and after purchase price adjustments made
at closing) from WorldCom in exchange for AOL's network services subsidiary,
ANS, all of the outstanding capital stock of which was transferred to
WorldCom (the "Purchase and Sale"). In connection with the Purchase and Sale,
AOL, WorldCom and ANS entered into a Master Agreement for Data Communications
(the "Services Agreement") under which WorldCom will provide network services
to AOL, including network management services and data communications services,
for a five-year period. WorldCom will utilize the purchased ANS assets to
provide such services to AOL. The Services Agreement provides AOL with exclusive
use of the dial-up network infrastructure sold with ANS during peak usage
periods and provides that the title to the modems and related equipment
necessary to operate ANS's portion of the AOL dial up network will revert to
AOL upon termination or expiration of the Services Agreement.
Concurrent with the Purchase and Sale, AOL's European partner, Bertelsmann, AG
("Bertelsmann"), paid $75 million to AOL for a 50% interest in the European
component of the COLS Business (the "COLS European Business"). AOL and
Bertelsmann have each invested an additional $25 million to operate the COLS
European Business as part of an expanded joint venture relationship between the
parties.
Immediately prior to AOL's acquisition of the COLS Business, WorldCom acquired
CompuServe pursuant to an Agreement and Plan of Merger by and among H & R Block,
Inc., H&R Block Group, Inc., a wholly-owned subsidiary of H&R Block, Inc.
(and the majority shareholder of CompuServe prior to the completion of the
merger), WorldCom, and Walnut Acquisition Company, LLC, a wholly-owned limited
liability company of WorldCom. WorldCom retained and will operate the network
services division of CompuServe.
The unaudited pro forma combined condensed balance sheet gives effect to the
transaction by and among AOL, ANS and WorldCom discussed above as if it had
been consummated as of December 31, 1997. The unaudited pro forma combined
condensed balance sheet combines the unaudited historical condensed balance
sheet of AOL as of December 31, 1997 and the unaudited historical condensed
balance sheet of the COLS Business as of October 31, 1997.
The unaudited pro forma combined statements of operations give effect to the
transaction by and among AOL, ANS and WorldCom discussed above as if it had
been consummated at the beginning of the periods presented. The unaudited pro
forma combined statements of operations for the six months ended December 31,
1997 and 1996 combine the unaudited historical statements of operations of AOL
for the six months ended December 31, 1997 and 1996 and the unaudited
historical statements of operations of the COLS Business for the six months
ended October 31, 1997 and 1996, respectively. The unaudited pro forma combined
statement of operations for the year ended June 30, 1997 combines the audited
historical statement of operations of AOL for the year ended June 30, 1997 and
the audited historical statement of operations of the COLS Business for the year
ended April 30, 1997.
The acquisition of the COLS Business is accounted for as a purchase business
combination under APB 16, "Business Combinations". The purchase price is
allocated to the tangible and intangible assets purchased, as well as
liabilities assumed, based upon their respective fair values. The allocation of
the purchase price included in the pro forma financial information is
preliminary. The final values may differ from those set forth herein. The
Company believes, however, that the final allocation will not be materially
different from the pro forma allocation.
The pro forma information is presented for illustrative purposes only and does
not purport to be indicative of the operating results or financial position that
would have actually occurred if the transaction had been in effect on the dates
indicated, nor is it indicative of the future operating results or financial
position of the Company. The pro forma adjustments are based upon information
and assumptions available at the time of the filing of this Form 8-K/A. 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.
<TABLE>
America Online, Inc.
Pro Forma Combined Condensed Balance Sheet
as of December 31, 1997
(In thousands)
(Unaudited)
Historical Pro Forma
Less
COLS
COLS European
AOL Business 1 ANS 2 Business 3
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash, cash equivalents and short-
term investments $ 518,436 $ - $ 2,785 $ -
Accounts receivable 117,848 53,892 15,597 13,710
Prepaid expenses and other current
assets 81,150 24,849 7,942 1,191
Total current assets 717,434 78,741 26,324 14,901
Property and equipment, net 336,097 75,421 36,947 7,485
Other assets:
Product development cost, net 83,635 1,600 - -
Other assets including available-for-
sale securities 155,097 6,162 6,513 978
Goodwill and Other Assets 42,733 37,827 31,325 -
Deferred income taxes 48,165 - - -
Total Assets $ 1,383,161 $199,751 $101,109 23,364
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 68,485 $ 22,021 $ 4,574 $ 2,180
Other accrued expenses and
liabilities 334,631 32,382 47,189 12,496
Deferred network services credit - - - -
Deferred revenue 174,392 5,552 3,882 -
Total current liabilities 577,508 59,955 55,645 14,676
Notes payable 371,391 - - -
Deferred income taxes 48,165 - - -
Deferred revenue long-term 79,384 - - -
Deferred network services credit - - - -
Other liabilities 1,156 - - -
Total Liabilities 1,077,604 59,955 55,645 14,676
Total stockholders' equity 305,557 139,796 45,464 8,688
$1,383,161 $ 199,751 $101,109 $23,364
Pro Forma
Other Pro Forma
Subtotal Adjustments 4 Combined
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash, cash equivalents and short-term
investments $515,651 $204,500 A $720,151
Accounts receivable 142,433 5,599 148,032
Prepaid expenses and other current
assets 96,866 (17,470)B,C 79,396
Total current assets 754,950 192,629 947,579
Property and equipment, net 367,086 (35,210)B,D 331,876
Other assets:
Product development cost, net 85,235 - 85,235
Other assets including available-for-
sale securities 153,768 124,719 E 278,487
Goodwill and Other Assets 49,235 43,372 B,F 92,607
Deferred income taxes 48,165 - 48,165
Total Assets $ 1,458,439 $325,510 $1,783,949
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable 83,752 - 83,752
Other accrued expenses and
liabilities 307,328 29,617 G 336,945
Deferred network services credit - 76,307 H 76,307
Deferred revenue 176,062 - 176,062
Total current liabilities 567,142 105,924 673,066
Notes payable 371,391 - 371,391
Deferred income taxes 48,165 - 48,165
Deferred revenue long-term 79,384 - 79,384
Deferred network services credit - 305,230 H 305,230
Other liabilities 1,156 - 1,156
Total Liabilities 1,067,238 411,154 1,478,392
Total stockholders' equity 391,201 (85,644) 305,557
$1,458,439 $ 325,510 $1,783,949
See accompanying notes.
</TABLE>
<TABLE>
America Online, Inc.
Pro Forma Combined Statement of Operations
For the six month period ended December 31, 1997
(In thousands, except per share data)
(Unaudited)
Historical Pro Forma
Less
COLS
COLS European
AOL Business 1 ANS 2 Business 3
<S> <C> <C> <C> <C>
Revenues $1,113,634 $ 241,172 $ 23,742 $ 79,566
Costs and expenses:
Cost of revenues 712,987 169,347 5,044 66,297
Marketing 194,622 58,373 14,718 13,412
Product development 39,447 10,451 - -
General and administrative 104,974 23,440 2,885 7,533
Amortization of goodwill 3,837 629 2,202 -
Restructuring charge (1,306) - - -
Settlement charge (1,009) - - -
Total costs and expenses 1,053,552 262,240 24,849 87,242
Income (loss) from operations 60,082 (21,068) (1,107) (7,676)
Other income, net 6,068 - 507 -
Income (loss) before provision for
income taxes 66,150 (21,068) (600) (7,676)
Provision for income taxes (26,218) - 228 -
Net income (loss) $ 39,932 $ (21,068) $ (372) $(7,676)
Net income per common share -
diluted $ 0.17
Net income per common share - basic $ 0.20
Weighted average shares outstanding
- diluted 238,752
Weighted average shares outstanding
- basic 204,238
Pro Forma
Other Pro Forma
Subtotal Adjustments 4 Combined
<S> <C> <C> <C>
Revenues $1,251,498 $ (16,824) B $1,234,674
Costs and expenses:
Cost of revenues 810,993 (98,440) B,H,I 712,553
Marketing 224,865 (3,512) B 221,353
Product development 49,898 (175) B 49,723
General and administrative 117,996 (2,186) B 115,810
Amortization of goodwill 2,264 7,491 B,F 9,755
Restructuring charge (1,306) - (1,306)
Settlement charge (1,009) - (1,009)
Total costs and expenses 1,203,701 (96,822) 1,106,879
Income (loss) from operations 47,797 79,998 127,795
Other income, net 5,561 - 5,561
Income (loss) before provision for
income taxes 53,358 79,998 133,356
Provision for income taxes (26,446) (26,403) J (52,849)
Net income (loss) $ 26,912 $53,595 $ 80,507
Net income per common share - diluted $ 0.34
Net income per common share - basic $ 0.39
Weighted average shares outstanding
- diluted 238,752
Weighted average shares outstanding
- basic 204,238
See accompanying notes.
</TABLE>
<TABLE>
America Online, Inc.
Pro Forma Combined Statement of Operations
For the six month period ended December 31, 1996
(In thousands, except per share data)
(Unaudited)
Historical Pro Forma
Less
COLS
COLS European
AOL Business 1 ANS 2 Business 3
<S> <C> <C> <C> <C>
Revenues $ 759,394 $ 287,111 $14,205 $ 75,763
Costs and expenses:
Cost of revenues 463,042 237,767 2,699 69,369
Marketing
Marketing 230,977 117,137 4,549 23,359
Write off of deferred subscriber
acquisition cost 385,221 - - -
Product development 38,339 12,319 - -
General and administrative 49,261 24,267 903 6,551
Amortization of goodwill 3,509 945 2,202 -
Restructuring charge 48,627 25,563 - -
Settlement charge 24,300 - - -
Total costs and expenses 1,243,276 417,998 10,353 99,279
Income (loss) from operations (483,882) (130,887) 3,852 (23,516)
Other income, net 1,088 - - -
Income (loss) before provision for
income taxes (482,794) (130,887) 3,852 (23,516)
Provision for income taxes - 36,979 - -
Net income (loss) $(482,794) $ (93,908) $3,852 $(23,516)
Net income per common share - diluted $ (2.58)
Net income per common share - basic $ (2.58)
Weighted average shares outstanding -
diluted 187,454
Weighted average shares outstanding -
basic 187,454
Pro Forma
Other Pro Forma
Subtotal Adjustments 4 Combined
<S> <C> <C> <C>
Revenues $ 956,537 $ (14,686) B $ 941,851
Costs and expenses:
Cost of revenues 628,741 (80,191) B,H,I 548,550
Marketing
Marketing 320,206 (9,260) B 310,946
Write off of deferred subscriber 385,221 - 385,221
acquisition cost
Product development 50,658 (532) B 50,126
General and administrative 66,074 (1,451) B 64,623
Amortization of goodwill 2,252 7,175 B,F 9,427
Restructuring charge 74,190 - 74,190
Settlement charge 24,300 - 24,300
Total costs and expenses 1,551,642 (84,258) 1,467,383
Income (loss) from operations (595,105) 69,573 (525,532)
Other income, net 1,088 - 1,088
Income (loss) before provision for
income taxes (594,017) 69,573 (524,444)
Provision for income taxes 36,979 (36,979) J -
Net income (loss) $ (557,038) 32,594 $(524,444)
Net income per common share - diluted $ (2.80)
Net income per common share - basic $ (2.80)
Weighted average shares outstanding -
diluted 187,454
Weighted average shares outstanding -
basic 187,454
See accompanying notes.
</TABLE>
<TABLE>
America Online, Inc.
Pro Forma Combined Statement of Operations
Year Ended June 30, 1997
( In thousands, except per share data)
(Unaudited)
Historical Pro Forma
Less
COLS
COLS European
AOL Business 1 ANS 2 Business 3
<S> <C> <C> <C> <C>
Revenues $1,685,228 $ 556,558 $ 30,092 $156,315
Costs and expenses:
Cost of revenues 1,074,051 425,869 5,192 137,431
Marketing
Marketing 421,866 194,427 11,785 43,377
Write off of deferred subscriber
acquisition cost 385,221 - - -
Product development 79,145 25,563 - -
General and administrative 126,705 51,512 1,909 15,604
Amortization of goodwill 6,549 1,575 4,404 -
Restructuring charge 48,627 32,784 - -
Contract termination charge 24,506 - - -
Settlement charge 24,204 - - -
Total costs and expenses 2,190,874 731,730 23,290 196,412
Income (loss) from operations (505,646) (175,172) 6,802 (40,097)
Other income, net 6,299 - 20 -
Income (loss) before provision for
income taxes (499,347) (175,172) 6,822 (40,097)
Provision for income taxes - 36,979 - -
Net income (loss) $(499,347) (138,193) $6,822 $(40,097)
Net income per common share - diluted $ (2.61)
Net income per common share - basic $ (2.61)
Weighted average shares outstanding -
diluted 191,214
Weighted average shares outstanding -
basic 191,214
Pro Forma
Other Pro Forma
Subtotal Adjustments 4 Combined
<S> <C> <C> <C>
Revenues $ 2,055,379 $(32,507) B $2,022,872
Costs and expenses:
Cost of revenues 1,357,297 (174,431) B,H,I 1,182,866
Marketing
Marketing 561,131 (15,959) B 545,172
Write off of deferred subscriber
acquisition cost 385,221 - 385,221
Product development 104,708 (935) B 103,773
General and administrative 160,704 (2,977) 157,727
Amortization of goodwill 3,720 14,665 B,F 18,385
Restructuring charge 81,411 - 81,411
Contract termination charge 24,506 - 24,506
Settlement charge 24,204 - 24,204
Total costs and expenses 2,702,902 (179,637) 2,523,265
Income (loss) from operations (647,523) 147,130 (500,393)
Other income, net 6,279 - 6,279
Income (loss) before provision for
income taxes (641,244) 147,130 (494,114)
Provision for income taxes 36,979 (36,979) J -
Net income (loss) $(604,265) $110,151 (494,114)
Net income per common share - diluted $ (2.58)
Net income per common share - basic $ (2.58)
Weighted average shares outstanding -
diluted 191,214
Weighted average shares outstanding -
basic 191,214
See accompanying notes.
</TABLE>
Notes to Unaudited Pro Forma Combined Financial Statements
1. Reflects the assets and liabilities and the results of operations of the
COLS Business acquired by AOL. The statements of operations of the COLS
Business includes the results of operations of CompuServe's worldwide
interactive services division including the results of operations of its
wholly-owned subsidiaries Spry, Inc. (Spry), for all periods presented and
CompuServe Works of Wonder, Inc. ("WOW!") for the period ended April 30,
1997. The WOW! interactive service was withdrawn effective January 31,
1997. The balance sheet reflects the financial position of the COLS
Business including the assets and liabilities of Spry.
The audited financial statements and the unaudited interim period financial
statements of the COLS Business are included in this Form 8-K/A.
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 assets and liabilities and the results of operations of the
ANS business exchanged for the COLS Business and $147 million in cash
(excluding $15 million in cash received as part of the COLS Business and
after purchase price adjustments made at closing)from WorldCom.
The pro forma statements 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 assets and liabilities and the results of operations of the
COLS European Business sold to Bertelsmann concurrent with the Purchase and
Sale.
The statements of operations and balance sheet have been prepared as if the
COLS European Business had operated as an independent standalone entity for
the periods presented. The financial statements include allocations of
corporate administrative and network service costs. Management believes
that these allocations are reasonable. These financial statements are 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. Reflects the cash received from the Purchase and Sale, the sale of 50%
of the COLS European Business to Bertelsmann, net of cash reinvested into
the COLS European Business by AOL, and the minimum cash requirements
associated with the purchase of the COLS Business and the sale of the COLS
European Business.
B. 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. See
Note 4E.
C. Reflects the write down to fair value of approximately $15 million of
certain current assets in connection with the allocation of the purchase
price of the COLS Business.
D. Reflects the write down to fair value of approximately $33 million of
certain fixed assets in connection with the allocation of the purchase
price of the COLS Business.
E. Reflects AOL's investment in the COLS European Business and the impact
of the allocation of Spry's assets to the estimated net realizable value,
see Note 4B.
F. Reflects the excess of the fair market value of the domestic and rest-
of-world interactive services 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.
G. Reflects the accrual of certain liabilities directly associated with
the Purchase and Sale including certain professional fees as well as other
contractual obligations acquired by the Company.
H. Reflects the excess of the fair market value of assets received over
the net book value of the ANS business exchanged. This deferred network
service credit will be amortized 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.
I. Reflects the impact of the pricing contained in the Services Agreement
as well as the impact of the amortization of the deferred network services
credit. See Note 4H. 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 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.
J. Reflects the adjustment necessary to conform the effective tax rate
applied to the pro forma combined results of operations to 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.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
AMERICA ONLINE, INC.
Date:April 17, 1998 By:/S/LENNERT J. LEADER
Lennert J. Leader
Senior Vice President, Chief
Financial Officer, Chief
Accounting Officer, Treasurer
and Assistant Secretary
EXHIBIT INDEX
Exhibit
Number Description
23 Consent of Ernst & Young LLP
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8) listed below of our report dated March 26, 1998 with respect to the
financial statements of the Interactive Services Division of CompuServe
Corporation for the year ended April 30, 1997, included in America Online,
Inc.'s Current Report on Form 8-K/A dated April 17, 1998, filed with the
Securities and Exchange Commision.
1) No. 33-46607 10) No. 33-94004
2) No. 33-48447 11) No. 333-00416
3) No. 33-78066 12) No. 333-02460
4) No. 33-86392 13) No. 333-07163
5) No. 33-86394 14) No. 333-07559
6) No. 33-86396 15) No. 333-07603
7) No. 33-90174 16) No. 333-22027
8) No. 33-91050 17) No. 333-46637
9) No. 33-94000 18) No. 333-46635
19) No. 333-46633
/s/Ernst & Young LLP
Ernst & Young LLP
Columbus, Ohio
April 17, 1998
