SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1999
Commission File Number - 001-12143
AMERICA ONLINE, INC.
(Exact name of registrant as specified in its charter)
Delaware 54-1322110
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
22000 AOL Way 20166-9323
Dulles, Virginia (zip code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (703) 265-1000
Securities registered pursuant to section 12(b) of the Act:
(Name of Each Exchange on
(Title of Each Class) Which Registered)
-------------------------------------- -------------------------
Common Stock, par value $.01 per share New York Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange
Securities registered pursuant to section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No_____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. _____
As of July 30, 1999, the aggregate market value of voting stock held by
non-affiliates of the registrant, based upon the closing sales price for the
registrant's common stock, as reported on the New York Stock Exchange, was
approximately $104.4 billion (calculated by excluding shares owned beneficially
by directors and officers).
Number of shares of registrant's common stock outstanding
as of July 30, 1999...................................1,108,080,083
DOCUMENTS INCORPORATED BY REFERENCE
The following documents (or parts thereof) are incorporated by reference
into the following parts of this Form 10-K: Certain information required in Part
III of this Form 10-K is incorporated from the registrant's Proxy Statement for
its 1999 Annual Meeting of Stockholders.
<PAGE>
PART I
Item 1. Business
General
Founded in 1985, America Online, Inc., based in Dulles, Virginia, is the
world's leader in interactive services, Web brands, Internet technologies, and
electronic commerce services.
America Online has two major lines of businesses organized into four
product groups:
o the Interactive Online Services business, comprised of the Interactive
Services Group, the Interactive Properties Group and the AOL
International Group, and
o the Enterprise Solutions business, comprised of the Netscape
Enterprise Group.
The product groups are described below.
The Interactive Services Group develops and operates branded interactive
services, including:
o the AOL service, a worldwide Internet online service with more than 17
million members as of June 30, 1999
o the CompuServe service, a worldwide Internet online service with
approximately 2 million members
o the Netscape Netcenter, an Internet portal with more than 17 million
registered users
o the AOL.COM Internet portal
o the Netscape Communicator client software, including the Netscape
Navigator browser
The Interactive Properties Group is built around branded properties that
operate across multiple services and platforms, such as
o Digital City, Inc., the No. 1 branded local content network and
community guide on the AOL service and the Internet
o ICQ, the world's leading communications portal that provides instant
communications and chat technology
o MovieFone, Inc., the nation's No. 1 movie guide and ticketing service
provided through an interactive telephone service and on the AOL
service and the Internet
o Internet music brands Spinner.com, Winamp and SHOUTcast
The AOL International Group oversees the AOL and CompuServe services and
operations outside the United States, as well as the Netscape Online service,
which will be launched soon in the United Kingdom.
The Netscape Enterprise Group focuses on providing businesses a range of
software products, technical support, consulting and training services. These
products and services enable businesses and users to share information, manage
networks and facilitate electronic commerce.
In November 1998, America Online entered into a strategic alliance with Sun
Microsystems, Inc. ("Sun"), a leader in network computing products and services,
to accelerate the growth of electronic commerce. The strategic alliance provides
that, over a three-year period, the Company will develop and market, together
with Sun, client software and network application and server software for
electronic commerce, extended communities and connectivity, including software
based in part on the Netscape Enterprise Group code base, on Sun code and
technology and on certain America Online services features, to business
enterprises.
For a discussion of financial information about the Company's two lines of
business, refer to Note 9 of the Notes to Consolidated Financial Statements.
During the fiscal year, the Company entered into a number of strategic
mergers. In March 1999, the Company completed its merger with Netscape
Communications Corporation and in May 1999, the Company completed its merger
with MovieFone, Inc. The Company also completed mergers with Nullsoft, Inc. and
Spinner Networks Incorporated, companies that provide music over the Internet,
When, Inc., a company that provides a personalized event directory and calendar
services, AtWeb, Inc., and PersonaLogic, Inc.
America Online was incorporated in Delaware on May 24, 1985. The principal
executive offices are located at 22000 AOL Way, Dulles, Virginia 20166-9323. The
Company's telephone number at that address is (703) 265-1000. Inquiries may also
be sent to America Online's Internet address: AOL [email protected], or to the America
Online address, AOL IR.
<PAGE>
Interactive Online Services Business
Products and Services
The Company's Interactive Online Services business is divided into three
major product groups: the Interactive Services Group, the Interactive Properties
Group and the AOL International Group. This line of business includes the
Company's online and Internet services, Web properties and client software. The
Company has developed a multiple-brand strategy of products and services that
appeal to complementary and diverse groups of members or users of the Internet.
The Company has also developed a multiple-revenue stream strategy designed to
broaden the sources of revenues from its properties and services beyond
subscription revenues to include revenues from sources such as advertising,
commerce, licensing fees and transaction fees. The Company has augmented its
online services with branded properties that add features or content across
multiple services or platforms. Following these strategies has enabled the
Company to operate the business and improve its services and products in a
cost-effective manner by utilizing a shared infrastructure performing core
functions.
Interactive Services Group
The Interactive Services Group operates the Company's interactive
products: the AOL and CompuServe services and their related brand and product
extensions such as AOL.COM and AOL Instant Messenger ("AIM"); Netscape
Netcenter; and the Netscape Communicator client software, including the Netscape
Navigator browser.
The AOL Service
The Company's AOL service, with 17.6 million members at June 30, 1999,
provides subscribers with a global, interactive community offering a wide
variety of content, features and tools. The AOL service also includes simple
access to the Internet with search functionality through AOL NetFind. The range
of content, features, and tools offered on the AOL service includes the
following:
--Online Community--America Online promotes interactive community through
electronic mail services, public bulletin boards, the Buddy List feature (for
members to keep an up-to-the moment account of whether fellow members are
online, subject to a blocking feature), the AOL Instant Messenger service, which
allows members to communicate online instantaneously without having to access an
electronic mailbox, an online community center, public or private "meeting
rooms" and interactive conversations (chat). Guest interviews, with
participation by members, take place at live "auditorium" events.
--Channel Line-Up--Content on the AOL service is organized into channels,
allowing members to navigate the service easily to find areas of interest. Each
of the following nineteen channels offers informational content and commerce and
community opportunities: AOL Today, News, Sports, Influence, Travel,
International, Personal Finance, WorkPlace, Computing, Research & Learn,
Entertainment, Games, Interests, Lifestyles, Shopping, Health, Families, Kids
Only and Local. Content providers on the AOL service include CBS News, Hachette
Filipacchi Magazines, Bloomberg, The New York Times and Business Week.
--Personalization and Control Features--Members can personalize their
experience on the AOL service through a number of features and tools, including
a reminder service that sends e-mail in advance of important events, stock
portfolios that automatically update market prices, Mail Controls, which allow
members to limit who may send them e-mail and to block certain types of e-mail,
Favorite Places, which allows members to mark particular Web sites or AOL areas,
and Portfolio Direct and News Profiles, which send stories of particular
interest to members. The AOL service offers Parental Controls to help parents
form their children's online experience, including tools that limit access to
particular AOL areas or Web sites or to certain features (for example, the AOL
Instant Messenger service, sending or receiving files attached to e-mail or
embedded pictures in e-mail, or access to premium services). The Marketing
Preferences feature enables members to elect not to receive certain marketing
offers.
Later this year the Company plans to introduce its latest version of the
AOL service software, AOL 5.0. New features to the service will include "You've
Got Pictures," "My Calendar," AOL Search and AOL Plus. "You've Got Pictures,"
which began testing in June 1999, will allow members to receive their developed
photos online, share the photos with others via e-mail, organize and store
photos online and order reprints and gifts. "My Calendar" will be an interactive
desktop calendar that includes features that enable members to track
appointments, key dates and other personal events online. AOL 5.0 will feature
AOL Search, a new search product that will enable AOL members to search the
Internet and AOL's exclusive content without leaving the AOL service. The
service will also include AOL Plus, a feature that will enable members to
connect to the AOL service through high-speed broadband technologies, including
DSL, cable, satellite and wireless and will provide additional online content to
members connecting through such broadband technologies. The expanded content
will include video, games, music and online catalogue shopping features.
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The CompuServe Service
The CompuServe service, with approximately 2 million members, targets the
value-oriented portion of the U.S. market and the professional business-oriented
market outside of the U.S. It is available in over 500 cities worldwide,
including in the U.S., Canada and Europe. This fiscal year the CompuServe
service launched CompuServe 2000, new software that provides faster Internet
connections, easier installation and registration, expanded customer options,
more powerful e-mail features and simpler navigation. CompuServe also launched a
Web site, CompuServe.com, to serve as an Internet gateway for its members.
Features on the site include personalized news, updated weather, favorite links
and Web centers highlighting specific areas of interest. CompuServe has created
a Custom Solutions Division to develop and create co-branded and custom versions
of the CompuServe 2000 software. The Custom Solutions Division will also offer
private label Internet solutions for strategic partners.
The Netscape Netcenter
The Company's Netscape Netcenter Web site (http://www.netscape.com) has
more than 17 million registered users and offers a variety of products and
services, including news and information, opportunities to purchase goods and
services, Internet site directories, software, software downloads, and product
and technical support information. Netcenter's services consist of search and
navigation services, such as the aggregated NetSearch area, which helps
consumers and businesses find relevant information, and SmartBrowsing;
programming channels, such as Lifestyles, Personal Finance or Small Business,
which organize content and services for directed broadcast; communications and
community services such as e-mail and bulletin board services, which help
consumers and businesses connect and communicate; personalization services, such
as My Netscape Channel, a personalized topical channel that users can customize
to their personal interests; Customer Netcenter, which enables businesses to
create their own portals; and opportunities for electronic commerce. Netcenter
also offers services such as: Site Central, a free Web site building service,
Netscape Sports Channel, Delivery Channel by FedEx and the My Netscape Network.
Netcenter also promotes the Company's software and customer solutions by
featuring descriptions of the Company's offerings and providing downloads of
certain software products. Netcenter includes a co-branded version of the
Company's AOL Instant Messenger service and its "Local" channel features content
provided by the Company's Digital City property.
The AOL.COM Web Site
The Company's AOL.COM Web site (http://www.AOL.COM) offers Internet users
(who may not be AOL members) content, features and tools, including AOL NetFind,
an Internet search and rating tool, and the AOL Instant Messenger service, which
allows Internet users to communicate in real-time with their friends and family.
AOL.COM also offers AOL members the opportunity to exchange e-mail on the
Internet, without signing onto the service, through AOL NetMail, and My News, a
personalized news service. Content provided on the AOL.COM site includes news,
shopping, Web search services, classified advertisements, and white and yellow
pages directories. The Company plans to continue to expand content and services
available through the AOL.COM Web site.
AOL Instant Messenger (AIM)
The Company's AOL Instant Messenger (AIM) service is a Web-based
communications service that enables Internet users to know when other users of
the service are online and to send and respond in real time to private
personalized electronic text messages. When an instant message is sent via AIM,
the message pops up on the receiver's screen instantly. The AIM service had over
25 million registered users, as of June 30, 1999. The AIM service is free, and
available for downloading on AOL.COM and on a co-branded basis on the Company's
other brands and services, including the CompuServe service, CompuServe.com,
Netscape Netcenter, and to users of Netscape Communicator software. The Company
has also announced arrangements to develop co-branded versions of the AIM
serivce with Apple Computer, Inc., Mindspring Enterprises, Inc., Earthlink
Network and Juno Online Services, Inc. Version 2.0 of the AIM service offers
such features as the ability to search the Web and yellow and white pages
directory features directly from the AIM service and access to news and
information; a "File Transfer" feature that allows users to share files with
other AIM 2.0 users; and a directory of chat and interest areas.
<PAGE>
Netscape Communicator
Netscape Communicator is a suite of open HTML-based client software that
integrates browsing, e-mail, Web-based word processing and group scheduling.
This suite of software enables users to communicate, share and access
information. Netscape Navigator, the browser that serves as the core component
of Netscape Communicator, allows access to information and network applications
on intranets, extranets and the Internet. Netscape Navigator offers a
point-and-click graphical user interface that allows users to browse the
Internet's array of network resources and participate in commerce across
extranets and the Internet. Two versions of the Netscape Communicator are
marketed: Netscape Communicator and Netscape Communicator with Calendar. The
latest version, Communicator 4.6, was released in May 1999 and offers several
new features, including the Company's SmartBrowsing technology and streaming
audio and visual capabilities for consumers. With the SmartBrowsing technology
consumers can search Netcenter services and connect to Web sites covering a
variety of topics by entering common words or topics (Netscape Internet
Keywords) into the browser location bar.
Interactive Properties Group
The Interactive Properties Group includes and oversees the Company's
branded properties that operate across multiple services or platforms, such as
Digital City, ICQ and MovieFone. The group is also responsible for developing
new distribution networks that will enable the Company to build or acquire
branded properties that operate across the Company's multiple services and
platforms while benefiting from the Company's common infrastructure.
Digital City
The Company's subsidiary, Digital City, Inc., which is owned in part by the
Tribune Company, is a local online content network that offers a network of
local content and community guides in over 60 U.S. cities, including Atlanta,
Boston, Chicago, Dallas, Denver, Detroit, Los Angeles, Minneapolis, New York,
Orlando, Philadelphia, San Diego, San Francisco and Washington, D.C. Local
content provided by Digital City includes original and third-party news, sports,
weather, a local guide service with directory and classified listings and an
interactive forum. Digital City provides local interactive content and services
on the AOL service, AOL.COM, the CompuServe service, CompuServe.com, Netscape
NetCenter, ICQ and on the Worldwide Web (http://www.digitalcity.com). Digital
City also is available through other distribution vehicles. For example, Digital
City has an agreement with MCI Worldcom to become the local content provider on
MCI Worldcom Internet, offering its interactive city guides to its Internet
subscribers.
ICQ
The Company's subsidiary, ICQ Ltd., is an Internet-based communications Web
portal site, which utilizes the ICQ ("I seek you") instant communications and
chat technology. The portal site is located at http://www.icq.com. At the end of
fiscal 1999, ICQ had nearly 38 million registered users, and was being used
actively by almost 15 million users. More than 7.5 million people use ICQ
everyday, with more than one million simultaneous users. Users become aware of
ICQ through the "word of mouth" equivalent on the Internet of invitations from
current ICQ users to potential users via e-mail. ICQ has international appeal
and presence and is used primarily by young, knowledgeable users. ICQ has
introduced its latest software, 99a, which brings new tools onto to the desktop,
including ICQiT!, a built-in suite of intuitive search tools, and the new ICQ
NOW! content and community area. The Company acquired the ICQ technology with
its focus on interactive community and constant desktop presence, and is
developing it into an all-service Web portal that maintains its desktop
presence.
AOL MovieFone
The Company acquired MovieFone, the largest movie guide and ticketing
service in the country, in May 1999. Through its interactive telephone service
and its online service, MovieFone.com, MovieFone provides millions of moviegoers
each week with a complete free directory of movies, showtimes and theater
locations, and also provides them the ability to purchase tickets. The Company
intends to use MovieFone to enhance the online entertainment information
available across its family of brands and to provide special events and features
for subscribers to and users of its interactive services and products.
<PAGE>
Spinner.com, Winamp and SHOUTcast
The Company acquired several Internet music brands in May 1999 through its
acquisitions of Spinner Networks Incorporated and Nullsoft, Inc. The Spinner.com
Web site offers over 100 channels of programmed music in various formats. Its
content includes over 175,000 songs, and its music players display song
information as the song is played. The music players also provide links that
enable real-time listener feedback and instant ordering of the music being
played. Nullsoft, Inc. is the developer of Winamp, a branded MP3 player for
Windows, and SHOUTcast, an MP3 streaming audio system. The SHOUTcast streaming
audio system enables individuals to broadcast their own content over the
Internet. The Company plans to make these music features available to consumers
across its brands, as well as to customize them for the audience and partners of
the Company's brands.
AOL International Group
The AOL International Group oversees the AOL and CompuServe services and
operations outside the United States, as well as the Netscape Online service,
which will be launched soon in the United Kingdom. As of August 1999, the AOL
and CompuServe services had more than 3 million members outside the United
States. The Company offers its AOL and/or CompuServe branded services through
joint ventures or distribution arrangements in Australia, Austria, Canada,
France, Germany, Japan, the Netherlands, Sweden, Switzerland and the United
Kingdom. Globally, members are able to access these services in over 100
countries. Additionally, the Company is in the process of expanding the number
of countries to which it offers local services. The Company's international
strategy is to provide consumers with local services in key international
markets featuring local language, content, marketing and community.
Central to the Company's strategy has been the formation of strategic
alliances with strong international partners and the provision of access for all
members of international services. In addition, U.S. and global subscribers to
the AOL service can access selected content and communities offered on the
Company's other global services. The Company, through joint ventures with
Bertelsmann AG entitled "AOL Europe" and "CompuServe Europe," provides the AOL
service and/or the CompuServe service in several European countries and plans to
extend these services into additional European markets. Bertelsmann, one of the
world's largest media companies, is a minority stockholder in the Company with
an approximately 1.3% stake, and Dr. Thomas Middelhoff, Bertelsmann's Chairman,
is a member of the Company's Board of Directors.
The Company continues to update its services to match the needs of its
international markets. For example, in June 1999, AOL Europe introduced an
unlimited use, flat-rate monthly pricing plan in the United Kingdom, and in July
1999, AOL Europe announced plans to launch Netscape Online, a new subscription
free service, in mid-August 1999. The Netscape Online service will compete in
the emerging subscription-free value market in the United Kingdom and will
complement the existing AOL and CompuServe services.
During the past fiscal year, the Company has also taken steps to launch
services in several new foreign markets:
o Australia: The AOL Australia service was launched in October 1998
through a joint venture between the Company and Bertelsmann AG. AOL
Australia features exclusive local Australian content and also offers
members access to the original content available on the international
services.
o Hong Kong: An AOL-branded service for Hong Kong consumers is expected
to be launched in the fall of 1999. The AOL Hong Kong service will
provide original local content in both Chinese and English, with most
local content being developed or provided by China Internet
Corporation Limited ("CIC"), a Hong Kong based company that has
entered into a distribution arrangement with the Company. In June
1999, the Company acquired an equity interest in the former
wholly-owned subsidiary of CIC, China.com, an Internet company and
affiliate of CIC that operates Web portals throughout greater China.
The Company intends to use its investment in China.com to expand its
commitments in the region. A Web site, AOL.COM.HK, is currently
available in either English or Chinese language. The Web site includes
both a co-branded AOL Instant Messenger service and the AOL Netfind
feature with either English or Chinese language search capabilities.
o Latin America: In December 1998, the Company announced the formation
of a joint venture with the Cisneros Group of Companies ("Cisneros
Group") to bring the Company's services to consumers in Latin America.
In June 1999, the Brazilian subsidiary of the joint venture launched
the BR.AOL.COM Web site. The joint venture expects to launch an
Internet online service, AOL Brasil, by the end of 1999. The joint
venture plans to launch services in Mexico and Argentina in 2000, with
other markets to be added in the future. The joint venture will also
be responsible for the development of the CompuServe brand in Latin
America.
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Advertising and Commerce
An important component of the Company's strategy in its Interactive Online
Services business is to increase revenues from advertising and commerce sources
and from the sale of merchandise. The Company continues to establish a wide
variety of relationships with advertising and commerce partners to grow and
diversify its non-subscription based revenues and to provide subscribers on the
Company's interactive services with access to a broad selection of competitively
priced, easy-to-order products and services. The Company has worked to develop
multiple revenue sources for its interactive properties and services, and to
broaden the scope of those revenue sources beyond subscriptions and advertising
fees to include revenues from additional sources, such as transaction fees and
licensing fees. The Company has also expanded the scope, range and types of
businesses involved in advertising and commerce relationships. The Company has
entered into advertising arrangements that encompass multiple brands within the
Company's family of brands. Additionally, the Company has renewed and extended
or expanded relationships with existing advertising and commerce partners.
The Company offers its advertising and commerce partners a variety of
customized programs, which may include guaranteed numbers of impressions and
select sponsorship of particular online areas or Web pages for designated time
periods. As merchants recognize the value in reaching the Company's large,
growing and active subscriber base and users of its Web-based properties, the
Company has been able to earn additional revenues by offering selected merchants
exclusive rights to market particular goods or services within one or more of
the Company's online services and properties. In those transactions, the Company
provides its commerce partners certain marketing and promotional opportunities
and in return receives cash payments, the opportunity for revenue sharing,
cross-promotions and competitive pricing and online conveniences for
subscribers. Certain of the transactions with partners also include an equity
component for the Company. The Company may receive a warrant to purchase stock
or may purchase or acquire a direct equity interest in the partner. These equity
investments are accounted for in accordance with Company accounting policies and
certain of these equity investments may result in revenue generation at the
onset of the deal. In addition, these equity investments can also represent an
additional potential source of income to the Company upon their disposition.
The advertising and commerce partnerships also provide the users of the
Company's interactive services and properties with access to a diverse selection
of consumer products and services. The Company obtains revenues from the sale of
merchandise by offering for sale to subscribers on its interactive services a
number of computer and Internet online goods and services, including hardware
and software products and books and Company logo merchandise. The Company
promotes its merchandise principally by means of promotional "pop-up" screens
and makes its merchandise available in online stores included in various channel
stores and in specialized seasonal or other targeted shops.
Network Services
Interactive Online Services Business Technologies
The Company employs a multiple vendor strategy in designing, structuring
and operating its network services utilized in its Interactive Online Services
business. The Company manages AOLnet, a transfer control protocol/Internet
protocol (TCP/IP) network of third party network service providers, including
Sprint Corporation, GTE Internetworking, formerly BBN Corporation, and MCI
WorldCom, Inc.'s wholly-owned subsidiary MCI Worldcom Advanced Networks, Inc.
AOLnet is used for the AOL service and certain versions of the CompuServe
service in North America.
The Company anticipates continuing to build AOLnet in order to increase its
network capacity, provide members of its online services with higher speed
access and reduce data network costs on a per-hour basis. During fiscal 1999,
the Company added modems at a rate of approximately 37,500 monthly to expand to
approximately 1.25 million modems. The AOL service grew as of July 1999 to
achieve over 1.14 million simultaneous users, the exchange of approximately 66
million e-mail messages a day and 468 million Instant Message communications a
day. AOLnet offers members of the AOL service in North America local telephone
numbers in approximately 1,000 cities. In total, the AOL service is available in
approximately 1,500 cities in more than 100 countries.
The CompuServe service for versions prior to CompuServe 2000 currently
relies on data network services provided pursuant to a Network Services
Agreement among the Company and CompuServe Incorporated, a wholly-owned
subsidiary of MCI WorldCom. The agreement has an initial term ending December
31, 2002, subject to possible extension by the Company under certain
circumstances. Under the agreement, the Company has made certain commitments to
use such network services for these versions of the CompuServe service. The
smooth operation of and access capacity on these versions of the CompuServe
service are dependent on the network services provided under the agreement and
would be adversely affected by service failures of the network services
provider. The CompuServe service is available in over 500 cities worldwide.
The Company's ability to reduce data network costs on a per-hour basis and
to expand the network capacity may be limited or impaired under certain
circumstances. The Company enters into multiple-year data communications
agreements to support AOLnet. In connection with those agreements, the Company
may commit to purchase certain minimum data communications services or to pay a
fixed cost for the network services. Accordingly, if the number of subscribers
or usage significantly decreases, network costs will not correspondingly
decrease.
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Subscribers to the Company's interactive online services may experience
difficulty in accessing their service from local access numbers from time to
time due to changing patterns of usage or peaks in usage in particular
geographic areas. 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 expansion of AOLnet requires a
substantial investment in telecommunications equipment, which the Company is
financing principally through leasing. Supply shortages or the failure to obtain
the necessary financings for the buildout of AOLnet could impair the Company's
ability to expand network capacity.
Service Platforms and Access Devices
The Company supports a variety of software platforms, hardware devices and
conduits for access to the Company's interactive online services. Today, the
vast majority of members and users of interactive online services access such
services through personal computers. Software platforms that the AOL and
CompuServe services are available on include primarily the Windows (3.1, 95 and
98) and Macintosh operating systems. The Company has established its "AOL
Anywhere" strategy of making the AOL service and features available through
multiple connections and multiple devices. The Company intends to make its
interactive online services available on new and future platforms or devices,
such as televisions, wireless telephones, hand-held or pocket devices, online
appliances, and smart phones, as consumer demand and technology and commercial
viability permit. The Company is developing versions of its interactive online
software that are customized for use on the various platforms. Features that may
be made available on the different platforms include e-mail, news, stock quotes,
electronic commerce and instant messages. The Company's next generation software
for the AOL service, AOL 5.0, which will be introduced in the fall of 1999, will
include the new feature AOL Plus, which will enable members to connect to the
AOL service through high-speed broadband technologies, including DSL, cable,
satellite and wireless, and will provide additional online content to members
connecting through such broadband technologies. The expanded content will
include video, games, music and online catalogue shopping features.
The Company already has taken steps under this strategy to broaden the
platforms and devices on which services or features of its services can be
accessed. For example, in June 1999, the Company and 3Com Corporation announced
a strategic relationship to give AOL service members access to their e-mail via
a handheld computer and to work to provide additional features of the AOL
service on the handheld platform. In addition, the Company has continued
development work related to AOL TV, an enhanced interactive television Internet
service. In May 1999, the Company announced arrangements with four partners,
DIRECTV, Inc., Hughes Network Systems, Phillips Electronics and Network
Computer, Inc. (now known as Liberate Technology, Inc.), related to the
development of different components of the AOL TV service, including the design
and manufacture of set top boxes used in the service, the software platform for
the service and collaboration on combining digital satellite television
programming with the service. The Company also has a license from Gemstar
International Group Limited to use Gemstar's technology and intellectual
property to develop and deploy electronic programming guides for the AOL TV
service.
In June 1999, the Company formed a strategic alliance with Hughes
Electronics Corporation ("Hughes"), a subsidiary of General Motors Corporation
("General Motors"), to develop and market integrated digital entertainment and
Internet services. The alliance will extend the reach of the Company's AOL TV
interactive television and its AOL Plus high-speed Internet services. The
alliance, which builds on an earlier agreement to develop a combination set-top
receiver for DirecTV and AOL TV, provides for extensive cross-promotion and
marketing. It also provides for the delivery of AOL Plus to members via Hughes'
DirectPC satellite Internet network beginning next year, as well as delivery
over Hughes' next generation satellite system for two-way, broadband
connectivity. In connection with the alliance, the Company made a $1.5 billion
investment in Hughes in the form of a General Motors preference stock, which
carries a 6-1/4% coupon rate and has a mandatory conversion into General Motors
Class H common stock (GMH) in three years. For additional information regarding
this investment, see "Liquidity and Capital Resources" under Part II, Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The Company has upgraded AOLnet to support the v.90 standard for high-speed
access at 56 kps, and is also investing in the development of alternative
technologies to deliver its interactive online services, including cable modems,
Digital Subscriber Line (xDSL) access, satellite and wireless technologies. The
Company plans to offer its members higher-speed options when they become
easy-to-use and commercially viable for the mass market. The Company has formed
strategic alliances with each of Bell Atlantic, SBC Communications, Ameritech
Corp. and GTE Corp. to use new DSL technology to make available a high-speed
upgrade connection to subscribers, with the initial roll out beginning in the
summer of 1999. By the end of 1999, the Company expects to offer a high-speed
broadband upgrade to serve more than 70 percent of AOL members and will cover
nearly 16 million homes. The Company also has entered into an agreement with
Compaq under which new Compaq Presario Internet PCs will be equipped with
DSL-ready modems and will feature pre-installed AOL software that will enable
users to access features available through broadband.
<PAGE>
Marketing
The Company's marketing efforts and activities in its Interactive Online
Services business are conducted for its multiple brands through a common
infrastructure. The marketing goals of the Company's Interactive Online Services
business are to attract and retain members or users, as applicable, of the
online services and properties and to develop and differentiate the Company's
family of brands. To support member acquisition, the Company markets its
products and services through a broad array of programs and strategies,
including broadcast advertising campaigns, direct mail, magazine inserts and
advertisements, co-marketing, bundling agreements and alternate media. The
Company also actively markets its multiple brands through traditional campaigns
(broadcast television, radio and print publications), and through more
innovative means, such as through extensive online and offline cross-promotion
and co-branding with a wide variety of interactive services partners.
Additionally, through bundling agreements, the Company's interactive online
services are on a range of computers made by major personal computer
manufacturers. The multi-year agreements provide that pre-installed software
will be available by clicking on an icon during the computer's initial setup
process. Through an agreement with Microsoft Corp., the AOL service is
accessible via a desktop folder on the Windows 95 and 98 operating systems (and
will be available on future versions of the Windows operating system through the
term of the agreement).
The Company utilizes targeted or limited promotions and marketing programs
and pricing plans designed to appeal to particular groups of potential users of
its interactive online services and to distinguish and develop its different
brands. For example, in connection with the positioning of the CompuServe
service in the United States as a value-oriented brand, in June and July 1999
the Company announced marketing initiatives for its CompuServe service with two
computer manufacturers and a number of additional retailers. Under these
promotions, consumers signing up for three-year memberships to the CompuServe
2000 service at $21.95 per month will receive a rebate of $400 in connection
with the purchase of designated models of computers. This promotion is designed
to appeal to consumers who are purchasing computers for the primary purpose of
getting online and to make the purchase of a personal computer and Internet
access easier and more affordable.
The Interactive Online Services business utilizes specialized retention
programs designed to increase member and user loyalty and satisfaction. These
retention programs include regularly scheduled online events and conferences;
the regular addition of new content, features and software programs; and online
promotions of upcoming online events and new features. The Company also provides
a variety of support mechanisms such as online support and 24-hour telephone
customer support services.
Enterprise Solutions Business
Products and Services
The Netscape Enterprise Group is the primary product group in the
Enterprise Solutions business of the Company. In addition, the Company has
formed Netscape Business Solutions to sell AOL and Netscape products and
services to business partners and other companies.
Netscape Enterprise Group
The Netscape Enterprise Group provides enterprise software and services to
businesses that assist them in providing services to customers in the electronic
commerce markets. The Netscape Enterprise group develops, markets, sells and
supports a broad suite of enterprise software, which consists of electronic
commerce infrastructure and electronic commerce applications targeted primarily
at corporate intranets and extranets, as well as the Internet. The software
allows users to share information, manage networks and take their businesses
online. The software is based on industry-standard protocols that can be
deployed across a variety of operating systems, platforms, databases and
interconnected with traditional client/server applications. The Netscape
Enterprise Group also provides a variety of services to support its software
products, including technical support, professional services and training.
Following the merger with Netscape in March 1999, the Netscape Enterprise Group
began contributing to the Company's strategic alliance with Sun Microsystems,
Inc.(see below).
Electronic Commerce Infrastructure
The Electronic Commerce Infrastructure is a group of solutions for
enterprise customers and Internet Service Providers that provide a flexible,
scalable foundation on which the customers can build and manage their own
extranet or Internet applications or use the Electronic Commerce Applications.
The Electronic Commerce Infrastructure provides a services-ready platform
through such solutions as a directory and security service for managing users
and applications, an application server for building and deploying applications,
and a messaging solution for hosting and delivering communications services such
as e-mail and unified messaging.
<PAGE>
Electronic Commerce Applications
The Netscape CommerceXpert product family of electronic commerce
applications enable businesses to link and manage online trading communities of
suppliers, distributers, and customers of all sizes and degrees of technical
sophistication. The Netscape CommerceXpert solutions are based on the same open
protocols and scalable security architecture used for communications on the
Internet. These solutions enable organizations to create more secure Internet
commerce sites and exchange information with trading partners.
Sun Alliance
In November 1998, the Company entered into a strategic electronic commerce
alliance with Sun, which is now referred to as the Sun-Netscape Alliance. In
combination with dedicated resources from Sun, the Netscape Enterprise Group
operates the Company's part of the alliance. The alliance builds and markets on
a collaborative basis end-to-end electronic commerce solutions to help business
partners and other companies put their businesses online. The alliance product
portfolio provides customers with scalable, integrated infrastructure software
and a family of production-ready electronic commerce applications. Products will
be offered on the industry's most widely available computing platforms. The
infrastructure product portfolio includes: messaging (e-mail) and calendar,
collaboration, Web, application, directory (network phone book) and certificate
(security) servers. The alliance offers a family of production-ready
applications for electronic commerce, including commerce exchange, procurement,
selling and billing applications intended to make electronic commerce more
efficient. The alliance initially will market and provide existing products from
each of Sun and the Netscape Enterprise Group and then will include
collaboratively developed products. The alliance has a dedicated sales force
that sells the full suite of products on multiple platforms. Support and
integration services are also provided.
Marketing
The Company's marketing efforts and activities in its Enterprise Solutions
line of business are conducted primarily through joint marketing efforts of the
Sun-Netscape Alliance. The marketing goals of the Company's Enterprise Solutions
business are to position the Sun-Netscape Alliance as the leading provider of
electronic commerce applications and Internet infrastracture software to power
the Net economy. The Sun-Netscape Alliance has announced that it will develop,
market and sell the products and systems through the alliance using the brand
name "iPlanet."
The marketing programs of the Company's Enterprise Solutions business focus
on reaching corporate decision makers in its key markets. Advertising will focus
on the Sun-Netscape Alliance's leadership position in the industry and the
breadth and innovation of the iPlanet product portfolio. Advertising media will
include the Company's interactive online services and properties, traditional
print and broadcast advertising campaigns and bundling agreements. A dedicated
sales force also markets the products and services sold or provided through the
Sun-Netscape Alliance directly to potential customers.
The Enterprise Solutions business utilizes customer marketing programs
designed to increase customer loyalty, customer value over time and customer
satisfaction. These programs include the recently announced iPlanet Customer
Program featuring a secure customer extranet and specialized joint marketing
activities, a new customer quality initiative and customer support and services.
Employees
As of June 30, 1999, the Company had approximately 12,100 employees.
America Online believes that its relations with its employees are good. None of
the Company's employees are represented by a labor union, and the Company has
never experienced a work stoppage.
Proprietary Rights
The Company relies upon a combination of contract provisions and patent,
copyright, trademark and trade secret laws to protect its proprietary rights in
its products and services. The Company distributes its products and services
under agreements that grant members, users or customers a license to use its
products and services and relies on the protections afforded by the copyright
laws to protect against the unauthorized reproduction of its products. To
license its products, the Company relies in part on "shrink wrap" licenses that
are not signed by the end-user and, therefore, may be unenforceable under the
laws of certain jurisdictions. In addition, the Company attempts to protect its
trade secrets and other proprietary information through agreements with
employees and consultants. The Company has also filed for a number of patents
for technology relating to the Internet and online industry. Although the
Company intends to protect its rights vigorously, there can be no assurance that
these measures will be successful. Policing unauthorized use of the Company's
products and services is difficult and the steps taken may not prevent the
misappropriation of the Company's technology and intellectual property rights.
In addition, effective patent, trademark, trade secret and copyright protection
may be unavailable or limited in certain foreign countries.
The Company seeks to protect some of the source code of its products as a
trade secret and as an unpublished copyright work. Source code for certain
products has been or will be published in order to obtain patent protection or
to register copyright in such source code. Other source code has been
distributed under open source code licenses. The Company has obtained federal
trademark registration of a number of marks, including America Online, AOL,
Buddy List, Netscape, Netscape Navigator; AOL's triangle design logo; and
Netscape's "N" logo and ship's wheel logo, and has trademark rights in the U.S.
and abroad in many other proprietary names including, AOL.COM, Digital City,
ICQ, AOL Instant Messenger, AOLnet, Netscape Netcenter, "You've Got Mail" and
CompuServe.
<PAGE>
The Company believes that its products, trademarks and other proprietary
rights do not infringe on the proprietary rights of third parties. From time to
time, however, the Company has received communications from third parties
asserting that features, contents or names of certain of its services or
products may infringe patents, copyrights, trademarks and other rights of such
parties. No litigation is pending in this area that would have a material
adverse effect on the Company's ability to develop, market and sell its products
or operate its services. There can be no assurance that third parties will not
assert infringement claims against the Company in the future with respect to
current or future features or contents of services or products or that any such
assertion may not result in litigation or require the Company to enter into
royalty arrangements. Third parties also challenge the Company's marks from time
to time and such challenges may result in limitation or loss of trademark rights
to such proprietary marks.
Regulatory Environment; Public Policy
In the United States and most countries in which the Company conducts its
major operations, the Company is not currently subject to direct regulation
other than pursuant to laws applicable to businesses generally, including
businesses operating in the Internet. Adverse developments in the legal or
regulatory environment relating to the interactive online services and Internet
industry in the United States, Europe, Asia 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
telecommunications regulation, particularly related to the infrastructures on
which the Internet rests, access charges, encryption standards and related
export controls, content regulation, consumer protection, advertising,
intellectual property, privacy, electronic commerce, and taxation, tariff and
other trade barriers, 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 a beneficial or an adverse
effect on the Company's business, financial condition and operating results. The
Company has supported certain proposals designed to enhance market access and
competition in the offering of both narrowband and broadband Internet services
in the United States and in foreign markets and believes that the adoption of
such proposals would have a beneficial effect on the development of the Internet
medium and of the Company's prospects. The Company is unable, at this time, to
predict whether any such proposals will be adopted.
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) 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.
The Company actively works both in the United States and internationally
with industry groups and alliances, as well as public interest groups and
representatives of government on issues affecting the interactive media,
including issues such as privacy measures and policies, obscenity and
pornography, consumer protection, taxation of interactive services and use,
regulation of means of access to the Internet and intellectual property issues
such as the application of copyright laws to the interactive medium. For
example, the Company is a member of the openNet Coalition, a coalition of
industry leaders promoting open access to broadband technologies; the Internet
Alliance and the NetCoalition.com, Internet industry associations; and the
Online Privacy Alliance formed to address privacy issues in the interactive
medium and is a member of the steering committees of TRUSTe and BBB Online, each
of which is developing enforcement systems for private sector commitments to
fair information practice principles.
The Company believes that industry-led standards to address issues facing
the interactive medium will result in workable solutions without restricting the
further development of the medium. The Company seeks to educate representatives
of industry, government and public interest groups on the benefits to society of
the new interactive services medium and of the greater likelihood of society's
achieving those benefits through the independent industry-led and market driven
approaches outlined above. In the Company's view, such an approach will provide
a greater acceptance of the medium by consumers around the world and a more
favorable environment for the acceptance of the Company's products and services.
Some of the issues the Company is focusing on are the protection of privacy,
online tools to permit user choice of content, prosecution of online crimes,
safeguarding of children, enhancement of online security, education and
learning, online community activities, fostering citizen and parental education
and involvement and protection of intellectual property. The Company has adopted
internal policies and principles regarding these areas and has implemented
features in its services, such as its Parental Controls feature, chat safety
tips posted prominently on the Kids Only channel of the AOL service, and the
Notify AOL feature that enables members to report inappropriate activity on the
AOL service, as further support for its standards. The Company is unable at this
time to predict whether this approach will be adopted by government and whether
the positive regulatory environment being sought by this approach will be
forthcoming.
<PAGE>
Available Information
The Company files annual, quarterly and special reports, proxy statements
and other information with the Securities and Exchange Commission. Any document
the Company files with the Commission may be read or copied at the Commission's
public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please
call the Commission at 1-800-SEC-0330 for further information on the public
reference room. The Company's Commission filings are also available to the
public at the Commission's Web site at http://www.sec.gov.
Item 2. Properties
The Company maintains facilities and offices at various locations
throughout the United States and the rest of the world for general corporate
purposes, including technology centers, customer call centers, office space and
headquarters.
America Online maintains its headquarters facilities in Dulles, Virginia,
and holds various properties at and near the headquarters facilities that are
used principally in its Interactive Online Services business. The Company leases
office space in the following locations for Customer Call Centers: Tucson,
Arizona; Jacksonville, Florida; Albuquerque, New Mexico; Oklahoma City,
Oklahoma; Ogden, Utah; and the Philippines. The CompuServe service has its
primary operations in Columbus, Ohio, and has various properties at and near
those facilities. Digital City leases office space in the United States cities
for which it provides local interactive content and services. MovieFone leases
office space in New York City, but is moving its operations to leased office
space in Westchester, New York. ICQ maintains its operations in Israel. The
Enterprise Solutions business has its primary operations in Mountain View,
California, and has various other properties throughout the United States and in
other countries.
The following table sets forth information on the Company's material
properties:
Location Size Owned/Lease Purpose
- --------------------------------------------------------------------------------
Columbus, OH 296,000 sq. ft. Owned Office Space
Dulles, VA 590,000 sq. ft.(1) Owned (2) Corporate Headquarters
Dulles, VA 180,000 sq. ft. Owned Technology Center
Manassas, VA 220,000 sq. ft. Owned Technology Center(3)
Mountain View, CA 1,054,000 sq. ft. Leased Office Space
Reston, VA 265,000 sq. ft. Owned (2) Technology Center
San Francisco, CA 36,000 sq. ft. Leased Office Space
Vienna, VA 110,000 sq. ft. Leased Office Space
(1)Two additional facilities are under construction at this site that, when
completed, will add 380,000 sq. ft. to the current size. Both facilities are
expected to be completed in 2000.
(2)This property is held subject to a mortgage.
(3)The Company acquired 25.5 acres of land in Manassas, Virginia in February
1999. The technology center to be located on the property is under
construction and is expected to be completed in early 2000.
Item 3. Legal Proceedings
The Company is a party to various litigation matters, investigations and
proceedings, including a shareholder derivative suit filed in Delaware chancery
court against certain current and former directors of the Company alleging
violations of federal securities laws. The Company has settled the shareholder
derivative suit and obtained the approval of 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 Department of Labor ("DOL") is investigating the applicability of the
Fair Labor Standards Act ("FLSA") to the Company's Community Leader program. The
Company believes the Community Leader program reflects industry practices, that
the Community Leaders are volunteers, not employees, and that the Company's
actions comply with the law. The Company is cooperating with the DOL, but is
unable to predict the outcome of the DOL's investigation. Former volunteers have
sued the Company on behalf of an alleged class consisting of current and former
volunteers, alleging violations of the FLSA and comparable state statutes. The
Company believes the claims have no merit and intends to defend them vigorously.
The Company cannot predict the outcome of the claims or whether other former or
current volunteers will file additional actions.
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. Management
believes, however, that the ultimate outcome of all pending litigation should
not have a material adverse effect on the Company's financial position and
results of operations.
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Market Price of Common Stock
The following table sets forth the range of high and low sale prices for
the Company's Common Stock for the periods indicated and reflects all stock
splits effected by the Company:
For the quarter ended: High Low
- ---------------------- ------ ------
September 30, 1997.... $ 10.06 $ 7.06
December 31, 1997..... $ 11.41 $ 8.00
March 31, 1998........ $ 17.47 $10.31
June 30, 1998......... $ 27.41 $17.31
September 30, 1998.... $ 35.13 $17.50
December 31, 1998..... $ 80.00 $20.66
March 31, 1999........ $153.75 $67.00
June 30, 1999......... $175.00 $89.50
The Company has never declared, nor has it paid, any cash dividends on its
Common Stock. The Company currently intends to retain its earnings to finance
future growth and, therefore, does not anticipate paying any cash dividends on
its Common Stock in the foreseeable future.
As of July 26, 1999, the approximate number of stockholders of record of
Common Stock was 24,600. In addition, there were approximately 1.9 million
beneficial holders of the Common Stock, representing persons whose stock is in
nominee or "street name" accounts through brokers.
Exchange Information
The Company's Common Stock is traded on the New York Stock Exchange under
the symbol "AOL."
Options on the Company's stock are traded on the Chicago Board Options
Exchange, the American Stock Exchange, and the Pacific Stock Exchange.
Recent Sales of Unregistered Securities
On May 28, 1999, the Company acquired Spinner Networks Incorporated in
exchange for the issuance of approximately 2.4 million shares of Company common
stock. The transaction was a private placement and exempt from registration
pursuant to Regulation D of the Securities Act of 1933, as amended.
On May 28, 1999, the Company acquired Nullsoft, Inc. in exchange for the
issuance of approximately 720,000 shares of Company common stock. The
transaction was a private placement and exempt from registration pursuant to
Regulation D of the Securities Act of 1933, as amended.
Item 6. Selected Financial Data
<TABLE>
Year Ended June 30,
-----------------------------------------
1999 1998 1997 1996 1995
-------- -------- ------- -------- -------
(Amounts in millions, except per share data)
Statement of Operations Data:
<S> <C> <C> <C> <C> <C>
Subscription services..................... $3,321 $2,183 $1,478 $1,024 $352
Advertising, commerce and other .......... 1,000 543 308 111 50
Enterprise solutions...................... 456 365 411 188 23
-------- -------- ------- -------- -------
Total revenues............................ 4,777 3,091 2,197 1,323 425
Income (loss) from operations............. 458 (120) (485) 64 (41)
Net income (loss) (1)..................... 762 (74) (485) 35 (55)
Income (loss) per common share:
Net income (loss) per share-diluted....... $ 0.60 $(0.08) $(0.58) $ 0.04 $(0.09)
Net income (loss) per share-basic......... $ 0.73 $(0.08) $(0.58) $ 0.05 $(0.09)
Weighted average shares outstanding:
Diluted................................... 1,277 925 838 944 587
Basic..................................... 1,041 925 838 751 587
<PAGE>
As of June 30,
-----------------------------------------
1999 1998 1997 1996 1995
-------- -------- ------- -------- -------
(Amounts in millions)
Balance Sheet Data:
Working capital (deficiency).............. $254 $108 $(40) $72 $18
Total assets.............................. 5,348 2,874 1,501 1,271 459
Total debt................................ 364 372 52 25 24
Stockholders' equity...................... 3,033 996 610 707 242
Year Ended June 30,
-----------------------------------------
1999 1998 1997 1996 1995
-------- -------- ------- -------- -------
(Amounts in millions)
Other Selected Data:
Net cash provided by operating activities. $1,099 $437 $131 $2 $18
Earnings Before Interest, Taxes,
Depreciation and Amortization (EBITDA)(2) 968 302 111 138 11
</TABLE>
- ------------------
(1)Net income in the fiscal year ended June 30, 1999, includes special charges
of $95 million related to mergers and restructurings, $25 million in
transition costs and a net gain of $567 million related to the sale of
investments in Excite, Inc. Net loss in the fiscal year ended June 30, 1998,
includes special charges of $75 million related to mergers and
restructurings, $94 million related to acquired in-process research and
development and $17 million related to settlements. Net loss in the fiscal
year ended June 30, 1997, includes special charges of $385 million for the
write-off of deferred subscriber acquisition costs, $49 million for
restructuring, $24 million for contract terminations, $24 million for a
legal settlement and $9 million related to acquired in-process research and
development. Net income in the fiscal year ended June 30, 1996, includes
special charges of $17 million for acquired in-process research and
development and $8 million in merger related costs. Net loss in the fiscal
year ended June 30, 1995, includes special charges of $50 million for
acquired in-process research and development and $2 million for merger
expenses.
(2)EBITDA is defined as net income plus: (1) provision/(benefit) for income
taxes, (2) interest expense, (3) depreciation and amortization and (4)
special charges. For the fiscal years ended June 30, 1997 and prior, EBITDA
does not add back the amortization of subscriber acquisition costs. The
Company considers EBITDA an important indicator of the operational strength
and performance of its business including the ability to provide cash flows
to service debt and fund capital expenditures. EBITDA, however, should not
be considered an alternative to operating or net income as an indicator of
the performance of the Company, or as an alternative to cash flows from
operating activities as a measure of liquidity, in each case determined in
accordance with generally accepted accounting principles ("GAAP").
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Founded in 1985, America Online, Inc., ("America Online" or the "Company")
based in Dulles, Virginia, is the world's leader in interactive services, Web
brands, Internet technologies, and electronic commerce services. The Company
operates two worldwide subscription based Internet online services, America
Online, with more than 17 million members, and CompuServe, with approximately 2
million members; several leading Internet brands including ICQ, AOL Instant
Messenger and Digital City, Inc.; the Netscape Netcenter and AOL.COM Internet
portals; and the Netscape Communicator client software, including the Netscape
Navigator browser; AOL MovieFone, the nation's number one move listing guide and
ticketing service; and Spinner Networks Incorporated and Nullsoft, Inc., leaders
in Internet music. Through its strategic alliance with Sun Microsystems, Inc.
the Company also develops and offers easy-to-deploy, end-to-end electronic
commerce and enterprise solutions for companies operating in and doing business
on the Internet.
The Company currently has two major lines of businesses organized into four
product groups. These groups are supported by a common infrastructure. This
organization structure allows the Company to develop and grow multiple revenue
streams by utilizing the common infrastructure across the multiple brands it
currently has, as well as cost-effectively compete in new and emerging markets.
Interactive Online Services Business
The Interactive Services Group
The Interactive Services Group operates the Company's interactive products:
the AOL and CompuServe services and their related brand and product extensions,
including AOL Instant Messenger and AOL.COM; Netscape Netcenter; and the
Netscape Communicator client software, including the Netscape Navigator browser.
This group is also charged with rapidly delivering high-quality, world-class
products, features and functionality across all branded services and properties
and also has responsibility for broadband development and AOL devices like AOL
TV.
<PAGE>
The Interactive Properties Group
The Interactive Properties Group operates ICQ, Digital City, MovieFone,
Direct Marketing Services ("DMS"), Spinner Networks Incorporated and Nullsoft,
Inc., developer of the Winamp and SHOUTcast brands. This group is responsible
for building new revenue streams by seeking out opportunities to build or
acquire branded properties that operate across multiple services or platforms.
The AOL International Group
The AOL International Group oversees the AOL and CompuServe services
outside of the U.S., as well as the recently announced Netscape Online service.
The AOL International Group operates the AOL and CompuServe brands in Europe
with its joint venture partner Bertelsmann AG; AOL Canada, a wholly-owned
subsidiary of America Online, Inc.; AOL Japan, with its joint venture partners
Mitsui and Nikkei; and AOL in Australia with Bertelsmann. America Online plans
to launch services in Hong Kong with China Internet Corporation and in Latin
America with the Cisneros Group.
Netscape Enterprise Solution Business
The Netscape Enterprise Group
The Netscape Enterprise Group serves Netscape's enterprise customers and
contributes to America Online's part of the strategic alliance with Sun. In
combination with dedicated resources from Sun, the Netscape Enterprise Group
delivers easy-to-deploy, end-to-end solutions to help business partners and
other companies put their businesses online.
Competition
The Company competes with a wide range of other companies in the
communications, advertising, entertainment, information, media, Web-based
services, software, technology, direct mail and electronic commerce fields for
subscription, advertising, and commerce revenues, and in the development of
distribution technologies and equipment in its Interactive Online Services
business. The Company also competes with a wide range of companies in the
development and sale of electronic commerce infrastructure and applications in
its Enterprise Solutions business.
o Competitors for subscription revenues include:
-- online services such as the Microsoft Network, AT&T Worldnet and
Prodigy Classic
-- national and local Internet service providers, such as
MindSpring and EarthLink
-- long distance and regional telephone companies offering access
as part of their telephone service, such as AT&T Corp., MCI
WorldCom, Inc., Sprint Corporation and regional Bell operating
companies
-- cable television companies
-- cable Internet access services offered by companies such as
Excite@Home and Road Runner Group
o Competitors for advertising and commerce revenues include:
-- online services such as the Microsoft Network, AT&T Worldnet and
Prodigy Classic
-- Web-based navigation and search service companies such as Yahoo!
Inc., Infoseek Corporation (to be acquired by the Walt Disney
Company), Lycos, Inc. and Excite@Home.
-- global media companies including newspapers, radio and
television stations and content providers, such as the National
Broadcasting Corporation, CBS Corporation, The Walt Disney
Company, Time Warner Inc., The Washington Post Company and Conde
Nast Publications, Inc.
-- cable Internet access services offered by companies such as
Excite@Home and Road Runner Group
-- Web sites focusing on content, commerce, community and similar
features such as Amazon.com and eBay.
o Competition in the development of distribution technologies and
equipment includes:
-- broadband distribution technologies used in cable Internet
access services offered by companies such as Excite@Home and
Road Runner Group
-- advanced telephone-based access services offered through digital
subscriber line technologies offered by local telecommunications
companies
-- other advanced digital services offered by broadcast, satellite
and wireless companies
-- television-based interactive computer services, such as those
offered by Microsoft's WebTV
-- personal digital assistants or handheld computers, enhanced
mobile phones and other equipment offering functional
equivalents to the Company's features
<PAGE>
o Competitors in the development and sale of electronic commerce
infrastructure and applications include:
-- providers of electronic commerce infrastructure such as server
software, including International Business Machines Corporation,
Microsoft Corporation, Oracle Corporation, Novell, Inc.,
Software.com, Inc., BEA Systems, Inc. and the provider of the
Apache Web Server
-- providers of electronic commerce applications including
International Business Machines Corporation, Oracle Corporation,
General Electric Information Systems, Microsoft Corporation,
PeopleSoft, Inc., SAP A.G., Open Market, Inc., Ariba
Technologies, CommerceOne, Sterling Commerce, Inc. and
BroadVision, Inc.
Some of the present competitors and potential future competitors of the
Company may have greater financial, technical, marketing or personnel resources
than the Company. In addition, as a result of acquisitions, certain competitors
are able to offer both Internet access and other services, such as cable
television or telephone service, and such consolidation may continue. The
competitive environment could have a variety of adverse effects on the Company.
For example, it could:
o negatively impact the Company's ability to generate greater revenues
and profits from sources other than online service subscription
revenues, such as advertising and electronic commerce
o limit the Company's opportunities to enter into or renew agreements
with content providers and distribution partners
o limit the Company's ability to develop new products and services
o limit the Company's ability to continue to grow or sustain its
subscriber base
o require price reductions in the subscription fees for online services
and require increased spending on marketing, network capacity, content
procurement and product and features development
o require price reductions in the Company's enterprise software products
o result in a loss of the Company's market share in the enterprise
software industry
o require an increase in the Company's sales and marketing expenditures
Any of the foregoing events could have an adverse impact on revenues or
result in an increase in costs as a percentage of revenues, either of which
could have a material adverse effect on the Company's business, financial
condition and operating results.
Consolidated Results of Operations
Revenues
The following table and discussion highlights the revenues of the Company
for the years ended June 30, 1999, 1998 and 1997.
<TABLE>
Year ended June 30,
-----------------------------------------------
1999 1998 1997
--------------- --------------- ---------------
(Dollars in millions)
Revenues:
<S> <C> <C> <C> <C> <C> <C>
Subscription services................................... $3,321 69.5% $2,183 70.6% $1,478 67.3%
Advertising, commerce and other......................... 1,000 21.0 543 17.6 308 14.0
Enterprise solutions.................................... 456 9.5 365 11.8 411 18.7
------- ------- ------- ------- ------- -------
Total revenues.......................................... $4,777 100.0% $3,091 100.0% $2,197 100.0%
</TABLE>
The Company generates three main types of revenues: subscription services;
advertising, commerce and other; and enterprise solutions revenues. Subscription
services revenues are generated from customers subscribing to the Company's AOL
service and, effective February 1, 1998, the CompuServe service. Advertising,
commerce and other revenues are non-subscription based and are generated mainly
from businesses marketing to the Company's base of subscribers and users across
its multiple brands. Advertising, commerce and other revenues mainly consist of
advertising and related revenues, fees associated with electronic commerce and
the sale of merchandise. Enterprise solutions revenues consist principally of
product licensing fees and fees from technical support, consulting and training
services.
Subscription Services Revenues
Currently, the Company's Interactive Online Services business generates
subscription services revenue primarily from subscribers paying a monthly
membership fee. Prior to December 1, 1996, a significant portion of online
service revenues were comprised of hourly charges based on usage in excess of
the number of hours of usage provided as part of the monthly fee. With the
introduction of flat-rate pricing, as described below, the portion of online
service revenues which are generated from hourly charges has decreased
substantially.
<PAGE>
Effective December 1, 1996, the Company began offering several pricing
alternatives to the AOL service in the U.S. aimed at providing a variety of
price points designed to appeal to a wide range of consumers. The Company's
current pricing options are as follows:
o A standard monthly membership fee of $21.95, with no additional hourly
charges (the "Flat-Rate Plan"). Subscribers can also choose to prepay
for one year in advance at the monthly rate of $19.95. The Company
increased the price of its Flat-Rate Plan from $19.95 per month to
$21.95 per month, and the effective monthly rate of the annual plan
from $17.95 per month to $19.95 per month, effective at the start of
each member's monthly billing cycle in April 1998. Those subscribers
who were currently on the annual plan were not subject to an increase
until their renewal date. These increases were implemented in order to
fund the continued improvement of members' online experience and to
keep pace with the cost to the Company of members' increased usage.
o An alternative offering of three hours for $4.95 per month, with
additional time priced at $2.50 per hour.
o An alternative offering of $9.95 per month for unlimited use--for
those subscribers who have an Internet connection other than through
AOL and use this connection to access AOL services.
Prior to December 1, 1996, the Company's standard monthly membership fee
for its AOL service in the U.S., which included five hours of service, was $9.95
per month, with a $2.95 hourly fee for usage in excess of five hours per month.
Existing members at December 1, 1996, could retain the $9.95 / five hour pricing
upon request. For the period July 1, 1996 through November 30, 1996, the Company
also offered a pricing plan which included 20 hours of service for $19.95 per
month, with a $2.95 hourly fee for usage in excess of 20 hours per month (the
"Value Plan"). This plan was discontinued upon the availability of the Flat-Rate
Plan on December 1, 1996.
Effective February 1, 1998, the Company offered the following price plans
for the CompuServe service:
o A standard monthly membership offering of five hours for $9.95 per
month, with additional time priced at $2.95 per hour.
o An alternative offering of $24.95 per month with no additional hourly
charge.
During fiscal 1999, the Company launched CompuServe 2000 which utilizes the
same platform and infrastructure as the AOL service. This service offered the
following price plans:
o A standard monthly membership offering of 20 hours for $9.95 per
month, with additional time priced at $2.95 per hour.
o An alternative offering of $19.95 per month with no additional hourly
charge.
At June 30, 1999, the Company had approximately 17.6 million AOL brand
subscribers, including approximately 15.5 million in North America and
approximately 2.1 million in the rest of the world. Also at that date, the
Company had approximately 2 million CompuServe brand subscribers, including
approximately 1 million in North America and approximately 1 million in the rest
of world. At June 30, 1998, the Company had approximately 12.5 million AOL brand
subscribers, including approximately 11.2 million in North America and
approximately 1.3 million in the rest of the world. Also at that date, the
Company had approximately 2 million CompuServe brand subscribers, including
approximately 1 million in North America and approximately 1 million in the rest
of world.
For fiscal 1999, subscription services revenues increased from $2,183
million to $3,321 million, or 52%, over fiscal 1998. This increase was comprised
of an increase in AOL subscription services revenues of $1,020 million, as well
as CompuServe subscription services revenues of $118 million, which began in
February 1998. The increase in AOL subscription services revenues was primarily
attributable to a 38% increase in the average number of AOL North American
subscribers for fiscal 1999, compared to fiscal 1998, as well as a 8.2% increase
in the average monthly subscription services revenue per AOL North American
subscriber. The average monthly subscription services revenue per AOL North
American subscriber increased from $17.95 in fiscal 1998 to $19.42 in fiscal
1999. This increase was principally attributable to the increase in the
Flat-Rate Plan membership fee from $19.95 to $21.95, which became effective in
April 1998.
For fiscal 1998, subscription services revenues increased from $1,478
million to $2,183 million, or 48%, over fiscal 1997. This increase was comprised
of an increase in AOL subscription services revenues of $637 million, as well as
CompuServe subscription services revenues of $88 million, which began in
February 1998, partially offset by a $20 million decrease in subscription
services revenues from the Company's Internet service, Global Network Navigator
("GNN"), which was discontinued in fiscal 1997. The increase in AOL subscription
services revenues was primarily attributable to a 39% increase in the average
number of AOL North American subscribers for fiscal 1998, compared to fiscal
1997, as well as a 2.7% increase in the average monthly subscription services
revenue per AOL North American subscriber. The average monthly subscription
services revenue per AOL North American subscriber increased from $17.48 in
fiscal 1997 to $17.95 in fiscal 1998. This increase was principally attributable
to a reduction in the amount of refunds/credits issued to subscribers in fiscal
1998.
<PAGE>
Advertising, Commerce and Other Revenues
An important component of the Company's business strategy in its
Interactive Online Services business is an increasing reliance on advertising,
commerce and other revenues. These revenues include advertising and electronic
commerce fees, the sale of merchandise, as well as other revenues, which consist
primarily of royalty fees and development revenues, as well as data network
service revenues generated by ANS Communications, Inc. ("ANS") (through its sale
in January 1998). The growth of advertising, commerce and other revenues is
important to the Company's business objectives, as these revenues provide an
important contribution to the Company's operating results. Advertising revenues
are expected to grow in importance as the Company continues to leverage its
large, active and growing user base. This user base not only includes the paying
subscribers of the AOL and CompuServe services, it also includes users of the
Company's other branded portals and services such as AOL MovieFone, Netcenter
(with more than 17 million registered users), AOL.COM, ICQ (with almost 15
million active registered users) and Digital City. Affecting the growth in
advertising, commerce and other revenues is the backlog balance as of June 30,
1999, 1998 and 1997 of $1,519 million, $511 million and $180 million,
respectively. During fiscal 2000, approximately $680 million of revenue will be
generated from the June 30, 1999 backlog.
The following table summarizes the material components of advertising,
commerce and other revenues for the years ended June 30, 1999, 1998 and 1997.
<TABLE>
Year ended June 30,
-----------------------------------------------
1999 1998 1997
--------------- --------------- ---------------
(Dollars in millions)
<S> <C> <C> <C> <C> <C> <C>
Advertising and electronic commerce fees................ $ 765 76.5% $ 358 65.9% $ 147 47.7%
Merchandise............................................. 134 13.4 103 19.0 109 35.4
Other................................................... 101 10.1 82 15.1 52 16.9
------- ------- ------- ------- ------- -------
Total advertising, commerce and other revenues.......... $1,000 100.0% $ 543 100.0% $ 308 100.0%
</TABLE>
Advertising, commerce and other revenues increased by 84%, from $543
million in fiscal 1998 to $1,000 million in fiscal 1999. More advertising on the
Company's AOL service and Netcenter portal, as well as an increase in electronic
commerce fees drove the increase. Advertising and electronic commerce fees
increased by 114%, from $358 million in fiscal 1998 to $765 million in fiscal
1999.
Advertising, commerce and other revenues increased by 76%, from $308
million in fiscal 1997 to $543 million in fiscal 1998. More advertising on the
Company's AOL service and Netcenter portal, as well as an increase in electronic
commerce fees primarily drove the increase. Advertising and electronic commerce
fees increased by 144%, from $147 million in fiscal 1997 to $358 million in
fiscal 1998.
Enterprise Solutions Revenues
The Netscape Enterprise Solutions business generates revenues that consist
principally of product licensing fees and fees from technical support,
consulting and training services. The Netscape Enterprise Group focuses on
providing businesses a range of software products, technical support, consulting
and training services. These products and services enable businesses and users
to share information, manage networks and facilitate electronic commerce on the
Internet. In November 1998, the Company entered into a strategic alliance with
Sun Microsystems, Inc. ("Sun"), a leader in network computing products and
services, to accelerate the growth of electronic commerce. The strategic
alliance provides that, over a three year period, the Company will develop and
market, together with Sun, client software and network application and server
software for electronic commerce, extended communities and connectivity,
including software based in part on the Netscape code base, on Sun code and
technology and on certain America Online services features, to business
enterprises.
Enterprise solutions revenues increased by 25%, from $365 million in
fiscal 1998 to $456 million in fiscal 1999. The increase was due to an increase
in product sales related to server applications and consulting services coupled
with the decline in revenues in fiscal 1998 due to offering the Netscape
Communicator client software, including the Netscape Navigator browser for free
starting in January 1998.
Enterprise solutions revenues decreased by 11%, from $411 million in
fiscal 1997 to $365 million in fiscal 1998. The decrease was due to offering the
Netscape Communicator client software, including the Netscape Navigator browser
for free starting in January 1998, offset by an 18% increase in product sales
related to server applications and consulting services.
<PAGE>
Costs and Expenses
The following table and discussion highlights the costs and expenses of the
Company for the years ended June 30, 1999, 1998 and 1997.
<TABLE>
Year ended June 30,
-----------------------------------------------
1999 1998 1997
--------------- --------------- ---------------
(Dollars in millions)
<S> <C> <C> <C> <C> <C> <C>
Total revenues.......................................... $4,777 100.0% $3,091 100.0% $2,197 100.0%
Costs and expenses:
Cost of revenues........................................ $2,657 55.6% $1,811 58.6% $1,162 52.9%
Sales and marketing
Sales and marketing.................................. 808 16.9 623 20.2 608 27.7
Write-off of deferred subscriber acquisition costs... - - - - 385 17.5
Product development..................................... 286 6.0 239 7.7 195 8.9
General and administrative.............................. 408 8.5 328 10.6 220 10.0
Amortization of goodwill and other intangible assets.... 65 1.4 24 0.8 6 0.3
Acquired in-process research and development............ - - 94 3.0 9 0.4
Merger, restructuring and contract termination charges.. 95 2.0 75 2.4 73 3.3
Settlement charges...................................... - - 17 0.5 24 1.1
------- ------- ------- ------- ------- -------
Total costs and expenses................................ $4,319 90.4% $3,211 103.8% $2,682 122.1%
</TABLE>
Cost of Revenues
Cost of revenues includes network-related costs, consisting primarily of
data network costs, personnel and related costs associated with operating the
data centers, data network and providing customer support, consulting, technical
support/training and billing, host computer and network equipment costs, the
costs of merchandise sold, royalties paid to information and service providers
and royalties paid for licensed technologies.
Since the introduction of the Flat-Rate Plan for the AOL service in
December 1996, the Company has experienced a significant increase in both: 1)
subscriber usage, which is mainly due to the growth of the subscriber base, and
2) the average monthly usage per subscriber as subscribers spend more and more
time online. These increases have the potential to increase network cost on both
an absolute dollar basis, as well as a percentage of revenue basis. While the
growth in subscriber usage and the related costs generally are consistent with
the increases in subscription service revenues, the increase in usage and
related costs per subscriber could impact operating margins. Average monthly
subscriber usage in the first quarter of fiscal 1997, the last quarter before
the introduction of flat-rate pricing, was approximately 7 hours. In fiscal
1998, average monthly subscriber usage ranged between 20 and 23 hours, and was
approximately 22 hours in the fourth quarter of fiscal 1998. In fiscal 1999,
average monthly subscriber usage ranged between 24 and 27 hours and was
approximately 27 hours in the fourth quarter of fiscal 1999. The Company has,
and plans to continue to minimize the impact of the aforementioned increases by
increasing advertising, commerce and other revenues and by reducing network
costs, on a relative basis (either on a per-hour basis or as a percentage of
total revenues). An important factor in reducing network costs is the reduction
of the costs of operating the Company's data network, on a per-hour basis,
through volume discounts and more efficient utilization of AOLnet, the Company's
TCP/IP network. The Company expects that the growth in advertising, commerce and
other revenues, assuming such growth continues, will provide the Company with
the opportunity and flexibility to fund the costs associated with the increased
usage resulting from flat-rate pricing, as well as programs designed to grow the
subscriber base and meet other business objectives.
For fiscal 1999, cost of revenues increased from $1,811 million to $2,657
million, or 47%, over fiscal 1998, and decreased as a percentage of total
revenues from 58.6% to 55.6%. The increase in cost of revenues in fiscal 1999
was primarily attributable to increases in data network costs, host computer and
network equipment costs and personnel and related costs associated with
operating the data centers, data network, providing customer support,
consulting, technical support/training and billing. Data network costs increased
primarily as a result of the larger member base and more usage per member. Host
computer and network equipment costs, consisting of lease, depreciation and
maintenance expenses, increased as a result of additional host computer and
network equipment, necessitated by the larger member base and more usage by
members. Personnel and related costs associated with operating the data centers,
data network, providing customer support and billing increased primarily as a
result of the requirements of supporting a larger data network, a larger member
base and increased subscription services revenues. Personnel and related costs
associated with consulting and technical support/training increased due to
providing additional customer support and professional services. The decrease in
cost of revenues as a percentage of total revenues was primarily attributable to
growth of the higher margin advertising, commerce and other revenues, as well as
a decrease in network-related costs as a percentage of subscription services
revenue.
<PAGE>
For fiscal 1998, cost of revenues increased from $1,162 million to $1,811
million, or 56%, over fiscal 1997, and increased as a percentage of total
revenues from 52.9% to 58.6%. The increase in cost of revenues in fiscal 1998
was primarily attributable to increases in data network costs, host computer and
network equipment costs and personnel and related costs associated with
operating the data centers, data network, providing customer support,
consulting, technical support/training and billing. Data network costs increased
primarily as a result of the larger member base and more usage per member. Host
computer and network equipment costs, consisting of lease, depreciation and
maintenance expenses, increased as a result of additional host computer and
network equipment, necessitated by the larger member base and more usage by
members. Personnel and related costs associated with operating the data centers,
data network, providing customer support and billing increased primarily as a
result of the requirements of supporting a larger data network, a larger member
base and increased subscription services revenues. Personnel and related costs
associated with consulting and technical support/training increased due to
providing additional customer support and professional services. The increase in
cost of revenues, as a percentage of total revenues, in fiscal 1998 was
primarily attributable to an increase, as a percentage of total revenues, in
host computer and network equipment costs coupled with the decrease in revenues
related to the high margin Netscape Communicator client software (including the
Netscape Navigator browser) partially offset by a decrease, as a percentage of
total revenues, in royalties paid to information and service providers.
Sales and Marketing
Sales and marketing expenses include the costs to acquire and retain
subscribers, the operating expenses associated with the sales and marketing
organizations and other general marketing costs.
Marketing expenses have declined as a percentage of revenues primarily as a
result of the improved value proposition offered by flat-rate pricing, which has
resulted in improved subscriber acquisition and retention rates, as compared to
rates achieved prior to flat-rate pricing. The Company's marketing strategy is
expected to continue to emphasize brand advertising across multiple brands as
well as cost-effective bundling agreements, where the Company's products are
widely distributed with new personal computers, the Windows operating system and
other peripheral computer equipment and software. Additionally, the Company will
continue to market its products via direct mail programs.
For fiscal 1999, sales and marketing expenses increased from $623 million
to $808 million, or 30%, over fiscal 1998, and decreased as a percentage of
total revenues from 20.2% to 16.9%. The increase in sales and marketing expenses
for fiscal 1999 was mainly attributable to an increase in direct subscriber
acquisition costs, brand advertising across multiple brands and personnel costs
associated with expanding the Netscape Enterprise business. The decrease as a
percentage of total revenues was primarily a result of the substantial growth in
revenues.
For fiscal 1998, sales and marketing expenses increased from $608 million
to $623 million, or 2%, over fiscal 1997, and decreased as a percentage of total
revenues from 27.7% to 20.2%. The increase in sales and marketing expenses for
fiscal 1998 was mainly attributable to an increase in Netcenter staffing and
related sales commissions, partially offset by a decrease in subscriber
acquisition costs. The decrease as a percentage of total revenues was mainly due
to the decrease in subscriber acquisition costs.
The Company made a change in the first quarter of fiscal 1997 which
resulted in subscriber acquisition costs being expensed for periods subsequent
to the first quarter of fiscal 1997, versus being capitalized and amortized over
twenty-four months in the first quarter of fiscal 1997 and prior. As a result of
the aforementioned change in accounting estimate, the balance of deferred
subscriber acquisition costs as of September 30, 1996, totaling $385 million,
was written off. For additional information regarding this change, refer to Note
3 of the Notes to Consolidated Financial Statements.
For fiscal 1998, sales and marketing expenses, before capitalization and
amortization, decreased from $679 million to $623 million, or 8.2%, over fiscal
1997, and decreased as a percentage of total revenues from 30.9% to 20.2%. The
decrease in sales and marketing expenses for fiscal 1998, before capitalization
and amortization, was primarily attributable to a decrease in subscriber
acquisition costs. The Company was able to decrease its subscriber acquisition
costs primarily as a result of the improved value proposition offered by
flat-rate pricing, which has resulted in improved acquisition and retention
rates, as compared to rates achieved prior to flat-rate pricing.
Product Development
Product development costs consist of personnel and related costs for
research and development efforts and other product development costs either
prior to the development effort reaching technological feasibility or once the
product has reached the maintenance phase of its life cycle.
For fiscal 1999, product development costs increased from $239 million to
$286 million, or 20%, over fiscal 1998, and decreased as a percentage of total
revenues from 7.7% to 6.0%. The increase in product development costs was
primarily due to an increase in the number of technical employees to support
additional products across multiple brands. The decrease in product development
costs as a percentage of total revenues was primarily a result of the
substantial growth in revenues.
For fiscal 1998, product development costs increased from $195 million to
$239 million, or 23%, over fiscal 1997, and decreased as a percentage of total
revenues from 8.9% to 7.7%. The increase in product development costs was
primarily due to an increase in personnel costs resulting from the Company's
acquisitions of Actra Business Systems LLC ("Actra"), KIVA Software Corporation
("KIVA") and the online service of CompuServe (see Note 8 of the Notes to
Consolidated Financial Statements). The decrease in product development costs as
a percentage of total revenues was primarily a result of the substantial growth
in revenues.
<PAGE>
General and Administrative
For fiscal 1999, general and administrative expenses increased from $328
million to $408 million, or 24%, over fiscal 1998, and decreased as a percentage
of total revenues from 10.6% to 8.5%. The increase in general and administrative
costs for fiscal 1999, was primarily attributable to higher personnel costs,
including payroll taxes associated with employee stock option exercises. The
decrease in general and administrative costs as a percentage of total revenues
was primarily attributable to the substantial growth in revenues.
For fiscal 1998, general and administrative expenses increased from $220
million to $328 million, or 49%, over fiscal 1997, and increased slightly as a
percentage of total revenues from 10.0% to 10.6%. The increase in general and
administrative costs for fiscal 1998, and such costs as a percentage of total
revenues, was primarily attributable to higher personnel and related costs,
which included compensatory stock options and other charges primarily related to
the sale of ANS, as well as increases in professional fees, principally related
to legal matters.
Amortization of Goodwill and Other Intangible Assets
Amortization of goodwill and other intangible assets increased to $65
million in fiscal 1999 from $24 million in fiscal 1998 and $6 million in fiscal
1997. The increase in amortization expense over the three years is primarily
attributable to goodwill associated with the acquisitions of Mirabilis, Ltd.
("Mirabilis") in June 1998, CompuServe in January 1998, DigitalStyle Corporation
("DigitalStyle") and Portola Communications, Inc. ("Portola") in June 1997, and
Actra in December 1997, as well as purchases of various companies made by the
Company in late fiscal 1997 and early fiscal 1998. The increase is partially
offset by a decrease in goodwill amortization resulting from the disposition of
ANS in January 1998 and the shutdown of GNN in the Company's fiscal 1997
restructuring.
Acquired In-Process Research and Development
The Company incurred a total of $94 million in acquired in-process research
and development charges in fiscal 1998 related to the acquisitions of Mirabilis,
Actra, Personal Library Software, Inc. ("PLS") and NetChannel, Inc.
("NetChannel").
In June 1998, the Company acquired the assets, including the developmental
ICQ instant communications and chat technology, and assumed certain liabilities
of Mirabilis. The ICQ technology is an enabling technology for online
communication. At the date of acquisition, Mirabilis reported 12 million
registered trial users of which approximately half were active. The Company paid
$287 million in cash and may pay up to $120 million in additional contingent
purchase payments based on future performance levels. The Company's Consolidated
Statements of Operations reflect a one-time write-off of the amount of purchase
price allocated to in-process research and development of approximately $60
million.
The Company allocated the excess purchase price over the fair value of net
tangible assets acquired to identified intangible assets. In performing this
allocation, the Company considered, among other factors, the attrition rate of
the active users of the technology at the date of acquisition (estimated to be
similar to the rate experienced by the AOL service) and the research and
development projects in-process at the date of acquisition. With regard to the
in-process research and development projects, the Company considered, among
other factors, the stage of development of each project at the time of
acquisition, the importance of each project to the overall development plan, and
the projected incremental cash flows from the projects when completed and any
associated risks. Associated risks include the inherent difficulties and
uncertainties in completing each project and thereby achieving technological
feasibility and risks related to the impact of potential changes in future
target markets.
During fiscal 1999, the Company incurred approximately $5 million, related
primarily to salaries, to develop the in-process technology into commercially
viable products and the Company intends to incur approximately $9 million more
over the next year. Remaining development efforts are focused on addressing
security issues, architecture stability and electronic commerce capabilities,
and completion of these projects will be necessary before revenues are produced.
The Company expects to begin to benefit from the purchased in-process research
and development by its fiscal year 2000. If these projects are not successfully
developed, the Company may not realize the value assigned to the in-process
research and development projects. In addition, the value of the other acquired
intangible assets may also become impaired.
The Company acquired Actra, a developer of commerce applications for
conducting business-to-business and business-to-consumer commerce on the
Internet in December 1997, PLS, a developer of information indexing and search
technologies in January 1998 and NetChannel, a Web-enhanced television company,
in June 1998. These transactions were accounted for under the purchase method of
accounting. In connection with the purchase of Actra, the Company recorded a
charge for acquired in-process research and development of $14 million. In
connection with the purchases of PLS and NetChannel, the Company recorded
charges for acquired in-process research and development in fiscal 1998 of $10
million related to each acquisition.
<PAGE>
The Company incurred a total of $9 million ($5 million and $4 million,
respectively) in acquired in-process research and development charges in fiscal
1997 related to the acquisitions of Portola and DigitalStyle in June 1997.
The technology, market and development risk factors discussed above for the
Mirabilis acquisition are also relevant and should be considered with regard to
the acquisitions of Actra, PLS, NetChannel, Portola and DigitalStyle.
Merger, Restructuring and Contract Termination Charges
In fiscal 1999, the Company recognized charges that totaled $95 million
related to restructurings and mergers.
o In connection with the mergers of MovieFone, Inc., Spinner Networks
Incorporated, NullSoft, Inc. and AtWeb, Inc., the Company recorded
direct merger-related costs of $17 million.
o In connection with plans announced and implemented in March 1999, the
Company recorded a charge of $78 million for direct costs related to
the merger with Netscape and the Company's reorganization plans to
integrate Netscape's operations and build on the strengths of the
Netscape brand and capabilities as well as the merger with When, Inc.
In fiscal 1998, the Company recognized net charges of $75 million related
to restructurings and mergers.
o In connection with a restructuring plan adopted in the third quarter
of fiscal 1998, the Company recorded a $35 million restructuring
charge associated with the restructuring of its AOL Studios brand
group. The restructuring included the exiting of certain business
activities, the termination of approximately 160 employees and the
shutdown of certain subsidiaries and facilities.
o At the end of the second and beginning of the third quarters of fiscal
1998, the Company recorded a $35 million restructuring charge related
to the implementation of certain restructuring actions mainly related
to the Enterprise Solution business. These actions were aimed at
reducing its cost structure, improving its competitiveness and
restoring sustainable profitability. The restructuring plan resulted
from decreased demand for certain Enterprise products and the adoption
of a new strategic direction. The restructuring included a reduction
in the workforce (approximately 400 employees), the closure of certain
facilities, the write-off of non-performing operating assets and
third-party royalty payment obligations relating to canceled
contracts.
o In the fiscal year ended 1998, the Company recognized merger costs of
$6 million related to the acquisition of Kiva Software Corporation
consisting mainly of investment banking, legal and accounting
services.
o In connection with a restructuring plan adopted in the second quarter
of fiscal 1997, the Company recorded a $49 million restructuring
charge associated with the Company's change in business model, the
reorganization of the Company into three operating units, the
termination of approximately 300 employees and the shutdown of certain
operating divisions and subsidiaries. As of the first quarter of
fiscal 1998, substantially all of the restructuring activities had
been completed and the Company reversed $1 million of the original
restructuring accrual in the first quarter of fiscal 1998.
In fiscal 1997, the Company recognized net charges of $73 million related
to restructurings and contract terminations.
o In connection with a restructuring plan adopted in the second quarter
of fiscal 1997, the Company recorded a $49 million restructuring
charge associated with the Company's change in business model, the
reorganization of the Company into three operating units, the
termination of approximately 300 employees and the shutdown of certain
operating divisions and subsidiaries.
o In the fourth quarter of fiscal 1997, the Company recorded a contract
termination charge of $24 million, which consists of unconditional
payments associated with terminating certain information provider
contracts, which became uneconomic as a result of the Company's
introduction of flat-rate pricing in December 1996.
Refer to Notes 4 and 5 of the Notes to Consolidated Financial Statements
for further information related to the restructurings, contract terminations and
merger costs.
Settlement Charges
In fiscal 1998, the Company recorded a net settlement charge of $18 million
in connection with the settlement of the Orman v. America Online, Inc. class
action lawsuit filed in U.S. District Court for the Eastern District of Virginia
alleging violations of federal securities laws between August 1995 and October
1996. Included in the net settlement charge is an estimate of $17 million in
insurance receipts.
<PAGE>
In fiscal 1997, the Company recorded a settlement charge of $24 million in
connection with a legal settlement reached with various State Attorneys General
and a preliminary legal settlement reached with various class action plaintiffs,
to resolve potential claims arising out of the Company's introduction of
flat-rate pricing and its representation that it would provide unlimited access
to subscribers. Pursuant to these settlements, the Company agreed to make
payments to subscribers, according to their usage of the AOL service, who may
have been injured by their reliance on the Company's claim of unlimited access.
These payments do not represent refunds of online service revenues, but are
rather the compromise and settlement of allegations that the Company's
advertising of unlimited access under its flat-rate pricing plan violated
consumer protection laws. In the second quarter of fiscal 1998, the Company
revised its estimate of the total liability associated with these matters, and
reversed $1 million of the original settlement accrual.
Other Income, net
Other income, net consists primarily of investment income and non-operating
gains net of interest expense and non-operating charges. The Company had other
income of $638 million and $30 million in fiscal 1999 and fiscal 1998,
respectively. The increase in other income in fiscal 1999 was primarily
attributable to a net gain of approximately $567 million on the sale of Excite,
Inc. investments. The additional increase is mainly due to an increase in net
interest income and a reduction of non-operating losses related to various
investments. The Company had other income of $30 million and $10 million in
fiscal 1998 and fiscal 1997, respectively. The increase in other income in
fiscal 1998 was primarily attributable to gains on the sale of certain
available-for-sale securities and increases in net interest income partially
offset by decreases in the allocation of losses to minority stockholders and
increases in non-operating losses related to various investments.
(Provision) Benefit for Income Taxes
The (provision) benefit for income taxes was $(334), $16 and $(10) million
in fiscal 1999, fiscal 1998 and fiscal 1997, respectively. The substantial
increase in the provision for income taxes in fiscal 1999 is a direct result of
the Company's increase in pre-tax income. For additional information regarding
income taxes, refer to Note 14 of the Notes to Consolidated Financial
Statements.
Segment Results of Operations
The Company operates its two major lines of businesses as Interactive
Online Services and Enterprise Solutions. For further information regarding
segments, refer to Note 9 of the Notes to Consolidated Financial Statements.
A summary of the segment financial information is as follows:
<TABLE>
Years ended June 30,
----------------------------------------
1999 1998 1997
------------ ------------ ------------
(Amounts in millions)
Revenues:
<S> <C> <C> <C>
Interactive Online Services................. $4,321 $2,726 $1,786
Enterprise Solutions........................ 456 365 411
------------ ------------ ------------
Total revenues.......................... $4,777 $3,091 $2,197
Income (loss) from operations:
Interactive Online Services (1).(2)......... $ 955 $ 412 $ (257)
Enterprise Solutions. (2)................... 6 (18) 98
General & Administrative.................... (408) (328) (220)
Other (3)................................... (95) (186) (106)
------------ ------------ ------------
Total income (loss) from operations..... $ 458 $ (120) $ (485)
</TABLE>
(1)Loss from operations for the year ended June 1997 includes $385 million
write-off of deferred subscriber acquisition costs.
(2)In fiscal 1999, Enterprise Solutions and Interactive Online services include
$5 million and $60 million, respectively, of goodwill and other intangible
assets amortization.
(3)Other consists of all special items; merger, restructuring, contract
termination, acquired in-process research and development and settlement
charges.
For an overview of the segment revenues, refer to the consolidated results
of operations discussion earlier in this section.
Interactive Online Services income from operations increased from $128
million (excluding $385 million write-off of deferred subscriber acquisitions
costs)in fiscal 1997 to $412 million in fiscal 1998 and $955 million in fiscal
1999. These increases are mainly the result of increases in subscription
services and advertising, commerce and other revenues coupled with improved
margins and a decrease in marketing expenses (as a percentage of revenues)
resulting from the improved value proposition offered by flat-rate pricing.
<PAGE>
Enterprise Solutions income (loss) from operations decreased from $98
million in fiscal 1997 to a loss of $(18) million in fiscal 1998 and increased
to income of $6 million in fiscal 1999. The decrease from fiscal 1997 to 1998
was mainly a result of offering the Netscape Communicator client software
(including the Netscape Navigator browser) for free starting in January 1998.
The increase from fiscal 1998 to 1999 was mainly attributable to the increase in
revenues.
Liquidity and Capital Resources
The Company is currently financing its operations primarily through cash
generated from operations. During fiscal 1999, the Company generated more than
$1 billion in cash from operations. In addition, the Company has generated cash
from the sale of its capital stock, the sale of its convertible notes as well as
the sale of marketable securities it held. The Company has financed its
investments in telecommunications equipment principally through leasing. Net
cash provided by operating activities was $1,099 million, $437 million and $131
million in fiscal 1999, 1998 and 1997, respectively, and increased primarily due
to the Company's increase in net income. Net cash used in investing activities
was $1,776 million, $531 million and $367 million in fiscal 1999, fiscal 1998
and fiscal 1997, respectively. The increase in cash used in investing activities
is mainly due to the Company's $1.5 billion investment in a General Motors
equity security related to the strategic alliance the Company entered with
Hughes Electronics Corporation ("Hughes"). For additional information regarding
this investment, refer to Note 8 of the Notes to the Consolidated Financial
Statements. The increase in cash used in investing activities was offset by net
proceeds of approximately $600 million related to the sale of Excite, Inc.
investments during fiscal 1999. Net cash provided by financing activities was
$887 million, $580 million and $250 million in fiscal 1999, fiscal 1998 and
fiscal 1997, respectively. Included in financing activities for the fiscal 1999,
were $550 million in aggregate net proceeds from a public stock offering of its
common stock.
The Company uses its working capital to finance ongoing operations and to
fund marketing and the development of its products and services. The Company
plans to continue to invest in subscriber acquisition, retention and brand
marketing to expand its subscriber base, as well as in network, computing and
support infrastructure. Additionally, the Company expects to use a portion of
its cash for the acquisition and subsequent funding of technologies, content,
products or businesses complementary to the Company's current business. The
Company anticipates that cash on hand and cash provided by operating activities
will be sufficient to fund its operations for the next twelve months. The
Company currently has approximately $450 million available under a shelf
registration filed in June 1998. In May 1999, the Company filed a registration
statement to raise an additional $4.5 billion by sale of the Company's debt
securities, common stock, preferred stock depositary shares, warrants or stock
purchase contracts to purchase common stock or preferred stock. The total
offering price of these securities, in the aggregate, will not exceed $5
billion.
At June 30, 1999, the Company had working capital of $254 million, compared
to working capital of $108 million at June 30, 1998. In addition, the Company
had investments including available-for-sale securities of $2,151 million and
$531 million at June 30, 1999 and 1998, respectively. Current assets increased
by $716 million, from $1,263 million at June 30, 1998 to $1,979 million at June
30, 1999, while current liabilities increased by $570 million, from $1,155
million to $1,725 million, over this same period. The increase in current assets
was primarily attributable to an increase in cash and short-term investments
resulting from cash generated by operations. The change in current liabilities
was due to increases in other accrued expenses and liabilities, primarily
related to an increase in accrued telecommunications costs, as well an increase
in deferred revenues.
During July 1998, the Company improved its cash and working capital
balances as a result of a public offering of common stock. The Company sold
21,560,000 shares of common stock and raised a total of $550 million in new
equity which was used to fund general corporate purposes. In November 1997, the
Company sold $350 million of 4% Convertible Subordinated Notes due November 15,
2002 (the "Notes"). The Notes are convertible into the Company's common stock at
a conversion rate of 76.63752 shares of common stock for each $1,000 principal
amount of the Notes (equivalent to a conversion price of $13.04844 per share),
subject to adjustment in certain events. Interest on the Notes is payable
semiannually on May 15 and November 15 of each year, commencing on May 15, 1998.
The Notes may be redeemed at the option of the Company on or after November 14,
2000, in whole or in part, at the redemption prices set forth in the Notes.
In June 1998, the Company purchased Mirabilis for $287 million in cash (and
contingent purchase price payments of up to $120 million) and NetChannel for $16
million in cash. For additional information regarding these acquisitions, see
Note 8 of the Notes to Consolidated Financial Statements.
In January 1998, the Company consummated a Purchase and Sale Agreement (the
"Purchase and Sale") by and among the Company, ANS Communications, Inc.
("ANS"), a then wholly-owned subsidiary of the Company, and MCI WorldCom, Inc.
("WorldCom") pursuant to which the Company transferred to WorldCom all of the
issued and outstanding capital stock of ANS in exchange for the online services
business of CompuServe Corporation ("CompuServe"), which was acquired by
WorldCom shortly before the consummation of the Purchase and Sale, and $147
million in cash (excluding $15 million in cash received as part of the
CompuServe online services business and after purchase price adjustments made at
closing). Immediately after the consummation of the Purchase and Sale, the
Company's European partner, Bertelsmann AG, paid $75 million to the Company for
a 50% interest in a newly created joint venture to operate the CompuServe
European online service. Each company invested an additional $25 million in cash
in this joint venture. The Company generated $207 million in net cash as a
result of the aforementioned transactions.
<PAGE>
The Company enters into multiple-year data communications agreements in
order to support AOLnet. In connection with those agreements, the Company may
commit to purchase certain minimum data communications services. Should the
Company not require the delivery of such minimums, the Company's per hour data
communications costs may increase. For additional information regarding the
Company's commitments, see Note 11 of the Notes to Consolidated Financial
Statements.
In May 1996, the Company entered into a joint venture with Mitsui & Co.,
("Mitsui") and Nihon Keizai Shimbun, Inc. ("Nikkei") to offer interactive online
services in Japan. In connection with the agreement, the Company received
approximately $28 million through the sale of convertible preferred stock to
Mitsui. The preferred stock had an aggregate liquidation preference of
approximately $28 million and accrued dividends at a rate of 4% per annum.
Accrued dividends could be paid in the form of additional shares of preferred
stock. During May 1998, the preferred stock, together with accrued but unpaid
dividends, was converted into 1,568,000 shares of common stock based on the fair
market value of common stock at the time of conversion.
The Company leases the majority of its equipment under non-cancelable
operating leases. It is building AOLnet, its data communications network, as
well as expanding its data center capacity. The buildout of AOLnet and the
expansion of data center capacity requires a substantial investment in
telecommunications and server equipment. The Company plans to continue making
significant investments in these areas. The Company is funding these
investments, which are anticipated to total approximately $1 billion in fiscal
2000, through a combination of leases, debt financing and cash purchases.
Earning Before Interest, Taxes, Depreciation and Amortization ("EBITDA")
The following table and discussion summarizes EBITDA for the years ended
June 30, 1999, 1998 and 1997:
Years ended June 30,
----------------------------------------
1999 1998 1997
------------ ------------ ------------
(Amounts in millions)
EBITDA............................... $968 $302 $111
The Company defines EBITDA as net income plus: (1) provision/(benefit) for
income taxes, (2) interest expense, (3) depreciation and amortization and (4)
special charges. For the fiscal years ended June 30, 1997, EBITDA does not add
back the amortization of subscriber acquisition costs. EBITDA is presented and
discussed because the Company considers EBITDA an important indicator of the
operational strength and performance of its business including the ability to
provide cash flows to service debt and fund capital expenditures. EBITDA,
however, should not be considered an alternative to operating or net income as
an indicator of the performance of the Company, or as an alternative to cash
flows from operating activities as a measure of liquidity, in each case
determined in accordance with generally accepted accounting principles ("GAAP").
For fiscal 1999, EBITDA increased from $302 million to $968 million or 221%
over fiscal 1998. For fiscal 1998, EBITDA increased from $111 million to $302
million or 172%. The increase from fiscal 1998 to 1999 is mainly due to the
significant increase in income before taxes (excluding special charges) from $96
million in fiscal 1998 to $649 million in fiscal 1999, as well as an increase of
approximately $100 million in depreciation and amortization. The increase from
fiscal 1997 to 1998 is due to the increase in income before taxes (excluding
special charges) from $16 million in fiscal 1997 to $96 million in fiscal 1998,
as well as an increase of approximately $100 million in depreciation and
amortization.
Seasonality
The growth in subscriber acquisitions and usage in the Company's online
services 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, the Company does not definitively 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.
Since making advertising revenue a key component of the Company's strategy
in its Interactive Online Services business, the Company has experienced
difficulty in distinguishing seasonality in advertising sales from the overall
market growth. Seasonal factors seem to be mitigated by advertisers' growing
interest in the overall online medium, as well as gaining access to the
Company's large and growing subscriber/user base across multiple branded
distribution channels. When the online advertising industry matures and online
advertising budgets experience normal growth, the Company expects to experience
the effects of seasonality in securing advertising commitments.
<PAGE>
Year 2000 Compliance
The Company utilizes a significant number of computer software programs and
operating systems across its entire organization, including applications used in
operating its online services and Web sites, the proprietary software of the AOL
and CompuServe services, Netscape software products, member and customer
services, network access, content providers, joint ventures and various
administrative and billing functions. To the extent that these applications
contain source codes that are unable to appropriately interpret the upcoming
calendar year 2000, some level of modification, or even possibly replacement may
be necessary.
In 1997, the Company 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 oversees testing and is continuing its assessment of
the Company's company-wide compliance. The Company's system hardware components,
client and host software, current versions of Netscape software products and
corporate business and information systems are currently undergoing review and
testing. To date, the Company has experienced few problems related to Year 2000
testing, and the problems that have been identified are in the process of being
addressed.
The Company intends to make Year 2000 compliant certain versions of the
client software for the AOL service and the CompuServe service that are
available on the Windows and Macintosh operating systems, as well as versions of
Netscape software products that are currently shipped. While the majority of AOL
and CompuServe members use proprietary client software that will be compliant, a
third-party Internet browser utilized in most versions of the client software
may not be Year 2000 compliant. A free patch or upgrade will be required for
members using some versions of the client software or browser to achieve Year
2000 compliance. In the coming months, the Company will encourage members of its
online services to upgrade their browser and/or their software to versions that
are expected to be Year 2000 compliant, if they have not already done so. The
Company will make available to members, and communicate that availability, free
patches or upgrades that can be downloaded from the online services. The Company
has not tested, and does not expect to certify as Year 2000 compliant, certain
older versions of the AOL and CompuServe software. The Company has developed,
and will be implementing over the remainder of the year, a communication program
that informs members how to obtain the free patch or upgrade to a Year 2000
compliant version of the client software or browser.
With respect to the Company's Netscape software business, testing continues
on currently shipped products. The Company also will make available at no
additional cost to customers any required patch to the versions of Netscape
software products currently being shipped to customers and communicate their
availability. In addition, the Company will be encouraging customers to upgrade
to versions of the software that are expected to be Year 2000 compliant, if they
have not already done so.
In addition, the Company is continuing to gather information from 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
intends to continue its efforts to seek reassurances regarding the Year 2000
compliance of vendors, joint venture partners and content partners. In the event
any third parties cannot timely provide the Company with content, products,
services or systems that meet the Year 2000 requirements, the content on the
Company's services, access to the Company's services, the ability to offer
products and services and the ability to process sales could be materially
adversely affected.
The costs incurred through June 30, 1999 to address Year 2000 compliance
were approximately $11 million. The Company currently estimates it will incur a
total of approximately $20 million in costs to support its compliance
initiatives. The Company cannot predict the outcome of its Year 2000 program,
whether third party systems and component software are, or will be Year 2000
compliant, the costs required to address the Year 2000 issue, or whether a
failure to achieve substantial Year 2000 compliance will have a material adverse
effect on the Company's business, financial condition or results of operations.
Failure to achieve Year 2000 compliance could result in some interruptions in
the work of some employees, the inability of some members and customers to
access the Company's online services and Web sites or errors and defects in the
Netscape products. This, in turn, may result in the loss of subscription
services revenue, advertising and commerce revenue or enterprise solution
revenue, the inability to deliver minimum guaranteed levels of traffic,
diversion of development resources, or increased service and warranty costs.
Occurrence of any of these may also result in additional remedial costs and
damage to reputation.
The Company has developed a contingency plan to address possible Year 2000
risks to its systems. The plan identifies a hierarchy of critical functions,
acceptable delay times, recovery strategies to return functions to operational
status and defines the core team for managing this recovery process. The Company
will continue to modify this plan to address systems of its recent acquisitions.
Inflation
The Company believes that inflation has not had, and will not have in the
future, a material effect on its results of operations.
<PAGE>
Forward-Looking Statements
This report and other oral and written statements made by the Company to
the public contain and incorporate by reference forward-looking statements
within the meaning of the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995. The forward-looking statements are based on
management's current expectations or beliefs and are subject to a number of
factors and uncertainties that could cause actual results to differ materially
from those described in the forward-looking statements. Such statements address
the following subjects: future operating results; subscriber growth and
retention; advertising, commerce and other revenues; earnings growth and
expectations; development and success of multiple brands; new products and
services (such as AOL 5.0, and the "You've Got Pictures," "My Calendar," AOL
Search and AOL Plus features); corporate spending; liquidity; network capacity;
new access and distribution technologies; regulatory developments, including the
Company's ability to shape public policy in, for example, telecommunications,
privacy and tax areas.
The following factors, among others, could cause actual results to differ
materially from those described in the forward-looking statements:
The risk that the Company and its data communications access providers
will be unable to provide adequate server and network capacity. Risks
associated with the fixed costs and minimum commitment nature of a
substantial majority of the Company's network services, such that a
significant decrease in demand for online services would not result in a
corresponding decrease in network costs. Risks related to the build-out of
AOLnet and the expansion of server and network capacity; the risk that
demand will not develop for the capacity created; the risk that supply
shortages for hardware and equipment and for local exchange carrier lines
from local telephone companies could impede the provision of adequate
network and system capacity; and the risk of the failure to obtain the
necessary financing.
Any damage or failure to the Company's computer equipment and the
information stored in its data centers.
Factors related to increased competition, including: price reductions
and increased spending; inability to generate greater revenues and profits
from advertising and electronic commerce; limitations on the Company's
opportunities to enter into or renew agreements with content providers and
distribution partners; limitations on the Company's ability to develop new
products and services; limitations on the Company's ability to continue to
grow or sustain its subscriber base; loss of the Company's market share in
the enterprise software industry; and an adverse impact on gross and
operating margins.
The failure to increase revenues at a rate sufficient to offset the
increase in data communications and equipment costs resulting from
increasing usage.
The risk of loss of services of executive officers and other key
employees.
The risk that because of seasonal and other factors, the Company is
unable to predict growth in sales, usage, subscriber acquisitions and
advertising commitments.
The failure of the Company to establish new relationships with
electronic commerce, advertising, marketing, technology and content
providers or the loss of a number of relationships with such providers or
the risk of significantly increased costs or decreased revenues needed, to
maintain, or resulting from the failure to maintain, such relationships, as
the case may be.
The risk associated with accepting warrants in lieu of cash in certain
electronic commerce agreements, as the value of such warrants is dependent
upon the common stock price of the warrant issuer at the time the warrants
are earned.
The risks related to the acquisition of businesses, including the
failure to successfully integrate and manage acquired technology,
operations and personnel, the loss of key employees of the acquired
companies and diversion of the Company's management's attention from other
ongoing business concerns; and the risk of significant charges for
in-process research and development or other matters.
The inability of the Company to introduce new products and services;
and its inability to develop, or achieve commercial acceptance for, these
new products and services. The failure to resolve issues concerning
commercial activities via the Internet, including security, reliability,
cost, ease of use and access. The risk of adverse changes in the U.S.
regulatory environment surrounding interactive services.
The failure of the Company or its partners to successfully market,
sell and deliver its services in international markets; and risks inherent
in doing business on an international level, such as laws that differ
greatly from those in the United States, unexpected changes in regulatory
requirements, political risks, export restrictions and controls, tariffs
and other trade barriers and fluctuations in currency exchange rates.
<PAGE>
The Company's inability to offer its services through advanced
distribution technologies such as cable and broadcast, and the resulting
inability to offer advanced services such as voice and full motion video.
The Company's inability to develop new technology or modify its existing
technology to keep pace with technological advances and the pursuit of
these technological advances requiring substantial expenditures.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to immaterial levels of market risks, including
changes in foreign currency exchange rates and interest rates. Market risk is
the potential loss arising from adverse changes in market rates and prices, such
as foreign currency exchange and interest rates. The Company does not enter into
derivatives or other financial instruments for trading or speculative purposes.
The Company only enters into financial instruments to manage and reduce the
impact of changes in foreign currency exchange rates. In June 1998, the Company
initiated hedging activities to mitigate the impact on intercompany balances of
changes in foreign exchange rates. The Company is using foreign currency forward
exchange contracts as a vehicle for hedging these intercompany balances. A
foreign currency forward exchange contract obligates the Company to exchange
predetermined amounts of specified foreign currencies at specified exchange
rates on specified dates and to make or receive an equivalent U.S. dollar
payment equal to the value of such exchange. For these contracts that are
designated and effective as hedges, realized and unrealized gains and losses
resulting from changes in the spot exchange rate (including those from open,
matured and terminated contracts) are included in other income and net discounts
or premiums (the difference between the spot exchange rate and the forward
exchange rate at inception of the contract) are also accreted or amortized to
other income, over the life of each contract, using the straight-line method.
These gains and losses offset gains and losses on intercompany balances, which
are also included in other income. The related amounts due to or from
counterparties are included in other assets or other liabilities. In general,
these foreign currency forward exchange contracts mature in three months or
less. The estimated fair value of the contracts are immaterial due to their
short-term nature.
Item 8. Financial Statements and Supplementary Data
Reference is made to the financial statements listed under the heading "(a)
(1) Consolidated Financial Statements" of Item 14 hereof, which financial
statements are incorporated herein by reference in response to this Item 8.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
The response to this item is incorporated by reference from the Sections
titled "Management" and "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Registrant's Proxy Statement for its 1999 Annual Meeting of
Stockholders.
Item 11. Executive Compensation
The response to this item is incorporated by reference from the Section
titled "Executive Compensation," but not from the Sections titled "Executive
Compensation--Performance Graph" and "Executive Compensation--Report on
Executive Compensation by the Compensation and Management Development Committee
of the Board of Directors," in the Registrant's Proxy Statement for its 1999
Annual Meeting of Stockholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The response to this item is incorporated by reference from the Section
titled "Share Ownership" in the Registrant's Proxy Statement for its 1999 Annual
Meeting of Stockholders.
Item 13. Certain Relationships and Related Transactions
The response to this item is incorporated by reference from the Section
titled "Certain Relationships and Related Transactions" in the Registrant's
Proxy Statement for its 1999 Annual Meeting of Stockholders.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) Consolidated Financial Statements
The following consolidated financial statements of America Online, Inc. and
the Report of Independent Auditors thereon are included in Item 8 above:
Consolidated Balance Sheets as of June 30, 1999 and 1998.................... F-2
Consolidated Statements of Operations for the years
ended June 30, 1999, 1998, and 1997.................................... F-3
Consolidated Statements of Changes in Stockholders'
Equity for the years ended June 30, 1999, 1998, and 1997............... F-4
Consolidated Statements of Cash Flows for the years
ended June 30, 1999, 1998, and 1997.................................... F-5
Notes to Consolidated Financial Statements.................................. F-6
Report of Management....................................................... F-25
Report of Independent Auditors............................................. F-26
<PAGE>
(a)(2) Financial Statement Schedules
All financial statement schedules required by Item 14(a) (2) have been
omitted because they are inapplicable or because the required information has
been included in the Consolidated Financial Statements or Notes thereto.
(a)(3) Exhibits
The following Exhibits are incorporated herein by reference or are filed
with this report as indicated below. Copies of exhibits will be furnished, upon
request, to holders or beneficial owners of America Online, Inc. Common Stock as
of August 30, 1999, subject to payment in advance of a fee of 25 cents per
page to reimburse America Online, Inc. for reproduction costs.
EXHIBIT LIST
Exhibit
No. Description
- ------- ------------------------------------------------------------------------
2.1 Purchase and Sale Agreement dated as of September 7, 1997 by and among
America Online, Inc., ANS Communications, Inc. and WorldCom, Inc.
(Filed as Exhibit 2 to the Company's Current Report on Form 8-K, dated
September 19,1997, and incorporated herein by reference.)
2.2 Agreement of Purchase and Sale dated as of June 5, 1998 by and among
America Online, Inc., AOL Acquisition Corp., R.G.A.O. Holdings Ltd.,
and Mirabilis, Ltd. and the Principal Stockholders (Confidential
treatment has been requested with respect to certain portions of the
Agreement). (Filed as Exhibit 2 to the Company's Current Report on Form
8-K, dated June 11, 1998, and incorporated herein by reference.)
2.3 Agreement and Plan of Merger dated as of November 23, 1998 by and among
America Online, Inc., Apollo Acquisition Corp. and Netscape
Communications Corporation (Filed as Exhibit 2.1 to the Company's
Current Report on Form 8-K, dated November 23, 1998 and incorporated
herein by reference.)
2.4 Agreement and Plan of Merger dated as of February 1, 1999 by and among
America Online, Inc., MF Acquisition Corporation and MovieFone, Inc.
(Filed as Exhibit 2.1 to the Company's Current Report on Form 8-K dated
February 1, 1999 and incorporated herein by reference.)
3.1 Restated Certificate of Incorporation of America Online, Inc. (Filed as
Exhibit 3.1 to the Company's Annual Report on Form 10-K for the year
ended June 30, 1997 and incorporated herein by reference.)
3.2 Amendment of Section A of Article 4 of the Restated Certificate of
Incorporation of America Online, Inc. (Filed as Exhibit 3.1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended September
30, 1998 and incorporated herein by reference.)
3.3 Certificate of Designation, Preferences and Rights of Series A-1 Junior
Participating Preferred Stock of America Online, Inc. (Filed as Exhibit
3.3 to the Company's Annual Report on Form 10-K for the year ended June
30, 1998 and incorporated herein by reference.)
3.4 Certificate of Elimination of Series A Junior Participation Preferred
Stock of America Online, Inc. (Filed as Exhibit 3.4 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1998 and
incorporated herein by reference.)
3.5 Restated By-Laws of America Online, Inc. (Filed as Exhibit 3.5 to the
Company's Annual Report on Form 10-K for the year ended June 30, 1998
and incorporated herein by reference.)
4.1 Article 4, Article 6 and Article 8 of the Restated Certificate of
Incorporation (see Exhibits 3.1 and 3.2)
4.2 Indenture, dated as of November 17, 1997 between America Online, Inc.,
as issuer, and State Street Bank and Trust Company, as trustee. (Filed
as Exhibit 4.1 to the Company's Current Report on Form 8-K, dated
December 2, 1997 and incorporated herein by reference.)
4.3 Registration Rights Agreement, dated as of November 17, 1997 between
America Online, Inc. and Goldman, Sachs & Co., BT Alex. Brown
Incorporated, Lehman Brothers Inc. and Cowen & Company. (Filed as
Exhibit 4.2 to the Company's Current Report on Form 8-K, dated December
2, 1997 and incorporated herein by reference.)
4.4 Purchase Agreement dated November 12, 1997 between America Online, Inc.
and Goldman, Sachs & Co., BT Alex. Brown Incorporated, Lehman Brothers
Inc. and Cowen & Company. (Filed as Exhibit 4.3 to the Company's
Current Report on Form 8-K, dated December 2, 1997 and incorporated
herein by reference.)
4.5 Rights Agreement dated as of May 12, 1998, between America Online, Inc.
and BankBoston, N.A., as Rights Agent. (Filed as Exhibit 4.2 to the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31,
1998 and incorporated herein by reference.)
10.1 The Company's Employee Stock Purchase Plan, as amended.*
10.2 The Company's 1992 Employee, Director and Consultant Stock Option Plan,
as amended.*
10.3 The Company's Incentive Stock Option Plan, 1987 Restatement. (Filed as
Exhibit 10.25 to the Company's Registration Statement on Form S-1,
Registration Statement No. 33-45585, as filed on February 6, 1992 and
incorporated herein by reference.)
<PAGE>
10.4 The Company's 1987 Stock Incentive Plan. (Filed as Exhibit 10.26 to the
Company's Registration Statement on Form S-1, Registration Statement
No. 33-45585, as filed on February 6, 1992 and incorporated herein by
reference.)
10.5 Amendment No. 1 to the Company's 1987 Stock Incentive Plan. (Filed as
Exhibit 10.27 to the Company's Registration Statement on Form S-1,
Registration Statement No. 33-45585, as filed on February 6, 1992 and
incorporated herein by reference.)
10.6 Employment Agreement and related agreements entered into with Robert W.
Pittman. (Filed as Exhibit 10.15 to the Company's Annual Report on Form
10-K for the year ended June 30, 1997 and incorporated herein by
reference.)
10.7 Employment Agreement and related agreements entered into with George
Vradenburg, III. (Filed as Exhibit 10.10 to the Company's Annual Report
on Form 10-K for the year ended June 30, 1998 and incorporated herein
by reference.)
10.8 Employment Agreement and related agreements entered into with J.
Michael Kelly. *
10.9 Restricted Stock Agreement between America Online, Inc. and J. Michael
Kelly (Filed as Exhibit 4.4 to the Company's Registration Statement on
Form S-8, Registration Statement No. 33-60623, as filed on August 4,
1998 and incorporated herein by reference.)
10.10 Strategic Development and Marketing Agreement made and entered into on
November 23, 1998, by and between America Online, Inc. and Sun
Microsystems, Inc. (Confidential treatment granted) (Filed as Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q for quarter ended
December 31, 1998 and incorporated herein by reference.)
10.11 Sun Microsystems, Inc. Service Provider Agreement effective November 1,
1998 (Confidential treatment granted)(Filed as Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q for quarter ended December 31,
1998 and incorporated herein by reference.)
21.1 List of Subsidiaries *
23.1 Consent of Ernst & Young LLP *
24.1 Powers of Attorney *
* Filed with this report
(b) Reports on Form 8-K
The following reports on Form 8-K were filed during the quarter ended June
30, 1999:
Item # Description Filing Date
- --------- -------------------------------------------------------------------
5, 7 A report dated April 21, 1999 filing a newsletter April 21, 1999
and historical unaudited supplemental financial
statements concerning certain one-time items
2, 7 An amendment to a prior report dated March 17, 1999 April 21, 1999
to file the financial statements of the Company,
due to the acquisition of Netscape Communications
Corporation
2, 5, 7 A report dated May 21, 1999 regarding the May 27, 1999
acquisition of MovieFone, Inc. by the Company
and litigation filed against the Company
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 13th day of
August, 1999.
AMERICA ONLINE, INC.
By: /s/ J. MICHAEL KELLY
J. Michael Kelly,
Senior Vice President, Chief Financial Officer
and Assistant Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on the 13th day of August, 1999.
Signature Title Date
* Chairman of the Board, August 13, 1999
- ------------------------------------- Chief Executive Officer
Stephen M. Case (principal executive
officer)
* President, Chief August 13, 1999
- ------------------------------------- Operating Officer
Robert W. Pittman and Director
/s/ J. Michael Kelly Senior Vice President, August 13, 1999
- ------------------------------------- Chief Financial Officer
J. Michael Kelly and Assistant Secretary
(principal financial officer)
* Vice President, August 13, 1999
- ------------------------------------- Controller, Chief
James F. MacGuidwin Accounting & Budget Officer
(principal accounting officer)
* Director August 13, 1999
- -------------------------------------
Daniel F. Akerson
* Director August 13, 1999
- -------------------------------------
James L. Barksdale
* Director August 13, 1999
- -------------------------------------
Frank J. Caufield
* Director August 13, 1999
- -------------------------------------
Alexander M. Haig, Jr.
* Director August 13, 1999
- -------------------------------------
William N. Melton
* Director August 13, 1999
- -------------------------------------
Thomas Middelhoff
* Director August 13, 1999
- -------------------------------------
Colin L. Powell
* Director August 13, 1999
- -------------------------------------
Franklin D. Raines
*By:/s/ J. MICHAEL KELLY
J. Michael Kelly, as Attorney-in-
Fact for each of the persons indicated
<PAGE>
AMERICA ONLINE, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of June 30, 1999 and 1998.................... F-2
Consolidated Statements of Operations for the years ended
June 30, 1999, 1998 and 1997........................................... F-3
Consolidated Statements of Changes in Stockholders' Equity
for the years ended June 30, 1999, 1998 and 1997...................... F-4
Consolidated Statements of Cash Flows for the years ended
June 30, 1999, 1998 and 1997........................................... F-5
Notes to Consolidated Financial Statements.................................. F-6
Report of Management....................................................... F-25
Report of Independent Auditors............................................. F-26
<PAGE>
<TABLE>
<CAPTION>
AMERICA ONLINE, INC.
CONSOLIDATED BALANCE SHEETS
June 30,
-----------------
1999 1998
-------- --------
(Amounts in
millions, except
ASSETS share data)
Current assets:
<S> <C> <C>
Cash and cash equivalents........................................................... $ 887 $ 677
Short-term investments.............................................................. 537 146
Trade accounts receivable, less allowances of $54 and $34,
respectively...................................................................... 323 192
Other receivables................................................................... 79 93
Prepaid expenses and other current assets........................................... 153 155
-------- --------
Total current assets................................................................ 1,979 1,263
Property and equipment at cost, net................................................. 657 503
Other assets:
Investments including available-for-sale securities................................. 2,151 531
Product development costs, net...................................................... 100 88
Goodwill and other intangible assets, net........................................... 454 472
Other assets........................................................................ 7 17
-------- --------
$5,348 $2,874
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable.............................................................. $ 74 $ 120
Other accrued expenses and liabilities.............................................. 795 461
Deferred revenue.................................................................... 646 420
Accrued personnel costs............................................................. 134 78
Deferred network services credit.................................................... 76 76
-------- --------
Total current liabilities........................................................... 1,725 1,155
Long-term liabilities:
Notes payable....................................................................... 348 372
Deferred revenue.................................................................... 30 71
Other liabilities................................................................... 15 7
Deferred network services credit.................................................... 197 273
-------- --------
Total liabilities................................................................... 2,315 1,878
Stockholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares authorized, no shares issued
and outstanding at June 30, 1999 and 1998, respectively........................... - -
Common stock, $.01 par value; 1,800,000,000 shares authorized, 1,100,893,933 and
973,150,052 shares issued and outstanding at June 30, 1999 and 1998, respectively. 11 10
Additional paid-in capital.......................................................... 2,703 1,431
Accumulated comprehensive income - unrealized gain on
available-for-sale securities, net................................................ 168 145
Retained earnings (accumulated deficit)............................................. 151 (590)
-------- --------
Total stockholders' equity.......................................................... 3,033 996
-------- --------
$5,348 $2,874
======== ========
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AMERICA ONLINE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended June 30,
------------------------
1999 1998 1997
------- -------- -------
(Amounts in millions,
except per share data)
Revenues:
<S> <C> <C> <C>
Subscription services................................... $3,321 $2,183 $1,478
Advertising, commerce and other......................... 1,000 543 308
Enterprise solutions.................................... 456 365 411
------- -------- -------
Total revenues.......................................... 4,777 3,091 2,197
Costs and expenses:
Cost of revenues........................................ 2,657 1,811 1,162
Sales and marketing
Sales and marketing.................................. 808 623 608
Write-off of deferred subscriber acquisition costs... - - 385
Product development..................................... 286 239 195
General and administrative.............................. 408 328 220
Amortization of goodwill and other intangible assets.... 65 24 6
Acquired in-process research and development............ - 94 9
Merger, restructuring and contract termination charges.. 95 75 73
Settlement charges...................................... - 17 24
------- -------- -------
Total costs and expenses................................ 4,319 3,211 2,682
Income (loss) from operations........................... 458 (120) (485)
Other income, net....................................... 638 30 10
------- -------- -------
Income (loss) before provision for income taxes......... 1,096 (90) (475)
(Provision) benefit for income taxes.................... (334) 16 (10)
------- -------- -------
Net income (loss)....................................... $ 762 $ (74) $ (485)
======= ======== =======
Earnings (loss) per share:
Earnings (loss) per share-diluted....................... $ 0.60 $(0.08) $(0.58)
Earnings (loss) per share-basic......................... $ 0.73 $(0.08) $(0.58)
Weighted average shares outstanding-diluted............. 1,277 925 838
Weighted average shares outstanding-basic............... 1,041 925 838
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AMERICA ONLINE, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Preferred Stock Common Stock Additional Accumulated
--------------- ---------------- Paid-in Comprehensive
Shares Amount Shares Amount Capital Income, Net
-------- ------ ------- ------ --------- -------------
(Amounts in millions, except share data)
<S> <C> <C> <C> <C> <C> <C>
Balances at June 30, 1996................... 1,000 $- 820,733,466 $8 $724 $2
Common stock issued:
Exercise of options and ESPP.............. - - 58,329,319 1 93 -
Business acquisitions..................... - - 6,195,803 - 82 -
Sale of stock, net........................ - - 2,781,000 - 157 -
Amortization of compensatory stock options - - - - 2 -
Unrealized gain on
available-for-sale securities, net....... - - - - 11 17
Tax benefit related to stock options........ - - - - 25 -
Net loss.................................... - - - - - -
------- ------ --------------- ----- --------- ---------------
Balances at June 30, 1997................... 1,000 - 888,039,588 9 1,094 19
Effect of pooling restatement............... - - 1,380,428 - 8 -
Common stock issued:
Exercise of options and ESPP.............. - - 75,321,563 1 132 -
Business acquisitions..................... - - 3,030,449 - 80 -
Sale of stock, net........................ - - 3,810,024 - 8 -
Amortization of compensatory
stock options............................. - - - - 33 -
Unrealized gain on
available-for-sale securities, net........ - - - - 78 126
Conversion of preferred stock
to common stock........................... (1,000) - 1,568,000 - - -
Tax expense related to stock options........ - - - - (2) -
Net loss.................................... - - - - - -
------ ------ --------------- ------ ---------- ------------------
Balances at June 30, 1998................... - - 973,150,052 10 1,431 145
Effect of pooling restatement............... - - 4,298,203 - 32 -
Common stock issued:
Exercise of options, warrant and ESPP..... - - 92,737,858 1 266 -
Sale of stock, net........................ - - 23,900,109 - 569 -
Amortization of compensatory
stock options............................. - - - - 20 -
Unrealized gain on
available-for-sale securities, net........ - - - - 13 23
Conversion of debt.......................... - - 6,807,711 - 88 -
Tax benefit related to stock options........ - - - - 284 -
Net income.................................. - - - - - -
-------- ------ --------------- ------ ---------- ------------------
Balances at June 30, 1999................... - $- 1,100,893,933 $11 $2,703 $168
======== ====== =============== ====== ========== ==================
<PAGE>
Comprehensive
Retained Income (Loss)
Earnings For The
(Accumulated Years Ended
Deficit) Total June 30,
------------ ------ -----------
<S> <C> <C> <C>
Balances at June 30, 1996................... $(27) $707
Common stock issued:
Exercise of options and ESPP.............. - 94
Business acquisitions..................... - 82
Sale of stock, net........................ - 157
Amortization of compensatory stock options - 2
Unrealized gain on
available-for-sale securities, net....... - 28 17
Tax benefit related to stock options........ - 25
Net loss.................................... (485) (485) (485)
---------- ------ ----------
Balances at June 30, 1997................... (512) 610 $(468)
Effect of pooling restatement............... (4) 4 ==========
Common stock issued:
Exercise of options and ESPP.............. - 133
Business acquisitions..................... - 80
Sale of stock, net........................ - 8
Amortization of compensatory
stock options............................. - 33
Unrealized gain on
available-for-sale securities, net........ - 204 126
Conversion of preferred stock
to common stock........................... - -
Tax expense related to stock options........ - (2)
Net loss.................................... (74) (74) (74)
----------- ------ ----------
Balances at June 30, 1998................... (590) 996 $ 52
Effect of pooling restatement............... (21) 11 ==========
Common stock issued:
Exercise of options, warrant and ESPP..... - 261
Sale of stock, net........................ - 575
Amortization of compensatory
stock options............................. - 20
Unrealized gain on
available-for-sale securities, net........ - 36 23
Conversion of debt.......................... - 88
Tax benefit related to stock options........ - 284
Net income.................................. 762 762 762
----------- ------ ----------
Balances at June 30, 1999................... $ 151 $3,033 $ 785
=========== ====== ==========
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AMERICA ONLINE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended June 30,
---------------------
1999 1998 1997
------ ------- ------
(Amounts in millions)
Cash flows from operating activities:
<S> <C> <C> <C>
Net income (loss)...................................................................... $ 762 $ (74) $(485)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Write-off of deferred subscriber acquisition costs..................................... - - 385
Non-cash restructuring charges......................................................... 7 32 22
Depreciation and amortization.......................................................... 298 191 93
Amortization of deferred network services credit....................................... (76) (32) -
Charge for acquired in-process research and development................................ - 94 9
Compensatory stock options............................................................. 20 33 2
Deferred income taxes.................................................................. 334 (18) (1)
Gain on sale of investments............................................................ (564) (28) -
Amortization of subscriber acquisition costs........................................... - - 59
Changes in assets and liabilities, net of the effects of acquisitions and dispositions:
Trade accounts receivable............................................................ (123) 78 (122)
Other receivables.................................................................... 12 (67) 2
Prepaid expenses and other current assets............................................ (63) 28 (50)
Deferred subscriber acquisition costs................................................ - - (130)
Other assets......................................................................... 4 (5) (15)
Investments including available-for-sale securities.................................. (16) (40) (30)
Accrued expenses and other current liabilities....................................... 319 141 130
Deferred revenue and other liabilities............................................... 185 104 262
------ ------- ------
Total adjustments...................................................................... 337 511 616
------ ------- ------
Net cash provided by operating activities.............................................. 1,099 437 131
Cash flows from investing activities:
Purchase of property and equipment..................................................... (301) (384) (230)
Product development costs.............................................................. (49) (51) (57)
Proceeds from sale of investments...................................................... 769 87 26
Purchase of investments, including available-for-sale securities....................... (2,289) (166) (208)
Maturity of investments................................................................ 133 103 83
Net (payments) proceeds for acquisitions/dispositions of subsidiaries.................. 30 (98) 30
Other investing activities............................................................. (69) (22) (11)
------ ------- ------
Net cash used in investing activities.................................................. (1,776) (531) (367)
Cash flows from financing activities:
Proceeds from issuance of common and preferred stock, net.............................. 836 141 251
Proceeds from sale and leaseback of property and equipment............................. 8 70 20
Principal and accrued interest payments on line of credit and debt..................... (22) (2) (22)
Proceeds from line of credit and issuance of debt...................................... 65 371 1
------ ------- ------
Net cash provided by financing activities.............................................. 887 580 250
------ ------- ------
Net increase in cash and cash equivalents.............................................. 210 486 14
Cash and cash equivalents at beginning of year......................................... 677 191 177
------ ------- ------
Cash and cash equivalents at end of year............................................... $ 887 $ 677 $ 191
====== ======= ======
Supplemental cash flow information
Cash paid during the year for:
Interest............................................................................... $ 17 $ 10 $ 2
See accompanying notes.
</TABLE>
<PAGE>
AMERICA ONLINE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Organization
America Online, Inc. (the "Company") was incorporated in the state of
Delaware in May 1985. The Company, based in Dulles, Virginia, is the world's
leader in interactive services, Web brands, Internet technologies and electronic
commerce services. America Online, Inc. operates: two worldwide Internet
services, the AOL service, with more than 17 million members, and the CompuServe
service, with approximately 2 million members; several leading Internet brands
including ICQ, AOl Instant Messenger and Digital City, Inc.; the Netscape
Netcenter, and AOL.COM Internet portals; the Netscape Communicator client
software, including the Netscape Navigator browser; AOL MovieFone, the nation's
number one movie listing guide and ticketing service; and Spinner Networks
Incorporated and Nullsoft, Inc., leaders in Internet music. Through its
strategic alliance with Sun Microsystems, Inc., the Company also develops and
offers easy-to-deploy, end-to-end electronic commerce and enterprise solutions
for companies operating in and doing business on the Internet.
Note 2. Summary of Significant Accounting Policies
Principles of Consolidation. The consolidated financial statements include
the accounts of the Company and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
Business Combinations. Business combinations which have been accounted for
under the purchase method of accounting include the results of operations of the
acquired business from the date of acquisition. Net assets of the companies
acquired are recorded at their fair value to the Company at the date of
acquisition. Amounts allocated to acquired in-process research and development
are expensed in the period of acquisition (see Note 8).
Other business combinations have been accounted for under the
pooling-of-interests method of accounting. In such cases, the assets,
liabilities and stockholders' equity of the acquired entities were combined with
the Company's respective accounts at recorded values. Prior period financial
statements have been restated to give effect to the merger unless the effect of
the business combination is not material to the financial statements of the
Company (see Note 8).
Revenue Recognition. Subscription services revenues are recognized over the
period that services are provided. Other revenues, which consist principally of
electronic commerce and advertising revenues, enterprise solutions sales which
include software licenses and services, as well as data network service
revenues, are recognized as the services are performed or when the goods are
delivered. Deferred revenue consists primarily of prepaid electronic commerce
and advertising fees and monthly and annual prepaid subscription fees billed in
advance.
Beginning in fiscal 1998, the Company adopted Statement of Position 97-2
"Software Revenue Recognition" as amended by Statement of Position 98-4. The
effect of adoption did not have a material impact on the Company's results of
operations. The Company recognizes the revenue allocable to software licenses
upon delivery of the software product to the end-user, unless the fee is not
fixed or determinable or collectibility is not probable. In software
arrangements that include more than one element, the Company allocates the total
arrangement fee among each deliverable based on the relative fair value of each
of the deliverables determined based on vendor-specific objective evidence.
Property and Equipment. Property and equipment are depreciated or amortized
using the straight-line method over the following estimated useful lives:
Computer equipment and internal software.. 2 to 5 years
Buildings and related improvements........ 15 to 40 years
Leasehold improvements.................... 4 to 10 years
Furniture and fixtures.................... 5 years
Effective July 1, 1998, the Company adopted Statement of Position (SOP)
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use", which requires that certain costs for the development of internal
use software should be capitalized, including the costs of coding, software
configuration, upgrades and enhancements. The adoption of this pronouncement did
not have a material effect on the Company's financial results.
Subscriber Acquisition Costs and Advertising. The Company accounts for
subscriber acquisition costs pursuant to Statement of Position 93-7, "Reporting
on Advertising Costs" ("SOP 93-7"). As a result of the Company's change in
accounting estimate (see Note 3), effective October 1, 1996, the Company began
expensing all costs of advertising as incurred. Included in sales and marketing
expense is both brand and acquisition advertising across the Company's multiple
brands and was $599 million, $476 million and $453 million for the fiscal years
ended June 30, 1999, 1998 and 1997, respectively.
<PAGE>
Prior to October 1, 1996, the Company accounted for the cost of direct
response advertising as deferred subscriber acquisition costs to comply with the
criteria of SOP 93-7. These costs consist solely of the costs of marketing
programs which result in subscriber registrations without further effort
required by the Company. Direct response advertising costs, relate directly to
subscriber solicitations and principally include the printing, production and
shipping of starter kits and the costs of obtaining qualified prospects by
various targeted direct marketing programs and from third parties. These
subscriber acquisition costs have been incurred for the solicitation of
specifically identifiable prospects. The deferred costs were amortized,
beginning the month after such costs were incurred, over a period determined by
calculating the ratio of current revenues related to direct response advertising
versus the total expected revenues related to this advertising, or twenty-four
months, whichever was shorter. All other costs related to the acquisition of
subscribers, as well as general marketing costs, were expensed as incurred. No
indirect costs are included in deferred subscriber acquisition costs.
On a quarterly basis, management reviewed the estimated future operating
results of the Company's subscriber base in order to evaluate the recoverability
of deferred subscriber acquisition costs and the related amortization period.
Management's assessment of the recoverability and amortization period of
deferred subscriber acquisition costs was subject to change based upon actual
results and other factors.
Product Development Costs. The Company's subscription service is comprised
of various features which contribute to the overall functionality of the
service. The overall functionality of the service is delivered primarily through
the Company's four products (the AOL service and the CompuServe service for
Windows and Macintosh). The Company capitalizes costs incurred for the
production of computer software used in the sale of its services. Capitalized
costs include direct labor and related overhead for software produced by the
Company and the cost of software purchased from third parties. All costs in the
software development process which are classified as research and development
are expensed as incurred until technological feasibility has been established
("beta"). Once technological feasibility has been established, such costs are
capitalized until the software has completed beta testing and is generally
available. To the extent the Company retains the rights to software development
funded by third parties, such costs are capitalized in accordance with the
Company's normal accounting policies. Amortization, a cost of revenue, is
provided on a product-by-product basis, using the greater of the straight-line
method or the current year revenue as a percentage of total revenue estimates
for the related software product, not to exceed five years, commencing the month
after the date of product release. Quarterly, the Company reviews and expenses
the unamortized cost of any feature identified as being impaired. The Company
also reviews recoverability of the total unamortized cost of all features and
software products in relation to estimated online service and relevant other
revenues and, when necessary, makes an appropriate adjustment to net realizable
value.
Capitalized product development costs consist of the following:
Year ended
June 30,
-----------
(in millions) 1999 1998
----- -----
Balance, beginning of year.. $ 88 $73
Costs capitalized........... 45 51
Costs amortized............. (33) (36)
----- -----
Balance, end of year........ $100 $88
===== =====
The accumulated amortization of product development costs related to the
production of computer software totaled $106 million and $72 million at June 30,
1999 and 1998, respectively.
Based on the Company's product development process related to the Netscape
Enterprise group, costs incurred between completion of the working model and the
point at which the product is ready for general release have been insignificant
and have not been capitalized.
Included in product development costs are research and development costs
totaling $179 million, $182 million and $139 million, and other product
development costs totaling $107 million, $57 million and $56 million in the
years ended June 30, 1999, 1998 and 1997, respectively.
Foreign Currency Translation and Hedging of Intercompany Balances. Assets
and liabilities of the Company's wholly-owned foreign subsidiaries are
translated into U.S. dollars at year-end exchange rates, and revenues and
expenses are translated at average rates prevailing during the year. Translation
adjustments are included as a component of stockholders' equity. Foreign
currency transaction gains and losses, which have been immaterial, are included
in results of operations. In June 1998, the Company initiated hedging activities
to mitigate the impact on intercompany balances of changes in foreign exchange
rates. In general, these foreign currency forward exchange contracts mature in
three months or less. The estimated fair value of the contracts is immaterial
due to their short-term nature.
<PAGE>
Investments. The Company has various investments, including foreign and
domestic joint ventures, that are accounted for under the equity method of
accounting. All investments in which the Company has the ability to exercise
significant influence over the investee, but less than a controlling voting
interest, are accounted for under the equity method of accounting. Under the
equity method of accounting, the Company's share of the investee's earnings or
loss is included in consolidated operating results. To date, the Company's basis
and current commitments in its investments accounted for under the equity method
of accounting have been minimal. As a result, these investments have not
significantly impacted the Company's results of operations or its financial
position.
All other investments, for which the Company does not have the ability to
exercise significant influence or for which there is not a readily determinable
market value, are accounted for under the cost method of accounting. Dividends
and other distributions of earnings from investees, if any, are included in
income when declared. The Company periodically evaluates the carrying value of
its investments accounted for under the cost method of accounting and as of June
30, 1999 and 1998, such investments were recorded at the lower of cost or
estimated net realizable value.
Goodwill and Other Intangible Assets. Goodwill and other intangible assets
relate to purchase transactions and are amortized on a straight-line basis over
periods ranging from 2-10 years. As of June 30, 1999 and 1998, accumulated
amortization was $89 million and $24 million, respectively. The Company
periodically evaluates whether changes have occurred that would require revision
of the remaining estimated useful life of the assigned goodwill or render the
goodwill not recoverable. If such circumstances arise, the Company would use an
estimate of the undiscounted value of expected future operating cash flows to
determine whether the goodwill is recoverable.
Cash, Cash Equivalents and Short-term Investments. The Company considers
all highly liquid investments with an original maturity of three months or less
to be cash equivalents. Short-term investments of $537 million and $146 million
as of the fiscal years ended June 30, 1999 and 1998, respectively, are carried
at cost which approximates fair market value and mature within one year.
Trade Accounts Receivables. The carrying amount of the Company's trade
accounts receivables approximate fair value. The Company recorded provisions of
$33 and $25 million and write-offs of $13 and $14 million during the fiscal
years ended June 30, 1999 and 1998, respectively.
Investments Including Available-For-Sale Securities. The Company has
classified all debt and equity securities as available-for-sale.
Available-for-sale securities are carried at fair value, with unrealized gains
and losses reported as a separate component of stockholders' equity net of
applicable income taxes. Realized gains and losses and declines in value judged
to be other-than-temporary on available-for-sale securities are included in
other income. The cost basis for realized gains and losses on available-for-sale
securities is determined on a specific identification basis.
As of June 30, 1999, the Company had available-for-sale equity investments
in public companies with a fair market value of $1,956 million and a cost basis
of $1,686 million. The unrealized gain of $168 million, net of tax, has been
recorded as a separate component of stockholders' equity. Included in the $1,956
million is an investment of $1.5 billion in a General Motors equity security
related to the strategic alliance the Company entered with Hughes Electronics
Corporation ("Hughes"). For additional information regarding this investment,
refer to Note 8. During fiscal 1999, the Company sold investments in Excite,
Inc. for a net gain of approximately $567 million.
As of June 30, 1998, the Company had available-for-sale equity investments
in public companies with a fair market value of $286 million and a cost basis of
$52 million. The unrealized gain of $145 million, net of tax, has been recorded
as a separate component of stockholders' equity. Included in the $286 million is
an investment in Excite, Inc. of $250 million.
As of June 30, 1999, the Company had approximately $12 million of debt
securities (included in investments including available-for-sale securities)
with maturity dates in fiscal years 2002 and 2004. As of June 30, 1998, the
Company had approximately $47 million of debt securities (included in
investments including available-for-sale securities) with similar maturity
periods. The cost of these debt securities approximated fair market value.
In January 1997, the Securities and Exchange Commission issued new rules
requiring disclosure of the Company's accounting policies for derivatives and
market risk disclosure. The Company does not have any material derivative
financial instruments as of June 30, 1999, and believes that the interest rate
risk associated with its borrowings and market risk associated with its
available-for-sale securities are not material to the results of operations of
the Company. The available-for-sale securities subject the Company's financial
position to market rate risk. The Company sells products to customers in
diversified industries, primarily in the Americas, which includes Canada and
Latin America, Europe and the Asia Pacific region. The Company performs ongoing
credit evaluations of its customers' financial condition and generally does not
require collateral on product sales. The Company maintains reserves to provide
for estimated credit losses. Actual credit losses could differ from such
estimates.
<PAGE>
Financial Instruments. The carrying amounts for the Company's cash and cash
equivalents, other receivables, other assets, trade accounts payable, accrued
expenses and liabilities and other liabilities approximate fair value. The fair
market value for notes payable (see Note 12) and investments including
available-for-sale securities is based on quoted market prices where available.
Barter Transactions. The Company barters advertising for products and
services. Such transactions are recorded at the estimated fair value of the
products or services received or given. Revenue from barter transactions is
recognized when advertising is provided, and services received are charged to
expense when used. Barter transactions are immaterial to the Company's statement
of operations for all periods presented.
Net Income (Loss) per Common Share. The Company calculates net income
(loss) per share as required by SFAS No. 128, "Earnings per Share." SFAS No. 128
replaced the calculation of primary and fully diluted earnings per share with
the basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share exclude any dilutive effect of stock options, warrants
and convertible securities (see Note 7).
Stock-Based Compensation. During 1997, the Company adopted SFAS No. 123,
"Accounting for Stock-Based Compensation." The provisions of SFAS No. 123 allow
companies to either expense the estimated fair value of stock options or to
continue to follow the intrinsic value method set forth in APB Opinion 25,
"Accounting for Stock Issued to Employees" ("APB 25") but disclose the pro forma
effects on net income (loss) had the fair value of the options been expensed.
The Company has elected to continue to apply APB 25 in accounting for its stock
option incentive plans (see Note 16).
Reclassification. Certain amounts in prior years' consolidated financial
statements have been reclassified to conform to the current year presentation.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Recent Pronouncements. The FASB recently issued Statement No 137,
"Accounting for Derivative Instruments and Hedging Activities-Deferral of
Effective Date of FASB Statement No. 133". The Statement defers for one year the
effective date of FASB Statement No. 133, "Accounting for Derivative Instruments
and Hedging Activities". The rule now will apply to all fiscal quarters of all
fiscal years beginning after June 15, 2000. In June 1998, the FASB issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," which
is required to be adopted in years beginning after June 15, 1999. The Statement
permits early adoption as of the beginning of any fiscal quarter after its
issuance. The Statement will require the Company to recognize all derivatives on
the balance sheet at fair value. Derivatives that are not hedges must be
adjusted to fair value through income. If the derivative is a hedge, depending
on the nature of the hedge, changes in the fair value of derivatives will either
be offset against the change in fair value of the hedged assets, liabilities, or
firm commitments through earnings or recognized in other comprehensive income
until the hedged item is recognized in earnings. The ineffective portion of a
derivative's change in fair value will be immediately recognized in earnings.
The Company has not yet determined if it will early adopt and what the effect of
SFAS No. 133 will be on the earnings and financial position of the Company.
SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition, With
Respect to Certain Transactions" was issued in December 1998 and addresses
software revenue recognition as it applies to certain multiple-element
arrangements. SOP 98-9 also amends SOP 98-4, "Deferral of the Effective Date of
a Provision of SOP 97-2", to extend the deferral of application of certain
passages of SOP 97-2 through fiscal years beginning on or before March 15, 1999.
All other provisions of SOP 98-9 are effective for transactions entered into in
fiscal years beginning after March 15, 1999. The Company will comply with the
requirements of this SOP as they become effective and this is not expected to
have a material effect on the Company's revenues and earnings.
Note 3. Change in Accounting Estimate
As a result of a change in accounting estimate, the Company recorded a
charge of $385 million ($0.46 per share), as of September 30, 1996, representing
the balance of deferred subscriber acquisition costs as of that date. The
Company previously had deferred the cost of certain marketing activities, to
comply with the criteria of Statement of Position 93-7, "Reporting on
Advertising Costs", and then amortized those costs over a period determined by
calculating the ratio of current revenues related to direct response advertising
versus the total expected revenues related to this advertising, or twenty-four
months, whichever was shorter. For further information on subscriber acquisition
costs, refer to Note 2. The Company's changing business model, which includes
flat-rate pricing for its online service, increasingly is expected to reduce its
reliance on online service subscriber revenues for the generation of revenues
and profits. This changing business model, coupled with a lack of historical
experience with flat-rate pricing, created uncertainties regarding the level of
expected future economic benefits from online service subscriber revenues. As a
result, the Company believed it no longer had an adequate accounting basis to
support recognizing deferred subscriber acquisition costs as an asset.
<PAGE>
Note 4. Merger/Restructuring Charges
During the quarter ended June 1999, the Company recorded a charge of
approximately $15 million of direct costs primarily related to the mergers of
MovieFone, Inc. ("MovieFone"), Spinner Networks, Incorporated ("Spinner") and
NullSoft, Inc. ("NullSoft"). These charges primarily consisted of investment
banker fees, severance and other personnel costs, fees for legal and accounting
services, and other expenses directly related to the transaction.
During the quarter ended March 1999, the Company recorded a charge of
approximately $78 million of direct costs primarily related to the mergers of
Netscape and When, Inc. and the Company's reorganization plans to integrate
Netscape's operations and build on the strengths of the Netscape brand and
capabilities. This charge primarily consists of investment banker fees,
severance and other personnel costs (related to the elimination of approximately
850 positions), fees for legal and accounting services, and other expenses
directly related to the transaction.
During the quarter ended December 1998, the Company recognized
approximately $2 million in merger related costs in connection with the merger
of AtWeb, Inc. These expenses were primarily associated with fees for investment
banking, legal and accounting services, severance costs and other related
charges in connection with the transaction.
The following table summarizes the activity in the 1999 accruals during the
period ended June 30, 1999. The balance of the restructuring accrual at June 30,
1999 is included in other accrued expenses and liabilities on the consolidated
balance sheet and is anticipated to be paid within 12 months.
(in millions)
Restructuring/ Balance
Merger Non Cash June 30,
Charges Items Payments 1999
------------- -------- -------- --------
Banking, legal, regulatory
and accounting fees........... $49 $ - $(45) $ 4
Severance and related costs..... 27 - (16) 11
Facilities shutdown costs....... 9 - (1) 8
Miscellaneous expenses.......... 10 (7) (6) (3)
------------- -------- -------- --------
Total........................... $95 $ (7) $(68) $20
============= ======== ======== ========
In connection with a restructuring plan adopted in the third quarter of
fiscal 1998, the Company recorded a $35 million restructuring charge associated
with the restructuring of its former AOL Studios brand group. The restructuring
included the exiting of certain business activities, the termination of
approximately 160 employees and the shutdown of certain subsidiaries and
facilities.
During fiscal 1998, the Company recorded a $35 million restructuring charge
associated with actions aimed at reducing its cost structure, improving its
competitiveness and restoring sustainable profitability mainly related to the
Netscape Enterprise group. The restructuring plan resulted from decreased demand
for certain Netscape products and the adoption of a new strategic direction. The
restructuring included a reduction in the workforce (approximately 400
employees), the closure of certain facilities, the write-off of non-performing
operating assets, and third-party royalty payment obligations relating to
canceled contracts.
As of June 30, 1999, all of the restructuring activities related to fiscal
1998 has been completed.
In connection with a restructuring plan adopted in the second quarter of
fiscal 1997, the Company recorded a $49 million restructuring charge associated
with the Company's change in business model, the reorganization of the Company
into three operating units, the termination of approximately 300 employees and
the shutdown of certain operating divisions and subsidiaries. As of September
30, 1997, all of the restructuring activities had been completed and, as a
result, the Company reversed $1 million of the original restructuring accrual.
Note 5. Contract Termination Charge
In fiscal 1997, the Company recorded a contract termination charge of $24
million, which consisted of unconditional payments associated with terminating
certain information provider contracts, which became uneconomic as a result of
the Company's introduction of flat-rate pricing in December 1996. Subsequent to
the contract terminations, the Company entered into new agreements with these
information providers.
Note 6. Settlement Charges
In fiscal 1998, the Company recorded a net settlement charge of $18 million
in connection with the settlement of the Orman v. America Online, Inc., class
action lawsuit filed in the U.S. District Court for the Eastern District of
Virginia alleging violations of federal securities laws between August 1995 and
October 1996. As of June 30, 1999, the Company has paid out approximately $35
million and has a receivable of $17 million related to the estimated insurance
receipts in other receivables.
<PAGE>
In fiscal 1997, the Company recorded a settlement charge of $24 million in
connection with a legal settlement reached with various State Attorneys General
and a preliminary legal settlement reached with various class action plaintiffs,
to resolve potential claims arising out of the Company's introduction of
flat-rate pricing and its representation that it would provide unlimited access
to its subscribers. Pursuant to these settlements, the Company agreed to make
payments to subscribers, according to their usage of the AOL service, who may
have been injured by their reliance on the Company's claim of unlimited access.
These payments do not represent refunds of online service revenues, but are
rather the compromise and settlement of allegations that the Company's
advertising of unlimited access under its flat-rate plan violated consumer
protection laws. In fiscal 1998, the Company revised its estimate of the total
liability associated with these matters and reversed $1 million of the original
settlement accrual.
Note 7. Earnings (Loss) Per Share
The following table sets forth the computation of basic and diluted
earnings (loss) per share for the years ended June 30, 1999, 1998 and 1997:
<TABLE>
(in millions except for per share data) 1999 1998 1997
-------- -------- --------
Basic earnings per share:
<S> <C> <C> <C>
Net income (loss) available to common shareholders..............................$ 762 $ (74) $ (485)
-------- -------- --------
Weighted average shares outstanding............................................. 1,041 925 838
Basic earnings (loss) per share.................................................$ 0.73 $ (0.08) $ (0.58)
======== ======== ========
Diluted earnings per share:
Net income (loss) available to common shareholders..............................$ 762 $ (74) $ (485)
Interest on convertible debt, net of tax........................................ 10 - -
-------- -------- --------
Adjusted net income (loss) available to common shareholders
assuming conversion..........................................................$ 772 $ (74) $ (485)
-------- -------- --------
Weighted average shares outstanding............................................. 1,041 925 838
Effect of dilutive securities:
Employee stock options....................................................... 191 - -
Warrants..................................................................... 20 - -
Convertible debt............................................................. 25 - -
-------- -------- --------
Adjusted weighted average shares and assumed conversions........................ 1,277 925 838
======== ======== ========
Diluted earnings (loss) per share...............................................$ 0.60 $ (0.08) $ (0.58)
======== ======== ========
</TABLE>
Note 8. Business Developments
Purchase Transactions
Acquisition of Mirabilis, Ltd.
In June 1998, the Company purchased the assets, including the developmental
ICQ instant communications and chat technology, and assumed certain liabilities
of Mirabilis, Ltd. ("Mirabilis") for $287 million in cash. Mirabilis was a
development stage enterprise that had generated no revenues. In addition,
contingent purchase payments, based on future performance levels, of up to $120
million may be made over three years beginning in the Company's fiscal year
2001. The acquisition was accounted for under the purchase method of accounting
and, accordingly, the results of operations are included in the financial
statements as of the date of acquisition, and the assets and liabilities were
recorded based upon their fair values at the date of acquisition. The Company
has allocated the excess purchase price over the fair value of net tangible
assets acquired to the following identifiable intangible assets: goodwill and
strategic value, existing technology, base of trial users, ICQ tradename and
brand and acquired in-process research and development.
In connection with the acquisition of Mirabilis, the Company recorded
approximately $228 million in goodwill and other intangible assets, which are
being amortized on a straight-line basis over periods of five to ten years.
<PAGE>
Acquisition of CompuServe Online Services Business
In January 1998, the Company consummated a Purchase and Sale Agreement (the
"Purchase and Sale") by and among the Company, ANS Communications, Inc. ("ANS"),
a then wholly-owned subsidiary of the Company, and MCI WorldCom, Inc.
("WorldCom") pursuant to which the Company transferred to WorldCom all of the
issued and outstanding capital stock of ANS in exchange for the online services
business of CompuServe Corporation ("CompuServe"), which was acquired by
WorldCom shortly before the consummation of the Purchase and Sale, and $147
million in cash (excluding $15 million in cash received as part of the
CompuServe online services business and after purchase price adjustments made at
closing). The transaction was accounted for under the purchase method of
accounting and, accordingly, the assets and liabilities were recorded based upon
their fair values at the date of acquisition. As a result of these transactions,
the excess of the cash and the fair value of the CompuServe business received
over the book value of ANS amounted to $381 million. This balance is classified
as current and long-term deferred network services credit and is being amortized
on a straight-line basis over a five-year term (equal to the term of a network
services agreement entered into with WorldCom) as a reduction of network
services expense within cost of revenues.
In connection with the acquisition of CompuServe, the Company recorded
approximately $127 million in goodwill and other intangible assets, which are
being amortized on a straight-line basis over periods of three to seven years.
Immediately after the consummation of the Purchase and Sale, the Company's
European partner, Bertelsmann AG, paid $75 million to the Company for a 50%
interest in a newly created joint venture to operate the CompuServe European
online service. Both the Company and Bertelsmann AG invested an additional $25
million in cash in this joint venture. The Company accounts for this transaction
under the equity method of accounting in accordance with the terms of the
securities issued in the joint venture.
Other Purchase Transactions
In fiscal 1998, the Company acquired Personal Library Software, Inc.
("PLS"), a developer of information indexing and search technologies,
NetChannel, Inc. ("NetChannel"), a Web-enhanced television company and the
remaining equity interests of Actra Business Systems LLC ("Actra"), a designer
of Internet commerce applications. The Company purchased all of the outstanding
capital stock of each of the corporations and the limited liability company and
assumed all of their outstanding stock options in exchange for an aggregate of
approximately 3.3 million shares of the Company's common stock and options,
approximately $16 million in cash payments, the assumption of approximately $21
million in liabilities and $2 million in transition costs. The total purchase
price for these transactions was approximately $114 million.
In fiscal 1997, the Company acquired Portola Communications, Inc.
("Portola"), a builder of high-performance messaging systems, DigitalStyle
Corporation ("DigitalStyle"), a developer of Web graphics tools and Java-based
animation and the ImagiNation Network, Inc. ("INN"), an interactive games
company. The Company purchased all of the outstanding capital stock of each of
the corporations and assumed all of their outstanding stock options in exchange
for an aggregate of approximately 4.7 million shares of the Company's common
stock and options and approximately $3 million in transition costs. The purchase
price for the acquisitions was approximately $76 million.
In connection with the above mentioned purchase transactions, the Company
recorded charges for acquired in-process research and development ("IPR&D") of
approximately $94 million in the fiscal year ended June 30, 1998 and
approximately $9 million in the fiscal year ended June 30, 1997. Any related
purchased IPR&D for each of the above acquisitions represents the present value
of the estimated after-tax cash flows expected to be generated by the purchased
technology, which, at the acquisition dates, had not yet reached technological
feasibility. The cash flow projections for revenues were based on estimates of
relevant market sizes and growth factors, expected industry trends, the
anticipated nature and timing of new product introductions by the Company and
its competitors, individual product sales cycles and the estimated life of each
product's underlying technology. Estimated operating expenses and income taxes
were deducted from estimated revenue projections to arrive at estimated
after-tax cash flows. Projected operating expenses include cost of goods sold,
marketing and selling expenses, general and administrative expenses, and
research and development, including estimated costs to maintain the products
once they have been introduced into the market and are generating revenue. The
remaining identified intangibles, including goodwill that may result from any
future contingent purchase payments, will be amortized on a straight-line basis
over lives ranging from 5 to 10 years.
The following unaudited pro forma information has been prepared assuming
that the sale of ANS and the acquisitions of Portola, DigitalStyle, Actra,
CompuServe and Mirabilis had taken place at the beginning of the respective
periods presented. The amount of the aggregate purchase price allocated to
acquired IPR&D for each applicable acquisition has been excluded from the pro
forma information, as it is a non-recurring item. The pro forma financial
information is not necessarily indicative of the combined results that would
have occurred had the acquisitions taken place at the beginning of the period,
nor is it necessarily indicative of results that may occur in the future. The
pro forma effect of the PLS, NetChannel and INN transactions are immaterial for
all periods presented and therefore are not included in the pro forma
information.
<PAGE>
Pro Forma
For the year
ended June 30,
---------------
(in millions, except per share data) 1998
---------------
(unaudited)
Revenue............................. $3,229
Loss from operations................ $(57)
Net Loss............................ $(11)
Loss per share-diluted.............. $(0.01)
Loss per share-basic................ $(0.01)
Pooling Transactions
In March 1999, the Company completed its merger with Netscape
Communications Corporation ("Netscape"), in which Netscape became a wholly owned
subsidiary of the Company. The Company exchanged approximately 95 million shares
of common stock for all the outstanding common shares of Netscape. The merger
was accounted for under the pooling-of-interests method of accounting and,
accordingly, the accompanying financial statements and footnotes have been
restated to include the operations of Netscape for all periods presented. During
the quarter ended March 31, 1999, the Company incurred approximately $25 million
in transition and retention costs, which was charged to operations as incurred.
For the years ended June 30, 1999 (through the date of the merger), 1998 and
1997, Netscape's revenues were approximately $461 million, $452 million and $461
million, respectively. For the years ended June 30, 1999 (through the date of
the merger), 1998 and 1997, Netscape's net income (loss) was approximately $(77)
million, $(159) million and $14 million, respectively. See Note 4 for additional
information.
During fiscal 1999, the Company completed mergers with Nullsoft, Inc.
("Nullsoft") and Spinner Networks, Incorporated ("Spinner"), companies that
provide Internet music, When, Inc. ("When.com"), a company that provides a
personalized event directory and calendar services, AtWeb, Inc. ("AtWeb") and
PersonaLogic, Inc. ("PersonaLogic"). The Company exchanged approximately 8.2
million shares of common stock for all the outstanding capital stock of these
companies. These mergers were accounted for under the pooling-of-interests
method of accounting. As the combined results of these companies is material to
the Company's net income (loss) for the fiscal year ended June 30, 1998, the
accompanying financial statements have been restated to include the operations
of these companies for all periods presented. For the year ended June 30, 1999,
these companies had revenues of approximately $2 million through the date of the
merger and all prior years were immaterial. For the years ended June 30, 1999
(through the dates of the mergers), 1998 and 1997, the net loss for these
companies was approximately $18 million, $8 million and $3 million,
respectively. See Note 4 for additional information.
In May 1999, the Company completed its merger with MovieFone, Inc.,
("MovieFone"). The Company exchanged approximately 4.3 million shares of common
stock for all the outstanding common and preferred shares of MovieFone. As
MovieFone's historical results of operations were not material in relation to
those of AOL, the financial information prior to the quarter ended June 30, 1999
has not been restated to reflect the merger. See Note 4 for additional
information.
In December 1997, the Company completed its merger with KIVA Software
Corporation ("KIVA"). The Company exchanged approximately 5.4 million shares of
common stock for all of the outstanding capital stock and options of KIVA, a
privately held company. The merger was treated as a pooling-of-interests for
accounting purposes, and accordingly the historical financial statements of the
Company have been restated as if the merger occurred at the beginning of the
earliest period presented. In connection with the business combination, the
Company incurred direct transaction costs of approximately $6 million, which
consisted primarily of fees for investment banking, legal and accounting
services incurred in conjunction with the business combination. For the years
ended June 30, 1998 (through the date of the merger) and 1997, KIVA's revenues
were approximately $4 million and $1 million, respectively. For the years ended
June 30, 1998 (through the date of the merger) and 1997, KIVA's net loss was
approximately $3 million and $5 million, respectively.
Other Business Developments
In June 1999, the Company announced a strategic alliance with Hughes
Electronics Corporation ("Hughes") to develop and market uniquely integrated
digital entertainment and Internet services nationwide. This new alliance builds
on the Company's "AOL Anywhere" strategy, as well as providing another means of
higher speed access to its subscribers. The Companies will launch an extensive
cross-marketing initiative to package and extend the reach of both AOL TV and
DirecTV. Under the agreement, the Company made a $1.5 billion strategic
investment in a General Motors preference stock, which carries a 6-1/4% coupon
rate and has a mandatory conversion into General Motors Class H common stock
(GMH) in three years.
<PAGE>
In November 1998, the Company announced a strategic alliance with Sun
Microsystems, Inc. ("Sun") to jointly develop a comprehensive suite of
easy-to-deploy, end-to-end solutions to help companies and Internet service
providers rapidly enter the electronic commerce market and scale their
electronic commerce operations. Sun will become a lead systems and service
provider to the Company and the Company is committed to purchase systems and
services worth approximately $400 million at list price from Sun through 2002
for its electronic commerce partners and its own use. The Company will receive
more than $350 million in licensing, marketing and advertising fees from Sun,
plus significant minimum revenue commitments of $975 million, over the next
three years.
Note 9. Segment Information
Effective June 30, 1999, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." Certain information is
disclosed, per SFAS No. 131, based on the way management organizes financial
information for making operating decisions and assessing performance.
The Company currently has two major lines of businesses organized into four
product groups who all share the same infrastructure.
The Interactive Online Services business is comprised of the Interactive
Services group, the Interactive Properties group and the AOL International
group. The Interactive Services group operates the Company's interactive
products: the AOL and CompuServe services and their related brand and product
extensions; Netscape Netcenter; and the Netscape Communicator client software,
including the Netscape Navigator browser. The new product group has
responsibility for broadband development and AOL devices like AOL TV, and is
charged with rapidly delivering high-quality, world-class products, features and
functionality across all branded services and properties. The Interactive
Properties Group oversees ICQ, Digital City, MovieFone, Direct Marketing
Services (DMS), Spinner and Nullsoft, developer of the Winamp and SHOUTcast
brands. This group is responsible for building new revenue streams by seeking
out opportunities to build or acquire branded properties that operate across
multiple services or platforms. The AOL International Group oversees the AOL and
CompuServe services outside of the U.S. The AOL International Group operates the
AOL and CompuServe brands in Europe with its joint venture partner Bertelsmann
AG; AOL Canada, a wholly-owned subsidiary of America Online, Inc.; AOL Japan,
with its joint venture partners Mitsui and Nikkei; and AOL in Australia with
Bertelsmann. America Online plans to launch services in Hong Kong with China
Internet Corporation and in Latin America with the Cisneros Group.
The Enterprise Solutions business is comprised of the Netscape Enterprise
Group. This segment focuses on providing businesses a range of software
products, technical support, consulting and training services. These products
and services historically have enabled businesses and users to share
information, manage networks and facilitate electronic commerce.
In November 1998, America Online entered into a strategic alliance with Sun
Microsystems, Inc., a leader in network computing products and services, to
accelerate the growth of electronic commerce. The strategic alliance provides
that, over a three year period, the Company will develop and market, together
with Sun, client software and network application and server software for
electronic commerce, extended communities and connectivity, including software
based in part on the Netscape code base, on Sun code and technology and on
certain America Online services features, to business enterprises. In
combination with dedicated resources from Sun, the Netscape Enterprise Group
delivers easy-to-deploy, end-to-end solutions to help business partners and
other companies put their businesses online.
While there are no intersegment revenues between the two reportable
segments, shared support service functions such as human resources, facilities
management and other infrastructure support groups are allocated based on usage
or headcount, where practical, to the two operating segments. Charges that
cannot be allocated are reported as general & administrative costs and are not
allocated to the segments. Special charges determined to be significant are
reported separately in the Consolidated Statement of Operations and are not
assigned or allocated to the segments. All other accounting policies, as
described previously in Note 2 "Summary of Significant Accounting Policies," are
applied consistently to the segments, where applicable.
A summary of the segment financial information is as follows:
<TABLE>
Years ended June 30,
----------------------------------------
1999 1998 1997
------------ ------------ ------------
(Amounts in millions)
Revenues:
<S> <C> <C> <C>
Interactive Online Services................. $4,321 $2,726 $1,786
Enterprise Solutions........................ 456 365 411
------------ ------------ ------------
Total revenues.......................... $4,777 $3,091 $2,197
Income (loss) from operations:
Interactive Online Services (1).(2)......... $ 955 $ 412 $ (257)
Enterprise Solutions. (2)................... 6 (18) 98
General & Administrative.................... (408) (328) (220)
Other (3)................................... (95) (186) (106)
------------ ------------ ------------
Total income (loss) from operations..... $ 458 $ (120) $ (485)
</TABLE>
<PAGE>
1. Loss from operations for the year ended June 1997 includes $385 million
write-off of deferred subscriber acquisition costs.
2. In fiscal 1999, Enterprise Solutions and Interactive Online Services include
$5 million and $60 million, respectively, of goodwill and other intangible
assets amortization.
3. Other consists of all special items: merger, restructuring, contract
termination, acquired in-process research and development and settlement
charges.
The Company does not have any material revenues and/or assets outside the
United States and no single customer accounts for more than 10% or greater of
total revenues.
Note 10. Property and Equipment
Property and equipment consist of the following:
June 30,
---------
(in millions) 1999 1998
---- ----
Land............................................ $ 31 $ 24
Buildings, equipment and related improvements... 191 98
Leasehold and network improvements.............. 189 149
Furniture and fixtures.......................... 73 42
Computer equipment and internal software........ 494 341
Construction in progress........................ 15 36
---- ----
993 690
Less accumulated depreciation and amortization.. 336 186
Less restructuring-related adjustments.......... - 1
---- ----
Net property and equipment...................... $657 $503
==== ====
The Company's depreciation and amortization expense for the years ended
June 30, 1999, 1998 and 1997 totaled $159 million, $110 million and $46 million,
respectively.
Note 11. Commitments and Contingencies
The Company leases facilities and equipment primarily under several
long-term operating leases, certain of which have renewal options. Future
minimum payments under non-cancelable operating leases with initial terms of one
year or more consist of the following:
(in millions)
Year ending June 30,
-------------------- -----
2000................ $262
2001................ 186
2002................ 129
2003................ 76
2004................ 33
Thereafter.......... 123
-----
$809
=====
The Company's rental expense under operating leases in the years ended June
30, 1999, 1998 and 1997 totaled approximately $294 million, $261 million and
$154 million, respectively.
The Company has guaranteed monthly usage levels of data and voice
communications with some of its network providers and commitments related to the
construction of additional office buildings. The remaining commitments are
$1,270 million, $1,216 million, $1,212 million and $186 million for the years
ending June 30, 2000, 2001, 2002 and 2003, respectively. The related expense for
the years ended June 30, 1999, 1998 and 1997, was $1,397 million, $958 million
and $405 million, respectively.
As of June 30, 1999, the Company has guaranteed approximately $17 million
in indebtedness of one of its joint ventures. The Company has not had to make
any payments related to this guarantee during the year ended June 30, 1999.
The Company is a party to various litigation matters, investigations and
proceedings, including a shareholder derivative suit filed in Delaware chancery
court against certain current and former directors of the Company alleging
violations of federal securities laws. The Company has settled the shareholder
derivative suit and obtained the approval of 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 Department of Labor ("DOL") is investigating the applicability of the
Fair Labor Standards Act ("FLSA") to the Company's Community Leader program. The
Company believes the Community Leader program reflects industry practices, that
the Community Leaders are volunteers, not employees, and that the Company's
actions comply with the law. The Company is cooperating with the DOL, but is
unable to predict the outcome of the DOL's investigation. Former volunteers have
sued the Company on behalf of an alleged class consisting of current and former
volunteers, alleging violations of the FLSA and comparable state statutes. The
Company believes the claims have no merit and intends to defend them vigorously.
The Company cannot predict the outcome of the claims or whether other former or
current volunteers will file additional actions.
<PAGE>
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. Management
believes, however, that the ultimate outcome of all pending litigation should
not have a material adverse effect on the Company's financial position and
results of operations.
Note 12. Notes Payable
During June 1999, the Company borrowed approximately $65 million in the
form of two mortgages on its office buildings and land located in Dulles,
Virginia. The notes are collateralized by the buildings and land and carry
interest rates of 7.7% and 6.75%. The notes amortize over 25 years and are
payable in full at the end of 10 years. As of June 30, 1999, the principal
amount outstanding on these mortgages is $65 million.
During September 1997, the Company borrowed approximately $29 million in a
refinancing of one of its office buildings. The note is collateralized by the
Company's office building and carries interest at a fixed rate of 7.46%. The
note amortizes on a straight-line basis over a term of 25 years and if not paid
in full at the end of 10 years, the interest rate, from that point forward, is
subject to adjustment. As of June 30, 1999 and 1998, the principal amount
outstanding on this note was $28 million.
On November 17, 1997, the Company sold $350 million of 4% Convertible
Subordinated Notes due November 15, 2002 (the "Notes"). The Notes are
convertible into the Company's common stock at a conversion rate of 76.63752
shares of common stock for each $1,000 principal amount of the Notes (equivalent
to a conversion price of $13.04844 per share), subject to adjustment in certain
events and at the holders option. Interest on the Notes is payable semiannually
on May 15 and November 15 of each year, commencing on May 15, 1998. The Notes
may be redeemed at the option of the Company on or after November 14, 2000, in
whole or in part, at the redemption prices set forth in the Notes. During fiscal
1999, approximately 6.8 million shares of common stock were issued related to
conversions. At June 30, 1999, the fair value of the Notes exceeded the carrying
value by nearly $2 billion as estimated by using quoted market prices. As of
June 30, 1999 and 1998, the principal amount, net of unamortized discount, was
$256 million and $345 million, respectively.
Notes payable at June 30, 1997, totaled $52 million and mainly consisted of
a two-year senior secured revolving credit facility ("Credit Facility"). The
Company had the Credit Facility available to support its continuing growth and
network expansion. The interest rate on the Credit Facility was 100 basis points
above the London Interbank Offered Rate and interest was paid periodically, but
at least quarterly. The Credit Facility was subject to certain financial
covenants and is payable in full at the end of the two year term, on July 1,
1999. As of June 30, 1999 and 1998, there were no outstanding amounts on the
Credit Facility and the Credit Facility was terminated June 30, 1999.
Note 13. Other Income, Net
The following table summarizes the components of other income:
Year ended June 30,
-----------------
(in millions) 1999 1998 1997
----- ----- -----
Interest income................................ $102 $37 $16
Interest expense............................... (20) (15) (2)
Allocation of losses to minority shareholders.. - 6 15
Equity investment losses....................... (4) (10) (10)
Gain (loss) on investments..................... 558 17 (9)
Other income (expense)......................... 2 (5) -
----- ----- -----
$638 $30 $10
===== ===== =====
Note 14. Income Taxes
The (provision) benefit for income taxes is comprised of:
<TABLE>
Year Ended June 30,
--------------------
(in millions) 1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Current - primarily foreign............................................... $ (2) $ (2) $ (2)
Deferred - primarily US federal and state................................. (48) 18 (8)
Deferred tax charge attributable to the Company's stock option plans...... (284) - -
====== ====== ======
Provision for income taxes................................................ $(334) $ 16 $(10)
====== ====== ======
</TABLE>
<PAGE>
The provision for income taxes differs from the amount computed by applying
the statutory federal income tax rate to income before provision for income
taxes. The sources and tax effects of the differences are as follows:
<TABLE>
Year Ended June 30,
------------------
(in millions) 1999 1998 1997
----- ------- ----
<S> <C> <C> <C> <C>
Income tax (provision) benefit at the federal statutory rate of 35%.. $(384) $ 31 $167
State income (tax) benefit, net of federal benefit................... (23) (6) 14
Nondeductible charge for purchased research and development.......... - (28) (3)
Nondeductible charge for merger related expenses .................... (21) - -
Valuation allowance changes affecting the provision for income taxes. 113 32 (181)
Other................................................................ (19) (13) (7)
----- ------- ----
$(334) $ 16 $(10)
===== ======= ====
</TABLE>
As of June 30, 1999, the Company has net operating loss carryforwards of
approximately $7 billion for tax purposes which will be available to offset
future taxable income. If not used, these carryforwards will expire between 2001
and 2019. To the extent that net operating loss carryforwards, when realized,
relate to stock option deductions, the resulting benefits will be credited to
stockholders' equity.
The Company's income tax provision was computed based on the federal
statutory rate and the average state statutory rates, net of the related federal
benefit.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are as follows:
<PAGE>
<TABLE>
June 30,
--------------
(in millions) 1999 1998
------- ------
Short term:
Short term deferred tax assets:
<S> <C> <C>
Deferred revenue................................ $ 21 $ 30
Accrued expenses and other...................... 34 19
Restructure reserve............................. - 32
Valuation allowance............................. (52) (38)
------- ------
Total........................................... $ 3 $43
======= ======
Long term:
Long term deferred tax liabilities:
Capitalized software costs...................... $ (46) $ (33)
Unrealized gain on available-for-sale securities (103) (89)
Unremitted earnings of foreign subsidiaries .... (6) -
------- ------
Total........................................... (155) (122)
Long term deferred tax assets:
Net operating loss carryforwards................ 2,670 412
Deferred network services credit................ 101 131
Other........................................... 95 8
Valuation allowance............................. (2,714) (426)
------- ------
Total........................................... 152 125
------- ------
Net long term deferred asset (liability)........ $ (3) $ 3
======= ======
</TABLE>
The valuation allowance for deferred tax assets increased by $2,302 million
in fiscal 1999. The increase in this allowance was primarily due to the benefit
generated from the current year exercise of stock options and warrants of $2,609
million and certain deferred tax assets associated with acquisitions of $95
million which will result in future tax deductions. The benefit from the fiscal
1999 exercise of options and warrants will be recorded to stockholders' equity
as it is realized. This increase was partially offset by (1) the utilization of
$284 million of benefits generated from prior years' exercises of stock options
to reduce fiscal 1999 income taxes payable and (2) the utilization of net
operating losses relating to book taxable income of approximately $171 million
resulting in valuation allowance changes affecting the provision for income
taxes.
The Company has net operating loss carryforwards for tax purposes ("NOLs")
and other deferred tax benefits that are available to offset future taxable
income. Only a portion of the NOLs are attributable to operating activities. The
remainder of the NOLs are attributable to tax deductions related to the exercise
of stock options.
Prior to the third quarter of fiscal 1998, the Company followed the
practice of computing its income tax expense using the assumption that current
year stock option deductions were used first to offset its financial statement
income. NOLs could then offset any excess of financial statement income over
current year stock option deductions. Because stock option deductions are not
recognized as an expense for financial reporting purposes, the tax benefit of
stock option deductions must be credited to additional paid-in capital with an
offsetting income tax expense recorded in the income statement.
The Company changed its accounting for income taxes to recognize the tax
benefits from current and prior years' stock option deductions after utilization
of NOLs from operations (i.e., NOLs determined without deductions for exercised
stock options) to reduce income tax expense. Because stock option deductions
would have been utilized for financial accounting purposes in prior years under
both accounting methods due to the absence of NOLs from operations, this
accounting change had no effect on 1997 and prior years' tax provisions or
additional paid-in capital. The effect of this change was to increase net income
and diluted earnings per share for the year ended June 30, 1998 by $73 million
and $0.08, respectively.
<PAGE>
The Company's deferred tax asset related to operations and exercised stock
options amounted to:
June 30,
--------------
(in millions) 1999 1998
------ ------
Operations..... $ 141 $ 252
Stock options.. $2,626 $ 383
When realization of the deferred tax asset is more likely than not to
occur, the benefit related to the deductible temporary differences attributable
to operations will be recognized as a reduction of income tax expense. The
benefit related to the deductible temporary differences attributable to stock
option deductions will be credited to additional paid-in capital when realized.
Note 15. Capital Accounts
Common Stock. At June 30, 1999 and 1998, the Company's $.01 par value
common stock authorized was 1,800,000,000 shares with 1,100,893,933 and
973,150,052 shares issued and outstanding, respectively. At June 30, 1999,
237,009,873 shares were reserved for the exercise of issued and unissued common
stock options, and convertible debt, and 10,074,160 shares were reserved for
issuance in connection with the Company's Employee Stock Purchase Plans.
During July 1998, the Company completed a public offering of common stock.
The Company sold approximately 21.6 shares of common stock and raised a total of
$550 million in new equity. The Company used the proceeds for general operating
purposes. In addition, the Company sold approximately 3.8 million and 2.3
million shares in fiscal 1998 and 1999, respectively, and had net proceeds of
approximately $8 million and $19 million in the same time periods.
Preferred Stock. In February 1992, the Company's stockholders approved an
amendment and restatement of the certificate of incorporation which authorized
the future issuance of 5,000,000 shares of preferred stock, $.01 par value, with
rights and preferences to be determined by the Board of Directors.
During May 1996, the Company sold 1,000 shares of Series B convertible
preferred stock ("the Preferred Stock") for approximately $28 million. The
Preferred Stock had an aggregate liquidation preference of approximately $28
million and accrued dividends at a rate of 4% per annum. Accrued dividends could
be paid in the form of additional shares of Preferred Stock. During May 1998,
the Preferred Stock, plus accrued but unpaid dividends, automatically converted
into 1,568,000 shares of common stock based on the fair market value of common
stock at the time of conversion.
Warrant. In connection with an agreement with one of the Company's
communications providers, the Company had an outstanding warrant, that was
exercised during March 1999. The warrant, subject to certain performance
standards specified in the agreement, allowed the Company's communication
provider to purchase 28,800,000 shares of common stock at a price of $0.4922 per
share.
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 stockholders 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
adopted in fiscal 1993 were redeemed in conjunction with the implementation of
the New Plan and the former plan was terminated. 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 stockholders (other than the acquirer) to purchase
common stock or securities of the acquirer 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
stockholder of the Company. The Rights will expire on May 12, 2008 unless
redeemed by the Company prior to that date.
Stock Splits. In November 1994, April 1995, November 1995, March 1998,
November 1998 and February 1999, the Company effected two-for-one splits of the
outstanding shares of common stock. Accordingly, all data shown in the
accompanying consolidated financial statements and notes has been retroactively
adjusted to reflect the stock splits.
Note 16. Stock Plans
Options to purchase the Company's common stock under various stock option
plans have been granted to employees, directors and consultants of the Company
at fair market value at the date of grant. Generally, the options become
exercisable over periods ranging from one to four years and expire ten years
from the date of grant. In certain of these plans, the Company has repurchase
rights upon the individual cessation of employment. Generally, these rights
lapse over a 48-month period. In fiscal years 1998 and 1997, the Board of
Directors authorized approximately 11 million options to be repriced. The
vesting schedules were not materially changed and no employees owning 3% or more
of the Company's common stock nor any senior executives participated in the
repricing.
<PAGE>
The effect of applying SFAS No. 123 on 1999, 1998 and 1997 pro forma net
loss as stated below is not necessarily representative of the effects on
reported net income (loss) for future years due to, among other things, the
vesting period of the stock options and the fair value of additional stock
options in future years. Had compensation cost for the Company's stock option
plans been determined based upon the fair value at the grant date for awards
under the plans consistent with the methodology prescribed under SFAS No. 123,
the Company's net income (loss) in 1999, 1998 and 1997 would have been
approximately $504 million, $(132) million and $(625) million, or $0.39 per
share, $(0.14) per share and $(0.75) per share, respectively, on a diluted
basis. The fair value of the options granted during 1999, 1998 and 1997 are
estimated at $22.93 per share, $5.28 per share and $1.13 per share,
respectively, on the date of grant using the Black-Scholes option-pricing model
with the following assumptions: no dividend yield, volatility of 65%, a
risk-free interest rate of 5.40% for 1999, 5.51% for 1998 and 5.69% for 1997,
and an expected life of 0.45 years from date of vesting. A summary of stock
option activity is as follows:
Number Weighted-
of average exercise
shares price
------------- ----------------
Balance at June 30, 1996.. 260,774,430 $ 1.68
Granted................... 52,198,406 $ 3.90
Exercised................. (55,724,857) $ 1.26
Forfeited................. (25,013,143) $ 2.93
------------- ----------------
Balance at June 30, 1997.. 232,234,836 $ 2.14
Granted................... 81,370,433 $12.37
Exercised................. (73,707,980) $ 1.51
Forfeited................. (17,534,536) $ 4.92
------------- ----------------
Balance at June 30, 1998.. 222,362,753 $ 5.88
Granted................... 54,765,388 $50.55
Exercised................. (61,202,205) $ 3.38
Forfeited................. (16,356,677) $19.89
------------- ----------------
Balance at June 30, 1999.. 199,569,259 $17.75
============= ================
<TABLE>
Options outstanding Options exercisable
--------------------------------------- ------------------------
Weighted-
average Weighted- Weighted-
Number remaining average Number average
Range outstanding contractual exercise exercisable as exercise
of exercise price as of 6/30/99 life (in years) price of 6/30/99 price
------------------- ------------- --------------- --------- -------------- ---------
<S> <C> <C> <C> <C> <C>
$0.01 to $1.70..... 34,328,228 5.0 $0.90 33,372,307 $0.91
$1.72 to $3.39..... 40,668,741 6.6 $2.81 26,246,169 $2.57
$3.46 to $8.06..... 37,213,772 7.7 $6.83 11,431,800 $6.08
$8.44 to $21.93.... 35,015,933 8.4 $14.83 6,761,363 $15.42
$21.94 to $45.49... 36,813,111 9.2 $24.74 2,187,441 $26.44
$45.69 to $90.13... 4,147,119 9.6 $77.82 319,231 $74.06
$90.88 to $128.32.. 7,503,079 9.8 $112.03 11,919 $108.15
$129.07 to $167.50. 3,879,276 9.8 $141.76 193,115 $141.07
------------------- ------------- --------------- --------- -------------- ---------
$0.01 to $167.50... 199,569,259 7.6 $17.75 80,523,345 $4.74
============= =============== ========= ============== =========
</TABLE>
Employee Stock Purchase Plan In May 1992, the Company's Board of Directors
adopted a non-compensatory Employee Stock Purchase Plan ("the ESPP"). Under the
ESPP, employees of the Company who elect to participate are granted options to
purchase common stock at a 15 percent discount from the market value of such
stock. The ESPP permits an enrolled employee to make contributions to purchase
shares of common stock by having withheld from his or her salary an amount
between 1 percent and 15 percent of compensation. The Stock and Option
Subcommittee of the Compensation and Management Development Committee of the
Board of Directors administer the ESPP. The total number of shares of common
stock that may be issued pursuant to options granted under the ESPP is
14,400,000. A total of approximately 6 million shares of common stock have been
issued under the ESPP.
In June 1995, the Company adopted a non-compensatory Employee Stock
Purchase Plan ("the Netscape ESPP") under Section 423 of the Internal Revenue
Code and a total of 3,150,000 shares of common stock may be issued pursuant to
options under the Netscape ESPP. The Company's Board of Directors in 1998
amended the Netscape ESPP to increase the maximum percentage of payroll
deductions which any participant may contribute from his or her eligible
compensation to 15%; amended the Netscape ESPP from a two-year rolling offering
period to a six-month fixed offering period effective with the offering period
beginning March 1999; amended the limit to the number of shares any employee may
purchase in any purchase period to a maximum of 1,800 shares; and changed the
offering dates for each purchase period to March 1 and September 1 of each year.
Under this plan, qualified employees are entitled to purchase common stock at a
15% discount from the market value of such stock. Approximately 2 million shares
of common stock have been issued under the Netscape ESPP.
<PAGE>
Note 17. Employee Benefit Plan
Savings Plans The Company has two savings plans that qualify as a deferred
salary arrangement under Section 401(k) of the Internal Revenue Code. Under the
plans, participating employees may defer a portion of their pretax earnings. In
one plan, the Company matches 50% of each employee's contributions up to a
maximum matching contribution of 3% of the employee's earnings and in the other
plan, the Company's contributions are discretionary. The Company's contributions
to plans were approximately $6 million, $5 million and $3 million in the years
ended June 30, 1999, 1998 and 1997, respectively.
Note 18. Quarterly Information (unaudited)
<TABLE>
Quarter Ended
---------------------------------------------
September 30, December 31, March 31, June 30,
------------- ------------ --------- --------
(Amounts in millions, except per share data)
Fiscal 1999(1)(3)
<S> <C> <C> <C> <C>
Subscription service revenues............... $723 $786 $869 $943
Advertising, commerce and other revenues.... 175 244 275 306
Enterprise solution revenues................ 101 118 109 128
------------- ------------ --------- --------
Total revenues.............................. 999 1,148 1,253 1,377
Income from operations...................... 77 123 47 211
Net income ................................. 76 115 411 160
Net income per share-diluted............... $0.06 $0.09 $0.32 $0.13
Net income per share-basic................. $0.08 $0.12 $0.39 $0.15
Net cash provided by operating activities... $120 $178 $605 $196
Earnings Before Interest, Taxes,
Depreciation and Amortization (EBITDA)(4).. 153 221 251 343
Fiscal 1998(2)(3)
Subscription service revenues............... $439 $488 $580 $676
Advertising, commerce and other revenues.... 106 131 142 164
Enterprise solution revenues................ 123 104 35 103
------------- ------------ --------- --------
Total revenues.............................. 668 723 757 943
Income (loss) from operations............... 25 (54) (83) (8)
Net income (loss)........................... 31 (34) (78) 7
Net income (loss) per share-diluted......... $0.03 $(0.04) $(0.08) $0.01
Net income (loss) per share-basic........... $0.04 $(0.04) $(0.08) $0.01
Net cash provided by operating activities... $125 $57 $130 $125
Earnings Before Interest, Taxes,
Depreciation and Amortization (EBITDA)(4).. 76 41 31 154
</TABLE>
The special charges referred to below include charges for restructurings,
acquired in-process research and development, mergers, transition costs,
settlements, write-off of deferred subscriber acquisition costs and contract
terminations.
(1)Net income in the fiscal year ended June 30, 1999 includes special charges
of $2 million in the quarter ended December 31, 1998, $78 million and $25
million in the quarter ended March 31, 1999 and $15 million in the quarter
ended June 30, 1999. Net income in the quarter ended March 31, 1999 also
includes a gain on the sale of Excite, Inc. investments of approximately
$567 million.
(2)Net loss in the fiscal year ended June 30, 1998 includes net charges of $42
million in the quarter ended December 31, 1997, $58 million in the quarter
ended March 31, 1998 and $88 million in the quarter ended June 30, 1998.
(3)The sum of per share earnings (loss) does not equal earnings (loss) per
share for the year due to equivalent share calculations which are impacted
by the Company's losses, fluctuations in the Company's common stock market
prices and the timing (weighting) of shares issued.
(4)EBITDA is defined as net income plus: (1) provision/(benefit) for income
taxes, (2) interest expense, (3) depreciation and amortization and (4)
special charges. The Company considers EBITDA an important indicator of the
operational strength and performance of its business including the ability
to provide cash flows to service debt and fund capital expenditures. EBITDA,
however, should not be considered an alternative to operating or net income
as an indicator of the performance of the Company, or as an alternative to
cash flows from operating activities as a measure of liquidity, in each case
determined in accordance with generally accepted accounting principles
("GAAP").
<PAGE>
REPORT OF MANAGEMENT
The management of America Online, Inc. is responsible for the integrity
and objectivity of the financial and operating information contained in this
Annual Report on Form 10-K, including the consolidated financial statements
covered by the Report of Independent Auditors. These statements were prepared in
conformity with generally accepted accounting principles and include amounts
that are based on the best estimates and judgments of management, which it
believes, are reasonable under the circumstances.
The Company maintains a system of internal accounting policies,
procedures and controls designed to provide management with reasonable assurance
that assets are safeguarded against loss from unauthorized use or disposition,
and that transactions are executed in accordance with management's authorization
and recorded properly. The system was enhanced with the fiscal 1999 fourth
quarter initiation of a formal Standards of Business Conduct fostering a strong
ethical climate. The Company also maintains an internal auditing function, which
evaluates and formally reports on the adequacy and effectiveness of internal
accounting and operational controls and procedures.
Ernst & Young LLP audits the Company's financial statements in
accordance with generally accepted auditing standards and provides an objective,
independent review of the Company's internal control and the fairness of its
reported financial condition and results of operations.
In addition, the Audit Committee of the Board of Directors, consisting
solely of outside directors, meets periodically with management, the independent
auditors and internal auditors to review internal accounting controls, audit
results and accounting principles and practices, and annually recommends to the
Board of Directors the selection of independent auditors.
STEPHEN M. CASE
Chairman of the Board
and Chief Executive
Officer
J. MICHAEL KELLY
Senior Vice President and
Chief Financial Officer
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
America Online, Inc.
We have audited the accompanying consolidated balance sheets of America
Online, Inc. as of June 30, 1999 and 1998, and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for
each of the three years in the period ended June 30, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of America Online,
Inc. at June 30, 1999 and 1998, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended June 30,
1999, in conformity with generally accepted accounting principles.
As discussed in Note 14 to the consolidated financial statements, in 1998
the Company changed its method of accounting for income taxes.
/s/ ERNST & YOUNG LLP
Vienna, Virginia
July 21, 1999
Exhibit 10.1
America Online, Inc.
Employee Stock Purchase Plan
(Amended and Restated Effective as of July 28, 1999)
<PAGE>
America Online, Inc. Employee Stock Purchase Plan
(Amended and Restated Effective as of July 28, 1999)
Contents
Section Page
Article I. The Plan
1.1 Establishment and Restatement of the Plan 1
1.2 Applicability of the Plan 1
1.3 Purpose of the Plan 1
Article II. Definitions
2.1 Affiliate 2
2.2 Board 2
2.3 Closing Price 2
2.4 Code 2
2.5 Committee 2
2.6 Common Stock 2
2.7 Company 2
2.8 Compensation 2
2.9 Contribution Account 3
2.10 Eligible Employee 3
2.11 Employer 3
2.12 Exercise Date 3
2.13 Exercise Price 3
2.14 Option 3
2.15 Participant 3
2.16 Participation Period 3
2.17 Plan 3
2.18 Trading Date 3
Article III. Eligibility and Participation
3.1 Eligibility 4
3.2 Enrollment 4
3.3 Termination of Plan Participation 4
Article IV. Available Stock
4.1 In General 7
4.2 Changes in Corporate Capitalization 7
4.3 Dissolution, Merger, and Consolidation 7
Article V. Purchasing Common Stock
5.1 Participants' Accounts 8
5.2 Participant Contributions 8
5.3 Common Stock Purchases 8
Article VI. Amendment and Termination
6.1 Amendment 10
6.2 Termination 10
Article VII. General Provisions
7.1 Administration 11
7.2 Rights Not Transferable 11
7.3 Shareholder Rights 11
7.4 No Contract of Employment 12
7.5 Tax Considerations 12
7.6 Application of Funds 12
7.7 Applicable Law 12
7.8 Severability 12
<PAGE>
Article I. The Plan
1.1 Establishment and Restatement of the Plan
America Online, Inc. (the "Company") previously established and presently
maintains a qualified employee stock purchase plan for the benefit of the
Eligible Employees of the Company and each participating Affiliate. The Plan was
initially effective on June 16, 1992 and was last amended and restated as of
December 1, 1997. The Plan is hereby amended and restated, effective July 28,
1999. It shall continue to be known as the America Online, Inc. Employee Stock
Purchase Plan (the "Plan").
1.2 Applicability of the Plan
The provisions of this Plan apply only to Eligible Employees of the Company or a
participating Affiliate who are actively employed on or after July 28, 1999. The
rights of any individual that arise under this Plan before July 28, 1999 shall
be determined under the Plan as in effect at that time.
1.3 Purpose of the Plan
The Plan is intended to encourage Eligible Employees to promote the Company's
best interests and enhance the Company's long-term performance by allowing them
to purchase the Company's Common Stock through payroll deductions. The Company
intends this Plan to qualify as an employee stock purchase plan under Code
section 423. Accordingly, the Plan shall be construed in a manner consistent
with the requirements of such section.
Article II. Definitions
Whenever used in this Plan, the following terms shall have the meanings set
forth below unless otherwise expressly provided. When the defined meaning is
intended, the term is capitalized. The definition of any term in the singular
shall also include the plural.
2.1 Affiliate
Affiliate means any present or future corporation which is a subsidiary
corporation within the meaning of Code section 424(f).
2.2 Board
Board means the Company's Board of Directors.
2.3 Closing Price
Closing Price means, as of any applicable date, the last trade price for the
Company's Common Stock on the New York Stock Exchange. However, if no trade
takes place on the New York Stock Exchange for a particular date, the Closing
Price for such date shall be the average of the closing bid and asked prices on
such day as officially quoted by the New York Stock Exchange.
2.4 Code
Code means the Internal Revenue Code of 1986, as amended, or as it may be
amended from time to time. A reference to a particular section of the Code shall
also be deemed to refer to the regulations under that section.
2.5 Committee
Committee means the Committee appointed by the Board to which the Board may
delegate it powers to administer this Plan.
2.6 Common Stock
Common Stock means shares of the Company's common stock having a par value of
$.01 per share.
2.7 Company
Company means America Online, Inc., or any successor thereto that agrees to
adopt and continue this Plan.
2.8 Compensation
Compensation means the total cash compensation (before taxes) received by a
Participant during a Participation Period from salary or wages. Salary and wages
shall include, but not be limited to, overtime pay, bonuses, holiday pay,
vacation pay, and short-term disability payments. Salary reduction contributions
made by the Participant under any plan maintained by the Company or an Affiliate
pursuant to Code section 125 or 401(k) shall also be included in Compensation.
Compensation shall not include payments under any other form of equity or fringe
benefit program (including, but not limited to, car allowances, relocation
reimbursements, and expatriate allowances) and compensation attributable to the
vesting of any restricted stock or exercise of a stock option.
2.9 Contribution Account
Contribution Account means the bookkeeping account established on behalf of each
Participant under section 5.1. An Employer is not required to segregate
Contribution Accounts from the Employer's other assets.
<PAGE>
2.10 Eligible Employee
Eligible Employee means each person who, on the first day of a Participation
Period, is employed by an Employer.
2.11 Employer
Employer means the Company and each Affiliate which becomes a party to the Plan
with the approval of the Board. As of June 1, 1999, each of the following are
Employers under the Plan:
America Online, Inc.
AOL Community, Inc.
AOL TV, Inc.
Asylum, Inc.
CompuServe Interactive Services, Inc.
PersonaLogic, Inc.
When Inc.
AOL Canada Services Inc.
AOL America Online France Holding SARL
AOL America Online (Deutschland) GmbH
AOL America Online Limited (Ireland).
As of September 1, 1999, Netscape Communications Corporation is an Employer
under the Plan. As of December 1, 1999, Digital Marketing Services, Inc. is an
Employer under the Plan.
2.12 Exercise Date
Exercise Date means the last Trading Date of the applicable Participation
Period.
2.13 Exercise Price Exercise Price means the lesser of:
(a) 85 percent of the Closing Price on the first Trading Date of the applicable
Participation Period; or (b) 85 percent of the Closing Price on the Exercise
Date of the applicable Participation Period.
Notwithstanding the above, for the special three-month participation period
described in section 2.16, Exercise Price shall mean the lesser of (i) 85
percent of the Closing Price on September 1, 1999 or (ii) 85 percent of the
Closing Price on November 30, 1999.
2.14 Option
Option means a right granted under this Plan to an Eligible Employee to purchase
shares of Common Stock.
2.15 Participant
Participant means an Eligible Employee who has enrolled in the Plan pursuant to
sections 3.1 and 3.2.
2.16 Participation Period
Participation Period means either:
(a) the six-month period beginning on each December 1 and ending on the
following May 31; or (b) the six-month period beginning on each June 1 and
ending on the following November 30.
In addition, for Eligible Employees of Netscape Communications Corporation,
there shall be a special three-month Participation Period that begins on
September 1, 1999 and ends on November 30, 1999.
2.17 Plan
Plan means this America Online, Inc. Employee Stock Purchase Plan, as amended
from time to time.
2.18 Trading Date
Trading Date means a date on which stocks in the United States are traded on the
New York Stock Exchange, regardless of whether any Common Stock is actually
traded on such date.
Article III. Eligibility and Participation
3.1 Eligibility
Each Eligible Employee may become a Participant on the first day of the
Participation Period that coincides with or next follows the Eligible Employee's
first day of employment with the Company or a participating Affiliate.
However, no otherwise Eligible Employee shall become a Participant for a
Participation Period if, immediately following such Participation Period, such
individual would own stock and/or hold options to purchase stock, representing 5
percent or more of the total combined voting power or value of all classes of
stock of the Company or an Affiliate. The attribution rules described in Code
section 424(d) shall apply in determining the stock ownership of any Eligible
Employee under this section 3.1.
3.2 Enrollment
(a) General Rule. An Eligible Employee may become a Participant by enrolling in
the Plan as of the first day of the earliest Participation Period identified in
section 3.1, or as of the first day of any subsequent Participation Period
(provided he or she is still an Eligible Employee). The enrollment procedures
shall be prescribed by the Committee or the most senior human resources officer
of the Company and shall be communicated to Eligible Employees approximately 30
days before the first day of the applicable Participation Period.
<PAGE>
(b) Payroll Deduction Election. At the time of enrollment, an Eligible Employee
shall authorize a regular payroll deduction from his or her Compensation for the
applicable Participation Period in accordance with section 5.2.
3.3 Termination of Plan Participation
(a) Voluntary Discontinuance. A Participant may discontinue his or her payroll
deduction election for a Participation Period by giving notice at a time, and in
a manner, prescribed by the Committee. This voluntary discontinuance of Plan
participation must occur no later than 11:59 p.m., Eastern Time, on the 15th of
the month in which the Participation Period ends.
Any balance remaining in the Participant's Contribution Account at the time of
such voluntary discontinuance shall be refunded (without interest) to the
Participant within 30 days.
(b) Termination of Employment. Except as otherwise provided in subsection (c), a
Participant who terminates employment during a Participation Period shall be
deemed to have discontinued Plan participation on the first day of such
Participation Period. Any balance remaining in the Participant's Contribution
Account at the time of such termination from employment shall be refunded
(without interest) to the Participant within 30 days following such termination.
(c) Retirement. The following provisions shall apply to a Participant who
terminates employment during a Participation Period on or after the first day of
the month in which the Participant reaches age 65.
(1) If such Participant terminates employment during the first three months
of a Participation Period, the Participant shall be deemed to have
discontinued Plan participation on the first day of such Participation
Period. The balance in the Participant's Contribution Account shall be
refunded (without interest) to the Participant within 30 days following
such retirement.
(2) If such Participant terminates employment during the last three months
of a Participation Period, payroll deductions will cease at the time of
such termination. Unless the Participant elects otherwise, the balance
in the Participant's Contribution Account shall be used to purchase
whole shares of Common Stock on the Exercise Date for the Participation
Period in which the termination occurs. (Any amounts remaining in the
Contribution Account after the purchase of whole shares of Common Stock
shall be paid to the Participant (without interest) within 30 days
following the Exercise Date).
However, instead of exercising Options on the Exercise Date described
above, such Participant may elect, before the applicable Exercise Date,
to receive the balance in his or her Contribution Account (without
interest). If the Participant elects this cash payment, the payment
shall be made within 30 days following the Participant's election.
(d) Death. If a Participant dies during a Participation Period, the balance that
is credited to the Participant's Contribution Account shall be used to purchase
whole shares of Common Stock on the Exercise Date for the Participation Period
in which the Participant died. This Common Stock shall be distributed to the
Participant's estate as soon as practicable following such Exercise Date. (In
addition, any amounts remaining in the Contribution Account after the purchase
of whole shares of Common Stock shall be paid to the estate (without interest)
within 30 days following such Exercise Date.)
<PAGE>
However, instead of exercising Options on the Exercise Date described above, the
executor of the Participant's estate may elect, before the applicable Exercise
Date, to receive the balance in the Participant's Contribution Account (without
interest). If the executor elects this cash payment, the payment shall be made
to the Participant's estate within 30 days following such election.
(e) Disability. If a Participant incurs a Disability during a Participation
Period, payroll deductions for that Participant will cease on the date of such
Disability. Unless the Participant elects otherwise, the balance in the
Participant's Contribution Account shall be used to purchase whole shares of
Common Stock on the Exercise Date for the Participation Period in which the
Disability occurs. (Any amounts remaining in the Contribution Account after the
purchase of whole shares of Common Stock shall be paid to the Participant
(without interest) within 30 days following such Exercise Date.)
However, instead of exercising Options on the Exercise Date described above,
such Participant may elect, before the applicable Exercise Date, to receive the
balance in his or her Contribution Account (without interest). If the disabled
Participant elects this cash payment, the payment shall be made within 30 days
following such election.
For purposes of this subsection (e), a Participant is treated as having incurred
a Disability when the Participant leaves the Employer's active employment on
account of any condition which would be treated as a total and permanent
disability under Code section 22(e)(3).
(f) Leaves of Absence. Payroll deductions will cease when a Participant begins
an unpaid leave of absence. Unless the Participant elects otherwise, the balance
in the Participant's Contribution Account shall be used to purchase whole shares
of Common Stock on the Exercise Date for the Participation Period in which the
leave begins. (Any amounts remaining in the Contribution Account after the
purchase of whole shares of Common Stock shall be paid to the Participant
(without interest) within 30 days following such Exercise Date.)
However, instead of exercising Options as of the Exercise Date described above,
such Participant may elect, before the applicable Exercise Date, to receive the
balance in his or her Contribution Account (without interest). If the
Participant elects this cash payment, the payment shall be made within 30 days
following such election.
Notwithstanding any other provision in this subsection (f), if a Participant's
unpaid leave of absence extends beyond the 90 days, such Participant shall be
deemed to have incurred a termination of employment on the later of the 91st day
of such leave or the date on which the Participant no longer has reemployment
rights guaranteed by contract or law. In this event, the Participant shall
receive a cash payment of any amounts remaining in his or her Contribution
Account in accordance with subsection (b).
(g) Transfer to Nonparticipating Affiliate. Payroll deductions will cease when a
Participant is transferred from an Employer to a nonparticipating Affiliate. The
balance in the Participant's Contribution Account at the time of such transfer
shall be refunded to the Participant (without interest) within 30 days following
such transfer.
Article IV. Available Stock
4.1 In General
Subject to sections 4.2 and 4.3, 14,400,000 shares of Common Stock shall be
available for purchase by Participants under this Plan. These shares may be
authorized and unissued shares or may be issued shares that were subsequently
acquired by an Employer. If an Option under the Plan expires or terminates
without having been exercised in whole or in part, the shares that are subject
to such Option shall again be available for subsequent Option grants under the
Plan.
If the total number of shares of Common Stock to be purchased on an Exercise
Date exceeds the maximum number of shares available for the Participation
Period, the Committee shall allocate a percentage of the available shares to
each Participant equal to the balance in the Participant's Contribution Account
divided by the aggregate balance of all Contribution Accounts. (The allocation
to each individual Participant shall be rounded down to the nearest number of
whole shares.) Any balance remaining in the Participant's Contribution Account
after such allocation shall be distributed to the Participant in cash (without
interest) as soon as practicable.
4.2 Changes in Corporate Capitalization
The number of shares of Common Stock available under the Plan, the number of
shares of Common Stock that are subject to each outstanding Option, and the
Exercise Price may be adjusted by the Board to reflect any increase or decrease
in the number of shares of issued Common Stock resulting from any subdivision or
consolidation of shares, the payment of a stock dividend, or other increase or
decrease in the number of shares outstanding effected without receipt of
consideration by the Company. Adjustments shall be made in the sole discretion
of the Board, and its decision shall be final and binding.
4.3 Dissolution, Merger, and Consolidation
Upon the dissolution or liquidation of the Company, or upon a merger or
consolidation of the Company in which the Company is not the surviving
corporation, each Participant who holds an Option under the Plan shall be
entitled to receive at the next Exercise Date the same cash, securities, and/or
other property which a holder of Common Stock was entitled to upon and at the
time of such transaction. The Board shall take whatever steps it deems
reasonably necessary in connection with any such transaction to assure that
Participants receive the benefits described in this section 4.3.
Article V. Purchasing Common Stock
5.1 Participants' Accounts
The Committee shall establish a Contribution Account in the name of each
Participant. The payroll deductions authorized by the Participant under section
5.2 shall be credited to the Participant's Contribution Account, without
interest. The amount credited to a Participant's Contribution Account as of an
Exercise Date shall be used to purchase shares of Common Stock in accordance
with section 5.3.
5.2 Participant Contributions
(a) Payroll Deduction. An Eligible Employee may become a Participant for a
Participation Period by enrolling in the Plan at a time, and in a manner,
prescribed by the Committee or the senior human resources officer of the
Company. As part of the enrollment process, the Participant shall authorize the
Employer to deduct a whole percentage (ranging from 1 percent to 15 percent, as
specified by the Participant) of the Participant's Compensation from each
paycheck that is received during the applicable Participation Period.
The payroll deduction election in effect at the end of the current Participation
Period shall automatically remain in effect for the next following Participation
Period unless changed by the Participant at a time, and in a manner, prescribed
by the Committee.
(b) Election Changes During a Participation Period. A Participant may increase
or decrease his or her payroll deduction election during a Participation Period
by giving notice at least 15 days before the first day of the pay period for
which the change is effective. (If the Participant reduces the payroll deduction
election to zero, the Participant shall be subject to the additional provisions
of section 3.3(a).)
<PAGE>
5.3 Common Stock Purchases
(a) General Rule. Except as provided in section 3.3 (regarding the cessation of
participation during a Participation Period), section 4.1 (relating to a
shortage of available shares), or section 5.3(b) (regarding the limit described
in Code section 423(b)(8)), all amounts credited to the Participant's
Contribution Account during a Participation Period shall be used automatically
to acquire whole shares of Common Stock. The number of whole shares acquired on
behalf of each Participant shall be determined by dividing the amount credited
to the Participant's Contribution Account on the Exercise Date by the Exercise
Price.
If there is any amount remaining in the Participant's Contribution Account after
the purchase of whole shares of Common Stock under this subsection (a), such
amount shall be carried forward for use during the next following Participation
Period unless the Participant requests a cash payment of such remainder. If the
Participant elects a cash payment within 30 days following the Exercise Date,
such payment shall be made (without interest) within 30 days following such
election.
(b) Calendar Year Limit. Notwithstanding any provision in this Plan to the
contrary, no Eligible Employee shall be granted an Option in the Plan which
would permit the Eligible Employee's rights to purchase Common Stock under all
employee stock purchase plans (within the meaning of Code section 423) of the
Company or an Affiliate to accrue at a rate which exceeds $25,000 in fair market
value of such stock (determined at the time the Option is granted--i.e., the
first day of the Participation Period for which the Common Stock is acquired)
for each calendar year in which the Option is outstanding.
(c) Stock Certificates. As soon as reasonably practicable following each
Exercise Date, Common Stock purchased under subsection (a) shall be credited to
an account in the Participant's name in the offices of a broker designated by
the Committee. Physical delivery of the Common Stock certificates to
Participants shall not be required.
Article VI. Amendment and Termination
6.1 Amendment
Except as provided below, the Plan may be amended by the shareholders, by the
Board, or by the Committee. (This right to amend shall include the right of the
Board to designate, from time to time, any Affiliate as a participating Employer
herein). However, no amendment may--
(a) adversely affect any Option that was granted before the adoption date of
such amendment, unless any Participant to whom such Option has been granted
gives his or her written consent to such amendment;
(b) increase the aggregate number of shares which may be issued under the Plan
(except an increase occurring under section 4.2 relating to changes in the
Company's capitalization) without shareholder approval; or
(c) change the designation of participating Employers (except as provided
above) without shareholder approval.
If shareholder approval for an amendment is required under subsection (b) or
(c), such approval must be obtained within 12 months after the date the
amendment is approved by the Board. If the required approval is not obtained,
any such amendment shall be null and void from its intended effective date.
6.2 Termination
The shareholders, the Board, or the Committee may terminate the Plan at any
time. If the Plan is terminated, the Committee shall give notice to affected
Participants, terminate all payroll deductions, and pay to the Participants any
balances remaining in their Contribution Accounts (without interest) as soon as
practicable following such termination.
Article VII. General Provisions
7.1 Administration
The Board shall be responsible for the administration of the Plan. The Board
shall have the authority--
(a) to establish rules and procedures for the administration of the Plan which
are not inconsistent with the provisions hereof;
(b) to interpret the terms and provisions of the Plan and determine all
questions arising under the Plan; and
(c) to delegate to the Committee any of its administrative responsibilities
hereunder (except its power to designate Affiliates as participating
Employers).
The Committee may, in turn, delegate to the appropriate individuals the
authority to administer the Plan and keep records of individual benefits. The
Committee, however, may not delegate its power to terminate or amend the Plan.
In carrying out its responsibilities, neither the Board nor the Committee shall
discriminate in favor of or against any Participant. Each Eligible Employee
shall have the same rights and privileges under the Plan, except that the amount
of Common Stock which may be purchased under Options granted under the Plan
shall bear a uniform relationship to the amount of the Eligible Employee's
Compensation.
In carrying out its responsibilities, the Board and the Committee shall have the
utmost discretion permitted by law. Also, to the extent permitted by law, all
findings of fact, determinations, interpretations, and decisions of the Board
and the Committee shall be conclusive and binding upon all persons.
<PAGE>
7.2 Rights Not Transferable
Options granted under the Plan may not be transferred by the Participant except
by will or by the laws of descent and distribution. Additionally, no Option
shall be subject to execution, attachment, or similar process. Any attempt to
assign, transfer, attach, or otherwise dispose of any Option granted under this
Plan shall be null and void. An Option may be exercised only by the Participant
(or by the Participant's legal representative if permitted under Code section
423) during his or her lifetime. After the Participant's death, the
Participant's outstanding Option may be exercised by the executor of the
Participant's estate pursuant to section 3.3(d).
7.3 Shareholder Rights
A Participant shall not have any rights as a shareholder with respect to Common
Stock issuable pursuant to the exercise of an Option granted under this Plan
until a certificate for such shares of Common Stock are issued to him or her, or
the Company reflects the Participant's ownership in its stock ledger or other
appropriate record of Common Stock ownership.
7.4 No Contract of Employment
Nothing contained in the Plan shall be deemed to give any Eligible Employee the
right to be retained in the service of the Company or an Affiliate, or to
interfere with the right of the Company or an Affiliate to discharge or retire
any Eligible Employee at any time.
7.5 Tax Considerations
(a) Favorable Taxation Under Code Section 423. To qualify for favorable tax
treatment under Code section 423, a Participant may not transfer or
otherwise dispose of Common Stock acquired under this Plan until the later
of:
(1) one year from the date of acquisition of such Common Stock; or
(2) two years after the date on which the related Option was granted (i.e.,
the first day of the Participation Period for which the Common Stock
was acquired).
However, if the Participant dies before such Common Stock is sold, these
holding period requirements do not apply.
(b) Notice of Disqualifying Disposition. Each Participant who acquires shares
of Common Stock under this Plan shall notify the Company, in writing, if
the Participant disposes of such shares before the later of the two dates
identified in subsection (a) above.
(c) Withholding. The Committee may make appropriate withholding of federal,
state, and local income taxes from a Participant's Compensation to the
extent that the Committee deems such withholding to be necessary under
applicable law. Alternatively, the Committee may require the Participant to
remit any such taxes directly to the Employer by separate check.
7.6 Application of Funds
The proceeds received by the Company from the sale of Common Stock under this
Plan will be used for general corporate purposes.
7.7 Applicable Law
The obligations of the Company to sell and deliver Common Stock under the Plan
shall be subject to all applicable laws, regulations, rules, and approvals,
including, but not limited to, the effectiveness of a registration statement
under the Securities Act of 1933 if deemed necessary or appropriate by the
Company. Certificates for shares of Common Stock issued hereunder may be
legended as the Board shall deem appropriate.
Questions relating to the validity, construction, and administration of the Plan
shall be determined under the laws of the State of Delaware to the extent that
such laws are not inconsistent with Code section 423.
7.8 Severability
If a provision of the Plan is illegal or invalid, the illegality or invalidity
shall not affect the remaining parts of the Plan, and the Plan shall be
construed and enforced as if the illegal or invalid provision had not been
included in this Plan.
<PAGE>
In Witness Whereof, the authorized officers of the Company have signed this
document and have affixed the corporate seal on , 1997.
America Online, Inc.
Attest:
By __________________________________
Its__________________________________
By: _______________________________ (Corporate Seal)
Its ___________________________
Exhibit 10.2
AMERICA ONLINE, INC.
1992 EMPLOYEE, DIRECTOR AND CONSULTANT
STOCK OPTION PLAN
(AS AMENDED AND RESTATED)
1. PURPOSES OF THE PLAN.
The Plan is intended to encourage ownership of Shares by Key Employees and
directors of and certain consultants to the Company in order to attract such
people, to induce them to work for the benefit of the Company or of an
Affiliate, and to provide additional incentive for them to promote the success
of the Company or of an Affiliate. The Plan provides for the granting of ISOs
and Non-Qualified Options.
2. DEFINITIONS.
Unless otherwise specified or unless the context otherwise requires,
the following terms, as used in this America Online, Inc. 1992
Employee, Director and Consultant Stock Option Plan, have the following
meanings:
Administrator means the Board of Directors, unless it has
delegated power to act on its behalf to the Committee, in
which case the Administrator means the Committee.
Affiliate, with respect to ISOs, means a corporation which,
for purposes of Section 424 of the Code, is a parent or
subsidiary of the Company, direct or indirect, and with
respect to Non-Qualified Options, means any corporation,
company or other entity such that the Company directly or
indirectly, through one or more intermediaries, owns or
controls the greater of (i) 25% of the voting power or
outstanding securities of such corporation, company or other
entity; or (ii) such amount of voting or outstanding
securities or has other controlling interest such that the
Shares and the Options would qualify for registration on Form
S-8, all as determined by the Administrator.
Board of Directors means the Board of Directors of the
Company.
Change in Control means either a Corporate Change in Control
or a Transactional Change in Control.
Code means the United States Internal Revenue Code of 1986, as
amended.
Committee means the committee of the Board of Directors to
which the Board of Directors has delegated power to act under
or pursuant to the provisions of the Plan.
Common Stock means shares of the Company's common stock, $.01
par value per share.
Company means America Online, Inc., a Delaware corporation.
Corporate Change in Control means the happening of any of the
following events:
(1) the acquisition by any individual, entity or group (an
"Entity"), including any "person" within the meaning of
Section 13(d)(3) or 14(d)(2) of the Exchange Act, of
beneficial ownership (within the meaning of Rule 13d-3
promulgated under the Exchange Act) of 30% or more of either
(i) the then outstanding shares of common stock of the Company
(the "Outstanding Company Common Stock") or (ii) the combined
voting power of the then outstanding securities of the Company
entitled to vote generally in the election of directors (the
"Outstanding Company Voting Securities"); excluding, however,
the following: (A) any acquisition directly from the Company
(excluding any acquisition by virtue of the exercise of an
exercise, conversion or exchange privilege unless the security
being so exercised, converted or exchanged was itself acquired
directly from the Company), (B) any acquisition by the
Company, or (C) any acquisition by an employee benefit plan
(or related trust) sponsored or maintained by the Company or
by any corporation controlled by the Company; or
(2) a change in the composition of the Board since July 30,
1997, such that the individuals who, as of such date,
constituted the Board of Directors (the "Incumbent Board")
cease for any reason to constitute at least a majority of such
Board; provided that any individual who becomes a director of
the Company subsequent to July 30, 1997 whose election, or
nomination for election by the Company's stockholders, was
approved by the vote of at least a majority of the directors
then comprising the Incumbent Board shall be deemed a member
of the Incumbent Board; and provided further, that any
individual who was initially elected as a director of the
Company as a result of an actual or threatened election
contest, as such terms are used in Rule 14a-11 of Regulation
14A promulgated under the Exchange Act, or any other actual or
threatened solicitation of proxies or consents by or on behalf
of any person or Entity other than the Board shall not be
deemed a member of the Incumbent Board.
Disability or Disabled means permanent and total disability as
defined in Section 22(e)(3) of the Code.
Fair Market Value of a Share of Common Stock means:
(1) If the Common Stock is listed on a national securities
exchange or traded in the over-the-counter market and sales
prices are regularly reported for the Common Stock, the
closing or last price of the Common Stock on the Composite
Tape or other comparable reporting system for the applicable
date, or if the applicable date is not a trading day, the
trading day immediately preceding the applicable date;
(2) If the Common Stock is not traded on a national securities
exchange but is traded on the over-the-counter market, if
sales prices are not regularly reported for the Common Stock
for the trading day referred to in clause (1), and if bid and
asked prices for the Common Stock are regularly reported, the
mean between the bid and the asked price for the Common Stock
at the close of trading in the over-the-counter market on the
applicable date, or if the applicable date is not a trading
day, on the trading day immediately preceding the applicable
date; and
(3) If the Common Stock is neither listed on a national
securities exchange nor traded in the over-the-counter market,
such value as the Administrator, in good faith, shall
determine.
Involuntary Employment Action shall mean any change in the
terms and conditions of the Participant's employment with the
Company or any successor, without cause (as defined herein),
to such extent that:
(1) the Participant shall fail to be vested with power,
authority and resources analogous to the Participant's title
and/or office prior to the Change in Control, or
(2) the Participant shall lose any significant duties or
responsibilities attending such office, or
(3) there shall occur a reduction in the Participant's base
compensation, or
(4) the Participant's employment with the Company, or its
successor, is terminated without cause (as defined herein).
ISO means an option meant to qualify as an incentive stock
option under Section 422 of the Code.
Key Employee means an employee of the Company or of an
Affiliate (including, without limitation, an employee who is
also serving as an officer or director of the Company or of an
Affiliate), designated by the Administrator to be eligible to
be granted one or more Options under the Plan.
Non-Qualified Option means an option which is not intended to
qualify as an ISO.
Option means an ISO or Non-Qualified Option granted under the
Plan.
Option Agreement means an agreement between the Company and a
Participant delivered pursuant to the Plan, in such form as
the Administrator shall approve.
Participant means a Key Employee, director or consultant to
whom one or more Options are granted under the Plan. As used
herein, "Participant" shall include "Participant's Survivors"
where the context requires.
Plan means this America Online, Inc. 1992 Employee, Director
and Consultant Stock Option Plan.
Shares means shares of the Common Stock as to which Options
have been or may be granted under the Plan or any shares of
capital stock into which the Shares are changed or for which
they are exchanged within the provisions of Paragraph 3 of the
Plan. The Shares issued upon exercise of Options granted under
the Plan may be authorized and unissued shares or shares held
by the Company in its treasury, or both.
Survivors means a deceased Participant's legal representatives
and/or any person or persons who acquired the Participant's
rights to an Option by will or by the laws of descent and
distribution.
Transactional Change in Control shall mean any of the
following transactions to which the Company is a party:
(1) a reorganization, recapitalization, merger or
consolidation (a "Corporate Transaction") of the Company,
unless securities representing 60% or more of either the
outstanding shares of common stock or the combined voting
power of the then outstanding voting securities entitled to
vote generally in the election of directors of the Company or
the corporation resulting from such Corporate Transaction (or
the parent of such corporation) are held subsequent to such
transaction by the person or persons who were the beneficial
holders of the Outstanding Company Common Stock and
Outstanding Company Voting Securities immediately prior to
such Corporate Transaction, in substantially the same
proportions as their ownership immediately prior to such
Corporate Transaction; or
(2) the sale, transfer or other disposition of all or
substantially all of the assets of the Company.
3. SHARES SUBJECT TO THE PLAN.
The number of Shares which may be issued from time to time pursuant to this
Plan shall be 421,640,000 or the equivalent of such number of Shares after the
Administrator, in its sole discretion, has interpreted the effect of any stock
split, stock dividend, combination, recapitalization or similar transaction in
accordance with Paragraph 16 of the Plan.
If an Option ceases to be "outstanding", in whole or in part, the Shares
which were subject to such Option shall be available for the granting of other
Options under the Plan. Any Option shall be treated as "outstanding" until such
Option is exercised in full, or terminates or expires under the provisions of
the Plan, or by agreement of the parties to the pertinent Option Agreement.
4. ADMINISTRATION OF THE PLAN.
The Administrator of the Plan will be the Board of Directors, except to the
extent the Board of Directors delegates its authority to the Committee, in which
case the Committee shall be the Administrator. Subject to the provisions of the
Plan, the Administrator is authorized to:
a. Interpret the provisions of the Plan or of any Option or Option
Agreement and to make all rules and determinations which it deems
necessary or advisable for the administration of the Plan;
b. Determine which employees of the Company or of an Affiliate shall be
designated as Key Employees and which of the Key Employees,
directors and consultants shall be granted Options;
c. Determine the number of Shares for which an Option or Options shall
be granted, provided, however, that in no event shall Options to
purchase more than 4,000,000 Shares be granted to any Participant in
any fiscal year; and
d. Specify the terms and conditions upon which an Option or Options may
be granted;
provided, however, that all such interpretations, rules, determinations, terms
and conditions shall be made and prescribed in the context of preserving the tax
status under Section 422 of the Code of those Options which are designated as
ISOs. Subject to the foregoing, the interpretation and construction by the
Administrator of any provisions of the Plan or of any Option granted under it
shall be final, unless otherwise determined by the Board of Directors, if the
Administrator is the Committee. The Administrator's determinations under the
Plan need not be uniform and may be made by it selectively among persons who
receive, or are eligible to receive, Options under the Plan (whether or not such
persons are similarly situated). Without limiting the generality of the
foregoing, the Administrator shall be entitled, among other things, to make non
uniform and selective determinations, and to enter into non uniform and
selective Option Agreements, as to (a) the persons to receive Options under the
Plan, (b) the terms and provisions of Options under the Plan, and whether a
termination of service with the Company and any Affiliate has occurred.
5. ELIGIBILITY FOR PARTICIPATION.
The Administrator will, in its sole discretion, name the Participants in
the Plan, provided, however, that each Participant must be a Key Employee,
director or consultant of the Company or of an Affiliate at the time an Option
is granted. Members of the Company's Board of Directors who are not employees of
the Company or of an Affiliate may receive options pursuant to Paragraph 6,
Subparagraph A(f), but only pursuant thereto. Notwithstanding any of the
foregoing provisions, the Administrator may authorize the grant of an Option to
a person not then an employee, director or consultant of the Company or of an
Affiliate; provided, however, that the actual grant of such Option shall be
conditioned upon such person becoming eligible to become a Participant at or
prior to the time of the execution of the Option Agreement evidencing such
Option. ISOs may be granted only to Key Employees. Non-Qualified Options may be
granted to any Key Employee, director or consultant of the Company or an
Affiliate. The granting of any Option to any individual shall neither entitle
that individual to, nor disqualify him or her from, participation in any other
grant of Options.
6. TERMS AND CONDITIONS OF OPTIONS.
Each Option shall be set forth in writing in an Option Agreement, duly
executed by the Company and, to the extent required by law or requested by the
Company, by the Participant. The Administrator may provide that Options be
granted subject to such terms and conditions, consistent with the terms and
conditions specifically required under this Plan, as the Administrator may deem
appropriate including, without limitation, subsequent approval by the
stockholders of the Company of this Plan or any amendments thereto.
A. Non-Qualified Options: Each Option intended to be a Non-Qualified
Option shall be subject to the terms and conditions which the
Administrator determines to be appropriate and in the best interest of
the Company, subject to the following minimum standards for any such
Non-Qualified Option:
a. Option Price: The option price (per share) of the Shares covered
by each Option shall be determined by the Administrator but shall
not be less than one hundred percent (100%) of the Fair Market
Value (per share) of the Shares on the date of grant of the
Option.
b. Each Option Agreement shall state the number of Shares to which
it pertains;
c. Each Option Agreement shall state the date or dates on which it
first is exercisable and the date after which it may no longer be
exercised, and may provide that the Option rights accrue or
become exercisable in installments over a period of months or
years, or upon the occurrence of certain conditions or the
attainment of stated goals or events; and
d. Exercise of any Option may be conditioned upon the Participant's
execution of a Share purchase agreement in form satisfactory to
the Administrator providing for certain protections for the
Company and its other stockholders, including requirements that:
i. The Participant's or the Participant's Survivors' right to
sell or transfer the Shares may be restricted; and
ii.The Participant or the Participant's Survivors may be
required to execute letters of investment intent and must also
acknowledge that the Shares will bear legends noting any
applicable restrictions.
e. Limitation on Grant of Non-Qualified Options: No Non-Qualified
Option shall be granted after the date provided in Paragraph 22
of this Plan.
f. Directors' Options: Each director of the Company who is not an
employee of the Company or any Affiliate, upon first being elected
or appointed to the Board of Directors, shall be granted a
Non-Qualified Option to purchase 10,000 shares; provided, however,
that the Administrator shall be entitled to grant an Option for
such higher number of shares as may be appropriate (as determined
by the Administrator) for recruitment purposes. On the date
following the annual meeting of stockholders of the Company each
year, giving effect to the election of any director or directors at
such annual meeting of stockholders, each director who is not an
employee of the Company or any Affiliate and who has served at
least six months as a director shall be granted a Non-Qualified
Option to purchase 10,000 Shares. In addition, on date following
the annual meeting of stockholders of the Company each year, giving
effect to the election of any director or directors at such annual
meeting of stockholders, each director who is not an employee of
the Company or any Affiliate and who serves on the Compensation
Committee or the Audit Committee of the Board of Directors (or
other committee designated by the Board of Directors to be entitled
to receive options under this sentence) shall be granted a
Non-Qualified Option to purchase 5,000 shares; provided, further,
that on such date, each such director who serves as the Chair of
such committee shall be granted an additional Option to purchase
5,000 shares. The grants for service as a committee member or Chair
shall cover service on all eligible committees and shall not be
cumulative for service on more than one committee. Each Option
granted pursuant to this Section 6(A)(f) shall (i) have an exercise
price equal to the Fair Market Value (per share) of the Shares on
the date of grant of the Option, (ii) have a term of ten (10)
years, and (iii) be immediately exercisable (subject to Section 16
of the Securities Exchange Act of 1934, as amended (the "1934
Act")). The Board of Directors may amend this Section 6(A)(f) to
increase, reduce, eliminate, or institute option grants for Board,
Committee, or other individual or collective service under this
Plan.
B. ISOs: Each Option intended to be an ISO shall so state and shall be
issued only to a Key Employee and be subject to at least the following
terms and conditions, with such additional restrictions or changes as
the Administrator determines are appropriate but not in conflict with
Section 422 of the Code and relevant regulations and rulings of the
Internal Revenue Service:
a. Minimum standards: The ISO shall meet the minimum standards
required of Non-Qualified Options, as described in Paragraph 6(A)
above, except clauses (a) and (f) thereunder.
b. Option Price: Immediately before the Option is granted, if the
Participant owns, directly or by reason of the applicable
attribution rules in Section 424(d) of the Code:
i.Ten percent (10%) or less of the total combined voting power of
all classes of stock of the Company or an Affiliate, the
Option price per share of the Shares covered by each Option
shall not be less than one hundred percent (100%) of the Fair
Market Value per share of the Shares on the date of the grant
of the Option.
ii.More than ten percent (10%) of the total combined voting
power of all classes of stock of the Company or an Affiliate,
the Option price per share of the Shares covered by each
Option shall not be less than one hundred ten percent (110%)
of the Fair Market Value on the date of grant.
c. Term of Option: For Participants who own
i. Ten percent (10%) or less of the total combined voting power
of all classes of stock of the Company or an Affiliate, each
Option shall terminate not more than ten (10) years from the
date of the grant or at such earlier time as the Option
Agreement may provide.
ii.More than ten percent (10%) of the total combined voting
power of all classes of stock of the Company or an Affiliate,
each Option shall terminate not more than five (5) years from
the date of the grant or at such earlier time as the Option
Agreement may provide.
d. Limitation on Yearly Exercise: The Option Agreements shall
restrict the amount of Options which may be exercisable in any
calendar year (under this or any other ISO plan of the Company or
an Affiliate) so that the aggregate Fair Market Value (determined
at the time each ISO is granted) of the stock with respect to
which ISOs are exercisable for the first time by the Participant
in any calendar year does not exceed one hundred thousand dollars
($100,000), provided that this subparagraph (d) shall have no
force or effect if its inclusion in the Plan is not necessary for
Options issued as ISOs to qualify as ISOs pursuant to Section
422(d) of the Code.
e.Limitation on Grant of ISOs: No ISOs shall be granted after
February 3, 2002, the date which is the earlier of ten (10) years
from the date of the adoption of the Plan by the Company and the
date of the approval of the Plan by the shareholders of the
Company.
f. To the extent that an Option which is intended to be an ISO fails
to so qualify, it shall be treated as a Non-Qualified Option.
7. EXERCISE OF OPTIONS AND ISSUE OF SHARES.
An Option (or any part or installment thereof) shall be exercised by giving
written notice to the Company at its principal executive office address,
together with provision for payment of the full purchase price in accordance
with this Paragraph for the Shares as to which the Option is being exercised,
and upon compliance with any other condition(s) set forth in the Option
Agreement. Such written notice shall be signed by the person exercising the
Option, shall state the number of Shares with respect to which the Option is
being exercised and shall contain any representation required by the Plan or the
Option Agreement. Payment of the purchase price for the Shares as to which such
Option is being exercised shall be made (a) in United States dollars in cash or
by check, or (b) at the discretion of the Administrator, through delivery of
shares of Common Stock having a Fair Market Value equal as of the date of the
exercise to the cash exercise price of the Option, or (c) at the discretion of
the Administrator, by delivery of the grantee's personal recourse note bearing
interest payable not less than annually at no less than 100% of the applicable
Federal rate, as defined in Section 1274(d) of the Code, or (d) at the
discretion of the Administrator, in accordance with a cashless exercise program
established with a securities brokerage firm, and approved by the Administrator,
or (e) at the discretion of the Administrator, through such other method of
payment approved by the Administrator, or (f) at the discretion of the
Administrator, by any combination of (a), (b), (c), (d) and (e) above.
Notwithstanding the foregoing, the Administrator shall accept only such payment
on exercise of an ISO as is permitted by Section 422 of the Code.
The Company shall then reasonably promptly deliver the Shares as to which
such Option was exercised to the Participant (or to the Participant's Survivors,
as the case may be). In determining what constitutes "reasonably promptly," it
is expressly understood that the delivery of the Shares may be delayed by the
Company in order to comply with any law or regulation (including, without
limitation, state securities or "blue sky" laws) which requires the Company to
take any action with respect to the Shares prior to their issuance. The Shares
shall, upon delivery, be evidenced by an appropriate certificate or certificates
for fully paid, non-assessable Shares.
The Administrator shall have the right to accelerate the date of exercise
of any installment of any Option; provided that the Administrator shall not
accelerate the exercise date of any installment of any Option granted to any Key
Employee as an ISO (and not previously converted into a Non-Qualified Option
pursuant to Paragraph 19) if such acceleration would violate the annual vesting
limitation contained in Section 422(d) of the Code, as described in Paragraph
6(B)(d).
The Administrator may, in its discretion, amend any term or condition of an
outstanding Option provided (i) such term or condition as amended is permitted
by the Plan, (ii) if any amendment is materially adverse to the Participant, any
such amendment shall be made only with the consent of the Participant to whom
the Option was granted, or in the event of the death of the Participant, the
Participant's Survivors, and (iii) any such amendment of any ISO shall be made
only after the Administrator, after consulting with counsel for the Company,
determines whether such amendment would constitute a "modification" of any
Option which is an ISO (as that term is defined in Section 424(h) of the Code)
or would cause any adverse tax consequences for the holder of such ISO.
8. RIGHTS AS A STOCKHOLDER.
No Participant to whom an Option has been granted shall have rights as a
stockholder with respect to any Shares covered by such Option, except after due
exercise of the Option and tender of the full purchase price for the Shares
being purchased pursuant to such exercise (and satisfaction of such other
conditions for the transfer of Shares as may be required pursuant to the Option)
and registration of the Shares in the Company's share register in the name of
the Participant.
9. ASSIGNABILITY AND TRANSFERABILITY OF OPTIONS.
By its terms, an Option granted to a Participant shall not be transferable
by the Participant other than (i) by will or by the laws of descent and
distribution, or (ii) as otherwise determined by the Administrator and set forth
in the applicable Option Agreement. The designation of a beneficiary of an
Option by a Participant shall not be deemed a transfer prohibited by this
Paragraph. Except as provided above, an Option shall be exercisable, during the
Participant's lifetime, only by such Participant (or by his or her legal
representative) and shall not be assigned, pledged or hypothecated in any way
(whether by operation of law or otherwise) and shall not be subject to
execution, attachment or similar process. Any attempted transfer, assignment,
pledge, hypothecation or other disposition of any Option or of any rights
granted thereunder contrary to the provisions of this Plan, or the levy of any
attachment or similar process upon an Option, shall be null and void.
10. EFFECT OF TERMINATION OF SERVICE OTHER THAN "FOR CAUSE" OR DEATH OR
DISABILITY.
Except as otherwise provided in the pertinent Option Agreement, in the
event of a termination of service (whether as an employee, director or
consultant) with the Company or an Affiliate before the Participant has
exercised all Options, the following rules apply:
a. A Participant who ceases to be an employee, director or consultant of
the Company or of an Affiliate (for any reason other than termination
"for cause", Disability, or death for which events there are special
rules in Paragraphs 11, 12, and 13, respectively), may exercise any
Option granted to him or her to the extent that the Option is
exercisable on the date of such termination of service, but only within
such term as the Administrator has designated in the pertinent Option
Agreement.
b. Except as provided in Subparagraph (c) below, or Paragraph 12 or 13, in
no event may an Option Agreement provide, if the Option is intended to
be an ISO, that the time for exercise be later than three (3) months
after the Participant's termination of employment.
c. The provisions of this Paragraph, and not the provisions of Paragraph 12
or 13, shall apply to a Participant who subsequently becomes Disabled or
dies after the termination of employment, director status or
consultancy, provided, however, in the case of a Participant's
Disability or death within three (3) months after the termination of
employment, director status or consultancy, the Participant or the
Participant's Survivors may exercise the Option within one (1) year
after the date of the Participant's termination of employment, but in no
event after the date of expiration of the term of the Option.
d. Notwithstanding anything herein to the contrary, if subsequent to a
Participant's termination of employment, termination of director status
or termination of consultancy, but prior to the exercise of an Option,
the Board of Directors determines that, either prior or subsequent to
the Participant's termination, the Participant engaged in conduct which
would constitute "cause" (as defined in Section 11 below), then such
Participant shall forthwith cease to have any right to exercise any
Option.
e. A Participant to whom an Option has been granted under the Plan who is
absent from work with the Company or with an Affiliate because of
temporary disability (any disability other than a permanent and total
Disability as defined in Paragraph 2 hereof), or who is on leave of
absence for any purpose, shall not, during the period of any such
absence, be deemed, by virtue of such absence alone, to have terminated
such Participant's employment, director status or consultancy with the
Company or with an Affiliate, except as the Administrator or the Option
Agreement may otherwise expressly provide.
f. Except as required by law or as set forth in the pertinent Option
Agreement, Options granted under the Plan shall not be affected by any
change of a Participant's status within or among the Company and any
Affiliates, so long as the Participant continues to be an employee,
director or consultant of the Company or any Affiliate.
11. EFFECT OF TERMINATION OF SERVICE "FOR CAUSE".
Except as otherwise provided in the pertinent Option Agreement, the
following rules apply if the Participant's service (whether as an employee,
director or consultant) with the Company or an Affiliate is terminated "for
cause" prior to the time that all his or her outstanding Options have been
exercised:
a. All outstanding and unexercised Options as of the time the Participant
is notified his or her service is terminated for "cause" will
immediately be forfeited.
b. For purposes of this Plan, "cause" shall include (and is not limited to)
dishonesty with respect to the Company or any Affiliate,
insubordination, substantial malfeasance or non-feasance of duty,
unauthorized disclosure of confidential information, and conduct
substantially prejudicial to the business of the Company or any
Affiliate. The determination of the Administrator as to the existence of
"cause" will be conclusive on the Participant and the Company.
c. "Cause" is not limited to events which have occurred prior to a
Participant's termination of service, nor is it necessary that the
Administrator's finding of "cause" occur prior to termination. If the
Administrator determines, subsequent to a Participant's termination of
service but prior to the exercise of an Option, that either prior or
subsequent to the Participant's termination the Participant engaged in
conduct which would constitute "cause," then the right to exercise any
Option is forfeited.
d. Any definition in an agreement between the Participant and the Company
or an Affiliate, which contains a conflicting definition of "cause" for
termination and which is in effect at the time of such termination,
shall supersede the definition in this Plan with respect to such
Participant.
12. EFFECT OF TERMINATION OF SERVICE FOR DISABILITY.
Except as otherwise provided in the pertinent Option Agreement, a
Participant who ceases to be an employee, director or consultant of the Company
or of an Affiliate by reason of Disability may exercise any Option granted to
such Participant:
a. To the extent exercisable but not exercised on the date of Disability;
and
b. In the event rights to exercise the Option accrue periodically, to the
extent of a pro rata portion of any additional rights as would have
accrued had the Participant not become Disabled prior to the end of the
accrual period which next ends following the date of Disability. The
proration shall be based upon the number of days of such accrual period
prior to the date of Disability.
A Disabled Participant may exercise such rights only within the period
ending one (1) year after the date of the Participant's termination of
employment, directorship or consultancy, as the case may be, notwithstanding
that the Participant might have been able to exercise the Option as to some or
all of the Shares on a later date if the Participant had not become disabled and
had continued to be an employee, director or consultant or, if earlier, within
the originally prescribed term of the Option.
The Administrator shall make the determination both of whether Disability
has occurred and the date of its occurrence (unless a procedure for such
determination is set forth in another agreement between the Company and such
Participant, in which case such procedure shall be used for such determination).
If requested, the Participant shall be examined by a physician selected or
approved by the Administrator, the cost of which examination shall be paid for
by the Company.
13. EFFECT OF DEATH WHILE AN EMPLOYEE, DIRECTOR OR CONSULTANT.
Except as otherwise provided in the pertinent Option Agreement, in the
event of the death of a Participant while the Participant is an employee,
director or consultant of the Company or of an Affiliate, such Option may be
exercised by the Participant's Survivors:
a. To the extent exercisable but not exercised on the date of death; and
b. In the event rights to exercise the Option accrue periodically, to the
extent of a pro rata portion of any additional rights which would have
accrued had the Participant not died prior to the end of the accrual
period which next ends following the date of death. The proration shall
be based upon the number of days of such accrual period prior to the
Participant's death.
If the Participant's Survivors wish to exercise the Option, they must take
all necessary steps to exercise the Option within one (1) year after the date of
death of such Participant, notwithstanding that the decedent might have been
able to exercise the Option as to some or all of the Shares on a later date if
he or she had not died and had continued to be an employee, director or
consultant or, if earlier, within the originally prescribed term of the Option.
14. PURCHASE FOR INVESTMENT.
Unless the offering and sale of the Shares to be issued upon the particular
exercise of an Option shall have been effectively registered under the
Securities Act of 1933, as now in force or hereafter amended (the "1933 Act"),
the Company shall be under no obligation to issue the Shares covered by such
exercise unless and until the following conditions have been fulfilled:
a. The person(s) who exercise(s) such Option shall warrant to the Company,
prior to the receipt of such Shares, that such person(s) are acquiring
such Shares for their own respective accounts, for investment, and not
with a view to, or for sale in connection with, the distribution of any
such Shares, in which event the person(s) acquiring such Shares shall be
bound by the provisions of the following legend which shall be endorsed
upon the certificate(s) evidencing their Shares issued pursuant to such
exercise of such grant:
"The shares represented by this certificate have been
taken for investment and they may not be sold or
otherwise transferred by any person, including a
pledgee, unless (1) either (a) a Registration
Statement with respect to such shares shall be
effective under the Securities Act of 1933, as
amended, or (b) the Company shall have received an
opinion of counsel satisfactory to it that an
exemption from registration under such Act is then
available, and (2) there shall have been compliance
with all applicable state securities laws."
b. At the discretion of the Administrator, the Company shall have received
an opinion of its counsel that the Shares may be issued upon such
particular exercise in compliance with the 1933 Act without registration
thereunder.
The Company may delay issuance of the Shares until completion of any action
or obtaining of any consent which the Company deems necessary under any
applicable law (including, without limitation, state securities or "blue sky"
laws.)
15. DISSOLUTION OR LIQUIDATION OF THE COMPANY.
Upon the dissolution or liquidation of the Company, all Options granted
under this Plan which as of such date shall not have been exercised will
terminate and become null and void; provided, however, that if the rights of a
Participant or a Participant's Survivors have not otherwise terminated and
expired, (i) the Participant or the Participant's Survivors will have the right
immediately prior to such dissolution or liquidation to exercise any Option to
the extent that the Option is exercisable as of the date immediately prior to
such dissolution or liquidation; and (ii) if a Change in Control shall have
occurred within the twelve months immediately prior to the date of such
dissolution or liquidation, such Participant or such Participant's Survivors
will have the right immediately prior to such dissolution or liquidation to
exercise any Option then outstanding whether or not such Option is exercisable
as of such date.
16. ADJUSTMENTS.
Upon the occurrence of any of the following events, a Participant's rights
with respect to any Option granted to him or her hereunder which has not
previously been exercised in full shall be adjusted as hereinafter provided,
unless otherwise specifically provided in the pertinent Option Agreement:
A. Stock Dividends and Stock Splits. If (i) the shares of Common Stock
shall be subdivided or combined into a greater or smaller number of shares or if
the Company shall issue any shares of Common Stock as a stock dividend on its
outstanding Common Stock, or (ii) additional shares or new or different shares
or other securities of the Company or other non-cash assets are distributed with
respect to such shares of Common Stock, the number of shares of Common Stock
deliverable upon the exercise of such Option may be appropriately increased or
decreased proportionately, and appropriate adjustments may be made in the
purchase price per share to reflect such subdivision, combination or stock
dividend. The number of Shares subject to options to be granted to directors
pursuant to Paragraph 6(A)(f) shall also be proportionately adjusted upon the
occurrence of such events, except as the Administrator shall otherwise determine
in its sole discretion. The number of Shares subject to options to be granted
pursuant to Paragraph 4(c) shall also be proportionately adjusted upon the
occurrence of such events.
B. Corporate Changes in Control. In the event of a Corporate Change in
Control
(i) Each Option outstanding as of the date such Corporate Change in
Control is determined to have occurred, and which is not then exercisable
by reason of vesting requirements, shall automatically accelerate the
vesting so that the Option shall become fully exercisable and vested on the
first to occur of (x) the date the Option becomes vested and exercisable
under its original terms (with respect only to such Options as otherwise
would vest during such one-year period under their terms), (y) the first
anniversary of the date such Corporate Change in Control is determined to
have occurred, and (z) the occurrence of an Involuntary Employment Action;
and
(ii) The Options so accelerated shall remain so exercisable until the
earlier of the original expiration date of the Option and the earlier
termination of the Option in accordance with the Plan and the Agreement.
C. Transactional Changes in Control. In the event of a Transactional Change
in Control,
(i) Each Option outstanding as of the date such Transactional Change in
Control is determined to have occurred shall be either: (a) assumed by the
successor corporation (or its parent) or replaced with a comparable option
to purchase shares of the capital stock of the successor corporation (or
its parent) on an equitable basis, (b) terminated upon written notice to
the Participants stating that all Options (for purposes of this
Subparagraph all Options then outstanding shall be deemed to be
exercisable) must be exercised within a specified number of days (which
shall not be less than 15 days) from the date such notice is given, at the
end of which period the Options shall terminate, or (c) terminated in
exchange for a cash payment equal to the excess of the Fair Market Value of
the shares subject to such Options (for purposes of this Subparagraph all
Options then outstanding shall be deemed to be exercisable) over the
exercise price thereof; provided, however, that if any of the treatments of
Options pursuant to this Plan set forth in clauses (a), (b) or (c) above
would make a Transactional Change in Control transaction ineligible for
pooling-of-interest accounting under APB No. 16 such that but for the
nature of such treatment such transaction would otherwise be eligible for
such accounting treatment, the Committee (or the Administrator if no
Committee has been appointed) shall have the ability to substitute for any
cash or other consideration payable under such treatment shares of Common
Stock with a Fair Market Value or other consideration with value equal to
the cash or other consideration that would otherwise be payable pursuant to
such treatment. The determination of which of the treatments set forth in
clauses (a), (b) and (c) above to provide and of comparability under clause
(a) above shall be made by the Administrator and its determinations shall
be final, binding and conclusive.
(ii) Each Option that is assumed or replaced in connection with a
Transactional Change in Control shall automatically accelerate so that the
Option shall become fully exercisable and vested on the first to occur of
(x) the date the Option becomes vested and exercisable under its original
terms (with respect only to such Options as otherwise would vest during
such one-year period under their terms), (y) the first anniversary of the
date such Transactional Change in Control is determined to have occurred,
and (z) the occurrence of an Involuntary Employment Action. The Options so
accelerated shall remain so exercisable until the earlier of the original
expiration date of the Option and the earlier termination of the Option in
accordance with the Plan and the Agreement.
D. Corporate Transaction. In the event of a Corporate Transaction that does
not constitute a Transactional Change in Control or in the event of a similar
event, pursuant to which securities of the Company or of another corporation or
entity are issued with respect to the outstanding shares of Common Stock, a
Participant upon exercising an Option shall be entitled to receive for the
purchase price paid upon such exercise the securities which would have been
received if such Option had been exercised prior to such Corporate Transaction.
E. Modification of ISOs. Notwithstanding the foregoing, any adjustments
made pursuant to Subparagraph A, B, C or D with respect to ISOs shall be made
only after the Administrator, after consulting with counsel for the Company,
determines whether such adjustments would constitute a "modification" of such
ISOs (as that term is defined in Section 424(h) of the Code) or would cause any
adverse tax consequences for the holders of such ISOs. If the Administrator
determines that such adjustments made with respect to ISOs would constitute a
"modification" of such ISOs, it may refrain from making such adjustments, unless
the holder of an ISO specifically requests in writing that such adjustment be
made and such writing indicates that the holder has full knowledge of the
consequences of such "modification" on his or her income tax treatment with
respect to the ISO.
17. ISSUANCES OF SECURITIES.
Except as expressly provided herein, no issuance by the Company of shares
of stock of any class, or securities convertible into shares of stock of any
class, shall affect, and no adjustment by reason thereof shall be made with
respect to, the number or price of shares subject to Options. Except as
expressly provided herein, no adjustments shall be made for dividends paid in
cash or in property (including without limitation, securities) of the Company.
18. FRACTIONAL SHARES.
No fractional shares shall be issued under the Plan and the person
exercising such right shall receive from the Company cash in lieu of such
fractional shares equal to the Fair Market Value thereof.
19. CONVERSION OF ISOs INTO NON-QUALIFIED OPTIONS; TERMINATION OF ISOs.
The Administrator, at the written request of any Participant, may in its
discretion take such actions as may be necessary to convert such Participant's
ISOs (or any portions thereof) that have not been exercised on the date of
conversion into Non-Qualified Options at any time prior to the expiration of
such ISOs, regardless of whether the Participant is an employee of the Company
or an Affiliate at the time of such conversion. Such actions may include, but
not be limited to, extending the exercise period or reducing the exercise price
of the appropriate installments of such Options. At the time of such conversion,
the Administrator (with the consent of the Participant) may impose such
conditions on the exercise of the resulting Non-Qualified Options as the
Administrator in its discretion may determine, provided that such conditions
shall not be inconsistent with this Plan. Nothing in the Plan shall be deemed to
give any Participant the right to have such Participant's ISOs converted into
Non-Qualified Options, and no such conversion shall occur until and unless the
Administrator takes appropriate action. The Administrator, with the consent of
the Participant, may also terminate any portion of any ISO that has not been
exercised at the time of such conversion.
20. WITHHOLDING.
In the event that any federal, state, or local income taxes, employment
taxes, Federal Insurance Contributions Act ("F.I.C.A.") withholdings or other
amounts are required by applicable law or governmental regulation to be withheld
from the Participant's salary, wages or other remuneration in connection with
the exercise of an Option or a Disqualifying Disposition (as defined in
Paragraph 21), the Company may withhold from the Participant's compensation, if
any, or may require that the Participant advance in cash to the Company, or to
any Affiliate of the Company which employs or employed the Participant, the
amount of such withholdings unless a different withholding arrangement,
including the use of shares of the Company's Common Stock or a promissory note,
is authorized by the Administrator (and permitted by law). For purposes hereof,
the fair market value of the shares withheld for purposes of payroll withholding
shall be determined in the manner provided in Paragraph 2 above, as of the most
recent practicable date prior to the date of exercise. If the fair market value
of the shares withheld is less than the amount of payroll withholdings required,
the Participant may be required to advance the difference in cash to the Company
or the Affiliate employer. The Administrator in its discretion may condition the
exercise of an Option for less than the then Fair Market Value on the
Participant's payment of such additional withholding.
21. NOTICE TO COMPANY OF DISQUALIFYING DISPOSITION.
Each Key Employee who receives an ISO must agree to notify the Company in
writing immediately after the Key Employee makes a Disqualifying Disposition of
any shares acquired pursuant to the exercise of an ISO. A Disqualifying
Disposition is any disposition (including any sale) of such shares before the
later of (a) two years after the date the Key Employee was granted the ISO, or
(b) one year after the date the Key Employee acquired Shares by exercising the
ISO. If the Key Employee has died before such stock is sold, these holding
period requirements do not apply and no Disqualifying Disposition can occur
thereafter.
22. TERMINATION OF THE PLAN.
The Plan will terminate on February 3, 2002, the date which is ten (10)
years from the earlier of the date of its adoption and the date of its approval
by the stockholders of the Company. The Plan may be terminated at an earlier
date by vote of the stockholders of the Company; provided, however, that any
such earlier termination will not affect any Options granted or Option
Agreements executed prior to the effective date of such termination.
23. AMENDMENT OF THE PLAN AND AGREEMENTS.
The Plan may be amended by the stockholders of the Company. The Plan may
also be amended by the Board of Directors or the Administrator, including,
without limitation, to the extent necessary to qualify any or all outstanding
Options granted under the Plan or Options to be granted under the Plan for
favorable federal income tax treatment (including deferral of taxation upon
exercise) as may be afforded incentive stock options under Section 422 of the
Code, for as long as the Company has a class of stock registered pursuant to
Section 12 of the 1934 Act and to the extent necessary to qualify the shares
issuable upon exercise of any outstanding Options granted, or Options to be
granted, under the Plan for listing on any national securities exchange or
quotation in any national automated quotation system of securities dealers. Any
amendment approved by the Administrator which the Administrator determines is of
a scope that requires stockholder approval shall be subject to obtaining such
stockholder approval. Any modification or amendment of the Plan shall not,
without the consent of a Participant, materially adversely affect his or her
rights under an Option previously granted to him or her. With the consent of the
Participant affected, the Administrator may amend outstanding Option Agreements
in a manner which may be materially adverse to the Participant but which is not
inconsistent with the Plan. In the discretion of the Administrator, outstanding
Option Agreements may be amended by the Administrator in a manner which is not
materially adverse to the Participant.
24. EMPLOYMENT OR OTHER RELATIONSHIP.
Nothing in this Plan or any Option Agreement shall be deemed to prevent the
Company or an Affiliate from terminating the employment, consultancy or director
status of a Participant, nor to prevent a Participant from terminating his or
her own employment, consultancy or director status or to give any Participant a
right to be retained in employment or other service by the Company or any
Affiliate for any period of time.
All Options shall constitute a special incentive payment to the Participant
and shall not be taken into account in computing the amount of salary or
compensation of the Participant for the purpose of determining any benefits
under any pension, retirement, profit-sharing, bonus, life insurance or other
benefit plan of the Company or under any agreement between the Company and the
Participant, unless such plan or agreement specifically provides otherwise.
25. GOVERNING LAW.
This Plan shall be construed and enforced in accordance with the law of the
State of Delaware.
Exhibit 10.8
June 16, 1998
Mr. J. Michael Kelly
162 Woodridge Circle
New Canaan, CT
Dear Mike:
We are very pleased to offer you the position of Senior Vice
President and Chief Financial Officer of America Online, Inc.,
reporting directly to me as Chief Executive Officer of AOL. In this
position, you will be an Officer of AOL (subject to formal Board
action, which I will request promptly after your execution of this
letter) and you will be responsible for all corporate financial matters
relating to the Company. This letter will set forth the economic and
key employment conditions of your employment.
Salary: You will be entitled to a minimum base compensation at
the annual rate of $450,000, payable semi-monthly, subject to customary
tax deductions. Your base compensation will be reviewed annually and
may be increased at the discretion of AOL's Board of Directors, based
on your performance and changes in competitive market conditions.
Bonus: You will participate in AOL's Management Incentive Plan
(MIP) with a targeted bonus of 75% of your base pay if you and AOL meet
the established performance objectives (and proportionally greater
percentages of your base pay should you and AOL exceed such established
performance objectives). Your pay out for AOL's fiscal year 1999
(7/1/98-6/30/99) will be guaranteed at no less than 75% of your then
base pay (i.e. $338,000).
Stock Options: In contemplation of, and subject to, your
becoming employed by the Company, you have been granted an option to
purchase 225,000 shares of AOL common stock vesting equally over a 4
year period of time and an option to purchase 225,000 shares of AOL
common stock vesting at a rate of 33-1/3% on the 4th, 5th and 6th
anniversaries of the grant. The form of option agreement to be entered
into by you and the Company with respect to these stock options is
delivered herewith.
Restricted Stock: The Company will take appropriate actions
(primarily filings with the Securities and Exchange Commission) so that
on or about your commencement date, the Company can offer and grant you
50,000 shares of AOL common stock which will vest and become
transferable at a rate of 16,667, 16,667, and 16,666 shares
respectively on the 1st, 2nd, 3rd year anniversaries of your employment
date (the "Restricted Shares"). The form of Restricted Stock Agreement
that wold be used is delivered herewith.
Relocation: You will be eligible for AOL's executive
relocation package, a copy of which is delivered here with. If you
wish, AOL will acquire your current Connecticut home through a third
party buy out and will provide you a relocation allowance equal to one
months pay to cover miscellaneous relocation expenses. All relocation
expenses, to include the relocation allowance, will be grossed up at
the highest appropriate tax bracket.
Benefits: You and your family will be eligible to participate
in all AOL-sponsored plans provided generally to AOL employees or to
AOL senior management, including health and benefit plans and life and
disability insurance plans, in accordance with AOL's current
eligibility requirements. Mark Stavish has delivered a summary of the
existing plans to you.
Key Employment Conditions: You will devote your full business
time to the Company. As a condition of your employment, you will enter
into a Confidentiality, Non Competition and Proprietary Rights
Agreement, a copy of which has been delivered to you by Mark Stavish.
<PAGE>
Termination: Your employment by AOL is at will and you or the
Company will be free to terminate such employment at any time, with or
without Cause. In the event of termination by you other than for Good
Reason, or termination by the Company for Cause, you shall be entitled
as of the termination date to no further compensation under this
agreement, except that you shall be entitled to receive such portion of
your base compensation as shall have accrued but remain unpaid as of
the termination date. In the event AOL terminates your employment other
then for Cause, or you terminate your employment for Good Reason, you
will be entitled to receive the following items in exchange for a valid
release of all claims against the Company:
0 Your base compensation accrued through the termination date,
0 Continuation of your base compensation for a period of twelve
months,
0 Full payment of your MIP bonus after the end of the fiscal year
in which your termination occurs, at the same time similarly
situated continuing AOL employees receive their MIP bonuses,
0 Pro-rated payout of your MIP bonus for the subsequent Fiscal Year
as determined by multiplying your then bonus percentage
opportunity times your then base pay, multiplied by a fraction
whose denominator will be 12 and whose numerator will be the
number of full months of base pay continuance you receive during
the course of that fiscal year, and
0 Your Restricted Stock will become fully vested.
For purposes of this agreement, "Cause" shall be limited to
your conviction of a felony involving moral turpitude, your willful and
continued failure substantially to perform your required duties under
this Agreement after notice and opportunity to cure, your intentional
or repeated violation of the Confidentiality, Non-Competition and
Proprietary Rights Agreement, or your intentional or improper conduct
substantially prejudicial to the business of the Company or any of its
affiliates; and "Good Reason" shall be limited to a termination by you,
(a) due to death or qualifying for long-term disability, or (b) upon 60
days notice following your transfer to an office outside of the
Company's headquarters, or (c) upon 60 days notice following a change
by the Company in your reporting relationship or your authority which
causes your position with the Company to become of materially less
responsibility than your position immediately following the
Commencement Date, provided that such material change is not in
connection with a termination of your employment by the Company, and
provided, further, that the Company shall not have taken action within
30 days of such notice of termination such that the circumstances
constituting a Good Reason shall have ceased.
Commencement Date: The Commencement Date of your employment
shall be as soon as practicable.
Mike, we are all very excited about the prospect of your
joining the AOL team and working with us to build a great company and a
new medium. If the terms of this letter are acceptable to you, please
execute and return the enclosed copy.
We look forward to a long and mutually rewarding relationship.
Sincerely yours,
/s/ STEPHEN M. CASE
Stephen M. Case
Chairman
Agreed:
/s/ J. MICHAEL KELLY Date: 6/16/98
J. Michael Kelly
<PAGE>
CONFIDENTIALITY, NON-COMPETITION AND
PROPRIETARY RIGHTS AGREEMENT
For our company, people are the most important asset. That is because, in our
competitive environment, we rely distinctly on your intellect and inventiveness.
Your creativity, enterprise and common sense help us succeed against intense
competition; your monetary compensation and benefits package, as well as
community-building events within, the company, reflect this value. We invest
millions in distribution, marketing and infrastructure to advance our
activities. We invest in you. We take the risk that these will pay off. It is
not our intent to underwrite entrepreneurship that will not end up profiting the
company. In other words, work done on company time belongs to America Online,
Incorporated.
It is to protect our investment in you that we ask you to read, undergo and sign
the following agreement, which is a condition of your employment.
Effective 6/23/98, l998, I, the undersigned, hereby agree as follows:
1. Definitions:
a) AOL means America Online, Incorporated and the Affiliates of America
Online, Incorporated. Affiliates shall mean: (i) any corporation,
company or other entity more than thirty-three percent (33%) of whose
outstanding shares or securities are, now or hereafter, owned or
controlled, directly or indirectly, by AOL and its Affiliates, and
(ii) any partnership, joint venture, unincorporated association or
limited liability company more than fifty percent (50%) of whose
ownership interest is now or hereafter owned or controlled in the
aggregate, directly or indirectly, by AOL and its Affiliates.
b) Proprietary Information means any information that I may be furnished
or may otherwise receive or have access to while employed by AOL that
relates to the following: AOL's business, finances, business plans,
business opportunities, past, present or future products, software,
content, research, development, improvements, inventions, product
designs and plans, processes, techniques, designs or other technical
data, source code, services, subscribers, personnel, customer lists
and other unpublished information provided by AOL or a third party
that has provided proprietary information to AOL.
2. Protecting Proprietary Information: Both during and after the term of this
agreement, I agree to preserve and protect the confidentiality of
Proprietary Information and all its physical forms, whether disclosed to
me before or after this agreement is signed. In addition, I agree not do
any of the following: (a) disclose or disseminate Proprietary Information
to anyone, including AOL employees or volunteers, who lacks a need to
know; (b) remove Proprietary Information from AOL's premises; (c) use
Proprietary Information for my or any third party's benefit.
3. Exceptions: The foregoing obligations will not apply to any information
which I can establish to have (a) become known without breach of this
agreement by me; (b) been given to me by a third party who is not
obligated to maintain confidentiality; (c) been developed by me prior to
the date this agreement is signed, as established by documentary evidence;
(d) been disclosed under operation of law, except that I will disclose
only such information as is legally required and will use reasonable
efforts to obtain confidential treatment for any Proprietary Information
that is so disclosed; or (e) been disclosed by me with AOL's prior written
approval.
4. Ownership of Proprietary Information: All proprietary information used or
generated during the course of working for AOL is AOL's property alone. I
agree to deliver to AOL all documents and tangibles, including diskettes
and other storage media containing Proprietary Information, upon
termination of my employment with AOL or within three (3) days after AOL
so requests.
5. AOL's Rights to Works for Hire and Others: All writings or works of
authorship, including, without limitation, program codes or documentation
that I produce or author in performing services for AOL together with any
copyrights on those writings or works of authorship, are works made for
hire and, therefore, the property of AOL. To the extent that any such
writings or works of authorship may not, by operation of law, be works
made for hire, this agreement constitutes my irrevocable assignment to AOL
of the ownership of, and all rights of copyright in, such items. Also, AOL
shall have the right to obtain and hold in its own name all rights of
copyright, copyright registrations and similar protections that may be
available with respect to any such writings or works. I agree to give AOL
or its assignees all assistance reasonably required to perfect such
rights.
6. Assignment of Inventions, Techniques: Henceforth, I assign to AOL my
entire right, title and interest in any invention, technique, process,
device, discovery, improvement or know-how, patentable or not, that I
conceive, solely or jointly, while working for AOL: (a) that relates in
any manner to the actual or anticipated business of AOL; (b) that is
suggested by or results from any task assigned to me or work performed by
me for or on behalf of AOL; or (c) for which AOL equipment, supplies,
facilities, information or materials are used. I shall disclose any such
invention, technique, process, device, discovery, improvement or know-how
promptly to AOL. Further, I shall execute a specific assignment of title
to AOL and do anything else reasonably necessary to enable AOL to secure
patent, trade secret or any other proprietary rights in the United States
or foreign countries.
7. Prior Inventions: In the space provided at the end of this document, I
agree to list and describe any inventions I have made or conceived of
before my employment with AOL. These items are excluded from this
agreement.
8. Outside Employment or Activities: I understand that I may continue to work
on and retain rights to projects of my own interest outside of AOL,
provided that: (a) they do not fall under paragraphs 5 or 6 above; (b)
they do not interfere in any way with my time at work for AOL; and (c)
should any products with potential commercial application result from any
such project, AOL will have the right of first refusal to purchase and
market such products.
9. Limits on Publicizing AOL Information: I shall not submit any article for
publication or deliver any public speech that contains any information
relating to the business of AOL or identifies me as an employee or
representative of the company without first receiving written consent from
an officer of AOL.
10. Competitive Employment: While employed by AOL and for one year after the
termination of my employment for any reason, but not less than three years
from the date of this agreement, I will not, within the United States or
any country in which AOL or a licensee of AOL is then operating or
preparing to operate: (a) directly or indirectly own, manage, operate,
join, control or be employed by; (b) directly or indirectly participate in
the ownership, management, operation or control of; or (c) be connected in
any manner with any business of the type and character of business in
which AOL engages at the time of such termination.
11. Conflicting Obligations: I represent and warrant that: (a) I am able to
enter into this agreement and that such ability is not limited or
restricted by any agreements or understandings between me and other
persons or companies; (b) I will not disclose to AOL or its clients, or
induce AOL to use or disclose, any Proprietary Information or material
belonging to others, except with the written permission of the owner of
such information or material; and (c) any information, materials or
products I develop for or any advice I provide to AOL shall not rely or in
any way be based on confidential or Proprietary Information or trade
secrets I have obtained or derived from sources other than AOL.
I hereby agree to indemnify and hold AOL harmless from and against any and
all damages, claims, costs and expenses, including reasonable attorneys'
fees, based on or arising, directly or indirectly, from the breach of any
agreement or understanding between me and another person or company. This
includes, but is not limited to, liability a rising from any confidential
or proprietary information or trade secrets I have from sources other than
AOL.
12. Observance of Applicable Laws: I will fully comply, and do all things
necessary for AOL to fully comply, with all laws and regulations of the
government of the United States and with provisions of contracts between
AOL and the agencies of the U.S. government or contractors that relate to
patent rights, technical data or the safeguarding of information and
material.
13. Non-Solicitation: While working for AOL and for one year after any
termination of my employment with AOL, I will not (a) attempt, directly or
indirectly, to induce or attempt to influence any employee of AOL to leave
AOL's employ; or (b) solicit business from any of AOL's customers, either
directly or indirectly, for the benefit of anyone other than AOL; nor will
I participate or assist in any way in the solicitation of business from
any such customers as an employee of or consultant to another entity,
unless the business being solicited is not in competition with the
services AOL provides to such customers.
14. Further Understanding of Foregoing Provisions: I understand and agree to
the following statements:
(a)(i) My contractual obligations under paragraphs 2, 10, 11 and 13 have
a unique and very substantial value to AOL; (ii) I have sufficient
assets and other skills to provide a reasonable livelihood for myself
and my dependents while such paragraphs are in force; and (iii) I am
subject to immediate dismissal for any breach of those provisions and
that such dismissal shall not relieve me from my continuing obligations
under this agreement or from the imposition by a court of any judicial
remedies, such as money damages or equitable enforcement of those
provisions.
(b)The terms and provisions of this agreement apply to all Proprietary
Information and other materials developed for, or any advice provided
to, AOL prior to my signing this agreement.
(c)The termination of my employment with AOL, for any reason, shall not
relieve me from complying with the undertakings and agreements herein
that call for performance prior or subsequent to the termination date,
including, but not limited to, those undertakings and agreements set
forth in paragraphs 2, 4,10, 11 and 13.
15. Attorneys' Fees: Should I be found liable for any action taken to enforce
this agreement, I will reimburse AOL for its reasonable attorneys' fees
and court costs.
16. Waiver: No act or failure to act by AOL waives any right herein. To be
effective, any waiver by AOL must be in writing and signed by an officer
of AQL.
17. Assignment: Although I shall not have the right to assign this agreement,
it is nevertheless binding on my heirs, executors and administrators and
on AOL's successors and assigns.
18. Severability: In the event that any provision of this agreement conflicts
with the law under which it is to be construed or if a court with
jurisdiction over the parties to this agreement holds any such provision
invalid, such provision shall be deemed to be restated to reflect as
nearly as possible the original intentions of the parties in accordance
with applicable force and effect.
19. Governing Laws: The laws of the Commonwealth of Virginia shall govern this
agreement as such laws are applied to contracts executed by Commonwealth
of Virginia residents and performed entirely within the Commonwealth of
Virginia.
20. Entire Agreement: This document constitutes my entire agreement with AOL
with respect to its subject matter, superseding any prior negotiations and
agreements. No provisions of this agreement may be changed except by a
written agreement signed by both myself and an officer of AOL.
21. Remedies: All remedies herein are cumulative and in addition to all other
remedies that may be available at law or in equity.
/s/ J. MICHAEL KELLY
Signature
J. Michael Kelly
Print Name
6/23/98
Date
For America Online, Incorporated
/s/ MARK STAVISH
Signature
SVP, HR
Title
6/23/98
Date
Prior inventions to be excluded from this Agreement are listed and briefly
described below:
Exhibit 21.1
SUBSIDIARIES OF AMERICA ONLINE, INC.
JURISDICTION OF
NAME INCORPORATION
Actra Business Systems, LLC Delaware
AOL Community, Inc. Delaware
AOL Foundation, Inc. Delaware
AOL TV, Inc. Delaware
AOL Ventures, Inc. Delaware
AOLV Hub, Inc. Delaware
AOLV Fashion Channel, Inc. Delaware
AOLV Healthy Living Channel, Inc. Delaware
AtWeb, Inc. California
Entertainment Asylum, Inc. California
CompuServe Interactive Services, Inc. Delaware
CompuServe Interactive Services Latin America, Inc. Delaware
CompuServe Ventures Incorporated Ohio
CompuServe Works of Wonder, Inc. Ohio
Cyber Leasing Corp. Delaware
Digital City, Inc. Delaware
Digital Marketing Services, Inc. Delaware
Digital Style Corporation Delaware
Extreme Fans, Inc. (doing business as Real Fans) Illinois
Global Network Navigator, Inc. Delaware
ICQ Networks, Inc. New York
ICQ Holding Company, Inc. New York
ICQ, Inc. Delaware
The ImagiNation Network, Inc.
(doing business as WorldPlay Entertainment, Inc.) Delaware
Johnson-Grace Newco, Inc. Delaware
Kiva Software Corporation California
MovieFone, Inc. Delaware
MF Investment Corp. Delaware
Netscape Communications Corporation Delaware
Nullsoft, Inc. Delaware
Personal Library Software Inc. Maryland
PersonaLogic, Inc. California
Portola Communications Corporation California
Redgate Communications Corp. Delaware
Spinner Networks, Inc. California
Sunrise Capital Corporation Delaware
Websoft, Inc. Delaware
When Inc. Delaware
AOL Argentina S.R.L Argentina
AOL America Online (Australia) Pty Limited Australia
AOL Brasil Ltda. Brazil
AOL Canada Inc. Canada
AOL Canada Services Inc. Canada
AOL America Online France Holding SARL France
AOL Bertelsmann Online Service France SNC France
AOL CompuServe France SAS France
CompuServe Interactive Services France SNC France
AOL America Online (Deutschland) GmbH Germany
AOL Bertelsmann Online GmbH & Co. KG. Germany
AOL Bertelsmann Online Verwaltung GmbH Germany
AOL Bertelsmann Service Operation GmbH & Co. KG Germany
AOL Bertelsmann Service Operations Verwaltungs-
und Beteiligungs GmbH Germany
AOL Holding GmbH Germany
CompuServe Interactive Services Beteiligungs-
und Verwaltungs GmbH Germany
CompuServe Interactive Services Deutschland
Management GmbH Germany
CompuServe Interactive Services Deutshland GmbH & Co. KG Germany
AOL Bertelsmann Online Europa GmbH Germany
AOL America Online Limited (Ireland) Ireland
AOL Bertelsmann Service Operations Limited Ireland
CompuServe Interactive Services Limited Ireland Ireland
ICQ, Limited Israel
America Online (Japan), Inc. Japan
AOL Japan, Inc. Japan
AOL Mexico, S. de R.L. de C.V. Mexico
America Online Holding B.V. Netherlands
AOL Finance B.V. Netherlands
AOL International Finance C.V. Netherlands
CIS Holding BV Netherlands
CompuServe Interactive Services Nederland CV Netherlands
CompuServe Management B.V. Netherlands
Pan Latin Interactive Ventures C.V. Netherlands
AOL Member Services-Philippines, Inc. Philippines
AOL Latin America, S.L. Spain
CompuServe Interactive Services Schweiz GmbH Switzerland
America Online (Rights) Limited United Kingdom
AOL (UK) Limited United Kingdom
AOL Bertelsmann Online (UK Management) Limited United Kingdom
AOL Bertelsmann Service Operations (UK Management) Limited United Kingdom
AOL Holdings (UK) Limited United Kingdom
CompuServe Service Operations UK United Kingdom
AOL Bertelsmann Online Limited Partnership United Kingdom
AOL Holdings (UK) (2) Limited United Kingdom
CompuServe Interactive Services Limited United Kingdom
Csi CompuServe Interactive Services UK United Kingdom
America Online Joint Venture Holdings, Inc. Delaware
America Online/Bertelsmann Finance LLC Delaware
AOL International LLC Delaware
AOL Latin America Management LLC Delaware
Latin America QuotaHolder LLC Delaware
Latin American Interactive Services, Inc. Delaware
Transatlantic Web Services Inc. Delaware
AOL Australia Holdings LLC Delaware
Netscape Communications Australia PTY Limited Australia
Netscape Communications FSC Incorporated Barbados
Netscape Communications do Brasil Ltda. Brazil
Netscape Communications Canada, Inc. Canada
Netscape Communications Denmark A/A Denmark
Netscape Communications Europe SARL France
Netscape Communications France Societe Anonyme France
Netscape Communications GmbH Germany
Netscape Communications Limited Hong Kong
Netscape Communications Ireland Limited Ireland
Netscape Communications Italia SRL Italy
Netscape Communications Japan, Ltd. Japan
Netscape Communications Nederland B.V. Netherlands
Netscape Internet Communications Espana, S.A. Spain
Netscape Communications Asia South Pte Limited Singapore
Netscape Communications Sweden AB Sweden
Netscape Communications (Switzerland) Ltd. Switzerland
Netscape Communications Limited United Kingdom
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
listed below of our report dated July 21, 1999, with respect to the consolidated
financial statements of America Online, Inc., included in this Annual Report
(Form 10-K) for the year ended June 30, 1999.
1) No. 33-46607 12) No. 333-02460 23) No. 333-60625 34) No. 333-74533
2) No. 33-48447 13) No. 333-07163 24) No. 333-68605 35) No. 333-74535
3) No. 33-78066 14) No. 333-07559 25) No. 333-68631 36) No. 333-74537
4) No. 33-86392 15) No. 333-07603 26) No. 333-68599 37) No. 333-74539
5) No. 33-86394 16) No. 333-22027 27) No. 333-72499 38) No. 333-74541
6) No. 33-86396 17) No. 333-46633 28) No. 333-74521 39) No. 333-74543
7) No. 33-90174 18) No. 333-46635 29) No. 333-74523 40) No. 333-76725
8) No. 33-91050 19) No. 333-46637 30) No. 333-74525 41) No. 333-76733
9) No. 33-94000 20) No. 333-57143 31) No. 333-74527 42) No. 333-76743
10) No. 33-94004 21) No. 333-57153 32) No. 333-74529 43) No. 333-79489
11) No. 333-00416 22) No. 333-60623 33) No. 333-74531 44) No. 333-79797
45) No. 333-82123
46) No. 333-83409
/s/Ernst & Young LLP
Vienna, Virginia
August 10, 1999
Exhibit 24.1
POWER OF ATTORNEY
I, Stephen M. Case, whose signature appears below, constitute and
appoint Stephen M. Case, Kenneth J. Novack, J. Michael Kelly, Sheila A. Clark
and James F. MacGuidwin, and each of them, my true and lawful attorneys-in-fact
and agents, with full power of substitution and resubstitution in each of them,
for him/her and in his/her name, place and stead, and in any and all capacities,
to sign the Form 10-K for the fiscal year ended June 30, 1999, and any required
amendments or supplements thereto, and to file the same, with all exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite or necessary to be done in or about the premises, for all intents and
purposes as he or she might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them or their or
his/her substitute or substitutes lawfully do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, the undersigned has caused this Power of Attorney
to be executed as of this 13th day of August, 1999.
/s/Stephen M. Case
Signature
Stephen M. Case
Print Name
<PAGE>
POWER OF ATTORNEY
I, Daniel F. Akerson, whose signature appears below, constitute and
appoint Stephen M. Case, Kenneth J. Novack, J. Michael Kelly, Sheila A. Clark
and James F. MacGuidwin, and each of them, my true and lawful attorneys-in-fact
and agents, with full power of substitution and resubstitution in each of them,
for him/her and in his/her name, place and stead, and in any and all capacities,
to sign the Form 10-K for the fiscal year ended June 30, 1999, and any required
amendments or supplements thereto, and to file the same, with all exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite or necessary to be done in or about the premises, for all intents and
purposes as he or she might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them or their or
his/her substitute or substitutes lawfully do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, the undersigned has caused this Power of Attorney
to be executed as of this 13th day of August, 1999.
/s/Daniel F. Akerson
Signature
Daniel F. Akerson
Print Name
<PAGE>
POWER OF ATTORNEY
I, James L. Barksdale, whose signature appears below, constitute and
appoint Stephen M. Case, Kenneth J. Novack, J. Michael Kelly, Sheila A. Clark
and James F. MacGuidwin, and each of them, my true and lawful attorneys-in-fact
and agents, with full power of substitution and resubstitution in each of them,
for him/her and in his/her name, place and stead, and in any and all capacities,
to sign the Form 10-K for the fiscal year ended June 30, 1999, and any required
amendments or supplements thereto, and to file the same, with all exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite or necessary to be done in or about the premises, for all intents and
purposes as he or she might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them or their or
his/her substitute or substitutes lawfully do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, the undersigned has caused this Power of Attorney
to be executed as of this 13th day of August, 1999.
/s/James L. Barksdale
Signature
James L. Barksdale
Print Name
<PAGE>
POWER OF ATTORNEY
I, Frank J. Caufield, whose signature appears below, constitute and
appoint Stephen M. Case, Kenneth J. Novack, J. Michael Kelly, Sheila A. Clark
and James F. MacGuidwin, and each of them, my true and lawful attorneys-in-fact
and agents, with full power of substitution and resubstitution in each of them,
for him/her and in his/her name, place and stead, and in any and all capacities,
to sign the Form 10-K for the fiscal year ended June 30, 1999, and any required
amendments or supplements thereto, and to file the same, with all exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite or necessary to be done in or about the premises, for all intents and
purposes as he or she might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them or their or
his/her substitute or substitutes lawfully do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, the undersigned has caused this Power of Attorney
to be executed as of this 13th day of August, 1999.
/s/Frank J. Caufield
Signature
Frank J. Caufield
Print Name
<PAGE>
POWER OF ATTORNEY
I, General Alexander M. Haig, Jr., whose signature appears below,
constitute and appoint Stephen M. Case, Kenneth J. Novack, J. Michael Kelly,
Sheila A. Clark and James F. MacGuidwin, and each of them, my true and lawful
attorneys-in-fact and agents, with full power of substitution and resubstitution
in each of them, for him/her and in his/her name, place and stead, and in any
and all capacities, to sign the Form 10-K for the fiscal year ended June 30,
1999, and any required amendments or supplements thereto, and to file the same,
with all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite or necessary to be done in or about the premises,
for all intents and purposes as he or she might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents or any of
them or their or his/her substitute or substitutes lawfully do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has caused this Power of Attorney
to be executed as of this 13th day of August, 1999.
/s/General Alexander M. Haig, Jr.
Signature
General Alexander M. Haig, Jr.
Print Name
<PAGE>
POWER OF ATTORNEY
I, William N. Melton, whose signature appears below, constitute and
appoint Stephen M. Case, Kenneth J. Novack, J. Michael Kelly, Sheila A. Clark
and James F. MacGuidwin, and each of them, my true and lawful attorneys-in-fact
and agents, with full power of substitution and resubstitution in each of them,
for him/her and in his/her name, place and stead, and in any and all capacities,
to sign the Form 10-K for the fiscal year ended June 30, 1999, and any required
amendments or supplements thereto, and to file the same, with all exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite or necessary to be done in or about the premises, for all intents and
purposes as he or she might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them or their or
his/her substitute or substitutes lawfully do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, the undersigned has caused this Power of Attorney
to be executed as of this 13th day of August, 1999.
/s/William N. Melton
Signature
William N. Melton
Print Name
<PAGE>
POWER OF ATTORNEY
I, Thomas Middelhoff, whose signature appears below, constitute and
appoint Stephen M. Case, Kenneth J. Novack, J. Michael Kelly, Sheila A. Clark
and James F. MacGuidwin, and each of them, my true and lawful attorneys-in-fact
and agents, with full power of substitution and resubstitution in each of them,
for him/her and in his/her name, place and stead, and in any and all capacities,
to sign the Form 10-K for the fiscal year ended June 30, 1999, and any required
amendments or supplements thereto, and to file the same, with all exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite or necessary to be done in or about the premises, for all intents and
purposes as he or she might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them or their or
his/her substitute or substitutes lawfully do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, the undersigned has caused this Power of Attorney
to be executed as of this 13th day of August, 1999.
/s/Thomas Middelhoff
Signature
Thomas Middelhoff
Print Name
<PAGE>
POWER OF ATTORNEY
I, Robert W. Pittman, whose signature appears below, constitute and
appoint Stephen M. Case, Kenneth J. Novack, J. Michael Kelly, Sheila A. Clark
and James F. MacGuidwin, and each of them, my true and lawful attorneys-in-fact
and agents, with full power of substitution and resubstitution in each of them,
for him/her and in his/her name, place and stead, and in any and all capacities,
to sign the Form 10-K for the fiscal year ended June 30, 1999, and any required
amendments or supplements thereto, and to file the same, with all exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite or necessary to be done in or about the premises, for all intents and
purposes as he or she might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them or their or
his/her substitute or substitutes lawfully do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, the undersigned has caused this Power of Attorney
to be executed as of this 13th day of August, 1999.
/s/Robert W. Pittman
Signature
Robert W. Pittman
Print Name
<PAGE>
POWER OF ATTORNEY
I, Colin L. Powell, whose signature appears below, constitute and
appoint Stephen M. Case, Kenneth J. Novack, J. Michael Kelly, Sheila A. Clark
and James F. MacGuidwin, and each of them, my true and lawful attorneys-in-fact
and agents, with full power of substitution and resubstitution in each of them,
for him/her and in his/her name, place and stead, and in any and all capacities,
to sign the Form 10-K for the fiscal year ended June 30, 1999, and any required
amendments or supplements thereto, and to file the same, with all exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite or necessary to be done in or about the premises, for all intents and
purposes as he or she might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them or their or
his/her substitute or substitutes lawfully do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, the undersigned has caused this Power of Attorney
to be executed as of this 13th day of August, 1999.
/s/Colin L. Powell
Signature
Colin L. Powell
Print Name
<PAGE>
POWER OF ATTORNEY
I, Franklin D. Raines, whose signature appears below, constitute and
appoint Stephen M. Case, Kenneth J. Novack, J. Michael Kelly, Sheila A. Clark
and James F. MacGuidwin, and each of them, my true and lawful attorneys-in-fact
and agents, with full power of substitution and resubstitution in each of them,
for him/her and in his/her name, place and stead, and in any and all capacities,
to sign the Form 10-K for the fiscal year ended June 30, 1999, and any required
amendments or supplements thereto, and to file the same, with all exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite or necessary to be done in or about the premises, for all intents and
purposes as he or she might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them or their or
his/her substitute or substitutes lawfully do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, the undersigned has caused this Power of Attorney
to be executed as of this 13th day of August, 1999.
/s/Franklin D. Raines
Signature
Franklin D. Raines
Print Name
<PAGE>
POWER OF ATTORNEY
I, James F. MacGuidwin, whose signature appears below, constitute and
appoint Stephen M. Case, Kenneth J. Novack, J. Michael Kelly, Sheila A. Clark
and James F. MacGuidwin, and each of them, my true and lawful attorneys-in-fact
and agents, with full power of substitution and resubstitution in each of them,
for him/her and in his/her name, place and stead, and in any and all capacities,
to sign the Form 10-K for the fiscal year ended June 30, 1999, and any required
amendments or supplements thereto, and to file the same, with all exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite or necessary to be done in or about the premises, for all intents and
purposes as he or she might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them or their or
his/her substitute or substitutes lawfully do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, the undersigned has caused this Power of Attorney
to be executed as of this 13th day of August, 1999.
/s/James F. MacGuidwin
Signature
James F. MacGuidwin
Print Name
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