SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
America Online, Inc.
(Name of Registrant as Specified in Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1)and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
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(5) Total fee paid:
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
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<PAGE>
LOGO
22000 AOL Way
Dulles, VA 20166-9323
September __, 1999
Dear Stockholder,
You are cordially invited to attend the 1999 Annual Meeting of Stockholders
of America Online, Inc. (the "Company") to be held at 10:00 a.m. on October 28,
1999 at the Westfields International Conference Center, located at 14750
Conference Center Drive, Chantilly, Virginia.
At the Annual Meeting, _____ people will be elected to the Board of
Directors. The Board of Directors recommends the election of the _____ nominees
named in the Proxy Statement. In addition, the Company will ask the Stockholders
to: approve and adopt an amendment to the Company's Restated Certificate of
Incorporation, as amended, to increase the authorized number of shares of Common
Stock; approve the Company's 1999 Stock Plan; approve the Company's Executive
Incentive Plan; and ratify the selection of Ernst & Young LLP as the Company's
independent public accountants.
Whether you plan to attend the Annual Meeting or not, it is important that
you promptly complete, sign, date and return the enclosed proxy card, or vote
via the Internet or by telephone in accordance with the instructions set forth
on the proxy card. This will ensure your proper representation at the Annual
Meeting.
Sincerely,
Stephen M. Case,
Chairman of the Board and Chief
Executive Officer
YOUR VOTE IS IMPORTANT.
PLEASE REMEMBER PROMPTLY TO RETURN YOUR
PROXY OR VOTE VIA THE INTERNET OR BY TELEPHONE.
<PAGE>
AMERICA ONLINE, INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To be Held on October 28, 1999
To the Stockholders of America Online, Inc.
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of America
Online, Inc., a Delaware corporation (the "Company"), will be held on October
28, 1999 at the Westfields International Conference Center, located at 14750
Conference Center Drive, Chantilly, Virginia at 10:00 a.m. for the following
purposes:
1. To elect _____ members to the Board of Directors to serve for a term
ending in 2002, and until their successors are duly elected and
qualified.
2. To amend the Company's Restated Certificate of Incorporation, as
amended, to increase the authorized number of shares of Common Stock
from 1,800,000,000 to 6,000,000,000.
3. To approve the Company's 1999 Stock Plan.
4. To approve the Company's Executive Incentive Plan.
5. To consider and act upon a proposal to ratify the appointment of Ernst &
Young LLP as the Company's independent public accountants for the fiscal
year ending June 30, 2000.
6. To transact such other business as may be properly brought before the
Annual Meeting and any adjournments thereof.
The Board of Directors has fixed the close of business on August 30, 1999
as the record date for the determination of Stockholders entitled to notice of
and to vote at the Annual Meeting and at any adjournments thereof. A list of
such Stockholders will be available for inspection at the Westfields
International Conference Center during ordinary business hours for the ten-day
period prior to the Annual Meeting.
All Stockholders are cordially invited to attend the Annual Meeting.
However, to ensure your representation, you are requested to complete, sign,
date and return the enclosed proxy as soon as possible in accordance with the
instructions on the proxy card. A return addressed envelope is enclosed for your
convenience. Stockholders also may vote via the Internet or by telephone. See
"Voting Electronically or by Telephone."
BY ORDER OF THE BOARD OF DIRECTORS
Sheila A. Clark
Corporate Secretary
Dulles, Virginia
September __, 1999
<PAGE>
AMERICA ONLINE, INC.
22000 AOL Way
Dulles, Virginia 20166-9323
(703) 265-1000
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PROXY STATEMENT
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GENERAL INFORMATION
This Proxy Statement is furnished in connection with the solicitation by
the Board of Directors of America Online, Inc. (the "Company" or "America
Online"), a Delaware corporation, of proxies, in the accompanying form, to be
used at the Annual Meeting of Stockholders to be held at the Westfields
International Conference Center, located at 14750 Conference Center Drive,
Chantilly, Virginia on October 28, 1999 at 10:00 a.m., and any adjournments
thereof (the "Meeting").
Where the Stockholder specifies a choice on the proxy as to how his or her
shares are to be voted on a particular matter, the shares will be voted
accordingly. If no choice is specified, the shares will be voted FOR the
election of the _____ nominees for Director named herein, FOR the amendment of
the Company's Restated Certificate of Incorporation, as amended, to increase the
authorized number of shares of Common Stock from 1,800,000,000 to 6,000,000,000,
FOR the approval of the Company's 1999 Stock Plan, FOR approval of the Company's
Executive Incentive Plan, and FOR the ratification of the appointment of Ernst &
Young LLP as the Company's independent public accountants for the fiscal year
ending June 30, 2000. You can revoke your proxy at any time before the voting at
the Meeting by sending a properly signed written notice of your revocation to
the Corporate Secretary of the Company, by submitting another proxy that is
properly signed and bears a later date or by voting in person at the Meeting.
Attendance at the Meeting will not itself revoke an earlier submitted proxy. To
revoke a proxy previously submitted electronically through the Internet or by
telephone, you may simply vote again at a later date, using the same procedures,
in which case your later submitted vote will be recorded and your earlier vote
revoked. You should direct any written notices of revocation and related
correspondence to: America Online, Inc., 22000 AOL Way, Dulles, Virginia 20166,
Attention: Corporate Secretary. Shares represented by valid proxies in the form
enclosed, received in time for use at the Meeting and not revoked at or prior to
the Meeting, will be voted at the Meeting. The presence, in person or by proxy,
of the holders of a majority of the outstanding shares of the Company's common
stock, par value $.01 per share ("Common Stock"), is necessary to constitute a
quorum at the Meeting. With respect to the tabulation of proxies for purposes of
constituting a quorum, abstentions and broker non-votes are treated as present.
For purposes of the proposal to amend the Company's Restated Certificate of
Incorporation, as amended, to increase the authorized number of shares of Common
Stock (Item 2), abstentions and broker non-votes will have the effect of a
negative vote, and for purposes of each of the other proposals, abstentions and
broker non-votes will have no effect on the vote.
The close of business on August 30, 1999 has been fixed as the record date
for determining the Stockholders entitled to notice of and to vote at the
Meeting. As of that date, the Company had 1,112,371,296 shares of Common Stock
outstanding and entitled to vote. Holders of Common Stock are entitled to one
vote per share on all matters to be voted on by Stockholders. This Proxy
Statement and the accompanying proxy are being mailed or will be available
electronically on or about September __, 1999 to all Stockholders entitled to
notice of and to vote at the Meeting.
The cost of soliciting proxies, including expenses in connection with
preparing and mailing this Proxy Statement, will be borne by the Company. In
addition, the Company will reimburse brokerage firms and other persons
representing beneficial owners of Common Stock of the Company for their expenses
in forwarding proxy material to such beneficial owners. Solicitation of proxies
by mail may be supplemented by telephone, telegram, telex, and other electronic
means, and personal solicitation by the Directors, officers or employees of the
Company. No additional compensation will be paid to Directors, officers or
employees for such solicitation. The Company has retained Corporate Investor
Communications, Inc. to assist in the solicitation of proxies, for a fee
estimated to be approximately $16,000 plus reasonable out-of-pocket expenses.
The Annual Report to Stockholders for the fiscal year ended June 30, 1999
is being mailed to the Stockholders with this Proxy Statement, but does not
constitute a part hereof.
The Company effected a two-for-one stock split on each of November 17, 1998
and February 22, 1999. All of the information presented herein is on a
post-split basis, except where specifically indicated otherwise.
<PAGE>
VOTING ELECTRONICALLY OR BY TELEPHONE
Instead of submitting your vote by mail on the enclosed proxy card, you can
vote electronically by submitting your proxy through the Internet or by
telephone. Please note that there are separate arrangements for using the
Internet and telephone depending on whether shares are registered in the
Company's stock records in your name or in the name of a brokerage firm or bank.
The Internet and telephone voting procedures are designed to authenticate
Stockholders' identities, to allow Stockholders to vote their shares and to
confirm that their instructions have been properly recorded. The Company has
been advised by counsel that the procedures that have been put in place are
consistent with the requirements of applicable law. Stockholders voting via the
Internet through either Boston EquiServe, a division of EquiServe ("Boston
EquiServe") or ADP Investor Communication Services should understand that there
may be costs associated with electronic access, such as usage charges from
Internet access providers and telephone companies, that would be borne by the
Stockholder.
For Shares Registered Directly in the Name of the Stockholder
Stockholders with shares registered directly in their name in the Company's
stock records maintained by our transfer agent, Boston EquiServe, may vote their
shares (1) by submitting their proxy through the Internet at the following
address on the World Wide Web: http://www.equiserve.com/proxy, (2) by making a
toll-free telephone call from the U.S. and Canada to Boston EquiServe at
1-888-807-7699 or (3) by mailing their signed proxy card. Specific instructions
to be followed by registered Stockholders are set forth on the enclosed proxy
card. Proxies submitted through the Internet or by telephone through Boston
EquiServe as described above must be received by 5:00 p.m. on October 27, 1999.
For Shares Registered in the Name of a Brokerage Firm or Bank
A number of brokerage firms and banks are participating in a program
provided through ADP Investor Communication Services that offers telephone and
Internet voting options. That program is different from the program provided by
Boston EquiServe for shares registered in the name of the Stockholder. If your
shares are held in an account at a brokerage firm or bank participating in the
ADP Program, you may vote those shares by calling the telephone number which
appears on your voting form or through the Internet in accordance with
instructions set forth on the voting form. Votes submitted through the Internet
or by telephone through the ADP Program must be received by midnight on October
27, 1999.
Revocation of Proxies Submitted Electronically or by Telephone
To revoke a proxy previously submitted electronically through the Internet
or by telephone, you may simply vote again at a later date, using the same
procedures, in which case your later submitted vote will be recorded and your
earlier vote revoked.
<PAGE>
SHARE OWNERSHIP
The following table sets forth certain information as of July 31, 1999,
concerning the ownership of Common Stock by (i) each current member of the Board
of Directors of the Company, (ii) each nominee of the Board of Directors, (iii)
each executive officer of the Company named in the Summary Compensation Table
appearing under "Executive Compensation," below and (iv) all current Directors
and executive officers of the Company as a group. No Stockholder of the Company
is known by the Company to be the beneficial owner of more than 5% of the
outstanding shares of Common Stock.
Shares Beneficially
Owned (1)
Name and Address Number Percent
Current Directors:
Stephen M. Case (2)(3) 9,036,883 *
Daniel F. Akerson (4) 144,000 *
James L. Barksdale (3) 4,164,113 *
Frank J. Caufield (4) 1,067,586 *
General Alexander M. Haig, Jr.(4) 1,227,392 *
William N. Melton (3) 2,200,000 *
Dr. Thomas Middelhoff (5) -0- N/A
Robert W. Pittman (3) 1,022,129 *
General Colin L. Powell (4) 120,000 *
Franklin D. Raines (4) 108,000 *
Nominee:
_____________________ ________ __
Named Executive Officers
Who Are Not Directors:
J. Michael Kelly (3) 305,000 *
Kenneth J. Novack (3) 199,259 *
George Vradenburg, III (3) 879,600 *
All executive officers and 27,113,774 2.4%
Directors as a group (19 persons) (3)
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* Represents beneficial ownership of less than 1% of the Company's Common Stock.
(1) The number of shares of Common Stock issued and outstanding on July 31,
1999 was 1,108,080,083. The calculation of percentages is based upon the
number of shares of Common Stock issued and outstanding on such date, plus
shares of Common Stock subject to options held by the respective persons on
July 31, 1999 and exercisable within 60 days thereafter. The persons and
entities named in the table have sole voting and dispositive power with
respect to all shares shown as beneficially owned by them, except as
described below. Attached to each share of Common Stock is a Preferred
Share Purchase Right to acquire one one-thousandth of a share of the
Company's Series A-1 Junior Participating Preferred Stock, par value $.01
per share, which Preferred Share Purchase Rights are not presently
exercisable.
(2) Includes 121,876 shares held by Mr. Case's spouse as to which he shares
beneficial ownership.
(3) Excludes executive officers appointed after July 30, 1999. Includes shares
issuable within 60 days of July 31, 1999 upon the exercise of options to
purchase Common Stock as follows: Mr. Case-4,705,000; Mr. Melton-1,400,000;
Mr. Pittman-1,016,000; Mr. Kelly-105,000; Mr. Novack-198,000; Mr.
Vradenburg-874,000; and all Directors and executive officers as a group
16,206,212.
(4) Represents shares issuable within 60 days of July 31, 1999 upon the
exercise of options to purchase Common Stock. (5) Dr. Middelhoff is
Chairman of Bertelsmann AG, a joint venture partner of the Company. Dr.
Middelhoff disclaims beneficial ownership of 14,414,240 shares of Common
Stock owned by Bertelsmann AG.
<PAGE>
MANAGEMENT
Directors
The Company's Restated Certificate of Incorporation, as amended, and
Restated By-Laws provide for a classified Board of Directors. The Board of
Directors currently consists of ten members, classified into three classes as
follows: Stephen M. Case, William N. Melton and Dr. Thomas Middelhoff constitute
a class with a term ending in 1999 (the "Class III Directors"); General
Alexander M. Haig, Jr., Daniel F. Akerson and Franklin D. Raines constitute a
class with a term ending in 2000 (the "Class I Directors"); and James L.
Barksdale, Frank J. Caufield, Robert W. Pittman and General Colin L. Powell
constitute a class with a term ending in 2001 (the "Class II Directors"). For
information on the Directors being nominated for election, see "Election of
Directors (Item 1)."
The names of the Company's Directors and certain information about them are
set forth below:
Name Age Positions with the Company
Stephen M. Case 41 Chairman of the Board and Chief
Executive Officer
Daniel F. Akerson 50 Director
James L. Barksdale 56 Director
Frank J. Caufield 59 Director
General Alexander M. Haig, Jr. 74 Director
William N. Melton 57 Director
Dr. Thomas Middelhoff 46 Director
Robert W. Pittman 45 President, Chief Operating
Officer and Director
General Colin L. Powell 62 Director
Franklin D. Raines 50 Director
Mr. Case, a co-founder of the Company, has been Chairman of the Board of
Directors since October 1995, Chief Executive Officer of the Company since April
1993 and a Director since September 1992. He also served as Executive Vice
President from September 1987 to January 1991 and Vice President, Marketing,
from 1985 to September 1987. Mr. Case currently serves as a Director of the New
York Stock Exchange, Inc.
Mr. Akerson has been a Director of the Company since 1997. He currently
serves as Chairman of the Board of Nextel Communications, Inc., a company that
provides a wide array of digital and analog wireless communications services
throughout the United States, and has held this position since March 1996 and
Co-Chairman of Eagle River, L.L.C., a private investment company primarily
engaged in telecommunications and technology operations since July 1999. He
served as Chief Executive Officer of Nextel from March 1996 until July 1999.
From 1993 until March 1996, Mr. Akerson served as a general partner of Forstmann
Little & Co., a private investment firm. While serving as a general partner of
Forstmann Little, Mr. Akerson also held the positions of Chairman of the Board
and Chief Executive Officer of General Instrument Corporation, a technology
company acquired by Forstmann Little. Mr. Akerson currently serves as a Director
of American Express Company.
Mr. Barksdale has been a director of the Company since March 1999. He has
been the Managing Partner of the Barksdale Group, a venture-capital firm, since
it was founded in April 1999. He served as a director of Netscape Communications
Corporation from October 1994 until its acquisition by the Company in March
1999. He joined Netscape in January 1995 as President and Chief Executive
Officer. From January 1992 to January 1995, Mr. Barksdale served as President
and Chief Operating Officer, and, as of September 1994, Chief Executive Officer,
of AT&T Wireless Services (formerly, McCaw Cellular Communications, Inc.), a
cellular telecommunications company. Mr. Barksdale serves as a director of 3Com
Corporation, Robert Mondavi Corporation, Liberate Technologies, Inc., Sun
Microsystems, Inc., FDX Corporation, HomeGrocer.com, Inc. and Respond.com, Inc.
Mr. Caufield has been a Director of the Company since 1991. He has held the
position of general partner of Kleiner Perkins Caufield & Byers, a venture
capital partnership, since 1978. He is a Director of Megabios Corp., a
biomedical company, and WebLogic, Inc., a supplier of Java application servers
and Java-to-database integration solutions.
<PAGE>
General Haig has been a Director of the Company since 1989. He has held the
position of Chairman and President of Worldwide Associates, Inc., an
international advisor and venture capital company, since 1984. General Haig is
the former U.S. Secretary of State, former Supreme Allied Commander, Europe,
former White House Chief of Staff and former Vice Chief of Staff, Army. General
Haig has been awarded many military decorations, including the Distinguished
Service Cross. A retired full General, U.S. Army, he also served as the
President and Chief Operating Officer of United Technologies Corp., and is
currently a director of Interneuron Pharmaceuticals, Inc., MGM Grand, Inc.,
Metro-Goldwyn-Mayer, Inc. and Preferred Employers Holding, Inc.
Mr. Melton has been a Director of the Company since September 1992. In
January 1999, he was appointed Chairman of the Board and Chief Executive Officer
of CyberCash, Inc., a leading developer of software and service solutions for
payments over the Internet. From 1994 to 1998, he held the positions of
President and Chief Executive Officer of CyberCash. From 1981 to 1992, he held
positions at Verifone, Inc., including President and Chief Executive Officer
from 1981 to 1986 and Chairman of the Board from 1981 to 1992. Mr. Melton served
as a Director of Verifone from 1992 to July 1996. Mr. Melton is a Director of
Transaction Network Services, Inc.
Dr. Middelhoff has been a Director of the Company since May 1995. He has
been, since October 1998, Chairman of Bertelsmann AG, one of the world's largest
media companies, and has been a member of the Executive Board of Bertelsmann AG
since July 1994. For the year prior to October 1998, he served as Chairman
Designate of Bertelsmann Industries, Gutersloh. From July 1990 through July
1994, he served as Chairman of the Management Board of Mohndruck Graphische
Betriebe GmbH and as Chief Executive Officer and as a member of the Board of
Directors of Bertelsmann Industries, Gutersloh. Prior to that, he served as
Managing Director of Mohndruck Graphische Betriebe GmbH. Dr. Middelhoff was
nominated as a Director of the Company pursuant to the terms of a Common Stock
Purchase Agreement with Bertelsmann AG. Dr. Middelhoff is a Director of
barnesandnoble.com inc.
Mr. Pittman has been a Director of the Company since October 1995. He was
appointed President and Chief Operating Officer of the Company in February 1998.
Previously, he was President and Chief Executive Officer of AOL Networks, a
division of the Company, from November 1996 until February 1998. He held the
positions of Managing Partner and Chief Executive Officer of Century 21 Real
Estate Corp. from October 1995 to October 1996. Mr. Pittman had previously been
President and Chief Executive Officer of Time Warner Enterprises, a division of
Time Warner Entertainment Company, LP, a company engaged in entertainment, cable
networks and cable systems, from 1990 to September 1995, and Chairman and Chief
Executive Officer of Six Flags Entertainment Corporation, the second largest
theme park operator in the United States, from December 1991 to September 1995.
Mr. Pittman is a Director of Cendant Corporation and barnesandnoble.com inc. Mr.
Pittman also has served as President and Chief Executive Officer of MTV
Networks, and was the creator of the MTV network.
General Colin L. Powell has been a director of the Company since September
1998. General Powell is Chairman of America's Promise: The Alliance for Youth, a
national not-for-profit organization dedicated to improving the lives of our
nation's more than 15 million at-risk youth. He served as the Chairman of the
Joint Chiefs of Staff from October 1989 to September 1993, and as National
Security Advisor from December 1987 to January 1989. He is also a director of
Gulfstream Aerospace Corporation, a designer, developer, manufacturer and
marketer of intercontinental business jet aircraft.
Mr. Raines has been a director of the Company since September 1998. Mr.
Raines has served as Chairman and Chief Executive Officer of Fannie Mae since
January 1, 1999. Prior to joining Fannie Mae, he served in the President's
Cabinet as Director of the U.S. Office of Management and Budget from September
of 1996 to May of 1998. In this role he developed the first balanced federal
budget in thirty years and reformed the acquisition of information technology.
From 1991 to 1996, Mr. Raines was Vice Chairman of Fannie Mae, in charge of the
company's legal, credit policy, finance, and corporate development functions. He
is widely credited with having commenced the company's successful efforts to
utilize technology to lower the costs of mortgage origination. Prior to joining
Fannie Mae, Mr. Raines was a general partner at Lazard Freres & Co. Before
joining Lazard Freres, he served from 1977 to 1979 as Associate Director for
Economics and Government in the U.S. Office of Management and Budget, and
Assistant Director of the White House Domestic Policy Staff. Mr. Raines is a
Director of Pfizer, Inc. and PepsiCo, Inc.
Committees of the Board and Meetings
Meeting Attendance. During the fiscal year ended June 30, 1999, there were
12 meetings of the Board of Directors, and 10 meetings of the Audit and
Compensation and Management Development Committees of the Board of Directors. No
Director attended fewer than 75% of the total number of meetings of the Board of
Directors and its Committees on which he served during the fiscal year. In
addition, the members of the Board of Directors and its Committees acted at
various times by unanimous written consent pursuant to Delaware law.
Audit Committee. The Audit Committee, which met five times in fiscal 1999,
currently has three members, Messrs. Caufield (Chair), Melton and Raines. The
Audit Committee reviews the engagement of the Company's independent accountants,
and reviews annual financial statements, considers matters relating to
accounting policy and internal controls and reviews the scope of annual audits.
<PAGE>
Compensation and Management Development Committee. The Compensation and
Management Development Committee, which met five times during fiscal 1999,
currently has three members, General Haig (Chair), Mr. Akerson and General
Powell. The Compensation and Management Development Committee reviews, approves
and makes recommendations on the Company's compensation policies, practices and
procedures to ensure that legal and fiduciary responsibilities of the Board of
Directors are carried out and that such policies, practices and procedures
contribute to the success of the Company. The Committee also oversees the
retention and development of key management employees of the Company. The
Committee administers the Company's stock plans, including the 1992 Employee,
Director and Consultant Stock Option Plan, the 1987 Stock Incentive Plan, the
1985 Incentive Stock Option Plan (Restatement) and the employee stock purchase
plans.
Nominating Committee. The Nominating Committee meets informally from time
to time during the year as well as meeting formally for the purpose of selecting
nominees to the Board of Directors. The Nominating Committee currently has six
members, General Powell (Chair), Mr. Akerson, Mr. Barksdale, Mr. Caufield,
General Haig and Mr. Raines. The Nominating Committee's role, following
consultation with all other members of the Board of Directors, is to make
recommendations to the full Board as to the size and composition of the Board
and to make recommendations as to particular nominees to serve as Directors.
Compensation of Directors
The Company's policy is not to pay cash compensation to members of the
Board for serving as a Director or for their attendance at Board meetings or
Committee meetings.
Directors are eligible to participate in the Company's 1992 Employee,
Director and Consultant Stock Option Plan (the "1992 Plan"). Under the 1992
Plan, each non-employee Director receives an initial grant of an option upon
first being elected or appointed to the Board of Directors to purchase 20,000
shares of Common Stock (or such higher number of options as is determined by the
Committee for recruitment purposes). The 1992 Plan also provides for an annual
grant on the date following the annual meeting of Stockholders of the Company of
each year, after giving effect to the election of any Director or Directors at
such annual meeting of Stockholders, to each non-employee Director (who has
served for at least six months as a Director) of an option to purchase 20,000
shares of Common Stock. Non-employee Directors who serve on the Company's
Compensation and Management Development or Audit Committees (or other committee
designated by the Board) are granted each year an option to purchase 10,000
shares, with the Chair of each such committee receiving an additional option to
purchase another 10,000 shares. Options granted for service on committees are
not cumulative for service on more than one committee. All of such options
granted to non-employee Directors have an exercise price equal to the fair
market value of the Common Stock on such grant date, have a term of ten years,
and are immediately exercisable.
Executive Officers
The names of, and certain information regarding, executive officers of the
Company who are not Directors of the Company, are set forth below. The executive
officers serve at the pleasure of the Board of Directors and the Chief Executive
Officer.
Name Age Positions with the Company
Kathryn A. Bushkin 50 Senior Vice President, Chief Communications
Officer
Miles R. Gilburne 48 Senior Vice President, Corporate Development
J. Michael Kelly 43 Senior Vice President, Chief Financial Officer
and Assistant Secretary
James F. MacGuidwin 43 Vice President, Controller and Chief
Accounting & Budget Officer
Kenneth J. Novack 58 Vice Chairman
William J. Raduchel 53 Senior Vice President and Chief Technology
Officer
George Vradenburg, III 56 Senior Vice President, Global and Strategic
Policy
<PAGE>
Ms. Bushkin was appointed as Senior Vice President, Chief Communications
Officer of the Company in October 1997. She was Senior Managing Director of Hill
and Knowlton, a public relations firm, from 1996 to 1997 and headed Hill and
Knowlton's U.S. Media Relations practice. For 12 years prior to that, she was
Director of Editorial Administration at U.S. News & World Report, where she
oversaw the magazine's news department, new media operations and long-term
projects. Ms. Bushkin also served as Press Secretary to Senator Gary Hart for
his Senate office and his 1984 Presidential campaign.
Mr. Gilburne joined the Company in February 1995 as Senior Vice President,
Corporate Development. Prior to joining the Company, Mr. Gilburne was a founding
attorney of the Silicon Valley office of the law firm of Weil, Gotshal & Manges.
Mr. Gilburne is also a partner in the Cole-Gilburne Fund, a venture capital
fund.
Mr. Kelly joined the Company as Senior Vice President, Chief Financial
Officer and Assistant Secretary of the Company in July 1998. Prior to joining
the Company, he was Executive Vice President-Finance and Planning and Chief
Financial Officer of GTE Corporation, one of the world's largest
telecommunications companies. Mr. Kelly was appointed GTE's Senior Vice
President-Finance in 1994, receiving the responsibility for Corporate Planning
and Development during 1997. From 1991 to 1994, he served as Vice
President-Controller of GTE.
Mr. MacGuidwin was appointed as Vice President, Controller and Chief
Accounting and Budget Officer of the Company in October 1998. He served as
Senior Vice President of Planning & Budgeting from October 1996 until September
1998 and as Vice President, Planning & Budgets from November 1995 until October
1996. Prior to joining the Company in 1996, Mr. MacGuidwin had a six-month
consulting arrangement with Time Warner Telecommunications and, for the 13 years
before that, was with MCI Communications Corporation, lastly as Vice President,
Finance and Customer Service for the MultiNational Accounts Division.
Mr. Novack was appointed as Vice Chairman of the Company in May 1998. He
became Of Counsel to the Boston-based law firm of Mintz, Levin, Cohn, Ferris,
Glovsky and Popeo, PC after his retirement as a member of that firm in August
1998. Mr. Novack joined Mintz Levin in 1966 as an associate and rose to the
position of Managing Partner in 1972. He was President and Chief Executive
Officer of the firm from 1991 to 1994 and served on its executive committee from
1970 until his retirement. He is a member of the Board of Directors of Ekco
Group, Inc., a manufacturer of brand-name houseware products.
Mr. Raduchel was appointed as Senior Vice President and Chief Technology
Officer of the Company in September 1999. He served as Chief Strategy Officer
and a member of the Executive Committee of Sun Microsystems, Inc. from January
1998 to September 1999. He served as Vice President, Corporate Planning and
Development and as Chief Information Officer from July 1991 to January 1998, as
Vice President Human Resources (acting) from July 1991 to June 1992, as Vice
President and Chief Financial Officer from JunJune 1989 to July 1991, as well as
Chief Information Officer (acting) from November 1990 to July 1991 and as Vice
President, Corporate Planning and Development from October 1988 to June 1989. He
is a Director of MIH Limited, a multi-national provider of pay-television
platform services and pay-television technology.
Mr. Vradenburg has held the position of Senior Vice President, Global and
Strategic Policy since December 1998. Mr. Vradenburg served as Senior Vice
President, General Counsel and Secretary from March 1997 to December 1998. He
was a Senior Partner with the law firm of Latham & Watkins and co-chair of its
Entertainment & Media Practice Group from 1995 to 1997. Mr. Vradenburg
previously served as Executive Vice President of Fox, Inc., which owns and
operates a television broadcasting network and produces and distributes
entertainment, news and sports programming, from 1991 to 1995 and Senior Vice
President and General Counsel of CBS, Inc., a television and radio broadcasting
and cable programming company, from 1985 to 1991.
<PAGE>
EXECUTIVE COMPENSATION
Summary Compensation Table
The following Summary Compensation Table sets forth summary information as
to compensation received by the Company's Chief Executive Officer and each of
the four other most highly compensated persons who were serving as executive
officers of the Company as of June 30, 1999 (collectively, the "named executive
officers") for services rendered to the Company in all capacities during the
three fiscal years ended June 30, 1999. All of the information presented in the
following table is on a post-split basis.
<TABLE>
Long-Term
Annual Compensation Compensation Awards
-------------------------- -------------------------
Other Restricted Securities
Name and Principal Fiscal Annual Stock Underlying All Other
Position Year Salary Bonus Compensation Awards Options(#) Compensation(1)
<S> <C> <C> <C> <C> <C> <C> <C>
Stephen M. Case.......... 1999 $575,000 $1,000,000 $0 $0 900,000 $4,932
Chairman of the Board and 1998 $426,667 $750,000 $0 $0 5,200,000 $2,923
Chief Executive Officer 1997 $271,250 $0 $0 $0 800,000 $3,826
Robert W. Pittman........ 1999 $591,667 $1,000,000 $80,000(2) $0 720,000 $955
President and Chief 1998 $541,665 $750,000 $127,698(2) $0 3,600,000 $690
Operating Officer 1997 $335,064 $125,000 $111,092(2) $0 4,000,000 $85
J. Michael Kelly, ....... 1999 $444,886 $500,000 $8,687(3) $5,660,000(4) 0 $544
Senior Vice President,
Chief Financial Officer,
and Assistant Secretary
George Vradenburg, III... 1999 $392,500 $350,000 $231,300(5) $0 280,000 $6,756
Senior Vice President, 1998 $380,000 $490,000 $115,000(5) $0 280,000 $1,845
Global and Strategic 1997 $126,667 $95,000 $326,500(5) $0 1,920,000 $0
Policy
Kenneth J. Novack(6)..... 1999 $350,000 $400,000 $0 $0 1,280,000 $5,666
Vice Chairman 1998 $49,053 $950,000 $34,167 $0 800,000 $20
- ------------------
</TABLE>
(1) All Other Compensation for Mr. Case, Mr. Pittman, Mr. Kelly, Mr. Vradenburg
and Mr. Novack during fiscal 1999 includes the dollar value of premiums
paid by the Company with respect to term life insurance for their benefit
in the amounts of $557, $995, $544, $2,400 and $1,395, respectively. All
Other Compensation for Mr. Case, Mr. Vradenburg and Mr. Novack during
fiscal 1999 also includes $4,375, $4,356 and $4,271, respectively, of
matching contributions made under the Company's 401(k) Plan.
(2) For fiscal 1999, includes a housing allowance of $80,000,for fiscal 1998,
includes a housing allowance of $120,000 and for fiscal 1997, includes
$80,000 for reimbursement of moving expenses.
(3) Includes relocation costs.
(4 Represents the dollar value of the award of 200,000 shares of the Company's
common stock based on the closing sales price of $28.30 as quoted on the
New York Stock Exchange on July 6, 1998 on a post-split basis. The award
vests in equal annual installments over a three-year period commencing with
July 6, 1999, the first anniversary from the date of grant. The aggregate
market value of the 200,000 shares of restricted stock was $22,100,000,
based on the closing sales price of $110.50 as quoted on the New York Stock
Exchange on June 30, 1999. Mr. Kelly is entitled to receive all dividends
paid on such shares.
(5) For fiscal 1999, includes a housing allowance of $231,300, for fiscal 1998,
includes a housing allowance equal to $110,000. For fiscal 1997, represents
$89,900 in relocation costs and $236,600 in housing and travel allowances.
(6) Mr. Novack was appointed as Vice Chairman of the Company in May 1998.Prior
to that time, he was a consultant to the Company and received compensation
as such during fiscal 1998, which is reflected herein.
<PAGE>
Option Grants in Last Fiscal Year
The following table provides information regarding the grant of stock
options during fiscal year 1999 to the named executive officers.
<TABLE>
Potential Realizable Value
at Assumed Annual Rate of
Stock Price Appreciation
Individual Grants for Option Term(4)
Fair
Number of % of Total Options Market
Shares Covered Granted to Exercise Value on
by Option Employees in Price Date of Expiration
Name Grant(1) Fiscal Year ($/share) Grant Date 5% 10%
- ------------------------- -------------- ------------------- --------- -------- ---------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Stephen M. Case...............900,000(2) 1.7% $22.50 $21.328 2008 $11,016,958 $29,537,405
Robert W. Pittman.............720,000(2) 1.3% $22.50 $21.328 2008 $8,813,567 $23,629,924
J. Michael Kelly.............. 0 N/A N/A N/A N/A 0 0
George Vradenburg, III........280,000(2) 0.5% $22.50 $21.328 2008 $3,427,498 $9,189,415
Kenneth J. Novack.............280,000(2) 0.5% $22.50 $21.328 2008 $3,427,498 $9,189,415
500,000(2) 0.9% $25.75 $25.750 2008 $8,097,018 $20,519,434
500,000(3) 0.9% $25.75 $25.750 2008 $8,097,018 $20,519,434
- ------------------
</TABLE>
(1) Options are non-qualified stock options and generally terminate 90 days
following termination of the executive officer's employment with the
Company or the expiration date, whichever occurs earlier. The exercise
price of each option was determined to be equal to or greater than the fair
market value per share of the Common Stock on the grant date.
(2) These options become exercisable over a four-year period, 25% on each
anniversary of the grant date of the option.
(3) These options become exercisable in three equal annual installments
commencing on the fourth anniversary of the date of grant of the option and
continuing each anniversary thereafter such that the third and final
installment vests on the sixth anniversary of the date of grant.
(4) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. These gains
are based on assumed rates of stock price appreciation of 5% and 10%
compounded annually from the date the respective options were granted to
their expiration date. The gains shown are net of the option exercise
price, but do not include deductions for taxes or other expenses associated
with the exercise of the option or the sale of the underlying shares. The
actual gains, if any, on the exercise of stock options will depend on the
future performance of the Common Stock, the option holder's continued
employment throughout the option period, and the date on which the options
are exercised.
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Values
The following table provides information regarding the aggregate exercises
of options by each of the named executive officers. In addition, this table
includes the number of shares covered by both exercisable and unexercisable
stock options as of June 30, 1999, and the values of "in-the-money" options,
which values represent the positive spread between the exercise price of any
such option and the fiscal year-end value of the Company's Common Stock.
<TABLE>
Number of Securities Value of the Unexercised
Shares Underlying Unexercised In-The-Money Options
Acquired Value Options at Fiscal Year-End at Fiscal Year-End(2)
Name on Exercise Realized(1) Exercisable Unexercisable Exercisable Unexercisable
<S> <C> <C> <C> <C> <C> <C>
Stephen M. Case..............2,035,000 $115,509,748 6,017,000 6,200,000 $657,483,084 $606,284,000
Robert W. Pittman..............504,000 $21,745,809 1,656,000 6,120,000 $174,410,400 $611,804,000
J. Michael Kelly............... 0 $0 225,000 1,575,000 $19,870,875 $139,096,125
George Vradenburg..............120,000 $7,524,296 734,000 1,258,000 $78,232,960 $128,295,120
Kenneth J. Novack...............64,000 $1,493,135 228,000 2,364,000 $23,847,060 $215,798,190
- ------------------
</TABLE>
(1) The value realized represents the aggregate market value of the shares
covered by the option on the date of exercise less the aggregate exercise
price paid by the executive officer.
(2) The value of unexercised in-the-money options at fiscal year-end assumes a
fair market value for the Company's Common Stock of $110.50, the closing
market price per share of the Company's Common Stock as reported on the New
York Stock Exchange on June 30, 1999.
<PAGE>
Employment Contracts
In October 1996, the Company entered into an employment agreement with
Robert W. Pittman, the President and Chief Operating Officer of the Company. In
the event Mr. Pittman's employment is terminated by him for a good reason or by
the Company other than for cause or a permanent and total disability, he will
become a consultant of the Company for a term of two years, subject to the terms
and conditions of a consulting agreement. In the Company's discretion, Mr.
Pittman will become a consultant of the Company for two years if the Company
terminates his employment for cause or if he terminates his employment for other
than a good reason. Mr. Pittman is subject to the terms of a
confidentiality/non-competition/proprietary rights agreement that remains in
effect for the term of the consulting agreement. The Company has agreed to
reimburse Mr. Pittman for flight hours and use of a co-pilot if he determines
the use of his private aircraft is the easiest and safest method for travel on
Company business. However, the Company has no other obligation with respect to
such flights, the aircraft or use thereof.
In November 1997, the Company entered into a letter agreement with George
Vradenburg, III, who is Senior Vice President, Global and Strategic Policy of
the Company. Pursuant to the terms of the agreement, if Mr. Vradenburg
terminates his employment for a good reason or if the Company terminates his
employment without cause, Mr. Vradenburg will become a consultant of the Company
for two years. In the Company's discretion, Mr. Vradenburg will become a
consultant of the Company for two years if the Company terminates his employment
for cause or if he terminates his employment for other than a good reason. Mr.
Vradenburg is subject to the terms of a
confidentiality/non-competition/proprietary rights agreement that remains in
effect for the term of the consulting agreement. Mr. Vradenburg's employment
agreement provides for the Company to make him certain loans and to advance
certain expenses, as described below under "Certain Relationships and Related
Transactions."
In June 1998, the Company entered into a letter agreement with J. Michael
Kelly, who is Senior Vice President, Chief Financial Officer and Assistant
Secretary of the Company. Pursuant to the terms of the agreement, if Mr. Kelly
terminates his employment for a good reason or if the Company terminates his
employment without cause, Mr. Kelly will receive his base compensation accrued
through the termination date, continuation of his base compensation for a period
of twelve months, payment of his Management Incentive Plan ("MIP") bonus in full
if his termination occurs after the end of the fiscal year, a pro-rated payout
of his MIP for the fiscal year following his termination for the period he
continues to receive his base compensation and full vesting on his restricted
stock award. Mr. Kelly is subject to the terms of a
confidentiality/non-competition/proprietary rights agreement.
The Company's 1992 Employee, Director and Consultant Stock Option Plan
provides that upon the occurrence of a "Corporate Change in Control" or a
"Transactional Change in Control" (as defined in the 1992 Plan), which include
(i) the acquisition (with certain exceptions) of 30% of the outstanding Common
Stock of the Company by a person, entity or group, (ii) certain changes in the
composition of the Board of Directors, (iii) certain mergers, reorganizations,
recapitalizations or consolidations involving the Company and (iv) the sale of
all or substantially all of the assets of the Company, the outstanding options
that have not yet vested will become fully vested upon the earliest of (a) the
normal vesting date, (b) one year from the applicable "Corporate Change in
Control" or "Transactional Change in Control" or (c) an involuntary employment
action, such as termination of employment without cause or a reduction in base
compensation, power, authority, duties or responsibilities.
Compensation Committee Interlocks and Insider Participation
On January 31, 1998, the Company completed the acquisition of the worldwide
online services businesses of CompuServe Corporation, and entered into a joint
venture agreement to operate the CompuServe European online business in
partnership with Bertelsmann AG (the "CompuServe Joint Venture"). Bertelsmann AG
paid $75 million to the Company for its 50% interest in the CompuServe Joint
Venture. The Company and Bertelsmann AG each invested an additional $25 million
in cash in the CompuServe Joint Venture. Dr. Middelhoff is a Director and a
former member of the Compensation and Management Development Committee of the
Board of Directors of the Company, a member of Bertelsmann's Executive Board,
and Chairman of Bertelsmann. Also, Dr. Middelhoff is an emeritus member of the
Steering Committee, which coordinates the Company's and Bertelsmann's activities
under their joint venture agreement dated April 13, 1995 to establish online
services in greater Europe.
<PAGE>
Performance Graph
The following graph compares the annual change in the Company's cumulative
total Stockholder return on its Common Stock during a period commencing on June
30, 1994 and ending on June 30, 1999 (as measured by dividing (i) the sum of (A)
the cumulative amount of dividends for the measurement period, assuming dividend
reinvestment and (B) the difference between the Company's share price at the end
and the beginning of the measurement period; by (ii) the share price at the
beginning of the measurement period) with the cumulative total return of each
of: (a) the Total Return Index for the New York Stock Exchange (the "NYSE Market
Index"); and (b) the Total Return Index for the NYSE, the American Stock
Exchange and the Nasdaq National Market Computer and Data Processing Services
Stocks (U.S. and foreign Companies) (the "C&DP Index") during such period,
assuming a $100 investment on June 30, 1994. It should be noted that the Company
has not paid any dividends on the Common Stock, and no dividends are included in
the representation of the Company's performance. The stock price performance on
the graph below is not necessarily indicative of future price performance.
Comparison of Cumulative Total Return Among
America Online, Inc., NYSE Market Index, and
NYSE/AMEX/Nasdaq C&DP Stocks
Measurement Period America NYSE NYSE/AMEX
(Fiscal Year Covered) Online, Inc. Market Nasdaq C&DP
Stock
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
Measurement Pt - 6/30/94 $ 100 $100 $100
FYE 6/30/95 $ 308.8 $122.9 $154.6
FYE 6/30/96 $ 614.0 $154.8 $202.9
FYE 6/30/97 $ 780.7 $202.8 $257.9
FYE 6/30/98 $ 2,984.6 $260.0 $386.9
FYE 6/30/99 $12,492.1 $298.1 $564.8
REPORT ON EXECUTIVE COMPENSATION BY THE
COMPENSATION AND MANAGEMENT DEVELOPMENT COMMITTEE
OF THE BOARD OF DIRECTORS
The Compensation and Management Development Committee ("the "Committee")
comprises three non-employee, independent members of the Board of Directors. It
is the responsibility of the Committee to review, recommend and approve changes
to the Company's compensation policies and benefits programs, to administer the
Company's stock plans, including approving stock option grants to executive
officers and certain other stock option grants, and to otherwise ensure that the
Company's compensation philosophy is consistent with the Company's best
interests and is properly implemented.
Compensation Philosophy
The compensation philosophy of the Company is to (i) provide a competitive
total compensation package that enables the Company to attract and retain key
executive and employee talent needed to accomplish the Company's goals and (ii)
directly link compensation to improvements in Company financial and operational
performance and increases in Stockholder value as measured by the Company's
stock price.
Compensation Program
The Company's compensation program for all employees emphasizes variable
compensation, primarily through performance-based grants of long-term,
equity-based incentives in the form of stock options. Salaries at all employee
levels are generally targeted at median market levels. The Company also
maintains a cash-based Management Incentive Plan with awards targeted to provide
fully competitive levels of total cash compensation based on the degree of
achievement of Company financial and operational performance measures.
The Committee conducts ongoing reviews of total compensation levels,
structure, and design with the assistance of an outside consultant. The
objective of the reviews is to ensure that management and key employee total
compensation opportunity links total compensation to the Company's performance
and stock price appreciation and keeps pace with the Company's competitive
trends. The Company's size, success, and high profile have made its employees
and executives targets for competitors seeking talented employees. Consequently,
the Company has actively managed compensation levels to ensure that they are
fully competitive and capable of retaining top performers over the long term. As
a result of the competitive reviews and compensation actions, the Committee
believes that the base salary, total cash compensation, and stock appreciation
opportunities for senior management, as well as those of the broad employee
population, are consistent with competitive market levels.
<PAGE>
Base Salaries
The Committee reviews each senior executive officer's salary annually. In
determining appropriate salary levels, the Committee considers the officer's
impact level, scope of responsibility, prior experience, past accomplishments,
and data on prevailing compensation levels in relevant executive labor markets.
Based on the findings of the most recent compensation review, the Committee has
approved base salary increases for certain executive officers to be effective in
fiscal 2000 which, in conjunction with cash incentive awards targeted under the
Management Incentive Plan for fiscal 2000, will maintain total cash compensation
levels in line with competitive levels and with the Company's compensation
philosophy.
The Committee annually reviews and approves the compensation of Mr. Case,
the Company's Chairman and Chief Executive Officer. Mr. Case's compensation is
determined in a manner consistent with the practices used in determining the
compensation of other executive officers of the Company. As part of the base
salary increases approved by the Committee, Mr. Case's base salary will be
increased to an annual rate of $750,000 in fiscal 2000. Mr. Case's base salary
increase for fiscal 2000, along with the incentive award targeted under the
Management Incentive Plan, provides Mr. Case with a total cash compensation
opportunity generally in line, although still conservative, with competitive
compensation levels in relevant executive labor markets.
Management Incentive Plan
Over the past several years, the Company has firmly established itself as a
global leader in interactive services, including online services. In line with
its growth and development, the Company has adopted and refined compensation
practices which reflect what the Company believes to be "best practices" for
established, growing companies with similar revenue rates and market
capitalization. Although equity compensation is and will remain a key element of
the Company's management compensation strategy, the Company also maintains a
cash-based Management Incentive Plan with awards based upon Company financial
and key operational performance measures.
The Committee administers the Management Incentive Plan. Awards under the
plan are determined by the Company's performance as measured against certain
pre-established performance measures. At the beginning of fiscal 1999, the
Committee established performance goals related to the Company's earnings
performance. During the fiscal year, the Company exceeded substantially its
earnings objective and accomplished significant initiatives, including the
acquisitions of Netscape Communications Corporation, MovieFone, Inc.,
PersonaLogic, Inc., When Inc., Spinner Networks Incorporated, Nullsoft, Inc. and
Digital Marketing Services, Inc. Consequently, the Committee approved funding
under the plan at 150% of the target awards for senior executive officers,
including Mr. Case, for fiscal year 1999. This was the maximum funding level
permissible under the plan.
Stock Options
The Committee believes that granting stock options on an ongoing basis
provides officers with a strong economic interest in maximizing stock price
appreciation over the longer term. The Company believes that the practice of
granting stock options is critical to retaining and recruiting the key talent
necessary at all employee levels to ensure the Company's continued success.
The Committee is responsible for administering the Company's stock
programs, including individual stock option grants to officers and aggregate
grants to all plan participants. It is the Company's practice to set option
exercise prices at not less than 100% of the stock fair market value on the date
of grant. Thus, the value of the Stockholders' investment in the Company must
appreciate before an optionee receives any financial benefit from the option.
Options are generally granted for a term of ten years.
In determining the size of stock option grants, the Committee considers the
officer's responsibilities, the expected future contribution of the officer to
the Company's performance and the number of shares, which continue to be subject
to vesting under outstanding options. In addition, the Committee examines the
level of equity incentives held by each officer relative to the other officers'
equity positions, their tenure, responsibilities, experience, and value to the
Company. In August 1998, the Company granted options to nearly all employees
based on their performance during the preceding year. The Company's named
executive officers (5 people) received options to purchase an aggregate of
2,180,000 shares, or 8.4% of the 26,016,840 total options granted to employees
as part of this annual review process. Options granted generally provide that
they are not exercisable until one year after the date of grant, at which time
they become exercisable on a cumulative basis at a maximum annual rate of 25% of
the total number of shares underlying the option grant. In the aggregate, the
named executive officers received options to purchase a total of 3,180,000
shares, or 7.0% of the total options granted to employees for fiscal 1999. Mr.
Case received an option to purchase 900,000 shares as part of the August 1998
performance grants.
<PAGE>
The Committee monitors the Company's equity-based compensation program on
an ongoing basis to ensure that Stockholders' resources are used effectively and
in the best interests of the Company. During the past several fiscal years, in
consultation with independent outside consultants, the Committee has monitored
the program to ensure that dilution from stock option plans is managed within
levels consistent with the Company's staffing levels, market value and
prevailing levels of option dilution for high growth companies. Over the past
several years, the Company has steadily reduced the level of outstanding options
as a percentage of Common Stock outstanding.
The Committee will continue to monitor the Company's compensation program
in order to maintain the proper balance between cash compensation and
equity-based incentives and may consider further revisions in the future,
although it is expected that equity-based compensation will remain one of the
principal components of compensation.
The Committee believes that the Company's stock option plans have been very
effective in attracting, retaining, and motivating executives and employees of
the Company over time and have proven to be an important component of the
overall compensation program. Because of the Company's continuing rapid growth
and the acquisition of Netscape Communications Corporation in March 1999, the
Committee recommended and the Board of Directors approved in February 1999 and
July 1999 amendments to increase by 8,000,000 shares and 25,000,000 shares,
respectively, the number of shares of Common Stock that may be issued pursuant
to the exercise of options granted under the 1992 Employee, Director, and
Consultant Stock Option Plan (the "1992 Plan").
Policy on Deductibility of Compensation
Section 162(m) of the U.S. Internal Revenue Code limits the tax
deductibility by a company of compensation in excess of $1 million paid to any
of its five most highly compensated executive officers. However, compensation
which qualifies as "performance-based" is excluded from the $1 million limit if,
among other requirements, the compensation is payable only upon attainment of
pre-established, objective performance goals under a plan approved by
Stockholders. Accordingly, the Committee has recommended that an Executive
Incentive Plan, which would replace the Management Incentive Plan discussed in
this report, be submitted to the Company's Stockholders so that payments made
under the plan in the future will be qualified as "performance-based" under
Section 162(m) and all amounts will be deductible by the Company. The 1992 Plan
approved by the Company's Stockholders with subsequent amendments provides for
option grants to be qualified as "performance-based" under Section 162(m). The
Committee has also approved the adoption of the 1999 Stock Plan and has
recommended that such plan be submitted to the Company's Stockholders so that
the options granted under the plan will be qualified as "performance-based"
under Section 162(m) and the income recognized by participants upon exercise
will be deductible by the Company.
Alexander M. Haig, Jr.
Chairman, Compensation and
Management Development Committee
Daniel F. Akerson
Colin L. Powell
<PAGE>
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's Directors and officers, and persons who
own more than ten percent of a registered class of the Company's equity
securities, to file with the Securities and Exchange Commission (the "SEC")
initial reports of ownership and reports of changes in ownership of Common Stock
and other equity securities of the Company. Directors, officers and greater than
ten percent holders are required by SEC regulation to furnish the Company with
copies of all Section 16(a) reports they file.
To the Company's knowledge, except as noted below, based solely on review
of the copies of the above-mentioned reports furnished to the Company and
written representations regarding all reportable transactions, during the fiscal
year ended June 30, 1999, all Section 16(a) filing requirements applicable to
its Directors and officers and greater than ten percent beneficial owners were
complied with on time. Lennert J. Leader filed late two reports reflecting four
gifts of stock.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Set forth below is certain information as of June 30, 1999 as to loans made
pursuant to employment agreements by the Company to its Directors and executive
officers that were outstanding during the fiscal year.
<TABLE>
Largest
Aggregate
Amount
Outstanding
in Fiscal Balance as
Name and Position Nature of Indebtedness Year 99 of 6/30/99 Interest Rate
- -------------------------- ---------------------- ----------- ---------- -----------------
<S> <C> <C> <C>
George Vradenburg, III.... Residential(1) $400,000 $400,000 *
Senior Vice President, Personal(1) $285,000 $285,000 *
Global and Strategic
Policy
</TABLE>
- ------------------
* Such loans were granted at interest rates equal to the "Applicable Federal
Rate" as established by the Internal Revenue Service. The Applicable
Federal Rate at June 30, 1999 was 4.98%.
(1) The residential and personal loans are repayable by Mr. Vradenburg upon the
earliest of (i) termination of Mr. Vradenburg's employment by the Company
for cause, (ii) termination by Mr. Vradenburg other than for a good reason,
or (iii) March 2000.
During the fiscal year ended June 30, 1999, the Company paid attorneys fees
totaling approximately $560,000 on behalf of the Chief Executive Officer and the
former Chief Financial Officer of the Company who were named as defendants in
the Orman v. America Online, Inc. class action lawsuit, which alleged violations
of federal securities laws, a related derivative action against Directors of the
Company and related matters. Substantially all of the attorneys' fees were
covered by insurance.
<PAGE>
ELECTION OF DIRECTORS
(Item 1)
The Company's Restated Certificate of Incorporation, as amended, and
Restated By-Laws provide for a classified Board of Directors. The Board of
Directors currently consists of ten members, classified into three classes as
follows: Stephen M. Case, William N. Melton and Thomas Middelhoff constitute a
class with a term which expires at the upcoming Annual Meeting (the "Class III
Directors"); General Alexander M. Haig, Jr., Daniel F. Akerson and Franklin D.
Raines constitute a class with a term ending in 2000 (the "Class I Directors");
and James L. Barksdale, Frank J. Caufield, Robert W. Pittman and General Colin
L. Powell constitute a class with a term ending in 2001 (the "Class II
Directors"). The Class III Directors to be elected at the Meeting will serve a
three-year term expiring in 2002.
Background information appears below for each of the nominees for election
as Directors. Although the Company does not anticipate that any of the persons
named below will be unwilling or unable to stand for election, in the event of
such an occurrence, proxies may be voted for a substitute designated by the
Board of Directors.
Name Age Business Experience
Stephen M. Case 41 Mr. Case, a co-founder of the Company, has been
Chairman of the Board of Directors since October
1995, Chief Executive Officer of the Company
since April 1993 and a Director since September
1992. He also served as Executive Vice President
from September 1987 to January 1991 and Vice
President, Marketing, from 1985 to September
1987. Mr. Case currently serves as a Director of
the New York Stock Exchange, Inc.
William N. Melton 57 Mr. Melton has been a Director of the Company
since September 1992. In January 1999, he
was appointed Chairman of the Board and Chief
Executive Officer of CyberCash, Inc., a leading
developer of software and service solutions for
payments over the Internet. From 1994 to 1998, he
held the positions of President and Chief
Executive Officer of CyberCash. From 1981 to 1992,
he held positions at Verifone, Inc., including
President and Chief Executive Officer from 1981 to
1986 and Chairman of the Board from 1981 to 1992.
Mr. Melton served as a Director of Verifone from
1992 to July 1996. Mr. Melton is a Director of
Transaction Network Services, Inc.
Thomas Middelhoff 46 Dr. Middelhoff has been a Director of the Company
since May 1995. He has been, since October 1998,
Chairman of Bertelsmann AG, one of the world's
largest media companies, and has been a member of
the Executive Board of Bertelsmann AG since July
1994. For the year prior to October 1998, he
served as Chairman Designate of Bertelsmann
Industries, Gutersloh. From July 1990 through July
1994, he served as Chairman of the Management
Board of Mohndruck Graphische Betriebe GmbH and
as Chief Executive Officer and as a member of
the Board of Directors of Bertelsmann Industries,
Gutersloh. Prior to that, he served as Managing
Director of Mohndruck Graphische Betriebe GmbH.
Dr. Middelhoff was nominated as a Director of the
Company pursuant to the terms of a Common Stock
Purchase Agreement with Bertelsmann AG. Dr.
Middelhoff is a Director of barnesandnoble.com
inc.
__________________ __ __________________________________________________
A plurality of the votes cast at the Meeting is required to elect each
nominee as a Director. Unless authority to vote for any of the nominees named
above is withheld, the shares represented by the enclosed proxy will be voted
FOR the election as Directors of such nominees.
THE BOARD OF DIRECTORS RECOMMENDS THE ELECTION OF STEPHEN M. CASE, WILLIAM
N. MELTON, THOMAS MIDDELHOFF AND _______________ AS DIRECTORS, AND PROXIES
SOLICITED BY THE BOARD WILL BE VOTED IN FAVOR THEREOF UNLESS A STOCKHOLDER HAS
INDICATED OTHERWISE ON THE PROXY.
<PAGE>
AMENDMENT OF THE COMPANY'S RESTATED CERTIFICATE OF INCORPORATION,
AS AMENDED, TO INCREASE THE AUTHORIZED NUMBER OF SHARES OF COMMON STOCK
(Item 2)
The Company's Restated Certificate of Incorporation, as amended (the
"Certificate of Incorporation"), authorizes the issuance of 1,800,000,000 shares
of Common Stock, $.01 par value, and 5,000,000 shares of Preferred Stock, $.01
par value. As of July 28, 1999, the Board of Directors of the Company approved
an amendment to the Certificate of Incorporation to increase the authorized
number of shares of Common Stock from 1,800,000,000 to 6,000,000,000 and to
submit the proposed amendment to the Stockholders at this Meeting.
Purpose and Effect of the Amendment
The general purpose and effect of the proposed amendment to the Company's
Certificate of Incorporation will be to authorize 4,200,000,000 additional
shares of Common Stock. The Board of Directors believes that it is prudent to
have the additional shares of Common Stock available for general corporate
purposes, including payment of stock dividends, stock splits or other
recapitalizations, acquisitions, equity financings, and grants of stock options.
Although the Board of Directors has not decided to effect a stock split,
the Board wants to maintain the ability to effect a stock split. The Company has
a history of regular stock splits, having declared six such splits since October
1994, each of which was effected by making a dividend of one additional share
for each share presently owned. In considering stock splits, the Board's
philosophy continues to be guided by a conviction not only that the Company's
ownership, and the liquidity afforded its Stockholders, expands in relation to
the number of shares outstanding, but also that the Company's shares become more
attractive to individual investors when it is possible to acquire a larger
number of them for the same total dollar amount. The Board of Directors
considers a number of factors, including general market conditions, in deciding
whether or when to effect a stock split, and any of these factors could cause
the Board to decide against effecting a stock split at any particular time. The
Company has determined that securing Stockholder approval of 4,200,000,000
additional authorized shares of Common Stock would be appropriate in order to
provide the Company with the flexibility to consider a combination of possible
actions, including acquisitions or stock splits, that might require the issuance
of additional shares of Common Stock.
The Company currently has 1,800,000,000 authorized shares of Common Stock.
As of August 31, 1999, the Company had approximately 1,112,000,000 shares issued
and outstanding and of the remaining 688,000,000 authorized but unissued shares,
the Company has reserved approximately 20,000,000 shares in connection with the
possible conversion of outstanding convertible subordinated debt, 225,000,000
shares pursuant to the Company's option plans and 10,000,000 shares pursuant to
the Company's Employee Stock Purchase Plan.
Except in connection with the reserved shares described above, the Company
currently has no arrangements or understandings for the issuance of additional
shares of Common Stock, although opportunities for acquisitions and equity
financings could arise at any time and the Company has a shelf registration
statement available for the issuance of up to approximately $5 billion of debt
or equity financings. If the Board of Directors deems it to be in the best
interests of the Company and the Stockholders to issue additional shares of
Common Stock in the future, the Board of Directors generally will not seek
further authorization by vote of the Stockholders, unless such authorization is
otherwise required by law or regulations.
The increase in the authorized number of shares of Common Stock could have
an anti-takeover effect. If the Company's Board of Directors desired to issue
additional shares in the future, such issuance could dilute the voting power of
a person seeking control of the Company, thereby deterring or rendering more
difficult a merger, tender offer, proxy contest or an extraordinary corporate
transaction opposed by the Company.
Vote
The affirmative vote of a majority of the outstanding shares of Common
Stock entitled to vote at the Meeting will be required to approve the amendment
to the Company's Certificate of Incorporation increasing the number of
authorized shares of Common Stock from 1,800,000,000 to 6,000,000,000.
THE BOARD OF DIRECTORS RECOMMENDS THE APPROVAL OF THE AMENDMENT TO THE
COMPANY'S CERTIFICATE OF INCORPORATION TO INCREASE THE AUTHORIZED SHARES OF
COMMON STOCK FROM 1,800,000,000 to 6,000,000,000, AND PROXIES SOLICITED BY THE
BOARD WILL BE VOTED IN FAVOR THEREOF UNLESS A STOCKHOLDER HAS INDICATED
OTHERWISE ON THE PROXY.
<PAGE>
APPROVAL OF THE COMPANY'S 1999 STOCK PLAN
(Item 3)
General
The Company's Stockholders are being asked to approve the adoption of the
Company's 1999 Stock Plan (the "1999 Plan"). The 1999 Plan will supplement the
Company's existing 1992 Employee, Director and Consultant Stock Option Plan (the
"1992 Plan") under which option grants have been made to substantially all
full-time employees as well as non-employee Directors and select other persons
who have served as consultants to the Company. All of the Company's employees
(approximately 12,100 as of June 30, 1999), select consultants (estimated to be
less than ten individuals currently) and all directors are eligible to
participate in the 1999 Plan. The 1999 Plan will become effective immediately
upon such Stockholder approval. It is anticipated that, if approved by the
Stockholders, the 1999 Plan will be used in lieu of the 1992 Plan going forward,
except for employees in locations in which using the 1999 Plan would require
substantial effort to implement due to local law requirements. For those
employees, options would continue to be granted under the 1992 Plan. The 1999
Plan is substantially the same as the 1992 Plan, as amended to the current time,
except that the 1999 Plan provides for the issuance of rights to purchase
restricted stock ("stock purchase rights") as well as options.
The 1999 Plan will be funded initially with 50,000,000 shares of Common
Stock reserved for issuance under the plan, no more than 5% of which can be used
in connection with grants of stock purchase rights. As of July 30, 1999, the
closing price of the Company's common stock as quoted by the NYSE was $95.125.
The Company has experienced the need, on occasion, to make grants of restricted
stock, through rights to purchase stock at a nominal cost, in connection with
the hiring of officers and anticipates encountering such need in the future.
Including stock purchase rights in the 1999 Plan will enable the Company to use
awards of stock in those instances the Company determines it appropriate and
necessary in connection with the hiring or retention of selected employees. As
noted, under the terms of the 1999 Plan, no more than 5% of the shares available
for issuance can be used in connection with the grant of stock purchase rights.
The Company's rapid internal growth and growth through acquisitions during
recent years have generated substantial need for meaningful option grants to
attract and retain talented employees critical to the Company's ongoing growth
and success. The ongoing growth of the interactive online services and
enterprise software markets has created a hypercompetitive market for talented
individuals, especially in the programming, technical, new media, and sales
areas. In order to continue to attract and retain key talent, the Company must
offer market competitive long-term compensation opportunities. Stock options,
because of their upside potential and vesting requirements, are a key component
in recruiting and retaining these employees.
The Company's Board of Directors believes that the stock option plans have
been very effective for these purposes over time and have proven to be an
important component of the Company's overall compensation strategy for all
employees. The Company is committed to broad-based participation in the stock
option program by employees at all levels. Under the stock options program, all
full-time employees are eligible for and most receive option grants at hire and
annually thereafter, in accordance with a performance assessment process. During
fiscal year 1999, non-officer employees received 89.7% of the stock options
granted. The Company believes that the stock option program, with its emphasis
on highly competitive performance-based grants to nearly all employees, is
important in order to maintain the Company's culture, employee motivation, and
continued success.
The Compensation and Management Development Committee of the Board of
Directors (the "Committee") monitors the Company's stock programs on an ongoing
basis to ensure that stock options and other stock awards are used effectively
and in the best interests of the Company and its Stockholders. During the past
three fiscal years, in consultation with independent outside consultants, the
Committee has revised and monitored the program to ensure that dilution from
stock option plans is managed within levels consistent with the Company's
staffing levels and market value and taking into account market and industry
analysis. As a result of these efforts, as well as normal exercise of
outstanding options by optionees, the Company has reduced the percentage of
outstanding options compared to common shares outstanding from 31.8% as of June
30, 1996 down to 18.2% as of June 30, 1999. By carefully managing Stockholder
resources, the Company seeks to continue providing stock-price growth to
Stockholders and meaningful performance-based compensation opportunities for its
broad-based employee population.
The Company is seeking Stockholder approval of the 1999 Plan in order for
option grants under the 1999 Plan to qualify as "performance-based" compensation
under Section 162(m) of the Internal Revenue Code. The 1999 Plan will be funded
initially with 50,000,000 shares reserved for issuance under the plan. As of
August 31, 1999, there were 10,676,050 options available for grant under the
1992 Plan. Options for 195,081,455 shares of Common Stock were outstanding under
the 1992 Plan as of August 31, 1999.
<PAGE>
The following is a summary of the principal features of the 1999 Plan.
Material Features of the 1999 Plan
The purpose of the 1999 Plan is to attract, retain and motivate employees,
directors, officers and consultants through the issuance of options or rights to
purchase Common Stock of the Company and to encourage ownership of Common Stock
by most employees, directors and certain consultants of the Company. The 1999
Plan will be administered by the Compensation and Management Development
Committee of the Board of Directors (the "Committee"). Subject to the provisions
of the 1999 Plan, the Committee determines the persons to whom options or stock
purchase rights will be granted, the number of shares to be covered by each
option or stock purchase right and the terms and conditions upon which an option
or stock purchase right may be granted. All employees, directors and consultants
of the Company and its affiliates (as defined in the 1999 Plan, "Affiliates")
are eligible to participate in the 1999 Plan, although the Company has
discretion in identifying those people who actually receive grants.
Options granted under the 1999 Plan may be either (i) options intended to
qualify as "incentive stock options" under Section 422 of the Internal Revenue
Code of 1986, as amended (the "Code"), or (ii) non-qualified stock options.
Other than certain minimum requirements described below, the Committee has the
discretion to fix the terms of options granted under the 1999 Plan. Incentive
stock options may be granted under the 1999 Plan to employees of the Company and
its Affiliates. Non-qualified stock options may be granted, in the Company's
discretion, to consultants, directors and employees of the Company and its
Affiliates.
Non-employee directors of the Company receive non-qualified stock options
as the sole form of compensation for their services (not including reimbursement
of expenses). The 1999 Plan provides for an initial grant to each non-employee
director, upon first being elected or appointed to the Board of Directors, of
options to purchase 20,000 shares of Common Stock (or such higher number of
options as determined by the Committee for recruitment purposes). The 1999 Plan
also provides for an annual grant on the date following the annual meeting of
Stockholders of the Company of each year, after giving effect to the election of
any director or directors at such annual meeting of Stockholders, to each
non-employee director (who has served for at least six months as a director) of
an option to purchase 20,000 shares of Common Stock. Non-employee directors who
serve on the Company's Compensation and Management Development or Audit
Committees (or other committees designated by the Board) are granted an annual
option to purchase 10,000 shares, and the Chairman of such committees receives
an additional annual option for 10,000 shares. Options granted for service on
committees of the Board are not cumulative for service on more than one
committee. All options granted to non-employee directors will (i) have an
exercise price equal to the fair market value of the Common Stock on the grant
date, (ii) have a term of ten years, and (iii) be immediately exercisable
(subject to the rules under Section 16 of the Exchange Act).
Incentive and non-qualified stock options granted under the 1999 Plan may
not be granted with an exercise price less than the fair market value of the
Common Stock on the date of grant (or 110% of fair market value in the case of
incentive stock options granted to participants holding 10% or more of the
voting stock of the Company). Stock options granted under the 1999 Plan expire
not more than ten years from the date of grant, or not more than five years from
the date of grant in the case of incentive stock options granted to an employee
holding more than 10% of the voting stock of the Company. The aggregate fair
market value (determined at the time of grant) of shares issuable pursuant to
incentive stock options which become exercisable in any calendar year under any
incentive stock option plan of the Company by an employee may not exceed
$100,000. An option granted under the 1999 Plan is not transferable by an
optionholder except by (i) will or by the laws of descent and distribution or
(ii) as determined by the Committee and set forth in the Option Agreement. An
option is exercisable only by the optionholder or one who receives the option
pursuant to a permitted transfer.
An incentive stock option granted under the 1999 Plan may be exercised
after the termination of the optionholder's employment with the Company (other
than by reason of death, disability or termination for cause as defined in the
1999 Plan) to the extent exercisable on the date of such termination, for up to
three months following such termination, provided that such incentive stock
option has not expired on the date of such exercise. In granting any
non-qualified stock option, the Committee may specify that such non-qualified
stock option shall be subject to such termination or cancellation provisions as
the Committee may specify. In the event of death or permanent and total
disability while an optionholder is employed by the Company or within three
months of termination of employment, incentive stock options and non-qualified
stock options may be exercised, to the extent exercisable on the date of
termination of employment (as calculated under the 1999 Plan), by the
optionholder or the optionholder's survivors at any time prior to the earlier of
the option's specified expiration date or one year from the date of the
optionholder's termination of employment (all as more specifically provided in
the 1999 Plan).
<PAGE>
Stock purchase rights may be granted only in connection with the hiring or
retention of a key employee. Stock purchase rights entitle the participant to
purchase shares of common stock at a specified price, which may be nominal but
not less than the par value of the common stock, within six months of the date
of grant. The shares acquired upon purchase are restricted from transfers and
are subject to a repurchase right held by the Company. The repurchase right
lapses with respect to specified numbers or percentages of the shares over a
period of time specified in the restricted stock purchase agreement that applies
to the stock purchase right. The repurchase right entitles the Company to
repurchase the shares at the same price paid for the shares by the participant
in the event the individual's employment with the Company terminates before the
lapsing of the repurchase right occurs, subject to the terms of the restricted
stock purchase agreement, which may provide for accelerated lapsing of the
repurchase right in the case of terminations of employment due to death,
disability or for terminations by the Company other than for cause. Stock
purchase rights and shares subject to the repurchase right are not transferable
by the participant except (i) by will or by the laws of descent and distribution
or (ii) as determined by the Committee and set forth in the restricted stock
purchase agreement. Stock purchase rights are exercisable only by the holder or
one who receives the stock purchase rights pursuant to a permitted transfer.
If the shares of Common Stock are subdivided or combined into a greater or
smaller number of shares or if the Company issues any shares of Common Stock as
a stock dividend on its outstanding Common Stock, the number of shares of Common
Stock deliverable upon the exercise of an option or stock purchase right granted
under the 1999 Plan (including a non-employee director's option) shall be
appropriately increased or decreased proportionately, and appropriate
adjustments shall be made in the purchase price per share to reflect such
subdivision, combination or stock dividend. Unless otherwise provided in a
specific stock option agreement or restricted stock purchase agreement, in the
event of either (i) the acquisition (with certain exceptions) of 30% or more of
the outstanding Common Stock or voting power by an individual, entity or group
acting together or (ii) a change in a majority of the Directors comprising the
Board at the time the 1999 Board is first approved by the Stockholders (other
than changes resulting from nominations by the then incumbent Directors and the
normal election process), vesting of the options outstanding or lapsing of the
repurchase rights on shares issued with respect to stock purchase rights issued
under the 1999 Plan shall automatically accelerate and such options shall become
fully exercisable and vested and such repurchase right shall fully lapse on the
earliest of (a) the original vesting or lapsing date, (b) the first anniversary
of the date the acquisition or change in composition of the Board is deemed to
have occurred, or (c) the occurrence of an "Involuntary Employment Action," as
defined in the 1999 Plan. In addition, unless otherwise provided in a specific
stock option agreement or restricted stock purchase agreement, in the event of
(i) a reorganization, recapitalization, merger or consolidation of the Company
(unless securities representing 60% or more of the outstanding common stock or
voting power of the entity resulting from such transaction is held subsequent to
such transaction by the persons who were the beneficial holders of the
outstanding Common Stock or voting securities of the Company immediately prior
to such transaction, in substantially the same proportions as their ownership
immediately prior to the transaction) or (ii) the sale, transfer or other
disposition of all or substantially all of the assets of the Company, each
option or stock purchase right outstanding as of the date of such transaction
shall be: (x) assumed by the successor corporation (or its parent) on an
equitable basis, (y) terminated upon written notice to the participants stating
that all options (with all options then outstanding being deemed to be
exercisable for purposes of this section) or stock purchase rights must be
exercised within a specified number of days (not less than 15), at the end of
which period any options or stock purchase rights not exercised will terminate,
or (z) terminated in exchange for a cash payment equal to the excess of fair
market value of the shares subject to option or stock purchase right over the
exercise or purchase price (with all options then outstanding being deemed to be
exercisable for purposes of this section), provided that the administrator of
the 1999 Plan shall select which treatment to provide and under certain
circumstances can determine to provide shares of Common Stock or other
consideration with value equal to the cash or other consideration that otherwise
would be received by a participant. Each option or the lapsing of the repurchase
right on shares issued with respect to stock purchase rights that are assumed or
replaced in connection with such a transaction shall automatically accelerate
and such options shall become fully exercisable and vested or the repurchase
right shall fully lapse on the earliest of (a) the original vesting or lapsing
date, (b) the first anniversary of the date the transaction is determined to
have occurred, or (c) the occurrence of an "Involuntary Employment Action," as
defined in the 1999 Plan. In the event of other reorganizations,
recapitalizations, mergers or consolidations (not meeting the criteria described
above), pursuant to which securities of the Company or of another corporation
are issued with respect to the outstanding shares of Common Stock, a participant
upon exercising an option or stock purchase right will be entitled to receive
for the purchase price paid upon such exercise the securities he or she would
have received if he or she had exercised such option or stock purchase right
prior to such reorganization, recapitalization, merger or consolidation. An
"Involuntary Employment Action" includes termination of employment without
cause, reduction in base compensation, loss of duties or responsibilities and
reduction in power, authority or resources.
<PAGE>
The Stockholders of the Company may amend the 1999 Plan. The 1999 Plan may
also be amended by the Board of Directors or the Committee, provided that any
amendment approved by the Board of Directors or the Committee which is of a
scope that the Committee determines requires Stockholder approval, shall be
subject to obtaining such Stockholder approval. The Committee may amend
outstanding option agreements or restricted stock purchase agreements as long as
the amendment is not materially adverse to the participant. Amendments that are
materially adverse to the participant can be effected only with the consent of
the participant.
The Committee has not made any awards under the 1999 Plan. The maximum
number of options or stock purchase rights that can be granted to an individual
in any fiscal year of the Company is options or stock purchase rights, or a
combination thereof, to purchase 2,000,000 shares, as such number may be
adjusted in accordance with the 1999 Plan.
Federal Income Tax Considerations
The following is a description of certain U.S. Federal income tax
consequences of the issuance and exercise of options under the 1999 Plan:
Incentive Stock Options. An incentive stock option ("ISO") does not result
in taxable income to the optionee or a deduction to the Company at the time it
is granted or exercised, provided that the optionee does not dispose of any
acquired ISO shares within two years after the date the ISO was granted or
within one year after he acquires the shares (the "ISO holding period").
However, the difference between the fair market value of the stock on the date
he exercises the option (and acquires the stock) and the option price therefor
will be an item of tax preference includible in "alternative minimum taxable
income." Upon disposition of the stock after the expiration of the ISO holding
period, the optionee will generally recognize long term capital gain or loss
based on the difference between the disposition proceeds and the option price
paid for the stock. If the stock is disposed of prior to the expiration of the
ISO holding period, the optionee generally will recognize ordinary income, and
the Company will have a corresponding deduction, in the year of the disposition
equal to the excess of the fair market value of the stock on the date of
exercise of the option over the option price. If the amount realized upon such a
disqualifying disposition is less than the fair market value of the stock on the
date of exercise, the amount of ordinary income will be limited to the excess of
the amount realized over the optionee's adjusted basis in the stock.
Non-Qualified Stock Options. The grant of a non-qualified stock option will
not result in taxable income to the optionee or deduction to the Company at the
time of grant. When the Optionee exercises his or her option to purchase the
stock, the amount of the excess of the then fair market value of the shares
acquired over the option price is treated as supplemental compensation and is
taxable as ordinary income. The Company is entitled to a corresponding
deduction.
Stock Purchase Rights. The grant of a stock purchase right will not result
in taxable income to the participant or a deduction to the Company at the time
of grant. The participant will recognize ordinary income (taxable as
compensation), and the Company will have a corresponding deduction, subject to
limitations that may be imposed under Section 162(m) of the Internal Revenue
Code, at the time the repurchase right in favor of the Company lapses and
restrictions on transfer of shares are removed. The taxable compensation income
will be equal to the excess of the then fair market value of the shares for
which all restrictions on transfer and repurchase rights have lapsed over the
purchase price.
Deductibility of Compensation. If the Stockholders approve the 1999 Plan,
options granted under this Plan will qualify as "performance-based" compensation
under Section 162(m) of the Internal Revenue Code, so as to allow the Company to
take corresponding deductions for all supplemental income that Optionees realize
upon the exercise of their stock options. Stock purchase rights granted under
the 1999 Plan will not qualify as "performance based" compensation under Section
162(m) of the Internal Revenue Code, and to the extent stock purchase rights are
granted to "covered employees," as such term is defined under Section 162(m),
the Company will not be able to deduct related compensation expenses to the
extent such expenses exceed $1,000,000 in any year. Reference is made to the
Report of the Compensation and Management Development Committee, under
"Deductibility of Compensation Expenses," above.
<PAGE>
Approval
The affirmative vote of a majority of the votes cast affirmatively or
negatively at the Meeting is required to approve the 1999 Plan.
THE BOARD OF DIRECTORS RECOMMENDS APPROVAL OF THE 1999 PLAN, AND PROXIES
SOLICITED BY THE BOARD WILL BE VOTED IN FAVOR OF SUCH PLAN UNLESS A STOCKHOLDER
HAS INDICATED OTHERWISE ON THE PROXY.
APPROVAL OF THE COMPANY'S EXECUTIVE INCENTIVE PLAN
(Item 4)
The Board of Directors of the Company believes that the continued success
of the Company depends on its ability to attract, retain and motivate key
employees. The Company's executive compensation program consists of the
following three components: salary, annual cash bonus and equity-based
incentives in the form of stock options. The program is structured to promote
the achievement of corporate goals and performance that is in the long-term
interest of Stockholders and to reflect the market for executive compensation.
While stock option awards reflect the long-term value created for
Stockholders, the annual bonus component focuses on current operating results.
Since January 1997, the Company has maintained a cash-based Management Incentive
Plan (the "MIP") with awards based on financial and key operational measures for
the Company. The Committee administers the MIP, in which designated management
employees and officers currently participate. In August 1999, the Committee
approved a separate Executive Incentive Plan (the "EIP") for the most highly
compensated executive officers of the Company. The EIP is patterned on the MIP,
but is designed to conform to the specific requirements of Section 162(m) of the
Internal Revenue Code. If approved by Stockholders, the EIP will provide the
annual bonus component of total compensation for participants in that plan. Only
executive officers designated and approved by the Committee may participate in
the EIP. Committee-designated EIP participants may not participate in the MIP.
The following summary of the material terms of the EIP does not purport to be
complete and is qualified in its entirety by the terms of the Incentive Plan.
Stockholder Approval Requirement
The EIP is being submitted to the Company's Stockholders for approval
pursuant to the requirements of Section 162(m) of the Internal Revenue Code of
1986, as amended (the "Code"). Section 162(m) imposes an annual $1 million limit
on the Company's Federal income tax deduction for compensation paid to a
"covered employee" of a public company ("Deduction Limit"). Under Section
162(m), the term "covered employee" includes the chief executive officer and the
four other most highly compensated executive officers of the Company. The
Deduction Limit applies to compensation that does not qualify for any of the
limited number of exceptions provided for in Section 162(m).
One of the exceptions to the Deduction Limit is for compensation paid under
a plan that contains certain criteria so that compensation paid will be
considered "performance-based" under the Code. To qualify for this exception,
the following requirements must be met: (a) the compensation must be payable on
account of the attainment of one or more pre-established objective performance
goals; (b) the performance goals must be established by a compensation committee
of the board of directors that is comprised solely of two or more "outside
directors;" (c) the material terms under which the compensation will be paid
must be disclosed to and approved by Stockholders before payment; and (d) the
compensation committee must certify in writing that the performance goals have
been satisfied prior to payment.
It is the Company's policy to structure its incentive compensation programs
to satisfy the requirements for the "performance-based compensation" exception
to the Deduction Limit and, thus, to preserve the full deductibility of
compensation paid thereunder, to the extent practicable. As a consequence, the
Committee has directed that the EIP be submitted to the Company's Stockholders
for approval in accordance with the requirements for the "performance-based
compensation" exception to the Deduction Limit. If approved by the Stockholders,
the EIP will become effective for the fiscal year ending June 30, 2000 and
compensation paid to "covered employees" under the EIP will not be subject to
the Deduction Limit.
<PAGE>
Administration
The EIP will be administered by the Committee, which currently consists of
three Board members, all of whom qualify as "outside directors," within the
meaning of Section 162(m) and the regulations promulgated thereunder. The
Committee has full authority to determine the manner in which the EIP will
operate, to interpret the provisions of the EIP and to make all determinations
thereunder. In addition, the Committee has authority to adopt, amend and repeal
such rules, guidelines, procedures and practices governing the EIP as it shall,
from time to time, deem advisable. The Committee is currently composed of
General Haig, Mr. Akerson and General Powell.
Eligibility For Participation
Participation in the EIP is limited to designated executive officers of the
Company. The Committee has authority to select those executive officers who will
participate in the EIP. There are currently five executive officers of the
Company who have been selected to participate in the EIP for the fiscal year
ending June 30, 2000: Stephen M. Case, Robert W. Pittman, J. Michael Kelly,
Kenneth J. Novack, and George Vradenburg, III. The Committee may change the
number and identity of EIP participants from year to year at the beginning of a
plan year or at the time an executive officer is hired or promoted by the
Company. EIP participants may not simultaneously participate in the MIP.
Plan Operation
The EIP has been designed to link a significant portion of a participant's
pay directly to the Company's operating performance. Annual bonuses paid under
the EIP ("Annual Bonuses") will be determined by the application of the
following formula:
Annual Bonus = Salary Paid X Target Percentage X Performance Factor
Salaries for the participants in the EIP are established by the Committee
no later than 90 days after the commencement of the plan year and are determined
by market analysis, based on data reported in published national compensation
surveys and the public filings of relevant labor competitors.
For each participant, a Target Percentage of salary is assigned based on
market data and is intended to bring cash compensation to a competitive level of
the market range for comparable positions when specified performance goals are
met. Total cash compensation can exceed the market range if the specified
performance goals are exceeded. For fiscal year 2000, the Target Percentages for
the participants in the EIP are: 100% for Messrs. Case and Pittman, and 75% for
Messrs. Kelly, Novack, and Vradenburg. The Target Percentages are determined and
may be changed from year to year by the Committee, subject to the provisions of
Section 162(m) and the regulations promulgated thereunder, but may not exceed
250% for any participant. The maximum dollar amount to be paid under the EIP to
any participant in any fiscal year may not exceed $5,000,000.
The Performance Factor will equal 1.0 if specified performance goals are
met, and can vary from 0 to 2.0 based on actual performance versus the
pre-established objective(s). The maximum Performance Factor is currently set at
1.5.
The Committee establishes performance goals within the first 90 days of
each fiscal year. The performance goals selected by the Committee shall be based
on any one or more of the following: price of the Company's Common Stock,
stockholder return, return on equity, return on investment, return on capital,
economic profit, economic value added, net income, operating income, sales, free
cash flow, earnings per share, operating company contribution or market share.
These goals shall have a minimum performance standard below which no
payments will be made, and a maximum performance standard above which no
additional payments will be made. Any performance goals established may be based
on an analysis of historical performance and growth expectations, financial
results of comparable businesses, and progress toward achieving the Company's
long-range strategic plan. These performance goals and determination of results
shall be based entirely on financially-based measures and may include or exclude
either or both corporate taxes or non-recurring items, at the discretion of the
Committee.
The Committee has determined that for the fiscal year ending June 30, 2000,
performance will be measured by the Company's net income. To measure net income
for purposes of determining awards under the EIP, the Committee may include or
exclude either or both corporate taxes or non-recurring items at its sole
discretion.
The Committee has the discretion to reduce the amount of compensation
actually paid when a performance goal is met as permitted under Section 162(m)
of the Code. The Committee has established goals and maximum amounts that it
considers to be appropriate in light of foreseeable contingencies and future
business conditions, and the Board believes it is in the best interests of the
Stockholders to allow the Committee to retain this amount of flexibility.
<PAGE>
The Committee may terminate the EIP at any time. The Committee may also
amend the EIP from time to time, with or without notice. If approved by the
Stockholders, this proposal would not limit the Company's right to award or pay
other forms of compensation (including, but not limited to, salary, cash bonuses
or other stock-based awards) to the Company's executive officers, whether or not
the performance goals under the EIP, as described in this proposal, are achieved
in any future year, and whether or not such other forms of compensation would be
deductible for Federal income tax purposes, if the Committee determines that the
award or payment of such other forms of compensation is in the best interests of
the Stockholders.
Section 162(m) of the Code currently requires Stockholder approval of
certain material amendments to the EIP, such as a change in the method of
determining the maximum amount that can be paid to a participant and a change in
the class of persons eligible to participate in the EIP.
Approval
The affirmative vote of a majority of the votes cast affirmatively or
negatively at the Meeting is required to approve the EIP.
THE BOARD OF DIRECTORS RECOMMENDS APPROVAL OF THE EIP, AND PROXIES
SOLICITED BY THE BOARD WILL BE VOTED IN FAVOR OF SUCH PLAN UNLESS A STOCKHOLDER
HAS INDICATED OTHERWISE ON THE PROXY.
INDEPENDENT PUBLIC ACCOUNTANTS
(Item 5)
The Board of Directors has appointed Ernst & Young LLP, independent public
accountants, to audit the financial statements of the Company for the fiscal
year ending June 30, 2000. The Board proposes that the Stockholders ratify this
appointment. Ernst & Young LLP audited the Company's financial statements for
the fiscal year ended June 30, 1999. The Company expects that representatives of
Ernst & Young LLP will be present at the Meeting, with the opportunity to make a
statement if they so desire, and will be available to respond to appropriate
questions.
In the event that ratification of the appointment of Ernst & Young LLP as
the independent public accountants for the Company is not obtained at the
Meeting, the Board of Directors will reconsider its appointment.
The affirmative vote of a majority of the votes cast affirmatively or
negatively at the Meeting is required to ratify the appointment of the
independent public accountants.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE TO APPROVE THE RATIFICATION OF THE
APPOINTMENT OF INDEPENDENT PUBLIC ACCOUNTANTS, AND PROXIES SOLICITED BY THE
BOARD WILL BE VOTED IN FAVOR THEREOF UNLESS A STOCKHOLDER HAS INDICATED
OTHERWISE ON THE PROXY.
OTHER MATTERS
The Board of Directors knows of no other business which will be presented
to the Meeting. If any other business is properly brought before the Meeting, it
is intended that proxies in the enclosed form will be voted in respect thereof
in accordance with the judgment of the persons voting the proxies.
<PAGE>
STOCKHOLDER PROPOSALS
To be considered for inclusion in the Company's proxy statement relating to
the 2000 Annual Meeting of Stockholders, Stockholder proposals must be received
no later than ______, 2000. To be considered for presentation at the Annual
Meeting, although not included in the proxy statement, proposals must be
received no later than August 29, 2000, nor earlier than July 20, 2000. All
Stockholder proposals should be marked for the attention of Corporate Secretary,
America Online, Inc., 22000 AOL Way, Dulles, Virginia 20166-9323.
WHETHER OR NOT YOU INTEND TO BE PRESENT AT THE MEETING, YOU ARE URGED TO
FILL OUT, SIGN, DATE AND RETURN THE ENCLOSED PROXY AT YOUR EARLIEST CONVENIENCE.
By order of the Board
of Directors:
Sheila A. Clark
Corporate Secretary
Dulles, Virginia
September __, 1999
<PAGE>
AMERICA ONLINE, INC.
THIS PROXY IS BEING SOLICITED BY AMERICA ONLINE, INC.'S
BOARD OF DIRECTORS
The undersigned, revoking previous proxies relating to these shares, hereby
acknowledges receipt of the Notice and Proxy Statement dated September __, 1999
in connection with the Annual Meeting to be held at 10:00 a.m. on October 28,
1999 at the Westfields International Conference Center, located at 14750
Conference Center Drive, Chantilly, Virginia and hereby appoints Stephen M.
Case, J. Michael Kelly and Sheila A. Clark and each of them (with full power to
act alone), the attorneys and proxies of the undersigned, with power of
substitution to each, to vote all shares of the Common Stock of America Online,
Inc. registered in the name provided herein which the undersigned is entitled to
vote at the 1999 Annual Meeting of Stockholders, and at any adjournment or
adjournments thereof, with all the powers the undersigned would have if
personally present. Without limiting the general authorization hereby given,
said proxies are, and each of them is, instructed to vote or act as follows on
the proposals set forth in said Proxy.
This Proxy when executed will be voted in the manner directed herein. If no
direction is made this Proxy will be voted FOR each of the proposals set forth
on the reverse side. With respect to the tabulation of proxies for purposes of
the proposal to amend the Company's Restated Certificate of Incorporation to
increase the authorized number of shares, abstentions and broker non-votes are
treated as votes against the proposal.
In their discretion the proxies are authorized to vote upon such other
matters as may properly come before the meeting or any adjournments thereof.
SEE REVERSE SIDE FOR ALL OF THE PROPOSALS. If you wish to vote in
accordance with the Board of Directors' recommendations, just sign on the
reverse side. You need not mark any boxes.
<PAGE>
[x] Please mark
votes as in
this example.
The Board of Directors recommends a vote FOR Proposals 1-5.
1. Election of Three Directors (or if any nominee is not available for election,
such substitute as the Board of Directors may designate).
Nominees: Stephen M. Case, William N. Melton, Thomas Middelhoff and ___________
FOR [ ] [ ] WITHHELD
ALL FROM ALL
NOMINEES NOMINEES
[ ] -----------------------------
For all nominees except as noted above
FOR AGAINST ABSTAIN
2. Amendment of Restated Certificate [ ] [ ] [ ]
of Incorporation to increase the
number of authorized shares.
3. Approval of the Company's 1999 [ ] [ ] [ ]
Stock Plan.
4. Approval of the Company's Executive [ ] [ ] [ ]
Incentive Plan
5. Proposal to ratify the appointment of Ernst [ ] [ ] [ ]
& Young LLP as the Company's independent
public accountants for the fiscal year
ending June 30, 2000.
In their discretion, the proxies are authorized to vote upon such other business
as may properly come before the meeting or any adjournments thereof.
MARK HERE FOR ADDRESS CHANGE AND NOTE AT LEFT [ ]
Please sign exactly as name(s) appears hereon. Joint owners
should each sign. When signing as attorney, executor,
administrator, trustee or guardian, please give full title as
such.
Signature:________________ Date______ Signature:________________ Date_______
