SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2000
Commission File Number - 001-12143
AMERICA ONLINE, INC.
(Exact name of registrant as specified in its charter)
Delaware 54-1322110
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
22000 AOL Way 20166-9323
Dulles, Virginia (zip code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (703) 265-1000
Securities registered pursuant to section 12(b) of the Act:
(Name of Each Exchange on
(Title of Each Class) Which Registered)
-------------------------------------- -------------------------
Common Stock, par value $.01 per share New York Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange
Securities registered pursuant to section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No_____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
As of August 31, 2000, the aggregate market value of voting stock held by
non-affiliates of the registrant, based upon the closing sales price for the
registrant's common stock, as reported on the New York Stock Exchange, was
approximately $121.5 billion (calculated by excluding shares owned beneficially
by directors and officers).
Number of shares of registrant's common stock outstanding
as of August 31, 2000..............................................2,324,112,291
DOCUMENTS INCORPORATED BY REFERENCE
The following documents (or parts thereof) are incorporated by reference
into the following parts of this Form 10-K: Certain information required in Part
III of this Form 10-K is incorporated from the registrant's Proxy Statement for
its 2000 Annual Meeting of Stockholders.
<PAGE>
PART I
Item 1. Business
General
Founded in 1985, America Online, Inc., based in Dulles, Virginia, is the
world's leader in interactive services, Web brands, Internet technologies, and
electronic commerce services.
America Online has four major lines of businesses:
o the Interactive Services Group,
o the Interactive Properties Group,
o the AOL International Group, and
o the Netscape Enterprise Group.
The lines of business are described below.
The Interactive Services Group develops and operates branded interactive
services, including:
o the AOL service, a worldwide Internet online service with
approximately 23.2 million members as of June 30, 2000
o the CompuServe service, a worldwide Internet online service with
approximately 2.8 million members as of June 30, 2000
o the Netscape Netcenter, an Internet portal
o the AOL.COM Internet portal
o the Netscape Communicator client software, including the Netscape
Navigator browser
o the AOLTV service, an interactive television service for mass-market
consumers
o the AOL Wireless services, which deliver features and content of the
AOL service and branded properties to wireless consumers
The Interactive Properties Group is built around branded properties that
operate across multiple services and platforms, such as:
o Digital City, Inc., the leading local online network and community
guide on the AOL service and the Internet based on the number of
visitors per month
o ICQ, the world's leading communications portal based on the number
of registered users that provides instant communications and chat
technology
o AOL Instant Messenger (AIM), a Web-based communications service that
enables Internet users to send and respond in real time to electronic
messages
o Moviefone, Inc., the nation's No. 1 movie guide and ticketing
service based on the number of users
o Internet music brands Spinner.com, Winamp and SHOUTcast
o MapQuest.com, a leader in destination information solutions
The AOL International Group oversees the AOL and CompuServe services and
operations outside the United States, as well as the Netscape Online service in
the United Kingdom.
The Netscape Enterprise Group focuses on providing businesses a range of
software products, technical support, consulting and training services. These
products and services enable businesses and users to share information, manage
networks and facilitate electronic commerce. The Netscape Enterprise Group
operates primarily through iPlanet E-Commerce Solutions, a Sun-Netscape
alliance. This strategic alliance between America Online and Sun Microsystems,
Inc. ("Sun"), a leader in network computing products and services, was formed in
November 1998 and began operating in March 1999.
For a discussion of financial information about the Company's lines of
business, refer to Note 7 of the Notes to Consolidated Financial Statements and
Management's Discussion and Analysis.
America Online was incorporated in Delaware on May 24, 1985. The principal
executive offices are located at 22000 AOL Way, Dulles, Virginia 20166-9323. The
Company's telephone number at that address is (703) 265-1000. Inquiries may also
be sent to America Online's Internet address: AOL [email protected], or to the America
Online address, AOL IR.
Products and Services
The Company has developed a multiple-brand strategy of products and
services that appeal to complementary and diverse groups of its members and
other users of the Internet. The Company has also developed a multiple-revenue
stream strategy designed to broaden the sources of revenues from its properties
and services beyond subscription revenues to include revenues from sources such
as advertising, commerce, licensing fees and transaction fees. The Company has
augmented its online services with branded properties that add features or
content across multiple services or platforms. Following these strategies has
enabled the Company to operate the business and improve its services and
products in a cost-effective manner by utilizing a shared infrastructure
performing core functions.
Interactive Services Group
The Interactive Services Group operates the Company's interactive
products: the AOL and CompuServe services and their related brand and product
extensions such as AOL.COM, AOLTV and AOL Wireless services; Netscape Netcenter;
and the Netscape browser software.
The AOL Service
The Company's AOL service, with 23.2 million members at June 30, 2000,
provides subscribers with a global, interactive community offering a wide
variety of content, features and tools. The range of content, features, and
tools offered on the AOL service includes the following:
--Online Community--The AOL service promotes interactive community
through electronic mail services, message boards, the Buddy List feature (for
instant messaging), an online community center, public or private "meeting
rooms" and interactive conversations (chat). Guest interviews, with
participation by members, take place at live "auditorium" events. "You've Got
Pictures" allows members to receive their developed photos online, share the
photos with others via e-mail, organize and store photos online and order
reprints and gifts.
--Channel Line-Up--Content on the AOL service is organized into
channels, allowing members to navigate the service easily to find areas of
interest. Each of the following nineteen channels offers informational content
and commerce and community opportunities: AOL Today, News, Sports, Travel,
International, Personal Finance, WorkPlace, Computing, Research & Learn,
Entertainment, Games, Interests, Lifestyles, Shopping, Health, Families, Teens,
Kids Only and Local. Content providers on the AOL service include CBS News,
Hachette Filipacchi Magazines, Time Inc. Magazines, Bloomberg and Business Week.
--Personalization and Control Features--Members can personalize their
experience on the AOL service through a number of features and tools, including
a reminder service that sends e-mail in advance of important events, stock
portfolios that automatically update market prices, Mail Controls, which allow
members to limit who may send them e-mail and to block certain types of e-mail,
Favorite Places, which allows members to mark particular Web sites or AOL areas,
and Portfolio Direct and News Profiles, which send stories of particular
interest to members. The AOL service offers Parental Controls to help parents
form their children's online experience, including tools that limit access to
particular AOL areas or Web sites or to certain features (for example, the AIM
service, sending or receiving files attached to e-mail or embedded pictures in
e-mail, or access to premium services). The Marketing Preferences feature
enables members to elect not to receive certain marketing offers. "My Calendar"
is an interactive desktop calendar that includes features that enable members to
track appointments, key dates and other personal events online.
--Search Capability--The AOL service features AOL Search, a search
product introduced with AOL 5.0 in October 1999 that enables AOL members to
search the Internet and AOL's exclusive content without leaving the AOL service.
AOL Search is based on Netscape's Open Directory Project, a human-edited Web
site directory, and presents search results according to their degree of
relevance to the original search terms.
In April 2000, the Company introduced AOL Plus, a feature that provides
additional multimedia online content to members connecting to the AOL service
through high-speed broadband technologies, including DSL, cable, satellite and
wireless technologies. The expanded content includes streaming audio,
full-motion video, games and online catalogue shopping features.
The Company introduced its latest version of the AOL service software, AOL
5.0, in October 1999. New features to the service included "You've Got
Pictures," "My Calendar," AOL Search and AOL Plus. The Company expects to launch
its next generation AOL 6.0 software in the fall of 2000. The AOL 6.0 software,
which is in beta testing, will include new features such as mailbox sorting,
which will allow members to sort e-mail by address, subject heading and type of
message; "Shopping Assistant," a feature that provides shopping information such
as store ratings and price comparisons to members shopping online; enhancements
to the Personal Filing Cabinet and the Address Book features; and a redesigned
toolbar.
The AOL.COM Web Site
The Company's AOL.COM Web site (http://www.AOL.COM) offers AOL members and
other Internet users content, features and tools, including AOL Search, an
Internet search and rating tool, the AIM service, which allows Internet users to
communicate in real-time with their friends and family, My News, a personalized
news service and My Calendar, a personalized calendar service. AOL.COM also
offers AOL members the opportunity to exchange e-mail through any Internet
connection, using AOL Mail. Content provided on the AOL.COM site includes news,
shopping, Web search services, classified advertisements, and white and yellow
pages directories. The Company plans to continue to expand content and services
available through the AOL.COM Web site.
The AOLTV Service
The Company launched the AOLTV service, an interactive television service
for mass-market consumers, in the summer of 2000 in three initial markets -
Phoenix, Sacramento and Baltimore. AOLTV enables consumers to enhance their
television viewing experience using the AOL service's interactive content and
features. With the AOLTV service, consumers can watch television using their
existing signal and choose from a range of additional interactive features, such
as e-mail, instant messaging, and chat, utilizing a set-top box and a wireless
keyboard or universal remote control. The AOLTV service offers additional
content provided by partners of the Company that complements the television
programming and a program guide that organizes the television channels into
different categories and allows users to select channels by clicking on words
and graphics.
AOL Wireless Service
The AOL Wireless services deliver a variety of the AOL service's features
and content to users of wireless devices, such as mobile phones, pagers and
other handheld devices. The content and services include wireless access to
e-mail, news, weather, sports and stock quotes, as well as content from the
Company's other properties, such as Digital City, MapQuest.com and Moviefone.
America Online has joined with Sprint PCS and AT&T to deliver AOL Mobile
services to consumers via Internet-ready phones. The Company plans to introduce
the AOL Mobile Communicator service, which will offer wireless access to e-mail
and instant messaging using pager-sized two-way wireless devices, by the end of
2000. The Company also has an agreement with OmniSky Corporation to deliver AOL
Wireless services on handheld devices via the OmniSky wireless Internet service.
Wireless applications for Palm handheld devices are also available, including
content from MapQuest.com and Moviefone. The Company also plans to make e-mail
and instant messaging available on the Palm devices. AOL Wireless also provides
text entry solutions for wireless devices through the Company's subsidiary,
Tegic Communications, Inc. Tegic's leading product, the T9 Text Input software,
enables individuals to send e-mail, short messaging services and instant
messages, as well as perform other text-based functions and access the Internet,
using the standard telephone keypad to enter words or sentences.
The CompuServe Service
The CompuServe service, with approximately 2.8 million members at June 30,
2000, targets the value-oriented portion of the U.S. market and the professional
business-oriented market outside of the U.S. It is available in over 500 cities
worldwide, including in the U.S., Canada and Europe. CompuServe offers two
versions of its service - CompuServe Classic and CompuServe 2000, which was
introduced in February 1999 and offers software that provides faster Internet
connections, easier installation and registration, expanded customer options,
more powerful e-mail features and simpler navigation. CompuServe also operates a
Web site (http://www.CompuServe.com) to serve as an Internet gateway for its
members. Features on the site include personalized news, updated weather,
favorite links and Web centers highlighting specific areas of interest.
CompuServe has created a Custom Solutions group to develop and operate
co-branded and custom versions of the CompuServe 2000 software. This group
operates the Gateway.net Internet Service Provider. The Custom Solutions group
also offers private label Internet solutions for strategic partners, including
Worldcom, AAA, Continental Airlines and Thomas Regional Directory. CompuServe is
currently beta testing version 6.0 of CompuServe 2000, which it plans to launch
later this year.
Netscape Netcenter
Netscape Netcenter (http://www.netscape.com) offers a variety of products
and services, including news and information, opportunities to purchase goods
and services, Internet site directories, software, software downloads, and
product and technical support information. More than 30 million users have
registered with Netscape Netcenter as of June 30, 2000. Netcenter's services
consist of search and navigation services, such as the aggregated NetSearch
area, which helps consumers and businesses find relevant information, and
SmartBrowsing; programming channels, such as Lifestyles, Personal Finance and
Small Business, which organize content and services for directed broadcast;
communications and community services such as e-mail and message board services,
which help consumers and businesses connect and communicate; personalization
services, such as My Netscape, a personalized topical channel that users can
customize to their personal interests; and opportunities for electronic
commerce. Netcenter also offers services such as: Site Central, a free Web site
building service, Netscape Sports Channel, and delivery services by FedEx.
Through an arrangement with Time Warner, CNN Interactive is now a premier news
provider for Netcenter. Netcenter also promotes the Company's software and
customer solutions by featuring descriptions of the Company's offerings and
providing downloads of certain software products. Netcenter includes a
co-branded version of the Company's AIM service and its "Local" channel features
content provided by the Company's Digital City property.
Netscape Communicator/Netscape 6
Netscape Communicator is a suite of open HTML-based client software that
integrates browsing, e-mail, Web-based word processing and group scheduling.
This suite of software enables users to communicate, share and access
information. Netscape Navigator, the browser that serves as the core component
of Netscape Communicator, allows access to information and network applications
on intranets, extranets and the Internet. Netscape Navigator offers a
point-and-click graphical user interface that allows users to browse the
Internet's array of network resources and participate in commerce across
extranets and the Internet. Two versions of the Netscape Communicator are
marketed: Netscape Communicator and Netscape Communicator with Calendar. The
latest version, Communicator 4.75, was released in August 2000 and features
SmartBrowsing and streaming audio and visual capabilities. With SmartBrowsing,
consumers can search Netcenter services and connect to Web sites covering a
variety of topics by entering common words or topics (Netscape Internet
Keywords) into the browser location bar. Communicator 4.75 also offers music and
multimedia features through Netscape Radio, which rebroadcasts Spinner content
and provides consumers with an endless stream of music.
Preview versions of the Company's next generation Netscape 6 browser
software were released in April and August 2000. Netscape 6 is powered by
Netscape's Gecko technology, which features a faster and more powerful browser
engine technology than previously offered by Netscape. The Netscape Gecko
technology allows individual developers to tailor the browser software to their
own use, and it is designed to operate across multiple platforms, so that it can
be deployed on a range of Internet devices. Gecko can run on multiple computing
systems, including LINUX, Mac OS and Windows. The Netscape 6 browser software
offers a number of new features, including: a customizable integrated search
engine; "My Sidebar," a customizable side bar that lets consumers choose tabs to
track news, stock quotes, and buddy lists, among other options; and "Themes," a
feature that lets consumers personalize the look and feel of the browser by
selecting different combinations of graphic elements. The Netscape 6 browser
software also integrates e-mail and instant messaging within the browser
environment.
Interactive Properties Group
The Interactive Properties Group includes and oversees the Company's
branded properties that operate across multiple services or platforms, such as
Digital City, ICQ, AIM, Moviefone, Spinner, Winamp, SHOUTcast and MapQuest.com.
The group is also responsible for developing new distribution networks that will
enable the Company to build or acquire branded properties that operate across
the Company's multiple services and platforms while benefiting from the
Company's common infrastructure.
Digital City
The Company's subsidiary, Digital City, Inc., is a local online content
network that offers a network of local content and community guides in over 200
U.S. markets, including Atlanta, Boston, Chicago, Dallas, Denver, Detroit, Los
Angeles, Minneapolis, New York, Orlando, Philadelphia, San Diego, San Francisco
and Washington, D.C. The newest version of Digital City - Digital City 2000 -
was launched in the spring of 2000. Local content provided by Digital City
includes original and third-party news, sports, weather, and local guide
services that offer information and reviews on local events, restaurants, health
care, housing and job listings. Digital City Wireless, also launched in the
spring of 2000, makes the content and services of Digital City available to
wireless consumers in some cities. Digital City provides local interactive
content and services on the AOL service, AOL.COM, the CompuServe service,
CompuServe.com, Netscape NetCenter, ICQ and on the Worldwide Web
(http://www.digitalcity.com). Digital City also is available through other
distribution vehicles, such as the USATODAY.com Web site and Worldcom's Internet
service provider.
ICQ
The Company's subsidiary, ICQ Ltd., is an Internet-based communications
Web portal site (http://www.icq.com), which utilizes the ICQ ("I seek you")
instant communications and chat technology with a focus on interactive community
and constant desktop presence. At the end of fiscal 2000, ICQ had over 70
million registered users, approximately two-thirds of whom were outside the
U.S., and was being used actively by more than 20 million users. An average of 8
million people use ICQ everyday, with peak use of more than 1.4 million
simultaneous users. Users become aware of ICQ through the "word of mouth"
equivalent on the Internet of invitations from current ICQ users to potential
users via e-mail. In May 2000, ICQ introduced its latest software, ICQ 2000a,
which features enhanced navigation, new instant messaging and communications
functionality and interface, menus, and features available in more than 11
languages.
AIM
The Company's AIM service is a Web-based communications service that
enables Internet users to know when other users of the service are online and to
send and respond in real time to private electronic messages. When an instant
message is sent via the AIM service, the message pops up on the receiver's
screen instantly. The AIM service had over 61 million registered users and more
than 20 million active users as of June 30, 2000. The AIM service is free, and
available for downloading on AOL.COM and on a co-branded basis on the Company's
other brands and services, including the CompuServe service, CompuServe.com,
Netscape Netcenter and to users of Netscape Communicator software. The Company
has also developed co-branded versions of the AIM service for Apple Computer,
Arch Communications, Bell South, DigitalWork.com, Earthlink, FaceTime
Communications, Juno, Kinko's, IBM's Lotus, Lycos, Motorola, Net2Phone, Nokia,
Novell, Oxygen Media, RealNetworks, Research in Motion, Riffage, TV Guide and
Voyager.net. The AIM service also offers such features as the ability to search
the Web directly from the AIM service and access news and information; a "File
Transfer" feature that allows users to share files with other AIM users; and a
directory of chat and interest areas. In June 2000, the Company launched Version
4.1 of AIM, featuring AIM Talk, which enables online voice communication between
AIM users, and Instant Images, which allows users to exchange images and sounds.
AOL Moviefone
Moviefone is the largest movie guide and ticketing service in the United
States based on the number of users. Through its interactive telephone service,
its online service, Moviefone.com, and the Company's wireless services,
Moviefone provides millions of moviegoers each week with a free directory of
movies, showtimes and theater locations, and also provides them the ability to
purchase tickets by phone or through its Web site. Moviefone launched a revamped
version of its Web site, www.Moviefone.com, in May 2000. The relaunched site
includes a new design, expanded national listings, streaming video previews,
"at-a-glance" reviews from critics and real moviegoers and a selection of
Internet movies. The phone service is now equipped with speech recognition
capabilities in some locations, allowing users to select a movie or enter
additional information by speaking into the phone, rather than using the buttons
on the telephone keypad. The AOL Moviefone service is also available on Palm
handheld devices and Internet-ready phones.
Spinner.com, Winamp and SHOUTcast
Spinner.com is a free music service that offers over 140 music channels
programmed by Spinner. Its content library includes over 350,000 songs. The
Spinner dedicated music player displays artist and song information as the songs
are played, and provides links that enable real-time listener feedback and
instant ordering of the music being played. In June 2000, the Spinner Plus 3.1
Player was launched, allowing users to personalize the look of their player and
providing an enhanced visual experience. Nullsoft, Inc. is the developer of
Winamp, the branded MP3 player for Windows, and SHOUTcast, an MP3 streaming
audio service. Winamp surpassed 25 million unique registrations as of June 30,
2000. During fiscal year 2000, the Winamp music site was revamped to feature
more music content and provide a more convenient user interface. The SHOUTcast
streaming audio service enables individuals to broadcast their own audio stream
over the Internet.
MapQuest.com
MapQuest.com, acquired by the Company in June 2000, is a leader in online
destination solutions. MapQuest.com licenses its technology to more than 1,600
business partners. Through these licensing agreements, MapQuest.com helps
businesses integrate maps and driving directions into their Internet, intranet
and call center applications for improved marketing and customer service
functions. MapQuest.com provides comprehensive online mapping solutions to
businesses and customized maps, destination information and driving directions
to consumers on the Internet and mobile devices through its Web site and through
third-party Web sites. By June 2000, more than 5.7 million unique visitors
visited the MapQuest.com Web site per month. MapQuest.com is available through
the Digital City and Moviefone Web sites, and MapQuest.com delivers mapping
services on several types of wireless devices. MapQuest.com is available in nine
languages. MapQuest.com also provides maps and geographic content in digital
form for a variety of industries.
AOL International Group
The AOL International Group oversees the AOL and CompuServe services and
operations outside the United States, as well as the Netscape Online service,
which operates in the United Kingdom. As of June 30, 2000, the AOL and
CompuServe services had more than 4.6 million members outside the United States.
The Company offers its AOL, CompuServe and/or Netscape branded services through
joint ventures or distribution arrangements in Argentina, Australia, Austria,
Brazil, Canada, France, Germany, Hong Kong, Japan, Mexico, the Netherlands,
Sweden, Switzerland and the United Kingdom. Globally, members are able to access
these services in over 100 countries. Additionally, the Company is in the
process of expanding the number of countries to which it offers local services.
One component of the Company's international strategy is to provide consumers
with local services in key international markets featuring local language,
content, marketing and community. Central to the Company's strategy has been the
formation of strategic alliances with strong local and regional partners and the
provision of access for all members of international services. In addition, U.S.
and global subscribers to the AOL service can access selected content and
communities offered on the Company's other global services.
During the past fiscal year, the Company has launched services in several
new foreign markets and has taken steps to develop or enhance services in
existing markets:
o Europe: The Company, through a joint venture with Bertelsmann AG called
"AOL Europe," provides the AOL service and the CompuServe service in
several European countries, Netscape Online in the United Kingdom and
CompuServe Office in Germany. In March 2000 the Company and Bertelsmann
announced plans to restructure their AOL Europe joint venture and to
undertake a new strategic alliance. The restructuring consists of a put
and call arrangement for America Online to purchase, in two installments,
Bertelsmann's 50% interest in AOL Europe, payable at America Online's
option in cash, stock or a combination of cash and stock. After December
15, 2001 and through January 15, 2002, Bertelsmann has the right to
require America Online to purchase 80% of its 50% interest in AOL Europe
with a closing date of January 31, 2002. After March 31, 2002 and through
April 30, 2002, Bertelsmann has the right to require America Online to
purchase the remaining 20% of its 50% interest in AOL Europe with a
closing date of July 1, 2002. If Bertelsmann fails to exercise its put
rights, America Online has the right to purchase 80% of Bertelsmann's 50%
interest in AOL Europe after January 15, 2002 and through January 15, 2003
and the remaining 20% after June 30, 2002 and through June 30, 2003. In
connection with the restructuring of the joint venture, the two companies
entered into a new alliance, which provides for expanded distribution of
Bertelsmann's media content and electronic commerce properties over
America Online's interactive brands worldwide. In August 1999, AOL Europe
introduced Netscape Online in the United Kingdom, a subscription-free
service focused on the value-conscious segment of the consumer market. In
May 2000, AOL Europe introduced CompuServe Office, a subscription-free
service, in Germany.
o Australia: In March 2000, the Company restructured the joint venture
operating the AOL Australia service. In connection with the entry into the
put and call arrangements with respect to Bertelsmann's interest in AOL
Europe, Bertelsmann transferred its 50% interest in AOL Australia to
America Online. The Company then formed a new joint venture with AAPT
Limited, Australia's third largest telecommunications company, to provide
the AOL Australia service.
o Hong Kong: An AOL-branded service for Hong Kong consumers - AOL Hong Kong
- was launched in September 1999. The AOL Hong Kong service was launched
under a license and distribution arrangement with China Internet
Corporation Limited, a Hong Kong based company, in conjunction with its
affiliate, China.com, an Internet company that operates Web portals
throughout greater China. The service provides consumers with original
local content in both Chinese and English, along with many of the AOL
service's standard features. The Company also made an equity investment in
China.com in June 1999.
o Latin America: The Company formed a joint venture in December 1998, AOL
Latin America, with the Cisneros Group of Companies ("Cisneros Group") to
bring the Company's services to consumers in Latin America. AOL Latin
America has launched services in three Latin American countries,
Argentina, Brazil and Mexico. In November 1999, America Online Brasil was
launched. America Online Mexico was launched in July 2000, followed by
America Online Argentina in August 2000. In August 2000, AOL Latin
America, Inc. completed an initial public offering of common stock and,
concurrently, Banco Itau, a regional bank in Latin America with online
banking operations, became a minority shareholder.
Netscape Enterprise Group
The Netscape Enterprise Group provides enterprise software and services to
businesses that assist them in providing services to customers in the electronic
commerce markets. The Netscape Enterprise Group develops, markets, sells and
supports a broad suite of enterprise software, which consists of electronic
commerce infrastructure and electronic commerce applications focused primarily
on corporate intranets and extranets, as well as the Internet. The software
allows users to share information, manage networks and take their businesses
online. The software is based primarily on industry-standard protocols that can
be deployed across a variety of operating systems, platforms, databases and
interconnected with traditional client/server applications. The Netscape
Enterprise Group also provides a variety of services to support its software
products, including technical support, professional services and training. The
Netscape Enterprise Group operates primarily through iPlanet E-Commerce
Solutions, a Sun-Netscape alliance.
Electronic Commerce Infrastructure
The Electronic Commerce Infrastructure is a group of solutions for
enterprise customers and Internet Service Providers that provide a flexible,
scalable foundation on which the customers can build and manage their own
extranet or Internet applications or use the Electronic Commerce Applications.
The Electronic Commerce Infrastructure provides a services-ready platform
through such solutions as a directory and security service for managing users
and applications, an application server for building and deploying applications,
and a messaging solution for hosting and delivering communications services such
as e-mail and unified messaging.
Electronic Commerce Applications
The CommerceXpert product family of electronic commerce applications enable
businesses to link and manage online trading communities of suppliers,
distributors, and customers of all sizes and degrees of technical
sophistication. The CommerceXpert solutions are based on the same open protocols
and scalable security architecture used for communications on the Internet.
These solutions enable organizations to create more secure Internet commerce
sites and exchange information with trading partners.
iPlanet E-Commerce Solutions
In November 1998, the Company entered into a strategic electronic commerce
alliance with Sun, which is now referred to as the iPlanet E-Commerce Solutions,
a Sun-Netscape Alliance. In combination with dedicated resources from Sun, the
Netscape Enterprise Group operates the Company's part of the alliance. The
alliance builds and markets on a collaborative basis end-to-end electronic
commerce solutions to help business partners and other companies put their
businesses online. The alliance product portfolio provides customers with
scalable, integrated infrastructure software and a family of production-ready
electronic commerce applications. Products are offered on the industry's most
widely available computing platforms. The infrastructure product portfolio
includes: messaging (e-mail) and calendar, collaboration, Web, application,
directory (network phone book) and certificate (security) servers. The alliance
offers a family of production-ready applications for electronic commerce,
including commerce exchange, procurement, selling and billing applications
intended to make electronic commerce more efficient. The alliance has a
dedicated sales force that sells the full suite of products on multiple
platforms. The alliance offers technical expertise, support and training to
consumers through its Alliance Professional Services group.
Network Services
Technologies
The Company employs a multiple vendor strategy in designing, structuring
and operating the network services utilized in its Interactive Services Group.
The Company manages AOLnet, a transfer control protocol/Internet protocol
(TCP/IP) network of third-party network service providers, including Sprint
Communications Company, Genuity Inc., WorldCom, Inc. and Level 3 Communications.
AOLnet is used for the AOL service and certain versions of the CompuServe
service in North America, including CompuServe 2000. The CompuServe service for
versions prior to CompuServe 2000 currently relies on data network services
provided pursuant to a Network Services Agreement among the Company and
WorldCom. The smooth operation of and access capacity on these earlier versions
of the CompuServe service are dependent on the network services provided under
the agreement and would be adversely affected by service failures of the network
services provider.
The Company anticipates continuing to build AOLnet in order to increase its
network capacity, provide members of its online services with higher speed
access and reduce data network costs on a per-hour basis. During fiscal 2000,
the Company added modems at a rate of approximately 50,000 monthly to expand to
approximately 2.6 million modems worldwide. The AOL service grew as of June 30,
2000 to achieve peaks of over 1.6 million simultaneous users and the exchange of
approximately 135 million e-mail messages a day.
The Company's ability to reduce data network costs on a per-hour basis and
to expand the network capacity may be limited or impaired under certain
circumstances. The Company enters into multiple-year data communications
agreements to support AOLnet. In connection with those agreements, the Company
may commit to purchase certain minimum data communications services or to pay a
fixed cost for the network services. Accordingly, if the number of subscribers
or usage significantly decreases, network costs will not correspondingly
decrease.
Subscribers to the Company's interactive online services may experience
difficulty in accessing their service from local access numbers from time to
time due to changing patterns of usage or peaks in usage in particular
geographic areas. In addition, supply shortages exist from time to time for
local exchange carrier lines from local telephone companies that the Company
requires to expand network capacity. The expansion of AOLnet requires a
substantial investment in telecommunications equipment. In addition to
purchasing telecommunications equipment, the Company also enters into operating
leases for the use of this equipment. Supply shortages could impair the
Company's ability to expand network capacity.
Service Platforms and Access Devices
The Company supports a variety of software platforms, hardware devices and
conduits for access to the Company's interactive services and Web-based
properties. Today, the vast majority of members and users of interactive
services access such services through personal computers. Operating systems on
which the AOL and CompuServe services are available include primarily the
Windows (3.1, 95 and 98) and Macintosh operating systems.
The Company has established its "AOL Anywhere" strategy of making features
and content of the AOL service and the Company's other properties and services
available through multiple connections and multiple devices, such as
televisions, wireless telephones, hand-held and pocket devices, specialized
Internet appliances, and smart phones. Features that are or will be available on
the different platforms and devices include e-mail, news, stock quotes,
electronic commerce and instant messages.
The Company already has taken steps under this strategy to broaden the
platforms and devices on which services or features of its services can be
accessed. The Company recently launched, in select locations, the AOLTV service,
an enhanced interactive television Internet service. The Company expects to
launch by the end of 2000 a new platform through an AOLTV/DIRECTV set-top box
manufactured by Hughes Network Systems that will combine AOLTV with digital
television programming from DIRECTV.
The Company has also launched versions of its AOL service on mobile
platforms, such as mobile phones, pagers and handheld computer devices. The
Company has agreements with companies such as 3Com Corporation, Casio, Sprint
PCS, AT&T Wireless, Nokia, Motorola, Research in Motion, BellSouth, Arch
Communications and OmniSky Corporation to offer AOL services such as e-mail,
news, stock quotes and instant messaging over various handheld and mobile
devices. In April 2000, the Company and Gateway announced the development of a
family of specialized Internet appliances featuring the "Instant AOL" service, a
customized version of the standard AOL service. The new devices will include a
countertop appliance, a wireless Web pad and a desktop appliance. The Company
expects to begin shipping the first of the appliances, the countertop appliance,
this winter.
The Company has also taken steps to adopt new technology and developments
in the delivery of interactive services. The Company's AOL 5.0 software now
includes AOL Plus, which provides additional online content to members
connecting through high-speed broadband technologies, including DSL, cable,
satellite and wireless. The expanded content includes streaming video and audio,
games, music and online catalogue shopping features.
The Company has upgraded AOLnet to support the v.90 standard for high-speed
access at 56 kps, and is also investing in the development of alternative
technologies to deliver its interactive online services, including cable modems,
Digital Subscriber Line (xDSL) access, satellite and wireless technologies. The
Company plans to continue to offer its members higher-speed options when they
become easy-to-use and commercially viable for the mass market. The Company has
formed strategic alliances with Verizon Communications and SBC Communications to
use new DSL technology to make available a high-speed upgrade connection to
subscribers. The initial roll out began in the summer of 1999. The Company also
has entered into an agreement with Compaq under which new Compaq Presario
Internet PCs will be equipped with DSL-ready modems and will feature
pre-installed AOL software that will enable users to access features available
through a broadband connection.
The Company formed a strategic alliance with Hughes Electronic Corporation,
a subsidiary of General Motors Corporation, in June 1999 to develop and market
integrated digital entertainment and Internet services. The alliance provides
for the delivery of AOL Plus to members via Hughes' DirectPC satellite Internet
network, as well as delivery over Hughes' next generation satellite system for
two-way, broadband connectivity. In connection with the alliance, the Company
made a $1.5 billion investment in Hughes in the form of a General Motors
preference stock, which carries a 6-1/4% coupon rate and has a mandatory
conversion into General Motors Class H common stock (GMH) in three years.
Advertising and Commerce
An important component of the Company's strategy in its businesses is to
continue increasing revenues from advertising and commerce sources and from the
direct sale of merchandise, as well as from additional sources such as
transaction and licensing fees. The Company continues to establish a wide
variety of relationships with advertising and commerce partners to grow and
diversify its non-subscription-based revenues and to provide subscribers on the
Company's interactive services with access to a broad selection of competitively
priced, easy-to-order products and services. The Company has also expanded the
scope, range and types of businesses involved in advertising and commerce
relationships; many of the Company's advertising and commerce contracts are with
industry leaders such as Coca-Cola, Kodak, Sears and Citigroup. The Company has
entered into advertising arrangements that encompass multiple brands within the
Company's family of brands. Additionally, the Company has renewed and extended
or expanded relationships with existing advertising and commerce partners.
The Company offers its advertising and commerce partners a variety of
customized programs, which may include premier placement or select sponsorship
of particular online areas or Web pages for designated time periods. As
merchants recognize the value in reaching the Company's large, growing and
active subscriber base and users of its Web-based properties, the Company has
been able to earn additional revenues by offering selected merchants exclusive
rights to market particular goods or services within one or more of the
Company's online services and properties. In those transactions, the Company
provides its commerce partners certain marketing and promotional opportunities
and in return receives cash payments, the opportunity for revenue sharing,
cross-promotions and competitive pricing and online conveniences for
subscribers. Certain of the transactions with partners also include an equity
component for the Company. The Company may receive a warrant to purchase stock
or may purchase or acquire a direct equity interest in the partner. These equity
investments are accounted for in accordance with Company accounting policies. In
addition, these equity investments can also represent an additional potential
source of income or loss to the Company upon their disposition.
Marketing
The Company's marketing activities in its Interactive Services and
Interactive Properties Groups are conducted for its multiple brands through a
common infrastructure. The marketing goals of the Interactive Services and
Interactive Properties Groups are to attract and retain members or users, as
applicable, and to develop and differentiate the Company's family of brands. To
support these goals, the Company markets its products, services and brands
through a broad array of programs and strategies, including broadcast television
and radio advertising campaigns, direct mail, magazine inserts and
advertisements, co-marketing, retail distributions, bundling agreements and
alternate media. The Company also markets through more innovative means, such as
through extensive online and offline cross-promotion and co-branding with a wide
variety of partners. Additionally, through bundling agreements, the Company's
interactive online services and products are on a range of computers made by
personal computer manufacturers. The multi-year agreements provide that
pre-installed software will be available by clicking on an icon during the
computer's initial setup process.
The Company utilizes targeted or limited promotions and marketing programs
and pricing plans designed to appeal to particular groups of potential users of
its interactive online services and to distinguish and develop its different
brands. For example, in connection with the positioning of the CompuServe
service in the United States as a value-oriented brand, in June and July 1999
the Company announced marketing initiatives for its CompuServe service with two
computer manufacturers and a number of additional retailers. Under these
promotions, consumers signing up for three-year memberships to the CompuServe
2000 service at $21.95 per month will receive a rebate of $400 in connection
with the purchase of designated merchandise. This promotion is designed to
appeal to consumers who are purchasing computers for the primary purpose of
getting online and to make the purchase of a personal computer and Internet
access easier and more affordable.
The Company's businesses utilize specialized retention programs designed
to increase member and user loyalty and satisfaction. These retention programs
include regularly scheduled online events and conferences; the regular addition
of new content, features and software programs; and online promotions of
upcoming online events and new features. The Company also provides a variety of
support mechanisms such as online support and 24-hour telephone customer support
services.
The Company's marketing efforts and activities in its Netscape Enterprise
Group are conducted primarily through joint marketing efforts of iPlanet
E-Commerce Solutions, a Sun-Netscape Alliance. The marketing goals of the
Company's Netscape Enterprise Group are to position iPlanet E-Commerce Solutions
as the leading provider of electronic commerce applications and Internet
infrastructure software to power the Net economy.
Advertising focuses on iPlanet's leadership position in the industry, and
the breadth and innovation of the iPlanet E-Commerce Solutions product
portfolio. Advertising media includes the Company's interactive online services
and properties, traditional print and broadcast advertising campaigns and
bundling agreements. A dedicated sales force also markets the products and
services sold or provided through iPlanet directly to potential customers. The
Netscape Enterprise Group utilizes customer marketing programs designed to
increase customer loyalty and customer satisfaction. These programs include the
iPlanet Customer Program featuring a secure customer extranet and specialized
joint marketing activities, a new customer quality initiative and customer
support and services.
Employees
As of June 30, 2000, the Company had approximately 15,000 employees.
America Online believes that its relations with its employees are good. None of
the Company's employees are represented by a labor union and the Company has
never experienced a work stoppage.
Proprietary Rights
The Company relies upon a combination of contract provisions and patent,
copyright, trademark and trade secret laws to protect its proprietary rights in
its products and services. The Company distributes its products and services
under agreements that grant members, users or customers a license to use its
products and services and relies on the protections afforded by the copyright
laws to protect against the unauthorized reproduction of its products. To
license its products, the Company relies in part on "shrink wrap" licenses that
are not signed by the end-user and, therefore, may be unenforceable under the
laws of certain jurisdictions. In addition, the Company moves to protect its
trade secrets and other proprietary information through agreements with
employees and consultants. The Company has also filed for a number of patents
for technology relating to the Internet and online industry. Although the
Company intends to protect its rights vigorously, there can be no assurance that
these measures will be successful. Policing unauthorized use of the Company's
products and services is difficult in this industry and the steps taken may not
prevent the misappropriation of the Company's technology and intellectual
property rights. In addition, effective patent, trademark, trade secret and
copyright protection may be unavailable or limited in certain foreign countries.
The Company seeks to protect some of the source code of its products as a
trade secret and as an unpublished copyright work. Source code for certain
products has been or will be published in order to obtain patent protection or
to register copyright in such source code. Other source code has been
distributed under open source code licenses. The Company has obtained federal
trademark registration of a number of marks, including America Online, AOL,
Buddy List, CompuServe, Netscape, Netscape Navigator; AOL's triangle design
logo; and Netscape's "N" logo and ship's wheel logo, and has trademark rights in
the U.S. and abroad in many other proprietary names including, AOL.COM, Digital
City, ICQ, AOL Instant Messenger, AOLnet, Netscape Netcenter, "You've Got Mail,"
Moviefone.com, Spinner, Winamp, T9 and MapQuest.
The Company believes that its products, trademarks and other proprietary
rights do not infringe on the proprietary rights of third parties. From time to
time, however, the Company has received communications from third parties
asserting that features, contents or names of certain of its services or
products may infringe patents, copyrights, trademarks and other rights of such
parties. No litigation is pending in this area that would have a material
adverse effect on the Company's ability to develop, market and sell its products
or operate its services. There can be no assurance that third parties will not
assert infringement claims against the Company in the future with respect to
current or future features or contents of services or products or that any such
assertion may not result in litigation or require the Company to enter into
royalty arrangements. Third parties also challenge the Company's marks from time
to time and such challenges may result in limitation or loss of trademark rights
to such proprietary marks.
Regulatory Environment; Public Policy
In the United States and most countries in which the Company conducts its
major operations, the Company is generally not regulated other than pursuant to
laws applicable to businesses in general or to value-added telecommunications
services specifically. In some countries, the Company is subject to specific
laws regulating the availability of certain material related tok, or to the
obtaining of, personal information. Adverse developments in the legal or
regulatory environment relating to the interactive online services and Internet
industry in the United States, Europe, Asia, Latin America or elsewhere could
have a material adverse effect on the Company's business, financial condition
and operating results. A number of legislative and regulatory proposals from
various international bodies and foreign and domestic governments in the areas
of telecommunications regulation, particularly related to the infrastructures on
which the Internet rests, access charges, encryption standards and related
export controls, content regulation, consumer protection, advertising,
intellectual property, privacy, electronic commerce, and taxation, tariff and
other trade barriers, among others,have been adopted or are now under
consideration. The Company is unable at this time to predict which, if any, of
the proposals under consideration may be adopted and, with respect to proposals
that have been or will be adopted, whether they will have a beneficial or an
adverse effect on the Company's business, financial condition and operating
results. The Company has supported certain proposals designed to enhance market
access and service competition in the offering of mobile, narrowband and
broadband Internet services in the United States and in foreign markets and is
itself taking steps to bring about such access and competition across all
Internet distribution systems; the Company believes that, where marketplace
forces are not producing such results, the adoption of such proposals would have
a beneficial effect on the development of the Internet medium and of the
Company's prospects. The Company is unable, at this time, to predict whether any
such proposals will be adopted.
Moreover, the manner in which existing domestic and foreign laws
(including Directive 95/46/EC of the European Parliament and of the European
Council on the protection of individuals with regard to the processing of
personal data and on the free movement of such data) will or may be applied to
online service and Internet access providers is uncertain, as is the effect on
the Company's business given different possible applications. Similarly, the
Company is unable to predict the effect on the Company from the potential future
application of various domestic and foreign laws governing content, export
restrictions, privacy, consumer protection, export controls on encryption
technology, tariffs and other trade barriers, intellectual property and taxes.
The Company actively works both in the United States and internationally
with industry groups and alliances, as well as public interest groups and
representatives of government on issues affecting the interactive media,
including issues such as privacy measures and policies, obscenity and
pornography, consumer protection, taxation of interactive services and use,
regulation of means of access to the Internet and intellectual property issues
such as the application of copyright laws to the interactive medium. For
example, the Company is a member of the Global Business Dialogue on Electronic
Commerce, a CEO-led organization advocating a global policy framework to foster
the development of electronic commerce throughout the world; openNet Coalition,
a coalition of industry leaders promoting open access to broadband technologies;
the Internet Alliance and the NetCoalition.com, Internet industry associations;
and the Online Privacy Alliance, a coalition formed to address privacy issues in
the interactive medium, and is a member of the steering committees of TRUSTe and
BBB Online, each of which is developing enforcement systems for private sector
commitments to fair information practice principles.
The Company believes that industry-led standards to address issues facing
the interactive medium will result in workable solutions without restricting the
further development of the medium. The Company seeks to educate representatives
of industry, government and public interest groups on the benefits to society of
the new interactive services medium. In the Company's view, the independent
industry-led and market driven approaches outlined above will provide a greater
acceptance of the medium by consumers around the world and a more favorable
environment for the acceptance of the Company's products and services. Some of
the issues the Company is focusing on are the protection of privacy, online
tools to permit user choice of content, prosecution of online crimes,
safeguarding of children, enhancement of online security, education and
learning, online community activities, fostering citizen and parental education
and involvement and protection of intellectual property. The Company has adopted
internal policies and principles regarding these areas and has implemented
features in its services, such as its Parental Controls feature, chat safety
tips posted prominently on the Kids Only channel of the AOL service, and the
Notify AOL feature that enables members to report inappropriate activity on the
AOL service, as further support for its standards. The Company is unable at this
time to predict whether this approach will be adopted by government and whether
the positive regulatory environment being sought by this approach will be
forthcoming.
Merger with Time Warner Inc.
On January 10, 2000, America Online entered into a merger agreement with
Time Warner Inc. pursuant to which each of America Online and Time Warner will
become a wholly owned subsidiary of a new parent company named AOL Time Warner
Inc. In the merger, each share of America Online common stock will be converted
into one share of AOL Time Warner common stock and each share of Time Warner
common stock and series common stock will be converted into 1.5 shares of AOL
Time Warner common stock and series common stock, respectively, and each share
of Time Warner preferred stock will be converted into a substantially identical
share of AOL Time Warner preferred stock.
As a result of the merger, the former stockholders of America Online will
have an approximate 55% interest in AOL Time Warner and the former stockholders
of Time Warner will have an approximate 45% interest in the combined entity,
expressed on a fully diluted basis. The merger is expected to be accounted for
by AOL Time Warner as an acquisition of Time Warner under the purchase method of
accounting for business combinations.
The merger was approved by the stockholders of America Online and Time
Warner at special meetings held on June 23, 2000. The merger is expected to
close in the fall of 2000. The consummation of the merger is subject to a number
of customary conditions, including required regulatory approvals, which the
companies are in the process of seeking. There can be no assurance that such
approvals will be obtained.
Other Business Combinations
During the fiscal year, the Company entered into additional strategic
mergers and business transactions. In November 1999, the Company completed its
merger with Tegic Communications, Inc., a provider of text entry solutions for
wireless devices. Tegic's leading product, T9 Text Input software, enables
individuals to send e-mail, short messaging services and instant messages, as
well as perform other text-based functions and access the Internet, using the
standard telephone keypad to enter words or sentences. In May 2000, the Company
purchased the 20% interest in Digital City it did not already own from The
Tribune Company. In June 2000, the Company completed its merger with
MapQuest.com, Inc., a leader in destination information solutions. MapQuest.com
provides online mapping solutions to businesses and provides customized maps,
destination information and driving directions to consumers. In addition, in
July 2000, the Company acquired Prophead Development, Inc., and in August 2000,
the Company completed mergers with Quack.com, Inc., LocalEyes Corporation and
iAmaze, Inc.
Available Information
The Company files annual, quarterly and special reports, proxy statements
and other information with the Securities and Exchange Commission. Any document
the Company files with the Commission may be read or copied at the Commission's
public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please
call the Commission at 1-800-SEC-0330 for further information on the public
reference room. The Company's Commission filings are also available to the
public at the Commission's Web site at http://www.sec.gov.
Item 2. Properties
The Company maintains facilities and offices at various locations
throughout the United States and the rest of the world for general corporate
purposes, including technology centers, customer call centers, office space and
headquarters.
America Online maintains its headquarters facilities in Dulles, Virginia,
and holds various properties at and near the headquarters facilities that are
used principally by its Interactive Services Group, Interactive Properties Group
and AOL International Group. The Company leases office space in the following
locations for Customer Call Centers: Tucson, Arizona; Jacksonville, Florida;
Albuquerque, New Mexico; Oklahoma City, Oklahoma; Ogden, Utah; and the
Philippines. The CompuServe service has its primary operations in Columbus,
Ohio, and has various properties at and near those facilities. Digital City
leases office space in the United States cities for which it provides local
interactive content and services. Moviefone leases office space in New York City
and White Plains, New York. ICQ maintains its operations in Israel. Spinner
leases office space in San Francisco. Tegic has it operations in Seattle,
Washington. MapQuest.com's main operations are located in Mount Joy,
Pennsylvania, and it has several smaller offices in various locations throughout
the United States. The Netscape Enterprise Group has its primary operations in
Mountain View, California, and has various other properties throughout the
United States and in other countries.
The following table sets forth information on the Company's material
properties:
Location Size Owned/Lease Purpose
--------------------------------------------------------------------------------
Columbus, OH 296,000 sq. ft. Owned Office Space
Dulles, VA 967,000 sq. ft.(1) Owned (2) Corporate Headquarters
Dulles, VA 180,000 sq. ft. Owned Technology Center
Manassas, VA 220,000 sq. ft. Owned Technology Center
Mountain View, CA 927,000 sq. ft. Leased Office Space
Reston, VA 265,000 sq. ft. Owned (2) Technology Center
Vienna, VA 110,000 sq. ft. Leased Office Space
(1) An additional facility is under construction at this site that, when
completed, will add 190,000 square feet to the current size. The facility is
expected to be completed in early 2001.
(2) This property is held subject to a mortgage.
Item 3. Legal Proceedings
The Company is a party to various litigation matters, investigations and
proceedings, including several complaints that have been filed and remain
pending in the Delaware Court of Chancery naming as defendants one or more of
America Online, the directors of America Online, Time Warner Inc. and the
directors of Time Warner. The complaints purport to be filed on behalf of
holders of America Online or Time Warner stock, as applicable, and allege
breaches of fiduciary duty by the applicable company and its directors or aiding
and abetting breaches of fiduciary duty by the other company and its directors
in connection with the proposed merger of America Online and Time Warner. The
plaintiffs in each case seek to enjoin completion of the merger and/or damages.
These cases are at a preliminary stage, but the Company does not believe these
lawsuits have any merit and intends to defend against them vigorously. The
Company is unable, however, to predict the outcome of these cases, or reasonably
estimate a range of possible loss given the current status of the litigation.
Since March 2000, America Online has been named as a defendant in several
class action lawsuits that have been filed in state and federal courts. The
complaints in these lawsuits contend that consumers and competing Internet
service providers have been injured because of the default selection features in
AOL 5.0. Plaintiffs are seeking damages, an injunction enjoining the
distribution of AOL Version 5.0 software, and disgorgement of all monies that
the Company has earned through the distribution of its Version 5.0 software.
These cases are at a preliminary stage, but America Online does not believe they
have merit and intends to contest them vigorously. The Company is unable,
however, to predict the outcome of these cases, or reasonably estimate a range
of possible loss given the current status of the litigation.
In the spring of 1999, the Department of Labor ("DOL") began an
investigation of the applicability of the Fair Labor Standards Act ("FLSA") to
the Company's Community Leader program. The Company believes the Community
Leaders are volunteers, not employees, that the Community Leader program
reflects industry practices, and that its actions comply with the law. The
Company is cooperating with the DOL's inquiry, but is unable to predict the
outcome of the DOL's investigation and cannot reasonably estimate a range of
possible loss given the current status of the DOL's investigation. Former
volunteers have sued the Company on behalf of an alleged class consisting of
current and former volunteers, alleging violations of the FLSA and comparable
state statutes. The Company believes the claims have no merit and intends to
defend them vigorously. The Company cannot predict the outcome of the claims or
whether other former or current volunteers will file additional actions, nor can
the Company reasonably estimate a range of possible loss given the current
status of the litigation.
The costs and other effects of pending or future litigation, governmental
investigations, legal and administrative cases and proceedings (whether civil or
criminal), settlements, judgments and investigations, claims and changes in
those matters (including those matters described above), and developments or
assertions by or against the Company relating to intellectual property rights
and intellectual property licenses, could have a material adverse effect on the
Company's business, financial condition and operating results.
Item 4. Submission of Matters to a Vote of Security Holders
A special meeting of the stockholders of the Company was held on June 23,
2000. The purpose of the meeting was to consider a proposal to approve and adopt
the Second Amended and Restated Agreement and Plan of Merger dated as of January
10, 2000 by and among AOL Time Warner Inc., America Online, Inc., Time Warner
Inc., America Online Merger Sub and Time Warner Merger Sub. The proposal was
approved with 1,273,120,576 shares cast in favor of the proposal, 32,055,011
shares cast against the proposal and 7,578,268 abstentions.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Market Price of Common Stock
The following table sets forth the range of high and low sale prices for
the Company's Common Stock for the periods indicated and reflects all stock
splits effected by the Company:
For the quarter ended: High Low
---------------------- ------ ------
September 30, 1998.... $ 17.57 $ 8.75
December 31, 1998..... $ 40.00 $10.33
March 31, 1999........ $ 76.88 $33.50
June 30, 1999......... $ 87.50 $44.75
September 30, 1999.... $ 64.59 $38.50
December 31, 1999..... $ 95.63 $52.03
March 31, 2000........ $ 82.88 $48.25
June 30, 2000......... $ 68.38 $48.38
The Company has never declared, nor has it paid, any cash dividends on its
Common Stock. The Company currently intends to retain its earnings to finance
future growth and, therefore, does not anticipate paying any cash dividends on
its Common Stock in the foreseeable future.
As of August 31, 2000, the approximate number of stockholders of record of
Common Stock was 42,800. In addition, the Company believes there were
approximately 3 million beneficial holders of the Common Stock, representing
persons whose stock is in nominee or "street name" accounts through brokers.
Exchange Information
The Company's Common Stock is traded on the New York Stock Exchange under
the symbol "AOL."
Options on the Company's stock are traded on the Chicago Board Options
Exchange, the American Stock Exchange, and the Pacific Stock Exchange.
Recent Sales of Unregistered Securities
None
<PAGE>
Item 6. Selected Financial Data
<TABLE>
Year Ended June 30,
------------------------------------------
2000 1999 1998 1997 1996
-------- -------- ------- -------- -------
(Amounts in millions, except per share data)
Statement of Operations Data:
<S> <C> <C> <C> <C> <C>
Subscription services..................... $4,400 $3,321 $2,183 $1,478 $1,024
Advertising, commerce and other .......... 1,986 1,027 566 330 125
Enterprise solutions...................... 500 456 365 411 188
-------- -------- ------- -------- -------
Total revenues............................ 6,886 4,804 3,114 2,219 1,337
Income (loss) from operations............. 1,398 450 (126) (176) (175)
Net income (loss) (1)..................... 1,232 754 (80) (176) (203)
Income (loss) per common share:
Net income (loss) per share-diluted....... $ 0.48 $ 0.30 $(0.04) $(0.10) $(0.13)
Net income (loss) per share-basic......... $ 0.54 $ 0.36 $(0.04) $(0.10) $(0.13)
Weighted average shares outstanding:
Diluted................................... 2,603 2,566 1,859 1,682 1,507
Basic..................................... 2,278 2,090 1,859 1,682 1,507
As of June 30,
------------------------------------------
2000 1999 1998 1997 1996
-------- -------- ------- -------- -------
(Amounts in millions)
Balance Sheet Data:
Working capital(deficiency)............... $2,033 $313 $114 $(40) $78
Total assets.............................. 10,673 5,417 2,886 1,508 966
Total debt................................ 1,646 364 372 52 25
Stockholders' equity...................... 6,161 3,095 1,004 612 400
Year Ended June 30,
------------------------------------------
2000 1999 1998 1997 1996
-------- -------- ------- -------- -------
(Amounts in millions)
Other Selected Data:
Net cash provided by operating activities. $1,808 $1,119 $428 $124 $2
Net cash used in investing activities..... (2,001) (1,809) (531) (366) (262)
Net cash provided by financing activities. 1,747 948 590 252 372
Earnings Before Interest, Taxes,
Depreciation and Amortization
(EBITDA, as adjusted) (2) ................ 1,788 858 259 19 (107)
</TABLE>
(1) Net income in the fiscal year ended June 30, 2000 includes net special
charges of $15 million related to mergers and $386 million from gains on
investments. Net income in the fiscal year ended June 30, 1999, includes
special charges of $95 million related to mergers and restructurings, $25
million in transition costs and a net gain of $567 million related to the
sale of investments in Excite, Inc. Net loss in the fiscal year ended June
30, 1998, includes special charges of $75 million related to mergers and
restructurings, $94 million related to acquired in-process research and
development and $17 million related to legal settlements. Net loss in the
fiscal year ended June 30, 1997, includes special charges of $49 related to
a restructuring, $24 million related to contract terminations, $24 million
for a legal settlement and $9 million related to acquired in-process
research and development. Net loss in the fiscal year ended June 30, 1996,
includes special charges of $17 million for acquired in-process research
and development, $8 million in merger related costs and $8 million for the
settlement of a class action lawsuit.
(2) EBITDA is defined as net income adjusted to exclude: (1)
provision/(benefit) for income taxes, (2) interest income and expense, (3)
depreciation and amortization and (4) special charges and gains on
investments. The Company considers EBITDA an important indicator of the
operational strength and performance of its business including the ability
to provide cash flows to service debt and fund capital expenditures.
EBITDA, however, should not be considered an alternative to operating or
net income as an indicator of the performance of the Company, or as an
alternative to cash flows from operating activities as a measure of
liquidity, in each case determined in accordance with generally accepted
accounting principles ("GAAP").
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Founded in 1985, America Online, Inc., based in Dulles, Virginia, is the world's
leader in interactive services, Web brands, Internet technologies, and
electronic commerce services.
America Online has four major lines of businesses:
o the Interactive Services Group,
o the Interactive Properties Group,
o the AOL International Group, and
o the Netscape Enterprise Group.
The lines of business are described below.
The Interactive Services Group develops and operates branded interactive
services, including:
o the AOL service, a worldwide Internet online service with approximately
23.2 million members as of June 30, 2000
o the CompuServe service, a worldwide Internet online service with
approximately 2.8 million members as of June 30, 2000
o the Netscape Netcenter, an Internet portal
o the AOL.COM Internet portal
o the Netscape Communicator client software, including the Netscape
Navigator browser
o the AOLTV service, an interactive television service for mass-market
consumers
o the AOL Wireless services, which deliver features and content of the
AOL service and branded properties to wireless consumers
The Interactive Properties Group is built around branded properties that
operate across multiple services and platforms, such as:
o Digital City, Inc., the leading local online network and community
guide on the AOL service and the Internet based on the number of
visitors per month
o ICQ, the world's leading communications portal based on the number of
registered users that provides instant communications and chat
technology
o AOL Instant Messenger (AIM), a Web-based communications service that
enables Internet users to send and respond in real time to private
personalized electronic text messages
o Moviefone, Inc., the nation's No. 1 movie guide and ticketing service
based on the number of users
o Internet music brands Spinner.com, Winamp and SHOUTcast
o MapQuest.com, a leader in destination information solutions
The AOL International Group oversees the AOL and CompuServe services and
operations outside the United States, as well as the Netscape Online service in
the United Kingdom.
The Netscape Enterprise Group focuses on providing businesses a range of
software products, technical support, consulting and training services. These
products and services enable businesses and users to share information, manage
networks and facilitate electronic commerce. The Netscape Enterprise group
operates primarily through iPlanet E-Commerce Solutions, a Sun-Netscape
alliance. This strategic alliance between America Online and Sun Microsystems,
Inc. ("Sun"), a leader in network computing products and services, was formed in
November 1998 and began operating in March 1999.
Competition
The Company competes with a wide range of other companies in the
communications, advertising, entertainment, information, media, Web-based
services, software, technology, direct mail and electronic commerce fields for
subscription, advertising, and commerce revenues, and in the development of
distribution technologies and equipment in its interactive businesses. The
Company also competes with a wide range of companies in the development and sale
of electronic commerce infrastructure and applications in its Netscape
Enterprise Group.
o Competitors for subscription revenues include:
- online services such as the Microsoft Network, AT&T Worldnet and Prodigy
Internet
- national and local Internet service providers (including
subscription-free providers), such as EarthLink, Juno, NetZero and
Bluelight.com
- long distance and regional telephone companies offering Internet access
as part of their telephone service, such as AT&T Corp., Sprint
Corporation and regional Bell operating companies
- cable television companies
- cable Internet access services such as Excite@Home, Road Runner and Juno
o Competitors for advertising and commerce revenues include:
- online services such as the Microsoft Network, AT&T Worldnet and Prodigy
Internet
- Web-based navigation and search services provided by companies such as
Yahoo! Inc., the Walt Disney Internet Group, Lycos, Inc. and Excite@Home
- global media companies including newspapers, radio and television
stations and content providers, such as the National Broadcasting
Corporation, CBS Corporation, The Walt Disney Company, The Washington
Post Company and Conde Nast Publications, Inc.
- cable Internet access services such as Excite@Home and Road Runner
- Web sites focusing on content, commerce, community and similar features
such as Amazon.com and eBay
o Competition in the development of distribution technologies and equipment
includes:
- broadband distribution technologies used in cable Internet access
services such as Excite@Home and Road Runner
- advanced telephone-based access services offered through digital
subscriber line technologies offered by local telecommunications
companies
- other advanced digital services offered by satellite and wireless
companies
- television-based interactive services, such as those offered by
Microsoft's WebTV
- personal digital assistants or handheld computers, enhanced mobile
phones and other equipment offering functional equivalents to the
Company's features
o Competitors in the development and sale of electronic commerce
infrastructure and applications include:
- providers of electronic commerce infrastructure such as server software,
including International Business Machines Corporation, Microsoft
Corporation, Oracle Corporation, Novell, Inc., Software.com, Inc. and
BEA Systems, Inc.
- providers of electronic commerce applications including International
Business Machines Corporation, Oracle Corporation, General Electric
Information Systems, Microsoft Corporation, PeopleSoft, Inc., SAP A.G.,
Open Market Incorporated, Ariba, Inc., CommerceOne, Inc., Sterling
Commerce, Inc. and BroadVision, Inc.
Some of the present competitors and potential future competitors of the
Company may have greater financial, technical, marketing or personnel resources
than the Company. In addition, as a result of acquisitions, certain competitors
are able to offer both Internet access and other services, such as cable
television or telephone service, and such consolidation may continue. The
competitive environment could have a variety of adverse effects on the Company.
For example, it could:
o negatively impact the Company's ability to generate greater revenues and
profits from sources other than online service subscription revenues, such
as advertising and electronic commerce
o limit the Company's opportunities to enter into or renew agreements with
content providers and distribution partners
o limit the Company's ability to develop new products and services
o limit the Company's ability to continue to grow or sustain its subscriber
base
o require price reductions in the subscription fees for online services and
require increased spending on marketing, network capacity, content
procurement and product and features development
o require price reductions in the Company's enterprise software products
o result in a loss of the Company's market share in the enterprise software
industry
o require an increase in the Company's sales and marketing expenditures
Any of the foregoing events could have an adverse impact on revenues or
result in an increase in costs as a percentage of revenues, either of which
could have a material adverse effect on the Company's business, financial
condition and operating results.
Consolidated Results of Operations
Revenues
The following table and discussion highlights the revenues of the Company
for the years ended June 30, 2000, 1999 and 1998.
<TABLE>
Year ended June 30,
-----------------------------------------------
2000 1999 1998
--------------- --------------- ---------------
(Dollars in millions)
Revenues:
<S> <C> <C> <C> <C> <C> <C>
Subscription services................................... $4,400 63.9% $3,321 69.1% $2,183 70.1%
Advertising, commerce and other......................... 1,986 28.8 1,027 21.4 566 18.2
Enterprise solutions.................................... 500 7.3 456 9.5 365 11.7
------- ------- ------- ------- ------- -------
Total revenues.......................................... $6,886 100.0% $4,804 100.0% $3,114 100.0%
</TABLE>
The Company generates three main types of revenues: subscription services;
advertising, commerce and other; and enterprise solutions revenues. Subscription
services revenues are generated from customers subscribing to the Company's AOL
service and, effective February 1, 1998, the CompuServe service. Advertising,
commerce and other revenues are non-subscription based and are generated mainly
from businesses marketing to the Company's base of subscribers and users across
its multiple brands. Advertising, commerce and other revenues mainly consist of
advertising and related revenues, fees associated with electronic commerce and
the sale of merchandise. Enterprise solutions revenues consist principally of
product licensing fees and fees from technical support, consulting and training
services.
Subscription Services Revenues
Currently, the Company's Interactive Services Group generates subscription
services revenue primarily from subscribers paying a monthly membership fee.
The Company's current pricing options for the AOL service in the United
States are as follows:
o A standard monthly membership fee of $21.95, with no additional hourly
charges (the "Flat-Rate Plan"). Subscribers can also choose to prepay
for one year in advance at an effective monthly rate of $19.95. The
Company increased the price of its Flat-Rate Plan from $19.95 per month
to $21.95 per month, and the effective monthly rate of the annual plan
from $17.95 per month to $19.95 per month, effective at the start of
each member's monthly billing cycle in April 1998. Those subscribers
who were on the annual plan at the time of change were not subject to
an increase until their renewal date.
o An alternative offering of three hours for $4.95 per month, with
additional time priced at $2.50 per hour.
o An alternative offering of $9.95 per month for unlimited use--for those
subscribers who have an Internet connection other than through AOL and
use this connection to access AOL services.
The Company's current pricing options for CompuServe 2000 are as follows:
o A standard monthly membership offering of 20 hours for $9.95 per month,
with additional time priced at $2.95 per hour.
o A standard monthly membership fee of $19.95, with no additional hourly
charges.
o An incentive rebate program offering a $400 rebate with a 3 year
commitment of $21.95 per month.
At June 30, 2000, the Company had approximately 23.2 million AOL brand
subscribers, of which approximately 19.4 million were in the United States. Also
at that date, the Company had approximately 2.8 million CompuServe brand
subscribers, of which approximately 2 million were in the United States. At June
30, 1999, the Company had approximately 17.6 million AOL brand subscribers, of
which approximately 15.3 million were in the United States. Also at that date,
the Company had approximately 2 million CompuServe brand subscribers, of which
approximately 1 million were in the United States. As of June 30, 2000 and 1999,
the AOL and CompuServe brands had approximately 4.6 million and 3.3 million
subscribers, respectively, outside of the United States.
For fiscal 2000, subscription services revenues increased from $3,321
million to $4,400 million, or 32%, over fiscal 1999. This increase was primarily
attributable to a 34% increase in the average number of U.S. subscribers in
fiscal 2000, compared to fiscal 1999, offset in part by a slight decrease in the
average monthly subscription services revenue per U.S. subscriber. The decrease
in the average monthly subscription services revenue per U.S. subscriber is due
to the different brands and services offered by the Company and the mix of
multiple price points offered by these brands and services.
For fiscal 1999, subscription services revenues increased from $2,183
million to $3,321 million, or 52%, over fiscal 1998. This increase was primarily
attributable to a 58% increase in the average number of U.S. subscribers in
fiscal 1999, compared to fiscal 1998, as well as a 7.4% increase in the average
monthly subscription services revenue per U.S. subscriber. The average monthly
subscription services revenue per U.S. subscriber increased from $17.90 in
fiscal 1998 to $19.22 in fiscal 1999. This increase was principally attributable
to the increase in the Flat-Rate Plan membership fee from $19.95 to $21.95,
which became effective in April 1998.
Advertising, Commerce and Other Revenues
An important objective of the Company's business strategy is a continued
emphasis on growing the advertising, commerce and other revenues. These revenues
consist principally of advertising and related revenues, fees associated with
electronic commerce, and the sale of merchandise across the Company's multiple
brands. During fiscal 2000, leveraging its large, active and growing user base,
the Company continued to build on its industry-leading advertising and commerce
through a series of major alliances with leading brands and retailers. The
Company's user base not only includes the paying subscribers of the AOL and
CompuServe services, it also includes users of the Company's other branded
portals and services such as MapQuest.com, AOL Moviefone, Netcenter (with more
than 28 million registered users), AOL.COM, ICQ (with more than 20 million
active registered users) and Digital City. Contributing to future growth in
advertising, commerce and other revenues is the Company's backlog, made up of
contractually committed revenues to be recognized in future periods. For
additional discussion, see Note 2 "Revenue Recognition" of the Notes to the
Consolidated Financial Statements. The backlog balances as of June 30, 2000,
1999 and 1998 were $3,017 million, $1,519 million and $511 million,
respectively. The majority of the backlog balance is from contracts with leading
brands and retailers such as General Motors, Hewlett-Packard, Coca-Cola, Kodak,
Sears, Gateway, Citigroup and Hughes. The Company expects that approximately
$1,305 million in revenues will be generated in fiscal 2001 from the June 30,
2000 backlog.
The following table summarizes the material components of advertising,
commerce and other revenues for the years ended June 30, 2000, 1999 and 1998.
<TABLE>
Year ended June 30,
-----------------------------------------------
2000 1999 1998
--------------- --------------- ---------------
(Dollars in millions)
<S> <C> <C> <C> <C> <C> <C>
Advertising and electronic commerce fees................ $1,600 80.6% $ 772 75.2% $ 363 64.1%
Merchandise............................................. 211 10.6 132 12.8 103 18.2
Other................................................... 175 8.8 123 12.0 100 17.7
------- ------- ------- ------- ------- -------
Total advertising, commerce and other revenues.......... $1,986 100.0% $1,027 100.0% $ 566 100.0%
</TABLE>
Advertising, commerce and other revenues increased by 93%, from $1,027
million in fiscal 1999 to $1,986 million in fiscal 2000. This increase was
primarily attributable to additional advertising and electronic commerce on the
Company's AOL service, as well as the Company's other branded services and
portals. Advertising and electronic commerce fees increased by 107%, from $772
million in fiscal 1999 to $1,600 million in fiscal 2000.
Advertising, commerce and other revenues increased by 81%, from $566
million in fiscal 1998 to $1,027 million in fiscal 1999. More advertising on the
Company's AOL service and Netcenter portal, as well as an increase in electronic
commerce fees primarily drove the increase. Advertising and electronic commerce
fees increased by 113%, from $363 million in fiscal 1998 to $772 million in
fiscal 1999.
Enterprise Solutions Revenues
The Netscape Enterprise Group generates revenues that consist principally
of product licensing fees and fees from technical support, consulting and
training services. The Netscape Enterprise Group focuses on providing businesses
a range of software products, technical support, consulting and training
services. These products and services enable businesses and users to share
information, manage networks and facilitate electronic commerce on the Internet.
In November 1998, the Company entered into a strategic alliance with Sun
Microsystems, Inc. ("Sun"), a leader in network computing products and services,
to accelerate the growth of electronic commerce. The alliance became effective
in March 1999. The strategic alliance provides that, over a three year period,
the Company and Sun will jointly develop and market to business enterprises,
iPlanet client software and network application and server software for
electronic commerce, extended communities and connectivity. These products will
include software incorporating the Netscape code, Sun code and technology and
certain America Online services features.
Enterprise solutions revenues increased by 10%, from $456 million in
fiscal 1999 to $500 million in fiscal 2000. The increase was primarily driven by
revenues generated from the alliance with Sun.
Enterprise solutions revenues increased by 25%, from $365 million in
fiscal 1998 to $456 million in fiscal 1999. The increase was due to an increase
in product sales related to server applications and consulting services coupled
with the decline in revenues in fiscal 1998 due to offering the Netscape
Communicator client software, including the Netscape Navigator browser, for free
starting in January 1998.
Costs and Expenses
The following table and discussion highlights the costs and expenses of
the Company for the years ended June 30, 2000, 1999 and 1998.
<TABLE>
Year ended June 30,
-----------------------------------------------
2000 1999 1998
--------------- --------------- ---------------
(Dollars in millions)
<S> <C> <C> <C> <C> <C> <C>
Total revenues.......................................... $6,886 100.0% $4,804 100.0% $3,114 100.0%
Costs and expenses:
Cost of revenues........................................ $3,458 50.2% $2,669 55.5% $1,825 58.6%
Sales and marketing..................................... 1,015 14.7 816 17.0 629 20.2
Product development..................................... 303 4.4 292 6.1 243 7.8
General and administrative.............................. 623 9.1 417 8.7 333 10.7
Amortization of goodwill and other intangible assets.... 74 1.1 65 1.3 24 0.8
Merger, restructuring and contract termination charges.. 15 0.2 95 2.0 75 2.4
Acquired in-process research and development............ - - - - 94 3.0
Settlement charges...................................... - - - - 17 .6
------- ------- ------- ------- ------- -------
Total costs and expenses................................ $5,488 79.7% $4,354 90.6% $3,240 104.1%
</TABLE>
Cost of Revenues
Cost of revenues includes network-related costs, consisting primarily of
data network costs; personnel and related costs associated with operating the
data centers, data network and providing customer support; billing, consulting
and technical support/training; host computer and network equipment costs; and
the costs of merchandise sold.
The Company continues to experience increases in both subscriber usage,
which is primarily due to the growth of the subscriber base, and average monthly
usage per subscriber. Both of these growth factors have the potential to
increase network costs on an absolute dollar basis, as well as a percentage of
revenue basis. While the growth in subscriber usage and related costs generally
are consistent with the increases in subscription service revenues, the increase
in usage and related costs per subscriber could impact operating margins. The
Company has minimized, and plans to continue to minimize, the impact to costs
associated with such growth by reducing network costs, on a relative basis
(either on a per-hour basis or as a percentage of total revenues) and increasing
advertising, commerce and other revenues. An important factor in reducing
network costs is the reduction of the costs of operating the Company's data
network, on a per-hour basis, through volume discounts and more efficient
utilization of AOLnet, the Company's TCP/IP network. The Company expects the
growth in advertising, commerce and other revenues, assuming such growth
continues, will provide the opportunity and flexibility to fund the costs
associated with the increased usage resulting from growing the Company's
subscriber base.
For fiscal 2000, cost of revenues increased from $2,669 million to $3,458
million, or 30%, over fiscal 1999, and decreased as a percentage of total
revenues from 55.5% to 50.2%. The increase in cost of revenues in fiscal 2000
was primarily attributable to increases in data network costs; merchandise
costs; personnel and related costs associated with operating the data centers,
data network and providing customer support; costs related to the Company's new
custom services; and billing expense as a result of increased member activity on
the various services. Data network costs increased primarily as a result of the
larger member base and increased usage per customer. Personnel and related costs
associated with operating the data centers, data network, providing customer
support and billing increased primarily as a result of the requirements of
supporting a larger data network and a larger customer base. Costs related to
the Company's new custom services are a result of the Company's agreement with
Gateway, Inc., which was entered into in October, 1999. The decrease in cost of
revenues as a percentage of total revenues was primarily attributable to growth
of the higher margin advertising, commerce and other revenues, as well as a
decrease in network-related costs as a percentage of subscription services
revenue. The decrease in network-related costs as a percentage of subscription
services revenue was primarily driven by an 18% decrease in the hourly network
cost for the year ended June 30, 2000 compared to the year ended June 30, 1999.
The decrease in the hourly network costs is mainly due to efficiencies the
Company continues to realize as a result of its size and scale, as well as lower
negotiated rates with its network providers. This decrease was partially offset
by an increase in daily member usage, from an average of 50 minutes per day in
the year ended June 30, 1999 to an average of nearly 58 minutes per day in the
year ended June 30, 2000.
For fiscal 1999, cost of revenues increased from $1,825 million to $2,669
million, or 46%, over fiscal 1998, and decreased as a percentage of total
revenues from 58.6% to 55.5%. The increase in cost of revenues in fiscal 1999
was primarily attributable to increases in data network costs, host computer and
network equipment costs, and personnel and related costs associated with
operating the data centers and data network and providing customer support;
consulting; technical support/training and billing. Data network costs increased
primarily as a result of the larger member base and more usage per member. Host
computer and network equipment costs, consisting of lease, depreciation and
maintenance expenses, increased as a result of additional host computer and
network equipment, as a result of the larger member base and more usage by
members. Personnel and related costs associated with operating the data centers,
data network, providing customer support and billing increased primarily as a
result of the requirements of supporting a larger data network, a larger member
base and increased subscription services revenues. Personnel and related costs
associated with consulting and technical support/training increased due to
providing additional customer support and professional services. The increase in
cost of revenues, as a percentage of total revenues, in fiscal 1998 was
primarily attributable to an increase, as a percentage of total revenues, in
host computer and network equipment costs coupled with the decrease in revenues
related to the high margin Netscape Communicator client software (including the
Netscape Navigator browser) partially offset by a decrease, as a percentage of
total revenues, in royalties paid to information and service providers.
Sales and Marketing
Sales and marketing expenses include the costs to acquire and retain
subscribers, the operating expenses associated with the sales and marketing
organizations and other general marketing costs to support the Company's
multiple brands.
The Company's strategy continues to emphasize brand advertising across
multiple brands, as well as cost-effective bundling agreements, where the
Company's products are widely distributed with new personal computers, the
Windows operating system and other peripheral computer equipment and software.
Additionally, the Company continues to market its products via direct mail
programs. These marketing initiatives coupled with improving subscriber
acquisition and retention rates, as well as the growth of advertising and
electronic commerce revenues, have contributed to the continued improvement of
marketing expenses as a percentage of total revenues.
For fiscal 2000, sales and marketing expenses increased from $816 million
to $1,015 million, or 24%, over fiscal 1999, and decreased as a percentage of
total revenues from 17.0% to 14.7%. The increase in sales and marketing expenses
for fiscal 2000 was mainly attributable to an increase in direct subscriber
acquisition costs related to the AOL service and brand advertising across
multiple brands, offset by a decrease in sales and sales support functions in
the Netscape Enterprise Group. The decrease in marketing expenses as a
percentage of total revenues was primarily a result of the substantial growth in
total revenues.
For fiscal 1999, sales and marketing expenses increased from $629 million
to $816 million, or 30%, over fiscal 1998, and decreased as a percentage of
total revenues from 20.2% to 17.0%. The increase in sales and marketing expenses
for fiscal 1999 was mainly attributable to an increase in direct subscriber
acquisition costs, brand advertising across multiple brands and personnel costs
associated with expanding the Netscape Enterprise business. The decrease as a
percentage of total revenues was primarily a result of the substantial growth in
revenues.
Product Development
Product development costs include research and development expenses and
other product development costs including support and maintenance of the
Company's multiple interactive products.
For fiscal 2000, product development costs increased from $292 million to
$303 million, or 4%, over fiscal 1999, and decreased as a percentage of total
revenues from 6.1% to 4.4%. The increase in product development costs was
primarily due to an increase in the number of technical employees to support
additional products across multiple brands. The decrease in product development
costs as a percentage of total revenues was primarily a result of the
substantial growth in total revenues.
For fiscal 1999, product development costs increased from $243 million to
$292 million, or 20%, over fiscal 1998, and decreased as a percentage of total
revenues from 7.8% to 6.1%. The increase in product development costs was
primarily due to an increase in personnel costs resulting from the Company's
acquisitions of Actra Business Systems LLC ("Actra"), KIVA Software Corporation
("KIVA") and the online service of CompuServe (see Note 6 of the Notes to
Consolidated Financial Statements). The decrease in product development costs as
a percentage of total revenues was primarily a result of the substantial growth
in revenues.
General and Administrative
For fiscal 2000, general and administrative expenses increased from $417
million to $623 million, or 49%, over fiscal 1999, and increased slightly as a
percentage of total revenues from 8.7% to 9.1%. The increase in general and
administrative costs for fiscal 2000, was primarily attributable to an increase
in bad debt expense related to the AOL and CompuServe services; increased
personnel costs, primarily payroll taxes related to employee stock option
exercises; and other professional services and fees, primarily consulting and
legal fees. The increase in bad debt related to the CompuServe service is
primarily due to the CompuServe rebate program which was initiated in fiscal
year 2000. The increase in bad debt related to the AOL service is primarily the
result of extending the collection period for subscription fees. In addition,
the increase in subscription revenues during fiscal 2000 for both the AOL and
CompuServe services contributed to the increase in bad debt.
For fiscal 1999, general and administrative expenses increased from $333
million to $417 million, or 25%, over fiscal 1998, and decreased as a percentage
of total revenues from 10.7% to 8.7%. The increase in general and administrative
costs for fiscal 1998, and such costs as a percentage of total revenues, was
primarily attributable to higher personnel and related costs, which included
compensatory stock options and other charges primarily related to the sale of
ANS Communications, Inc., ("ANS"), as well as increases in professional fees,
principally related to legal matters.
Amortization of Goodwill and Other Intangible Assets
Amortization of goodwill and other intangible assets increased to $74
million in fiscal 2000 from $65 million in fiscal 1999 and $24 million in fiscal
1998. The increase in amortization expense during fiscal 2000 is primarily
attributable to goodwill associated with the acquisition of the CompuServe
online service in January 1998, with minor subsequent adjustments. The increase
in amortization expense during fiscal 1999 is primarily attributable to goodwill
associated with the acquisitions of Mirabilis, Ltd. ("Mirabilis") in June 1998,
CompuServe in January 1998, and Actra in December 1997. The increase is
partially offset by a decrease in goodwill amortization resulting from the
disposition of ANS in January 1998.
Acquired In-Process Research and Development
The Company incurred a total of $94 million in acquired in-process
research and development charges in fiscal 1998 related to the acquisitions of
Mirabilis, Actra, Personal Library Software, Inc. ("PLS") and NetChannel, Inc.
("NetChannel").
In June 1998, the Company acquired the assets, including the developmental
ICQ instant communications and chat technology, and assumed certain liabilities
of Mirabilis. The ICQ technology is an enabling technology for online
communication. At the date of acquisition, Mirabilis reported 12 million
registered trial users of which approximately half were active. The Company paid
$287 million in cash and may pay up to $120 million in additional contingent
purchase payments based on future performance levels. The Company's Consolidated
Statements of Operations reflect a one-time write-off of the amount of purchase
price allocated to in-process research and development of approximately $60
million.
In accounting for the acquisition of Mirabilis, the Company allocated the
excess purchase price over the fair value of net tangible assets acquired to
identified intangible assets. In performing this allocation, the Company
considered, among other factors, the attrition rate of the active users of the
technology at the date of acquisition (estimated to be similar to the rate
experienced by the AOL service) and the research and development projects
in-process at the date of acquisition. With regard to the in-process research
and development projects, the Company considered, among other factors, the stage
of development of each project at the time of acquisition, the importance of
each project to the overall development plan, and the projected incremental cash
flows from the projects when completed and any associated risks. Associated
risks include the inherent difficulties and uncertainties in completing each
project and thereby achieving technological feasibility and risks related to the
impact of potential changes in future target markets. If these projects are not
successfully developed, the Company may not realize the value assigned to the
in-process research and development projects. In addition, the value of the
other acquired intangible assets may also become impaired.
The Company acquired Actra, a developer of commerce applications for
conducting business-to-business and business-to-consumer commerce on the
Internet in December 1997, PLS, a developer of information indexing and search
technologies in January 1998 and NetChannel, a Web-enhanced television company,
in June 1998. These transactions were accounted for under the purchase method of
accounting. In connection with the purchase of Actra, the Company recorded a
charge for acquired in-process research and development of $14 million. In
connection with the purchases of PLS and NetChannel, the Company recorded
charges for acquired in-process research and development in fiscal 1998 of $10
million related to each acquisition.
The technology, market and development risk factors discussed above for
the Mirabilis acquisition are also relevant and should be considered with regard
to the acquisitions of Actra, PLS and NetChannel.
Merger, Restructuring and Contract Termination Charges
In fiscal 2000, the Company recognized net charges of $15 million
primarily related to the mergers of MapQuest.com, Inc. and Tegic Communications,
Inc., consisting mainly of investment banking, legal and accounting services;
contract termination fees; and severance and other personnel costs. As of June
30, 2000, approximately $9 million of the merger related costs had been paid.
The company expects the remaining costs associated with the merger to be paid by
December, 2000.
In fiscal 1999, the Company recognized charges of $95 million related to
restructurings and mergers. All of these costs had been paid as of June 30,
2000.
o In connection with the mergers of Moviefone, Inc., Spinner Networks
Incorporated, NullSoft, Inc. and AtWeb, Inc., the Company recorded
direct merger-related costs of $17 million.
o In connection with plans announced and implemented in March 1999, the
Company recorded a charge of $78 million for direct costs related to
the merger with Netscape and the Company's reorganization plans to
integrate Netscape's operations and build on the strengths of the
Netscape brand and capabilities, as well as the merger with When, Inc.
In fiscal 1998, the Company recognized net charges of $75 million related
to restructurings and mergers. All of these costs had been paid as of June 30,
2000.
o In connection with a restructuring plan adopted in the third quarter of
fiscal 1998, the Company recorded a $35 million restructuring charge
associated with the restructuring of its AOL Studios brand group. The
restructuring included the exiting of certain business activities, the
termination of approximately 160 employees and the shutdown of certain
subsidiaries and facilities.
o At the end of the second and beginning of the third quarters of fiscal
1998, the Company recorded a $35 million restructuring charge related
to the implementation of certain restructuring actions mainly related
to the Netscape Enterprise Group. These actions were aimed at reducing
its cost structure, improving its competitiveness and restoring
sustainable profitability. The restructuring plan resulted from
decreased demand for certain Enterprise products and the adoption of a
new strategic direction. The restructuring included a reduction in the
workforce (approximately 400 employees), the closure of certain
facilities, the write-off of non-performing operating assets and
third-party royalty payment obligations relating to canceled contracts.
o In connection with the merger of Kiva Software Corporation, the Company
recognized merger costs of $6 million consisting mainly of investment
banking, legal and accounting services.
o In connection with a restructuring plan adopted in the second quarter
of fiscal 1997, the Company recorded a $49 million restructuring charge
associated with the Company's change in business model, the
reorganization of the Company into three operating units, the
termination of approximately 300 employees and the shutdown of certain
operating divisions and subsidiaries. As of the first quarter of fiscal
1998, substantially all of the restructuring activities had been
completed and the Company reversed $1 million of the original
restructuring accrual in the first quarter of fiscal 1998.
Refer to Note 3 of the Notes to Consolidated Financial Statements for
further information related to the restructurings and merger costs.
Settlement Charges
In fiscal 1998, the Company recorded a net settlement charge of $18
million in connection with the settlement of the Orman v. America Online, Inc.
class action lawsuit filed in U.S. District Court for the Eastern District of
Virginia alleging violations of federal securities laws between August 1995 and
October 1996. Included in the net settlement charge was an estimate of $17
million in insurance receipts. Also in fiscal 1998, the Company revised its
estimate of a liability in connection with a legal settlement that occurred in
fiscal 1997 and reversed $1 million of the original settlement accrual.
Other Income, net
Other income, net consists primarily of investment income and
non-operating gains net of interest expense and non-operating charges. The
Company had other income of $616 million, $638 million and $30 million in fiscal
years 2000, 1999 and 1998, respectively. The decrease in other income in fiscal
2000 was primarily attributable to net realized gains on investments of $408
million in fiscal 2000 compared to net realized gains of $565 million in fiscal
1999, offset by an increase in interest income. The increase in other income in
fiscal 1999 was primarily attributable to net realized gains on investments of
$565 million compared to net realized gains of $6 million in fiscal 1998 and
increases in net interest income partially offset by decreases in the allocation
of losses to minority stockholders, as well as investment write-offs.
The Company's investment portfolio of available-for-sale securities is
primarily invested in Internet and technology companies. These
available-for-sale equity investments are subject to significant fluctuations in
fair market value due to the volatility of the stock market and the industries
the Company is invested in. The Company has realized gains and losses from both
the sale of investments, as well as mergers and acquisitions of companies the
Company is invested in. See Note 11 of the Notes to the Consolidated Financial
Statements. The Company's objectives in managing its exposure to stock market
fluctuations is to minimize the impact of stock market declines to the Company's
earnings and cash flows. Beyond the control of the Company, however, continued
market volatility, as well as mergers and acquisitions, have the potential to
have a material non-cash impact on the operating results of the Company in
future periods.
(Provision) Benefit for Income Taxes
The (provision) benefit for income taxes was $(782), $(334) and $16
million in fiscal 2000, 1999 and 1998, respectively. The substantial increase in
the provision for income taxes in fiscal 1999 is a direct result of the
Company's increase in pre-tax income. For additional information regarding
income taxes, refer to Note 12 of the Notes to Consolidated Financial
Statements.
Segment Results of Operations
The Company currently has four operating segments, of which two are
reportable segments, that share the same infrastructure. For further information
regarding segments, refer to Note 7 of the Notes to the Consolidated Financial
Statements.
A summary of the segment financial information is as follows:
<TABLE>
Years ended June 30,
----------------------------------------
2000 1999 1998
------------ ------------ ------------
(Amounts in millions)
Revenues:
<S> <C> <C> <C>
Interactive Services Group (1).............. $5,993 $4,233 $2,689
Netscape Enterprise Group (2)............... 500 456 365
Other Segments (3) ......................... 393 115 60
------------ ------------ ------------
Total revenues.......................... $6,886 $4,804 $3,114
Income (loss) from operations:
Interactive Services Group (1).............. $1,685 $ 989 $452
Netscape Enterprise Group (2)............... 103 (14) (18)
Other Segments (3).......................... 79 (72) (88)
General & Administrative (4)................ (454) (358) (286)
Other charges............................... (15) (95) (186)
------------ ------------ ------------
Total income (loss) from operations..... $1,398 $ 450 $ (126)
</TABLE>
(1) For fiscal years 2000, 1999 and 1998, the Interactive Services Group
includes online service revenues of $4,400 million, $3,321 million and
$2,183 million, respectively; advertising, commerce and other revenues of
$1,593 million, $912 million and $506 million, respectively; and goodwill
and other intangible assets amortization of $44 million, $32 million and
$17 million, respectively.
(2) For fiscal years 2000, 1999 and 1998, the Netscape Enterprise Group is
comprised solely of enterprise revenues and includes goodwill and other
intangible assets amortization of $0 million, $5 million and $7 million,
respectively.
(3) For fiscal years 2000, 1999 and 1998, Other Segments are comprised solely
of advertising, commerce and other revenues and include goodwill and other
intangible assets amortization of $30 million, $28 million and $0 million,
respectively.
(4) Bad debt has been allocated to the applicable segment.
For an overview of the segment revenues, refer to the consolidated results
of operations discussion earlier in this section.
Interactive Services Group income from operations increased from $452
million in fiscal 1998 to $989 million in fiscal 1999 and $1,685 million in
fiscal 2000. These increases are mainly the result of increases in subscription
services and advertising, commerce and other revenues coupled with increased
network efficiencies.
Netscape Enterprise Group income/loss from operations improved from a loss
of $18 million in fiscal 1998 to a loss of $14 million in fiscal 1999 to income
of $103 million in fiscal 2000. These improvements were mainly attributable to
the increase in revenues, as well as a decline in operating expenses, as the
Netscape Enterprise Group began to realize efficiencies from using the Company's
infrastructure. In addition, the Netscape Enterprise Group is experiencing
benefits from the Sun Alliance, which became effective in March 1999.
Other Segments income/loss from operations improved from a loss of $88
million in fiscal 1998 to a loss of $72 million in fiscal 1999 to income of $79
million in fiscal 2000. These improvements were mainly attributable to an
increase in Interactive Properties advertising revenues partially offset by an
increase in cost of revenues and marketing costs.
Liquidity and Capital Resources
The Company is currently financing its operations primarily through cash
generated from operations. During fiscal 2000, the Company generated $1.8
billion in cash from operations. In addition, the Company has generated cash
from the sale of its convertible notes, the sale of marketable securities held
and the sale of its capital stock. In addition to purchasing telecommunications
equipment, the Company also enters into operating leases for the use of this
equipment. Net cash provided by operating activities was $1,808 million, $1,119
million and $428 million in fiscal 2000, 1999 and 1998, respectively, and
increased primarily due to the Company's increase in net income. Net cash used
in investing activities was $2,001 million, $1,809 million and $531 million in
fiscal 2000, 1999 and 1998, respectively. Cash used in investing activities
included $1.2 billion of investments in available-for-sale securities during
fiscal year 2000 and $2.3 billion during fiscal year 1999, including the
Company's $1.5 billion investment in a General Motors equity security related to
the strategic alliance the Company entered into with Hughes Electronics
Corporation ("Hughes"). Cash used in investing activities in fiscal year 1999
was offset by net proceeds of approximately $600 million related to the sale of
Excite, Inc. investments. Net cash provided by financing activities was $1,747
million, $948 million and $590 million in fiscal 2000, 1999 and 1998,
respectively. Included in financing activities for fiscal 2000 were $1.3 billion
in net proceeds from the issuance of convertible debt. Included in financing
activities for fiscal 1999 were $550 million in aggregate net proceeds from a
public stock offering of its common stock.
The Company uses its working capital to finance ongoing operations and to
fund marketing and the development of its products and services. The Company
plans to continue to invest in subscriber acquisition, retention and brand
marketing to expand its subscriber base, as well as in network, computing and
support infrastructure. Additionally, the Company expects to use a portion of
its cash for the acquisition and subsequent funding of technologies, content,
products or businesses complementary to the Company's current business. The
Company anticipates that cash on hand and cash provided by operating activities
will be sufficient to fund the operations of the Company's current business for
the next twelve months. The Company currently has approximately $3.7 billion
available for issuance under a shelf registration filed in May 1999.
At June 30, 2000, the Company had working capital of $2,033 million,
compared to working capital of $313 million at June 30, 1999. In addition, the
Company had investments including available-for-sale securities of $4,358
million and $2,151 million at June 30, 2000 and 1999, respectively. Current
assets increased by $2,383 million, from $2,045 million at June 30, 1999 to
$4,428 million at June 30, 2000, while current liabilities increased by $663
million, from $1,732 million to $2,395 million, over this same period. The
increase in current assets was primarily attributable to an increase in cash and
short-term investments resulting from cash generated by operations, as well as
cash generated by the issuance of convertible debt. The change in current
liabilities was due to an increase in deferred revenues.
During December 1999, the Company sold $2.3 billion aggregate principal at
maturity of zero-coupon Convertible Subordinated Notes (the "Zero-Coupon Notes")
due December 6, 2019 and received net proceeds of approximately $1.2 billion.
Also, in December 1999, the underwriters exercised the overallotment option on
the Zero-Coupon Notes. As a result, on January 5, 2000, the Company sold
additional Zero-Coupon Notes with aggregate principal at maturity of
approximately $55.6 million for net proceeds of approximately $30 million. For
additional information regarding these notes, refer to Note 10 of the Notes to
the Consolidated Financial Statements.
During July 1998, the Company sold approximately 43.2 million shares of
common stock and raised a total of $550 million in new equity, which was used
for general corporate purposes.
In November 1997, the Company sold $350 million of 4% Convertible
Subordinated Notes due November 15, 2002. For additional information regarding
these notes, refer to Note 10 of the Notes to the Consolidated Financial
Statements.
On March 17, 2000, America Online and Bertelsmann AG announced a global
alliance to expand the distribution of Bertelsmann's media content and
electronic commerce properties over America Online's interactive brands
worldwide. America Online and Bertelsmann also announced an agreement to
restructure their interests in the AOL Europe and AOL Australia joint ventures.
This restructuring consists of a put and call arrangement for America Online to
purchase, in two installments, Bertelsmann's 50% interest in AOL Europe for
consideration ranging from $6.75 billion to $8.25 billion, payable at America
Online's option in cash, America Online stock (or AOL Time Warner stock, if the
merger with Time Warner has closed) or a combination of cash and stock. For
additional information regarding these announcements, see Note 6 of the Notes to
Consolidated Financial Statements.
In June 1998, the Company purchased Mirabilis for $287 million in cash
(and contingent purchase price payments of up to $120 million) and NetChannel
for $16 million in cash. For additional information regarding these
acquisitions, see Note 6 of the Notes to Consolidated Financial Statements.
In January 1998, the Company consummated a Purchase and Sale Agreement
(the "Purchase and Sale") by and among the Company, ANS Communications, Inc.
("ANS"), a then wholly-owned subsidiary of the Company, and WorldCom, Inc.
("WorldCom") pursuant to which the Company transferred to WorldCom all of the
issued and outstanding capital stock of ANS in exchange for the online services
business of CompuServe Corporation ("CompuServe"), which was acquired by
WorldCom shortly before the consummation of the Purchase and Sale, and $147
million in cash (excluding $15 million in cash received as part of the
CompuServe online services business and after purchase price adjustments made at
closing). Immediately after the consummation of the Purchase and Sale, the
Company's European partner, Bertelsmann AG, paid $75 million to the Company for
a 50% interest in a newly created joint venture to operate the CompuServe
European online service. Each company invested an additional $25 million in cash
in this joint venture. The Company generated $207 million in net cash as a
result of the aforementioned transactions.
The Company enters into multiple-year data communications agreements in
order to support AOLnet. In connection with those agreements, the Company may
commit to purchase certain minimum data communications services. Should the
Company not require the delivery of such minimums, the Company's per hour data
communications costs may increase. For additional information regarding the
Company's commitments, see Note 9 of the Notes to Consolidated Financial
Statements.
The Company leases the majority of its equipment under non-cancelable
operating leases. It is building AOLnet, its data communications network, as
well as expanding its data center capacity. The buildout of AOLnet and the
expansion of data center capacity requires a substantial investment in
telecommunications and server equipment. The Company plans to continue making
significant investments in these areas. The Company is funding these
investments, which are anticipated to total approximately $750 million in fiscal
2001, through a combination of leases and cash purchases.
On January 10, 2000, the Company and Time Warner Inc. announced that they
had entered into an Agreement and Plan of Merger, dated as of January 10, 2000
(the "Merger Agreement"), which sets forth the terms and conditions of the
proposed merger of equals of America Online and Time Warner. Pursuant to the
Merger Agreement, America Online and Time Warner have formed AOL Time Warner and
each holds one share of AOL Time Warner. In June 2000, the stockholders approved
the merger. The Company expects the merger to be completed in the fall of 2000.
For additional information regarding this announcement, see Note 6 of the Notes
to Consolidated Financial Statements.
Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA")
The following table and discussion summarizes EBITDA for the years ended
June 30, 2000, 1999 and 1998:
Years ended June 30,
----------------------------------------
2000 1999 1998
------------ ------------ ------------
(Amounts in millions)
EBITDA (as adjusted).................. $1,788 $858 $259
The Company defines EBITDA as net income adjusted to exclude: (1)
provision/(benefit) for income taxes, (2) interest income and expense, (3)
depreciation and amortization and (4) special charges and gains on investments.
EBITDA is presented and discussed because the Company considers EBITDA an
important indicator of the operational strength and performance of its business
including the ability to provide cash flows to service debt and fund capital
expenditures. EBITDA, however, should not be considered an alternative to
operating or net income as an indicator of the performance of the Company, or as
an alternative to cash flows from operating activities as a measure of
liquidity, in each case determined in accordance with generally accepted
accounting principles ("GAAP").
For fiscal 2000, EBITDA increased from $858 million to $1,788 million or
108% over fiscal 1999. For fiscal 1999, EBITDA increased from $259 million to
$858 million or 231%. The increase from fiscal 1999 to 2000 is mainly due to the
significant increase in income before taxes (excluding special charges) from
$641 million in fiscal 1999 to $1,643 million in fiscal 2000. The increase from
fiscal 1998 to 1999 is due to the increase in income before taxes (excluding
special charges) from $90 million in fiscal 1998 to $641 million in fiscal 1999,
as well as an increase of approximately $100 million in depreciation and
amortization.
Seasonality
The growth in subscriber acquisitions and usage in the Company's online
services appears to be highest in the second and third fiscal quarters, when
sales of new computers and computer software are highest due to the holiday
season and following the holiday season, when new computer and software owners
are discovering Internet online services while spending more time indoors due to
winter weather.
Since making advertising revenue a key component of the Company's
strategy, the Company has experienced difficulty in distinguishing seasonality
in advertising sales from the overall market growth. Seasonal factors seem to be
mitigated by advertisers' growing interest in the overall online medium, as well
as gaining access to the Company's large and growing subscriber/user base across
multiple branded distribution channels.
Inflation
The Company believes that inflation has not had, and will not have in the
future, a material effect on its results of operations.
Forward-Looking Statements
This report and other oral and written statements made by the Company to
the public contain and incorporate by reference forward-looking statements
within the meaning of the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995. The forward-looking statements are based on
management's current expectations or beliefs and are subject to a number of
factors and uncertainties that could cause actual results to differ materially
from those described in the forward-looking statements. Such statements address
the following subjects: the proposed AOL/Time Warner merger; future operating
results; subscriber growth and retention; advertising, commerce and other
revenues; earnings growth and expectations; development and success of multiple
brands; new markets, products, services, features and content; corporate
spending; liquidity; network capacity; new platforms and access and distribution
technologies; regulatory developments, including the Company's ability to shape
public policy in, for example, telecommunications, privacy and tax areas.
The following factors, among others, could cause actual results to differ
materially from those described in the forward-looking statements:
With respect to the proposed America Online/Time Warner merger, the
inability to obtain, or meet conditions imposed for, governmental approvals for
the merger; the risk that the America Online and Time Warner businesses will not
be integrated successfully; costs related to the merger; fluctuating stock
market levels that could cause AOL Time Warner's stock value to be less than the
current America Online or Time Warner stock value; the difficulty the stock
market may have in valuing the AOL Time Warner business model; the failure of
AOL Time Warner to realize anticipated benefits of the America Online /Time
Warner merger.
The risk that the Company and its data communications access providers
will be unable to provide adequate server and network capacity. Risks associated
with the fixed costs and minimum commitment nature of a substantial majority of
the Company's network services, such that a significant decrease in demand for
online services would not result in a corresponding decrease in network costs.
Risks related to the build-out of AOLnet and the expansion of server and network
capacity; the risk that demand will not develop for the capacity created; the
risk that supply shortages for hardware and equipment and for local exchange
carrier lines from local telephone companies could impede the provision of
adequate network and system capacity; and the risk of the failure to obtain the
necessary financing.
Any damage or failure to the Company's computer equipment and the
information stored in its data centers.
The failure to increase revenues at a rate sufficient to offset the
increase in data communications and equipment costs resulting from increasing
usage.
Factors related to increased competition, including: price reductions and
increased spending; inability to generate greater revenues and profits from
advertising and electronic commerce; limitations on the Company's opportunities
to enter into or renew agreements with content providers and distribution
partners; limitations on the Company's ability to develop new products and
services; limitations on the Company's ability to continue to grow or sustain
the rate of growth of its subscriber base; and limitations on the Company's
ability to maintain or grow its market share in the enterprise software
industry.
The risk of loss of services of executive officers and other key
employees.
The failure of the Company to establish new relationships with electronic
commerce, advertising, marketing, technology and content providers or the loss
of a number of relationships with such providers or the risk of significantly
increased costs or decreased revenues needed, to maintain, or resulting from the
failure to maintain, such relationships, as the case may be.
The risk associated with accepting warrants in lieu of cash in certain
electronic commerce agreements, as the value of such warrants is dependent upon
the common stock price of the warrant issuer at the time the warrants are
earned, and for certain warrants the risk from periodic revaluation.
The risks related to the acquisition of businesses, including the failure
to successfully integrate and manage acquired technology, operations and
personnel, the loss of key employees of the acquired companies and diversion of
the Company's management's attention from other ongoing business concerns; and
the risk of significant charges for in-process research and development or other
matters.
The inability of the Company to introduce new products and services; and
its inability to develop, or achieve commercial acceptance for, these new
products and services. The failure to resolve issues concerning commercial
activities via the Internet, including security, reliability, cost, ease of use
and access. The risk of adverse changes in the U.S. regulatory environment
surrounding interactive services.
The failure of the Company or its partners to successfully market, sell
and deliver its services in international markets; and risks inherent in doing
business on an international level, such as laws that differ greatly from those
in the United States, unexpected changes in regulatory requirements, political
risks, export restrictions and controls, tariffs and other trade barriers and
fluctuations in currency exchange rates.
The Company's inability to offer its services through advanced
distribution technologies such as cable, satellite and wireless and a resulting
inability to offer advanced services such as voice and full motion video. The
Company's inability to develop new technology or modify its existing technology
to keep pace with technological advances and the pursuit of these technological
advances requiring substantial expenditures.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Market risk is the potential loss arising from adverse changes in market
rates and prices, such as foreign currency exchange, interest rates and a
decline in the stock market. The Company does not enter into derivatives or
other financial instruments for trading or speculative purposes. The Company is
exposed to immaterial levels of market risk related to changes in foreign
currency exchange rates and interest rates.
The Company is exposed to market risk as it relates to changes in the
market value of its investments. The Company invests in equity instruments of
public companies, certain of which will be classified as derivatives, for
business and strategic purposes and has classified these securities as
available-for-sale. These available-for-sale equity investments, primarily in
Internet and technology companies, are subject to significant fluctuations in
fair market value due to the volatility of the stock market and the industries
the Company is invested in. The Company has realized gains and losses from both
the sale of investments, as well as mergers and acquisitions of companies the
Company is invested in. See Note 11 of the Notes to the Consolidated Financial
Statements. As of June 30, 2000, the Company had available-for-sale equity
investments with a fair market value of $3,397 million and a cost basis of
$2,621 million. The gross unrealized gains of $1,016 million and gross
unrealized losses of $240 million have been recorded net of deferred taxes of
$298 million as a separate component of stockholders' equity. The Company's
objectives in managing its exposure to stock market fluctuations is to minimize
the impact of stock market declines to the Company's earnings and cash flows.
Beyond the control of the Company, however, continued market volatility, as well
as mergers and acquisitions, have the potential to have a material non-cash
impact on the operating results of the Company in future periods. See Note 2 of
the Notes to Consolidated Financial Statements for additional discussion of the
Company's exposure to stock market risk.
Item 8. Financial Statements and Supplementary Data
Reference is made to the financial statements listed under the heading
"(a)(1) Consolidated Financial Statements" of Item 14 hereof, which financial
statements are incorporated herein by reference in response to this Item 8.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
The response to this item is incorporated by reference from the Sections
titled "Management" and "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Registrant's Proxy Statement for its 2000 Annual Meeting of
Stockholders.
Item 11. Executive Compensation
The response to this item is incorporated by reference from the Section
titled "Executive Compensation," but not from the Sections titled "Executive
Compensation--Performance Graph" and "Executive Compensation--Report on
Executive Compensation by the Compensation and Management Development Committee
of the Board of Directors," in the Registrant's Proxy Statement for its 2000
Annual Meeting of Stockholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The response to this item is incorporated by reference from the Section
titled "Share Ownership" in the Registrant's Proxy Statement for its 2000 Annual
Meeting of Stockholders.
Item 13. Certain Relationships and Related Transactions
The response to this item is incorporated by reference from the Section
titled "Certain Relationships and Related Transactions" in the Registrant's
Proxy Statement for its 2000 Annual Meeting of Stockholders.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) Consolidated Financial Statements
The following consolidated financial statements of America Online, Inc.
and the Report of Independent Auditors thereon are included in Item 8 above:
<TABLE>
<S> <C>
Consolidated Balance Sheets as of June 30, 2000 and 1999................................. F-2
Consolidated Statements of Operations for the years ended June 30, 2000, 1999, and 1998.. F-3
Consolidated Statements of Changes in Stockholders' Equity for the years ended June 30,
2000, 1999, and 1998..................................................................... F-4
Consolidated Statements of Cash Flows for the years ended June 30, 2000, 1999, and 1998.. F-5
Notes to Consolidated Financial Statements............................................... F-6
Report of Management..................................................................... F-25
Report of Independent Auditors........................................................... F-26
</TABLE>
(a)(2) Financial Statement Schedules
All financial statement schedules required by Item 14(a) (2) have been
omitted because they are inapplicable or because the required information has
been included in the Consolidated Financial Statements or Notes thereto.
(a)(3) Exhibits
The following Exhibits are incorporated herein by reference or are filed
with this report as indicated below. Copies of exhibits will be furnished, upon
request, to holders or beneficial owners of America Online, Inc. Common Stock as
of September 28, 2000, subject to payment in advance of a fee of 25 cents per
page to reimburse America Online, Inc. for reproduction costs.
EXHIBIT LIST
Exhibit
No. Description
------- ----------------------------------------------------------------------
2.1 Purchase and Sale Agreement dated as of September 7, 1997 by and among
America Online, Inc., ANS Communications, Inc. and WorldCom, Inc.
(Filed as Exhibit 2 to the Company's Current Report on Form 8-K, dated
September 19,1997, and incorporated herein by reference.)
2.2 Agreement of Purchase and Sale dated as of June 5, 1998 by and among
America Online, Inc., AOL Acquisition Corp., R.G.A.O. Holdings Ltd.,
and Mirabilis, Ltd. and the Principal Stockholders (Confidential
treatment granted). (Filed as Exhibit 2 to the Company's Current
Report on Form 8-K, dated June 11, 1998, and incorporated herein by
reference.)
2.3 Agreement and Plan of Merger dated as of November 23, 1998 by and
among America Online, Inc., Apollo Acquisition Corp. and Netscape
Communications Corporation (Filed as Exhibit 2.1 to the Company's
Current Report on Form 8-K, dated November 23, 1998 and incorporated
herein by reference.)
2.4 Agreement and Plan of Merger dated as of February 1, 1999 by and among
America Online, Inc., MF Acquisition Corporation and Moviefone, Inc.
(Filed as Exhibit 2.1 to the Company's Current Report on Form 8-K dated
February 1, 1999 and incorporated herein by reference.)
2.5 Agreement and Plan of Merger dated as of December 21, 1999 among
America Online, Inc., MQ Acquisition, Inc. and MapQuest.com, Inc.
(Filed as Exhibit 2.1 to the Company's Current Report on Form 8-K
dated January 3, 2000 and incorporated herein by reference.)
2.6 Second Amended and Restated Agreement and Plan of Merger dated as of
January 10, 2000 among AOL Time Warner Inc., America Online, Inc.,
Time Warner Inc., America Online Merger Sub Inc. and Time Warner
Merger Sub Inc. (Filed as Exhibit 2.1 to Amendment No. 4 to AOL Time
Warner Inc.'s Form S-4 Registration Statement (File No. 333-30184),
filed on May 19, 2000 and incorporated herein by reference.)
3.1 Restated Certificate of Incorporation of America Online, Inc. (Filed
as Exhibit 3.1 to the Company's Annual Report on Form 10-K for the
year ended June 30, 1997 and incorporated herein by reference.)
3.2 Amendment of Section A of Article 4 of the Restated Certificate of
Incorporation of America Online, Inc. (Filed as Exhibit 3.1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999 and incorporated herein by reference.)
3.3 Certificate of Designation, Preferences and Rights of Series A-1
Junior Participating Preferred Stock of America Online, Inc. (Filed as
Exhibit 3.3 to the Company's Annual Report on Form 10-K for the year
ended June 30, 1998 and incorporated herein by reference.)
3.4 Certificate of Elimination of Series A Junior Participation Preferred
Stock of America Online, Inc. (Filed as Exhibit 3.4 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1998 and
incorporated herein by reference.)
3.5 Restated By-Laws of America Online, Inc. (Filed as Exhibit 3.5 to the
Company's Annual Report on Form 10-K for the year ended June 30, 1998
and incorporated herein by reference.)
4.1 Article 4, Article 6 and Article 8 of the Restated Certificate of
Incorporation (see Exhibits 3.1 and 3.2)
4.2 Indenture, dated as of November 17, 1997 between America Online, Inc.,
as issuer, and State Street Bank and Trust Company, as trustee. (Filed
as Exhibit 4.1 to the Company's Current Report on Form 8-K, dated
December 2, 1997 and incorporated herein by reference.)
4.3 Registration Rights Agreement, dated as of November 17, 1997 between
America Online, Inc. and Goldman, Sachs & Co., BT Alex. Brown
Incorporated, Lehman Brothers Inc. and Cowen & Company. (Filed as
Exhibit 4.2 to the Company's Current Report on Form 8-K, dated
December 2, 1997 and incorporated herein by reference.)
4.4 Purchase Agreement dated November 12, 1997 between America Online,
Inc. and Goldman, Sachs & Co., BT Alex. Brown Incorporated, Lehman
Brothers Inc. and Cowen & Company. (Filed as Exhibit 4.3 to the
Company's Current Report on Form 8-K, dated December 2, 1997 and
incorporated herein by reference.)
4.5 Rights Agreement dated as of May 12, 1998, between America Online,
Inc. and BankBoston, N.A., as Rights Agent. (Filed as Exhibit 4.2 to
the Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998 and incorporated herein by reference.)
4.6 Amendment No. 1 to Rights Agreement dated as of January 9, 2000
between America Online, Inc. and BankBoston, N.A., as Rights Agent.
(Filed as Exhibit 4.1 to the Registrant's Registration Statement on
Form 8-A/A, dated as of January 14, 2000 and incorporated herein by
reference.)
4.7 Form of Indenture to be dated as of December 6, 1999, between America
Online, Inc. and State Street Bank and Trust Company, as trustee
(filed as Exhibit 4.5 to the Company's Current Report on Form 8-K,
dated as of December 2, 1999 and incorporated herein by reference.)
4.8 Form of Supplemental Indenture No. 1 to be dated as of December 6,
1999, between America Online, Inc. and State Street Bank and Trust
Company, as trustee (filed as Exhibit 4.7 to the Company's Current
Report on Form 8-K, dated as of December 2, 1999 and incorporated
herein by reference.)
10.1 The Company's Employee Stock Purchase Plan, as amended. (Filed as
Exhibit 10.1 to the Company's Annual Report on Form 10-K for the year
ended June 30, 1999 and incorporated herein by reference.)
10.2 The Company's 1992 Employee, Director and Consultant Stock Option
Plan, as amended. (Filed as Exhibit 10.2 to the Company's Annual
Report on Form 10-K for the year ended June 30, 1999 and incorporated
herein by reference.)
10.3 The Company's 1999 Stock Plan*
10.4 The Company's Incentive Stock Option Plan, 1987 Restatement. (Filed as
Exhibit 10.25 to the Company's Registration Statement on Form S-1,
Registration Statement No. 33-45585, as filed on February 6, 1992 and
incorporated herein by reference.)
10.5 The Company's 1987 Stock Incentive Plan. (Filed as Exhibit 10.26 to
the Company's Registration Statement on Form S-1, Registration
Statement No. 33-45585, as filed on February 6, 1992 and incorporated
herein by reference.)
10.6 Amendment No. 1 to the Company's 1987 Stock Incentive Plan. (Filed as
Exhibit 10.27 to the Company's Registration Statement on Form S-1,
Registration Statement No 33-45585, as filed on February 6, 1992 and
incorporated herein by reference.)
10.7 Employment Agreement and related agreements entered into with Robert
W. Pittman. (Filed as Exhibit 10.15 to the Company's Annual Report on
Form 10-K for the year ended June 30, 1997 and incorporated herein by
reference.)
10.8 Employment Agreement and related agreements entered into with George
Vradenburg, III. (Filed as Exhibit 10.10 to the Company's Annual
Report on Form 10-K for the year ended June 30, 1998 and incorporated
herein by reference.)
10.9 Employment Agreement and related agreements entered into with J.
Michael Kelly. (Filed as Exhibit 10.8 to the Company's Annual Report
on Form 10-K for the year ended June 30, 1999 and incorporated herein
by reference.)
10.10 Restricted Stock Agreement between America Online, Inc. and J. Michael
Kelly (Filed as Exhibit 4.4 to the Company's Registration Statement on
Form S-8, Registration Statement No. 33-60623, as filed on August 4,
1998 and incorporated herein by reference.)
10.11 Strategic Development and Marketing Agreement made and entered into on
November 23, 1998, by and between America Online, Inc. and Sun
Microsystems, Inc. (Confidential treatment granted) (Filed as Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1998 and incorporated herein by reference.)
10.12 Sun Microsystems, Inc. Service Provider Agreement effective November
1, 1998 (Confidential treatment granted) (Filed as Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q for quarter ended December 31,
1998 and incorporated herein by reference.)
21.1 List of Subsidiaries *
23.1 Consent of Ernst & Young LLP *
24.1 Powers of Attorney (included on the signature page of this form 10-K
and incorporated herein by reference.)
------------
* Filed with this report
(b) Reports on Form 8-K
The following reports on Form 8-K were filed during the quarter ended June
30, 2000:
Item # Description Filing Date
------ ----------- -----------
7 A report dated April 3, 2000 filing pro forma
financial information April 3, 2000
5, 7 A report dated April 18, 2000 announcing fiscal year
2000 third quarter results April 21, 2000
7 A report dated May 23, 2000 filing pro forma
financial information May 23, 2000
5, 7 A report dated June 29, 2000 announcing consummation
of the acquisition of MapQuest.com, Inc. July 17, 2000
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 22nd day of
September, 2000.
AMERICA ONLINE, INC.
By: /s/J. Michael Kelly
J. Michael Kelly,
Senior Vice President, Chief Financial Officer
and Assistant Secretary
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature
appears below, constitute and appoint Stephen M. Case, Kenneth J. Novack, J.
Michael Kelly, Paul T. Cappuccio, Sheila A. Clark and James F. MacGuidwin, and
each of them, my true and lawful attorneys-in-fact and agents, with full power
of substitution and resubstitution in each of them, for him/her and in his/her
name, place and stead, and in any and all capacities, to sign the Form 10-K for
the fiscal year ended June 30, 2000, and any required amendments or supplements
thereto, and to file the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite or necessary to be done in
or about the premises, for all intents and purposes as he or she might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents or any of them or their or his/her substitute or substitutes lawfully
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on the 22nd day of September, 2000.
<TABLE>
Signature Title Date
<S> <C> <C>
/s/Stephen M. Case Chairman of the Board, Chief Executive September 22, 2000
--------------------------------------------------- Officer (principal executive officer)
Stephen M. Case
/s/Robert W. Pittman President, Chief Operating Officer and September 22, 2000
--------------------------------------------------- Director
Robert W. Pittman
/s/J. Michael Kelly Senior Vice President, Chief Financial September 22, 2000
--------------------------------------------------- Officer and Assistant Secretary
J. Michael Kelly (principal financial officer)
/s/James F. MacGuidwin Senior Vice President, Controller, Chief September 22, 2000
--------------------------------------------------- Accounting & Budget Officer and
James F. MacGuidwin Corporate Compliance Officer (principal
accounting officer)
/s/Daniel F. Akerson Director September 22, 2000
---------------------------------------------------
Daniel F. Akerson
/s/James L. Barksdale Director September 22, 2000
---------------------------------------------------
James L. Barksdale
/s/Frank J. Caulfield Director September 22, 2000
---------------------------------------------------
Frank J. Caufield
/s/Miles R. Gilburne Director September 22, 2000
---------------------------------------------------
Miles R. Gilburne
/s/Alexander M. Haig, Jr. Director September 22, 2000
---------------------------------------------------
Alexander M. Haig, Jr.
/s/Kenneth J. Novack Vice Chairman and Director September 22, 2000
---------------------------------------------------
Kenneth J. Novack
/s/Colin L. Powell Director September 22, 2000
---------------------------------------------------
Colin L. Powell
/s/Franklin D. Raines Director September 22, 2000
---------------------------------------------------
Franklin D. Raines
/s/Marjorie Scardino Director September 22, 2000
---------------------------------------------------
Marjorie Scardino
</TABLE>
<PAGE>
AMERICA ONLINE, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of June 30, 2000 and 1999.....................F-2
Consolidated Statements of Operations for the years ended June 30, 2000,
1999 and 1998................................................................F-3
Consolidated Statements of Changes in Stockholders' Equity for the years
ended June 30, 2000, 1999 and 1998...........................................F-4
Consolidated Statements of Cash Flows for the years ended June 30, 2000,
1999 and 1998................................................................F-5
Notes to Consolidated Financial Statements...................................F-6
Report of Management........................................................F-25
Report of Independent Auditors..............................................F-26
<PAGE>
AMERICA ONLINE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
June 30,
------------------
2000 1999
-------- --------
(Amounts in
millions, except
share data)
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents........................................................... $ 2,490 $ 936
Short-term investments.............................................................. 925 544
Trade accounts receivable, less allowances of $83 and $55,
respectively...................................................................... 422 330
Other receivables, net.............................................................. 110 79
Prepaid expenses and other current assets........................................... 481 156
-------- --------
Total current assets................................................................ 4,428 2,045
Property and equipment at cost, net................................................. 991 660
Other assets:
Investments including available-for-sale securities................................. 4,358 2,151
Product development costs, net...................................................... 159 100
Goodwill and other intangible assets, net........................................... 501 454
Other assets........................................................................ 236 7
-------- --------
$10,673 $5,417
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable.............................................................. $ 153 $ 76
Other accrued expenses and liabilities.............................................. 919 797
Deferred revenue.................................................................... 1,109 648
Accrued personnel costs............................................................. 138 135
Deferred network services credit.................................................... 76 76
-------- --------
Total current liabilities........................................................... 2,395 1,732
Long-term liabilities:
Notes payable....................................................................... 1,630 348
Deferred revenue.................................................................... 358 30
Other liabilities................................................................... 8 15
Deferred network services credit.................................................... 121 197
-------- --------
Total liabilities................................................................... 4,512 2,322
Stockholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares authorized, no shares issued
and outstanding at June 30, 2000 and 1999, respectively........................... - -
Common stock, $.01 par value; 6,000,000,000 shares authorized,
2,316,494,480 and 2,212,108,197 shares issued and outstanding at
June 30, 2000 and 1999, respectively.............................................. 23 22
Additional paid-in capital.......................................................... 4,314 2,781
Accumulated other comprehensive income - unrealized gain on
available-for-sale securities, net................................................ 478 168
Retained earnings .................................................................. 1,346 124
-------- --------
Total stockholders' equity.......................................................... 6,161 3,095
-------- --------
$10,673 $5,417
======== ========
See accompanying notes.
</TABLE>
<PAGE>
AMERICA ONLINE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
Year ended June 30,
------------------------
2000 1999 1998
------- -------- --------
(Amounts in millions,
except per share data)
Revenues:
<S> <C> <C> <C>
Subscription services................................... $4,400 $3,321 $2,183
Advertising, commerce and other......................... 1,986 1,027 566
Enterprise solutions.................................... 500 456 365
------- -------- --------
Total revenues.......................................... 6,886 4,804 3,114
Costs and expenses:
Cost of revenues........................................ 3,458 2,669 1,825
Sales and marketing..................................... 1,015 816 629
Product development..................................... 303 292 243
General and administrative.............................. 623 417 333
Amortization of goodwill and other intangible assets.... 74 65 24
Merger, restructuring and contract termination charges.. 15 95 75
Acquired in-process research and development............ - - 94
Settlement charges...................................... - - 17
------- -------- --------
Total costs and expenses................................ 5,488 4,354 3,240
Income (loss) from operations........................... 1,398 450 (126)
Other income, net....................................... 616 638 30
------- -------- --------
Income (loss) before provision for income taxes......... 2,014 1,088 (96)
(Provision) benefit for income taxes.................... (782) (334) 16
------- -------- --------
Net income (loss)....................................... $1,232 $ 754 $ (80)
======= ======== ========
Earnings (loss) per share:
Earnings (loss) per share-diluted....................... $ 0.48 $ 0.30 $ (0.04)
Earnings (loss) per share-basic......................... $ 0.54 $ 0.36 $ (0.04)
Weighted average shares outstanding-diluted............. 2,603 2,566 1,859
Weighted average shares outstanding-basic............... 2,278 2,090 1,859
See accompanying notes.
</TABLE>
<PAGE>
AMERICA ONLINE, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
Accumulated
Preferred Stock Common Stock Additional Other
--------------- ---------------------- Paid-in Comprehensive
Shares Amount Shares Amount Capital Income, Net
-------- ------ --------------- ------ ---------- ------------------
(Amounts in millions, except share data)
<S> <C> <C> <C> <C> <C> <C>
Balances at June 30, 1997,........................ 1,000 $- 1,781,725,323 $18 $1,093 $19
Effect of immaterial pooling ..................... - - 2,760,856 - 8 -
Common stock issued:
Exercise of options and ESPP................... - - 153,648,443 2 149 -
Business acquisitions.......................... - - 6,060,898 - 80 -
Sale of stock, net............................. - - 7,620,048 - 8 -
Amortization of compensatory stock options - - - - 33 -
Unrealized gain on
available-for-sale securities, net............. - - - - 78 126
Conversion of preferred stock
to common stock................................ (1,000) - 3,136,000 - - -
Tax expense related to stock options.............. - - - - (2) -
Net loss.......................................... - - - - - -
--------- ------ --------------- ----- --------- ---------------
Balances at June 30, 1998,........................ - - 1,954,951,568 20 1,447 145
Effect of immaterial poolings..................... - - 8,596,406 - 32 -
Common stock issued:
Exercise of options, warrant and ESPP.......... - - 187,144,583 2 328 -
Sale of stock, net............................. - - 47,800,218 - 569 -
Amortization of compensatory stock options........ - - - - 20 -
Unrealized gain on
available-for-sale securities, net............. - - - - 13 23
Conversion of debt................................ - - 13,615,422 - 88 -
Tax benefit related to stock options.............. - - - - 284 -
Net income........................................ - - - - - -
-------- ------ --------------- ------ ---------- ------------------
Balances at June 30, 1999......................... - - 2,212,108,197 22 2,781 168
Effect of immaterial poolings..................... - - 4,844,481 - 20 -
Common stock issued:
Exercise of options, warrant and ESPP.......... - - 96,103,862 1 428 -
Amortization of compensatory stock options........ - - - - 13 -
Unrealized gain on
available-for-sale securities, net............. - - - - 195 310
Conversion of debt................................ - - 2,225,544 - 14 -
Tax benefit related to stock options.............. - - - - 763 -
Investment in Gateway............................. - - 1,212,396 - 100 -
Net income........................................ - - - - - -
-------- ------ --------------- ------ ---------- ------------------
Balances at June 30, 2000......................... - $- 2,316,494,480 $23 $4,314 $478
========= ====== =============== ====== ========== ==================
Comprehensive
Retained Income (Loss)
Earnings For The
(Accumulated Years Ended
Deficit) Total June 30,
----------- ------ -------------
(Amounts in millions, except share data)
<S> <C> <C> <C>
Balances at June 30, 1997,........................ $(518) $612
Effect of immaterial pooling ..................... (10) (2)
Common stock issued:
Exercise of options and ESPP................... - 151
Business acquisitions.......................... - 80
Sale of stock, net............................. - 8
Amortization of compensatory stock options - 33
Unrealized gain on
available-for-sale securities, net............. - 204 126
Conversion of preferred stock
to common stock................................ - -
Tax expense related to stock options.............. - (2)
Net loss.......................................... (80) (80) (80)
---------- ------- -------------
Balances at June 30, 1998,........................ (608) 1,004 $ 46
Effect of immaterial poolings..................... (22) 10 =============
Common stock issued:
Exercise of options, warrant and ESPP.......... - 330
Sale of stock, net............................. - 569
Amortization of compensatory stock options........ - 20
Unrealized gain on
available-for-sale securities, net............. - 36 23
Conversion of debt................................ - 88
Tax benefit related to stock options.............. - 284
Net income........................................ 754 754 754
----------- ------ -------------
Balances at June 30, 1999......................... 124 3,095 $ 777
Effect of immaterial poolings..................... (10) 10 =============
Common stock issued:
Exercise of options, warrant and ESPP.......... - 429
Amortization of compensatory stock options........ - 13
Unrealized gain on
available-for-sale securities, net............. - 505 310
Conversion of debt................................ - 14
Tax benefit related to stock options.............. - 763
Investment in Gateway............................. - 100
Net income........................................ 1,232 1,232 1,232
----------- ------ -------------
Balances at June 30, 2000......................... $1,346 $6,161 $1,542
=========== ======= =============
See accompanying notes.
</TABLE>
<PAGE>
AMERICA ONLINE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
Year ended June 30,
---------------------
2000 1999 1998
------ ------- ------
(Amounts in millions)
Cash flows from operating activities:
<S> <C> <C> <C>
Net income (loss)...................................................................... $1,232 $ 754 $ (80)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Non-cash restructuring charges......................................................... 2 7 32
Depreciation and amortization.......................................................... 363 298 191
Amortization of deferred network services credit....................................... (76) (76) (32)
Charge for acquired in-process research and development................................ - - 94
Compensatory stock options............................................................. 13 20 33
Deferred income taxes.................................................................. 769 334 (18)
Gain on sale of investments including available-for-sale securities.................... (413) (564) (28)
Changes in assets and liabilities, net of the effects of acquisitions and dispositions:
Trade accounts receivable............................................................ (97) (125) 76
Other receivables.................................................................... (31) 12 (67)
Prepaid expenses and other current assets............................................ (323) (61) 27
Other assets.......................................................................... (198) 3 (5)
Investments including available-for-sale securities.................................. (454) 10 (40)
Accrued expenses and other current liabilities....................................... 237 321 141
Deferred revenue and other liabilities............................................... 784 186 104
------ ------- ------
Total adjustments...................................................................... 576 365 508
------ ------- ------
Net cash provided by operating activities.............................................. 1,808 1,119 428
Cash flows from investing activities:
Purchase of property and equipment..................................................... (642) (303) (384)
Product development costs.............................................................. (92) (49) (51)
Proceeds from sale of investments including available-for sale securities.............. 513 743 87
Purchase of investments, including available-for-sale securities....................... (1,248) (2,295) (166)
Proceeds from S/T investments, net..................................................... (382) 133 103
Purchase of minority interest in Digital City.......................................... (80) - -
Net (payments) proceeds for acquisitions/dispositions of subsidiaries.................. 10 31 (98)
Other investing activities............................................................. (80) (69) (22)
------ ------- ------
Net cash used in investing activities.................................................. (2,001) (1,809) (531)
Cash flows from financing activities:
Proceeds from issuance of common stock, net............................................ 429 905 152
Principal and accrued interest payments on debt........................................ (15) (22) (2)
Payment of deferred finance costs & other financing activities, net.................... 51 8 70
Redemption of preferred stock.......................................................... - (9) -
Proceeds from issuance of debt......................................................... 1,282 66 370
------ ------- ------
Net cash provided by financing activities.............................................. 1,747 948 590
------ ------- ------
Net increase in cash and cash equivalents.............................................. 1,554 258 487
Cash and cash equivalents at beginning of year......................................... 936 678 191
------ ------- ------
Cash and cash equivalents at end of year............................................... $2,490 $ 936 $ 678
====== ======= ======
Supplemental cash flow information
Cash paid during the year for:
Interest (net of amount capitalized).................................................. $ 14 $ 18 $ 10
See accompanying notes.
</TABLE>
<PAGE>
AMERICA ONLINE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Organization
America Online, Inc. (the "Company") was incorporated in the state of
Delaware in May 1985. The Company, based in Dulles, Virginia, is the world's
leader in interactive services, Web brands, Internet technologies and electronic
commerce services. America Online, Inc. operates: two worldwide Internet
services, the AOL service, with more than 23 million members, and the CompuServe
service, with approximately 2.8 million members; several leading Internet brands
including ICQ, AOL Instant Messenger and Digital City, Inc.; the Netscape
Netcenter and AOL.COM Internet portals; the Netscape Communicator client
software, including the Netscape Navigator browser; AOL Moviefone, the nation's
number one movie listing guide and ticketing service; MapQuest.com, a leader in
destination information solutions; and Spinner Networks Incorporated and
Nullsoft, Inc., leaders in Internet music. Through its strategic alliance with
Sun Microsystems, Inc., the Company also develops and offers easy-to-deploy,
end-to-end electronic commerce and enterprise solutions for companies operating
in and doing business on the Internet.
Note 2. Summary of Significant Accounting Policies
Principles of Consolidation. The consolidated financial statements include
the accounts of the Company and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
Business Combinations. Business combinations which have been accounted for
under the purchase method of accounting include the results of operations of the
acquired business from the date of acquisition. Net assets of the companies
acquired are recorded at their fair value to the Company at the date of
acquisition. Amounts allocated to acquired in-process research and development
are expensed in the period of acquisition (see Note 6).
Other business combinations have been accounted for under the
pooling-of-interests method of accounting. In such cases, the assets,
liabilities and stockholders' equity of the acquired entities were combined with
the Company's respective accounts at recorded values. Prior period financial
statements have been restated to give effect to the merger unless the effect of
the business combination is not material to the financial statements of the
Company (see Note 6).
Revenue Recognition. Subscription services revenues are recognized over
the period that services are provided. In contractual arrangements in which the
Company provides services to third party subscriber accounts, the Company
records its subscription service revenue, net of associated service costs, over
the period that services are provided. Advertising, commerce and other revenues
and Enterprise solutions revenues, are recognized as the services are performed
or when the goods are delivered. The Company generates advertising revenues
based on two types of contracts, standard and non-standard. The revenues derived
from standard advertising contracts in which the Company provides a minimum
number of impressions for a fixed fee, are recognized as the impressions are
delivered. The revenues derived from non-standard advertising contracts, which
provide carriage, advisory services, premier placements and exclusivities,
navigation benefits, brand affiliation and other benefits, are recognized
straight-line over the term of the contract, provided the Company is meeting its
obligations under the contract. Deferred revenue consists primarily of prepaid
electronic commerce and advertising fees and monthly and annual prepaid
subscription fees billed in advance.
The Company enters into rebate and other promotional programs with its
commerce partners. In fiscal 2000, the Company began to offer a rebate program
whereby there is a contract with the subscriber for a defined period of time.
The Company capitalizes the costs of the rebates and amortizes the amount as a
reduction of revenues over the period in which services are performed and/or
goods are delivered. As of June 30, 2000 the Company had a short-term and
long-term prepaid asset of approximately $141 million (net of an allowance of $7
million) and $200 million, respectively. During fiscal year 2000, the Company
recorded an allowance of $31 million and write-offs (deductions) against the
allowance of $24 million related to the rebate program.
For other promotional programs, in which consumers are typically offered a
subscription to the Company's subscription services at no charge as a result of
purchasing a product from the commerce partner, the Company records subscription
revenue on a straight-line basis, over the term of the service contract with the
subscriber, the amounts received from the commerce partners, less any amounts
paid for marketing to the commerce partners.
In accordance with Statement of Position 97-2, "Software Revenue
Recognition", as amended by Statement of Position 98-9, "Modification of SOP
97-2, Software Revenue Recognition, With Respect to Certain Transactions", the
Company recognizes the revenue allocable to software licenses upon delivery of
the software product to the end-user, unless the fee is not fixed or
determinable or collectibility is not probable. In software arrangements that
include more than one element, the Company allocates the total arrangement fee
among each deliverable based on the relative fair value of each of the
deliverables determined based on vendor-specific objective evidence ("VSOE").
The Company determines VSOE based on an established price list published by
management having the relevant authority, which reflects the prices at which
those elements are sold separately to third parties.
Property and Equipment. Property and equipment are depreciated or
amortized using the straight-line method over the following estimated useful
lives:
Computer equipment and internal software.................2 to 5 years
Buildings and related improvements.....................15 to 40 years
Leasehold improvements................................. 4 to 10 years
Furniture and fixtures....................................... 5 years
In accordance with Statement of Position 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use," the Company
capitalizes certain costs incurred for the development of internal use software.
These costs include the costs associated with coding, software configuration,
upgrades and enhancements.
In March 2000, the Emerging Issues Task Force issued its consensus on
Issue No. 00-2, "Accounting for Web Site Development Costs." ("EITF 00-2"). The
Company accounts for the development and maintenance of its website in
accordance with EITF 00-2.
Subscriber Acquisition Costs and Advertising. The Company accounts for
subscriber acquisition costs pursuant to Statement of Position 93-7, "Reporting
on Advertising Costs". Included in sales and marketing expense is both brand and
acquisition advertising across the Company's multiple brands which was $650
million, $599 million and $476 million for the fiscal years ended June 30, 2000,
1999 and 1998, respectively.
Investments Including Available-For-Sale Securities. The Company has
classified all debt and equity securities for which there is a determinable fair
market value and there are no restrictions on the Company's ability to sell
within the next 12 months as available-for-sale. In accordance with the
provisions of SFAS No. 115, available-for-sale securities are carried at fair
value, with unrealized gains and losses reported as a separate component of
stockholders' equity net of applicable income taxes. Realized gains and losses
and declines in value judged to be other-than-temporary on available-for-sale
securities are included in other income (see Note 11). The cost basis for
realized gains and losses on available-for-sale securities is determined on a
specific identification basis.
As of June 30, 2000, the Company had available-for-sale equity investments
with a fair market value of $3,397 million and a cost basis of $2,621 million.
The gross unrealized gains of $1,016 million and gross unrealized losses of $240
million have been recorded net of deferred taxes of $298 million as a separate
component of stockholders' equity. Included in the $3,397 million is an
investment of $1,506 million in a General Motors equity security related to the
strategic alliance the Company entered with Hughes Electronics Corporation
("Hughes").
As of June 30, 1999, the Company had available-for-sale equity investments
with a fair market value of $1,956 million and a cost basis of $1,685 million.
The gross unrealized gains of $273 million and gross unrealized losses of $2
million were recorded net of deferred taxes of $103 million as a separate
component of stockholders' equity. Included in the $1,956 million is an
investment of $1,506 million in a General Motors equity security related to the
strategic alliance the Company entered with Hughes.
As of June 30, 2000 and 1999, the Company had approximately $10 million
and $12 million of debt securities included in investments including
available-for-sale securities, respectively. Maturity dates range between fiscal
years 2002 and 2004. The cost of these debt securities approximated fair market
value.
Equity and Cost Investments. The Company has various investments,
including foreign and domestic joint ventures, that are accounted for under the
equity method of accounting. All investments in which the Company has the
ability to exercise significant influence over the investee, but less than a
controlling voting interest, are accounted for under the equity method of
accounting. Under the equity method of accounting, the Company's share of the
investee's earnings or loss is included in consolidated operating results. To
date, the Company's basis and current commitments in its investments accounted
for under the equity method of accounting have not been significant. As a
result, these investments have not significantly impacted the Company's results
of operations or its financial position.
Other investments, for which the Company does not have the ability to
exercise significant influence and for which there is not a readily determinable
market value, are accounted for under the cost method of accounting. In
addition, for investments in equity securities in which the Company is
restricted from selling the equity securities within 12 months, the investments
are accounted for under the cost method of accounting. When the restrictions on
the sale of such securities lapse, the Company classifies and accounts for the
securities as available-for-sale. Dividends and other distributions of earnings
from investees, if any, are included in income when declared. The Company
periodically evaluates the carrying value of its investments accounted for under
the cost method of accounting and as of June 30, 2000 and 1999 such investments
were recorded at the lower of cost or estimated net realizable value.
Product Development Costs. The Company's subscription services are
comprised of various features which contribute to the overall functionality of
the service. The overall functionality of the services are delivered primarily
through the Company's four products (the AOL service and the CompuServe service
for Windows and Macintosh). The Company capitalizes costs incurred for the
production of computer software that generates the functionality within its four
products. Capitalized costs include direct labor and related overhead for
software produced by the Company and the cost of software purchased from third
parties. All costs in the software development process which are classified as
research and development are expensed as incurred until technological
feasibility has been established ("beta"). Once technological feasibility has
been established, such costs are capitalized until the software has completed
beta testing and is mass-marketed. To the extent the Company retains the rights
to software development funded by third parties, such costs are capitalized in
accordance with the Company's normal accounting policies. Amortization, a cost
of revenue, is provided on a product-by-product basis, using the greater of the
straight-line method or the current year revenue as a percentage of total
revenue estimates for the related software product, not to exceed five years,
commencing the month after the date of product release. Quarterly, the Company
reviews and expenses the unamortized cost of any feature identified as being
impaired. The Company also reviews recoverability of the total unamortized cost
of all features and software products in relation to estimated online service
and relevant other revenues and, when necessary, makes an appropriate adjustment
to net realizable value.
Capitalized product development costs consist of the following:
Year ended
June 30,
-----------
(in millions) 2000 1999
----- -----
Balance, beginning of year.. $100 $88
Costs capitalized........... 91 45
Costs amortized............. (32) (33)
----- -----
Balance, end of year........ $159 $100
===== =====
The accumulated amortization of product development costs related to the
production of computer software totaled $137 million and $106 million at June
30, 2000 and 1999, respectively.
Included in product development expense are research and development costs
totaling $136 million, $136 million and $135 million, and other product
development costs totaling $167 million, $156 million and $108 million in the
years ended June 30, 2000, 1999 and 1998, respectively.
Foreign Currency Translation. Assets and liabilities of the Company's
wholly-owned foreign subsidiaries are translated into U.S. dollars at year-end
exchange rates, and revenues and expenses are translated at average rates
prevailing during the year. Translation adjustments are included as a component
of stockholders' equity. Foreign currency transaction gains and losses, which
have been immaterial, are included in results of operations.
Goodwill and Other Intangible Assets. Goodwill and other intangible assets
primarily relate to purchase transactions and are amortized on a straight-line
basis over periods ranging from 2 to 10 years. As of June 30, 2000 and 1999,
accumulated amortization was $165 million and $90 million, respectively. The
Company periodically evaluates whether changes have occurred that would require
revision of the remaining estimated useful life of the assigned goodwill or
render the goodwill not recoverable. If such circumstances arise, the Company
would use an estimate of the undiscounted value of expected future operating
cash flows to determine whether the goodwill is recoverable.
Cash, Cash Equivalents and Short-term Investments. The Company considers
all highly liquid investments with an original maturity of three months or less
to be cash equivalents. Short-term investments of $925 million and $544 million
as of the fiscal years ended June 30, 2000 and 1999, respectively, are carried
at cost which approximates fair market value and have original maturity dates
that range from four months to one year.
Trade Accounts Receivables. The carrying amount of the Company's trade
accounts receivables approximate fair value. The Company recorded provisions
(additions) to the allowance of $134 million and $59 million and write-offs
(deductions) against the allowance of $106 million and $39 million during the
fiscal years ended June 30, 2000 and 1999, respectively.
The Company sells products and services to customers in diversified
industries, primarily in the Americas, which includes Canada and Latin America,
Europe and the Asia Pacific region. The Company performs ongoing credit
evaluations of its customers' financial condition and generally does not require
collateral on product sales. The Company maintains reserves to provide for
estimated credit losses. Actual credit losses could differ from such estimates.
Financial Instruments. The carrying amounts for the Company's cash and
cash equivalents, other receivables, other assets, trade accounts payable,
accrued expenses and liabilities and other liabilities approximate fair value.
The fair market value for notes payable (see Note 10) and investments including
available-for-sale securities is based on quoted market prices where available.
Barter Transactions. The Company barters advertising for products and
services. Such transactions are recorded at the estimated fair value of the
products or services received or given. Revenue from barter transactions is
recognized when advertising is provided, and services received are charged to
expense when used. Barter transactions are immaterial to the Company's statement
of operations for all periods presented.
Net Income (Loss) per Common Share. The Company calculates net income
(loss) per share as required by SFAS No. 128, "Earnings per Share." SFAS No. 128
replaced the calculation of primary and fully diluted earnings per share with
the basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share exclude any dilutive effect of stock options, warrants
and convertible securities (see Note 5).
Stock-Based Compensation. The Company follows SFAS No. 123, "Accounting
for Stock-Based Compensation." The provisions of SFAS No. 123 allow companies to
either expense the estimated fair value of stock options or to continue to
follow the intrinsic value method set forth in APB Opinion 25, "Accounting for
Stock Issued to Employees" ("APB 25") but disclose the pro forma effects on net
income (loss) had the fair value of the options been expensed. The Company has
elected to continue to apply APB 25 in accounting for its stock option incentive
plans (see Note 14).
Reclassification. Certain amounts in prior years' consolidated financial
statements have been reclassified to conform to the current year presentation.
Use of Estimates. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates.
Recent Pronouncements. In March 2000, the FASB issued FASB Interpretation
No. 44, "Accounting for Certain Transactions involving Stock Compensation" ("FIN
44"), which contains rules designed to clarify the application of APB 25. FIN 44
will be effective on July 1, 2000 and the Company will adopt it at that time.
The Company believes the anticipated impact of adoption of FIN 44 will not be
material to the earnings and financial position of the Company.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101"), which clarifies certain existing accounting principles for the
timing of revenue recognition and its classification in the financial
statements. The SEC delayed the required implementation date of SAB 101 by
issuing Staff Accounting Bulletins No. 101A, "Amendment: Revenue Recognition in
Financial Statements" and 101B, "Second Amendment: Revenue Recognition in
Financial Statements" in March and June 2000, respectively. As a result, the SAB
101 will not be effective for the Company until the quarter ended June 30, 2001.
The Company believes the adoption of SAB 101 will not be material to the
earnings and financial position of the Company and it will mainly impact
Enterprise revenues.
The FASB recently issued Statement No. 137, "Accounting for Derivative
Instruments and Hedging Activities-Deferral of Effective Date of FASB Statement
No. 133". The Statement defers for one year the effective date of FASB Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities". The
rule now will apply to all fiscal quarters of all fiscal years beginning after
June 15, 2000. In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which is required to be adopted
in years beginning after June 15, 1999. The Statement permits early adoption as
of the beginning of any fiscal quarter after its issuance. The Statement will
require the Company to recognize all derivatives on the balance sheet at fair
value. Derivatives that are not hedges must be adjusted to fair value through
income. If the derivative is a hedge, depending on the nature of the hedge,
changes in the fair value of derivatives will either be offset against the
change in fair value of the hedged assets, liabilities, or firm commitments
through earnings or recognized in other comprehensive income until the hedged
item is recognized in earnings. The ineffective portion of a derivative's change
in fair value will be immediately recognized in earnings. Certain of the
Company's holdings of equity instruments have been deemed derivatives pursuant
to the criteria established in SFAS 133. The Company expects the adoption of
SFAS 133 in fiscal 2001, as well as the effect on subsequent periods, to be
immaterial.
Note 3. Merger/Restructuring Charges
Fiscal 2000
In June 2000, the Company recorded a net charge of approximately $10
million of direct costs primarily related to the merger of MapQuest.com, Inc.
("MapQuest.com"). This charge primarily consisted of investment banker fees,
contract termination fees, severance and other personnel costs, fees for legal
and accounting services and other expenses directly related to the transaction.
As part of the merger, approximately 70 positions will be eliminated. As of June
30, 2000, approximately $4 million of the merger related costs had been paid.
The company expects the remaining costs associated with the merger to be paid by
December 2000.
In December 1999, the Company recorded a charge of approximately $5
million of direct costs related to the merger of Tegic Communications, Inc.
("Tegic"). This charge primarily consisted of investment banker fees, fees for
legal and accounting services and other expenses directly related to the
transaction. All of these costs had been paid as of June 30, 2000.
Fiscal 1999
During the quarter ended June 1999, the Company recorded a charge of
approximately $15 million of direct costs primarily related to the mergers of
Moviefone, Inc. ("Moviefone"), Spinner Networks Incorporated ("Spinner") and
NullSoft, Inc. ("NullSoft"). These charges primarily consisted of investment
banker fees, severance and other personnel costs, fees for legal and accounting
services, and other expenses directly related to the transaction. All of these
costs had been paid as of June 30, 1999.
During the quarter ended March 1999, the Company recorded a charge of
approximately $78 million of direct costs primarily related to the mergers of
Netscape and When, Inc. and the Company's reorganization plans to integrate
Netscape's operations and build on the strengths of the Netscape brand and
capabilities. This charge primarily consisted of investment banker fees,
severance and other personnel costs (related to the elimination of approximately
850 positions), fees for legal and accounting services, and other expenses
directly related to the transaction. As of June 30, 2000, all of these costs had
been paid.
During the quarter ended December 1998, the Company recognized
approximately $2 million in merger related costs in connection with the merger
of AtWeb, Inc. These expenses were primarily associated with fees for investment
banking, legal and accounting services, severance costs and other related
charges in connection with the transaction. As of June 30, 2000, all of these
costs had been paid.
In connection with a restructuring plan adopted in the third quarter of
fiscal 1998, the Company recorded a $35 million restructuring charge associated
with the restructuring of its former AOL Studios brand group. The restructuring
included the exiting of certain business activities, the termination of
approximately 160 employees and the shutdown of certain subsidiaries and
facilities. As of June 30, 1999, all of these costs has been paid.
Fiscal 1998
During fiscal 1998, the Company recorded a $35 million restructuring
charge associated with actions aimed at reducing its cost structure, improving
its competitiveness and restoring sustainable profitability mainly related to
the Netscape Enterprise group. The restructuring plan resulted from decreased
demand for certain Netscape products and the adoption of a new strategic
direction. The restructuring included a reduction in the workforce
(approximately 400 employees), the closure of certain facilities, the write-off
of non-performing operating assets, and third-party royalty payment obligations
relating to canceled contracts. Also during fiscal 1998, the Company recognized
merger costs of $6 million related to the acquisition of Kiva Software
Corporation, consisting mainly of investment banking, legal and accounting
services. As of June 30, 2000, all of these costs had been paid.
During fiscal 1997, the Company recorded a $49 million restructuring
charge associated with the Company's change in business model, the
reorganization of the Company into three operating units, the termination of
approximately 300 employees and the shutdown of certain operating divisions and
subsidiaries. As of the first quarter of fiscal 1998, substantially all of the
restructuring activities had been completed and the Company reversed $1 million
of the original restructuring accrual in the first quarter of fiscal 1998.
Note 4. Settlement Charges
In fiscal 1998, the Company recorded a net settlement charge of $18
million in connection with the settlement of the Orman v. America Online, Inc.,
class action lawsuit filed in the U.S. District Court for the Eastern District
of Virginia alleging violations of federal securities laws between August 1995
and October 1996. Also in fiscal 1998, the Company revised its estimate of a
liability in connection with a legal settlement that occurred in fiscal 1997 and
reversed $1 million of the original accrual.
Note 5. Earnings (Loss) Per Share
The following table sets forth the computation of basic and diluted
earnings (loss) per share for the years ended June 30, 2000, 1999 and 1998:
<TABLE>
(in millions except for per share data) 2000 1999 1998
-------- -------- --------
Basic earnings per share:
<S> <C> <C> <C>
Net income (loss) available to common shareholders..............................$ 1,232 $ 754 $ (80)
-------- -------- --------
Weighted average shares outstanding............................................. 2,278 2,090 1,859
Basic earnings (loss) per share.................................................$ 0.54 $ 0.36 $ (0.04)
======== ======== ========
Diluted earnings per share:
Net income (loss) available to common shareholders..............................$ 1,232 $ 754 $ (80)
Interest on convertible debt, net of tax........................................ 7 10 -
-------- -------- --------
Adjusted net income (loss) available to common shareholders
assuming conversion..........................................................$ 1,239 $ 764 $ (80)
-------- -------- --------
Weighted average shares outstanding............................................. 2,278 2,090 1,859
Effect of dilutive securities:
Employee stock options....................................................... 286 385 -
Warrants..................................................................... - 40 -
Convertible debt............................................................. 39 51 -
-------- -------- --------
Adjusted weighted average shares and assumed conversions........................ 2,603 2,566 1,859
======== ======== ========
Diluted earnings (loss) per share...............................................$ 0.48 $ 0.30 $ (0.04)
======== ======== ========
</TABLE>
The diluted share base for the fiscal year ended June 30, 2000 excludes
incremental weighted shares of approximately 7.7 million and approximately 12
million related to convertible subordinated notes and stock options,
respectively. The diluted share base for the fiscal year ended June 30, 1999
excludes incremental weighted shares of approximately 8.8 million related to
stock options. The shares related to the convertible subordinated notes are
excluded due to their antidilutive effect as a result of adjusting net income by
$15 million for interest expense net of tax that would be forfeited if the notes
were converted to equity. The shares related to the stock options are excluded
due to their antidilutive effect as a result of the option's exercise prices
being greater than the average market price of the common shares during fiscal
2000 and 1999.
Note 6. Business Developments Purchase Transactions
Digital City
In May 2000, the Company purchased the 20% interest in Digital City, Inc.
("Digital City") it did not own for approximately $80 million. Approximately $66
million of the purchase price represents goodwill and is being amortized over 10
years. The net results attributable to the Company's non-owned portion of
earnings from Digital City has been previously reflected as earnings allocated
to minority shareholders included in other income, net and were not material for
the three years ended June 30, 2000.
Acquisition of Mirabilis, Ltd.
In June 1998, the Company purchased the assets, including the
developmental ICQ instant communications and chat technology, and assumed
certain liabilities of Mirabilis, Ltd. ("Mirabilis"), a development stage
enterprise that had generated no revenues, for $287 million in cash. In
addition, contingent purchase payments, based on future performance levels, of
up to $120 million may be made over three years beginning in the Company's
fiscal year 2001. As a result of certain performance levels being satisfied, the
Company paid $40 million in August 2000 related to the contingent purchase
price.
The acquisition was accounted for under the purchase method of accounting
and, accordingly, the results of operations are included in the financial
statements as of the date of acquisition, and the assets and liabilities were
recorded based upon their fair values at the date of acquisition. The Company
has allocated the excess purchase price over the fair value of net tangible
assets acquired to the following identifiable intangible assets: goodwill and
strategic value, existing technology, base of trial users, ICQ tradename and
brand and acquired in-process research and development. In accounting for the
acquisition of Mirabilis, the Company recorded approximately $228 million in
goodwill and other intangible assets, which are being amortized on a
straight-line basis over periods of five to ten years.
Acquisition of CompuServe Online Services Business
In January 1998, the Company consummated a Purchase and Sale Agreement
(the "Purchase and Sale") by and among the Company, ANS Communications, Inc.
("ANS"), a then wholly-owned subsidiary of the Company, and WorldCom, Inc.
("WorldCom") pursuant to which the Company transferred to WorldCom all of the
issued and outstanding capital stock of ANS in exchange for the online services
business of CompuServe Corporation ("CompuServe"), which was acquired by
WorldCom shortly before the consummation of the Purchase and Sale, and $147
million in cash (excluding $15 million in cash received as part of the
CompuServe online services business and after purchase price adjustments made at
closing). The transaction was accounted for under the purchase method of
accounting and, accordingly, the assets and liabilities were recorded based upon
their fair values at the date of acquisition. As a result of these transactions,
the excess of the cash and the fair value of the CompuServe business received
over the book value of ANS amounted to $381 million. This balance is classified
as current and long-term deferred network services credit and is being amortized
on a straight-line basis over a five-year term (equal to the term of a network
services agreement entered into with WorldCom) as a reduction of network
services expense within cost of revenues.
In connection with the acquisition of CompuServe, the Company recorded
approximately $127 million in goodwill and other intangible assets, which are
being amortized on a straight-line basis over periods of three to seven years.
Immediately after the consummation of the Purchase and Sale, the Company's
European partner, Bertelsmann AG, paid $75 million to the Company for a 50%
interest in a newly created joint venture to operate the CompuServe European
online service. Both the Company and Bertelsmann AG invested an additional $25
million in cash in this joint venture. The Company accounts for this transaction
under the equity method of accounting in accordance with the terms of the
securities issued in the joint venture.
Other Purchase Transactions
In fiscal 1998, the Company acquired Personal Library Software, Inc.
("PLS"), a developer of information indexing and search technologies,
NetChannel, Inc. ("NetChannel"), a Web-enhanced television company, and the
remaining equity interests of Actra Business Systems LLC ("Actra"), a designer
of Internet commerce applications. The Company purchased all of the outstanding
capital stock of each of the corporations and the limited liability company and
assumed all of their outstanding stock options in exchange for an aggregate of
approximately 6.6 million shares of the Company's common stock and options,
approximately $16 million in cash payments, the assumption of approximately $21
million in liabilities and $2 million in transition costs. The total purchase
price for these transactions was approximately $114 million.
In connection with the above mentioned purchase transactions, the Company
recorded a charge for acquired in-process research and development ("IPR&D") of
approximately $94 million in the fiscal year ended June 30, 1998. Any related
purchased IPR&D for each of the above acquisitions represents the present value
of the estimated after-tax cash flows expected to be generated by the purchased
technology, which, at the acquisition dates, had not yet reached technological
feasibility. The cash flow projections for revenues were based on estimates of
relevant market sizes and growth factors, expected industry trends, the
anticipated nature and timing of new product introductions by the Company and
its competitors, individual product sales cycles and the estimated life of each
product's underlying technology. Estimated operating expenses and income taxes
were deducted from estimated revenue projections to arrive at estimated
after-tax cash flows. Projected operating expenses include cost of goods sold,
marketing and selling expenses, general and administrative expenses, and
research and development, including estimated costs to maintain the products
once they have been introduced into the market and are generating revenue. The
remaining identified intangibles, including goodwill that may result from any
future contingent purchase payments, will be amortized on a straight-line basis
over lives ranging from 5 to 10 years.
The following unaudited pro forma information has been prepared assuming
that the sale of ANS and the acquisitions of Portola, DigitalStyle, Actra,
CompuServe and Mirabilis had taken place at the beginning of the respective
periods presented. The amount of the aggregate purchase price allocated to
acquired IPR&D for each applicable acquisition has been excluded from the pro
forma information, as it is a non-recurring item. The pro forma financial
information is not necessarily indicative of the combined results that would
have occurred had the acquisitions taken place at the beginning of the period,
nor is it necessarily indicative of results that may occur in the future. The
proforma effect of the PLS and NetChannel transactions are immaterial for all
periods presented and therefore are not included in the pro forma information.
Pro Forma
For the year
ended June 30,
---------------
(in millions, except per share data) 1998
---------------
(unaudited)
Revenue............................. $3,252
Loss from operations................ $(63)
Net Loss............................ $(16)
Loss per share-diluted.............. $(0.01)
Loss per share-basic................ $(0.01)
Pooling Transactions
Fiscal 2000
In June 2000, the Company completed its merger with MapQuest.com, Inc.
("MapQuest.com"), in which MapQuest.com became a wholly-owned subsidiary of the
Company. The Company exchanged approximately 12 million shares of common stock
for all the outstanding common shares of MapQuest.com. The merger was accounted
for under the pooling-of-interests method of accounting and, accordingly, the
accompanying financial statements and footnotes have been restated to include
the operations of MapQuest.com for all the periods presented. For the years
ended June 30, 2000 (through the date of the merger), 1999, and 1998,
MapQuest.com's revenues were approximately $43 million, $27 million and $23
million, respectively. For the years ended June 30, 2000 (through the date of
the merger), 1999 and 1998, MapQuest.com's net loss was approximately $34
million, $8 million and $5 million, respectively. See Note 3 for additional
information.
In November 1999, the Company completed its merger with Tegic
Communications, Inc. ("Tegic"), in which Tegic became a wholly-owned subsidiary
of the Company. The Company exhanged approximately 4.8 million shares of common
stock for all the outstanding common and preferred shares of Tegic in a
transaction that was accounted for as a pooling-of-interests. As Tegic's
historical results of operations were not material in relation to those of the
Company, the financial information prior to the quarter ended December 31, 1999
has not been restated to reflect the merger.
Fiscal 1999
In March 1999, the Company completed its merger with Netscape
Communications Corporation ("Netscape"), in which Netscape became a wholly-owned
subsidiary of the Company. The Company exchanged approximately 190 million
shares of common stock for all the outstanding common shares of Netscape. The
merger was accounted for under the pooling-of-interests method of accounting
and, accordingly, the accompanying financial statements and footnotes have been
restated to include the operations of Netscape for all periods presented. During
the quarter ended March 31, 1999, the Company incurred approximately $25 million
in transition and retention costs, which was charged to operations as incurred.
For the years ended June 30, 1999 (through the date of the merger) and 1998,
Netscape's revenues were approximately $461 million and $452 million,
respectively. For the years ended June 30, 1999 (through the date of the merger)
and 1998, Netscape's net loss was approximately $77 million and $159 million,
respectively. See Note 3 for additional information.
During fiscal 1999, the Company completed mergers with Nullsoft, Inc.
("Nullsoft") and Spinner Networks Incorporated ("Spinner"), companies that
provide Internet music, When, Inc. ("When.com"), a company that provides a
personalized event directory and calendar services, AtWeb, Inc. ("AtWeb") and
PersonaLogic, Inc. ("PersonaLogic"). The Company exchanged approximately 16.4
million shares of common stock for all the outstanding capital stock of these
companies. These mergers were accounted for under the pooling-of-interests
method of accounting. As the combined results of these companies is material to
the Company's net loss for the fiscal year ended June 30, 1998, the accompanying
financial statements have been restated to include the operations of these
companies for all periods presented. For the year ended June 30, 1999, these
companies had revenues of approximately $2 million through the dates of the
mergers and all prior years were immaterial. For the years ended June 30, 1999
(through the dates of the mergers) and 1998, the net loss for these companies
was approximately $18 million and $8 million, respectively. See Note 3 for
additional information.
In May 1999, the Company completed its merger with Moviefone, Inc.
("Moviefone"). The Company exchanged approximately 8.6 million shares of common
stock for all the outstanding common and preferred shares of Moviefone. As
Moviefone's historical results of operations were not material in relation to
those of the Company, the financial information prior to the quarter ended June
30, 1999 has not been restated to reflect the merger. See Note 3 for additional
information.
Fiscal 1998
In December 1997, the Company completed merger with KIVA Software
Corporation ("KIVA"). The Company exchanged approximately 10.8 million shares of
common stock for all of the outstanding capital stock and options of KIVA, a
privately held company. The merger was treated as a pooling-of-interests for
accounting purposes, and accordingly the historical financial statements of the
Company have been restated as if the merger occurred at the beginning of the
earliest period presented. In connection with the business combination, the
Company incurred direct transaction costs of approximately $6 million, which
consisted primarily of fees for investment banking, legal and accounting
services incurred in conjunction with the business combination. For the year
ended June 30, 1998 (through the date of the merger) KIVA's revenue was
approximately $4 million. For the year ended June 30, 1998 (through the date of
the merger) KIVA's net loss was approximately $3 million.
Other Business Developments
On January 10, 2000, the Company and Time Warner Inc. announced that they
had entered into an Agreement and Plan of Merger, dated as of January 10, 2000
(the "Merger Agreement"), which sets forth the terms and conditions of the
proposed merger of equals of America Online and Time Warner. Pursuant to the
Merger Agreement, America Online and Time Warner have formed AOL Time Warner and
each holds one share of AOL Time Warner. AOL Acquisition Sub, a newly formed and
wholly owned subsidiary of AOL Time Warner, will be merged with and into America
Online, with stockholders of America Online receiving one share of AOL Time
Warner common stock for each share of America Online Common Stock, and TW
Acquisition Sub, a newly formed and wholly owned subsidiary of AOL Time Warner,
will be merged with and into Time Warner, with common stockholders of Time
Warner receiving 1.5 shares of AOL Time Warner common stock for each share of
Time Warner common stock. As a result of the merger, the separate corporate
existence of each of AOL Acquisition Sub and TW Acquisition Sub will cease and
each of America Online and Time Warner will survive the merger as a wholly owned
subsidiary of AOL Time Warner. The transactions contemplated by the Merger
Agreement are subject to other customary closing conditions, such as regulatory
approvals. In June 2000, the stockholders of each of America Online and Time
Warner approved the merger. The Company expects the merger to be completed in
the fall of 2000.
On March 17, 2000, America Online and Bertelsmann AG announced a global
alliance to expand the distribution of Bertelsmann's media content and
electronic commerce properties over America Online's interactive brands
worldwide. America Online and Bertelsmann also announced an agreement to
restructure their interests in the AOL Europe and AOL Australia joint ventures.
This restructuring consists of a put and call arrangement for America Online to
purchase, in two installments, Bertelsmann's 50% interest in AOL Europe for
consideration ranging from $6.75 billion to $8.25 billion, payable at America
Online's option in cash, America Online stock (or AOL Time Warner stock, if the
merger has closed) or a combination of cash and stock. After December 15, 2001
and through January 15, 2002, Bertelsmann has the right to require America
Online to purchase 80% of its 50% interest in AOL Europe with a closing date of
January 31, 2002 for $5.3 billion. After March 31, 2002 and through April 30,
2002, Bertelsmann has the right to require America Online to purchase the
remaining 20% of its 50% interest in AOL Europe with a closing date of July 1,
2002 for $1.45 billion. If Bertelsmann fails to exercise its put rights, America
Online has the right to purchase 80% of Bertelsmann's 50% interest in AOL Europe
after January 15, 2002 and through January 15, 2003 for $6.5 billion and the
remaining 20% after June 30, 2002 and through June 30, 2003 for $1.75 billion.
In addition, the parties agreed that America Online would take immediate
ownership of Bertelsmann's 50% interest in the parties' AOL Australia joint
venture, subject to receipt of necessary regulatory approvals. Because
Bertelsmann's first put option will not close until January 31, 2002, if
exercised, America Online has not determined yet how it will fund the payment of
the purchase price for its purchases of Bertelsmann's interest in AOL Europe.
America Online cannot predict if Bertelsmann will exercise its put rights, and
America Online's call rights are not exercisable unless Bertelsmann fails to
exercise its put rights. If Bertelsmann does not exercise its put rights,
America Online will consider all pertinent factors at such time and during the
exercisability period of its call rights in determining whether to exercise its
call rights, including the performance and perceived value of AOL Europe at such
time, conditions in the markets where AOL Europe operates, financial market
conditions and America Online's (or AOL Time Warner's) business plans and
financial situation. For the years ended June 30, 2000 and 1999, AOL Europe's
revenues are less than 10% of America Online's revenues and AOL Europe's net
loss is less than 5% of America Online's net income. America Online anticipates
that the primary impact of the potential acquisition of Bertelsmann's interest
in AOL Europe on results of operations would be the amortization of $1 billion
to $1.5 billion of goodwill each year. America Online does not anticipate an
adverse impact from the potential acquisition on America Online's financial
position because it will have the ability to pay the purchase price either in
stock or cash, or a combination of the two, at its option. America Online
believes it will have adequate resources from its cash reserves or from
accessing the capital markets to make the required payment upon exercise of a
put or call right, should it decide to pay in cash, and that following the
merger, AOL Time Warner will be in a stronger position to make such payments
than America Online alone would be.
In November 1998, the Company announced a strategic alliance with Sun
Microsystems, Inc. ("Sun") to jointly develop a comprehensive suite of
easy-to-deploy, end-to-end solutions to help companies and Internet service
providers rapidly enter the electronic commerce market and scale their
electronic commerce operations. As a result, Sun has become a lead systems and
service provider to the Company and the Company is committed to purchase systems
and services worth approximately $400 million at list price from Sun through
2002 for its electronic commerce partners and its own use. As part of the
alliance with Sun, the Company will receive more than $350 million in licensing,
marketing and advertising fees from Sun, plus significant minimum revenue
commitments of $975 million. In fiscal 2000, the Company received $123 million
in licensing, marketing and advertising fees and approximately $317 million in
minimum revenue commitments.
Note 7. Segment Information
Effective June 30, 1999, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." Certain information is
disclosed, per SFAS No. 131, based on the way management organizes financial
information for making operating decisions and assessing performance. In
determining operating segments, the Company reviewed the current management
structure reporting to the chief operating decision-maker ("CODM") and analyzed
the reporting the CODM receives to allocate resources and measure performance.
America Online has four major lines of businesses:
o the Interactive Services Group,
o the Interactive Properties Group,
o the AOL International Group, and
o the Netscape Enterprise Group.
The lines of business are described below.
The Interactive Services Group develops and operates branded interactive
services, including:
o the AOL service, a worldwide Internet online service with approximately
23.2 million members as of June 30, 2000
o the CompuServe service, a worldwide Internet online service with
approximately 2.8 million members as of June 30, 2000
o the Netscape Netcenter, an Internet portal
o the AOL.COM Internet portal
o the Netscape Communicator client software, including the Netscape
Navigator browser
o the AOLTV service, an interactive television service for mass-market
consumers
o the AOL Wireless services, which deliver features and content of the
AOL service and branded properties to wireless consumers
The Interactive Properties Group is built around branded properties that
operate across multiple services and platforms, such as:
o Digital City, Inc., the leading local online network and community
guide on the AOL service and the Internet based on the number of
visitors per month
o ICQ, the world's leading communications portal based on the number of
registered users that provides instant communications and chat
technology
o AOL Instant Messenger (AIM), a Web-based communications service that
enables Internet users to send and respond in real time to private
personalized electronic text messages
o Moviefone, Inc., the nation's No. 1 movie guide and ticketing service
based on the number of users
o Internet music brands Spinner.com, Winamp and SHOUTcast
o MapQuest.com, a leader in destination information solutions
The AOL International Group oversees the AOL and CompuServe services and
operations outside the United States, as well as the Netscape Online service in
the United Kingdom.
The Netscape Enterprise Group focuses on providing businesses a range of
software products, technical support, consulting and training services. These
products and services enable businesses and users to share information, manage
networks and facilitate electronic commerce. The Netscape Enterprise group
operates primarily through iPlanet E-Commerce Solutions, a Sun-Netscape
alliance. This strategic alliance between America Online and Sun Microsystems,
Inc. ("Sun"), a leader in network computing products and services, was formed in
November 1998 and began operating in March 1999.
The Interactive Services Group and the Netscape Enterprise Group are the
only two reportable segments. The results of the Interactive Properties Group
and the AOL International Group have been combined in the "Other Segments" row
shown below. Prior period information has been restated to conform to the
current presentation. There are no intersegment revenues between the four
operating segments. Shared support service functions such as human resources,
facilities management and other infrastructure support groups are allocated
based on usage or headcount, where practical, to the four operating segments.
Charges that cannot be allocated are reported as general & administrative costs
and are not allocated to the segments. Special charges determined to be
significant are reported separately in the Condensed Consolidated Statements of
Operations and are not assigned or allocated to the segments. All other
accounting policies are applied consistently to the segments, where applicable.
A summary of the segment financial information is as follows:
<TABLE>
Years ended June 30,
----------------------------------------
2000 1999 1998
(Amounts in millions)
Revenues:
<S> <C> <C> <C>
Interactive Services Group (1).............. $5,993 $4,233 $2,689
Netscape Enterprise Group(2)................ 500 456 365
Other Segments (3).......................... 393 115 60
------------ ------------ ------------
Total revenues.......................... $6,886 $4,804 $3,114
Income (loss) from operations:
Interactive Services Group (1).............. $1,685 $ 989 $452
Netscape Enterprise Group (2)............... 103 (14) (18)
Other Segments (3).......................... 79 (72) (88)
General & Administrative (4)................ (454) (358) (286)
Other charges............................... (15) (95) (186)
------------ ------------ ------------
Total income (loss) from operations..... $1,398 $ 450 $ (126)
</TABLE>
(1) For fiscal years 2000, 1999 and 1998, the Interactive Services Group
includes online service revenues of $4,400 million, $3,321 million and
$2,183 million, respectively; advertising, commerce and other revenues of
$1,593 million, $912 million and $506 million, respectively; and goodwill
and other intangible assets amortization of $44 million, $32 million and
$17 million, respectively.
(2) For fiscal years 2000, 1999 and 1998, the Netscape Enterprise Group is
comprised solely of enterprise revenues and includes goodwill and other
intangible assets amortization of $0 million, $5 million and $7 million,
respectively.
(3) For fiscal years 2000, 1999 and 1998, Other Segments are comprised solely
of advertising, commerce and other revenues and include goodwill and other
intangible assets amortization of $30 million, $28 million and $0 million,
respectively.
(4) Bad debt has been allocated to the applicable segment.
The Company does not have any material revenues and/or assets outside the
United States and no single customer accounts for more than 10% or greater of
total revenues.
Note 8. Property and Equipment
Property and equipment consist of the following:
June 30,
-----------
(in millions) 2000 1999
---- -----
Land............................................ $ 37 $ 31
Buildings, equipment and related improvements... 303 191
Leasehold and network improvements.............. 214 188
Furniture and fixtures.......................... 86 74
Computer equipment and internal software........ 828 500
Construction in progress........................ 54 15
Vehicles........................................ 37 2
---- ------
1,559 1,001
Less accumulated depreciation and amortization.. 568 341
----- ------
Net property and equipment...................... $991 $660
===== =====
The Company's depreciation and amortization expense related to property
and equipment for the years ended June 30, 2000, 1999 and 1998 totaled $230
million, $160 million and $115 million, respectively.
Note 9. Commitments and Contingencies
Commitments
The Company leases facilities and equipment primarily under several
long-term operating leases, certain of which have renewal options. Future
minimum payments under non-cancelable operating leases with initial terms of one
year or more consist of the following:
(in millions)
Year ending June 30,
-------------------- -----
2001................ $209
2002................ 152
2003................ 69
2004................ 58
2005................ 43
Thereafter.......... 153
-----
$684
=====
The Company's rental expense under operating leases in the years ended
June 30, 2000, 1999 and 1998 totaled approximately $353 million, $296 million
and $269 million, respectively.
The Company has guaranteed monthly usage levels of data and voice
communications with some of its network providers and commitments related to the
construction of additional office buildings. The remaining commitments are
$1,684 million, $1,711 million, $1,149 million and $718 million for the years
ending June 30, 2001, 2002, 2003 and 2004, respectively.
As of June 30, 2000, the Company has guaranteed approximately $13 million
in indebtedness of one of its joint ventures. The Company has not had to make
any payments related to this guarantee during the year ended June 30, 2000.
Contingencies
The Company is a party to various litigation matters, investigations and
proceedings, including several complaints that have been filed and remain
pending in the Delaware Court of Chancery naming as defendants one or more of
America Online, the directors of America Online, Time Warner Inc. and the
directors of Time Warner. The complaints purport to be filed on behalf of
holders of America Online or Time Warner stock, as applicable, and allege
breaches of fiduciary duty by the applicable company and its directors or aiding
and abetting breaches of fiduciary duty by the other company and its directors
in connection with the proposed merger of America Online and Time Warner. The
plaintiffs in each case seek to enjoin completion of the merger and/or damages.
These cases are at a preliminary stage, but the Company does not believe these
lawsuits have any merit and intends to defend against them vigorously. The
Company is unable, however, to predict the outcome of these cases, or reasonably
estimate a range of possible loss given the current status of the litigation.
Since March 2000, America Online has been named as a defendant in several
class action lawsuits that have been filed in state and federal courts. The
complaints in these lawsuits contend that consumers and competing Internet
service providers have been injured because of the default selection features in
AOL 5.0. Plaintiffs are seeking damages, an injunction enjoining the
distribution of AOL Version 5.0 software, and disgorgement of all monies that
the Company has earned through the distribution of its Version 5.0 software.
These cases are at a preliminary stage, but America Online does not believe they
have merit and intends to contest them vigorously. The Company is unable,
however, to predict the outcome of these cases, or reasonably estimate a range
of possible loss given the current status of the litigation.
In the spring of 1999, the Department of Labor ("DOL") began an
investigation of the applicability of the Fair Labor Standards Act ("FLSA") to
the Company's Community Leader program. The Company believes the Community
Leaders are volunteers, not employees, that the Community Leader program
reflects industry practices, and that its actions comply with the law. The
Company is cooperating with the DOL's inquiry, but is unable to predict the
outcome of the DOL's investigation and cannot reasonably estimate a range of
possible loss given the current status of the DOL's investigation. Former
volunteers have sued the Company on behalf of an alleged class consisting of
current and former volunteers, alleging violations of the FLSA and comparable
state statutes. The Company believes the claims have no merit and intends to
defend them vigorously. The Company cannot predict the outcome of the claims or
whether other former or current volunteers will file additional actions, nor can
the Company reasonably estimate a range of possible loss given the current
status of the litigation.
The costs and other effects of pending or future litigation, governmental
investigations, legal and administrative cases and proceedings (whether civil or
criminal), settlements, judgments and investigations, claims and changes in
those matters (including those matters described above), and developments or
assertions by or against the Company relating to intellectual property rights
and intellectual property licenses, could have a material adverse effect on the
Company's business, financial condition and operating results.
Note 10. Notes Payable
During December 1999, the Company sold $2.3 billion principal at maturity
of zero-coupon Convertible Subordinated Notes due December 6, 2019 (the
"Zero-Coupon Notes") and received net proceeds of approximately $1.2 billion.
The Zero-Coupon Notes have a 3% yield to maturity and are convertible into the
Company's common stock at a conversion rate of 5.8338 shares of common stock for
each $1,000 principal amount of the Zero-Coupon Notes (equivalent to a
conversion price of $94.4938 per share based on the initial offering price of
the Zero-Coupon Notes). The Zero-Coupon Notes may be redeemed at the option of
the Company on or after December 6, 2002 at the redemption prices set forth in
the Zero-Coupon Notes. The holders can require the Company to repurchase the
Zero-Coupon Notes on December 6, 2004 at the redemption prices set forth in the
Zero-Coupon Notes. At June 30, 2000, the carrying value of the Zero-Coupon Notes
exceeded the fair value by approximately $160 million as estimated by using
quoted market prices. On December 31, 1999, the underwriters exercised the
overallotment option on the Zero-Coupon Notes. As a result, on January 5, 2000,
the Company sold additional Zero-Coupon Notes with aggregate principal at
maturity of approximately $55.6 million for net proceeds of approximately $30
million. As of June 30, 2000, the principal amount, net of unamortized discount,
was $1,296 million.
During June 1999, the Company borrowed approximately $65 million in the
form of two mortgages on its office buildings and land located in Dulles,
Virginia. The notes are collateralized by the buildings and land and carry
interest rates of 7.7% and 6.75%. The notes amortize over 25 years and are
payable in full at the end of 10 years. As of June 30, 2000 and 1999, the
principal amount outstanding on these mortgages was $64 million and $65 million,
respectively.
During September 1997, the Company borrowed approximately $29 million in a
refinancing of one of its office buildings. The note is collateralized by the
Company's office building and carries interest at a fixed rate of 7.46%. The
note amortizes on a straight-line basis over a term of 25 years and if not paid
in full at the end of 10 years, the interest rate, from that point forward, is
subject to adjustment. As of June 30, 2000 and 1999, the principal amount
outstanding on this note was $27 million and $28 million, respectively.
On November 17, 1997, the Company sold $350 million of 4% Convertible
Subordinated Notes due November 15, 2002 (the "Notes"). The Notes are
convertible into the Company's common stock at a conversion rate of 153.27504
shares of common stock for each $1,000 principal amount of the Notes (equivalent
to a conversion price of $6.52422 per share), subject to adjustment in certain
events and at the holders option. Interest on the Notes is payable semiannually
on May 15 and November 15 of each year, commencing on May 15, 1998. The Notes
may be redeemed at the option of the Company on or after November 14, 2000, in
whole or in part, at the redemption prices set forth in the Notes. During fiscal
2000, approximately 2.2 million shares of common stock were issued related to
conversions. At June 30, 2000, the fair value of the Notes exceeded the carrying
value by nearly $1.7 billion as estimated by using quoted market prices. As of
June 30, 2000 and 1999, the principal amount, net of unamortized discount, was
$244 million and $256 million, respectively.
Scheduled maturities of total debt at June 30, 2000 are:
(in millions)
Year ending June 30,
-------------------- -----
2001................$ 1
2002................ 248
2003................ 2
2004................ 2
2005................ 2
Thereafter.......... 2,406
-----
$2,661
Less: Unamortized
discount payable in
2019................(1,030)
-----
$1,631
======
Note 11. Other Income, Net
The following table summarizes the components of other income:
Year ended June 30,
-----------------
(in millions) 2000 1999 1998
----- ----- -----
Interest income................................ $257 $102 $37
Interest expense............................... (40) (20) (15)
Allocation of losses to minority shareholders.. - - 6
Equity investment losses....................... (14) (4) (10)
Gain on available-for-sale securities.......... 426 570 17
Loss on available-for-sale securities.......... (18) (5) (11)
Other income (expense)......................... 5 (5) 6
----- ----- -----
$616 $638 $30
===== ===== =====
The cash portion of net gains on available-for-sale securities was
approximately $135 million, $563 million and $17 million, respectively, for the
years ended June 30, 2000, 1999 and 1998.
<
Note 12. Income Taxes
The (provision) benefit for income taxes is comprised of:
<TABLE>
Year Ended June 30,
--------------------
(in millions) 2000 1999 1998
------ ------ ------
<S> <C> <C> <C>
Current - primarily foreign............................................... $ (3) $ (2) $ (2)
Deferred - primarily US federal and state................................. (20) (48) 18
Deferred tax charge attributable to the Company's stock option plans...... (759) (284) -
====== ====== ======
Provision for income taxes................................................ $(782) $(334) $ 16
</TABLE>
The provision for income taxes differs from the amount computed by
applying the statutory federal income tax rate to income before provision for
income taxes. The sources and tax effects of the differences are as follows:
<TABLE>
Year Ended June 30,
------------------
(in millions) 2000 1999 1998
----- ------- ----
<S> <C> <C> <C>
Income tax (provision) benefit at the federal statutory rate of 35%.. $(705) $(384) $ 31
State income (tax) benefit, net of federal benefit................... (60) (23) (6)
Nondeductible charge for purchased research and development.......... - - (28)
Nondeductible charge for merger related expenses .................... (5) (21) -
Benefit of dividends received deduction............................ 23 - -
Valuation allowance changes affecting the provision for income taxes. - 113 32
Other................................................................ (35) (19) (13)
----- ------- ----
$(782) $(334) $ 16
===== ======= ====
</TABLE>
As of June 30, 2000, the Company has net operating loss carryforwards of
approximately $10 billion for tax purposes, which will be available to offset
future taxable income. If not used, these carryforwards will expire between 2002
and 2020. To the extent that net operating loss carryforwards, when realized,
relate to stock option deductions, the resulting benefits will be credited to
stockholders' equity.
The Company's income tax provision was computed based on the federal
statutory rate and the average state statutory rates, net of the related federal
benefit.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are as follows:
June 30,
--------------
(in millions) 2000 1999
------- ------
Short term:
Short term deferred tax assets:
Deferred revenue................................ $ 24 $ 21
Accrued expenses and other...................... 18 34
Restructure reserve............................. - -
Valuation allowance............................. (39) (52)
------- ------
Total........................................... $ 3 $ 3
======= ======
Long term:
Long term deferred tax liabilities:
Capitalized software costs...................... $ (72) $ (46)
Unrealized gain on available-for-sale securities (298) (103)
Unremitted earnings of foreign subsidiaries .... (10) (6)
------- ------
Total........................................... (380) (155)
Long term deferred tax assets:
Net operating loss carryforwards................ 3,867 2,670
Deferred network services credit................ 72 101
Investment in AOL Europe ....................... 94 -
Other........................................... 57 95
Valuation allowance............................. (3,713)(2,714)
------- ------
Total........................................... 377 152
------- ------
Net long term deferred asset (liability)........ $ (3) $ (3)
======= ======
The valuation allowance for deferred tax assets increased by $986 million
in fiscal 2000. The increase in this allowance was primarily due to the benefit
generated from the current year exercise of stock options in excess of the
utilization of $759 million of benefits that reduce fiscal 2000 income taxes
payable. The benefit from the fiscal 2000 exercise of options will be recorded
to stockholders' equity as it is realized.
The Company has net operating loss carryforwards for tax purposes ("NOLs")
and other deferred tax benefits that are available to offset future taxable
income. Only a portion of the NOLs are attributable to operating activities. The
remainder of the NOLs are attributable to tax deductions related to the exercise
of stock options.
Prior to the third quarter of fiscal 1998, the Company followed the
practice of computing its income tax expense using the assumption that current
year stock option deductions were used first to offset its financial statement
income. NOLs could then offset any excess of financial statement income over
current year stock option deductions. Because stock option deductions are not
recognized as an expense for financial reporting purposes, the tax benefit of
stock option deductions must be credited to additional paid-in capital with an
offsetting income tax expense recorded in the income statement.
The Company changed its accounting for income taxes to recognize the tax
benefits from current and prior years' stock option deductions after utilization
of NOLs from operations (i.e., NOLs determined without deductions for exercised
stock options) to reduce income tax expense. Because stock option deductions
would have been utilized for financial accounting purposes in prior years under
both accounting methods due to the absence of NOLs from operations, this
accounting change had no effect on 1997 and prior years' tax provisions or
additional paid-in capital. The effect of this change was to increase net income
and diluted earnings per share for the year ended June 30, 1998 by $73 million
and $0.04, respectively.
The Company's deferred tax asset related to operations and exercised stock
options amounted to:
June 30,
--------------
(in millions) 2000 1999
------ ------
Operations..........................$ 141 $ 141
Stock options.......................$3,611 $2,626
When realization of the deferred tax asset is more likely than not to
occur, the benefit related to the deductible temporary differences attributable
to operations will be recognized as a reduction of income tax expense. The
benefit related to the deductible temporary differences attributable to stock
option deductions will be credited to additional paid-in capital when realized.
Note 13. Capital Accounts
Common Stock. At June 30, 2000 and 1999, the Company's $.01 par value
common stock authorized was 6 billion shares with approximately 2.3 billion and
2.2 billion shares issued and outstanding, respectively. At June 30, 2000,
approximately 527.7 million shares were reserved for the exercise of issued and
unissued common stock options, and convertible debt, and approximately 16.4
million shares were reserved for issuance in connection with the Company's
Employee Stock Purchase Plans.
The Company sold approximately 96 million, 192 million and 161 million
shares from the exercise of stock options, warrants and stock purchased through
the employee stock purchase plan in fiscal 2000, 1999 and 1998, respectively.
Net proceeds from these sales totaled approximately $429 million, $355 million
and $152 million in the same time periods. In addition, during July 1998, the
Company completed a public offering of common stock. The Company sold
approximately 43.2 million shares of common stock and raised a total of $550
million in new equity. The Company used the proceeds for general operating
purposes.
Preferred Stock. In February 1992, the Company's stockholders approved an
amendment and restatement of the certificate of incorporation which authorized
the future issuance of 5 million shares of preferred stock, $.01 par value, with
rights and preferences to be determined by the Board of Directors.
During May 1998, the Board of Directors designated 500,000 shares of the
Company's preferred stock as Series A-1 Junior Participating Preferred Stock in
connection with the establishment of a stockholder rights plan.
During May 1996, the Company sold 1,000 shares of Series B convertible
preferred stock (the "Preferred Stock") for approximately $28 million. The
Preferred Stock had an aggregate liquidation preference of approximately $28
million and accrued dividends at a rate of 4% per annum. Accrued dividends could
be paid in the form of additional shares of Preferred Stock. During May 1998,
the Preferred Stock, plus accrued but unpaid dividends, automatically converted
into 3.1 million shares of common stock based on the fair market value of common
stock at the time of conversion.
Warrant. In connection with an agreement with one of the Company's
communications providers, the Company issued a warrant that was exercised in
full during March 1999. The warrant, subject to certain performance standards
specified in the agreement, allowed the Company's communication provider to
purchase 57.6 million shares of common stock at a price of $0.2461 per share.
Shareholder Rights Plan. The Company adopted a new shareholder rights plan
on May 12, 1998 (the "New Plan"). The New Plan was implemented by declaring a
dividend, distributable to stockholders of record on June 1, 1998, of one
preferred share purchase right (a "Right") for each outstanding share of common
stock. All rights granted under the Company's former shareholder rights plan
adopted in fiscal 1993 were redeemed in conjunction with the implementation of
the New Plan and the former plan was terminated. Each Right under the New Plan
will initially entitle registered holders of the common stock to purchase one
one-thousandth of a share of the Company's new Series A-1 Junior Participating
Preferred Stock ("Series A-1 Preferred Stock") at a purchase price of $900 per
one one-thousandth of a share of Series A-1 Preferred Stock, subject to
adjustment. The Rights will be exercisable only if a person or group (i)
acquires 15% or more of the common stock or (ii) announces a tender offer that
would result in that person or group acquiring 15% or more of the common stock.
Once exercisable, and in some circumstances if certain additional conditions are
met, the New Plan allows stockholders (other than the acquirer) to purchase
common stock or securities of the acquirer having a then current market value of
two times the exercise price of the Right. The Rights are redeemable for $.001
per Right (subject to adjustment) at the option of the Board of Directors. Until
a Right is exercised, the holder of the Right, as such, has no rights as a
stockholder of the Company. The Rights will expire on May 12, 2008 unless
redeemed by the Company prior to that date. On January 9, 2000, the Company
adopted an amendment to the New Plan to exclude the Company's pending merger
with Time Warner from the actions that would cause the Rights to become
exercisable and to provide that the New Plan will terminate with the closing of
the merger with Time Warner.
Stock Splits. In November 1994, April 1995, November 1995, March 1998,
November 1998, February 1999, and November 1999 the Company effected two-for-one
splits of the outstanding shares of common stock. Accordingly, all data shown in
the accompanying consolidated financial statements and notes has been
retroactively adjusted to reflect the stock splits.
Note 14. Stock Plans
Options to purchase the Company's common stock under various stock option
plans have been granted to employees, directors and consultants of the Company
at fair market value at the date of grant. Generally, the options become
exercisable over periods ranging from one to four years and expire ten years
from the date of grant. In certain of these plans, the Company has repurchase
rights upon the individual cessation of employment. Generally, these rights
lapse over a 48-month period. In fiscal years 1998 and 1997, the Board of
Directors authorized approximately 22 million options to be repriced. The
vesting schedules were not materially changed and no employees owning 3% or more
of the Company's common stock nor any senior executives participated in the
repricing.
The effect of applying SFAS No. 123 on fiscal years 2000, 1999 and 1998
pro forma net income (loss) loss as stated below is not necessarily
representative of the effects on reported net income (loss) for future years due
to, among other things, the vesting period of the stock options and the fair
value of additional stock options in future years. Had compensation cost for the
Company's stock option plans been determined based upon the fair value at the
grant date for awards under the plans consistent with the methodology prescribed
under SFAS No. 123, the Company's net income (loss) in fiscal years 2000, 1999
and 1998 would have been approximately $629 million, $498 million and $(137)
million, or $0.24 per share, $0.19 per share and $(0.07) per share,
respectively, on a diluted basis. The fair value of the options granted during
fiscal years 2000, 1999 and 1998 are estimated at $23.80 per share, $11.47 per
share and $2.64 per share, respectively, on the date of grant using the
Black-Scholes option-pricing model with the following assumptions: no dividend
yield, volatility of 65%, a risk-free interest rate of 6.18% for 2000, 5.40% for
1999 and 5.51% for 1998, and an expected life of 0.51 years from date of
vesting. A summary of stock option activity is as follows:
Number Weighted-
of average exercise
shares price
------------- ----------------
Balance at June 30, 1997.. 463,692,048 $ 1.07
Granted................... 163,304,291 $ 6.17
Exercised................. (147,415,958) $ 0.76
Forfeited................. (37,618,532) $ 2.32
------------- ----------------
Balance at June 30, 1998.. 441,961,849 $ 2.96
Granted................... 111,711,524 $25.36
Exercised................. (122,446,540) $ 1.69
Forfeited................. (32,347,003) $ 9.95
------------- ----------------
Balance at June 30, 1999.. 398,879,830 $ 9.06
Granted................... 78,568,249 $50.61
Exercised................. (94,002,143) $ 3.90
Forfeited................. (26,859,157) $34.42
------------- ----------------
Balance at June 30, 2000.. 356,586,779 $17.67
============= ================
<TABLE>
Options outstanding Options exercisable
--------------------------------------- ------------------------
Weighted-
average Weighted- Weighted-
Number remaining average Number average
Range outstanding contractual exercise exercisable as exercise
of exercise price as of 6/30/00 life (in years) price of 6/30/00 price
------------------- ------------- --------------- --------- -------------- ---------
<S> <C> <C> <C> <C> <C>
$0.01 to $1.08..... 47,370,533 4.2 $0.57 46,237,363 $0.58
$1.09 to $2.12..... 50,290,991 5.9 $1.59 37,002,176 $1.56
$2.13 to $4.03..... 48,840,136 6.9 $3.73 24,215,994 $3.53
$4.15 to $9.35..... 47,769,659 7.4 $6.69 15,056,401 $7.27
$9.43 to $18.33.... 66,239,250 8.1 $11.77 13,010,314 $11.82
$19.03 to $47.54... 14,430,078 8.8 $39.47 2,914,982 $37.67
$47.57 to $47.94... 47,139,943 9.1 $47.94 331 $47.94
$48.33 to $93.94... 34,506,189 9.2 $60.35 5,291,162 $62.30
------------------- ------------- --------------- --------- -------------- ---------
$0.01 to $93.94.... 356,586,779 7.3 $17.67 143,728,723 $6.07
============= =============== ========= ============== =========
</TABLE>
Employee Stock Purchase Plan. In May 1992, the Company's Board of
Directors adopted a non-compensatory Employee Stock Purchase Plan ("the ESPP").
Under the ESPP, employees of the Company who elect to participate are granted
options to purchase common stock at a 15 percent discount from the market value
of such stock. The ESPP permits an enrolled employee to make contributions to
purchase shares of common stock by having withheld from his or her salary an
amount between 1 percent and 15 percent of compensation. The Stock and Option
Subcommittee of the Compensation and Management Development Committee of the
Board of Directors administers the ESPP. The total number of shares of common
stock that may be issued pursuant to options granted under the ESPP is
approximately 28.8 million. A total of approximately 12.4 million shares of
common stock have been issued under the ESPP.
In June 1995, the Company adopted a non-compensatory Employee Stock
Purchase Plan ("the Netscape ESPP") under Section 423 of the Internal Revenue
Code and a total of 6.3 million shares of common stock may be issued pursuant to
options under the Netscape ESPP. The Company's Board of Directors in 1998
amended the Netscape ESPP to increase the maximum percentage of payroll
deductions which any participant may contribute from his or her eligible
compensation to 15%; amended the Netscape ESPP from a two-year rolling offering
period to a six-month fixed offering period effective with the offering period
beginning March 1999; amended the limit to the number of shares any employee may
purchase in any purchase period to a maximum of 1,800 shares; and changed the
offering dates for each purchase period to March 1 and September 1 of each year.
Under this plan, qualified employees are entitled to purchase common stock at a
15 percent discount from the market value of such stock. Approximately 4 million
shares of common stock have been issued under the Netscape ESPP. The Netscape
ESPP was terminated in September 1999.
Note 15. Employee Benefit Plan
Savings Plans. As of June 30, 2000, the Company has one savings plan that
qualifies as a deferred salary arrangement under Section 401(k) of the Internal
Revenue Code. Under the plan, participating employees may defer a portion of
their pretax earnings. As defined by the plan, the Company matches 50% of each
employee's contributions up to a maximum matching contribution of 3% of the
employee's earnings. Prior to March 2000, the Company had two savings plans. In
one plan, the Company matched 50% of each employee's contributions up to a
maximum matching contribution of 3% of the employee's earnings and in the other
plan, the Company's contributions were discretionary. The Company's
contributions to plans were approximately $12 million, $6 million and $5 million
in the years ended June 30, 2000, 1999 and 1998, respectively.
Note 16. Subsequent Event
In August 2000, the Company purchased 4 million shares of common stock as
part of the initial public offering made by America Online Latin America, Inc.
("AOL-LA"). The purchase was made at the initial public offering price of $8 per
share, for a total of $32 million. In June 2000, the Company contributed $15
million to AOL-LA. In addition, in July 2000, the Company agreed to contribute
an additional $35 million to AOL-LA by December 31, 2000 of which $17.5 million
was funded in July 2000.
Note 17. Quarterly Information (unaudited)
<TABLE>
Quarter Ended
---------------------------------------------
September 30, December 31, March 31, June 30,
------------- ------------ --------- --------
(Amounts in millions, except per share data)
Fiscal 2000(1)
<S> <C> <C> <C> <C>
Subscription service revenues............... $995 $1,067 $1,153 $1,185
Advertising, commerce and other revenues.... 360 449 568 609
Enterprise solution revenues................ 122 117 126 135
------------- ------------ --------- --------
Total revenues.............................. 1,477 1,633 1,847 1,929
Income from operations...................... 260 306 376 456
Net income ................................. 181 280 433 338
Net income per share-diluted............... $0.07 $0.11 $0.17 $0.13
Net income per share-basic................. $0.08 $0.12 $0.19 $0.15
Net cash provided by operating activities.. $466 $353 $478 $511
Earnings Before Interest, Taxes,
Depreciation and Amortization
(EBITDA, as adjusted)(4).................. $337 $391 $488 $572
Fiscal 1999(2)(3)
Subscription service revenues............ $723 $786 $869 $943
Advertising, commerce and other revenue.. 182 251 281 313
Enterprise solution revenues............. 101 118 109 128
------------- ------------ --------- --------
Total revenues........................... 1,006 1,155 1,259 1,384
Income from operations................... 76 121 44 209
Net income............................... 75 113 409 157
Net income per share-diluted............. $0.03 $0.05 $0.16 $0.06
Net income per share-basic............... $0.04 $0.06 $0.20 $0.07
Net cash provided by operating activities $120 $178 $629 $192
Earnings Before Interest, Taxes,
Depreciation and Amortization
(EBITDA, as adjusted)(4)................. $133 $196 $225 $304
</TABLE>
(1) Net income in the fiscal year ended June 30, 2000 includes gains related to
investments of $111 million and merger expense of $5 million in the quarter
ended December 31, 1999, gains related to investments of $275 million in
the quarter ended March 31, 2000 and merger expense of $10 million in the
quarter ended June 30, 2000. Also, in the quarter ended December 31, 1999,
the company adjusted its accounting to capitalize the acquisition cost of
Gateway.net subscribers and amortize such cost over the term of the
agreement. The effect of the adjustment on the quarter was to increase net
income by $18 million and $.01 per diluted share.
(2) Net income in the fiscal year ended June 30, 1999 includes merger expense
of $2 million in the quarter ended December 31, 1998, merger and
restructuring expense of $78 million, transition expense of $25 million and
a gain related to an investment of $567 million in the quarter ended March
31, 1999 and merger expense of $15 million in the quarter ended June 30,
1999.
(3) The sum of per share earnings does not equal earnings per share for the
year due to equivalent share calculations which are impacted by
fluctuations in the Company's common stock market prices and the timing
(weighting) of shares issued.
(4) EBITDA is defined as net income adjusted to exclude: (1)
provision/(benefit) for income taxes, (2) interest income and expense, (3)
depreciation and amortization and (4) special charges and gains on
investments. The Company considers EBITDA an important indicator of the
operational strength and performance of its business including the ability
to provide cash flows to service debt and fund capital expenditures.
EBITDA, however, should not be considered an alternative to operating or
net income as an indicator of the performance of the Company, or as an
alternative to cash flows from operating activities as a measure of
liquidity, in each case determined in accordance with generally accepted
accounting principles ("GAAP").
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
America Online, Inc.
We have audited the accompanying consolidated balance sheets of America
Online, Inc. as of June 30, 2000 and 1999, and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for
each of the three years in the period ended June 30, 2000. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatements. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of America Online,
Inc. at June 30, 2000 and 1999, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended June 30,
2000, in conformity with accounting principles generally accepted in the United
States.
As discussed in Note 13, in 1998 the Company changed its method of
accounting for income taxes.
/s/ ERNST & YOUNG LLP
McLean, Virginia
July 20, 2000
