-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HmZEYvSwKi7MKxjRNPfO0lJvmyG140eq53ycB1GEJ/7EarJnJXvOxhFuHm26j9Z/ cmEIumcWND1d2bXLGUJBXw== 0000883780-97-000014.txt : 19970930 0000883780-97-000014.hdr.sgml : 19970930 ACCESSION NUMBER: 0000883780-97-000014 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970929 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICA ONLINE INC CENTRAL INDEX KEY: 0000883780 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROGRAMMING, DATA PROCESSING, ETC. [7370] IRS NUMBER: 541322110 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-12143 FILM NUMBER: 97687718 BUSINESS ADDRESS: STREET 1: 22000 AOL WAY STREET 2: C/O LENNERT J LEADER CFO CITY: DULLES STATE: VA ZIP: 20166 BUSINESS PHONE: 7034488700 10-K 1 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, 1997 Commission File Number- 0-19836 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 Dulles, Virginia 20166-9323 (Address of principal executive offices) (zip code) Registrant's telephone number, including area code: (703) 448-8700 Securities registered pursuant to section 12(b) of the Act: (Title of Each Class) (Name of Each Exchange on Which Registered) Common Stock, par value $.01 per share New York Stock Exchange Preferred Share Purchase Rights New York Stock Exchange Securities registered pursuant to section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of July 31, 1997, 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 in the New York Stock Exchange, was approximately $5.85 billion (calculated by excluding shares owned beneficially by directors, officers and stockholders owning more than 10% of outstanding stock from total outstanding shares solely for the purposes of this response). Number of shares of registrant's common stock outstanding as of July 31, 1997: 100,716,429. 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 1997 Annual Meeting of Stockholders. PART I Item 1. Business General America Online, Inc., including its subsidiaries ("America Online" or the "Company"), is the global leader in the interactive communications and services medium, with over $1.6 billion in revenue during fiscal 1997. The Company has the largest subscriber base of any Internet online service, with approximately 8.6 million members worldwide as of June 30, 1997, an increase of over 40% from last year. The Company generates revenues principally through membership and usage fees, as well as increasingly from other revenues, which include electronic commerce and advertising revenues. The Company offers its online services in the U.S., Austria, Canada, France, Germany, Japan, Sweden, Switzerland, and the United Kingdom and offers access to its AOL service in over 100 countries. The Company's mission, through its three business units, AOL Networks, AOL Studios, and ANS Communications, is to become the recognized brand leader in the development of an interactive medium that transcends traditional boundaries between people and places to create an interactive global community that holds the potential to change the way people communicate, stay informed, learn, shop and do business. To accomplish this mission, the Company's strategy is to continue to improve and expand its service offerings by incorporating new, scaleable technologies, build unique and engaging programming and content, expand investment in network capacity in order to serve existing members and support growth, and pursue related business opportunities, while maintaining technological flexibility. The Company seeks to establish America Online and AOL as recognized brand names and to build customer loyalty as a foundation for growth in subscribers and revenues. Through its AOL Networks unit, which oversees the Company's flagship Internet online service, the Company offers its members a broad range of original programming, features and tools through the AOL service and the AOL.com web site (http://www.AOL.com). The Company focuses on maximizing the interactive nature of its service by encouraging members to share information and ideas and provides numerous tools for members to customize the AOL service to best suit their individual and business needs. Offerings include electronic mail, Buddy Lists, Instant Messages, interactive news and magazines, entertainment, weather, sports, games, stock quotes, mutual fund transactions, online shopping, Internet access with search capabilities, software files, computing support, online classes and auditorium events, online meeting rooms and conversations (chat), and parental and mail controls. By offering a broad range of high quality Internet online products and services, AOL Networks seeks to build its subscriber base as a platform for increasing subscription and non- subscription based revenues, including from electronic commerce and advertising. Through its AOL Studios unit, the Company creates, invests in and builds original content for AOL and the Internet, focusing on branded properties in categories of local content, multiplayer games, entertainment, romance, sports and women. Under AOL Studios are Digital City, Inc. (owned by the Company and the Tribune Company, and providing local, community-based interactive content and services), Greenhouse Networks (a premier content developer for the mass market), WorldPlay Entertainment (expanding online games into a social entertainment experience) and AOL Ventures, Inc. (a content venture portfolio of strategic minority investments). ANS Communications, the Company's managed network services subsidiary, deploys access infrastructure for AOL and the Internet services industry. ANS provides large scale, high-speed network access to AOL's individual and business subscribers. ANS is a primary supplier for AOLnet, the Company's proprietary data communications network, which the Company expanded during fiscal 1997 from 143,000 modems to 350,000 modems, resulting in increased network capacity, higher speed access, and reduced per-hour data communication costs. The portfolio of AOL networks expanded during fiscal 1997 to reach approximately 1,300 cities worldwide. The Company has recently entered into an agreement with WorldCom, Inc. to sell ANS, as described below in Business -- Recent Developments. America Online was incorporated in Delaware on May 24, 1985. The Company's principal executive offices are located at 22000 AOL Way, Dulles, Virginia 20166-9323. Its telephone number at that address is (703) 448-8700. Its Internet address is AOL IR@aol.com, and its America Online address is AOL IR. Products and Services The Company's AOL service provides subscribers with a wide variety of content, features and tools, including electronic mail, Buddy Lists, Instant Messages, bulletin boards, interactive news and magazines, entertainment, weather, sports, games, stock quotes, mutual fund transactions, online shopping, Internet access with search capabilities, software files, computing support, online classes and auditorium events, meeting rooms and conversations (chat), parental and mail controls, and more. Members use these interactive communications facilities to share information and ideas, exchange advice and socialize. It is the Company's goal to continue developing and adding new sources of information and content in support of these member activities. The range of content, features, and tools offered by America Online includes the following: - Online Community - America Online promotes real-time online communication by scheduling conferences or discussions on specific topics. E-mail services allow members to send messages to other members' private electronic mailboxes, or to non-subscribers via fax, U.S. mail or an international e-mail gateway. Public bulletin boards allow members to share information and opinions on subjects of general or specialized interest. With Buddy Lists, members can keep an up-to-the moment account of whether fellow members are online (subject to a blocking feature), and Instant Messenger allows members to communicate online instantaneously without having to access an electronic mailbox. America Online also offers an interactive area that serves as the center or meeting place for America Online's online member community. Members enter existing, or create their own, public or private "meeting rooms" and are able to participate in lively interactive discussions with other members. Celebrity interviews, with participation by members, take place at live "auditorium" events. Through Mail Controls, subscribers can limit who may send them e-mail and the Preferred Mail feature allows members to block e-mail from known "junk" mailers in an effort to reduce the amount of junk e-mail that a member receives. The Company is expanding its online community beyond the AOL service to the Internet community by making available (currently in beta) AOL Instant Messenger and Buddy Lists to Internet users as well as AOL subscribers. The AOL.com web site (http://www.AOL.com) reaches out to the Internet community by making available AOL NetFind, an Internet search and ratings tool, to Internet users. - Computing - America Online provides its members access to tens of thousands of public domain and "shareware" software programs that members can transfer to their own disks to keep and use. Additionally, members can access information from numerous computer magazines such as MacWorld, PC World and Computer Life, talk to editors and interact with other members, and shop for computers, peripherals and commercial software. - News - America Online offers a broad range of information on current events with analysis in areas of domestic and international politics, business, weather, sports, and entertainment. America Online also provides a search capability which enables members to scan the news wires quickly to locate stories of interest and permits members to receive stories of interest on an ongoing basis into their electronic mailboxes. - Personal Finance - Through the Personal Finance channel, members have access to expert business analysis, stock, bond and commodity prices, information on companies, industries and markets, and investing and transaction services. For example, through content partnerships, America Online offers subscribers a discount stock brokerage system to place trades and the ability to track up-to-date personalized portfolio values. The AOL Banking Center offers home banking services, including bill payment, account review, and funds transfer, provided by over 20 financial institutions, and the Mutual Fund Center provides reference and educational information, prospectus and product information, applications and the ability to conduct mutual fund transactions and to access accounts 24 hours a day. - Shopping - In the AOL Shopping Channel, members have the ability to shop online 24 hours a day at over 45 stores, including 1-800-FLOWERS, Barnes & Noble, Lands' End, JC Penney, The Body Shop, Starbucks Coffee, Omaha Steaks, Eddie Bauer, Hickory Farms, FAO Schwarz, Godiva, Hallmark, Sharper Image, and American Greetings. During fiscal 1997, the Company agreed to make CUC International Inc. an anchor tenant in the AOL Shopping Channel providing AOL subscribers, after launch, with easy access to membership-based discount clubs in a wide range of consumer categories, from clothing and accessories to retail videos and software. The AOL service has implemented the AOL Certified Merchants Program, under which participating merchants agree to abide by customer service criteria, and the AOL Guarantee, which covers up to $50 of the credit card deductible for fraudulent purchases, in order to improve customer satisfaction and to encourage repeat business. Shopping opportunities also are available throughout the different content areas on the AOL service. Outside of its Shopping Channel, the Company has begun to offer shopping opportunities to the Internet through a partnership with Amazon.com, the leading online bookseller. - Travel - In the AOL Travel channel, subscribers can check availability, compare prices and purchase airline tickets and vacation packages, and make hotel and rental car reservations. The Travel channel also provides destination profiles, including maps and information on weather, currency, culture, history, and current events. - Sports - The AOL Sports channel informs and entertains members with college and professional sports scores, statistics, events coverage and analysis. Members also have available to them sports fantasy games and contests, shopping opportunities and chat. - Entertainment - In the Entertainment Channel, members learn about the latest events in the entertainment industry, including television, movies and the performing arts. Critics' reviews, celebrity photos, local movie listings, gossip columns, and articles from George and Entertainment Weekly are some highlights of this area. - Games - The Games channel features online game shows, murder mysteries, trivia and fantasy role-playing games and sports games. Players can move among games, participate in sponsored tournaments, contests and other organized activities and socialize with other players or spectators. The Company, through WorldPlay Entertainment (acquired by the Company as the ImagiNation Network, Inc., doing business as WorldPlay Entertainment), has recently begun to offer premium games in categories of puzzle & board, cards, strategy & action and adventure, for which subscribers pay $1.99 per hour in addition to the regular membership fee and usage charges. - Children's Programming and Parental Controls - The AOL service offers content directed to children on the Kids Only Channel and throughout the service through relationships with Nickelodeon, Marvel Comics, the Cartoon Network and others. Through Parental Controls, parents can limit the level of access from the AOL service to features and content on AOL and the Internet. Parents have three levels of access to choose from: adult, teen or child (for children up to age 12). Parental Controls also allow parents to limit their children's AOL e- mail, Instant Messages, downloads, and chat. In an effort to protect children's interests, the Company, its subsidiary Digital City, Inc. and the National Center for Missing and Exploited Children launched a program in July 1997 to post emergency alerts with photos of and information on missing children that are the subject of local or national searches. - Internet Access and Service - The Company provides members with simple access to and use of the Internet through integrated World Wide Web access within the AOL service. The integrated approach allows the user to seamlessly use the full suite of AOL features, including chat and e-mail, while exploring the Internet, all under America Online's standard pricing structures. In addition, America Online has incorporated advanced high-speed compression technology developed by the Johnson-Grace Company (acquired by the Company in January 1996), into the browser to improve Web access speed and graphic display performance. America Online's Internet capabilities also include e-mail gateways and mailing lists, USENET Newsgroups, file transfer protocol (FTP) and WAIS and Gopher databases. In addition, the Company has formed alliances with AT&T, Microsoft, Netscape, and Apple to increase brand recognition in different markets and to offer AOL customers high-quality Internet technology and tools and interactive programming. The Company launched its web site, AOL.com (http://www.AOL.com) in October 1995, where Internet users (who may not be AOL members) can use some of the same tools available to AOL members, including AOLNetFind, an Internet search tool that also rates Internet content, and Buddy Lists and Instant Messenger (currently in beta), which allow Internet users to see their friends and families online and to communicate real-time with them. - Local Content - The Company's subsidiary, Digital City, Inc., provides interactive content and services for and about local communities on the America Online Service and on the Worldwide Web. Digital City has a network of distinct local offerings in 14 major U.S. cities, including Atlanta, Boston, Chicago, Dallas, Denver, Hampton Roads (VA), Los Angeles, Minneapolis, Orlando, Philadelphia, San Diego, San Francisco, South Florida, and Washington, D.C. and reaches over two million consumers per month. Digital City plans to expand to a total of 21 major cities and has commenced the launch of its Web guides for these and 29 other major cities throughout the United States. Digital City's interactive product offers users original and third party local news, sports, weather and other information, a local guide service with directory and classified listings, and a forum for exchanging information, opinions and ideas. Digital City, Inc. is owned by Digital City LLC. The Company owns a majority ownership interest in that entity, and the Tribune Company owns the remaining interest. AOL Studios creates, markets and distributes original interactive titles, properties and new channels on the AOL service and the World Wide Web, and provides programming for AOL Networks and for other Internet access providers through its business units and subsidiaries. Greenhouse Networks, a division of the Company, is a content developer for the mass market; Digital City, Inc. provides local, community-based interactive content and services, and WorldPlay Entertainment (a wholly-owned subsidiary of the Company, ImagiNation Network, Inc. doing business as WorldPlay Entertainment) expands online games into a social entertainment experience; and AOL Ventures, Inc., a wholly-owned subsidiary of the Company, is a content venture portfolio of strategic AOL minority investments. In addition to the content currently available on its online service, America Online continues to add informative content through its strategic alliances with information providers as well as through joint ventures with major media companies. For example, the Company has formed alliances with ABC Sports, Capital Cities/ABC Inc., Newsweek, The New York Times, Warner Brothers Online, and Hachette Filipacchi Magazines to add original content and interactive programming. Advertising Sales and Electronic Commerce An important component of the Company's business strategy is to increase non-subscription based revenues, including from advertising sales and transaction fees associated with electronic commerce, and sale of merchandise, which the Company believes are increasingly important to its growth and success. The Company continues to establish a wide variety of relationships with advertising and electronic commerce partners in order to grow its non- subscription based revenues and to provide AOL subscribers with access to a broad selection of competitively priced, easy to order products and services. Advertising and electronic commerce revenues are an important part of the Company's non-subscription based revenues. The Company offers its advertising and electronic commerce partners certain marketing and promotional opportunities and in return seeks cash payments, the opportunity for revenue sharing, and competitive pricing and online conveniences for AOL subscribers. During fiscal 1997, the Company entered into agreements containing these features with Tel- Save Holdings, Inc., CUC International Inc., and 1-800-FLOWERS. For example, under the agreement with Tel-Save Holdings, Inc., Tel-Save will be the exclusive provider of consumer long-distance telecommunications services to be marketed to AOL members by the Company on the AOL service. The Company received $100 million in cash, and the parties have a revenue sharing arrangement that, based upon subscriber usage levels of the Tel-Save product offering, provides the Company with an opportunity to earn additional revenues. The agreement also provides for a warrant to America Online to purchase Tel-Save common stock. Tel-Save will offer AOL subscribers competitive pricing and the convenience of online billing. The Company has entered into numerous other relationships with advertisers and online merchants to promote their goods and services within the AOL Shopping Channel (see Business -- Products and Services -- Shopping) or elsewhere on the AOL service, including the following advertisers and merchants: American Express, Barnes & Noble, Charles Schwab, JC Penney, and Reebok. With its agreement with Amazon.com, Inc., the Company has begun to extend opportunities for advertising and electronic commerce beyond the AOL service to AOL's Internet-based properties. The Company seeks to continue to expand the scope and number of, and revenues from, its relationships with advertisers and electronic commerce partners. The Company offers for sale to AOL subscribers a number of computer and Internet online goods and services, including hardware and software products and books, and AOL logo merchandise. The Company promotes its merchandise principally by means of promotional "pop-up" screens and makes its merchandise available in online stores, including in various channel stores and in specialized seasonal or other targeted shops. The Company plans to continue to expand its opportunities for merchandise sales in the future. Network Services America Online employs a diversified portfolio approach in designing, structuring and operating its network services. America Online manages AOLnet, a network of third party network service providers, including Sprint Corporation, ANS Communications, Inc. ("ANS"), a wholly-owned subsidiary of America Online, and BBN Corporation, a part of GTE Internetworking. The Company's previous network system prior to December 1995 relied predominantly on a single network provider. AOLnet offers members in North America approximately 880 local telephone numbers in approximately 571 cities at speeds up to 28.8 kbps (kilobits per second). AOL Globalnet offers access in approximately 305 cities in 102 countries. In total, America Online, through all of its network services, offers its subscribers worldwide over 1600 local telephone numbers in approximately 1,300 cities in more than 100 countries. The ANS backbone network, which supports America Online's access to the Internet and a significant portion of AOLnet, is among the largest and fastest public data networks in the world. Through the expansion of the AOL network services during fiscal 1997 from 143,000 to 350,000 modems, the service grew, at peak, to permit over 384,000 simultaneous users, the exchange of up to 15 million e-mail messages a day and up to 116 million Instant Messages a day. The Company has recently entered into an agreement to sell ANS, as described below in Business - - - Recent Developments. Marketing and Distribution The goals of the Company's marketing programs are to attract and retain members. The Company seeks to build brand recognition and member loyalty and to make it easy for consumers to try, and subscribe to, the AOL service. The Company builds its brand name through a broad array of programs and strategies, including broadcast advertising campaigns, direct mail, magazine inserts, and increasingly from co-marketing, cross-promotion and bundling agreements. The Company has entered into co-marketing agreements with certain of its media partners and with affinity groups and associations to market directly to and cater to the needs of specific audiences, and has pursued cross-promotional opportunities through expanding existing, and establishing new, partnerships. Examples include agreements with ABC Sports, CBS SportsLine, CUC International Inc., Tel-Save Holdings, Inc., and 1-800-Flowers, that provide for the Company and its partners to jointly market, promote and advertise their products and services. Additionally, AOL has been preinstalled on nearly all leading personal computers for the consumer market, including those offered by Apple, Compaq, Dell, Gateway 2000, HP, IBM, Packard Bell, and Toshiba, and can be accessed through an icon on the Windows 95 and Apple Macintosh desktops and through Internet service providers such as the AT&T WorldNet service. The Company's marketing strategy is expected to place a greater emphasis on these cost-effective bundling agreements. Although the Company will continue to market its products via direct mail programs, such programs are expected to be more cost-efficient, as they will be directed to more narrowly targeted consumer groups. America Online utilizes specialized retention programs designed to increase customer loyalty and satisfaction and to maximize customer subscription life. These retention programs include regularly scheduled online events and conferences; the regular addition of new content, services 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 telephone customer support services. The Company believes that the adoption of flat-rate pricing will lead to increased subscriber acquisition and retention rates as compared to rates achieved prior to flat-rate pricing. America Online offers the following pricing alternatives for its AOL service: (1) a standard monthly membership fee of $19.95, with no additional hourly charges; subscribers can also choose to prepay for one year in advance at the monthly rate of $17.95; (2) an alternative offering three hours for $4.95 per month, with additional time priced at $2.50 per hour; and (3) an alternative offering of $9.95 per month for unlimited use -- for those subscribers who already have an Internet connection and use this connection to access the AOL service only. The Company has introduced premium games services, for which members pay $1.99 per hour (after any free hours offered under promotional programs) in addition to the regular monthly membership fee and hourly usage charges. Consumers can obtain the AOL software and a free trial membership at major software retailers and bookstores, or by calling 1-800-827-6364. International Expansion America Online has forged significant partnerships with leading international companies to create a global community of interactive services. The Company's international strategy is to provide consumers with local services in key international markets featuring local language, local content, marketing and community. Each of these services is marketed under the AOL brand name and provides seamless access to the U.S. and other international services to extend the AOL community worldwide. Central to the Company's strategy has been the formation of strategic alliances with strong international partners and the provision of high speed 28.8 kbps (kilobits per second) access for all members of international services. In addition, U.S. and global subscribers can access selected content and communities offered on the Company's other global services via the AOL International Channel, which is a convenient gateway featured on the new version AOL 3.0. America Online intends to continue to expand its global services through joint ventures and on its own, capitalizing on the growth of consumer personal computer ownership in key world markets. For AOL international subscribers traveling outside of their home countries, the Company will continue the expansion of international access to its services through its AOL Globalnet network and AOL international country networks, which currently provide access in more than 100 countries worldwide. Europe America Online, through a joint venture with Bertelsmann AG, one of the world's largest media companies, has launched the AOL service in France, Germany, and the United Kingdom. Each of these services provides European consumers with local content and communities via local access networks and is interconnected with the other AOL services. AOL also provides the U.K. service to consumers in Sweden, and the German service to consumers in Switzerland and Austria. Through this strategic partnership, the Company plans to extend these services into additional markets throughout Europe. The joint venture, AOL Europe, consists of Bertelsmann and America Online each owning 50%, except in Germany, where Axel Springer Verlag, Germany's largest newspaper publisher, holds a 10% equity participation. Bertelsmann is a minority stockholder in America Online with approximately a 3% stake, representing an initial investment of approximately $54 million, and has designated Dr. Middelhoff a member of the Company's Board of Directors. Canada AOL Canada features local Canadian content and services, and offers Canadian members localized client software, thirteen channels of Canadian content and billing in Canadian dollars. The service also provides message boards, discussion forums, e-mail, and easy access to the Internet through an integrated Web browser. AOL Canada's key partners include Citytv, a broadcaster and program producer; MuchMusic, Canada's first national music television channel; Shift Magazine, a Canadian publication in media, entertainment and technology; Green Line Investor Services, a division of TD Securities and Canada's largest discount broker; and Reuters Online Canada (ROC), a 24-hour a day multimedia online news service from the world's leading news and financial information company. Japan In April 1997, America Online launched AOL Japan through a partnership with Mitsui & Co., one of the world's largest international trading companies, and Nihon Keizai Shinbun (Nikkei), a leading Japanese media company and a primary business-information source for Japanese executives. AOL Japan offers interactive consumer services in Japan with a broad range of localized Japanese language content. The joint venture, AOL Japan, Inc., consists of Mitsui & Co. owning 40%, Nikkei 10% and America Online 50%. Mitsui and Nikkei contribute experience and credibility in the Japanese market, as well as the equivalent of approximately $52 million (in yen) to fund the launch of the Japanese service. America Online brings to the venture its leadership in developing, managing, and executing interactive online services in the U.S. and Europe. AOL Technologies AOL Technologies, a business unit under AOL Networks, is responsible for delivering research, development, and network/data center operations to the other America Online divisions, technology licensees and joint venture partners. This group is also responsible for the Company's billing functions. The Company has developed a flexible, scaleable architecture that enables America Online to rapidly embrace new opportunities and to operate services at a relatively low cost. Today America Online supports a variety of software platforms, hardware devices and conduits for delivery of the service. Software platforms include primarily Windows (3.1 and `95) and Macintosh. The Company is upgrading AOLnet to support x2 and k56flex, which are the two competing standards for high speed access, and is investing in the development of alternative technologies to deliver its services, including cable modems, DSL access, and future ISDN and wireless technologies. Competition The Company competes in the highly competitive businesses of online and Internet services, advertising and electronic commerce. Online services and Internet service providers, including CompuServe Corporation, the Microsoft Network and Prodigy Services Company and various national and local independent Internet service providers, such as NETCOM On-Line Communication Services, Inc., as well as long distance and regional telephone and cable companies, including, among others, AT&T Corp., MCI Communications Corporation and various regional Bell operating companies, @Home Network, and WebTV currently compete with the Company for both subscribers and for advertising and electronic commerce revenues. The Company also competes for advertising and electronic commerce revenues with major Web sites operated by search services and other companies such as Yahoo! Inc., Netscape Communications Corporation, Infoseek Corporation, CNET, Inc., Lycos, Inc., and Excite, Inc., and media companies such as The Walt Disney Company and Time Warner Inc. The Company has recently entered into an agreement with WorldCom, Inc. to acquire the CompuServe Corporation's online services businesses, as described below in Business -- Recent Developments. Some of the present competitors and potential future competitors of the Company may have greater financial, technical, marketing and/or personnel resources than the Company. America Online believes the principal competitive factors in the online and Internet services industries include, with respect to competition for subscribers, product features and performance quality, ease of use, access to distribution channels, strategic alliances, brand recognition, reliability and price, and with respect to advertising and electronic commerce revenues, numbers of visitors to an online or Internet site, duration and frequency of visits, and demographics of visitors. America Online believes that it currently competes effectively in these areas. For example, the Company works continually to upgrade its service and content offerings, has expanded its AOL.com web site and has introduced AOL NetFind, an Internet research and navigation tool for AOL subscribers and Internet users. Employees As of June 30, 1997, America Online had 7,371 employees. America Online believes that its relations with its employees are good. None of America Online's employees is represented by a labor union, and America Online has never experienced a work stoppage. Proprietary Rights America Online relies upon a combination of contract provisions and patent, copyright, trademark and trade secret laws to protect its proprietary rights in its products. America Online distributes its products under agreements that grant members a license to use America Online's products and services and relies on the protections afforded by the copyright laws to protect against the unauthorized reproduction of America Online's products. In addition, America Online attempts to protect its trade secrets and other proprietary information through agreements with employees and consultants. America Online has also filed for several patents for technology relating to the Internet and online industry. Although America Online intends to protect its rights vigorously, there can be no assurance that these measures will be successful. America Online seeks to protect the source code of its products as a trade secret and as an unpublished copyright work. America Online also has obtained federal trademark registration of the name America Online, AOL and the Company's triangle design logo and has trademark rights to many other proprietary names including, Digital City, AOL Instant Messenger, AOLnet, Buddy List, and Instant Message. America Online believes that due to the rapid pace of innovation within its industry, factors such as the technological and creative skills of its personnel are more important in establishing and maintaining a leadership position within the industry than are the various legal protections of its technology. America Online believes that its products, trademarks and other proprietary rights do not infringe on the proprietary rights of third parties. From time to time, however, America Online has received communications from third parties asserting that features or contents of certain of its services may infringe copyrights, patents and other rights of such parties. No litigation is pending in this area that would have a material adverse effect on America Online'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, America Online in the future with respect to current or future features or contents of services or that any such assertion may not result in litigation or require America Online to enter into royalty arrangements. Regulatory Environment; Public Policy In the United States and most countries in which the Company conducts its major operations, the Company is not currently subject to direct regulation other than pursuant to laws applicable to businesses generally. Adverse changes in the legal or regulatory environment relating to the interactive online services and Internet industry in the United States or in Europe could have a material adverse effect on the Company's business. A number of legislative and regulatory proposals from various international bodies and foreign and domestic governments in the areas of content regulation, consumer protection, intellectual property, privacy, electronic commerce, and taxation, among others, are now under consideration. The Company is unable at this time to predict which, if any, of such proposals may be adopted and, if adopted, whether such proposals would have an adverse effect on the Company's business. Moreover, the manner in which existing domestic and foreign laws 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. The Company is unable to predict the effect on the Company should that Directive be applied to prevent export of data from Europe to the United States, 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, export controls on encryption technology, tariffs and other trade barriers, intellectual property and taxes. The Company is seeking to educate industry, government and representatives of public interest groups on the benefits to society of the new interactive services medium and of the greater likelihood of society's achieving those benefits through the approach outlined above. In the Company's view, such an approach will provide a greater acceptance of the medium by consumers around the world and a more favorable environment for the acceptance of the Company's products and services. Some of the issues the Company is focusing on are the protection of privacy, 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 is unable at this time to predict whether its approach will be adopted by government and whether the positive regulatory environment being sought by this approach will be forthcoming. Recent Developments On September 7, 1997, America Online entered into a Purchase and Sale Agreement (the "Agreement") by and among America Online, ANS Communications, Inc., a Delaware corporation and a wholly-owned subsidiary of America Online ("ANS"), and WorldCom, Inc., a Georgia corporation ("WorldCom"), pursuant to which America Online agreed to transfer to WorldCom its ANS subsidiary and WorldCom agreed to transfer to America Online all of the online services businesses of CompuServe Corporation, a Delaware corporation ("CompuServe"), and $175 million in cash, subject to certain adjustments (the "Purchase and Sale"). Consummation of the Purchase and Sale is subject to the satisfaction of certain conditions, including, among others, the expiration or termination of any applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and any foreign competition law or similar law, the receipt of other required regulatory approvals, and the absence of certain adverse changes. Consummation of the Purchase and Sale is also subject to the consummation of WorldCom's acquisition of CompuServe pursuant to an Agreement and Plan of Merger (the "Merger Agreement") dated September 7, 1997, by and among H&R Block, Inc., a Missouri corporation ("H&R Block"), H&R Block Group, Inc., a Delaware corporation, a wholly-owned subsidiary of H&R Block and the majority shareholder of CompuServe, WorldCom, and Walnut Acquisition Company, L.L.C., a Delaware limited liability company which is wholly-owned by WorldCom. The closing of the Purchase and Sale is expected to occur on or before March 1, 1998, as soon as practicable after the satisfaction of the foregoing conditions. The Agreement provides that upon closing of the Purchase and Sale, the Company, WorldCom, and ANS will enter into a Master Agreement for Data Services, and that the Company, UUNET Technologies, Inc. and CompuServe will enter into a Network Services Agreement, each with an initial term to end in December 2002, subject to extension by the Company in certain circumstances (together, the "Network Agreements"). The Network Agreements provide for the Company to receive Internet access, additional modems for the Company's dial-up member access network, network and modem maintenance and operations services, and capacity on the CompuServe network in consideration for certain minimum commitments and fees in amounts to be based on certain factors. Item 2. Properties America Online holds various properties at and near the Company's headquarters facilities and under terms as set forth in the following chart and holds various properties in other locations as described below: LOCATION SIZE OWN/LEASE PURPOSE Dulles, VA 300,000 sq. ft. Lease(1) Corporate Headquarters Vienna, VA 100,000 sq. ft. Lease Office Space Vienna, VA 28,000 sq. ft. Lease Office Space Vienna, VA 170,000 sq. ft. Lease Office Space Reston, VA 265,000 sq. ft. Own Technology Center Herndon, VA 44,000 sq. ft. Lease Customer Support Washington, DC 3,923 sq. ft. Lease Office Space _____________ (1) Following a series of transactions, in May 1996, the Company leased from a limited partnership approximately 78 acres of unimproved land and approximately 39 acres of improved land for use as the Company's headquarters facilities. The initial five-year term of the lease is non-cancelable. After the initial term, the Company may purchase the property or arrange for the purchase of the property by a third party and terminate the lease. The Company leases office space in the following United States locations for Customer Call Centers: Tucson, AZ; Jacksonville, FL; Albuquerque, NM; Oklahoma City, OK; and Ogden, UT. In addition, the Company leases office space in the following United States locations: Scottsdale, AZ; Burlingame, CA; Culver City, CA; Irvine, CA; Oakhurst, CA; San Francisco, CA; San Mateo, CA; Santa Barbara, CA; Chicago, IL; Needham, MA; and New York, NY. Digital City, Inc. and ANS Communications, Inc., subsidiaries of the Company, lease office space in the United States locations where they have established their services. The Company also leases office space in the following international locations: London, England; Paris, France; Hamburg, Germany; Dublin, Ireland; Rehovot, Israel; Tokyo, Japan; West Toronto, Ontario; and Baar, Switzerland. Item 3. Legal Proceedings The Company is involved in various legal proceedings, including pending litigation. In February 1997, a class action lawsuit (Orman v. America Online, Inc., et al.) was filed against the Company, its officers and directors and its outside auditors alleging violations of the federal securities laws between August 10, 1995 and October 29, 1996. In July 1997, the original complaint was dismissed against all defendants. On August 11, 1997, an amended class action complaint was filed against the Company, its Chief Executive Officer and its Chief Financial Officer. A shareholder derivative suit related to the Orman lawsuit has also been filed against the Company's directors in Delaware chancery court. The Company believes that it has valid defenses to all litigation pending against it, including the Orman case, and all cases against the Company are, and will continue to be, vigorously defended. Management is unable to make a meaningful estimate of the amount or range of loss that could result from an unfavorable outcome of all pending litigation. It is possible that the Company's results of operations or cash flows in a particular quarter or annual period or its financial position could be materially affected by an ultimate unfavorable outcome of certain pending litigation. Management believes, however, that the ultimate outcome of all pending litigation should not have a material adverse effect on the Company's financial position. Item 4. Submission of Matters to a Vote of Security Holders Not Applicable. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. Market Price of Common Stock The following table sets forth the range of high and low sale prices for the Company's common stock: For the quarter ended: High Low September 30, 1995 $37.25 $21.38 December 31, 1995 46.25 28.25 March 31, 1996 60.00 32.75 June 30, 1996 71.00 36.63 September 30, 1996 46.50 24.50 December 31, 1996 44.25 22.38 March 31, 1997 48.00 31.75 June 30, 1997 62.13 41.75 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 September 3, 1997, the approximate number of stockholders of record of Common Stock was 2,670. This does not include the number of persons whose stock is in nominee or "street name" accounts through brokers. Exchange Information The Company's Common Stock is traded on the New York Stock Exchange under the symbol "AOL." Options on the Company's stock are traded on the Chicago Board Options Exchange, the American Stock Exchange, and the Pacific Stock Exchange. Recent Sales of Unregistered Securities On April 30, 1997, Asylum, Inc., a wholly-owned subsidiary of the Company, acquired LightSpeed Media, Inc. in exchange for the issuance of 16,725 shares of Company Common Stock and $850,000 in cash. The transaction was a private placement to five purchasers and exempt from registration pursuant to Section 4(2) of the Securities Act of 1933. On May 16, 1997, the Company sold 362,500 shares of Company common stock to Legg Mason Value Trust for an aggregate offering price of $16,353,281, including an underwriting commission of $163,533 to Alex Brown & Sons Incorporated. The transaction was a private placement to an accredited investor and exempt from registration pursuant to Rule 506 of Regulation D. Item 6. Selected Financial Data Selected Consolidated Financial and Other Data (Amounts in thousands, except per share data)
Year Ended June 30, 1997 1996 1995 1994 1993 Statement of Operations Data: Online service revenues $1,429,445 $ 991,656 $ 344,309 $ 98,497 $ 37,648 Other revenues 255,783 102,198 49,981 17,225 14,336 Total revenues 1,685,228 1,093,854 394,290 115,722 51,984 Income (loss) from operations (505,646) 65,243 (21,449) 4,176 1,702 Income (loss) before (499,347) 29,816 (35,751) 2,154 246 extraordinary item Net income (loss) (1) (499,347) 29,816 (35,751) 2,154 1,379 Income (loss) per common share: Income (loss) before $ (5.22) $ 0.28 $ (0.51) $ 0.03 $ - extraordinary item Net income (loss) $ (5.22) $ 0.28 $ (0.51) $ 0.03 $ 0.02 Weighted average shares outstanding 95,607 108,097 69,550 69,035 58,572 As of June 30, 1997 1996 1995 1994 1993 Balance Sheet Data: Working capital (deficiency) $(230,997) $ (22,848) $ 271 $38,679 $10,498 Total assets 846,688 958,754 405,413 155,178 39,279 Total debt 51,899 22,519 21,856 9,341 2,959 Stockholders' equity 128,034 512,502 216,812 98,802 23,785 Other Data (at fiscal year end): Worldwide members 8,636 6,198 3,005 903 303 (1) Net loss in the fiscal year ended June 30, 1997, includes charges of approximately $385.2 million for the write-off of deferred subscriber acquisition costs, approximately $48.6 million for a restructuring charge, approximately $24.2 million for legal settlements and approximately $24.5 million for contract termination charges. Net income in the fiscal year ended June 30, 1996, includes charges of approximately $17.0 million for acquired research and development, $8.0 million for the settlement of a class action lawsuit, and approximately $0.8 million for merger expenses. Net loss in the fiscal year ended June 30, 1995, includes charges of approximately $50.3 million for acquired research and development and approximately $2.2 million for merger expenses.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview The Company generates two types of revenues, online service revenues and other revenues. Online service revenues are generated by customers subscribing to the Company's online services. Other revenues are non-subscription based and are generated from the Company's base of subscribers as well as businesses. Other revenues include electronic commerce and advertising revenues, which consist of the sale of merchandise, advertising and related revenues, and transaction fees associated with electronic commerce, as well as other revenues, which consist primarily of data network service revenues. Currently, the Company's online service revenues are generated primarily from subscribers paying a monthly membership fee. Prior to December 1, 1996, a significant portion of online service revenues were comprised of hourly charges based on usage in excess of the number of hours of usage provided as part of the monthly fee. With the introduction of flat-rate pricing, as described below, the portion of online service revenues which are generated from hourly charges has decreased substantially. The growth of the Company's online service revenues, assuming such growth continues, is expected to be driven primarily by growth in its subscriber base. The growth of the subscriber base is dependent upon the Company's ability to acquire and retain subscribers. Effective December 1, 1996, the Company began offering several pricing alternatives to the AOL service aimed at providing price points for a wide range of consumers. These pricing alternatives are as follows: * A standard monthly membership fee of $19.95, with no additional hourly charges (the "Flat-Rate Plan"). Subscribers can also choose to prepay for one year in advance at the monthly rate of $17.95. * An alternative offering three hours for $4.95 per month, with additional time priced at $2.50 per hour. * An alternative offering of $9.95 per month for unlimited use - for those subscribers who already have an Internet connection and use this connection to access AOL. Prior to December 1, 1996, the Company's standard monthly membership fee for its AOL service, which included five hours of service, was $9.95 per month, with a $2.95 hourly fee for usage in excess of five hours per month. Existing members at December 1, 1996, could retain the $9.95 / five hour pricing upon request. For the period July 1, 1996 through November 30, 1996, the Company also offered a pricing plan which included 20 hours of service for $19.95 per month, with a $2.95 hourly fee for usage in excess of 20 hours per month (the "Value Plan"). The Value Plan was discontinued upon the availability of the Flat-Rate Plan on December 1, 1996. As a result of the introduction of the Flat-Rate Plan as detailed above, the Company's Internet service, Global Network Navigator ("GNN"), was discontinued. The Company had launched GNN in October 1995. Subsequent to the introduction of the Flat-Rate Plan, the Company experienced a significant increase in average monthly subscriber usage, and an attendant decrease in the average revenue per member-hour. The Company also experienced higher cost of revenues relative to total revenues. The Company plans to minimize the impact of the aforementioned changes by growing other revenues as well as decreasing costs, on a relative basis (either on a per-hour basis or as a percentage of total revenues), principally through network and operating cost efficiencies. An important component of the Company's business strategy is an increasing reliance on other revenue sources including the sale of merchandise, advertising and related revenues, and transaction fees associated with electronic commerce. The Company recognizes that this reliance on other revenue sources carries a higher degree of business risk than do the other strategy factors described below, which are more directly within the Company's control. Another important factor in the Company's business strategy is the further reduction of the costs of operating the Company's data network, on a per-hour basis, through the continuing build-out and efficient traffic management of AOLnet, the Company's TCP/IP network. The Company also anticipates marketing expenses as a percentage of revenues to be lower than they were in fiscal 1997 (absent the effects of capitalization and amortization), primarily as a result of the improved value proposition offered by flat-rate pricing, which is expected to provide improved subscriber acquisition and retention rates, as compared to rates achieved prior to flat-rate pricing. The Company's marketing strategy is expected to place a greater emphasis on cost-effective bundling agreements, whereby the Company's product is widely distributed with new personal computers and other peripheral computer equipment. Although the Company will continue to market its products via direct mail programs, such programs are expected to be more cost-efficient, as they will be directed to more narrowly targeted consumer groups. The growth of other revenues is important to the Company's business objectives, as they provide an important contribution to the Company's operating margins. In fiscal 1997, other revenues represented approximately 15% of total revenues, compared to approximately 9% in fiscal 1996. Among the Company's business objectives are increasing the subscriber base and continuing to accelerate the change in its business model into one in which increasingly more revenues and profits are generated from sources other than online service subscription revenues, such as advertising and electronic commerce. The Company expects that the growth in other revenues, assuming such growth continues, will be the primary source of future profit growth, and will provide the Company with the opportunity and flexibility to fund the costs associated with flat-rate pricing as well as programs designed to grow the subscriber base and meet other business objectives. Other revenues are generated primarily from electronic commerce and advertising, and include the sale of merchandise by the Company (principally computer hardware and software and AOL merchandise), as well as fees received from the sale of advertising, fees received from companies who market their products through the AOL service, and commission fees associated with the Company's co-branded VISA credit card. Advertising revenues are expected to grow in importance as the Company is able to leverage its large and growing subscriber base. The Company is able to offer its advertising partners a variety of customized programs, which may include guaranteed numbers of impressions and select sponsorship of particular online areas for designated time periods. In the past, electronic commerce revenues earned from companies who marketed their products on the AOL service were generally commission-based. In the future, the Company anticipates that a higher proportion of these types of revenues will be derived from fixed fees charged to these merchants, rather than being based on transaction levels. As merchants realize the value of reaching the Company's large subscriber base, the Company expects to earn additional revenues by offering selected merchants exclusive rights to market their particular class of goods or services within the Company's online service. The Company's operating margin declined in fiscal 1997, driven by the impact of the Company's switch to flat-rate pricing in December 1996 and a concomitant dramatic increase in member usage. Average monthly subscriber usage in the first quarter of fiscal 1997, the last quarter before the introduction of flat-rate pricing, was approximately 7 hours. In the fourth quarter of fiscal year 1997, average monthly subscriber usage had increased to approximately 18 hours. Due to the lack of historical operating experience under a flat-rate pricing structure, the Company is unsure whether these usage statistics will continue to trend upward. If usage trends continue to increase, further pressures on operating margins may result. The impact of increased usage on operating margins, if it occurs, could be offset, in whole or in part, by increases in other revenues, increased data network operating efficiencies, reductions in marketing expenses, or other factors. The Company competes in the highly competitive businesses of online and Internet services, advertising and electronic commerce. Online services and Internet service providers, including CompuServe Corporation, the Microsoft Network and Prodigy Services Company and various national and local independent Internet service providers, such as NETCOM On-Line Communication Services, Inc., as well as long distance and regional telephone and cable companies, including, among others, AT&T Corp., MCI Communications Corporation and various regional Bell operating companies, @Home Network, and WebTV currently compete with the Company for both subscribers and for advertising and electronic commerce revenues. The Company also competes for advertising and electronic commerce revenues with major Web sites operated by search services and other companies such as Yahoo! Inc., Netscape Communications Corporation, Infoseek Corporation, CNET, Inc., Lycos, Inc., and Excite, Inc., and media companies such as The Walt Disney Company and Time Warner Inc. The Company has recently entered into an agreement with WorldCom, Inc. to acquire the CompuServe Corporation's online services businesses, as described in Note 16 of the Notes to Consolidated Financial Statements. Some of the present competitors and potential future competitors may have greater financial, technical, marketing and/or personnel resources than the Company. The Company believes the principal competitive factors in the online and Internet services industries include, with respect to competition for subscribers, product features and quality, ease of use, access to distribution channels, strategic alliances, brand recognition, reliability and price, and with respect to advertising and electronic commerce revenues, numbers of visitors to an online or Internet site, duration and frequency of visits, and demographics of visitors. The Company believes that it currently competes effectively in these areas. The competitive environment could have the following effects: require the Company to implement new pricing programs that could result in lower prices and increased spending on marketing, network capacity, content procurement and product development; limit the Company's opportunities to enter into and/or renew agreements with content providers and distribution partners; limit its ability to develop new products and services; limit the Company's ability to grow its subscriber base; result in increased attrition in the Company's subscriber base; and negatively impact the Company's ability to meet its business objective of changing its business model into one in which increasingly more revenues and profits are generated from sources other than online service subscription revenues, such as advertising and electronic commerce. Any of the foregoing events could have an impact on revenues and result in an increase in costs as a percentage of revenues. These factors may have a material adverse effect on the Company's financial condition and operating results. Results of Operations Fiscal 1997 Compared to Fiscal 1996 Online Service Revenues For fiscal 1997, online service revenues increased from $991,656,000 to $1,429,445,000, or 44%, over fiscal 1996. This increase was primarily attributable to a 53% increase in the quarterly average number of AOL North American subscribers for fiscal 1997, compared to fiscal 1996, offset by a 6% decrease in the average monthly online service revenue per AOL North American subscriber. The average monthly online service revenue per AOL North American subscriber decreased from $17.96 in fiscal 1996 to $16.87 in fiscal 1997. This decrease was principally attributable to the availability of the Value Plan from July 1996 through November 1996, and the Flat-Rate Plan beginning in December 1996. Other Revenues Other revenues, consisting principally of electronic commerce and advertising revenues, as well as data network service revenues, increased by 150%, from $102,198,000 in fiscal 1996 to $255,783,000 in fiscal 1997. This increase was primarily attributable to an increase in electronic commerce and advertising revenues, driven primarily by increases in the sale of merchandise and more advertising on the Company's online service. Merchandise sales increased by 152% from $43,418,000 in fiscal 1996 to $109,320,000 in fiscal 1997, reflecting the impact of an expanded number of products offered for sale to the Company's larger membership base. Advertising and electronic commerce transaction fees increased by 532%, from $12,436,000 in fiscal 1996 to $78,645,000 in fiscal 1997. During the year additional companies entered into advertising and marketing agreements with the Company, as the Company expanded its inventory of available advertising and was able to deliver larger audiences to its advertising partners due to the growth in the membership base. The Company's co-branded VISA credit card, first introduced during fiscal 1997, generated $18,967,000 in revenues during the year. The Company entered into a 40-month electronic commerce agreement in February 1997 (the "Agreement") with long distance telephone service provider Tel-Save, Inc. Under the terms of the Agreement, the Company received $100 million in cash and warrants valued at $20 million (the "minimum contract value") as consideration related to a Tel-Save product offering to the Company's subscribers. The Agreement also contains a revenue-sharing arrangement that, based upon subscriber usage levels of the Tel-Save product offering, provides the Company with an opportunity to earn in excess of the $120 million minimum contract value. The Company recognized $24,100,000 in other revenues during the fiscal year ended June 30, 1997, pursuant to the Agreement. In the aggregate, the Company expects to recognize approximately $50 million of revenue pursuant to the Agreement during calendar year 1997, related principally to certain market exclusivities, production and development performance milestones, the prorated value of the warrants and other promotional commitments and deliverables. The Tel-Save product offering is expected to launch prior to the end of calendar year 1997. Given the evolving nature of transactions involving electronic commerce, the Company cannot predict whether electronic commerce agreements containing similar types of revenue-producing activities will become frequent in the future. Cost of Revenues Cost of revenues includes network-related costs, consisting primarily of data network costs, costs associated with operating the data centers and providing customer support, royalties paid to information and service providers, the costs of merchandise sold, and product development amortization expense. For fiscal 1997, cost of revenues increased from $638,025,000 to $1,040,762,000, or 63%, over fiscal 1996, and increased as a percentage of total revenues from 58.3% to 61.8%. The increase in cost of revenues was primarily attributable to an increase in data network costs, leased equipment costs, customer support costs, the costs of merchandise sold, and royalties paid to information and service providers. Data network costs increased primarily as a result of the larger customer base and more usage by customers. Leased equipment costs increased primarily as a result of additional host computer and network equipment. Customer support costs, which include personnel and telephone costs associated with providing customer support, were higher primarily as a result of the larger customer base and network access problems encountered by subscribers upon the introduction of the Flat-Rate Plan. The costs of merchandise sold increased as a result of an increase in merchandise revenues. Royalties paid to information and service providers increased as a result of a larger customer base and more usage and the Company's addition of more service content to broaden the appeal of the AOL service. The increase in cost of revenues as a percentage of total revenues was primarily attributable to increases in leased equipment costs, the costs of merchandise sold and product development amortization expense. The aforementioned increase was partially offset by a decrease in data network costs resulting from a lower cost per hour, due to a higher percentage of the Company's data traffic being carried on AOLnet. The Company is building AOLnet, a TCP/IP data network, in order to increase its network capacity, provide its members with higher speed access, and reduce data network costs on a per- hour basis. As the Company rapidly builds AOLnet, it plans to continue to manage an increasingly higher percentage of its total traffic to this network, which would lead to a lower overall data network per hour cost. In September 1997, the Company announced that, in exchange for its ANS Communications, Inc. subsidiary ("ANS"), it will acquire CompuServe Corporation's worldwide online services business from WorldCom, Inc. ("WorldCom") and receive approximately $175 million in cash. The Company also agreed that it will, upon closing of the aforementioned transaction, enter into a five year network services agreement with WorldCom which will provide the Company with significantly expanded network capacity for the Company's online service at favorable prices, and higher speed access as it becomes commercially available (refer to Note 16 of the Notes to Consolidated Financial Statements). ANS is an important component of the portfolio of suppliers which comprise AOLnet, and, under the network services agreement with WorldCom, will continue to be so in the future. The network services agreement with WorldCom is structured in such a manner that the Company anticipates its network costs will be at a level no greater than the Company would expect to incur if it continued to own ANS, thereby achieving a key benefit of ownership without the potential risks associated with ownership. The Company has entered into this transaction in order to realize the significant growth in the value of ANS and to allow the Company to concentrate on its core competencies - interactive services and content. Marketing and Write-off of Deferred Subscriber Acquisition Costs Marketing expenses include the costs to acquire and retain subscribers and other general marketing costs. For fiscal 1997, marketing expenses increased from $212,710,000 to $409,260,000, or 92%, over fiscal 1996, and increased as a percentage of total revenues from 19.4% to 24.3%. The increase in marketing expenses was primarily attributable to an increase in subscriber acquisition costs, which was impacted by a change in accounting estimate at September 30, 1996, that resulted in subscriber acquisition costs being currently expensed for periods subsequent to the first quarter of fiscal 1997, versus being capitalized and amortized over twenty-four months in fiscal 1996 and in the first quarter of fiscal 1997. The increase in marketing expenses as a percentage of total revenues was primarily attributable to increases in subscriber acquisition costs and general marketing costs, which include telemarketing and personnel. As a result of the aforementioned change in accounting estimate, the balance of deferred subscriber acquisition costs as of September 30, 1996, totaling $385,221,000, was written off. For additional information regarding this change, refer to Note 3 of the Notes to Consolidated Financial Statements. For fiscal 1997, marketing expenses, before capitalization and amortization, increased from $449,662,000 to $480,300,000, or 7%, over fiscal 1996, and decreased as a percentage of total revenues from 41.1% to 28.5%. The increase in marketing expenses, before capitalization and amortization, was primarily attributable to an increase in general marketing costs, including telemarketing and personnel. The decrease in marketing expenses as a percentage of total revenues, before capitalization and amortization, was primarily the result of a slight decrease in subscriber acquisition costs, before capitalization and amortization, combined with the substantial growth in revenues. Product Development Product development costs include research and development expenses and other product development costs. For fiscal 1997, product development costs increased from $43,164,000 to $58,208,000, or 35%, over fiscal 1996, and decreased as a percentage of total revenues from 3.9% to 3.5%. The increase in product development costs was primarily due to an increase in personnel costs related to an increase in the number of technical employees. The decrease in product development costs as a percentage of total revenues was primarily the result of the substantial growth in revenues, which more than offset the additional product development costs. General and Administrative For fiscal 1997, general and administrative costs increased from $110,653,000 to $193,537,000, or 75%, over fiscal 1996, and increased as a percentage of total revenues from 10.1% to 11.5%. The increase in general and administrative costs, and such costs as a percentage of total revenues, was principally attributable to higher office-related and personnel expenses, as a result of an increase in the number of employees and expansion of the Company's operations. The increase in office-related and personnel expenses included costs associated with certain subsidiaries that were present in fiscal 1997 only, including Digital City, Inc. and Imagination Network, Inc. (doing business as WorldPlay Entertainment, "WorldPlay"). Acquired Research and Development Acquired research and development costs, totaling $16,981,000 in fiscal 1996, relate to in-process research and development purchased pursuant to the Company's acquisition of Ubique, Ltd. ("Ubique") in September 1995. Amortization of Goodwill Goodwill is being amortized on a straight-line basis over periods ranging from two to ten years. Amortization of goodwill decreased to $6,549,000 in fiscal 1997 from $7,078,000 in fiscal 1996. The decrease in amortization of goodwill is primarily attributable to a write-off of the goodwill associated with GNN, partially offset by goodwill associated with various purchases made by the Company, including WorldPlay, which occurred in fiscal 1997. In connection with the fiscal 1997 restructuring charge (see Note 4 of the Notes to Consolidated Financial Statements), the Company wrote-off approximately $8,200,000 of capitalized goodwill associated with GNN. Restructuring Charge In connection with a restructuring plan adopted in the second quarter of fiscal 1997, the Company recorded a $48,627,000 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. The future impact of the restructuring activities on the Company's results of operations is not expected to be material. For additional information regarding this charge, refer to Note 4 of the Notes to Consolidated Financial Statements. Contract Termination Charge In fiscal 1997, the Company recorded a contract termination charge of $24,506,000, which consists of unconditional payments associated with terminating certain information provider contracts which became uneconomic as a result of the Company's introduction of flat-rate pricing in December 1996. For additional information regarding the contract termination charge, refer to Note 5 of the Notes to Consolidated Financial Statements. Settlement Charge In fiscal 1997, the Company recorded a settlement charge of $24,204,000 in connection with a legal settlement reached with various State Attorneys General and a preliminary legal settlement reached with various class action plaintiffs, to resolve potential claims arising out of the Company's introduction of flat- rate pricing and its representation that it would provide unlimited access to its subscribers. Pursuant to these settlements, the Company agreed to make payments to subscribers, according to their usage of the AOL service, who may have been injured by their reliance on the Company's claim of unlimited access. These payments do not represent refunds of online service revenues, but are rather the compromise and settlement of allegations that the Company's advertising of unlimited access under its flat-rate plan violated consumer protection laws. Other Income (Expense) Other income (expense) consists primarily of investment income and non- operating gains net of interest expense and non-operating charges. The Company had other income of $6,299,000 in fiscal 1997 and other expense of $2,056,000 in fiscal 1996. The change in other income (expense) was primarily attributable to the allocation of minority interest losses in fiscal 1997 and a charge in fiscal 1996 for the settlement of a class action lawsuit, partially offset by an increase in fiscal 1997 of non-operating losses related to various investments. Provision for Income Taxes The provision for income taxes was $0 and $32,523,000 in fiscal 1997 and fiscal 1996, respectively. For additional information regarding income taxes, refer to Note 12 of the Notes to Consolidated Financial Statements. Net Income (Loss) The Company had a net loss in fiscal 1997 of $499,347,000 compared to net income in fiscal 1996 of $29,816,000. The net loss in fiscal 1997 included $385,221,000 for the write-off of deferred subscriber acquisition costs, a restructuring charge of $48,627,000, a contract termination charge of $24,506,000 and a settlement charge of $24,204,000. The net income in fiscal 1996 included charges of $16,981,000 for acquired research and development, $8,000,000 related to the settlement of a class action lawsuit and $848,000 for merger expenses. Fiscal 1996 Compared to Fiscal 1995 Online Service Revenues For fiscal 1996, online service revenues increased from $344,309,000 to $991,656,000, or 188%, over fiscal 1995. This increase was primarily attributable to a 160% increase in the quarterly average number of AOL North American subscribers for fiscal 1996, compared to fiscal 1995, coupled with a 10% increase in the average monthly online service revenue per AOL North American subscriber. The average monthly online service revenue per AOL North American subscriber increased from $16.28 in fiscal 1995 to $17.96 in fiscal 1996. Other Revenues Other revenues, consisting principally of electronic commerce and advertising revenues, data network service revenues, marketing and production services and development and licensing fees, increased by 104%, from $49,981,000 in fiscal 1995 to $102,198,000 in fiscal 1996. This increase was primarily attributable to an increase in electronic commerce and advertising revenues and data network service revenues, partially offset by a decrease in revenues from marketing and production services. Merchandise sales increased by 206% from $14,190,000 in fiscal 1995 to $43,418,000 in fiscal 1996, reflecting the impact of an expanded number of products offered for sale to the Company's larger membership base. Data network services revenues increased by 177%, from $8,614,000 in fiscal 1995 to $23,879,000 in fiscal 1996, due to growth of the external customer base at the Company's ANS subsidiary. Advertising and electronic commerce transaction fees were a new source of revenue to the Company in fiscal 1996, and amounted to $12,436,000. Multimedia and CD-ROM production services decreased by 39%, from $10,031,000 in fiscal 1995 to $6,126,000 in fiscal 1996, and new media and interactive marketing services revenues decreased by 60%, from $10,014,000 to $3,956,000, as the Company refocused the resources at several of its subsidiaries from external sales to internal support. Cost of Revenues For fiscal 1996, cost of revenues increased from $232,318,000 to $638,025,000, or 175%, over fiscal 1996, and decreased as a percentage of total revenues from 58.9% to 58.3%. The increase in cost of revenues was primarily attributable to an increase in data network costs, customer support costs, leased equipment costs, and royalties paid to information and service providers. Data network costs increased primarily as a result of the larger customer base and more usage by customers. Customer support costs were higher primarily as a result of the larger customer base and a large number of new subscriber registrations. Leased equipment costs increased primarily as a result of additional host computer and network equipment. Royalties paid to information and service providers increased as a result of a larger customer base, more usage and the Company's addition of more service content to broaden the appeal of the AOL service. The decrease in cost of revenues as a percentage of total revenues is primarily attributable to a decrease in costs associated with marketing and production service revenues (as a percentage of total revenues) and a decrease in data network costs resulting from lower variable costs per hour, due to a higher percentage of the Company's data traffic being carried on AOLnet. The aforementioned decrease was partially offset by increases in leased equipment costs, costs associated with providing data network services to third parties, costs of merchandise sold and royalties paid to information and service providers. Marketing For fiscal 1996, marketing expenses increased from $77,064,000 to $212,710,000, or 176%, over fiscal 1995, and decreased as a percentage of total revenues from 19.5% to 19.4%. The increase in marketing expenses was primarily attributable to an increase in the size and number of marketing programs designed to expand the Company's subscriber base and new branding programs that began in August 1995. Effective July 1, 1995, the Company modified the components of subscriber acquisition costs deferred, and changed the period over which it amortizes subscriber acquisition costs. The period over which the Company amortizes subscriber acquisition costs was changed from twelve and eighteen months to a period determined by calculating the ratio of current revenues related to direct response advertising versus the total expected revenues related to this advertising, or twenty-four months, whichever is shorter. This change was made in order to more appropriately match subscriber acquisition costs with associated online service revenues. For additional information regarding the accounting for subscriber acquisition costs, refer to Note 2 of the Notes to Consolidated Financial Statements. Product Development For fiscal 1996, product development costs increased from $11,669,000 to $43,164,000, or 270%, over fiscal 1995, and increased as a percentage of total revenues from 3.0% to 3.9%. The increase in product development costs, and such costs as a percentage of total revenues, was primarily attributable to an increase in personnel costs related to an increase in the number of technical employees. General and Administrative For fiscal 1996, general and administrative costs increased from $42,700,000 to $110,653,000, or 159%, over fiscal 1995, and decreased as a percentage of total revenues from 10.8% to 10.1%. The increase in general and administrative costs was primarily attributable to higher personnel, office and travel expenses related to an increase in the number of employees. The decrease in general and administrative costs as a percentage of total revenues was a result of the substantial growth in revenues, which more than offset the additional general and administrative costs, combined with the semi-variable nature of many of the general and administrative costs. Acquired Research and Development Acquired research and development costs, totaling $16,981,000 in fiscal 1996, relate to in-process research and development purchased pursuant to the Company's acquisition of Ubique in September 1995. Acquired research and development costs, totaling $50,335,000 in fiscal 1995, relate to in-process research and development purchased pursuant to the Company's acquisitions of Booklink Technologies, Inc. and Navisoft, Inc. Amortization of Goodwill Amortization of goodwill increased to $7,078,000 in fiscal 1996 from $1,653,000 in fiscal 1995. The amortization of goodwill in these periods relates primarily to the Company's fiscal 1995 acquisitions of Advanced Network & Services, Inc. and Global Network Navigator, Inc., which resulted in approximately $56 million of goodwill. The increase in amortization of goodwill results from a full year of goodwill being recognized in fiscal 1996 compared to only a partial year of goodwill being recognized in fiscal 1995. Other Income (Expense) The Company had other expense of $2,056,000 in fiscal 1996 and other income of $3,074,000 in fiscal 1995. The change in other income (expense) was primarily attributable to a charge in fiscal 1996 related to the settlement of a class action lawsuit, partially offset by an increase in investment income. Merger Expenses Nonrecurring merger expenses totaling $848,000 were recognized in fiscal 1996 in connection with the merger of the Company with Johnson-Grace Company. Nonrecurring merger expenses totaling $2,207,000 were recognized in fiscal 1995 in connection with the mergers of the Company with Redgate Communications Corporation, Wide Area Information Servers, Inc. and Medior, Inc. Provision for Income Taxes The provision for income taxes was $32,523,000 and $15,169,000 in fiscal 1996 and fiscal 1995, respectively. For additional information regarding income taxes, refer to Note 12 of the Notes to Consolidated Financial Statements. Net Income (Loss) The Company had net income in fiscal 1996 of $29,816,000 compared to a net loss in fiscal 1995 of $35,751,000. The net income in fiscal 1996 included charges of $16,981,000 for acquired research and development, $8,000,000 related to the settlement of a class action lawsuit and $848,000 for merger expenses. The net loss in fiscal 1995 included charges of $50,335,000 for acquired research and development and $2,207,000 for merger expenses. Liquidity and Capital Resources The Company has financed its operations through cash generated from operations and the sale of its capital stock. The Company has financed its investments in facilities and telecommunications equipment principally through leasing. Net cash provided by (used in) operating activities was $17,260,000, ($55,694,000) and $123,049,000 for fiscal 1995, fiscal 1996 and fiscal 1997, respectively. Included in operating activities were expenditures for deferred subscriber acquisition costs of $111,761,000, $363,024,000 and $130,229,000 for fiscal 1995, fiscal 1996 and fiscal 1997, respectively; and an increase in deferred revenue of $214,097,000 in fiscal 1997 related to service revenues as well as an increase in prepaid advertising, which grew, principally as a result of agreements with Tel-Save, Inc., which included a $100,000,000 prepayment, and CUC International, Inc., which included a $45,000,000 prepayment. Net cash used in investing activities was $87,272,000, $90,099,000 and $196,594,000 in fiscal 1995, fiscal 1996 and fiscal 1997, respectively. Net cash provided by financing activities was $71,796,000, $218,337,000 and $79,464,000 in fiscal 1995, fiscal 1996 and fiscal 1997, respectively. Included in financing activities was $15,000,000 in fiscal 1997 representing proceeds from the sale of preferred stock in a subsidiary corporation, and approximately $139,500,000 in fiscal 1996 representing proceeds from a public stock offering of common stock. At June 30, 1997, the Company had a working capital deficiency of $230,997,000, compared to a working capital deficiency of $22,848,000 at June 30, 1996. The increase in working capital deficiency is due primarily to (1) an increase in other accrued expenses and liabilities of $169,422,000, primarily related to increases in telecommunications and other operating accruals driven by the growth in the Company's business; and (2) an increase in deferred revenue of $128,057,000, primarily related to an increase in deferred online service revenues as well as an increase in prepaid advertising revenues, as discussed above. Deferred online service revenues increased primarily as a result of the introduction in fiscal 1997 of an upfront annual payment plan, as well as an increase in the standard monthly membership fee from $9.95 to $19.95. On September 8, 1997, the Company announced that, in exchange for its ANS Communications, Inc. subsidiary, it will acquire CompuServe Corporation's ("CompuServe") worldwide online services business from WorldCom, Inc. ("WorldCom") and receive approximately $175 million in cash (the "Purchase and Sale"). Upon completion of the Purchase and Sale, the Company's European partner, Bertelsmann AG, will pay an additional $75 million to the Company and each company will invest $25 million in an expanded joint venture to operate CompuServe's European online service. The Company will generate approximately $225 million in cash as a result of the aforementioned transactions. The Company also agreed that it will, upon closing of the Purchase and Sale, enter into a five-year network services agreement with WorldCom which will provide the Company with significantly expanded network capacity for the Company's online service at favorable prices. In connection with these transactions, the Company expects to realize a gain of $300 million to $400 million, which will be recognized over the five-year term of the network services agreement with WorldCom. The transactions outlined above are subject to certain closing conditions, including regulatory approvals, and are expected to close on or before March 1, 1998. In April 1995, the Company entered into a joint venture with Bertelsmann, AG to offer interactive online services in Europe. In connection with the agreement, the Company received approximately $54 million through the sale of common stock to Bertelsmann, AG. In May 1996, the Company entered into a joint venture with Mitsui & Co., Ltd. (Mitsui) and Nihon Keizai Shimbun, Inc. (Nikkei) to offer interactive online services in Japan. In connection with the agreement, the Company received approximately $28,000,000 through the sale of convertible preferred stock to Mitsui. The preferred stock has an aggregate liquidation preference of approximately $28,000,000 and accrues dividends at a rate of 4% per annum. Accrued dividends can be paid in the form of additional shares of preferred stock. During May 1998, the preferred stock, together with accrued but unpaid dividends, automatically converts into shares of common stock based on the fair market value of common stock at the time of conversion. The Company currently leases the majority of its facilities and equipment under non-cancelable operating leases. The Company made significant investments in fiscal 1997 in the buildout of AOLnet, its data communications network, and in expanding its facilities, host server and data center capacity. The Company plans to continue making significant investments in these areas. The Company plans to fund these investments, which are anticipated to be between $600 million and $800 million in fiscal 1998, through a combination of leases, debt financing and cash purchase. The Company uses its working capital to finance ongoing operations and to fund marketing and content programs and the development of its products and services. The Company plans to continue to invest in subscriber acquisition and retention marketing and content programs 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 available cash and cash provided by operating activities will be sufficient to fund its operations for the next fiscal year. The Company is involved in various legal proceedings, including pending litigation. In February 1997, a class action lawsuit (Orman v. America Online, Inc., et al.) was filed against the Company, its officers and directors and its outside auditors alleging violations of the federal securities laws between August 10, 1995 and October 29, 1996. In July 1997, the original complaint was dismissed against all defendants. On August 11, 1997, an amended class action complaint was filed against the Company, its Chief Executive Officer and its Chief Financial Officer. A shareholder derivative suit related to the Orman lawsuit has also been filed against the Company's directors in Delaware chancery court. The Company believes that it has valid defenses to all litigation pending against it, including the Orman case, and all cases against the Company are, and will continue to be, vigorously defended. Management is unable to make a meaningful estimate of the amount or range of loss that could result from an unfavorable outcome of all pending litigation. It is possible that the Company's results of operations or cash flows in a particular quarter or annual period or its financial position could be materially affected by an ultimate unfavorable outcome of certain pending litigation. Management believes, however, that the ultimate outcome of all pending litigation should not have a material adverse effect on the Company's financial position. The Company believes that inflation has not had a material effect on its results of operations. Seasonality In April 1996, the Company began to see the effects of seasonality in both member acquisitions and in the amount of time spent by customers using its services. The Company may have experienced the effects of seasonality in previous periods, but the effects, if any, were not discernible due to the masking effect resulting from the Company's substantial growth rates in those periods. The Company expects that seasonality will have an effect in the future. The growth in the subscriber base is expected 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. Forward-Looking Statements Certain of the statements contained in the Company's periodic reports filed with the Securities and Exchange Commission and otherwise made to the public, including statements made in this Form 10-K, are forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including, without limitation, statements regarding the growth of online services revenues, the growth of other revenues, the reduction of data network costs on a per-hour basis, marketing expenses as a percentage of revenues, subscriber acquisition and retention rates, the impact of the foregoing factors on operating margins and the Company's belief in the outcome of pending or possible litigation. The Company wishes to caution readers that the following important factors could cause the Company's actual results to differ materially from those projected in the forward-looking statements made by, or on behalf of, the Company: Factors related to increased competition from existing and new competitors, including price reductions and increased spending on marketing, network capacity, content procurement and product development; limitations on the Company's opportunities to enter into and/or renew agreements with content providers and distribution partners; limitations on its ability to develop new products and services; limitations on its ability to continue to grow its subscriber base; increased membership acquisition costs; lower average monthly revenue per subscriber and increased attrition in the Company's subscriber base. Factors related to the new standard monthly membership fee (the Flat-Rate Plan), and other new pricing alternatives, which became available December 1, 1996, including uncertainty of the following: the effect on average cost-per- subscriber acquisition and retention rates; the amount of time spent by members using the AOL service under each pricing alternative; and the percentage of members who sign up under each pricing alternative relative to their usage patterns. Risks and uncertainties associated with the development of a new medium and industry and a new and evolving business model, and the related fluctuations in pricing, revenues, costs, products and services, the ability to anticipate customer demands and to respond quickly and effectively to market opportunities. Risks related to the buildout of AOLnet and the expansion of host server and data center capacity, including the inability to expand network, host server and data center capacity at a rate and speed to sufficiently satisfy subscriber demands, which accelerated substantially as a result of the introduction of flat-rate pricing; the failure of any of the Company's network providers; the failure to procure certain component parts required to expand AOLnet capacity, including modems, circuits, routers and local exchange carrier lines from local telephone companies; the failure to obtain the necessary financing for the buildout of AOLnet and the expansion of host server and data center capacity; and the risk that demand will not develop for the capacity AOLnet will provide. Any damage or failure to the Company's computer equipment and the information stored in its data centers, such as damage by fire, power loss, telecommunications failures, unauthorized intrusions and other events, that causes interruptions in the Company's operations, or any interruptions or service outages caused by software defects or server and network expansion. The Company's inability to manage its growth and to adapt its administrative, operational, customer support and financial control systems to the needs of the expanded entity and subscriber base; and the failure of management to anticipate, respond to and manage changing business conditions. 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 governing content that differ greatly from those in the U.S., unexpected changes in regulatory requirements, political risks, export restrictions, export controls relating to encryption technology, tariffs and other trade barriers, fluctuations in currency exchange rates, issues regarding intellectual property and potentially adverse tax consequences. The possibility of a moderating growth rate in the sale of new computers in the U.S. and, to some extent, internationally; general or specific economic conditions; the ability and willingness of purchasers to substitute other services for AOL; the perceived absolute or relative overall value of these services by the purchasers, including the features, quality and pricing compared to other competitive services; smaller market or slowing of market growth for such services. The amount and rate of growth in the Company's marketing and general and administrative expenses; the implementation of new marketing programs and promotional offers; the implementation of additional pricing programs; and the impact of unusual items resulting from the Company's ongoing evaluation of its business strategies, asset valuations and organizational structures. Difficulties or delays in the development, production, testing and marketing of products, including, but not limited to, a failure to ship new products and technologies when anticipated, including, but not limited to, new client software and new features and functionality, and the failure to develop new technology or modify existing technology to incorporate new standards and protocols. The acquisition of businesses, fixed assets and other assets and acquisition-related risks, including successful integration and management of acquired technology, operations and personnel, the loss of key employees of the acquired companies, and diversion of management attention from other ongoing business concerns; the making or incurring of any expenditures and expenses, including, but not limited to, depreciation and significant charges for in- process research and development or other matters; and any revaluation of assets or related expenses. The ability of the Company to diversify its sources of revenue through the introduction of new products and services and through the development of new revenue sources, such as electronic commerce and advertising. The effects of, and changes in, trade, monetary and fiscal policies, laws and regulations, other activities of governments, agencies and similar organizations, and social and economic conditions, such as trade restrictions or prohibitions, inflation and monetary fluctuations, import and other charges, or federal, state, local and other taxes. The loss of the services of executive officers and other key employees; and the Company's continued ability to attract and retain highly skilled and qualified personnel. The costs and other effects of litigation, governmental investigations, legal and administrative cases and proceedings (whether civil, such as environmental and product-related, or criminal), settlements, judgments and investigations, claims, and changes in those items, and developments or assertions by or against the Company relating to intellectual property rights and intellectual property licenses. Adoptions of new, or changes in, accounting policies, practices and estimates and the application of such policies, practices and estimates. The effects of any activities of parties with which the Company has an agreement or understanding, including any issues affecting any investment or joint venture in which the Company has an investment; the amount, type and cost of the financing which the Company has, and any changes to that financing. 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 1997 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 of Compensation Committee on Executive Compensation," in the Registrant's Proxy Statement for its 1997 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 1997 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 1997 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: Report of Independent Auditors F-2 Consolidated Statements of Operations for the years ended June 30, 1997, 1996, and 1995 F-3 Consolidated Balance Sheets as of June 30, 1997 and 1996 F-4 Consolidated Statements of Changes in Stockholders' Equity for the years ended June 30, 1997, 1996, and 1995 F-5 Consolidated Statements of Cash Flows for the years ended June 30, 1997, 1996, and 1995 F-6 Notes to Consolidated Financial Statements F-7 (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 3, 1997, 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 Agreement and Plan of Reorganization, dated May 11, 1994, as amended, among America Online, Inc., RCC Acquisition Corporation and RCC Communications Corporation (Filed as Annex A to the Company's Registration Statement on Form S-4, Registration Statement No. 33-82030, as filed on July 24, 1994 and incorporated herein by reference.) 2.2 Agreement and Plan of Reorganization dated as of November 8, 1994, among America Online, Inc., BLT Acquisition Corporation, CMG Information Services, Inc. and Booklink Technologies, Inc. (Filed as Exhibit 1 to the Company's Current Report on Form 8-K, dated January 9, 1995 and incorporated herein by reference.) 2.3 Asset Purchase Agreement by and between America Online, Inc. and Advanced Network & Services, Inc. dated as of November 25, 1994 (Filed as Exhibit 1 to the Company's Current Report on Form 8-K, dated February 28, 1995 and incorporated herein by reference.) 2.4 Agreement and Plan of Merger, dated as of December 20, 1995, among America Online, Inc., Santa's Acquisition Corp. and Johnson- Grace Company and its Principal Shareholders (Filed as Exhibit 2.1 to the Company's Current Report on Form 8-K, dated February 14, 1996 and incorporated herein by reference.) 2.5 Stock Purchase Agreement, dated as of August 5, 1996, among America Online, Inc., The ImagiNation Network, Inc. and AT&T Corp. (Filed as Exhibit 10 to the Company's Current Report on Form 8-K, dated August 5, 1996, and incorporated herein by reference.) 2.6 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.) 3.1 Restated Certificate of Incorporation of America Online, Inc. 3.2 Restated By-Laws of America Online, Inc. (Filed as Exhibit 3.2 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1997 and incorporated herein by reference.) 4.1 Article 4, Article 6 and Article 8 of the Restated Certificate of Incorporation (see Exhibit 3.1) 4.2 Rights Agreement dated as of April 23, 1993, including Exhibit A (Certificate of Designation setting forth the terms of Series A Junior Participating Preferred Stock, $.01 par value), Exhibit B (Form of Right Certificate) and Exhibit C (Summary of Rights to Purchase Series A Junior Participating Preferred Shares). (Filed as Exhibit 1 to the Company's Registration Statement on Form 8-A, as filed on September 9, 1996 and incorporated herein by reference.) 4.3 First Amendment to the Rights Agreement dated as of January 31, 1995. (Filed as Exhibit 2 to the Company's Registration Statement on Form 8-A, as filed on September 9, 1996 and incorporated herein by reference.) 10.1 Series C Preferred Stock Purchase Agreement, dated as of February 20, 1987, as amended, by and among America Online, Inc., Citicorp Venture Capital Ltd., Allstate Insurance Company, INCO Securities Corporation, North American Partners Limited Partnership, Merrill, Pickard, Anderson & Eyre II, Union Venture Corporation, Excelsior II, Excelsior Venture Capital Holdings (Jersey) Ltd., H & Q Ventures International C.V., Hamquist, H & Q Investors, H & Q Ventures III, Hamco Capital Corporation and Daniel H. Case, III. (Filed as Exhibit 10.4 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.) 10.2 Amendment to Series C Preferred Stock Purchase Agreement, dated September 10, 1987, by and among America Online, Inc., Kleiner, Perkins, Caufield & Byers II, Citicorp Venture Capital Ltd., Allstate Insurance Company, INCO Securities Corporation, North American Partners Limited Partnership, Merrill, Pickard, Anderson & Eyre II, Union Venture Corporation, Excelsior II, Excelsior Venture Capital Holdings (Jersey) Ltd., H & Q Ventures International C.V., H & Q Ventures III, H & Q Investors, Hamquist, Hamco Capital Corporation, and Daniel H. Case, III. (Filed as Exhibit 10.5 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.) 10.3 Series D Preferred Stock Purchase Agreement, dated as of September 27, 1991, as amended, between America Online, Inc. and Tribune Company. (Filed as Exhibit 10.6 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.) 10.4 Warrant Purchase Agreement, dated as of June 29, 1987, as amended, by and among America Online, Inc., United States Portfolio Leasing, and Hambrecht & Quist Leasing Partners. (Filed as Exhibit 10.7 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 Master Agreement for Data Communications Service, dated July 3, 1985, as amended on May 13, 1991, and an order for Communications Service Network Services pursuant thereto, dated January 15, 1992, between America Online, Inc. and GTE Telenet Communications Corporation. (Filed as Exhibit 10.18 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.) (Confidential treatment requested.) 10.6 The Company's Employee Stock Purchase Plan. (Filed as Exhibit 28.1 to the Company's Registration Statement on Form S-8, Registration Statement No. 33-48447, as filed on June 5, 1992 and incorporated herein by reference.) 10.7 The Company's 1992 Employee, Director and Consultant Stock Option Plan. (Filed as Exhibit 10. 24 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.) 10.8 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.) 10.9 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.) 10.10 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.) 10.11 Master Agreement for Data Communications and Warrant Purchase Agreement dated May 25, 1993 between Sprint Communications Company L.P. and America Online, Inc. (Filed as Exhibit 10.23 to the Company's Annual Report on Form 10-K for the year ended June 30, 1993 and incorporated herein by reference.) 10.12 First Amendment to Master Agreement for Data Communications, dated June 30, 1994, between Sprint Communication Company L.P. and America Online, Inc. (Filed as Exhibit 10.17 to the Company's Annual Report on Form 10-K for the year ended June 30, 1994 and incorporated herein by reference.) 10.13 Offer Letter to, and Employment Agreement with, Bruce R. Bond. 10.14 Employment Agreement entered into with Theodore J. Leonsis. 10.15 Employment Agreement and related agreements entered into with Robert W. Pittman. 21.1 List of Subsidiaries. 23.1 Consent of Ernst & Young LLP 24.1 Powers of Attorney. (b) Reports on Form 8-K None 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 29th day of September, 1997. AMERICA ONLINE, INC. By:/S/LENNERT J. LEADER Lennert J. Leader Senior Vice President, Chief Financial Officer, Treasurer, Chief Accounting Officer and Assistant Secretary Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on the 29th day of September, 1997. Signature Title Date /S/STEPHEN M. CASE Stephen M. Case Chairman of the Board, September 29, 1997 President, Chief Executive Officer and Director (principal executive officer) * James V. Kimsey Chairman Emeritus and Director September 29, 1997 /S/LENNERT J. LEADER Lennert J. Leader Senior Vice President, Chief September 29, 1997 Financial Officer, Treasurer, Chief Accounting Officer and Assistant Secretary (principal financial and accounting officer) * Frank J. Caufield Director September 29, 1997 * Robert J. Frankenberg Director September 29, 1997 * Alexander M. Haig, Jr. Director September 29, 1997 * William N. Melton Director September 29, 1997 * Thomas Middelhoff Director September 29, 1997 /S/ROBERT W. PITTMAN Robert W. Pittman Director September 29, 1997 *By:/S/LENNERT J. LEADER Lennert J. Leader, as Attorney-in- Fact for each of the persons indicated AMERICA ONLINE, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Auditors F-2 Consolidated Statements of Operations for the years ended June 30, 1997, 1996, and 1995 F-3 Consolidated Balance Sheets as of June 30, 1997 and 1996 F-4 Consolidated Statements of Changes in Stockholders' Equity for the years ended June 30, 1997, 1996, and 1995 F-5 Consolidated Statements of Cash Flows for the years ended June 30, 1997, 1996, and 1995 F-6 Notes to Consolidated Financial Statements F-7 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, 1997 and 1996, 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, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of America Online, Inc. at June 30, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended June 30, 1997, in conformity with generally accepted accounting principles. /S/Ernst & Young LLP Vienna, Virginia September 10, 1997
Consolidated Statements of Operations (Amounts in thousands, except per share data) Year ended June 30, 1997 1996 1995 Revenues: Online service revenues $1,429,445 $ 991,656 $ 344,309 Other revenues 255,783 102,198 49,981 Total revenues 1,685,228 1,093,854 394,290 Costs and expenses: Cost of revenues 1,040,762 638,025 232,318 Marketing Marketing 409,260 212,710 77,064 Write-off of deferred subscriber acquisition costs 385,221 - - Product development 58,208 43,164 11,669 General and administrative 193,537 110,653 42,700 Acquired research and development - 16,981 50,335 Amortization of goodwill 6,549 7,078 1,653 Restructuring charge 48,627 - - Contract termination charge 24,506 - - Settlement charge 24,204 - - Total costs and expenses 2,190,874 1,028,611 415,739 Income (loss) from operations (505,646) 65,243 (21,449) Other income (expense), net 6,299 (2,056) 3,074 Merger expenses - (848) (2,207) Income (loss) before provision for income taxes (499,347) 62,339 (20,582) Provision for income taxes - (32,523) (15,169) Net income (loss) $ (499,347) $ 29,816 $ (35,751) Earnings (loss) per share: Net income (loss) $ (5.22) $ 0.28 $ (0.51) Weighted average shares outstanding 95,607 108,097 69,550 See accompanying notes.
Consolidated Balance Sheets (Amounts in thousands, except share data) June 30, 1997 1996 Assets Current assets: Cash and cash equivalents $ 124,340 $ 118,421 Short-term investments 268 10,712 Trade accounts receivable 65,306 49,342 Other receivables 26,093 23,271 Prepaid expenses and other current assets 107,466 65,290 Total current assets 323,473 267,036 Property and equipment at cost, net 233,129 111,090 Other assets: Restricted cash 50,000 - Product development costs, net 72,498 44,330 Deferred subscriber acquisition costs, net - 314,181 License rights, net 16,777 4,947 Other assets 84,618 29,607 Deferred income taxes 24,410 135,872 Goodwill, net 41,783 51,691 $ 846,688 $ 958,754 Liabilities and Stockholders' Equity Current liabilities: Trade accounts payable $ 69,703 $ 105,904 Other accrued expenses and liabilities 297,298 127,876 Deferred revenue 166,007 37,950 Accrued personnel costs 20,008 15,719 Current portion of long-term debt 1,454 2,435 Total current liabilities 554,470 289,884 Long-term liabilities: Notes payable 50,000 19,306 Deferred income taxes 24,410 135,872 Deferred revenue 86,040 - Minority interests 2,674 22 Other liabilities 1,060 1,168 Total liabilities 718,654 446,252 Stockholders' equity: Preferred stock, $.01 par value; 5,000,000 shares authorized, 1,000 shares issued and outstanding 1 1 at June 30, 1997 and 1996 Common stock, $.01 par value; 300,000,000 shares authorized, 100,188,971 and 92,626,000 shares issued and outstanding at June 30, 1997 and 1996, respectively 1,002 926 Unrealized gain on available-for-sale securities 16,924 - Additional paid-in capital 617,221 519,342 Accumulated deficit (507,114) (7,767) Total stockholders' equity 128,034 512,502 $ 846,688 $ 958,754 See accompanying notes.
Consolidated Statements of Changes in Stockholders' Equity (Amounts in thousands, except share data) Preferred Stock Common Stock Shares Amount Shares Amount Balances at June 30, 1994 - - 63,103,176 $ 630 Effect of immaterial poolings - - 2,062,756 21 Balances as Restated - - 65,165,932 651 Common stock issued: Exercise of options - - 2,905,256 29 Business acquisitions - - 4,785,354 48 Sale of stock, net - - 3,871,726 39 Tax benefit related to stock options - - - - Net loss - - - - Balances at June 30, 1995 - - 76,728,268 767 Effect of pooling restatement - - - - Balances as Restated - - 76,728,268 767 Common stock issued: Exercise of options and warrants - - 10,370,338 104 Business acquisitions - - 465,502 5 Sale of stock, net - - 5,061,892 50 Sale of preferred stock, net 1,000 $ 1 - - Tax benefit related to stock options - - - - Net income - - - - Balances at June 30, 1996 1,000 1 92,626,000 926 Common stock issued: Exercise of options - - 6,933,261 69 Business acquisitions - - 379,225 4 Sale of stock, net - - 250,485 3 Sale of preferred stock, net - - - - Unrealized gain on available-for-sale securities - - - - Net loss - - - - Balances at June 30, 1997 1,000 $ 1 100,188,971 $1,002 Unrealized gain on Additional available- Paid-in for-sale Accumulated Capital securities Deficit Total Balances at June 30, 1994 $ 99,567 - $(1,396) $ 98,801 Effect of immaterial poolings 1,032 - 524 1,577 Balances as Restated 100,599 - (872) 100,378 Common stock issued: Exercise of options 4,655 - - 4,684 Business acquisitions 75,653 - - 75,701 Sale of stock, net 56,998 - - 57,037 Tax benefit related to stock options 14,763 - - 14,763 Net loss - - (35,751) (35,751) Balances at June 30, 1995 252,668 - (36,623) 216,812 Effect of pooling restatement - - (960) (960) Balances as Restated 252,668 - (37,583) 215,852 Common stock issued: Exercise of options and warrants 47,885 - - 47,989 Business acquisitions 16,632 - - 16,637 Sale of stock, net 141,320 - - 141,370 Sale of preferred stock, net 28,314 - - 28,315 Tax benefit related to stock options 32,523 - - 32,523 Net income - - 29,816 29,816 Balances at June 30, 1996 519,342 - (7,767) 512,502 Common stock issued: Exercise of options 70,152 - - 70,221 Business acquisitions 16,231 - - 16,235 Sale of stock, net 11,496 - - 11,499 Unrealized gain on available- for-sale securities - $16,924 - 16,924 Net loss - - (499,347) (499,347) Balances at June 30, 1997 $617,221 $16,924 $(507,114) $128,034 See accompanying notes.
Consolidated Statements of Cash Flows (Amounts in thousands) Year ended June 30, 1997 1996 1995 Cash flows from operating activities: Net income (loss) $(499,347) $ 29,816 $(35,751) Adjustments to reconcile net income to net cash provided by (used in) operating activities: Write-off of deferred subscriber acquisition costs 385,221 - - Non-cash restructuring charges 22,478 - - Depreciation and amortization 64,572 34,586 12,266 Amortization of subscriber acquisition costs 59,189 126,072 60,924 Loss on sale of property and equipment - 44 37 Charge for acquired research and development - 16,981 50,335 Changes in assets and liabilities: Trade accounts receivable (16,418) (16,838) (14,373) Other receivables 2,083 (11,890) (9,086) Prepaid expenses and other current assets (44,394) (39,763) (19,635) Deferred subscriber acquisition costs (130,229) (363,024) (111,761) Other assets (38,902) (20,667) (6,051) Trade accounts payable (36,944) 21,150 60,805 Accrued personnel costs 2,979 12,856 1,850 Other accrued expenses and liabilities 139,134 104,226 5,703 Deferred revenue 214,097 17,929 7,190 Deferred income taxes - 32,523 14,763 Other liabilities (470) 305 44 Total adjustments 622,396 (85,510) 53,011 Net cash provided by (used in) operating activities 123,049 (55,694) 17,260 Cash flows from investing activities: Short-term investments 10,444 7,960 5,380 Purchase of property and equipment (149,768) (61,295) (59,255) Product development costs (56,795) (32,631) (13,054) Sale of property and equipment - - 180 Purchase costs of acquired businesses (475) (4,133) (20,523) Net cash used in investing activities (196,594) (90,099) (87,272) Cash flows from financing activities: Proceeds from issuance of preferred stock of subsidiary 15,000 - - Proceeds from issuance of common stock, net 84,506 189,359 61,721 Proceeds from issuance of preferred stock, net - 28,315 - Principal and accrued interest payments on line of credit and long-term debt (19,811) (935) (3,045) Proceeds from line of credit and issuance of long-term debt 50,000 3,000 13,488 Restricted cash (50,000) - - Principal payments under capital lease obligations (231) (1,402) (368) Net cash provided by financing activities 79,464 218,337 71,796 Net increase in cash and cash equivalents 5,919 72,544 1,784 Cash and cash equivalents at beginning of year 118,421 45,877 44,093 Cash and cash equivalents at end of year $124,340 $118,421 $ 45,877 Supplemental cash flow information Cash paid during the year for: Interest $ 1,567 $ 1,659 $ 1,076 Income taxes - - - See accompanying notes.
Notes to Consolidated Financial Statements 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 leading provider of Internet online services, offering its subscribers a wide variety of services, including electronic mail, conferencing, software, computing support, interactive magazines and newspapers, and online classes, as well as easy access to services of the Internet. In addition, the Company provides businesses with fully managed services that include Internet connections, remote dial access, security solutions, Virtual Private Network and Web hosting services. 2. Summary of Significant Accounting Policies Principles of Consolidation: The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated. Business Combinations: Business combinations which have been accounted for under the purchase method of accounting include the results of operations of the acquired business from the date of acquisition. Net assets of the companies acquired are recorded at their fair value to the Company at the date of acquisition. 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. Revenue Recognition: Online service revenues are recognized over the period that services are provided. Other revenues, which consist principally of electronic commerce and advertising revenues as well as data network service revenues are recognized as the services are performed or when the goods are delivered. Deferred revenue consists primarily of monthly and annual prepaid subscription fees billed in advance and prepaid electronic commerce and advertising fees. 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 3 to 5 years Buildings and related improvements 15 to 40 years Leasehold improvements 4 to 10 years Furniture and fixtures 5 years
Subscriber Acquisition Costs: The Company accounts for subscriber acquisition costs pursuant to Statement of Position 93-7, "Reporting on Advertising Costs" ("SOP 93-7"). As a result of the Company's change in accounting estimate (see Note 3), effective October 1, 1996, the Company began expensing all costs of advertising as incurred. Prior to October 1, 1996, the Company accounted for the cost of direct response advertising as deferred subscriber acquisition costs to comply with the criteria of SOP 93-7. These costs consist solely of the costs of marketing programs which result in subscriber registrations without further effort required by the Company. Direct response advertising costs relate directly to subscriber solicitations and principally include the printing, production and shipping of starter kits and the costs of obtaining qualified prospects by various targeted direct marketing programs and from third parties. These subscriber acquisition costs have been incurred for the solicitation of specifically identifiable prospects. The deferred costs were amortized, beginning the month after such costs were incurred, over a period determined by calculating the ratio of current revenues related to direct response advertising versus the total expected revenues related to this advertising, or twenty-four months, whichever was shorter. All other costs related to the acquisition of subscribers, as well as general marketing costs, were expensed as incurred. No indirect costs are included in deferred subscriber acquisition costs. On a quarterly basis, management reviewed the estimated future operating results of the Company's subscriber base in order to evaluate the recoverability of deferred subscriber acquisition costs and the related amortization period. Management's assessment of the recoverability and amortization period of deferred subscriber acquisition costs was subject to change based upon actual results and other factors. Effective July 1, 1995, the Company modified the components of subscriber acquisition costs deferred, and changed the period over which it amortized subscriber acquisition costs. The period over which the Company amortized subscriber acquisition costs was changed from twelve and eighteen months to the period described previously in order to more appropriately match subscriber acquisition costs with associated online service revenues. The effect of this change in accounting estimate for the year ended June 30, 1996, was to increase net income by $48,106,000 ($.45 per share). Product Development Costs: The Company's online service is comprised of various features which contribute to the overall functionality of the service. The overall functionality of the service is delivered primarily through the Company's two products (AOL for Windows; AOL for Macintosh). The Company capitalizes costs incurred for the production of computer software used in the sale of its services. Capitalized costs include direct labor and related overhead for software produced by the Company and the cost of software purchased from third parties. All costs in the software development process which are classified as research and development are expensed as incurred until technological feasibility has been established. Once technological feasibility has been established, such costs are capitalized until the software has completed beta testing and is generally available. To the extent the Company retains the rights to software development funded by third parties, such costs are capitalized in accordance with the Company's normal accounting policies. Amortization, a cost of revenue, is provided on a product-by-product basis, using the greater of the straight-line method or the current year revenue as a percent 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: (in thousands) Year ended June 30, 1997 1996 Balance, beginning of year $ 44,330 $ 18,949 Costs capitalized 55,363 32,735 Costs amortized (27,195) (7,354) Balance, end of year $ 72,498 $ 44,330
The accumulated amortization of product development costs related to the production of computer software totaled $42,654,000 and $15,152,000 at June 30, 1997 and 1996, respectively. Included in product development costs are research and development costs totaling $16,998,000, $16,345,000 and $5,299,000 and other product development costs totaling $41,210,000, $26,819,000 and $6,370,000 in the years ended June 30, 1997, 1996 and 1995, respectively. Investments: The Company has various investments, including foreign joint ventures, that are accounted for under the equity method of accounting. All investments in which the Company has the ability to exercise significant influence over the investee, but less than a controlling voting interest, are accounted for under the equity method of accounting. Under the equity method of accounting, the Company's share of the investee's earnings or loss is included in consolidated operating results. To date, the Company's basis and current commitments in its investments accounted for under the equity method of accounting have been minimal. As a result, these investments have not significantly impacted the Company's results of operations or its financial position. All other investments, for which the Company does not have the ability to exercise significant influence or for which there is not a readily determinable market value, are accounted for under the cost method of accounting. Dividends and other distributions of earnings from investees, if any, are included in income when declared. The Company periodically evaluates the carrying value of its investments accounted for under the cost method of accounting and as of June 30, 1997, such investments are recorded at the lower of cost or estimated net realizable value. Goodwill: Goodwill consists of the excess of cost over the fair value of net assets acquired and certain other intangible assets relating to purchase transactions. Goodwill and intangible assets are amortized over periods ranging from 2-10 years. As of June 30, 1997 and 1996, accumulated amortization was $12,360,000 and $8,731,000, 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, Investments and Restricted Cash: The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. In fiscal 1995, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The adoption was not material to the Company's results of operations or its financial position. The Company has classified all debt and equity securities as available-for-sale. Available-for- sale securities are carried at fair value, with unrealized gains and losses reported as a separate component of stockholders' equity. Realized gains and losses and declines in value judged to be other-than-temporary on available-for- sale securities are included in other income. Available-for-sale securities at June 30, 1997 and 1996 include U.S. Treasury Bills and obligations of other Government agencies totaling $268,000 and $4,080,000 and U.S. corporate debt obligations totaling $0 and $6,632,000, respectively. At June 30, 1997 and 1996, the estimated fair value of these securities approximated cost. As of June 30, 1997, the Company had an additional available-for-sale equity investment (classified in other long-term assets) in a public company with a fair market value of $37,640,000 and a cost basis of $9,434,000. The unrealized gain of $16,924,000, net of tax, has been recorded as a separate component of stockholders' equity. Restricted cash relates to a financial covenant required under the Company's senior secured revolving credit facility ("Credit Facility"). For further information on the Credit Facility, refer to Note 10. Net Income (Loss) per Common Share: Net income (loss) per share is calculated by dividing net income (loss) by the weighted average number of common and, when dilutive, common equivalent shares outstanding during the period. Reclassification: Certain amounts in prior years' consolidated financial statements have been reclassified to conform to the current year presentation. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Recent Pronouncements: In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share". SFAS No. 128 establishes a different method of computing net income per share than is currently required under the provisions of Accounting Principles Board Opinion No. 15. Under SFAS No. 128, the Company will be required to present both basic net income per share and diluted net income per share. Basic net income (loss) per share would have been ($5.22), $0.35 and ($0.51) for the years ended June 30, 1997, 1996 and 1995, respectively. The impact of SFAS No. 128 on the calculation of diluted net income per share for the aforementioned periods would not have been material. The Company plans to adopt SFAS No. 128 in its fiscal quarter ending December 31, 1997, and at that time all historical net income per share data presented will be restated to conform to the provisions of SFAS No. 128. Stock-Based Compensation: During 1997, the Company adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123). 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). 3. Change in Accounting Estimate As a result of a change in accounting estimate, the Company recorded a charge of $385,221,000 ($4.03 per share), as of September 30, 1996, representing the balance of deferred subscriber acquisition costs as of that date. The Company previously had deferred the cost of certain marketing activities, to comply with the criteria of Statement of Position 93-7, "Reporting on Advertising Costs", and then amortized those costs over a period determined by calculating the ratio of current revenues related to direct response advertising versus the total expected revenues related to this advertising, or twenty-four months, whichever was shorter. For further information on subscriber acquisition costs, refer to Note 2. The Company's changing business model, which includes flat-rate pricing for its online service, increasingly is expected to reduce its reliance on online service subscriber revenues for the generation of revenues and profits. This changing business model, coupled with a lack of historical experience with flat-rate pricing, created uncertainties regarding the level of expected future economic benefits from online service subscriber revenues. As a result, the Company believed it no longer had an adequate accounting basis to support recognizing deferred subscriber acquisition costs as an asset. 4. Restructuring Charge In connection with a restructuring plan adopted in the second quarter of fiscal 1997, the Company recorded a $48,627,000 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. The components of the restructuring charge are as follows: In Thousands Write-off of impaired assets and discontinued businesses $ 31,215 Severance and personnel related 8,734 Other expenses 8,678 Total restructuring charge $ 48,627
Included in the category of write-off of impaired assets and discontinued businesses are the costs associated with the termination of the Company's Internet service, Global Network Navigator ("GNN"), and the write-off of the related goodwill. Additionally, the write-off of impaired assets and discontinued businesses category includes charges associated with unrealizable software development costs and certain prepaid marketing materials which are no longer usable under the Company's new business model which includes the flat- rate pricing structure. The severance and personnel related category includes the costs associated with terminating approximately 300 employees. The other expenses category consists primarily of costs incurred as a result of the requirements made by various regulatory bodies in connection with the Company's termination of its former pricing program. The following table summarizes the activity in the restructuring accrual during the year ended June 30, 1997. The balance of the restructuring accrual at June 30, 1997, is included in other accrued expenses and liabilities and is anticipated to be paid in fiscal 1998. In thousands Restructuring Charge $ 48,627 Payments (24,180) Non-cash adjustments (22,478) Restructuring accrual at June 30, 1997 $ 1,969
5. Contract Termination Charge In fiscal 1997, the Company recorded a contract termination charge of $24,506,000, which consists of unconditional payments associated with terminating certain information provider contracts which became uneconomic as a result of the Company's introduction of flat-rate pricing in December 1996. Approximately 58% of the contract termination payments are due upon signing, with most of the remainder payable in the first three quarters of fiscal 1998, and lesser amounts payable in the succeeding two quarters. The contract termination charge is recorded at the gross value of the contract termination payments, rather than the present value of such payments, as the implicit interest in the payments is not material. The balance of the accrued contract termination charge at June 30, 1997, is $14,644,000 and is included in other accrued expenses and liabilities. Subsequent to the contract terminations, the Company entered into new agreements with these information providers. 6. Settlement Charge In fiscal 1997, the Company recorded a settlement charge of $24,204,000 in connection with a legal settlement reached with various State Attorneys General and a preliminary legal settlement reached with various class action plaintiffs, to resolve potential claims arising out of the Company's introduction of flat-rate pricing and its representation that it would provide unlimited access to its subscribers. Pursuant to these settlements, the Company agreed to make payments to subscribers, according to their usage of the AOL service, who may have been injured by their reliance on the Company's claim of unlimited access. These payments do not represent refunds of online service revenues, but are rather the compromise and settlement of allegations that the Company's advertising of unlimited access under its flat-rate plan violated consumer protection laws. The balance of the accrued settlement charge at June 30, 1997, is $5,036,000 and is included in other accrued expenses and liabilities. 7. Business Combinations Pooling Transaction: In February 1996, the Company completed its merger with Johnson-Grace Company ("Johnson-Grace"), in which Johnson-Grace became a wholly- owned subsidiary of the Company. The Company exchanged 1,617,778 shares of common stock for all the outstanding common and preferred stock of Johnson- Grace. Additionally, 72,429 shares of the Company's common stock were reserved for outstanding stock options issued by Johnson-Grace and assumed by the Company. The merger was accounted for under the pooling of interests method of accounting, and accordingly, the accompanying consolidated financial statements have been restated to include the accounts and operations of Johnson-Grace for all periods presented prior to the merger. In connection with the merger of the Company and Johnson-Grace, merger expenses of $848,000 were recognized during 1996. Johnson-Grace had a fiscal year end of March 31 and, accordingly, the Company's retained earnings have been adjusted by $960,000 to reflect Johnson-Grace's results of operations for the three months ended June 30, 1995, which are not included in the Company's results of operations. Johnson-Grace's revenues, adjusted for intercompany sales, during the nine months ended March 31, 1996, and the years ended June 30, 1995 and 1994, were minimal. During the nine months ended March 31, 1996, and the year ended June 30, 1995, Johnson-Grace's net loss was $3,770,000 and $2,104,000, respectively. Purchase Transactions: In August 1996, the Company purchased 100% of the outstanding common stock of the ImagiNation Network, Inc. ("INN"), by issuing 362,500 shares of its common stock for a total purchase price of approximately $14.5 million. The acquisition 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. The pro forma effect on the year ended June 30, 1997, is immaterial. The effect on the year ended June 30, 1996, would have reduced net income and earnings per share to $16,995,000 and $0.16, respectively. In September 1995, the Company acquired Ubique, Ltd. ("Ubique"), an Israeli company, in a transaction accounted for under the purchase method of accounting. A total of 388,532 shares of the Company's common stock were issued and $1,500,000 was paid in exchange for all of the outstanding equity and related rights of Ubique. Additionally, 43,896 shares of the Company's common stock were reserved for outstanding stock options issued by Ubique and assumed by the Company. Approximately $17 million of the aggregate purchase price was allocated to in-process research and development and was charged to the Company's operations at the time of the acquisition. 8. Property and Equipment Property and equipment consist of the following: (in thousands) June 30, 1997 1996 Land $ 4,023 $ 7,600 Buildings and related improvements 37,755 34,479 Leasehold and network improvements 49,651 15,881 Furniture and fixtures 10,513 5,701 Computer equipment and internal software 159,512 84,775 Construction in progress 28,462 - 289,916 148,436 Less accumulated depreciation and amortization 56,787 37,346 Net property and equipment $233,129 $111,090
9. Commitments and Contingencies The Company leases facilities and equipment primarily under several long-term operating leases. Future minimum payments under non-cancelable operating leases with initial terms of one year or more consist of the following: (in thousands) Year ending June 30, 1998 $ 192,842 1999 167,139 2000 109,269 2001 42,704 2002 13,339 Thereafter 58,082 $ 583,375
The Company's rental expense under operating leases in the years ended June 30, 1997, 1996 and 1995, totaled approximately $142,935,000, $47,844,000 and $10,120,000, 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 an additional data center. The remaining commitments are $483,389,000, $466,920,000, $335,420,000 and $31,167,000 for the years ending June 30, 1998, 1999, 2000 and 2001, respectively. The related expense for the years ended June 30, 1997, 1996 and 1995, was $405,154,000, $278,513,000 and $119,798,000, respectively. The Company is involved in various legal proceedings, including pending litigation. In February 1997, a class action lawsuit (Orman v. America Online, Inc., et al.) was filed against the Company, its officers and directors and its outside auditors alleging violations of the federal securities laws between August 10, 1995 and October 29, 1996. In July 1997, the original complaint was dismissed against all defendants. On August 11, 1997, an amended class action complaint was filed against the Company, its Chief Executive Officer and its Chief Financial Officer. A shareholder derivative suit related to the Orman lawsuit has also been filed against the Company's directors in Delaware chancery court. The Company believes that it has valid defenses to all litigation pending against it, including the Orman case, and all cases against the Company are, and will continue to be, vigorously defended. Management is unable to make a meaningful estimate of the amount or range of loss that could result from an unfavorable outcome of all pending litigation. It is possible that the Company's results of operations or cash flows in a particular quarter or annual period or its financial position could be materially affected by an ultimate unfavorable outcome of certain pending litigation. Management believes, however, that the ultimate outcome of all pending litigation should not have a material adverse effect on the Company's financial position. 10. Notes Payable Notes payable at June 30, 1997, totaled $50 million and consists of a two year senior secured revolving credit facility ("Credit Facility"). The Company anticipates using the Credit Facility for the purpose of supporting its continuing growth and network expansion. The interest rate on the Credit Facility is 100 basis points above the London Interbank Offered Rate and interest is paid periodically, but at least quarterly. The Credit Facility is subject to certain financial covenants and is payable in full at the end of the two year term, on July 1, 1999. Notes payable at June 30, 1996, totaled approximately $20 million and consisted primarily of amounts borrowed to finance two office buildings and certain building improvements. The notes were collateralized by the respective assets. These notes were repaid during fiscal 1997. 11. Other Income (Expense) The following table summarizes the components of other income: (in thousands) Year ended June 30, 1997 1996 1995 Interest income $ 6,954 $ 6,901 $ 3,979 Interest expense (1,567) (1,404) (1,062) Allocation of minority losses 14,918 189 - Other income (expense) (14,006) (7,742) 157 $ 6,299 $ (2,056) $ 3,074
Other income (expense) in the year ended June 30, 1997, includes losses related to equity investments and write-downs of other miscellaneous investments. Other income (expense) in the year ended June 30, 1996, includes an $8,000,000 charge related to the settlement of a class action lawsuit. 12. Income Taxes The provision for income taxes is attributable to: (in thousands) Year ended June 30, 1997 1996 1995 Income before provision for income taxes $ - $ 32,523 $ 15,169 Current $ - $ - $ - Deferred - 32,523 15,169 $ - $ 32,523 $ 15,169
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: (in thousands) Year ended June 30, 1997 1996 1995 Income tax at the federal statutory rate of 35% $ (174,771) $21,195 $(6,998) State income tax, net of federal benefit (14,981) 3,424 1,597 Nondeductible charge for purchased research and development - 5,773 17,114 Loss, for which no tax benefit was derived 186,952 1,437 2,347 Other 2,800 694 1,109 $ - $32,523 $15,169
Deferred income taxes arise because of differences in the treatment of income and expense items for financial reporting and income tax purposes, primarily relating to product development costs and, prior to fiscal 1997, deferred subscriber acquisition costs. As of June 30, 1997, the Company has net operating loss carryforwards of approximately $790,000,000 for tax purposes which will be available to offset future taxable income. If not used, these carryforwards will expire between 2001 and 2012 . 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 liabilities and assets are as follows: (in thousands) June 30, 1997 1996 Deferred tax liabilities: Capitalized software costs $ 24,410 $ 16,801 Deferred subscriber acquisition costs - 119,071 Net deferred tax liabilities $ 24,410 $135,872 Deferred tax assets: Net operating loss carryforwards $ 300,200 $157,000 Other 8,227 - Total deferred tax assets 308,427 157,000 Valuation allowance for deferred assets (284,017) (21,128) Net deferred tax assets $ 24,410 $135,872
The valuation allowance for deferred assets increased by $262,889,000 in fiscal 1997 as a result of the Company's tax loss for the year as well as a substantial decrease in deferred tax liabilities, primarily caused by the write-off of deferred subscriber acquisition costs. In accordance with SFAS No. 109, the Company's history of tax losses and expected future tax deductions from stock options require that the Company account for deferred tax assets on the basis that it is more likely than not that the Company will not realize the tax benefits from the deferred tax assets. 13. Capital Accounts Common Stock: At June 30, 1997 and 1996, the Company's $.01 par value common stock authorized was 300,000,000 shares with 100,188,971 and 92,626,000 shares issued and outstanding, respectively. At June 30, 1997, 34,115,560 shares were reserved for the exercise of issued and unissued common stock options and a warrant, and 293,306 shares were reserved for issuance in connection with the Company's Employee Stock Purchase Plan. Preferred Stock: In February 1992, the Company's stockholders approved an amendment and restatement of the certificate of incorporation which authorized the future issuance of 5,000,000 shares of preferred stock, $.01 par value, with rights and preferences to be determined by the Board of Directors. During May 1996, the Company sold 1,000 shares of Series B convertible preferred stock ("the Preferred Stock") for approximately $28,000,000. The Preferred Stock has an aggregate liquidation preference of approximately $28,000,000 and accrues dividends at a rate of 4% per annum. Accrued dividends can be paid in the form of additional shares of Preferred Stock. During May 1998, the Preferred Stock, plus accrued but unpaid dividends, automatically converts into 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 has an outstanding warrant, exercisable through March 31, 1999, subject to certain performance standards specified in the agreement, to purchase 3,600,000 shares of common stock at a price of $3.91 per share. Shareholder Rights Plan: During fiscal 1993, the Company adopted a shareholder rights plan and distributed a dividend of one preferred share purchase right (a "Right") for each outstanding share of the Company's common stock. The Rights become exercisable in certain limited circumstances involving a potential business combination or change of control transaction of the Company. Each Right initially entitles registered holders of the Company's common stock to purchase one one-hundredth of a share of the Company's new Series A Junior Participating Preferred Stock ("Series A Preferred Stock") at a price of $150.00 per one one-hundredth of a share of Series A Preferred Stock. Following certain other events after the Rights have become exercisable, each Right entitles its holder to purchase for $150.00 an amount of common stock of the Company or, in certain circumstances, securities of the acquirer, having a then-current market value of two times the exercise price of the Right. The Rights are redeemable for one cent per Right at the option of the Board of Directors. Until a Right is exercised, the holder of the Right, as such, has no rights as a shareholder of the Company. The Rights expire on May 3, 2003, unless redeemed prior to that date. Stock Splits: On November 25, 1994, April 27, 1995 and November 28, 1995, 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. 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. The effect of applying SFAS No. 123 on 1997 and 1996 pro forma net income (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 1997 and 1996 would have been approximately ($540.9) million and $15.1 million, or ($5.66) per share and $0.14 per share, respectively. The fair value of the options granted during 1997 and 1996 are estimated as $9.00 and $16.35 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%, risk-free interest rate of 5.69% for 1997 and 5.38% for 1996, and expected life of 0.45 years from date of vesting. A summary of stock option activity is as follows: Number of Weighted average shares exercise price Balance at June 30, 1994 15,249,650 $ 2.72 Granted 24,385,513 $12.20 Exercised (2,905,256) $ 1.61 Forfeited (1,050,378) $10.51 Balance at June 30, 1995 35,679,529 $ 9.05 Granted 5,202,859 $34.06 Exercised (6,435,338) $ 5.51 Forfeited (2,145,257) $19.15 Balance at June 30, 1996 32,301,793 $13.11 Granted 6,415,963 $29.94 Exercised (6,933,261) $ 9.91 Forfeited (3,107,935) $23.49 Balance at June 30, 1997 28,676,560 $16.53
Options Outstanding Options Exercisable Weighted- Average Remaining Weighted Number Weighted- Number Contractual Average Exercisable Average Range of Outstanding Life Exercise as of Exercise Exercise as (in Years) Price 6/30/97 Price Price of 6/30/97 $ 0.01 to $ 6.71 5,303,305 5.2 $ 2.88 4,619,027 $ 2.74 $ 6.87 to $ 7.62 6,146,528 7.1 $ 7.17 2,272,489 $ 7.13 $ 7.65 to $17.25 5,517,845 7.6 $ 14.12 2,049,418 $ 13.91 $17.37 to $26.25 5,612,686 8.4 $ 21.75 1,042,612 $ 18.90 $26.88 to $42.75 4,784,250 9.1 $ 30.88 471,366 $ 33.67 $43.25 to $70.00 1,311,946 9.1 $ 50.96 229,241 $ 48.32 $ 0.01 to $70.00 28,676,560 7.5 $ 16.53 10,684,153 $ 9.74
Employee Stock Purchase Plan: In May 1992, the Company's Board of Directors adopted an 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 10 percent of compensation. The ESPP is administered by the Compensation Committee of the Board of Directors. The total number of shares of common stock that may be issued pursuant to options granted under the ESPP is 800,000. A total of 506,694 shares of common stock has been issued under the ESPP. 15 Employee Benefit Plan Savings Plan: The Company has a savings plan ("the Savings Plan") that qualifies as a deferred salary arrangement under Section 401(k) of the Internal Revenue Code. Under the Savings Plan, participating employees may defer a portion of their pretax earnings, up to the Internal Revenue Service annual contribution limit. The Company matches 50% of each employee's contributions up to a maximum matching contribution of 3% of the employee's earnings. The Company's matching contribution to the Savings Plan was approximately $2,657,000 and $1,126,000 in the years ended June 30, 1997 and 1996, respectively. 16 Subsequent Event On September 8, 1997, the Company announced that, in exchange for its ANS Communications, Inc. subsidiary, it will acquire CompuServe Corporation's ("CompuServe") worldwide online services business from WorldCom, Inc. ("WorldCom") and receive approximately $175 million in cash (the "Purchase and Sale"). Upon completion of the Purchase and Sale, the Company's European partner, Bertelsmann AG, will pay an additional $75 million to the Company and each company will invest $25 million in an expanded joint venture to operate CompuServe's European online service. The Company also agreed that it will, upon closing of the Purchase and Sale, enter into a five year network services agreement with WorldCom which will provide the Company with significantly expanded network capacity for the Company's online service at favorable prices, and higher speed access as it becomes commercially available. In connection with the aforementioned transactions, the Company expects to realize a gain of $300 million to $400 million, which will be recognized over the five year term of the network services agreement with WorldCom. The transactions outlined above are subject to certain closing conditions, including regulatory approvals, and are expected to close on or before March 1, 1998.
Quarterly Information (unaudited) (Amounts in thousands, except per share data) Quarter Ended September December March June Total 30, 31, 31, 30, Fiscal 1997 (1) (2) (3) Online service revenues $ 311,132 $ 351,220 $ 381,486 $385,607 $1,429,445 Other revenues 38,850 58,192 68,605 90,136 255,783 Total revenues 349,982 409,412 450,091 475,743 1,685,228 Loss from operations (356,144) (127,738) (6,715) (15,049) (505,646) Net loss (353,689) (129,105) (4,734) (11,819) (499,347) Net loss per share $ (3.80) $ (1.37) $ (0.05) $ (0.12) $ (5.22) Fiscal 1996 (2) (4) Online service revenues $ 178,479 $ 224,525 $ 285,481 $ 303,171 $ 991,656 Other revenues 19,423 24,620 26,859 31,296 102,198 Total revenues 197,902 249,145 312,340 334,467 1,093,854 Income (loss) from operations (6,803) 14,994 24,720 32,332 65,243 Net income (loss) (10,907) 9,530 15,127 16,066 29,816 Net income (loss) per share $ (0.14) $ 0.09 $ 0.14 $ 0.14 $ 0.28 (1) Net loss in the fiscal year ended June 30, 1997, includes charges of approximately $385.2 million in the quarter ended September 30, 1996, for the write-off of deferred subscriber acquisition costs, approximately $48.6 million in the quarter ended December 31, 1996, for a restructuring charge, $24.3 million in the quarter ended December 31, 1996, for a legal settlement and approximately $24.5 million in the quarter ended June 30, 1997, for contract termination charges. (2) The sum of per-share earnings (loss) does not equal earnings (loss) per share for the year due to equivalent share calculations which are impacted by the Company's loss in the first quarter of 1996 and by fluctuations in the Company's common stock market prices in 1997 and 1996. (3) The Company recorded a benefit of approximately $5.8 million in cost of revenues in the quarter ended June 30, 1997, resulting from the retroactive application of beneficial rates contained in certain new information provider contracts consummated in that quarter. (4) Net income in the fiscal year ended June 30, 1996, includes charges of approximately $17.0 million in the quarter ended September 30, 1995, for acquired research and development, $8.0 million in the quarter ended June 30, 1996, for the settlement of a class action lawsuit, and approximately $0.8 million in the quarter ended March 31, 1996, for merger expenses.
EX-3.1 2 RESTATED CERTIFICATE OF INCORPORATION OF AMERICA ONLINE, INC. (Formerly Quantum Computer Services, Inc.) Pursuant to Section 245 of the General Corporation Law of the State of Delaware ____________________________ Original Certificate of Incorporation filed with the Secretary of State of the State of Delaware May 24, 1985 __________________________ FIRST: The name of the corporation is America Online, Inc. (hereinafter referred to as the "Corporation"). SECOND: The address of the registered office of the Corporation in the State of Delaware is, 1013 Centre Road, Wilmington, County of New Castle. The name of its registered agent at such address is The Prentice-Hall Corporation System, Inc. THIRD: The purpose of the Corporation is to engage in any lawful act or activity or carry on any business for which corporations may be organized under the Delaware General Corporation Law or any successor statute. FOURTH: A. The total number of shares of all classes of stock which the Corporation shall have authority to issue is 305,000,000 shares, divided into two classes, consisting of: 300,000,000 shares of Common Stock, par value one cent ($0.01) per share (the "Common Stock"); and 5,000,000 shares of Preferred Stock, par value one cent ($0.01) per share (the "Undesignated Preferred Stock"). B. The following is a statement of the designations, powers, preferences and rights, and qualifications, limitations or restrictions of the Common Stock and the Preferred Stock. All cross references in this ARTICLE FOURTH refer to other paragraphs, sections or subsections in this ARTICLE FOURTH unless otherwise indicated. SECTION 1 - Common Stock All shares of Common Stock will be identical and will entitle the holders thereof to the same rights and privileges. 1.1. Voting Rights. The holders of Common Stock will be entitled to one vote per share on all matters to be voted on by the Corporation's stockholders, except as otherwise required by law. There shall be no cumulative voting. 1.2. Dividends. Dividends may be declared and paid on the Common Stock from funds lawfully available therefor as and when determined by the Board of Directors, subject to any provision of this Restated Certificate of Incorporation, as amended from time to time, and subject to the relative rights and preferences of any shares of Preferred Stock authorized and issued hereunder. 1.3. Liquidation Rights. In the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, the holders of Common Stock shall be entitled, subject to the rights and preferences, if any, of any shares of Preferred Stock authorized and issued hereunder, to share, ratably according to the number of shares of Common Stock held by them, in the remaining assets of the Corporation available for distribution to its stockholders. SECTION 2 - Undesignated Preferred Stock The Board of Directors is authorized, subject to any limitations prescribed by law, to provide for the issuance of shares of Undesignated Preferred Stock in series, and by filing a certificate pursuant to the applicable law of the State of Delaware (such certificate being hereinafter referred to as a "Preferred Stock Designation"), to establish from time to time the number of shares to be included in each such series, and to fix the designation, powers, preferences and rights of the shares of each such series and any qualifications, limitations or restrictions thereof. The number of authorized shares of Undesignated Preferred Stock may be increased by the affirmative vote of the holders of a majority of the Common Stock, without a vote of the holders of the Preferred Stock, or of any series thereof, unless a vote of any such holders is required pursuant to the terms of any Preferred Stock then outstanding, subject in any event to the provisions of Article ELEVENTH of this Restated Certificate of Incorporation. Pursuant to the authority conferred by this Article FOURTH, the following series of Preferred Stock have been designated, each such series consisting of such number of shares, with such voting powers and with such designations, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof as are stated and expressed in the exhibit with respect to such series attached hereto as specified below and incorporated herein by reference: Exhibit A Series A Junior Participating Preferred Stock Exhibit B Series B Convertible Preferred Stock FIFTH: The following provisions are inserted for the management of the business and the conduct of the affairs of the Corporation, and for further definition, limitation and regulation of the powers of the Corporation and of its directors and stockholders: A. The business and affairs of the Corporation shall be managed by or under the direction of the board of directors. In addition to the powers and authority expressly conferred upon them by statute or by this Restated Certificate of Incorporation or the by-laws of the Corporation, the directors are hereby empowered to exercise all such powers and do all such acts and things as may be exercised or done by the Corporation. B. The directors of the Corporation need not be elected by written ballot unless the by-laws so provide. C. Any action required or permitted to be taken by the stockholders of the Corporation may be effected only (i) at a duly called annual or special meeting of stockholders of the Corporation or (ii) by the unanimous written consent of all stockholders entitled to vote with regard to such action. SIXTH: A. Subject to the rights of the holders of any series of Preferred Stock then outstanding to elect additional directors under specified circumstances, the number of directors shall be fixed from time to time exclusively by the board of directors pursuant to a resolution adopted by a majority of the Whole Board. For purposes of this Restated Certificate of Incorporation, the term "Whole Board" shall mean the total number of authorized directors whether or not there exist any vacancies in previously authorized directorships. B. On or prior to the date on which the Corporation first provides notice of an annual meeting of the stockholders following the date this Article Sixth shall have become effective, the Board of Directors of the Corporation shall divide the directors into three classes, as nearly equal in number as reasonably possible, with the term of office of the first class to expire at the 1992 annual meeting of stockholders or any special meeting in lieu thereof, the term of office of the second class to expire at the 1993 annual meeting of stockholders or any special meeting in lieu thereof, and the term of office of the third class to expire at the 1994 annual meeting of stockholders or any special meeting in lieu thereof. At each annual meeting of stockholders or special meeting in lieu thereof following such initial classification, directors elected to succeed those directors whose terms expire shall be elected for a term of office to expire at the third succeeding annual meeting of stockholders or special meeting in lieu thereof after their election and until their successors are duly elected and qualified. C. Subject to the rights of the holders of any series of Preferred Stock then outstanding, newly created directorships resulting from any increase in the authorized number of directors or any vacancies in the Board of Directors resulting from death, resignation, retirement, disqualification, removal from office or other cause may be filled only by a majority vote of the directors then in office even though less than a quorum, or by a sole remaining director. In the event of any increase or decrease in the authorized number of directors, (i) each director then serving as such shall nevertheless continue as a director of the class of which he is a member until the expiration of his current term or his prior death, retirement, removal or resignation and (ii) the newly created or eliminated directorships resulting from such increase or decrease shall if reasonably possible be apportioned by the Board of Directors among the three classes of directors so as to ensure that no one class has more than one director more than any other class. To the extent reasonably possible, consistent with the foregoing rule, any newly created directorships shall be added to those classes whose terms of office are to expire at the latest dates following such allocation and newly eliminated directorships shall be subtracted from those classes whose terms of office are to expire at the earliest dates following such allocation, unless otherwise provided for from time to time by resolution adopted by a majority of the directors then in office, although less than a quorum. In the event of a vacancy in the Board of Directors, the remaining directors, except as otherwise provided by law, may exercise the powers of the full Board of Directors until the vacancy is filled. D. Advance notice of stockholder nominations for the election of directors and of business to be brought by stockholders before any meeting of the stockholders of the Corporation shall be given in the manner provided in the by-laws of the Corporation. E. Subject to the rights of the holders of any series of Preferred Stock then outstanding, any director, or the entire Board of Directors, may be removed from office at any time but only for cause by the affirmative vote of the holders of at least eighty percent (80%) of the voting power of all of the then outstanding shares of the Corporation entitled to vote generally in the election of directors, voting together as a single class. As used in this Article Sixth, "cause" shall mean only (i) conviction of a felony, (ii) declaration of unsound mind by order of court, (iii) gross dereliction of duty, (iv) commission of an action which constitutes intentional misconduct or a knowing violation of law if such action in either event results both in an improper substantial personal benefit and a material injury to the Corporation. A director may be removed for cause only after a reasonable notice and opportunity to be heard before the body proposing to remove him. SEVENTH: The Board of Directors is expressly empowered to adopt, amend or repeal by-laws of the Corporation. Any adoption, amendment or repeal of the by- laws of the Corporation by the board of directors shall require the approval of a majority of the Whole Board. The stockholders shall also have power to adopt, amend or repeal the by-laws of the Corporation; provided, however, that, in addition to any vote of the holders of any class or series of stock of the Corporation required by law or by this Restated Certificate of Incorporation, the affirmative vote of the holders of at least eighty percent (80%) of the voting power of all of the then outstanding shares of the capital stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required to adopt, amend or repeal any provision of the by-laws of the Corporation. EIGHTH: A. In addition to any affirmative vote required by law or this Restated Certificate of Incorporation, and except as otherwise expressly provided in this Article EIGHTH: 1. any merger or consolidation of the Corporation or any Subsidiary (as hereinafter defined) with (i) any Interested Stockholder (as hereinafter defined) or (ii) any other corporation (whether or not itself an Interested Stockholder) which is, or after such merger or consolidation would be, an Affiliate (as hereinafter defined) of an Interested Stockholder who was an Interested Stockholder immediately prior to such merger or consolidation; or 2. any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions) to or with any Interested Stockholder, or any Affiliate of any Interested Stockholder, of any assets of the Corporation or any Subsidiary (as hereinafter defined) having an aggregate Fair Market Value (as hereinafter defined) equaling or exceeding ten percent (10%) or more of the assets of the corporation; or 3. the issuance or transfer by the Corporation or any Subsidiary (in one transaction or a series of transactions) of any securities of the Corporation or any Subsidiary to any Interested Stockholder or any Affiliate of any Interested Stockholder in exchange for cash, securities or other property (or a combination thereof) having an aggregate Fair Market Value (as hereinafter defined) equaling or exceeding ten percent (10%) of the combined Fair Market Value of the then-outstanding shares of stock of the Corporation entitled to vote generally in the election of directors (for purposes of this Article EIGHTH, the "Voting Stock") of the Corporation, except for any issuance or transfer pursuant to an employee benefit plan of the Corporation or any Subsidiary thereof (including, without limitation of the immediately foregoing, issuances pursuant to such a plan to directors or consultants who are not employees); or 4. the adoption of any plan or proposal for the liquidation or dissolution of the Corporation proposed by or on behalf of an Interested Stockholder or any Affiliate of any Interested Stockholder; or 5. any reclassification of securities (including any reverse stock split), or recapitalization of the Corporation, or any merger or consolidation of the Corporation with any of its Subsidiaries or any other transaction (whether or not with or into or otherwise involving an Interested Stockholder) which has the effect, directly or indirectly, of increasing the proportionate share of the outstanding shares of any class of equity or convertible securities of the Corporation or any Subsidiary which is directly or indirectly owned by any Interested Stockholder or any Affiliate of any Interested Stockholder, except as a result of immaterial changes due to fractional share adjustments; shall require the affirmative vote of the holders of shares of voting stock of the Corporation representing at least eighty percent (80%) of the voting power of all the Voting Stock, voting together as a single class. Such affirmative vote shall be required notwithstanding the fact that no vote may be required, or that a lesser percentage may be specified, by law or by any other provision of this Restated Certificate of Incorporation, as amended or restated from time to time, or any Preferred Stock Designation or in any agreement with any national securities exchange or otherwise. The term "Business Combination" as used in this Article EIGHTH shall mean any transaction which is referred to in any one or more of paragraphs 1 through 5 of Section A of this Article EIGHTH. B. The provisions of Section A of this Article EIGHTH shall not be applicable to any particular Business Combination, and such Business Combination shall require only the affirmative vote of the majority of the outstanding shares of capital stock entitled to vote, or such vote; if any, as is otherwise required by law or by this Restated Certificate of Incorporation, if, in the case of any Business Combination that does not involve any cash or other consideration being received by the stockholders of the Corporation solely in their capacity as stockholders of the Corporation, the condition specified in the following paragraph 1 is met or, in the case of any other Business Combination, all of the conditions specified in either of the following paragraphs 1 or 2 are met: 1. The Business Combination shall have been approved by a majority of the Disinterested Directors (as hereinafter defined); provided, however, that this condition shall not be capable of satisfaction unless there are at least two Disinterested Directors. 2. All of the following conditions shall have been met: (a) The aggregate amount of the cash and the Fair Market Value as of the date of the consummation of the Business Combination of consideration other than cash to be received per share by the holders of Common Stock in such Business Combination shall at least be equal to the higher of the following: (1) (if applicable) the Highest Per Share Price (as hereinafter defined), including any brokerage commissions, transfer taxes and soliciting dealers' fees, paid by the Interested Stockholder or any of its Affiliates for any shares of Common Stock acquired by it (i) within the two year period immediately prior to the first public announcement of the proposal of the Business Combination (the "Announcement Date"), or (ii) in the transaction in which it became an Interested Stockholder, whichever is higher. (2) the Fair Market Value per share of Common Stock on the Announcement Date or on the date on which the Interested Stockholder became an Interested Stockholder (such latter date is referred to in this Article EIGHTH as the "Determination Date"), whichever is higher. (b) The aggregate amount of the cash and the Fair Market Value as of the date of the consummation of the Business Combination of consideration other than cash to be received per share by holders of shares of any class of outstanding Voting Stock, other than Common Stock or Excluded Preferred Stock (as hereinafter defined), shall be at least equal to the highest of the following (it being intended that the requirements of this subparagraph (b) shall be required to be met with respect to every such class of outstanding Voting Stock, whether or not the Interested Stockholder has previously acquired any shares of a particular class of Voting Stock): (1) (if applicable) the Highest Per Share Price (as hereinafter defined), including any brokerage commissions, transfer taxes and soliciting dealers' fees, paid by the Interested Stockholder for any shares of such class of Voting Stock acquired by it (i) within the two-year period immediately prior to the Announcement Date, or (ii) in the transaction in which it became an Interested Stockholder, whichever is higher; (2) (if applicable) the highest preferential amount per share to which the holders of shares of such class of Voting Stock are entitled in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation; and (3) the Fair Market Value per share of such class of Voting Stock on the Announcement Date or on the Determination Date, whichever is higher. (c) The consideration to be received by holders of a particular class of outstanding Voting Stock (including Common Stock and other than Excluded Preferred stock) shall be in cash or in the same form as the Interested Stockholder has previously paid for shares of such class of Voting Stock. If the Interested Stockholder has paid for shares of any class of Voting Stock with varying forms of consideration, the form of consideration to be received per share by holders of shares of such class of Voting Stock shall be either cash or the form used to acquire the largest number of shares of such class of Voting Stock previously acquired by the Interested Stockholder. The price determined in accordance with subparagraph B.2 of this Article EIGHTH shall be subject to appropriate adjustment in the event of any stock dividend, stock split, combination of shares or similar event. (d) After such Interested Stockholder has become an Interested Stockholder and prior to the consummation of such Business Combination: (1) except as approved by a majority of the Disinterested Directors there shall have been no failure to declare and pay at the regular date therefor any full quarterly dividends (whether or not cumulative) on any outstanding stock having preference over the Common Stock as to dividends or liquidation; (2) there shall have been (i) no reduction in the annual rate of dividends paid on the Common Stock (except as necessary to reflect any subdivision of the Common Stock), except as approved by a majority of the Disinterested Directors, and (ii) an increase in such annual rate of dividends as necessary to reflect any reclassification (including any reverse stock split), recapitalization, reorganization or any similar transaction which has the effect of reducing the number of outstanding shares of the Common Stock, unless the failure to so increase such annual rate is approved by a majority of the Disinterested Directors, and (3) neither such Interested Stockholder nor any of its Affiliates shall have become the beneficial owner of any additional shares of Voting Stock except as part of the transaction which results in such Interested Stockholder becoming an Interested Stockholder; provided, however, that no approval by Disinterested Directors shall satisfy the requirements of this subparagraph (d) unless at the time of such approval there are at least two Disinterested Directors. (e) After such Interested Stockholder has become an Interested Stockholder, such Interested Stockholder shall not have received the benefits directly or indirectly (except proportionately as a stockholder), of any loans, advances, guarantees, pledges or other financial assistance or any tax credits or other tax advantages provided by the Corporation, whether in anticipation of or in connection with such Business Combination or otherwise. (f) A proxy or information statement describing the proposed Business Combination and complying with the requirements of the Securities Exchange Act of 1934 and the rules and regulations thereunder (or any subsequent provisions replacing such Act, rules or regulations) shall be mailed to stockholders of the Corporation at least thirty (30) days prior to the consummation of such Business Combination (whether or not such proxy or information statement is required to be mailed pursuant to such Act or subsequent provisions). C. For the purposes of this Article EIGHTH: 1. "Person" means any individual, corporation, partnership, association, bank, joint stock company, trust, syndicate, unincorporated organization or similar company, or a group of "persons" acting or agreeing to act together for the purpose of acquiring, holding, voting or disposing of securities or their voting or other interest in the capital stock or other securities of the Corporation for a common purpose, pursuant to any contract, understanding, relationship, agreement or other arrangement, whether written or otherwise; provided, that a group of "persons" shall not include the Board of Directors of the Corporation in its solicitation of proxies under Regulation 14A of the General Rules and Regulations under the Securities Exchange Act of 1934 or under applicable state law. 2. "Interested Stockholder" shall mean any Person (other than the Corporation or any holding company or Subsidiary thereof) who or which: (a) is the beneficial owner, directly or indirectly, of more than fifteen percent (15%) of the voting power of the outstanding Voting Stock; or (b) is an Affiliate of the Corporation and at any time within the two-year period immediately prior to the date in question was the beneficial owner, directly or indirectly, of fifteen percent (15%) or more of the voting power of the then outstanding Voting Stock; or (c) is an assignee of or has otherwise succeeded to any shares of Voting Stock which were at any time within the two-year period immediately prior to the date in question beneficially owned by any Interested Stockholder, if such assignment or succession shall have occurred in the course of a transaction or series of transactions not involving a public offering within the meaning of the Securities Act of 1933, as amended (or any successor statute). 3. "Beneficial Ownership" shall be determined pursuant to Rule 13d-3 of the General Rules and Regulations under the Securities Exchange Act of 1934 (or any successor rule or statutory provision), or, if said Rule 13d-3 shall be rescinded and there shall be no successor rule or statutory provision thereto, pursuant to said Rule 13d-3 as in effect on the date of filing of this Restated Certificate of Incorporation; provided, however, that a Person shall, in any event, also be deemed the "beneficial owner" of any Voting Stock: (a) which such Person or any of its Affiliates beneficially owns, directly or indirectly; or (b) which such Person or any of its Affiliates has (i) the right to acquire (whether such right is exercisable immediately or only after the passage of time), pursuant to any agreement, arrangement or understanding (but shall not be deemed to be the beneficial owner of any voting shares solely by reason of an agreement, contract, or other arrangement with the Corporation to effect any transaction which is described in any one or more of clauses 1 through and including 5 of Section A of this Article EIGHTH) or upon the exercise of conversion rights, exchange rights, warrants, or options or otherwise, or (ii) sole or shared voting or investment power with respect thereto pursuant to any agreement, arrangement, understanding, relationship or otherwise (but shall not be deemed to be the beneficial owner of any voting shares solely by reason of a revocable proxy granted for a particular meeting of stockholders, pursuant to a public solicitation of proxies for such meeting, with respect to shares of which neither such Person nor any such Affiliate is otherwise deemed the beneficial owner); or (c) which are beneficially owned, directly or indirectly, by any other Person with which such first mentioned Person or any of its Affiliates acts as a partnership, limited partnership, syndicate or other group pursuant to any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of any shares of capital stock of the Corporation; and provided further, however, that (1) no director or officer of the Corporation (or any Affiliate of any such director or officer) shall, solely by reason of any or all of such directors or officers acting in their capacities as such, be deemed, for any purposes hereof, to beneficially own any Voting Stock beneficially owned by any other such director or officer (or any Affiliate thereof), and (2) neither any employee stock ownership or similar plan of the Corporation or any Subsidiary of the Corporation, nor any trustee with respect thereto or any Affiliate of such trustee (solely by reason of such capacity of such trustee), shall be deemed, for any purposes hereof, to beneficially own any Voting Stock held under any such plan. For purposes of computing the percentage beneficial ownership of Voting Stock of a Person, the outstanding Voting Stock shall include shares deemed owned by such Person through application of this subsection but shall not include any other Voting Stock which may be issuable by the Corporation pursuant to any agreement, or upon exercise of conversion rights, warrants or options, or otherwise. For all other purposes, the outstanding Voting Stock shall include only voting Stock then outstanding and shall not include any Voting Stock which may be issuable by the Corporation pursuant to any agreement, or upon the exercise of conversion rights, warrants or options, or otherwise. 4. "Affiliate" shall have the meaning ascribed to that term in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as in effect on the date of filing of this Restated Certificate of Incorporation. 5. "Subsidiary" means any corporation of which a majority of any class of equity security is owned, directly or indirectly, by the Corporation; provided, however, that for the purposes of the definition of Interested Stockholder set forth in Paragraph 2 of this Section C, the term "Subsidiary" shall mean only a corporation of which a majority of each class of equity security is owned, directly or indirectly, by the Corporation. 6. "Disinterested Director" means any member of the board of directors who is unaffiliated with the Interested Stockholder and was a member of the board of directors prior to the time that the Interested Stockholder became an Interested Stockholder, and any director who is thereafter chosen to fill any vacancy on the board of directors or who is elected and who, in either event, is unaffiliated with the Interested Stockholder and in connection with such directors' initial assumption of office is recommended for appointment or election by a majority of Disinterested Directors then on the board of directors. 7. "Fair Market Value" means: (a) in the case of stock, the highest closing sales price of the stock during the 30-day period immediately preceding the date in question of a share of such stock on the National Association of Securities Dealers Automated Quotation System or any system then in use, or, if such stock is admitted to trading on a principal United States securities exchange registered under the Securities Exchange Act of 1934, Fair Market Value shall be the highest sale price reported during the 30-day period preceding the date in question, or, if no such quotations are available, the Fair Market Value on the date in question of a share of such stock as determined by a majority of the Disinterested Directors in good faith, in each case with respect to any class of stock, appropriately adjusted for any dividend or distribution in shares of such stock or any stock split or reclassification of outstanding shares of such stock into a greater number of shares of such stock or any combination or reclassification of outstanding shares of such stock into a smaller number of shares of such stock, and (b) in the case of property other than cash or stock, the Fair Market Value of such property on the date in question as determined by a majority of the Disinterested Directors in good faith. 8. Reference to "Highest Per Share Price" shall in each case with respect to any class of stock reflect an appropriate adjustment for any dividend or distribution in shares of such stock or any stock split or reclassification of outstanding shares of such stock into a greater number of shares of such stock or any combination or reclassification of outstanding shares of such stock into a smaller number of shares of such stock. 9. In the event of any Business Combination in which the Corporation survives, the phrase "consideration other than cash to be received" as used in subparagraphs (a) and (b) of paragraph 2 of Section B of this Article EIGHTH shall include the shares of Common Stock and/or the shares of any other class of outstanding Voting Stock retained by the holders of such shares. 10. "Excluded Preferred Stock" means any series of Preferred Stock with respect to which the Preferred Stock Designation creating such series expressly provides that the provisions of this Article EIGHTH shall not apply. D. A majority of the Disinterested Directors of the Corporation shall have the power and duty to determine for the purposes of this Article EIGHTH, on the basis of information known to them after reasonable inquiry: (a) whether a Person is an Interested Stockholder; (b) the number of shares of Voting Stock beneficially owned by any Person; (c) whether a Person is an Affiliate of another; and (d) whether the assets which are the subject of any Business Combination have, or the consideration to be received for the issuance or transfer of securities by the Corporation or any Subsidiary in any Business Combination has an aggregate Fair Market Value equaling or exceeding ten percent (10%) of the assets of the Corporation or equaling or exceeding ten percent (10%) of the combined Fair Market Value of the voting Stock of the Corporation. A majority of the Disinterested Directors shall have the further power to interpret all of the terms and provisions of this Article EIGHTH. E. Nothing contained in this Article EIGHTH shall be construed to relieve any Interested Stockholder from any fiduciary obligation imposed by law. NINTH: 1. To the fullest extent permitted by the Delaware General Corporation Law as the same now exists or may hereafter be amended, the Corporation shall indemnify, and advance expenses to, its directors and officers and any person who is or was serving at the request of the Corporation as a director or officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise. The Corporation, by action of its board of directors, may provide indemnification or advance expenses to employees and agents of the Corporation or other persons only on such terms and conditions and to the extent determined by the board of directors in its sole and absolute discretion. 2. The indemnification and advancement of expenses provided by, or granted pursuant to, this Article Ninth shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any By-law, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office. 3. The Corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power to indemnify him against such liability under this Article Ninth. 4. The indemnification and advancement of expenses provided by, or granted pursuant to, this Article Ninth shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director or officer and shall inure to the benefit of the heirs, executors and administrators of such officer or director. The indemnification and advancement of expenses that may have been provided to an employee or agent of the Corporation by action of the board of directors, pursuant to the last sentence of Paragraph 1 of this Article Ninth, shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be an employee or agent of the Corporation and shall inure to the benefit of the heirs, executors and administrators of such a person, after the time such person has ceased to be an employee or agent of the Corporation, only on such terms and conditions and to the extent determined by the board of directors in its sole discretion. TENTH: To the fullest extent permitted by the Delaware General Corporation law as the same now exists or may hereafter be amended, a director of the Corporation shall not be liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. Any repeal or modification of this Article TENTH by the stockholders of the Corporation only shall be applied prospectively, to the extent that such repeal or modification would, if applied retrospectively, adversely affect any limitation on the personal liability of a director of the Corporation existing immediately prior to such repeal or modification. ELEVENTH: The Corporation reserves the right to amend or repeal any provision contained in this Restated Certificate of Incorporation in the manner prescribed by the laws of the State of Delaware and all rights conferred upon stockholders are granted subject to this reservation, provided, however, that in addition to the vote of the holders of any class or series of stock of the Corporation required by law or by this Restated Certificate of Incorporation, the affirmative vote of the holders of shares of voting stock of the Corporation representing at least eighty percent (80%) of the voting power of all of the then outstanding shares of the capital stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required to (i) reduce or eliminate the number of authorized shares of Common Stock or the number of authorized shares of Preferred Stock set forth in Article FOURTH or (ii) amend or repeal, or adopt any provision inconsistent with, Section 2 of Article FOURTH and Articles FIFTH, SIXTH, SEVENTH, EIGHTH, NINTH, TENTH and this Article ELEVENTH of this Restated Certificate of Incorporation. I, Lennert J. Leader, Senior Vice President, Chief Financial Officer, Chief Accounting Officer, Treasurer and Assistant Secretary of the aforesaid Corporation, hereby certify that the foregoing Restated Certificate of Incorporation of the said Corporation was duly adopted by its Board of Directors in accordance with the provisions of Section 245 of the General Corporation Law of the State of Delaware; that the said Restated Certificate of Incorporation only restates and integrates and does not further amend the provisions of the said Corporation's Certificate of Incorporation as heretofore amended or supplemented; and that there is no discrepancy between such provisions and the provisions of the said Restated Certificate of Incorporation. IN WITNESS WHEREOF, I have executed this Restated Certificate of Incorporation, under the seal of the said Corporation, this 25th day of September, 1997. AMERICA ONLINE, INC. By:/S/LENNERT J. LEADER Lennert J. Leader, Senior Vice President, Chief Financial Officer, Chief Accounting Officer, Treasurer and Assistant Secretary Exhibit A AMERICA ONLINE, INC. SERIES A JUNIOR PARTICIPATING PREFERRED STOCK The preferences, privileges and restrictions granted to or imposed on the Corporation's Series A Junior Participating Preferred Stock, par value $.01 per share, or the holders thereof, are as follows: Section 1. Designation and Amount. The shares of such series shall be designated as "Series A Junior Participating Preferred Stock" (the "Series A Preferred Stock") and the number of shares constituting the Series A Preferred Stock shall be two hundred thousand (200,000). Such number of shares may be increased or decreased by Resolution of the Board of Directors; provided, that no decrease shall reduce the number of shares of Series A Preferred Stock to a number less than the number of shares then outstanding plus the number of shares reserved for issuance upon the exercise of outstanding options, rights or warrants or upon the conversion of any outstanding securities issued by the corporation convertible into Series A Preferred Stock. Section 2. Dividends and Distributions. (A) Subject to the rights of the holders of any shares of any series of Preferred Stock (or any similar stock) ranking prior and superior to the Series A Preferred Stock with respect to dividends, the holders of shares of Series A Preferred Stock, in preference to the holders of Common Stock, $.01 par value (the "Common Stock"), of the Corporation, and of any other junior stock, shall be entitled to receive, when, as and if declared by the Board at Directors out of funds legally available for the purpose, quarterly dividends payable in cash on the first day of March, June, September and December in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series A Preferred Stock, in an amount per share (rounded to the nearest cent) equal to the greater of (a) $1 or (b) subject to the provision for adjustment hereinafter set forth, 100 times the aggregate per share amount of all cash dividends, and 100 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions, other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock since the immediately preceding Quarterly Dividend Payment Date or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series A Preferred Stock. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of at dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event under clause (b) of the preceding sentence shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) The Corporation shall declare a dividend or distribution on the Series A Preferred Stock as provided in paragraph (A) of this section immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock); provided that, in the event no dividend or distribution shall have been declared on the Common Stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $1 per share on the Series A Preferred Stock shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date. (C) Dividends shall begin to accrue and be cumulative on outstanding shares of Series A Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series A Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series A Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata an a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Series A Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be not more than 60 days prior to the date fixed for the payment thereof. Section 3. Voting Rights. The holders of shares of Series A Preferred Stock shall have the following voting rights: (A) Subject to the provision for adjustment hereinafter set forth, each share of Series A Preferred Stock shall entitle the holder thereof to 100 votes on all matters submitted to a vote of the stockholders of the Corporation. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the number of votes per share to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) Except as otherwise provided herein, in any other Certificate of Designation creating a series of Preferred Stock or any similar stock, or by law, the holders of shares of Series A Preferred Stock and the holders of shares of Common Stock and any other capital stock of the Corporation having general voting rights shall vote together as one class on all matters submitted to a vote of stockholders of the Corporation. (C) Except as set forth herein, or as otherwise provided by law, holders of Series A Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action. Section 4. Certain Restrictions. (A) Whenever quarterly dividends or other dividends or distributions payable on the Series A Preferred Stock as provided in Section 2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series A Preferred Stock outstanding shall have been paid in full, the Corporation shall not: (i) declare or pay dividends, or make any other distributions, on any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock; (ii) declare or pay dividends, or make any other distributions, on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, except dividends paid ratably on the Series A Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; (iii) redeem or purchase or otherwise acquire for consideration shares of any stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock, provided that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such junior stock in exchange for shares of any stock of the Corporation ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the Series A Preferred Stock; or (iv) redeem or purchase or otherwise acquire for consideration any shares of Series A Preferred Stock, or any shares of stock ranking on a parity with the Series A Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board or Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. (B) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under paragraph (A) of this Section 4, purchase or otherwise acquire such shares at such time and in such manner. Section 5. Reacquired Shares. Any shares of Series A Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and canceled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock subject to the conditions and restrictions on issuance set forth herein, in the Restated Certificate of incorporation, or in any other Certificate of Designation creating a series of Preferred Stock or any similar stock or as otherwise required by law. Section 6. Liquidation, Dissolution or Winding Up. Upon any liquidation, dissolution or winding up of the Corporation, no distribution shall be made (1) to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock unless, prior thereto, the holders of shares of Series A Preferred Stock shall have received $100 per share, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment, provided that the holders of shares of Series A Preferred Stock shall be entitled to receive an aggregate amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount to be distributed per share to holders of shares of Common Stock, or (2) to the holders of shares stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, except distributions made ratably on the Series A Preferred Stock and all such parity stock in proportion to the total amounts to which the holders of all such shares are entitled upon such liquidation, dissolution or winding up. In the event the corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise then by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such came the aggregate amount to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event under the proviso in clause (1) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Section 7. Consolidation, Merger, etc. In case the Corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case each share of Series A Preferred Stock shall at the same time be similarly exchanged or changed into an amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the Corporation at any time declares or pays any dividend on the Common Stock payable in shares of Common Stock, or effects a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Series A Preferred Stock shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Section 8. No Redemption. The shares of Series A Preferred Stock shall not be redeemable. Section 9. Rank. The Series A Preferred Stock shall rank junior with respect to the payment of dividends and the distribution of assets to all other series of the Corporation's Preferred Stock. Section 10. Amendment. The Restated Certificate of Incorporation of the Corporation shall not be amended in any manner which would materially alter or change the powers, preferences or special rights of the Series A Preferred Stock so as to affect them adversely without the affirmative vote of the holders of at least two-thirds of the outstanding shares of Series A Preferred Stock, voting together as a single class. Exhibit B AMERICA ONLINE, INC. SERIES B CONVERTIBLE PREFERRED STOCK The preferences, privileges and restrictions granted to or imposed on the Corporation's Series B Convertible Preferred Stock, par value $.01 per share, or the holders thereof, are as follows: Section 1. Designation and Amount. The shares of such series shall be designated as "Series B Convertible Preferred Stock" (the "Series B Preferred Stock") and the number of shares constituting the Series B Preferred Stock shall be one thousand (1,000). Such number of shares may be increased or decreased by resolution of the Board of Directors; provided that no decrease shall reduce the number of shares of Series B Preferred Stock to a number less than the number of shares then outstanding plus the number of shares reserved for issuance upon the exercise of outstanding options, rights or warrants or upon the conversion of any outstanding securities issued by the Corporation convertible into Series B Preferred Stock. Section 2. Liquidation, Dissolution or Winding Up. In the event of the voluntary or involuntary liquidation, dissolution or winding up of the Corporation, or in the event of its insolvency, before any distribution or payment is made to any holders of any shares of Common Stock or any other class or series of capital stock of the Corporation designated to be junior to the Series B Preferred Stock, and subject to the pari passu or senior liquidation rights and preferences of any class or series of Preferred Stock designated to be on parity with the Series B Preferred Stock, the holders of outstanding Series B Preferred Stock shall be entitled to have set apart for them, or to be paid first out of the assets of the Corporation available for distribution to holders of the Corporation's capital stock of all classes, an amount equal to $28,315.2430 per share of Series B Preferred Stock (which amount shall be subject to equitable adjustment whenever there shall occur a stock dividend, distribution, combination of shares, reclassification or other similar event with respect to Series B Preferred Stock and, as so adjusted from time to time, is hereinafter referred to as the "Base Liquidation Price") plus all Series B Dividends (as defined below) thereon accrued but unpaid, to and including the date full payment shall be tendered to the holders of Series B Preferred Stock with respect to such liquidation, dissolution or winding up. If, upon any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, the assets of the Corporation available for distribution to stockholders shall be insufficient to set aside for or to pay such amounts to the holders of shares of Series B Preferred Stock, the total amount of the Corporation's assets which is available to be paid to stockholders of the Corporation shall be distributed pro rata among the holders of the Series B Preferred Stock, subject to the liquidation rights and preferences of any class or series of Preferred Stock designated to be on a parity with the Series B Preferred Stock, and no distribution shall be made to or set apart for the holders of Common Stock or any other class or series of capital stock of the Corporation which at such time is junior to the Series B Preferred Stock as to liquidation rights and preferences. If the assets of the Corporation available for distribution to stockholders exceed such amounts, the balance of such assets shall be paid to or set aside for payment ratably among the holders of Common Stock and the holders of any class or series of Preferred Stock designated to be junior to the Series B Preferred Stock, in accordance with their relative rights and preferences. Section 3. Dividend Rights. (a) From and after the date on which shares of Series B Preferred Stock are first issued (the "Original Issue Date"), dividends shall accrue on each share of the Series B Preferred Stock, whether or not funds are legally available therefor and whether or not declared by the Board of Directors, at the rate equal to four percent (4%) per annum on the Base Liquidation Price of such share of Series B Preferred Stock, compounded annually (the "Series B Dividends"). From time to time the Board of Directors of the Corporation may declare and pay dividends or distributions on shares of the Common Stock or on any other class or series of capital stock of the Corporation, but only if all accrued Series B Dividends shall have been paid in full prior to the date of any such declaration, payment or distribution. Series B Dividends may, at the discretion of the Board of Directors, be paid by the issuance to each holder of a share of Series B Preferred Stock of the number of additional shares of Series B Preferred Stock determined by dividing (y) the amount of Series B Dividends payable to such holder by (z) the Conversion Price (as defined in Section 5(c) hereof) that would apply if such shares were to be converted on the date of such issuance. (b) In the event the Board of Directors of the Corporation shall declare a dividend payable upon the then outstanding shares of Common Stock (other than a dividend payable entirely in shares of Common Stock of the Corporation), the Board of Directors shall declare at the same time a dividend upon the then outstanding shares of the Series B Preferred Stock, payable at the same time as the dividend paid on the Common Stock, in an amount equal to the amount of dividends per share of Series B Preferred Stock as would have been payable on the largest number of whole shares of Common Stock into which each share of Series B Preferred Stock would have been converted if the Series B Preferred Stock had been converted to Common Stock pursuant to the provisions of Section 5 hereof as of the record date for the determination of holders of Common Stock entitled to receive such dividends. Section 4. Voting Rights. (a) Except as set forth herein or in the Restated Certificate of Incorporation of the Corporation, or as otherwise provided by law, the Series B Preferred Stock shall be non-voting, the holders of Series B Preferred Stock shall have no special voting rights and their consent shall not be required for taking any corporate action. (b) To the extent that the Series B Preferred Stock is entitled to vote or required to consent as provided by law or as set forth herein or in the Restated Certificate of Incorporation of the Corporation, the Series B Preferred Stock shall vote on the following basis: (i) Holders of Series B Preferred Stock shall have one vote per share; (ii) Except as otherwise provided by law or as set forth herein or in the Restated Certificate of Incorporation of the Corporation, the Series B Preferred Stock shall vote together with (A) all other classes of Preferred Stock entitled to vote on such matter and (B) the Common Stock, as a single class; and (iii) The Corporation shall not without having obtained the affirmative vote or written consent of the holders of not less than fifty percent (50%) in voting power of the outstanding shares of Series B Preferred Stock, voting as a separate class: (A) amend, alter or repeal any provision of, or add any provision to, the Corporation's Restated Certificate of Incorporation or By-laws if such action would alter or change the preferences, rights, privileges or powers of, or the restrictions provided for the benefit of, the Series B Preferred Stock; (B) reclassify any Common Stock into shares having any preference or priority as to assets superior to or on a parity with any such preference or priority of the Series B Preferred Stock; or (C) issue any additional shares of Series B Preferred Stock other than pursuant to Section 3(a) hereof. (c) The holders of at least a majority of the aggregate number of shares of Series B Stock outstanding may, by affirmative vote or consent, agree to a change or alteration by the Corporation in the preferences, voting powers, qualifications and special or relative rights and privileges of the Series B Stock, or may waive the application thereof in any particular instance. Section 5. Conversion. (a) Automatic Conversion on Second Anniversary. On the second anniversary of the Original Issue Date, or if such date is not a Business Day (as defined below) on the next succeeding Business Day, each share of Series B Preferred Stock shall automatically be converted, without the payment of any additional consideration or any further action by the holders of such shares and whether or not the certificates representing such shares are surrendered to the Corporation or its transfer agent, into such number of fully paid and non-assessable shares of Common Stock as is determined by dividing (i) the Base Liquidation Price plus all Series B Dividends thereon accrued but unpaid to and including the date of conversion by (ii) the Conversion Price (as defined below), determined as hereinafter provided, in effect on the date of conversion, calculated to four decimal places; provided that the Corporation shall not be obligated to issue certificates evidencing the shares of Common Stock issuable upon such conversion unless certificates evidencing such shares of the Series B Preferred Stock so converted are either delivered to the Corporation or its transfer agent, or the holder notifies the Corporation or any transfer agent that such certificates have been lost, stolen, or destroyed and executes an agreement satisfactory to the Corporation to indemnify the Corporation from any loss incurred by it in connection with such loss, theft or destruction. "Business Day" means any day on which commercial banks are not authorized or required by law to close in New York, New York. (b) Conversion Following Triggering Event at Option of Holders. (i) In the event that a Triggering Event (as defined below) has occurred, then the holders of at least a majority of the aggregate number of shares of Series B Stock outstanding may, by written notice to the Corporation sent not later than sixty (60) days following the date of such Triggering Event (a "Conversion Election Notice") elect to have each outstanding share of Series B Preferred Stock converted, on the next Business Day succeeding the date of such Conversion Election Notice, without the payment of any additional consideration or any further action by the holders of such shares and whether or not the certificates representing such shares are surrendered to the Corporation or its transfer agent, into such number of fully paid and non-assessable shares of Common Stock as is determined by dividing (i) the Base Liquidation Price plus all Series B Dividends thereon accrued but unpaid to and including the date of conversion by (ii) the Conversion Price (as defined below), determined as hereinafter provided, in effect on the date of conversion calculated to four decimal places; provided that the Corporation shall not be obligated to issue certificates evidencing the shares of Common Stock issuable upon such conversion unless certificates evidencing such shares of the Series B Preferred Stock so converted are either delivered to the Corporation or its transfer agent, or the holder notifies the Corporation or any transfer agent that such certificates have been lost, stolen, or destroyed and executes an agreement satisfactory to the Corporation to indemnify the Corporation from any loss incurred by it in connection with such loss, theft or destruction. (ii) As used herein, a "Triggering Event" shall mean (A) termination of the Joint Venture Agreement dated as of May 8, 1996 (the "JVA") between the Corporation, Mitsui & Co., Ltd. and the other parties thereto, pursuant to the terms thereof; (B) delivery of a Buyout Notice (as defined in the JVA) pursuant to the terms of the JVA; (C)the delivery of any Buy/Sell Notice (as defined in the JVA) or notice of dissolution, pursuant to Section 3.4.1 of the JVA; (D) timely delivery of a Launch Software Buyout Notice (as defined in the JVA); (E) a consolidation or merger of the Corporation as a result of which the Corporation is not the surviving entity or the sale of all or substantially all of the assets of the Corporation; (F)the Common Stock of the Corporation is neither: (x) quoted on the National Association of Security Dealers Automatic Quotation System ("NASDAQ"), (y) traded on a national securities exchange or (z) set forth in the National Quotation Bureau sheet listing; or (G) the stockholders of the Corporation shall have approved any plan or proposal for the liquidation or dissolution of the Corporation. (c) Determination of Conversion Price. The Conversion Price for purposes of calculating the number of shares of Common Stock deliverable upon conversion of Series B Preferred Stock (the "Conversion Price") shall, from time to time, be equal to (i) the average closing sales price per share of Common Stock as reported by NASDAQ, if the Common Stock is quoted on NASDAQ, (ii) the average closing sales price per share on the primary exchange on which the Common Stock is then traded, if the Common Stock is traded on a national securities exchange or (iii) if the Common Stock is neither quoted on NASDAQ nor traded on a national securities exchange, the average high bid price as set forth in the National Quotation Bureau sheet listing, in each case for the twenty (20) consecutive trading days ending on the date which is two (2) Business Days prior to the date shares of Series B Preferred Stock are converted into shares of Common Stock; provided that, in the event that any stock split, stock dividend, stock combination, reclassification or similar event is effected during such twenty (20) consecutive trading day period, calculation of such Conversion Price shall be equitably adjusted to account for such stock split, stock dividend, stock combination, reclassification or similar event. (d) Conversion Mechanics. Upon the conversion of the Series B Preferred Stock, the holders thereof shall surrender the certificate or certificates representing such shares, duly endorsed, at the office of the Corporation or of its transfer agent. Thereupon, there shall be issued and delivered to such holder, promptly at such office and in such holder's name as shown on such surrendered certificate or certificates, a certificate or certificates for the aggregate number of shares of Common Stock into which the aggregate shares of the Series B Preferred Stock surrendered were convertible on the date on which such conversion occurred. No fractional shares of Common Stock shall be issued upon conversion of the Series B Preferred Stock. In lieu of any fractional shares to which the holder would otherwise be entitled, the Corporation shall pay to such holder cash equal to such fraction multiplied by the then effective Conversion Price. (e) No Impairment. The Corporation shall not, by amendment of its Restated Certificate of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, impair or avoid or seek to impair or avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation but shall at all times in good faith assist in the carrying out of all the provisions of this Section 5 and in the taking of all such action as may be necessary or appropriate in order to effect the conversion of the Series B Preferred Stock as set forth herein. (f) Common Stock Reserved. The Corporation shall reserve and keep available out of its authorized but unissued Common Stock such number of shares of Common Stock as shall from time to time be sufficient to effect the conversion of all convertible Series B Preferred Stock. (g) Certain Taxes. The Corporation shall pay any issue or transfer taxes payable in connection with the conversion of any shares of Series B Preferred Stock; provided that the Corporation shall not be required to pay any tax which may be payable in respect of any transfer to a name other than that of the holder of such Series B Preferred Stock. Section 6. No Reissuance of Series B Preferred Stock. No share or shares of Series B Preferred Stock acquired by the Corporation by reason of redemption, purchase, conversion or otherwise shall be reissued, and all such shares shall be canceled, retired and eliminated from the shares which the Corporation shall be authorized to issue. Section 7. Residual Rights. All rights accruing to the outstanding shares of the Corporation not expressly provided for to the contrary herein or in the Resolution establishing the terms of the Series B Preferred Stock shall be vested in the Common Stock. Section 8. Rank. The Series B Preferred Stock shall rank superior with respect to the payment of dividends and the distribution of assets to all other series or classes of the Corporation's Preferred Stock, other than series or classes of the Corporation's Preferred Stock specified to rank on parity with the Series B Preferred Stock with respect to the payment of dividends and the distribution of assets. EX-10.13 3 May 10, 1996 Mr. Bruce Bond Dear Bruce: I am pleased to offer you the position of President and Chief Executive Officer of ANS CO+RE Systems, Inc. ("ANS" or the "Company"), a subsidiary of America Online, Inc. ("AOL"). I have no doubt that with your talent and vision, you will be able to build ANS into a global leader in the network services business. In your capacity as President and CEO, you will report to the Board of Directors of ANS. It is expected that the Board will initially be comprised of five members, consisting of yourself, two directors designated by AOL and two independent directors. I look forward to exploring candidates for the independent directors together with you. For so long as you continue to be employed as President and Chief Executive Officer of the Company, AOL will agree to vote its shares in favor of your election as a director of the Company. When you cease to be employed as President and Chief Executive Officer, you agree to resign from the Board of Directors if requested to do so by the Board. Your compensation will be $400,000 per year, payable semi-monthly, subject to customary deductions. In addition, you will be eligible to receive an annual bonus equal to 75% of your annual salary, with an opportunity to earn up to 150% of the base bonus amount with extraordinary performance. The performance metrics for the bonus will be set by the ANS Board of Directors and will initially be consistent with the parameters established by AOL for its executive officers. On or about your commencement date, you will be granted non-qualified stock options (the "Non-Qualified Options") to purchase a 2% of the outstanding capital stock of ANS, on a fully diluted basis, on the terms of a Non-Qualified form of Stock Option Agreement. The Non-Qualified Options will have an aggregate exercise price of $240,000 (the current fair market value of the shares). The Non-Qualified Options will vest in equal annual installments over a period of four years, subject to your continued employment. On or about your commencement date, you will also be granted Incentive Stock Option (the "ISO's" and, together with the Non-Qualified Options, the "ANS Options") to purchase an additional 2% of the outstanding capital stock of ANS, on a fully diluted basis, on the terms of an Incentive form of Stock Option Agreement. The ISOs will have an aggregate exercise price of $240,000 (the current fair market value of the shares). The ISOs will vest in equal annual installments over a period of four years, subject to your continued employment. In the event that ANS has not become a public company (or has otherwise achieved liquidity) by the second anniversary of your employment, you may, at your option, require ANS to acquire ("put") some or all of your vested shares at fair market value less any amounts owed by you to ANS. The fair market value of the shares will be determined by an independent appraiser, the cost of which will be borne by the Company. Following a change of control of the Company, if you remain with the Company (or its successor) for one year thereafter or if you are terminated or your position is downgraded following the change of control, all of the unvested ANS Options will be accelerated as more specifically provided in the various Stock Option Agreements. Upon the start of your employment, you will receive a $500,000 loan which will bear interest at the current prime rate and will be secured by your stock and options. In addition, you will receive a $250,000 loan which will bear interest at the current prime rate and will be secured by the equity in your new home (subordinated to any mortgage). The principal and interest under both loans will be payable in full upon the earlier of the fourth anniversary of your commencement date and the IPO of the Company (or other liquidity event), and may be paid by delivery of stock with a fair market value equal to the amount then due. If necessary, fair market value of the shares will be determined by an independent appraiser, the cost of which will be borne by the Company. Upon the second anniversary of your commencement date, all outstanding principal and interest may be pre-paid in full by delivery of any exercised option shares and cancellation of any unexercised ANS Option if the IPO of the Company has not occurred. In addition, the principal and interest under the loans will accelerate in the event that your employment is terminated by the Company for cause, or if you terminated your employment other than for cause. Your employment at the Company is at will and you or the Company are free to terminate the employment relationship at any time, with or without cause. We understand that you will devote your full business time to the Company. In the event that your employment is terminated without cause by the Company at any time, the number of ANS Options that would have vested had you continued to be employed for the balance of that year will immediately vest. In addition, in the event that your employment is terminated without cause by the Company, you will be paid an amount equal to twelve months of your then current salary as additional severance. As a condition to your employment, you will enter into a Confidentiality, Non- Competition and Proprietary Rights Agreement in the form attached hereto as Exhibit A. In connection with your relocation, the Company will acquire, either directly or through PHH, a service company retained by the Company, in accordance with industry practice, your current home at fair market value, which will be determined by PHH. In the event that the fair market value appraisal by PHH is less than 600,000 BPS, the Company will pay you the amount of the difference. In addition, the Company will pay reasonable expenses of your relocation, including interim housing, travel expenses for you and your family, moving expenses, and will pay you a one-time tax gross-up to cover relocation reimbursements. You and your family members will be eligible to participate in the ANS-sponsored health and benefit plans in accordance with the Company's current eligibility requirements. In addition, to the extent that you require additional medical coverage during the pregnancy of your wife, you agree to use your best efforts to continue your existing coverage, and the Company will reimburse you for the cost of the premiums. In the event that you are unable to obtain such continued coverage, the Company's current medical plan will cover up to $10,000 of such pregnancy related expenses, the maximum coverage for pre-existing conditions. The Company will reimburse you for reasonable expenses relating to your wife's pregnancy which exceed $10,000 subject to customary co-insurance deductibles. The Company will also work with you to obtain $2 million in term life insurance through the Company's existing policies and through additional policies as required, and will include the reasonable cost of obtaining such additional policies as additional annual compensation. In addition the Company will provide you with tax preparation assistance. Attached as Exhibits B and C, respectively, are the Stock Option Agreements and loan documents, which are subject to further review and revisions by the America Online legal department. Please forward any comments you have to Ellen Kirsh, our General Counsel. We hope to execute final documents by May 15, 1996. This letter, together with the exhibits hereto, Stock Option Agreements, and loan documents, is intended as our entire agreement with respect to your employment and supersedes our prior discussions. Any modifications in the future must be in writing and signed by both you and the Company. If the terms of this letter are acceptable to you, please execute the enclosed copy of this letter and return it to me. I look forward to a long and rewarding relationship. Very truly yours, ANS CO+RE Systems, Inc. By:/S/DAVID C. COLE David C. Cole Chairman Agreed and Accepted: /S/BRUCE BOND Bruce Bond Date: 15 May 1996 EMPLOYMENT AGREEMENT ANS CO+RE Systems, Inc. ("ANS") and Bruce R. Bond ("Employee"), of ANS, telephone number _________________________, hereby agree as follows: 1. ANS agrees to employ Employee, and Employee agrees to work diligently for ANS on such tasks as may be assigned during such employment, which shall commence on July 15, 1996. 2. The compensation to be paid by ANS to Employee will be at the rate set forth in the ANS offer letter to Employee, a copy of which is appended hereto, or such other rate as may be established later by ANS. 3. Employee will be entitled to participate in benefit programs as they are set or altered from time to time, and to accrue vacation time, in accordance with ANS policies and practices then applicable to persons of his or her personnel level. Employee will gain vested rights in these programs only to the extent that such program expressly provided for vesting. 4. This agreement may be terminated by either party at any time for any reason or for no reason at all, provided that two (2) weeks of notice are given prior to the effective date of such termination. ANS may, if it chooses, elect to pay compensation in lieu of giving prior notice. 5. Employee's Social Security number is _______________. 6. Employee hereby assigns to ANS his or her entire right, title and interest in any idea, invention, design of a useful article, computer program and related documentation, and other work of authorship (collectively "Developments") hereafter during the period of employment by ANS, made or conceived solely or jointly by Employee, or created wholly or in part by Employee, whether or not such Developments are patentable, copyrightable or susceptible to other forms of protection, and the Developments: (a) relate to the actual or anticipated business or research or development of ANS, or (b) are suggested by or result from any task assigned to Employee or work performed by Employee for or on behalf of ANS. In the case of any "other work of authorship", such assignment shall be limited to those works of authorship which meet both conditions (a) and (b)above. Employee acknowledges that the copyright and any other intellectual property right in ideas, inventions, designs, computer programs and documentation, and other works of authorship, created within his or her scope of employment with ANS belong to ANS by operation of law. In connection with any of the Developments assigned to ANS: (a) Employee will disclose them promptly to ANS management, and (b) Employee will, on ANS' request, promptly execute a specific assignment of title to ANS, and do anything else reasonably necessary to enable ANS to secure a patent, copyright or other form of protection therefor in the United States and in other countries. ANS is not required to designate Employee as an author of any design, computer program or related documentation, or other work of authorship herein assigned, when distributed publicly or otherwise, nor to make any distribution at all. Employee waives and releases, to the extent permitted by law, all rights which Employee might have respecting the subject matter of this paragraph 6. 7. Without ANS's prior written permission, Employee will not disclose to anyone outside of ANS or use in other than ANS's business, either during or after his or her employment, any confidential information or material of ANS or any information or material received in confidence by ANS. If Employee leaves the employ of ANS, Employee will return all property of ANS in his or her possession, including all confidential information or materials such as drawings, notebooks, reports and other documents. Confidential information or material of ANS is any information or material: (a) generated or collected by or utilized in the operations of ANS that relates to the actual or anticipated business or research or development of ANS, or (b) suggested by or resulting from any tasks assigned to Employee or work performed by Employee for or on behalf of ANS and which has not been made available generally to the public. 8. Employee will not disclose to ANS, use in its business, or cause it to use, any information or material which is confidential to others. 9. Employee will comply, and do all things necessary for ANS to comply, with all applicable laws and regulations, including laws and regulations that relate to intellectual property or to the safeguarding of information. 10. Employee's duties and responsibilities hereunder shall apply equally to ANS and to any subsidiary corporation(s) of ANS, and the rights and privileges of each such subsidiary corporation(s) shall be the same as provided hereunder to ANS, and references herein to ANS shall be to ANS and its subsidiary corporation(s). 11. Employee's duties to ANS established pursuant to paragraphs 6, 7, 8, 9 and 13 of this Agreement will survive the termination of this Agreement, and will continue until ANS shall have waived its rights to further compliance with the terms of such provisions. 12. Employee claims to have intellectual property interests in, or obligations relating to, the following subjects, and the referenced documents detail the intellectual property with respect to which Employee has duties or claims rights thereto: Subject Document Reference [None listed] (Append an expanded listing if needed.) 13. Except as listed in paragraph 12 hereof or as described in paragraph 13, employee acknowledges and agrees that he or she has no intellectual property interests or obligations of any kind or nature. Agreed this 24th day of July, 1996 Employee ANS CO+RE Systems, Inc. Signed: /s/Bruce R. Bond /s/Sherri Adams EX-10.14 4 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the "Agreement"), dated as of April 1, 1993, is entered into between Redgate Communications Corporation, a Delaware corporation (the "Company"), and Theodore J. Leonsis (the "Employee"). RECITAL The Company desires to employ the Employee and the Employee is willing to accept such employment, on the terms and subject to the conditions set forth in this Agreement. AGREEMENT In consideration of the recital and of the mutual promises set forth in this Agreement, the Company and the Employee agree as follows: 1. Termination of Prior Agreement. The Employment Agreement between the Company and the Employee, dated April 1, 1991, is hereby superseded and terminated in its entirety by this Agreement as of the date of this Agreement. 2. Employment. The Company shall employ the Employee and the Employee accepts such employment, upon the terms and subject to the conditions set forth in this Agreement. 3. Term and Termination. The Employee understands, acknowledges and agrees that his employment with the Company is for an unspecified duration and constitutes "at-will" employment. The Employee acknowledges and agrees that this employment relationship may be terminated at any time, with or without cause. The Employee understands and agrees that his satisfactory performance of the duties designated by the Company is the sole consideration for the salary and benefits paid by the Company. The Employee further understands and agrees that neither his job performance (whether satisfactory or exemplary) nor promotions, commendations, bonuses, stock, stock rights, or the like from the Company give rise to or establish an obligation on the part of either the Company or the Employee to continue his employment or in any way serve as the basis for modification, amendment, or extension, by implication or otherwise, of this Employment Agreement. This Employment Agreement cannot be modified, amended, or extended except in writing executed by the Company and by Employee. 4. Duties. During the term of this Agreement, the Employee shall serve as the President and Chief Executive Officer of the Company as well as Chairman of the Board of Directors and shall serve the Company in such other capacities as may be determined by the Board of Directors of the Company from time to time, and shall perform such administrative, managerial, development, production, marketing, research and other duties as are reasonable and commensurate with the Employee's position with the Company and as may be assigned to him by the Board of Directors of the Company or a committee thereof from time to time. Except as set forth in Schedule 4, the Employee shall devote his full time and energies to the business and affairs of the Company and shall use his best efforts, skills and abilities to perform his duties under this Agreement. 5. Compensation. During the term of this Agreement, the Employee shall be compensated as set forth in this Section 5. (a) Base Compensation. The Company shall pay to the Employee, and the Employee shall accept from the Company, as compensation for the performance of his duties under this Agreement, a salary at such rate as may be fixed from time to time by the Board of Directors of the Company, but in no event less than rate of $195,000 per year (the "Base Compensation"). The Employee's salary shall be payable biweekly in substantially equal installments, or at more frequent, or, in the event that the Company's other executive officers are paid less frequently, less frequent, intervals, as the Board of Directors may determine. (b) Fringe Benefits. For so long as Employee is employed by the Company, Employee shall be entitled to receive all standard fringe benefits, including without limitation, vacation benefits, offered by the Company to all employees. Employee shall further be entitled to continue to receive, and the Company shall be obligated to continue to provide to Employee at the Company's expense, all fringe benefits currently being received by Employee from the Company which are set forth on Schedule 5(b). 6. Representation of Employee. The Employee represents and warrants that the Employee is not a party to, or bound by, any agreement or commitment, or subject to any restriction, including but not limited to agreements related to previous employment containing confidentiality or noncompete covenants, which in the future may have a possibility of adversely affecting the business of the Company or the performance by the Employee of his duties under this Agreement. 7. Confidentiality. The Employee reaffirms the terms and conditions of his Confidential information and Nondisclosure Agreement, of even date herewith, with the Company. 8. Non-Competition. The Employee agrees that during the term of this Agreement and for a period of one year following the termination of the Employee's employment with the Company, the Employee will not, directly or indirectly as long as the Company is paying Employee his termination benefits: (a) as an individual proprietor, partner, stockholder, officer, employee, director, consultant, agent, joint venturer, investor, lender, or in any other capacity whatsoever, alone or in association with others, own, manage, operate, control or participate in the ownership, management, operation or control of, or work for or permit the use of his name by, or be connected in any manner with, any business activity which is in competition with any business of the Company or any of its subsidiaries in any state of the United States in which the Company or any of its subsidiaries transacts business on the date of the termination of this Agreement; (b) recruit or otherwise solicit or induce any person (natural or otherwise) who is at the time an employee of the Company to terminate his or her employment with, or otherwise cease his or her relationship with, the Company or any of its subsidiaries, or hire any such employee who has left the employ of the Company within one year after termination of such employee's employment with the Company; or (c) solicit any person (natural or otherwise) who is or who had been a customer of the Company or any of its subsidiaries at any time during the term of this Agreement. The restrictions against competition set forth above are considered by the parties to be reasonable for the purposes of protecting the business of the Company. If any such restriction is found by any court of competent jurisdiction to be unenforceable because it extends for too long a period of time or over too broad a range of activities or in too large a geographic area, however, such restriction shall be interpreted to extend only over the maximum period of time, range of activities or geographic area as to which it may be enforceable. 9. Remedies. The Employee acknowledges that the Company would be irreparably harmed and that monetary damages would not provide an adequate remedy in the event of a breach of the provisions of Sections 7 or 8. Accordingly, the Employee agrees that, in addition to any other remedies available to the Company, the Company shall be entitled to specifically enforce the provisions of Sections 7 or 8. In the event of such a breach, in addition to any other remedies available to the Company, the Company shall be entitled to receive from the Employee payment of, or reimbursement for, the Company's reasonable attorneys' fees and disbursements incurred in enforcing any such provision. 10. Termination. This Agreement may be terminated by the election of either party hereto or upon the occurrence of any of the events set forth in and subject to the terms of this Section 10. (a) Death. This Agreement will terminate upon the death of the Employee. (b) Disability. This Agreement may be terminated at the Company's option, immediately upon notice to the Employee, if the Employee shall suffer a permanent disability. For the purposes of this Agreement, the term "permanent disability" shall mean the Employee's inability to perform the Employee's duties under this Agreement for a period of any six consecutive months due to illness, accident or any other physical or mental incapacity. (c) Without Cause. This Agreement may be terminated at either party's option for any reason or no reason. (d) Cause. This Agreement may be terminated at the Company's option, immediately upon notice to the Employee, upon the Employee's: (i) breach of any material provision of this Agreement; (ii) willful refusal to perform a duty directed by the Board of Directors of the Company or a committee thereof which is reasonably within the scope of the Employee's duties; (iii) substantive misappropriation for personal use of assets or business opportunities of the Company; (iv) commission of a felony; (v) gross negligence or willful malfeasance in discharging the Employee's obligations under this Agreement; or (vi) the good faith determination by the Board of Directors of the Company that the Employee has failed or is unable to competently and adequately perform his duties under this Agreement. (e) Effect of Termination. In the event of any termination under this Section 10, the Company shall have no further obligation under this Agreement to make any payments to, or bestow any benefits on, the Employee from and after the date of the termination, other than payments or benefits accrued and due and payable to him prior to the date of the termination; provided, however, that in the event of a termination under Sections 10(a) (b) or (c), the Employee shall be entitled to continue to receive salary at his then current base salary in accordance with the Provisions of Section 5 for the twelve-month period beginning with the date of termination, and shall be provided the opportunity to remain covered by any or all (at Employee's option) of the Company's benefit plans applicable to Employee at the date of such termination, including without limitation, any of the Company's group or individual insurance plans, provided the Employee bears all expenses related to such continued benefit plans (which expenses, at the Company's option, may be offset against the foregoing severance payment or any other amount owed by the Company for the account of the Employee), and provided that the terms of any such benefit plans permit such continued insurance coverage of the Employee after such termination. The Employee will also continue to receive his car allowance of $800 per month, which is currently treated as income. 11. Miscellaneous. (a) Survival. The provisions of Sections 7 and 8 shall survive the termination of this Agreement. (b) Entire Agreement. This Agreement sets forth the entire understanding of the parties and merges and supersedes any prior or contemporaneous agreements between the parties pertaining to the subject matter hereof, including the prior employment agreement dated April 1, 1991 which, as provided above in Section 1, is superseded and terminated in its entirety as of the date of this Agreement. (c) Modification. This Agreement may not be modified or terminated orally, and no modification, termination or attempted waiver of any of the provisions hereof shall be binding unless in writing and signed by the party against whom the same is sought to be enforced; provided, however, that Employee's compensation may be increased at any time by the Company without in any way affecting any of the other terms and conditions of this Agreement, which in all other respects shall remain in full force and effect. (d) Waiver. Failure of a party to enforce one or more of the provisions of this Agreement or to require at any time performance of any of the obligations hereof shall not be construed to be a waiver of such provisions by such party nor to in any way affect the validity of this Agreement or such party's right thereafter to enforce any provision of this Agreement, nor to preclude such party from taking any other action at any time which it would legally be entitled to take. (e) Successors and Assigns. Neither party shall have the right to assign this personal Agreement, or any rights or obligations hereunder, without the consent of the other party; provided, however, that upon the sale of all or substantially all of the assets, business and goodwill of the Company to another company, or upon the merger or consolidation of the Company with another company, this Agreement shall inure to the benefit of, and be binding upon, both Employee and the company purchasing such assets, business and good will, or surviving such merger or consolidation, as the case may be, in the same manner and to the same extent as though such other company were the Company. Subject to the foregoing, this Agreement shall inure to the benefit of, and be binding upon, the parties hereto and their legal representatives, heirs, successors and assigns. (f) Additional Acts. The Employee and the Company each agrees to execute, acknowledge and deliver and file, or cause to be executed, acknowledged and delivered and filed, any and all further instruments, agreements or documents as may be necessary or expedient in order to consummate the transactions provided for in this Agreement and do any and all further acts and things as may be necessary or expedient in order to carry out the purpose and intent of this Agreement. (g) Communications. All notices, requests, other communications under this Agreement shall be in writing and shall be deemed to have been given at the time personally delivered or when mailed in any United States post office enclosed in a registered or certified postage prepaid envelope and addressed to the addresses set forth below, or to such other address as any party may specify by notice to the other party; provided, however, that any notice of change of address shall be effective only upon receipt. To the Company: Redgate Communication Corporation 660 Beachland Boulevard Vero Beach, Florida 32693 To the Employee: Theodore J. Leonsis 280 Sea Breeze Court Town of Orchid Vero Beach, Florida 32963 (h) Severability. If any provision of this Agreement is held to be invalid or unenforceable by a court of competent jurisdiction, such invalidity or unenforceability shall not affect the validity and enforceability of the other provisions of this Agreement and the provision held to be invalid or unenforceable shall be enforced as nearly as possible according to its original terms and intent to eliminate such invalidity or unenforceability. (i) Jurisdiction; Venue. Any suit, action or proceeding with respect to this Agreement, or any judgment entered by any court in respect hereof may be brought in the courts of the State of Florida or in the U.S. District Court for the Southern District of Florida, and the parties hereby accept the nonexclusive jurisdiction of those courts for the purpose of any suit, action or proceeding. In addition, the parties hereto irrevocably waive, to the fullest extent permitted by law, any objection which they may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement, or any judgment entered by any court in respect hereof brought in the State of Florida, and further irrevocably waive any claim that any suit, action or proceeding brought in the State of Florida has been brought in an inconvenient forum. (j) Governing Law. This Agreement is made and executed and shall be governed by the laws of the State of Florida, excluding rules relating to conflict of laws. IN WITNESS WHEREOF, each of the parties hereto have duly executed this Agreement as of the date set forth above. REDGATE COMMUNICATION CORPORATION By:/S/JOHN F. CUNNINGHAM Its: Director, Chairman Compensation Committee /S/THEODORE J. LEONSIS 2/12/94 Theodore J. Leonsis EX-10.15 5 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT, dated as of October 29, 1996, is by and between America Online, Inc., a Delaware corporation with its principal offices at 22000 AOL Way, Dulles, Virginia 20166-9323 (the "Company") and Robert W. Pittman ("Executive"). WHEREAS the Company desires to employ the services of Executive as President and Chief Executive Officer of America Online Networks ("AON"), a division or subsidiary of the Company, for the period and upon the terms and conditions hereinafter set forth; and WHEREAS Executive desires to serve in such capacities upon the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the covenants and agreements herein contained, the Company and Executive hereby agree as follows: 1. Employment. (a) The Company will employ the Executive, and Executive agrees to be employed by the Company, as President and Chief Executive Officer of AON. Executive will report to the Company's Chief Executive Officer and will also be a member of the Company's Office of the Chairman. Executive will be responsible for the general operation, management and profitability of AON, consistent with and subject to the business strategy and budgets of the Company and AON, as approved from time to time by the Company's Board of Directors (the "Board") and the Company's Chief Executive Officer. Executive shall have the authority to make expenditures and personnel decisions with respect to individuals whose duties lie solely within AON, subject to compliance with the Company's guidelines as revised from time to time and the AON budget as approved by the Board from time to time. Executive will also have such other responsibilities, duties and authority, commensurate with Executive's position, as may from time to time be assigned to him by the Company's Chief Executive Officer. (b) Executive agrees to devote substantially all of his full business time and energies to the business and affairs of the Company and AON, provided, however, that nothing contained in this Paragraph 1(b) shall be deemed to prevent or limit his right to: (i) make wholly passive investments in the securities of any entity which he does not control, directly or indirectly, and which is not a "Competitive Business" (as defined in the Confidential Information/ Noncompetition/Proprietary Rights Agreement attached hereto as Exhibit A (the "Confidentiality Agreement") and (ii) serve in the capacities set forth in Exhibit B, and in all other cases subject to the prior approval of the Chief Executive Officer, to serve as a member on the Board of Directors, Board of Trustees or other similar body of other corporations or entities which do not compete with the Company, AON or any of their Affiliates, provided that his duties in any such capacity shall be limited to that of a director of a public corporation and shall not include any day to day management activities. "Affiliates" as used herein shall mean corporations which for purposes of Section 424 of the Internal Revenue Code of 1986, as amended (the "Code"), are either a parent or subsidiary of the Company or AON, direct or indirect. Notwithstanding the foregoing, Executive shall be permitted to make wholly passive investments in any publicly-held Competitive Businesses, provided that his direct and indirect ownership shall not exceed 1% of the outstanding voting capital stock of any publicly-held Competitive Business. (c) The Company and the Executive also agree that during the Employment Term, Executive shall continue to serve as a director on the Board. In the event of any termination of Executive's employment, Executive agrees to resign from the Board if requested to do so by the Board. 2. Term of Employment. Executive's employment hereunder shall commence on November 1, 1996 (the "Commencement Date") and continue until terminated in accordance with the terms hereof (the "Employment Term"). 3. Principal Location. The principal location at which Executive will perform his duties will be the Company's principal offices, currently located in Dulles, Virginia. Executive acknowledges that frequent and substantial travel away from such offices will be required for the performance of his duties hereunder. 4. Compensation. In consideration for Executive's services under this Agreement during the Employment Term, Executive will be paid (i) a salary at an annual rate of $500,000, subject to increase by the Board or the Compensation Committee thereof, in its sole discretion (the "Base Salary") and (ii) a bonus in such amount, if any, as the Board or the Compensation Committee thereof may determine annually in its discretion, up to an amount equal to Executive's Base Salary (the "Annual Bonus"). Executive's Base Salary shall be paid in periodic installments at such times as salaries are generally paid to other senior executives of the Company. Executive's Base Salary and Annual Bonus, if any, shall be subject to required and voluntary withholding and deductions. 5. Benefits and Reimbursement of Expenses. During the Employment Term, Executive shall be entitled to the following benefits and payments. (a) Vacation. Executive shall be entitled to vacation commensurate with senior executives of the Company. (b) Employee Benefit Plans and Other Benefits. Executive shall also be entitled to participate in such employee benefit plans which the Company provides or may establish from time to time for the benefit of its senior executives generally, subject to the terms of each such plan and subject to the right of the Company to modify, revise or eliminate benefit plans from time to time in its sole discretion. (c) Reimbursement of Expenses. Executive shall be entitled to reimbursement for all ordinary and reasonable out-of-pocket business expenses which are reasonably incurred by him in furtherance of the Company's business, in accordance with the policies adopted from time to time by the Company. Executive will comply with the Company's travel policies as in effect from time to time. If Executive reasonably determines that the easiest and safest method to travel for AON business is to use his private aircraft, then the Company will reimburse Executive $800 per flight hour and up to $250 per day for a co-pilot. The Company will have no other obligation with respect to such flights, Executive's private aircraft or use thereof. (d) Housing and Relocation. For a period of up to two years, the Company shall rent appropriate accommodations for Executive's use near the Company's Dulles, Virginia headquarters for a monthly amount not to exceed $5,000. In addition, the Company shall pay the reasonable expenses of relocating Executive's family to the Dulles, Virginia area, including travel and moving expenses, in accordance with the Company's executive relocation policy. The Company will also pay Executive a tax gross up for all relocation expenses incurred and reimbursed by the Company during the first two years of employment. At any time while an employee of the Company, but not later than the second anniversary of the Commencement Date, Executive may require the Company to acquire, either directly or through a third party, Executive's current residence at 148-152 Music Mountain Road, Falls Village, Connecticut 06031 at the fair market value thereof as determined by an independent appraiser chosen by the Company and reasonably acceptable to Executive. 6. Stock Options. A stock option to purchase an aggregate of 400,000 shares of the Company's common stock, $.01 par value (the "Common Stock"), with an initial exercise price of $24.625 per share, has been granted to the Executive in anticipation of and subject to his employment pursuant to this Agreement. The terms and conditions of such option are set forth in the Nonqualified Stock Option Agreement attached hereto as Exhibit C-1. In addition, the Company shall promptly after the date hereof grant to Executive a stock option to purchase an aggregate of 100,000 shares of Common Stock, with an initial exercise price of $70 per share, subject to the terms and conditions set forth in the Nonqualified Stock Option Agreement attached hereto as Exhibit C-2. 7. Termination upon Death or Disability. (a) Executive's employment by the Company shall terminate upon his death, or upon the Company's written notice if, by virtue of Disability, Executive is unable to perform his duties hereunder. "Disability" shall mean permanent and total disability as defined in Section 22(e)(3) of the Code. (b) The Termination Date in the event of death shall be the date of death and in the event of Disability shall be the date of the Company's written notice. (c) In the event of a termination of employment as a result of Executive's death or Disability, the Company shall have no further obligations under this Agreement except as provided in Paragraph 11 below and the stock option agreements referred to in Paragraph 6 above. 8. Termination by the Executive. (a) Executive's employment may be terminated by him, by giving a Notice of Termination, at any time by written notice of thirty (30) days to the Company. Upon any such termination, the Company may elect to relieve Executive of his duties, responsibilities and authority hereunder during such thirty (30) day period, which shall not constitute a termination for Good Reason. (b) Executive's employment may also be terminated by him, by giving a Notice of Termination, at any time for a "Good Reason" (as defined below), provided such notice is given within ninety (90) days of the event or actions constituting Good Reason and sets forth in reasonable detail the facts and circumstances claimed to provide a basis for the termination, and provided, further, the Company shall not have taken actions within thirty (30) days of such Notice of Termination such that the circumstances constituting a Good Reason have ceased. The Termination Date in the event of a termination under this Paragraph 8 shall be the date set forth in the Notice of Termination, but in any event not later than thirty (30) days after the date such notice is given. (c) As used herein, a "Good Reason" shall mean any of the following: (i) a change in the location of the principal offices of AON to a location outside Northern Virginia, without the consent of Executive; (ii) failure to be nominated by the Board for election to the Board at any time such nominations are made, failure of the Board to appoint Executive as a member of the Office of the Chairman of the Company, or removal from the Board, the Office of the Chairman of the Company, or as the President and Chief Executive Officer of AON, provided that such failure or removal is not in connection with a termination of Executive's employment hereunder by the Company; (iii) a material adverse change by the Company in Executive's duties, authority, responsibilities or reporting relationship as President and Chief Executive Officer of AON (including a change which results in Executive no longer directly reporting to the Chief Executive Officer of the Company) which causes his position with the Company to become of less responsibility or authority than his position as of immediately following the Commencement Date, provided that such change is not in connection with a termination of Executive's employment hereunder by the Company; (iv) the appointment of an individual other than Executive to serve as President or Chief Operating Officer of the Company; (v) a reduction in Executive's base compensation; (vi) a material breach by the Company of a material provision of this Agreement which has not been cured within thirty (30) days after written notice thereof by Executive; or (vii) failure to obtain the assumption, either explicitly or by operation of law, of this Agreement by any successor to the Company. 9. Termination by the Company. (a) Executive's employment may be terminated at any time by the Company (i) with Cause by a Notice of Termination to Executive, effective immediately unless otherwise stated in such notice, which date shall be the Termination Date therefor; provided, however, that such termination must be approved or ratified by the affirmative vote of a majority of the members of the Company's Board of Directors (excluding Executive) and after giving Executive reasonable advance notice and an opportunity for Executive to be heard before the Board, (ii) without Cause at any time, by a Notice of Termination to Executive, effective immediately unless otherwise stated in such notice, which date shall be the Termination Date therefor, or (iii) for Disability in accordance with Paragraph 7. (b) For purposes of this Agreement, the Company shall have "Cause" to terminate Executive's employment hereunder in the event of Executive's (i) conviction of a felony involving moral turpitude, (ii) willful and continued failure to substantially perform his required duties under this Agreement which failure has not been cured within ten (10) days after written notice thereof by the Company, provided, however, that the Company shall only be required to give notice pursuant to this Section 9(b)(ii) one time during the term of this Agreement, (iii) intentional or repeated violation of the Confidentiality Agreement which has not been cured within ten (10) days after written notice thereof by the Company or (iv) intentional or repeated improper conduct substantially prejudicial to the business of the Company, AON or any of their Affiliates. 10. Effect of Termination for other than Death or Disability. (a) In the event Executive's employment hereunder is terminated by Executive for a Good Reason or by the Company other than for either Cause or Disability, Executive shall, effective as of the Termination Date, become a consultant to the Company for a term of two (2) years, subject to the terms and conditions set forth in the Consulting Agreement (the "Consulting Agreement") attached as Exhibit A to the Confidentiality Agreement. (b) In the event the Company shall terminate Executive's employment for Cause, or Executive shall terminate his employment for other than a Good Reason, then Executive shall be entitled as of the Termination Date to no compensation under this Agreement, except as provided in Paragraph 11. If the Company shall terminate Executive's employment for Cause or Executive shall terminate his employment for other than a Good Reason, then Executive shall be subject to the terms and conditions set forth in the Consulting Agreement, unless in accordance with the notice provisions thereof, the Company in its sole discretion shall have elected to terminate such agreement. 11. Accrued Compensation. In the event of any termination of Executive as an employee for any reason, Executive (or his estate) shall be paid such portion of Executive's Base Salary as has accrued by virtue of his service during the period prior to termination and has not yet been paid, together with any amounts for expense reimbursement and similar items which have been properly incurred in accordance with the provisions hereof prior to termination and have not yet been paid. 12. Confidential Information/Noncompetition/Proprietary Rights. Executive shall enter into the Confidentiality Agreement as of the date hereof. 13. General. (a) Notices. All notices and other communications hereunder shall be in writing, shall be addressed to the receiving party's address set forth below or to such other address as a party may designate by notice hereunder, and shall be either (i) delivered by hand, (ii) made by telecopy, (iii) sent by overnight courier, or (iv) sent by certified mail, return receipt requested, postage prepaid. If to the Company: America Online, Inc. 22000 AOL Way Dulles, Virginia 20166-9323 Attn: General Counsel With a copy to: Kenneth J. Novack, Esq. Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. One Financial Center Boston, MA 02111 If to Executive: Robert W. Pittman 148-152 Music Mountain Road Falls Village, CT 06031 With a copy to: Robert A. Kindler, Esq. Cravath, Swaine & Moore 825 Eighth Avenue New York, New York 10019 All notices and other communications hereunder shall be deemed to have been given either (i) if by hand, at the time of the delivery thereof to the receiving party at the address of such party set forth above, (ii) if made by telecopy, at the time that receipt thereof has been acknowledged by electronic confirmation or otherwise, (iii) if sent by overnight courier, on the next business day following the day such notice is delivered to the courier service, or (iv) if sent by certified mail, on the fifth business day following the day such mailing is made. (b) Entire Agreement. This Agreement and the Exhibits hereto embody the entire agreement and understanding between the parties hereto with respect to the subject matter hereof and supersede all prior oral or written agreements and understandings relating to the subject matter hereof. No statement, representation, warranty, covenant or agreement of any kind not expressly set forth in this Agreement or the Exhibits hereto shall affect, or be used to interpret, change or restrict, the express terms and provisions of this Agreement. (c) Modifications and Amendments. The terms and provisions of this Agreement may be modified or amended only by written agreement executed by the parties hereto. (d) Waivers and Consents. The terms and provisions of this Agreement may be waived, or consent for the departure therefrom granted, only by written document executed by the party entitled to the benefits of such terms or provisions. No such waiver or consent shall be deemed to be or shall constitute a waiver or consent with respect to any other terms or provisions of this Agreement, whether or not similar. Each such waiver or consent shall be effective only in the specific instance and for the purpose for which it was given, and shall not constitute a continuing waiver or consent. (e) Assignment. This Agreement shall inure to the benefit of and be enforceable by Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If Executive should die while any amount would be payable to Executive hereunder if Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to Executive's devisee, legatee or other designee or, if there be no such designee, to Executive's estate. Neither this Agreement nor any right arising hereunder may be assigned or pledged by Executive. (f) Governing Law; Consent to Jurisdiction. This Agreement and the rights and obligations of the parties hereunder shall be construed in accordance with and governed by the law of the Commonwealth of Virginia, without giving effect to the conflict of law principles thereof. Any legal action or proceeding with respect to this Agreement shall be brought in the courts of the Commonwealth of Virginia or of the United States of America for the District of Virginia. By execution and delivery of this Agreement, each of the parties hereto accepts for such party and in respect of such party's property, generally and unconditionally, the jurisdiction of the aforesaid courts. Each of the parties hereto irrevocably consents to the service of process of any of the aforementioned courts in any such action or proceeding by the mailing of copies thereof by certified mail, postage prepaid, to the party at its address set forth in Paragraph 13(a) hereof. (g) Severability. The parties intend this Agreement to be enforced as written. However, if any portion or provision of this Agreement shall to any extent be declared illegal or unenforceable by a duly authorized court having jurisdiction, then the remainder of this Agreement, or the application of such portion or provision in circumstances other than those as to which it is so declared illegal or unenforceable, shall not be affected thereby, and each portion and provision of this Agreement shall be valid and enforceable to the fullest extent permitted by law. (h) Headings and Captions. The headings and captions of the various subdivisions of this Agreement are for convenience of reference only and shall in no way modify, or affect the meaning or construction of any of the terms or provisions hereof. (i) No Waiver of Rights, Powers and Remedies. No failure or delay by a party hereto in exercising any right, power or remedy under this Agreement or the Exhibits, and no course of dealing between the parties hereto, shall operate as a waiver of any such right, power or remedy of the party. No single or partial exercise of any right, power or remedy under this Agreement or any of the Exhibits by a party hereto, nor any abandonment or discontinuance of steps to enforce any such right, power or remedy, shall preclude such party from any other or further exercise thereof or the exercise of any other right, power or remedy hereunder. The election of any remedy by a party hereto shall not constitute a waiver of the right of such party to pursue other available remedies. No notice to or demand on a party not expressly required under this Agreement or any of the Exhibits shall entitle the party receiving such notice or demand to any other or further notice or demand in similar or other circumstances or constitute a waiver of the rights of the party giving such notice or demand to any other or further action in any circumstances without such notice or demand. (j) Counterparts. This Agreement may be executed in one or more counterparts, and by different parties hereto on separate counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 14. No Conflicting Agreements. Except as set forth on Schedule A [we will need to review any such agreements to confirm this proviso is appropriate], Executive represents and warrants to the Company that he is not a party to or bound by any agreement or obligation which would limit or prohibit his ability to enter into and perform his obligations under this Agreement and the Exhibits hereto or which would subject the Company to any liability. IN WITNESS WHEREOF, the parties have executed this Employment Agreement as of the day and year first above written. AMERICA ONLINE, INC. By:/S/STEPHEN M. CASE Stephen M. Case Chairman & Chief Executive Officer /S/ROBERT W. PITTMAN Robert W. Pittman Confidentiality/Non-Competition/Proprietary Rights Agreement In consideration for the agreement of America Online, Inc., and/or its subsidiaries or affiliates (collectively "America Online") to employ me and as a condition to my continued employment by America Online, I hereby agree as follows: 1. I acknowledge that I may be furnished or may otherwise receive or have access to information which relates to America Online's past, present or future products, software, research, development, improvements, inventions, processes, techniques, designs or other technical data, or regarding administrative, management, financial, marketing or manufacturing activities of America Online or of a third party which provided proprietary information to America Online on a confidential basis. All such information, shall be considered by America Online as proprietary and confidential ("Proprietary Information"). 2. Both during and after the term of this Agreement, I agree to preserve and protect the confidentiality of the Proprietary Information and all physical forms thereof, whether disclosed to me before this Agreement is signed or afterward. In addition, I shall not (i) disclose or disseminate the Proprietary Information to any third party, including employees of America Online without a need to know, (ii) remove Proprietary Information from America Online's premises, or (iii) use Proprietary Information for my own benefit or for the benefit of any third party. 3. The foregoing obligations shall not apply to any information which I can establish to have (i) become publicly known without breach of this Agreement by me; (ii) been given to me by a third party who is not obligated to maintain confidentiality; or (iii) been developed by me prior to the date of this Agreement is signed, as established by documentary evidence. If I receive information with uncertain confidentiality, I agree to treat such information as Proprietary Information until I have verification from management that such information is neither confidential nor proprietary. 4. All Proprietary Information used or generated during the course of working for America Online is the property of America Online except for such information that was developed by me and was published or otherwise publicly disseminated prior to the date hereof. I agree to deliver to America Online all documents and other tangibles (including diskettes and other storage media) containing Proprietary Information upon termination of my employment with America Online or otherwise within (3) days after America Online so requests. 5. I acknowledge and agree that all writings or works of authorship, including, without limitation, program codes or documentation, produced or authored by me in the course of performing services for America Online, together with any copyrights on those writings or works of authorship, are works made for hire and the property of America Online. To the extent that any such writings or works of authorship may not, by operation of law, be works made for hire, this Agreement shall constitute an irrevocable assignment by me to America Online of the ownership of, and all rights of copyright in such items, and America Online shall have the right to obtain and hold in its own name, all rights of copyright, copyright registrations and similar protections which may be available in the works. I agree to give America Online or its assignees all assistance reasonably required to perfect such rights. 6. I shall and hereby do assign to America Online my entire right, title and interest in any invention, technique, process, device, discovery, improvement or know-how patentable or not, hereafter made or conceived solely or jointly by me while working for America Online, which relates in any manner to the actual or anticipated business or research and development of America Online or is suggested by or results from any task assigned to me or work performed by me for or on behalf of America Online or for which America Online equipment, supplies, facilities, information or materials are used. I shall disclose any such invention, technique, process, device, discovery, improvement or know how promptly, and execute a specific assignment of title to America Online, and do anything else reasonably necessary to enable America Online to secure patent, trade secret or any other proprietary rights in the United States or foreign countries. 7. Any inventions I have made or conceived before my employment with America Online are listed and described below. These items are excluded from this Agreement. 8. I understand that I may continue to work on, and retain rights to, projects of my own interest outside of America Online provided that (i) they do not fall under paragraphs 5 or 6 above; (ii) they do not interfere in any way with my time at work for America Online; and (iii) should any products with potential commercial application result from any such project, America Online shall be given the right of right refusal to purchase and market such products. 9. I shall not submit any article for publication that contains any information relating to the business of the Company or that identifies me as an employee or representative of the Company without receiving the prior written consent of an officer of America Online. I will not deliver any public speech that contains any information relating to the business of the company or that identifies me as an employee or representative of the Company without receiving the prior written consent of an officer of America Online if such speech would disclose material nonpublic information concerning the Company or would otherwise be adverse to the interests of the Company. 10. I represent and warrant that: (i) I am able to enter into this Agreement and that such ability is not limited or restricted by any agreements or understandings between me and other persons or companies; (ii) I will not disclose to America Online or its clients, or induce America online to use or disclose, any proprietary information or material belonging to others, except with the written permission of the owner of such information or material; and (iii) any information, materials or products I develop for, or any advice I provide to, America Online shall not rely or in any way be based upon confidential or proprietary information or trade secrets obtained or derived by me from sources other than America Online. I hereby agree to indemnify and hold America Online harmless from and against any and all damages, claims, costs and expenses, including reasonable attorneys' fees, based on or arising, directly or indirectly, from the breach of any agreement or understanding between me and another person or company including, but not limited to, liability arising from any confidential or proprietary information or trade secrets I have obtained from sources other than America Online. 11. I will fully comply, and do all things necessary for America Online to fully comply, with all appropriate U.S. Government laws and regulations, and with the provisions of contracts between America Online and the agencies of the U.S. Government or contractors, which relate to patent rights, technical data, or to the safeguarding of information and material. 12. While working for America Online and for a period of one year after any termination of my employment with America Online, I will not attempt, either directly or indirectly, to induce or attempt to influence any employee of America Online to leave America Online's employ. 13. While working for America Online and for a period of one year after any termination of my employment with America Online, I will not solicit business from any of America Online's customers, either directly or indirectly, for the benefit of anyone other than America Online or participate or assist in any way in the solicitation of business from any such customers as an employee of or consultant to another entity, unless the business being solicited is not competitive with the services provided by America Online to such customers. 14. I acknowledge and agree that: a) (i) my contractual obligations under paragraphs 2, 10, 11, 13 and 14 have a unique and very substantial value to America Online, (ii) I have sufficient assets and other skills to provide a reasonable livelihood for myself while such paragraphs are in force, and (iii) I am subject to immediate dismissal by America Online for any breach of those provisions and that such dismissal shall not relieve me from my continuing obligations under this Agreement or from the imposition by a court of any judicial remedies, such as money damages or equitable enforcement of those provisions. b) the terms and provisions of this Agreement are applicable to all information and materials developed for, or any advice provided to, America Online prior to the signing of this Agreement; and (c) the termination of my employment with America Online, for any reason, shall not relieve me from complying with the undertakings and agreements contained herein, which call for performance prior or subsequent to the termination date, including, but not limited to those undertakings and agreements set forth in paragraphs 2, 4, 11, 12 and 13. 15. No act or failure to act by America Online will waive any right contained herein. any waiver by America Online must be in writing and signed by an officer of America Online to be effective. 16. This Agreement shall be binding on my heirs, executors and administrators and on successors and assigns of America Online; however, I shall not have the right to assign this Agreement. 17. In the event that any provision of this Agreement conflicts with the law under which this Agreement is to be construed or if any such provision is held invalid by a court with jurisdiction over the parties to this Agreement, such provision shall be deemed to be restated to reflect as nearly as possible the original intentions of the parties in accordance with applicable force and effect. 18. This Agreement shall be governed by the laws of the Commonwealth of Virginia as such laws are applied to contracts executed by Commonwealth of Virginia residents and performed entirely within the Commonwealth of Virginia. 19. This document constitutes my entire Agreement with America Online with respect to its subject matter, superseding any prior negotiations and agreements. This Agreement may not be changed in any respect except by a written agreement signed by both myself and an officer of America Online. 20. All remedies provided herein are cumulative and in addition to all other remedies which may be available at law or in equity. Witness Signature /S/ROBERT W. PITTMAN Date Print Name Robert W. Pittman Date For America Online, Inc. Signature /S/STEPHEN M. CASE Title Chairman and Chief Executive Officer Date Prior inventions to be excluded from this Agreement are listed and briefly described below: [None Listed] Addendum to Confidentiality/Non-Competition/Proprietary Rights Agreement dated as of October 29, 1996 between America Online, Inc. and Robert W. Pittman The following provisions are hereby added to, incorporated in and made a part of the above-referenced Confidentiality/Non-Competition/Proprietary Rights Agreement (the "Agreement") as if originally set forth therein in their entirety (capitalized terms used and not otherwise defined in this Addendum have the meanings given to them in the Agreement): 23. I hereby acknowledge that my employment with America Online is on an "at will" basis. In the event that I am no longer employed by America Online as a result of (i) the termination of my employment without "Cause" by America Online pursuant to Section 9(a)(ii) of the Employment Agreement dated as of October 29, 1996 between me and America Online (the "Employment Agreement") or (ii) the termination of my employment by me for "Good Reason" pursuant to Section 8(b) of the Employment Agreement, I will be retained by America Online as an independent consultant in accordance with the terms of the Consulting Agreement attached hereto as Exhibit A. Further, in the event that I am no longer employed by America Online as a result of my termination of employment pursuant to Section 8(a) of the Employment Agreement or if I am terminated for "Cause" by America Online pursuant to Section 9(a)(i) of the Employment Agreement, I agree to be retained by America Online as an independent consultant in accordance with the terms of the Consulting Agreement attached hereto as Exhibit A, which Consulting Agreement shall automatically become effective simultaneously with the termination of my employment, unless America Online notifies me in writing within thirty (30) days following such termination of employment that it elects not to have the Consulting Agreement become effective and not to pay and provide the Non-Compete Consideration (as defined in Section 24 below), in which event: (i) the Consulting Agreement shall not become effective and shall cease and terminate and be of no force or effect, (ii) the Non-Compete Consideration shall not be paid or provided to me, and (iii) I shall not be subject to or bound by the restrictive covenants contained in Sections 24 and 25 below following such termination of employment. 24. During the period (the "Non-Compete Period") beginning with the start of the term of my employment by America Online and ending at midnight on the second anniversary of the effective date of the termination of my employment with America Online, I will not anywhere in the United States or in any other country in which America Online (directly or indirectly through any entity in which America Online has a material ownership interest, other than solely for investment purposes) or a licensee of America Online, in each case, is then operating or preparing to operate, directly or indirectly own, manage, operate, join, control, be employed by or participate in the ownership, management, operation or control of, or be connected in any manner with, any business of the type and character of the business then engaged in by America Online, or that is then competitive with the business then engaged in by America Online (excluding any company or business whose competitive business activities are wholly incidental to the business of such company or business)(collectively, a "Competitive Business"), whether such engagement shall be as an employer, officer, director, owner, employee, partner, advisor, consultant, shareholder, agent or other participant in any Competitive Business (or in any similar capacity in which I may derive an economic benefit from a Competitive Business), provided that during the period following the termination of my employment with America Online through and including the expiration of the Non-Compete Period, America Online shall in accordance with the terms of the Consulting Agreement: (A) pay or cause to be paid to me an amount equal to the same base salary and annual bonus, and provide the same benefits, as paid and provided to me by America Online at the time of the termination of my employment with America Online on the same terms, including timing of payments and otherwise, as said amounts were paid and benefits provided to me during my employment with America Online, provided that if America Online's benefit plans are modified generally for current executive employees, America Online may elect to have such modifications apply to me and (B) if my employment was terminated by America Online without "Cause" pursuant to Section 9(a)(ii) of the Employment Agreement or terminated by me for "Good Reason" pursuant to Section 8(b) of the Employment Agreement, continue the vesting of my stock options on the same basis as such stock options vested while I was employed by America Online (collectively, the "Non-Compete Consideration") except as otherwise provided in the Stock Option Agreements. Notwithstanding the foregoing, during the period of my employment with America Online, I shall be permitted to make wholly passive investments in any publicly-held Competitive Businesses provided that I shall not have a direct ownership interest or knowingly have an indirect ownership interest of more than 1% of the outstanding voting capital stock of any publicly-held Competitive Business. Further, during the period following the termination of my employment with America Online through and including the expiration of the Non-Compete Period, I shall be permitted to make wholly passive investments in any privately-held Competitive Business provided that I shall not have a direct or knowingly have an indirect ownership interest of more than 5% of the outstanding voting capital stock of any privately-held Competitive Business and provided further that I shall have no influence or control (either directly or through control or influence over any investment vehicle investing in any such privately-held business) over the business or management of such privately-held business (including, but not limited to, influence or control as an employee, consultant or director) other than the ability to vote securities owned. For purposes of this Agreement, any business which advertises, markets or sells its products through the Internet or other electronical mailing systems shall not, solely by virtue of the use of such systems to advertise, market or sell its products, be deemed a Competitive Business. I understand and acknowledge that, as consideration for my agreement not to compete during the Non-Compete Period after I am no longer employed by America Online, America Online shall pay or cause to be paid and provide to me the Non- Compete Consideration, and I acknowledge that upon the expiration of the Consulting Agreement or in the event America Online elects not to have the Consulting Agreement become effective in those instances provided in Section 23 above, my America Online stock options shall thereafter cease to vest in accordance with the 1992 Employee, Director and Consultant Stock Option Plan and the stock option agreements. In any event, my America Online stock options shall continue to vest during the term of the Consulting Agreement only if my employment was terminated by America Online without "Cause" pursuant to Section 9(a)(ii) of the Employment Agreement or terminated by me for "Good Reason" pursuant to Section 8(b) of the Employment Agreement. I further understand and acknowledge that, should I breach any of my obligations under this Section 24, America Online will be entitled, in addition to any other damages and remedies, to the return of all Non-Compete Consideration previously paid to me and I will not be entitled to any further Non-Compete Consideration. 25. I agree that any breach or threatened breach of this Agreement by me could cause irreparable damage and that in the event of such breach America Online shall have, in addition to any and all remedies of law, the right to an injunction, specific performance or other equitable relief to prevent the violation of my obligations hereunder without the necessity of any proof of actual damages or the posting of a bond or other security. 26. Section 15 of the Agreement is supplemented by adding Sections 23, 24, and 25 to, and deleting Section 10 from, the list of Sections of this Agreement set forth in clauses (a)(i) and (c) of such Section 15. IN WITNESS WHEREOF, the parties have executed this Addendum as of the 29th day of October, 1996. /S/ROBERT W. PITTMAN Witness Signature Robert W. Pittman Print Name For America Online, Inc. /S/STEPHEN M. CASE Signature Stephen M. Case Print Name Chairman and Chief Executive Officer Title Exhibit A CONSULTING AGREEMENT dated as of October 29, 1996 between AMERICA ONLINE, INC., a Delaware corporation (the "Company"), and Robert W. Pittman (the "Consultant"). The Consultant and the Company have entered into an employment agreement (the "Employment Agreement") and a Confidentiality/Non-Competition/Proprietary Rights Agreement (the "Confidentiality Agreement") in connection with the Consultant becoming an employee of the Company. In addition, the Consultant has been granted by the Company options to purchase shares of common stock, $.01 par value, of the Company, pursuant to stock option agreements between the Consultant and the Company (the "Stock Option Agreements") under the Company's 1992 Employee, Director and Consultant Stock Option Plan. All capitalized terms used but not defined herein shall have the meanings ascribed thereto in the Confidentiality Agreement. The Company and the Consultant agree (I) in the event the Consultant's employment is terminated by the Company without "Cause" pursuant to Section 9(a)(ii) of the Employment Agreement or the Consultant's employment is terminated by the Consultant for "Good Reason" pursuant to Section 8(b) of the Employment Agreement, or (ii) at the Company's sole election, in the event the Consultant's employment terminates as a result of the Consultant's termination of employment pursuant to either Section 8(a) or 9(a)(i) of the Employment Agreement, then from and after the effective date of the Consultant's termination of employment (the "Termination Date"), the Consultant shall be retained as a consultant to the Company, and the Consultant shall serve in such capacity. NOW, THEREFORE, in consideration of the premises set forth above and the mutual covenants and agreements contained herein and for other good and valuable consideration, the parties, intending to be legally bound, agree as follows: 1. Consulting Term. Subject to the provisions of Section 23 of the Confidentiality Agreement, the Company agrees to engage the Consultant as a consultant, and the Consultant agrees to be engaged as a consultant for the Company, in accordance with the terms and provisions of this Agreement, for the period commencing on the Termination Date and ending on the second anniversary of the Termination Date (the "Consulting Term"), as follows: (a) the nature of the consulting services to be performed by the Consultant hereunder shall be such advisory and consultative services, in connection with the business of the Company, as are requested of him from time to time by the executive employees of the Company, subject to the following: (i) during the consulting Term, the Consultant will, as requested by the Company, render such services for up to five (5) days per annum, such services to be rendered by the Consultant at such location(s) and time(s) as are reasonably requested by the Company and agreed to by the Consultant; (ii) for the purposes of computing the amount of services rendered by the Consultant, there shall be counted (A) the actual time spent by the Consultant at the Company's place of business at the Company's request, (B) the actual time spent by the Consultant in telephone consultation with, or on behalf of, the Company and (C) the actual time spent by the Consultant representing the Company at any location as the Company shall have reasonable requested, and one "day" of consulting services shall consist of one eight-hour period; (iii) notwithstanding the foregoing, the Consultant will not be required to render services during any period of illness which prevents him from rendering such services; (iv) the Consultant agrees to perform the consulting services assigned to him by the Company hereunder to the best of his abilities; and (v) the Consultant agrees to be bound by the Confidentiality Agreement as if he remained an employee of the Company provided that Section 8(iii) of the Confidentiality Agreement shall not apply. (b) notwithstanding the provisions hereof, the Company understands that the Consultant may be an employee of other parties during the Consulting Term and that any consulting services to be rendered by the Consultant hereunder shall be subject to his reasonable availability from such employment; (c) anything to the contrary contained herein notwithstanding, the Company may terminate this Agreement at any time during the Consulting Term immediately upon delivery of written notice to the Consultant provided that as and to the extent provided in paragraph (d) below: (I) the Company shall remain obligated to continue to pay and provide to the Consultant payments and benefits and (ii) in the event the Consultant's employment was terminated without "Cause" by the Company or by the Consultant for "Good Reason", the Consultant's stock options shall continue to vest; (d) as consideration for the Consultant's services rendered and for the Consultant's other agreements hereunder, during the Consulting Term: (I) the Company shall pay to the Consultant an amount equal to the same base salary and annual bonus and provide to the Consultant the same benefits as paid and provided to the Consultant by the Company at the time of termination of the Consultant's employment, in each case on the same terms, including, timing of payments and otherwise, as said amounts were paid and benefits provided during the Consultant's employment with the Company provided that if the Company's benefit plans are modified generally for current executive employees, the Company may elect to have such modifications apply to the Consultant; and (ii) in the event the Consultant's employment was terminated by the Company without "Cause" pursuant to Section 9(a)(ii) of the Employment Agreement or terminated by the Consultant for "Good Reason" pursuant to Section 8(b) of the Employment Agreement, the stock options granted to the Consultant under the terms of the Stock Option Agreements shall continue to vest during the Consulting Term on the same basis as such stock options vested during the Consultant's employment with the Company except as otherwise provided in the Stock Option Agreements; and (e) during the Consulting Term, the Company will reimburse the Consultant for all reasonable, documented expenses incurred in connection with the performance of his services hereunder or at the Company's request. 2. Consent and Waiver. The waiver or consent by the Company of any breach by the Consultant of any provision of this Agreement shall not operate as or be construed as a waiver or consent of any subsequent breach thereof. 3. Amendments and Modifications. This Agreement may be amended, modified, or terminated only by a written instrument executed by the parties hereto. 4. Binding Effect and Assignment. This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the Company and the Consultant and their respective successors and assigns; provided, however, that neither this Agreement nor any rights, benefits or obligations hereunder may be assigned by the Consultant. Anything contained herein to the contrary notwithstanding, this Agreement shall be of no force or effect, and neither party shall have any obligations hereunder, in the event this Agreement does not become effective in accordance with Section 23 of the Confidentiality Agreement. 5. Governing Law; Consent to Jurisdiction. This Agreement and the rights and obligations of the parties hereunder shall be construed in accordance with and governed by the law of the Commonwealth of Virginia, without giving effect to the conflict of law principles thereof. Any legal action or proceeding with respect to this Agreement shall be brought in the courts of the Commonwealth of Virginia or of the United States of America for the District of Virginia. By execution and delivery of this Agreement, each of the parties hereto accepts for such party and in respect of such party's property, generally and unconditionally, the jurisdiction of the aforesaid courts. Each of the parties hereto irrevocably consents to the service of process of any of the aforementioned courts in any such action or proceeding by the mailing of copies thereof by certified mail, postage prepaid, to the party at its address set forth in Paragraph 7 hereof. 6. Effect of Headings. The section and other headings herein are for convenience only and shall not affect the construction or interpretation of this Agreement. 7. Notices. All notices and other communications pursuant to this Agreement shall be in writing and deemed to be sufficient if contained in a written instrument and shall be deemed given if delivered personally, telecopied, sent by nationally-recognized overnight courier or mailed by registered or certified mail (return receipt requested), postage prepaid, to the parties at the following address: (i) if to the Company, to: America Online, Inc. 22000 AOL Way Dulles, VA 20166-9323 Attention: General Counsel Telecopier: (703) 265-2208; and (ii) if to the Consultant. to: the address for notice set forth on the last page hereof; or to such other address as the party to whom notice is to be given may have furnished to the other parties hereto in writing in accordance herewith. Any such notice or communication shall be deemed to have been received (A) in the case of personal delivery or delivery by telecopier, on the date of such delivery, (B) in the case of nationally-recognized overnight courier, on the next business day after the date when sent and (C) in the case of mailing, on the third business day following that on which the piece of mail containing such communication is posted. 8. Counterparts. This Agreement may be executed in one or more counterparts, and by the parties hereto in separate counterparts, each of which shall be an original, but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Consulting Agreement to be executed and delivered as of the date first above written. AMERICA ONLINE, INC. By:/S/STEPHEN M. CASE Name: Stephen M. Case Title: Chairman and CEO CONSULTANT /S/ROBERT W. PITTMAN Signature Robert W. Pittman Print Name EX-21.1 6 EXHIBIT 21.1 SUBSIDIARIES OF AMERICA ONLINE, INC. NAME JURISDICTION OF INCORPORATION Redgate Communications Corporation Delaware ANS Communications, Inc. Delaware ANS France S.a.r.l. France ANS Japan, Inc. Japan ANS Communications Europel Ltd. England AOL Productions, Inc. California Global Network Navigator, Inc. Delaware Websoft, Inc. Delaware Johnson-Grace Newco, Inc. Delaware AOL Ventures, Inc. Delaware AOLV Hub, Inc. Delaware AOLV Fashion Channel, Inc. Delaware AOLV Healthy Living Channel, Inc. Delaware The ImagiNation Network, Inc., d/b/a WorldPlay Entertainment, Inc. Delaware Digital City, Inc. Delaware Digital Marketing Services, Inc. Delaware Cyber Leasing Corp. Delaware AOL Community, Inc. Delaware Asylum, Inc., d/b/a Entertainment Asylum California AOL America Online Limited (Ireland) Ireland AOL (UK) Limited England AOL Bertelsmann Online LP England America Online France, S.a.r.l. France AOL Bertelsmann Online France S.N.C. France AOL America Online (Deutschland) GmbH Germany AOL Bertelsmann Online GmbH & Co KG Germany America Online Holding B.V. The Netherlands AOL Bertelsmann Europa GmbH Switzerland AOL Bertelsmann Online Verwaltungs GmbH Germany AOL Bertelsmann Service Operations Limited Ireland AOL Bertelsmann Online (UK Management) Limited England America Online (Japan), Inc. Japan AOL (Japan) Inc. Japan AOL Canada Services Inc. Canada Ubique, Ltd. Israel Ubique, Inc. Delaware EX-23.1 7 Exhibit 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registrations Statements (Form S-8) listed below of our report dated September 10, 1997, with respect to the consolidated financial statements of America Online, Inc., included in the Annual Report (Form 10-K) for the year ended June 30, 1997. 1) No. 33-46607 8) No. 33-91050 15) No. 333-21921 2) No. 33-48447 9) No. 33-94000 16) No. 333-22027 3) No. 33-78066 10) No. 33-94004 4) No. 33-86392 11) No. 333-00416 5) No. 33-86394 12) No. 333-02460 6) No. 33-86396 13) No. 333-07163 7) No. 33-90174 14) No. 333-07603 ERNST & YOUNG LLP /S/ERNST & YOUNG LLP Vienna, Virginia September 29, 1997 EX-24.1 8 EXHIBIT 24.1 POWER OF ATTORNEY I, Frank J. Caufield, whose signature appears below, constitute and appoint Stephen M. Case, Lennert J. Leader and Sheila A. Clark, 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, 1997, and any required amendments or supplements thereto, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite or necessary to be done in or about the premises, for all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them or their or his/her substitute or substitutes lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has caused this Power of Attorney to be executed as of this 26th day of September, 1997. /S/FRANK J. CAUFIELD Frank J. Caufield POWER OF ATTORNEY I, Robert J. Frankenberg, whose signature appears below, constitute and appoint Stephen M. Case, Lennert J. Leader and Sheila A. Clark, 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, 1997, and any required amendments or supplements thereto, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite or necessary to be done in or about the premises, for all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them or their or his/her substitute or substitutes lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has caused this Power of Attorney to be executed as of this 26th day of September, 1997. /S/ROBERT J. FRANKENBERG Robert J. Frankenberg POWER OF ATTORNEY I, Alexander M. Haig, Jr., whose signature appears below, constitute and appoint Stephen M. Case, Lennert J. Leader and Sheila A. Clark, 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, 1997, and any required amendments or supplements thereto, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite or necessary to be done in or about the premises, for all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them or their or his/her substitute or substitutes lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has caused this Power of Attorney to be executed as of this 26 th day of September, 1997. /S/ALEXANDER M. HAIG, JR. Alexander M. Haig, Jr. POWER OF ATTORNEY I, James V. Kimsey, whose signature appears below, constitute and appoint Stephen M. Case, Lennert J. Leader and Sheila A. Clark, 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, 1997, and any required amendments or supplements thereto, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite or necessary to be done in or about the premises, for all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them or their or his/her substitute or substitutes lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has caused this Power of Attorney to be executed as of this 26th day of September, 1997. /S/JAMES V. KIMSEY James V. Kimsey POWER OF ATTORNEY I, William N. Melton, whose signature appears below, constitute and appoint Stephen M. Case, Lennert J. Leader and Sheila A. Clark, 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, 1997, and any required amendments or supplements thereto, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite or necessary to be done in or about the premises, for all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them or their or his/her substitute or substitutes lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has caused this Power of Attorney to be executed as of this 26th day of September, 1997. /S/WILLIAM N. MELTON William N. Melton POWER OF ATTORNEY I, Dr. Thomas Middelhoff, whose signature appears below, constitute and appoint Stephen M. Case, Lennert J. Leader and Sheila A. Clark, 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, 1997, and any required amendments or supplements thereto, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite or necessary to be done in or about the premises, for all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them or their or his/her substitute or substitutes lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has caused this Power of Attorney to be executed as of this 1st day of September, 1997. /S/DR. THOMAS MIDDELHOFF Dr. Thomas Middelhoff EX-27 9
5 1,000 12-MOS JUN-30-1997 JUN-30-1997 124,340 268 91,399 0 0 323,473 303,354 (70,225) 846,688 554,470 0 0 1 1002 127,031 846,688 1,685,228 1,685,228 1,040,762 2,190,874 13,726 0 1,567 (499,347) 0 (499,347) 0 0 0 (499,347) (5.22) (5.22)
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