America Online 2014 Annual Report Download - page 108

AOL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The Notes are carried at their original issuance value, net of unamortized debt discount, and are not marked
to market each period. The approximate fair value of the Notes as of December 31, 2014, was $402.0 million.
The fair value of the Notes was estimated on the basis of inputs that are observable in the market and are
considered Level 2 in the fair value hierarchy.
The Company recognized interest expense related to the Notes of $6.6 million for the year ended
December 31, 2014, consisting of $1.0 million for the contractual coupon interest, $5.0 million for the accretion
of the convertible note discount and $0.6 million for the amortization of deferred transaction costs.
Note Hedge and Warrant Arrangements
In connection with the sale of the Notes, the Company entered into privately negotiated note hedge
transactions relating to approximately 6.6 million shares of common stock (the “Note Hedges”) with certain
option counterparties (the “Option Counterparties”). The Note Hedges represent call options from the Option
Counterparties with respect to $379.5 million aggregate principal amount of the Notes. The strike price of the
Note Hedges is $57.32 with a maturity date of September 1, 2019. These Note Hedges are designed to offset the
Company’s exposure to potential dilution and/or amounts the Company is required to pay in excess of the
principal amount upon conversion of the Notes in the event that the market value per share of its common stock
at the time of exercise is greater than the strike price of the Note Hedges (the strike price corresponds to the
initial conversion price of the Notes, subject to certain customary adjustments). During the third quarter of 2014,
the Company paid $70.1 million for the Note Hedges and as a result, $42.0 million, net of tax, was recorded as a
reduction to additional paid-in capital within stockholders’ equity.
Separately, the Company also entered into privately negotiated warrant transactions with the Option
Counterparties giving them the right to purchase in aggregate up to 13.2 million shares of common stock from
the Company at a strike price of $84.92 per share. The warrants will have a dilutive effect with respect to the
Company’s common stock to the extent that the market price per share of its common stock exceeds the strike
price of $84.92 per share of the warrants on or prior to the expiration date of the warrants. The warrants expire
over a three month period beginning on December 2, 2019. During the third quarter of 2014, the Company
received $33.5 million in proceeds from the issuance of warrants.
The Note Hedges and warrants are not marked to market. The Note Hedges and warrants are separate
transactions, entered into by the Company with the Option Counterparties and are not part of the terms of the
Notes and will not affect the holders’ rights under the Notes. In addition, holders of the Notes will not have any
rights with respect to the Note Hedges or the warrants. The value of the Note Hedges and warrants were initially
recorded to and continue to be classified as additional paid-in capital within stockholders’ equity.
NOTE 6—INCOME TAXES
The components of income (loss) from continuing operations before income taxes were as follows (in
millions):
Years Ended December 31,
2014 2013 2012
Domestic ........................................................ $201.2 $189.2 $ 1,189.9
Foreign ......................................................... (5.2) (5.5) 20.2
Total ........................................................... $196.0 $183.7 $ 1,210.1
92