America Online 2014 Annual Report Download - page 41

The conditional conversion feature of our outstanding Notes, if triggered, may adversely affect our financial
condition and operating results.
In the event the conditional conversion feature of our Notes is triggered, holders of the Notes will be entitled
to convert the Notes at any time during specified periods at their option. If one or more holders elect to convert
their Notes, unless we elect to satisfy our conversion obligation by delivering solely shares of our common stock
(other than paying cash in lieu of delivering any fractional share), we would be required to settle a portion or all
of our conversion obligation through the payment of cash, which could adversely affect our liquidity. In addition,
even if holders do not elect to convert their Notes, we could be required under applicable accounting rules to
reclassify all or a portion of the outstanding principal of the Notes as a current rather than long-term liability,
which would result in a material reduction of our net working capital.
Our outstanding Notes may be settled in cash, and the accounting method for such convertible debt securities
could have a material effect on our reported financial results.
In accordance with US GAAP accounting guidance for convertible debt instruments that may be settled in
cash upon conversion, we must separately account for the liability and equity components of convertible debt
instruments (such as the Notes) in a manner that reflects our economic interest cost. The equity component of
such instruments is required to be included in the additional paid-in capital section of stockholders’ equity on our
consolidated balance sheets at the issuance date and the value of the equity component is treated as debt discount
for purposes of accounting for the debt component of the Notes. As a result, we expect to record a greater amount
of non-cash interest expense as a result of the amortization of the discounted carrying value of the Notes to their
face amount over the term of the Notes. We will report lower net income (or larger net losses) in our financial
results because accounting guidance requires interest to include both the amortization of the debt discount and
the instrument’s non-convertible coupon interest rate, which could adversely affect our future financial results
and the trading price of our common stock.
In addition, under certain circumstances, convertible debt instruments (such as the Notes) that may be
settled entirely or partly in cash are currently accounted for utilizing the treasury stock method, the effect of
which is that any shares issuable upon conversion of the Notes are not included in the calculation of diluted
earnings per share except to the extent that the conversion value of the Notes exceeds their principal amount.
Under the treasury stock method, for diluted earnings per share purposes, the transaction is accounted for as if the
number of shares of common stock that would be necessary to settle such excess, if we elected to settle such
excess in shares, are issued. We cannot be sure that the accounting standards in the future will continue to permit
the use of the treasury stock method. If we are unable to use the treasury stock method in accounting for the
shares issuable upon conversion of the Notes, then our diluted earnings per share would be adversely affected. In
addition, our diluted earnings per share would also be adversely affected if the market price of our common stock
increases such that the conversion rights of the Notes are triggered, or the market price of our common stock
exceeds the applicable strike price of the warrants we issued in conjunction with the convertible note hedge and
warrant transactions and become “in the money,” then our diluted earnings per share would also be adversely
affected.
Future sales of our common stock or other securities convertible into our common stock could lower the
market price for our common stock.
In the future, we may issue or sell additional shares of our common stock or securities convertible into or
exchangeable for our common stock. In addition, a substantial number of shares of our common stock is reserved
for issuance in connection with our employee benefit plans, for purchase by employees under our employee stock
purchase plan, upon conversion of our outstanding convertible notes and in relation to the convertible note hedge
and warrant transactions we entered into in connection with the issuance of the convertible notes. We cannot
predict the size of future issuances or the effect, if any, that they may have on the market price for our common
stock. The issuance and sale of substantial amounts of common stock or securities convertible into or
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