DEFA14A 1 d362269ddefa14a.htm SCHEDULE 14A Schedule 14A

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934

(Amendment No.    )

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¨   Preliminary Proxy Statement
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¨   Definitive Proxy Statement
x   Definitive Additional Materials
¨   Soliciting Material Under Rule 14a-12
AOL Inc.
(Name of Registrant as Specified In Its Charter)
(Name of Persons(s) Filing Proxy Statement, if Other Than the Registrant)
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On June 4, 2012, AOL Inc. made available the following investor presentation materials.

 

 

 


JUNE 2012
AOL Inc.
Response to ISS Report


2
Forward-Looking Statements
This presentation may contain “forward-looking statements” within the meaning of the federal securities laws, including statements concerning anticipated future events and
expectations that are not historical facts. Words such as “anticipates,” “estimates,” “expects,” “projects,” “forecasts,” “intends,” “plans,” “will,” “believes” and words and terms of
similar substance used in connection with any discussion of future operating or financial performance identify forward-looking statements. These forward-looking statements are
based on management’s current expectations and beliefs about future events. As with any projection or forecast, they are inherently susceptible to uncertainty and changes in
circumstances. Except as required by law, we are under no obligation to, and expressly disclaim any obligation to, update or alter any forward-looking statements whether as a
result of such changes, new information, subsequent events or otherwise. Various factors could adversely affect our operations, business or financial results in the future and cause
our actual results to differ materially from those contained in the forward-looking statements, including those factors discussed in detail in the “Risk Factors” section contained in
our Annual Report on Form 10-K for the year ended December 31, 2011 (the “Annual Report”), filed with the Securities and Exchange Commission.  In addition, we operate a
web services company in a highly competitive, rapidly changing and consumer- and technology-driven industry. This industry is affected by government regulation, economic,
strategic, political and social conditions, consumer response to new and existing products and services, technological developments and, particularly in view of new technologies,
the continued ability to protect intellectual property rights. Our actual results could differ materially from management’s expectations because of changes in such factors.
Achieving our business and financial objectives, including growth in operations and maintenance of a strong balance sheet and liquidity position, could be adversely affected by
the factors discussed or referenced under the “Risk Factors” section contained in the Annual Report as well as, among other things: 1) changes in our plans, strategies and
intentions; 2) continual decline in market valuations associated with our cash flows and revenues; 3) the impact of significant acquisitions, dispositions and other similar
transactions; 4) our ability to attract and retain key employees; 5) any negative unintended consequences of cost reductions, restructuring actions or similar efforts, including with
respect to any associated savings, charges or other amounts; 6) market adoption of new products and services; 7) the failure to meet earnings expectations; 8) asset impairments; 9)
decreased liquidity in the capital markets; 10) our ability to access the capital markets for debt securities or bank financings; 11) the impact of “cyber-warfare” or terrorist acts and
hostilities and 12) the approval of the patent transaction with Microsoft Corporation by antitrust authorities and the satisfaction of the other closing conditions to that transaction as
well as to factors that could affect the manner, timing and amount of the return of any of the sale proceeds to AOL shareholders including the need for AOL to retain cash for its
business or to satisfy liabilities. 
Additional Information
In connection with the solicitation of proxies, AOL has filed with the Securities and Exchange Commission, a definitive proxy statement and other relevant documents concerning
the proposals to be presented at AOL’s 2012 Annual Meeting of Stockholders.  The proxy statement contains important information about AOL and the 2012 Annual Meeting.  In
connection with the 2012 Annual Meeting, AOL has mailed the definitive proxy statement to stockholders.  In addition, AOL files annual, quarterly and special reports, proxy
statements and other information with the SEC.  You are urged to read the proxy statement and other information because they contain important information about AOL and the
proposals to be presented at the 2012 Annual Meeting.  These documents are available free of charge at the SEC’s website (www.sec.gov) or from AOL at our investor relations
website (http://ir.aol.com).  The contents of the websites referenced herein are not deemed to be incorporated by reference into the proxy statement.
AOL and its directors, executive officers and certain employees may be deemed to be participants in the solicitation of proxies from AOL’s stockholders in connection with the
election of directors and other matters to be proposed at the 2012 Annual Meeting.  Information regarding the interests, if any, of these directors, executive officers and specified
employees is included in the definitive proxy statement and other materials filed by AOL with the SEC.


We believe AOL is nearing an inflection point on our path
toward revenue and Adjusted OIBDA growth
3
Now vs. Then
Q4'09
Q1'12
Total Revenue
(17%)
(4%)
Adjusted OIBDA
(42%)
(5%)
We believe AOL’s revenue trend improvements and cost cutting initiatives have set the
Company up for future revenue and Adjusted OIBDA growth
AOL had its lowest
Adjusted OIBDA
decline in 4 years in
the first quarter of
2012
(17%)
(4%)
(42%)
(5%)


Claim:
AOL does not deserve full credit for its 33% increase in stock price for the last twelve months
ended May 31, 2012, vs. 2% for NASDAQ
RESPONSE:
We believe the AOL Board’s actions have helped our stock performance while
Starboard’s actions have only hindered it
Starboard Action
Date
Stock Price Change
Sends first public letter to Board
12/21/2011
+ 2%
Nominates 5 directors
2/24/2012
-
1%
Files Schedule 13D
2/16/2012
Flat
Sends public letter to Board following patent-sale rumors
3/30/2012
-
2%
Sends public letter voicing concerns about capital allocation
4/10/2012
-
6%
AOL Action
Date
Stock Price Change
Authorizes $250 million share repurchase
8/11/2011
+ 12%
Q3 earnings beat guidance
11/2/2012
+ 12.5%
Q4 earnings beat guidance
2/1/2012
+ 10%
Announces $1.1 billion patent transaction with MSFT
4/9/2012
+ 43%
Q1 earnings beat guidance
5/9/2012
+ 3.5%
Even
Starboard’s
purchases
of
AOL
stock,
we
believe,
have
not
driven
our
stock
price
increases:
Starboard
acquired
approximately
85% of the AOL shares they own in 2011, while AOL’s stock is up almost 80% since the beginning of 2012. Moreover, while
Starboard bought approximately 5%, AOL’s board oversaw the repurchase of over 10% of the stock in 2011.
4
Starboard misleadingly claims credit for the patent transaction,
but the truth is that
AOL hired advisors and initiated the process to realize the value of its non-strategic patents
in July 2011 –
five months before Starboard’s first letter


AOL’s strategy and investment is focused on increasing
revenue while continuing to reduce the significant cost base we inherited
Illustrative AOL Branded Content Channel       
Potential
Direct
Revenue
Less
Costs
(1)
Margin
Assuming Fixed Cost Base
Direct Revenue
100%
Costs
(1)
80%
% Revenue
20%
Cost
Reduction
Revenue Growth Rate
0%
5%
10%
15%
0%
20%
24%
27%
30%
5%
24%
28%
31%
34%
10%
28%
31%
35%
37%
15%
32%
35%
38%
41%
Prior to shared corporate and technology costs, many
AOL properties are profitable with industry margins
AOL believes Starboard’s analysis incorrectly allocates
100% of AOL’s shared corporate and technology
infrastructure to one area of AOL’s business
There is significant leverage to the model when
revenue grows and/or costs are reduced
AOL is growing advertising revenue again
AOL has a track record of expense reduction
1
Costs are prior to shared corporate and infrastructure costs and include, among others: traffic acquisition, content, ad
sales, direct technology and marketing expenses
5
Claim:
AOL’s cost structure is inefficient
RESPONSE:
AOL
has
a
track
record
of
cutting
expenses.
We
believe
AOL
has
a
model
for
creating
profitable stand-alone properties with attractive margins and that AOL’s current revenue and cost
initiatives have increased and will continue to meaningfully increase profitability


6
Key Actions
Cost reductions have been a significant part of the AOL turnaround. We reduced Adjusted OIBDA expenses by
$0.5 billion in 2010.
After completing acquisition integration in early 2011, we have reduced costs from Q2 2011 to Q1 2012 by a $140
million annual run-rate
Annual Operating Expense Reduction
Headcount Reduction (excl. Patch)
Patch
Note: $ in billions
1
2012 run rate based on AOL’s Q1 expense rate
2
Huffington Post & goviral acquisitions
Claim:
The process which resulted in AOL reducing expenses by $500 million has now
become “anathema”
RESPONSE:
AOL has a track record of expense reduction. After expenses increased in Q1 and Q2
2011 as the Company integrated the acquisitions of goviral and The Huffington Post, AOL has
meaningfully reduced expenses since then at an annual run-rate of $140 million.
AOL reduced its expense base by $0.5 billion or 23%


AOL has made the difficult decision to invest in hyper-local through its P&L rather than through acquisitions
Patch’s national footprint is highly attractive to national advertisers, a critical component of local advertising
2011 was the high water mark in terms of Adjusted OIBDA investment
AOL expects Patch to generate between $40 and $50 million in revenue in 2012
In Just 1.5 Years Patch Has Grown its Usage
From Number 10 to Number 5 in Local
We Believe That In Just 3 Years From Inception,
Patch will Generate $40-$50 Million in Revenue
The Board has been actively involved in the decision to ramp up Patch to take advantage of this growing
opportunity and is firmly committed to Patch run-rate profitability by Q4 2013. Your Board will maintain
its rigorous oversight of this initiative and will not continue the investment if this goal is not met.
7
Claim:
AOL’s investment in Patch has been ineffective
RESPONSE:
Local advertising is expected to be a $40 billion market within 4 years. We believe we
have created a game changing hyper-local platform for that market and we have a plan to operate
Patch more efficiently
Source:  comScore (May 2012)


AOL’s revenue trends have improved rapidly as we have streamlined the business
Trends in AOL’s subscription and search & contextual revenue streams have materially improved, with
Q1 2012 percentage year-over-year decline in subscription revenue and search and contextual
revenue almost half and one-third, respectively, what they were in Q4 2009
Third Party Network revenue is increasing faster than traffic acquisition cost¹
The Board has been actively engaged in rigorous oversight throughout our turnaround, including:
Continuing to reduce costs every quarter since Q2 2011
Routinely reviewing Patch, including approving the rapid expansion of the Patch rollout
The Board has a clear and consistent pattern of bold actions to deliver shareholder value
In 2011, we initiated a $250 million stock repurchase authorization
In 2012, we will generate over $1 billion in stockholder value from the Microsoft patent transaction and
we intend to return all proceeds to our stockholders
8
Claim:
AOL’s
Board
has
“dug
in
its
heels”
and
has
moved
away
from
its
disciplined
strategic
analysis
RESPONSE:
We believe AOL has taken aggressive action to turn around the Company and
deliver shareholder value; these actions are indicative of the rigorous oversight AOL’s Board consistently
applies
1
Traffic
acquisition
cost
(TAC)
is
the
commission
AOL
pays
third
party
publishers
to
sell
advertising
inventory
on
those
publishers online properties
After exiting approximately $250 million of unprofitable revenue in 2010, which impacted
comparisons significantly, AOL’s advertising revenue has grown year-over-year in each of the
last five quarters
In 2010, AOL delivered $650 million in shareholder value by divesting non-core assets,
including Bebo, buy.at, DMS, ICQ and certain real estate properties
Reducing annual Adjusted OIBDA expenses by $500 million (ex Patch) and headcount by 37


9
1
“New media”
includes the Internet, websites, computer multimedia, video games, CD-ROMs and DVDs
2
Defined as serving on a public internet company board with greater than $500 million in annual revenues
New
Media
Experience
1
NONE
Public Internet Company
Board
Experience
2
NONE
NONE
CEO/ CFO/CMO
Experience
NONE
NONE
Operating Company
Claim:
Starboard
nominees
Dennis
Miller
and
Jeffrey
Smith
have
the
“background”
and
“experience”
to
make votes for them warranted
RESPONSE:
We
believe
AOL’s
nominees
each
have
significantly
greater
relevant
experience.
AOL
has
reached
out
to
Starboard
on
numerous
occasions
to
discuss
the
addition
of
mutually
acceptable
directors
all
of
these
efforts
have
been
rebuffed
by
Starboard.


10
AOL fully disclosed the details of Tim Armstrong’s employment agreement and the value
of his equity award to investors:
The employment agreement and award agreements with all performance measures were
promptly and publicly filed with the SEC (Exhibits 10.1 and 10.3
through 10.9 to the Form 10-Q
for Q1 2012)
The value of the recent equity grant was disclosed in a public filing with the SEC (Form 8-K
filed on March 30, 2012). AOL also stated in that filing that the recent equity grants were
anticipated to be effective after the earnings announcement for Q1 2012
AOL Proxy Statement stated that there would not be any additional equity grants until after the
2012 Annual Meeting (see page 28)
Tim Armstrong elected to forego his bonus in fiscal year 2009
Additionally, according to ISS, Mr. Armstrong’s total compensation in fiscal year 2011 was
approximately 50% of the ISS’
CEO peer median total compensation
AOL has been and will continue to be fully transparent with investors
regarding Tim Armstrong’s compensation
Claim:
AOL has not disclosed the specifics regarding CEO Tim Armstrong’s compensation
RESPONSE:
We believe that AOL has been completely transparent regarding Tim Armstrong’s
employment agreement and equity award


JUNE 2012
AOL Inc.
Urges You to Vote The
WHITE Proxy Card


12
Reconciliation of Non-GAAP Measures
(1)
(in millions)
2010
2011
2012
Three months ended
Year ended
Three months ended
Year ended
Three
months
ended
Adjusted operating income before depreciation and
amortization
(OIBDA)
2
31-Mar
30-Jun
30-Sep
31-Dec
31-Dec
31-Mar
30-Jun
30-Sep
31-Dec
31-Dec
31-Mar
Operating income (loss)
$80.7
($1,331.8)
$201.1
$67.4
($982.6)
($11.8)
($5.8)
$8.6
$54.8
$45.8
$31.4
Add: Depreciation
54.3
51.9
46.9
43.2
196.3
44.4
42.4
38.3
35.8
160.9
36.1
Add: Amortization of intangible assets 
62.2
35.7
22.8
24.6
145.3
24.2
26.7
22.6
18.5
92.0
9.8
Add: Restructuring costs
23.4
11.1
(0.4)
(0.3)
33.8
27.8
0.6
7.1
2.8
38.3
7.4
Add: Equity-based compensation
9.7
9.2
8.3
8.9
36.1
10.4
11.0
10.3
10.8
42.5
8.6
Add: Asset impairments and write-offs
1.4
1,415.9
7.8
1.4
1,426.5
1.5
2.7
0.9
2.5
7.6
0.9
Add: Losses/(gains) on disposal of consolidated
businesses, net
0.0
0.0
(119.6)
13.6
(106.0)
1.6
-
-
-
1.6
-
Add: Losses/(gains) on other asset sales
(0.4)
(0.1)
(0.7)
(0.8)
(2.0)
1.0
(1.0)
(0.6)
(0.6)
(1.2)
(0.4)
Adjusted OIBDA
$231.3
$191.9
$166.2
$158.0
$747.4
$99.1
$76.6
$87.2
$124.6
$387.5
$93.8
1
This schedule includes the financial measure Adjusted OIBDA, which is a non-GAAP financial measure. This measure may be different than
similarly-titled non-GAAP financial measures used by other companies. The presentation of this financial information is not intended to be
considered in isolation or as a substitute for the financial information prepared and presented in accordance with generally accepted accounting
principles (GAAP)
2
   We define Adjusted OIBDA as operating income before depreciation and amortization excluding the impact of restructuring costs, noncash
equity-based compensation, gains and losses on all disposals of assets (including those recorded in costs of revenues) and noncash asset
impairments. We consider Adjusted OIBDA to be a useful metric for management and investors to evaluate and compare the performance of our
business on a consistent basis across reporting periods, as it eliminates the effect of noncash items such as depreciation of tangible assets,
amortization of intangible assets that were primarily recognized in business combinations and asset impairments and write-offs, as well as the
effect of restructurings and gains and losses on asset sales, which we do not believe are indicative of our core operating performance. We
exclude the impacts of equity-based compensation to allow us to be more closely aligned with the industry and analyst community.
A limitation of this measure, however, is that it does not reflect the periodic costs of certain capitalized tangible and intangible assets used in
generating revenues in our business or the current or future expected cash expenditures for restructuring costs.  The Adjusted OIBDA measure
also does not include equity-based compensation, which is and will remain a key element of our overall long-term compensation package. 
Moreover, the Adjusted OIBDA measures do not reflect gains and losses on asset sales or impairment charges related to goodwill, intangible
assets and fixed assets which impact our operating performance.  We evaluate the investments in such tangible and intangible assets through
other financial measures, such as capital expenditure budgets, investment spending levels and return on capital.