AOL (AOL) 10-Q 2013 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2013

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from             to            

Commission File Number 001-34419

AOL INC.

(Exact name of registrant as specified in its charter)

Delaware	20-4268793
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
770 Broadway New York, NY	10003
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: 212-652-6400

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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of RegulationS-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	x	Accelerated filer	¨
Non-accelerated filer	¨  (Do not check if a smaller reporting company)	Smaller reporting company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of October 31, 2013, the number of shares of the Registrant’s common stock, par value $0.01 per share, outstanding was 78,472,048.

AOL INC.

TABLE OF CONTENTS

			Page     Number
PART I. FINANCIAL INFORMATION
		Cautionary Statement Concerning Forward-Looking Statements		1
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		2
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		23
	Item 4.	Controls and Procedures		24
	Item 1.	Financial Statements		25
PART II. OTHER INFORMATION
	Item 1.	Legal Proceedings		41
	Item 1A.	Risk Factors		42
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		42
	Item 6.	Exhibits		43
Signatures				44
Exhibit Index				45

AOL INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

	Page     Number
Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September  30, 2013 and 2012		25
Consolidated Balance Sheets as of September 30, 2013 and December 31, 2012		26
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2013 and 2012		27
Consolidated Statements of Equity for the Nine Months Ended September 30, 2013 and 2012		28
Note 1: Description of Business, Basis of Presentation and Summary of Significant Accounting Policies		29
Note 2: Income (Loss) Per Common Share		30
Note 3: Goodwill		31
Note 4: Business Acquisitions, Dispositions and Other Significant Transactions		32
Note 5: Long-Term Debt and Other Financing Arrangements		33
Note 6: Income Taxes		34
Note 7: Stockholders’ Equity		34
Note 8: Equity-Based Compensation		35
Note 9: Restructuring Costs		36
Note 10: Commitments and Contingencies		37
Note 11: Segment Information		38

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (“Quarterly Report”) contains certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 regarding business strategies, market potential, future financial and operational performance and other matters. 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 “Item 1A—Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2012 (“Annual Report”) and herein. 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 improved financial results and maintenance of a strong balance sheet and liquidity position, could be adversely affected by the factors discussed or referenced in “Item 1A—Risk Factors” in our Annual Report and herein as well as, among other things:

• changes in our plans, strategies and intentions;

• stock price volatility;

• future borrowing and restrictive covenants under the new revolving credit facility;

• the impact of significant acquisitions, dispositions and other similar transactions;

• our ability to attract and retain key employees;

• any negative unintended consequences of cost reductions, restructuring actions or similar efforts, including with respect to any associated savings, charges or other amounts;

• market adoption of new products and services;

• our ability to attract and retain unique visitors to our properties;

• asset impairments; and

• the impact of “cyber espionage.”

References in this Quarterly Report to “we,” “us,” the “Company,” and “AOL” refer to AOL Inc., a Delaware corporation.

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AOL INC.

PART I - ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion of our results of operations and financial condition together with our consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report as well as the discussion in the “Item 1—Business” section of our Annual Report. This discussion contains forward-looking statements that involve risks and uncertainties. The forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions and projections about our industry, business and future financial results. Our actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors, including those discussed in “Item 1A—Risk Factors” in our Annual Report and herein and “Cautionary Statement Concerning Forward-Looking Statements” herein.

Introduction

Management’s discussion and analysis of financial condition and results of operations (“MD&A”) is a supplement to the accompanying consolidated financial statements and provides additional information on our business, recent developments, results of operations, liquidity and capital resources and critical accounting policies. MD&A is organized as follows:

• Overview. This section provides a general description of our business and outlook for 2013, as well as recent developments we believe are important in understanding our results of operations and financial condition or in understanding anticipated future trends.

• Results of operations. This section provides an analysis of our results of operations for the three and nine months ended September 30, 2013 and 2012.

• Liquidity and capital resources. This section provides a discussion of our current financial condition and an analysis of our cash flows for the nine months ended September 30, 2013 and 2012. This section also provides an update to the discussion in our Annual Report of our customer credit risk and includes a discussion of the amount of financial capacity available to fund our future commitments and ongoing operating activities.

• Critical accounting policies. This section identifies those accounting policies that are considered important to our results of operations and financial condition and require significant judgment and estimates on the part of management.

Overview

Our Business

We are a leading global web services company with a suite of compelling brands and offerings and a substantial worldwide audience. Our business spans online content, products and services that we offer to consumers, advertisers, publishers and subscribers. We are focused on attracting and engaging internet consumers and providing valuable online advertising services. We market our offerings to advertisers on both AOL Properties and on third party properties (the “Third Party Network”). AOL Properties include our owned and operated content, products and services in the Membership Group and Brand Group segments, which are each described in further detail below. AOL Properties also include co-branded websites owned or operated by third parties for which certain criteria have been met, including that the internet traffic has been assigned to us. Through AOL Networks, which is also discussed in further detail below, we provide third party publishers with premium advertising products and services intended to make their websites attractive to brand advertisers, such

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PART I - ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

as video and custom content production, in addition to offering ad serving and sales of advertising inventory on the Third Party Network. Our AOL-brand access subscription service, which we offer to consumers in the United States for a monthly fee, is a valuable distribution channel for AOL Properties.

Our business is organized into three reportable segments: the Brand Group, the Membership Group, and AOL Networks. In addition to these reportable segments, we have a corporate and other category that includes activities that are not directly attributable or allocable to a specific segment.

Brand Group

The Brand Group consists of our portfolio of distinct and unique content and certain of our service brands. The results for this segment reflect the performance of our advertising offerings on a number of owned and operated sites, such as AOL.com, The Huffington Post, Patch, TechCrunch and MapQuest. The Brand Group also includes co-branded websites owned or operated by third parties for which certain criteria have been met, including that the internet traffic has been assigned to us.

We generate advertising revenues from the Brand Group through the sale of display advertising and search advertising. Display advertising revenue is generated by the display of graphical advertisements and other performance-based advertising. We offer advertisers marketing and promotional opportunities to purchase specific placements of advertising directly on sites within the Brand Group (i.e., in particular locations and on specific dates). In addition, we offer advertisers the opportunity to bid on unreserved advertising inventory on Brand Group sites utilizing our proprietary scheduling, optimization and delivery technology. We collectively refer to revenue associated with these offerings as premium display advertising revenue. Finally, advertising inventory on Brand Group sites not sold directly to advertisers, as described above, may be included for sale to advertisers with inventory purchased from third-party publishers through AOL Networks. Amounts received from external customers for inventory sold through AOL Networks are recognized in AOL Networks with a corresponding intersegment traffic acquisition cost (“TAC”) charge. An amount equal to the TAC charge for these transactions, reflecting the revenue net of the margin retained by AOL Networks, is then reflected as intersegment revenue within the Brand Group. Search advertising revenue is generated when a consumer clicks on a text-based advertisement on Brand Group sites. These text-based advertisements are either generated from a consumer-initiated search query or placed on sites targeted by advertisers based on the content of the websites. While the substantial majority of AOL search revenues are reflected within the Brand Group, there are also search revenues within the Membership Group and AOL Networks for search offerings provided in each of those segments.

Membership Group

The Membership Group consists of offerings that serve AOL registered account holders, both free and paid, and are focused on delivering world-class experiences to AOL’s users who rely on these AOL products and properties. The results for this segment include AOL’s subscription offerings and advertising offerings on Membership Group properties, including communications products such as AOL Mail and AIM.

In addition, we offer additional third party or AOL-developed products and services to internet consumers. We earn performance-based fees in relation to marketing third party products and services. We offer these products to our current and former access subscribers as well as other internet consumers. As with the Brand Group, advertising inventory on Membership Group sites not sold directly to advertisers may be included for sale to advertisers through AOL Networks and is reflected as intersegment revenue within the Membership Group in the same manner as described above. AOL Search is also offered on Membership Group properties.

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PART I - ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

AOL Networks

AOL Networks consists of AOL’s offerings to publishers and advertisers utilizing AOL’s third-party advertising network as well as AOL’s inventory within the Brand Group and Membership Group sold by AOL Networks. The results for this segment include the performance of Advertising.com, AOL On, ADTECH, Be On, Adap.tv, Pictela and sponsored listings. We generate advertising revenues on AOL Networks through the sale of advertising on third party websites and from advertising inventory on AOL Properties not sold directly to advertisers, as described above. Our advertising offerings on AOL Networks consist primarily of the sale of display advertising and also include search advertising through sponsored listings.

Recently, certain areas of the online display advertising market have experienced an increase in programmatic buying of advertising inventory. We are addressing this trend of programmatic buying by investing in technology, such as our demand side and supply side platforms, in order for advertisers and agencies to better manage their advertising campaigns through the use of our optimization technology. We have also addressed this trend by acquiring Adap.tv, a leading global programmatic video advertising platform. We also believe there is a significant opportunity to attract advertisers through the increased sale of premium formats and video through AOL Networks. We believe our scale, ability to target premium audiences and investments in technology and premium formats will allow us to increase the number of advertisers we work with and enable us to capitalize on the increase in programmatic buying. We believe our investments in premium formats and targeting will enable us to maximize yield for our advertisers. Revenues from the sale of our programmatic offerings are primarily reflected in AOL Networks results.

We have different cost structures within our advertising operations. In order to generate advertising revenues on AOL Networks, we have historically had to incur higher TAC as compared to advertising revenues generated on Brand Group or Membership Group properties. While a majority of the costs associated with generating advertising revenues on AOL Networks are variable, a majority of costs associated with generating advertising revenues on Brand Group and Membership Group properties are fixed. Therefore, to the extent we can generate higher revenues on Brand Group and Membership Group properties where we expect higher incremental margins, the increase in adjusted operating income before depreciation and amortization (“Adjusted OIBDA”) will be greater than it would be with an equivalent increase in advertising revenues on AOL Networks.

We believe that video enhancements across our owned and operated properties and third party websites can enhance our advertising product offerings and increase monetization and distribution of our content. We seek to launch new format enhancements, increase advertiser adoption of these formats and attract additional publishers. We aim to create products that will deepen our relationships with existing advertisers and attract new advertisers by providing them with effective and efficient means of reaching targeted audiences through premium video experiences. We remain focused on the continued expansion of our video platform for both our properties and our partners.

Recent Developments

Revolving Credit Facility

On July 1, 2013, we entered into a $250 million senior secured revolving credit facility agreement (the “Credit Facility Agreement”), together with the lenders named therein and JPMorgan Chase Bank, N.A., as administrative agent. Under the terms of the Credit Facility Agreement, we may request an increase in the commitments of up to an additional $250 million with commitments from either new lenders or increased commitments from existing lenders, subject to the satisfaction of certain conditions. The Credit Facility

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PART I - ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Agreement is guaranteed by all of AOL’s material domestic subsidiaries, as defined in the Credit Facility Agreement, and substantially all of the property and assets of AOL have been pledged as collateral, subject to customary exceptions. All amounts outstanding under the Credit Facility Agreement will be due and payable on July 1, 2018, and the commitments thereunder will terminate on such date.

We intend to use borrowings under the Credit Facility Agreement for general corporate purposes. No amounts have been borrowed under the Credit Facility Agreement to date.

2013 Stock Repurchase Programs

Concurrent with the closing of the Credit Facility Agreement, on July 8, 2013, we announced that the Board of Directors (the “Board”) approved a new stock repurchase program (the “New Repurchase Program”), which authorizes us to repurchase up to $150 million of outstanding shares of AOL common stock from time to time over the twelve months following the announcements of the New Repurchase Program. Repurchases are subject to market conditions, share price and other factors. The repurchases may be made in accordance with applicable securities laws in the open market, in block trades, pursuant to pre-arranged trading plans or otherwise and may include derivative transactions. The New Repurchase Program may be suspended or discontinued at any time. The New Repurchase Program does not affect in any way the terms of the previously announced $100 million share repurchase authorization approved by the Board in February 2013 (the “Original Repurchase Program”).

As of this filing, we have repurchased a total of 3.9 million shares at a weighted-average price of $34.75 per share (approximately $135 million in aggregate), bringing our remaining repurchase authorization under these programs to approximately $115 million.

Restructuring Actions

As part of our continuing effort to reduce our expenses and invest in areas of strategic focus, on August 15, 2013, we approved a restructuring plan for our Patch operations. As a result of this restructuring plan and other efforts to align our organizational structure with our strategy, we incurred restructuring charges of $19.0 million and $28.1 million for the three and nine months ended September 30, 2013, respectively. The restructuring actions taken in the third quarter resulted in a reduction of approximately 10% of our employee base, the substantial majority of which were at Patch. As we continue to consider opportunities to align our organizational structure with our strategy, we may identify additional restructuring actions. If additional restructuring actions are identified, we would incur additional restructuring costs.

Patch Impairment

During the third quarter, we determined that the restructuring of our Patch operations constituted a substantive change in circumstances that could potentially reduce the fair value of the Patch reporting unit below its carrying amount. Accordingly, we tested the Patch reporting unit goodwill and other long-lived assets attributable to Patch for impairment as of August 31, 2013 (the “interim testing date”).

Based on our interim impairment analyses, we have determined that as of the interim testing date the carrying value of the Patch reporting unit goodwill and certain capitalized internal-use software attributable to Patch was impaired, and accordingly recorded total impairment charges of $25.0 million for the three months ended September 30, 2013 ($17.5 million of which related to the Patch reporting unit’s goodwill). See “Note 3” in our accompanying consolidated financial statements for additional information on the interim goodwill impairment analysis.

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PART I - ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Acquisition of Adap.tv

On September 5, 2013, we acquired adap.tv, Inc., a Delaware corporation, (“Adap.tv”) for a purchase price of $405 million, subject to a working capital adjustment (which is currently estimated to increase the total consideration paid to $410 million). The consideration paid to acquire Adap.tv consisted of $329.6 million in cash, net of cash acquired, and 2.4 million shares of AOL common stock with a fair value of $80.8 million based on AOL’s closing price on the closing date. Adap.tv is an online video advertising company whose advertising technology platform provides advertisers and publishers the ability to buy and sell video advertising inventory across desktop, mobile, and connected TV platforms. This acquisition is expected to enhance our offerings to publishers and advertisers, and this expectation along with market conditions at the time of acquisition, contributed to a purchase price that resulted in the allocation of a significant portion of the purchase price to goodwill. The results of operations of Adap.tv will be reflected within the AOL Networks segment. See “Note 4” for additional information on our acquisition of Adap.tv.

Key Metrics

Key indicators to understanding our operating results include:

• Growth of advertising revenues, net of traffic acquisition costs;

• Unique visitors to AOL Properties;

• Moderation of subscription revenue declines; and

• Our ability to manage our cost structure.

Audience Metrics

We utilize unique visitor numbers to evaluate the performance of AOL Properties. In addition, we utilize unique visitor numbers to evaluate the reach of our total advertising network, which includes both AOL Properties and the Third Party Network. Unique visitor numbers provide an indication of our consumer reach. Although our consumer reach does not correlate directly to advertising revenue, we believe that our ability to broadly reach diverse demographic and geographic audiences is attractive to advertisers seeking to promote their brands to a variety of consumers without having to partner with multiple content providers. AOL Properties unique visitor numbers include unique visitors attributable to co-branded websites owned by third parties for which certain criteria have been met, including that the internet traffic has been assigned to us through a traffic assignment letter. For the three months ended September 30, 2013, approximately 8.6% of our unique visitors to AOL Properties were attributable to co-branded websites owned by third parties where the internet traffic was assigned to us, compared to approximately 8.4% for the three months ended September 30, 2012.

The source for our unique visitor information is a third party (comScore Media Metrix, or “Media Metrix”).

The following table presents our unique visitor metrics for the periods presented (in millions):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
Domestic average monthly unique visitors to AOL Properties		115		111		114		110
Domestic average monthly unique visitors to AOL Advertising Network		196		186		190		186

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PART I - ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Subscriber Access Metrics

The primary non-financial metrics we monitor for our subscription access service are monthly average churn and average paid tenure. Monthly average churn represents on average the percentage of AOL-brand access subscribers that are either terminated or cancel our services each month, factoring in new and reactivated subscribers. The domestic AOL-brand access subscriber monthly average churn was 1.4% and 1.8% for the three months ended September 30, 2013 and 2012, respectively. Churn has been moderating as our tenured base continues to mature and the value of additional products and services offered to subscribers increases. Average paid tenure represents the average period of time subscribers have paid for domestic AOL-brand internet access. The average paid tenure of our domestic AOL-brand access subscribers was approximately 13.0 years and 11.8 years for the three months ended September 30, 2013 and 2012, respectively.

Consolidated Results of Operations

Revenues

The following table presents our revenues, by revenue type, for the periods presented (in millions):

	Three Months Ended September 30,							Nine Months Ended September 30,
	2013		2012		% Change			2013		2012		% Change
Revenues:
Advertising	$	386.0	$	340.0		14	%	$	1,106.4	$	1,007.9		10	%
Subscription		161.6		173.5		(7	)%		493.4		531.1		(7	)%
Other		13.7		18.2		(25	)%		41.1		53.2		(23	)%
Total revenues	$	561.3	$	531.7		6	%	$	1,640.9	$	1,592.2		3	%

The following table presents our revenues, by revenue type, as a percentage of total revenues for the periods presented:

	Three Months Ended   September 30,						Nine Months Ended   September 30,
	2013			2012			2013			2012
Revenues:
Advertising		69	%		64	%		67	%		63	%
Subscription		29			33			30			33
Other		2			3			3			4
Total revenues		100	%		100	%		100	%		100	%

Advertising Revenues

Advertising revenues are generated on AOL Properties through display advertising and search advertising, as described in “Overview – Our Business” herein. Agreements for advertising on AOL Properties typically take the form of impression-based contracts in which we provide impressions in exchange for a fixed fee (generally stated as cost-per-thousand impressions), time-based contracts in which we provide promotion over a specified time period for a fixed fee or performance-based contracts in which performance is measured in terms of either

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PART I - ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

“click-throughs” when a user clicks on a company’s advertisement or other user actions such as product/customer registrations, survey participation, sales leads, product purchases or other revenue sharing relationships. In addition, agreements with advertisers can include other advertising-related services such as content sponsorships, exclusivities or advertising effectiveness research.

In addition to advertising revenues generated on AOL Properties, we also generate revenues from our advertising offerings on the Third Party Network. To generate revenues on the Third Party Network, we purchase advertising inventory from publishers (both large and small) in the Third Party Network using proprietary optimization, targeting and delivery technology to best match advertisers with available advertising inventory. Advertising arrangements for the sale of Third Party Network inventory typically take the form of impression-based contracts or performance-based contracts.

Advertising revenues on AOL Properties and the Third Party Network for the three and nine months ended September 30, 2013 and 2012 are as follows (in millions):

	Three Months Ended September 30,							Nine Months Ended September 30,
	2013		2012		% Change			2013		2012		% Change
AOL Properties:
Display	$	141.9	$	135.4		5	%	$	428.5	$	405.6		6	%
Search		95.0		91.8		3	%		286.8		267.9		7	%
Total AOL Properties		236.9		227.2		4	%		715.3		673.5		6	%
Third Party Network		149.1		112.8		32	%		391.1		334.4		17	%
Total advertising revenues	$	386.0	$	340.0		14	%	$	1,106.4	$	1,007.9		10	%

Total advertising revenues increased $46.0 million for the three months ended September 30, 2013 as compared to the same period in 2012. The increase in Third Party Network revenue of $36.3 million is primarily due to growth in the sale of premium formats, primarily video, across our programmatic platform. Third party network revenue for the three months ended September 30, 2013 includes $17.6 million related to Adap.tv, which was acquired in September 2013. Display revenue increased $6.5 million driven by an increase in pricing. Search revenue increased $3.2 million primarily due to an increase in revenue per search.

Total advertising revenues increased $98.5 million for the nine months ended September 30, 2013 as compared to the same period in 2012. The increase in Third Party Network revenue of $56.7 million is primarily due to growth in the sale of premium formats, primarily video, across our programmatic platform. Third party network revenue for the nine months ended September 30, 2013 includes $17.6 million related to Adap.tv, which was acquired in September 2013. Display revenue increased $22.9 million primarily due to increased impressions sold on AOL Properties. Search revenue increased $18.9 million primarily due to an increase in revenue per search.

Revenues Associated with Google

For all periods presented in this Quarterly Report, we have had a contractual relationship with Google Inc. (“Google”) whereby we generate significant revenues through paid text-based search and contextual advertising on AOL Properties provided by Google. For the three and nine months ended September 30, 2013, the revenues associated with the Google relationship (substantially all of which were search revenues generated on AOL Properties) were $89.9 million and $273.3 million, respectively, as compared to $85.9 million and $250.9 million for the three and nine months ended September 30, 2012, respectively.

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PART I - ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Subscription Revenues

Subscription revenues decreased 7% for both the three and nine months ended September 30, 2013 as compared to the same periods in 2012. The decline was due to a 13% decrease in the number of domestic AOL-brand access subscribers between September 30, 2012 and September 30, 2013, which resulted in a decline in subscription revenue of $23.2 million and $78.2 million, respectively. This decline was partially offset by a 9% increase for both the three and nine months ended September 30, 2013 as compared to the same periods in 2012 in domestic average monthly access subscription revenue per AOL-brand access subscriber (“ARPU”). The increase in ARPU for the three and nine months ended September 30, 2013, which resulted in an increase in subscription revenue of $13.2 million and $47.0 million, respectively, is primarily due to the simplified pricing structure initiated in late 2011 which continued in 2012 and 2013 as well as an increase related to our value plan strategy that provides additional features and services to subscribers.

The number of domestic AOL-brand access subscribers was 2.5 million and 2.9 million at September 30, 2013 and 2012, respectively. ARPU was $20.15 and $19.80 for the three and nine months ended September 30, 2013, respectively, compared to $18.47 and $18.09 for the three and nine months ended September 30, 2012, respectively. We include in our subscriber numbers individuals, households and entities that have provided billing information and completed the registration process sufficiently to allow for an initial log-on to the AOL access service. Our subscriber numbers include subscribers participating in introductory free-trial periods and subscribers that are paying no monthly fees or reduced monthly fees through member service and retention programs. Individuals who have only registered for our free offerings, including subscribers who have migrated from paid subscription plans, are not included in the AOL-brand access subscriber numbers presented above. Subscribers to our subscription access service also contribute to our ability to generate advertising revenues.

Other Revenues

Other revenues consist of revenues from licensing our proprietary ad serving technology to third parties through ADTECH, licensing revenues from third-party customers of MapQuest’s business-to-business services and fees from mobile carriers associated with our mobile e-mail and instant messaging functionality.

Other revenues decreased 25% and 23% for the three and nine months ended September 30, 2013, respectively, as compared to the same periods in 2012, due to the absence of revenue from StudioNow related to the divestiture in January 2013, a decrease in revenues from our mobile messaging services and a decline in ADTECH licensing revenues.

Geographical Concentration of Revenues

For the periods presented herein, a significant majority of our revenues have been generated in the United States. The majority of the non-United States revenues for these periods were generated by our European operations (primarily in the United Kingdom). We expect the significant majority of our revenues to continue to be generated in the United States for the foreseeable future. See “Note 11” in our accompanying consolidated financial statements for further information regarding the revenues generated in the countries in which we operate.

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PART I - ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Operating Costs and Expenses

The following table presents our operating costs and expenses for the periods presented (in millions):

	Three Months Ended September 30,							Nine Months Ended September 30,
	2013		2012		% Change			2013		2012		% Change
Costs of revenues	$	418.6	$	382.3		9	%	$	1,211.6	$	1,163.1		4	%
General and administrative		78.2		97.2		(20	)%		237.6		301.2		(21	)%
Amortization of intangible assets		11.1		9.0		23	%		29.7		28.6		4	%
Restructuring costs		19.0		0.4		NM			28.1		7.7		NM

NM = not meaningful

The following table represents our operating costs and expenses as a percentage of revenues for the periods presented:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
Operating costs and expenses:
Costs of revenues		75	%		72	%		74	%		73	%
General and administrative		14			18			14			19
Amortization of intangible assets		2			2			2			2
Restructuring costs		3			-			2			-
Operating costs and expenses		94	%		92	%		92	%		94	%

Costs of Revenues

The following categories of costs are generally included in costs of revenues: personnel and facilities costs, TAC, network-related costs, non-network depreciation and amortization and other costs of revenues. TAC consists of costs incurred through arrangements in which we acquire third-party online advertising inventory for resale and arrangements whereby partners distribute our free products or services or otherwise direct traffic to AOL Properties. TAC arrangements have a number of different economic structures, the most common of which are: payments based on a cost per thousand impressions or based on a percentage of the ultimate advertising revenues generated from the advertising inventory acquired for resale and payments for direct traffic delivered to AOL Properties priced on a per click basis (e.g., search engine marketing fees). These arrangements are primarily on a variable basis; however, the arrangements can also be on a fixed-fee basis, which often carry reciprocal performance guarantees by the counterparty, or a combination of fixed and variable fees.

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Costs of revenues for the three and nine months ended September 30, 2013 and 2012 are as follows (in millions):

	Three Months Ended September 30,							Nine Months Ended September 30,
	2013		2012		% Change			2013		2012		% Change
Costs of revenues:
Personnel costs	$	159.2	$	155.4		2	%	$	478.8	$	477.0		0	%
Facilities costs		15.1		13.2		14	%		42.2		40.4		4	%
TAC		114.0		89.6		27	%		307.9		252.8		22	%
Network-related costs		36.8		40.1		(8	)%		110.6		121.1		(9	)%
Non-network depreciation and amortization		14.7		15.4		(5	)%		44.5		48.0		(7	)%
Other costs of revenues		78.8		68.6		15	%		227.6		223.8		2	%
Total costs of revenues	$	418.6	$	382.3		9	%	$	1,211.6	$	1,163.1		4	%

The increase in costs of revenues for the three and nine months ended September 30, 2013 as compared to the same periods for 2012 was primarily driven by the increase in TAC of $24.4 million and $55.1 million, respectively. The increase in TAC for the three and nine months ended September 30, 2013 as compared to the same periods for 2012 was mainly driven by an increase in Third Party Network advertising revenues, which resulted in higher variable revenue share payments to our publishing partners of $16.0 million and $26.1 million, respectively, (including $10.8 million of TAC in the third quarter of 2013 as a result of our acquisition of Adap.tv), and the increase in marketing-related efforts on search revenue of $7.9 million and $26.7 million, respectively. The increase in costs of revenues for the three and nine months ended September 30, 2013 as compared to the same periods for 2012 was also driven by other long-lived asset impairment charges of $10.4 million included in other costs of revenues, the majority of which related to Patch.

Offsetting these overall increases in TAC for the three and nine months ended September 30, 2013 as compared to the same periods for 2012 was a decrease in network-related costs of $3.3 million and $10.5 million, respectively, mainly due to fewer depreciable network assets. The nine months ended September 30, 2013 as compared to the same period in 2012 includes a decline in sales tax expense of $9.6 million related to expense incurred in 2012 from a Virginia sales tax settlement and an additional decline in sales and use tax expense of $3.5 million due to the favorable settlement of a tax matter resolved in the first quarter of 2013.

General and Administrative

General and administrative expenses decreased $19.0 million for the three months ended September 30, 2013 as compared to the same period for 2012. The decrease was primarily due to declines in marketing and personnel costs mainly as a result of our continued cost reduction efforts. The three months ended September 30, 2013 as compared to the same period for 2012 includes an additional decline in legal and consulting costs incurred during the three months ended September 30, 2012 related to the patent transaction of $3.0 million.

General and administrative expenses decreased $63.6 million for the nine months ended September 30, 2013 as compared to the same period for 2012. The decrease was primarily due to legal and consulting costs incurred during the nine months ended September 30, 2012 related to the proxy contest of $10.6 million and costs related to the patent transaction with Microsoft Corporation (“Microsoft”) of $9.4 million. The decline in legal expenses

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also includes the $6.3 million benefit in June 2013 upon favorable resolution of a dispute over amounts to be reimbursed to us from escrow related to a prior acquisition. In addition, marketing, personnel costs and other general and administrative expenses for the nine months ended September 30, 2013 as compared to the same period for 2012 decreased as a result of our continued cost reduction efforts.

Restructuring Costs

As part of our continuing effort to reduce our expenses and invest in areas of strategic focus, on August 15, 2013, we approved a restructuring plan for our Patch operations. As a result of this restructuring plan and other efforts to align our organizational structure with our strategy, we incurred restructuring charges of $19.0 million and $28.1 million for the three and nine months ended September 30, 2013, respectively. The restructuring actions taken in the third quarter resulted in a reduction of approximately 10% of our employee base, the substantial majority of which were at Patch.

Other Transactions Impacting Operating Income

The following table presents other transactions impacting operating income for the periods presented (in millions):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2013		2012		% Change		2013		2012		% Change
Goodwill impairment charge	$	17.5	$	-		NM	$	17.5	$	-		NM
Income from licensing of intellectual property		-		-		NM		-		(96.0)		(100	)%
(Gain) loss on disposal of assets, net		0.2		(0.3)		NM		(2.1)		(946.1)		(100	)%

Goodwill Impairment Charge

We determined that the restructuring of our Patch operations constituted a substantive change in circumstances that could potentially reduce the fair value of the Patch reporting unit below its carrying amount. Accordingly, we tested the Patch reporting unit goodwill for impairment as of the interim testing date.

Based on our interim impairment analysis, we have determined that as of the interim testing date the carrying value of the Patch reporting unit was impaired, and accordingly recorded a goodwill impairment charge of $17.5 million for the three and nine months ended September 30, 2013. See “Note 3” in our accompanying consolidated financial statements for additional information on the goodwill impairment.

Income from Licensing of Intellectual Property and Gain on Disposal of Assets, Net

During the second quarter of 2012, we sold approximately 800 of our patents and their related patent applications (the “Sold Patents”) to Microsoft and granted Microsoft a non-exclusive license to our retained patent portfolio. Income from licensing of intellectual property of $96.0 million for the nine months ended September 30, 2012 reflects the license of our retained patent portfolio to Microsoft in June 2012. The gain on disposal of assets, net of $946.1 million for the nine months ended September 30, 2012 reflects the sale of the Sold Patents to Microsoft.

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Operating Income (Loss)

Operating income decreased $26.4 million and $1,015.2 million for the three and nine months ended September 30, 2013, respectively, as compared to the same periods in 2012 due to an increase in costs of revenues and restructuring costs and an impairment of goodwill in September 2013, partially offset by an increase in revenue and declines in general and administrative costs. Operating income for the nine months ended September 30, 2013 as compared to the same period in 2012 was also unfavorably impacted by the gain on the disposition of the Sold Patents and income from licensing of intellectual property in June 2012.

Other Income Statement Amounts

The following table presents our other income statement amounts for the periods presented (in millions):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2013		2012		% Change		2013		2012		% Change
Other income (loss), net		$     (2.1)		$     2.0		NM%		$     (5.6)		$     9.3		NM
Income tax provision		13.1		24.4		(46)%		57.8		130.7		(56)%

Other Income (Loss), Net

There were no significant changes in other income (loss), net for the three months ended September 30, 2013 as compared to the same period in 2012. Other loss, net was $5.6 million for the nine months ended September 30, 2013 as compared to other income, net of $9.3 million for the same period in 2012. The decrease was due primarily to the $10.8 million non-cash gain related to the consolidation of a joint venture between Mitsui Company Ltd. and the Company (“Ad.com Japan”) recorded in the first quarter of 2012 and unfavorable foreign currency impacts of $4.2 million.

Income Tax Provision

We recorded pre-tax income from operations of $14.6 million and related income tax expense of $13.1 million, which resulted in an effective tax rate of 89.7% for the three months ended September 30, 2013, as compared to an effective tax rate of 54.1% for the three months ended September 30, 2012. The effective tax rate for the three months ended September 30, 2013 differed from the statutory U.S. federal income tax rate of 35.0% primarily due to the tax impact of the goodwill impairment charge, the foreign losses that did not produce a tax benefit and the size of these items relative to our pre-tax income. The effective tax rate for the three months ended September 30, 2012 differed from the statutory U.S. federal income tax rate of 35.0% primarily due to the tax impact of foreign losses that did not produce a tax benefit.

We recorded pre-tax income from operations of $112.9 million and related income tax expense of $57.8 million, which resulted in an effective tax rate of 51.2% for the nine months ended September 30, 2013, as compared to an effective tax rate of 11.4% for the nine months ended September 30, 2012. The effective tax rate for the nine months ended September 30, 2013 differed from the statutory U.S. federal income tax rate of 35.0% primarily due to the impact of foreign losses that did not produce a tax benefit. The effective tax rate for the nine months ended September 30, 2012 differed substantially from the statutory U.S. federal income tax rate of 35.0% primarily due to the tax impact of the patent transaction with Microsoft in June 2012 and foreign losses that did not produce a tax benefit.

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Adjusted OIBDA

We use Adjusted OIBDA as a supplemental measure of our performance. We define Adjusted OIBDA as operating income before depreciation and amortization excluding the impact of restructuring costs, non-cash equity-based compensation, gains and losses on all disposals of assets, non-cash asset impairments and write-offs and special items. We consider Adjusted OIBDA to be a useful metric for management and investors to evaluate and compare the ongoing operating performance of our business on a consistent basis across reporting periods, as it eliminates the effect of non-cash items such as depreciation of tangible assets, amortization of intangible assets that were primarily recognized in business combinations, asset impairments and write-offs, as well as the effect of restructurings, gains and losses on asset sales and special items, 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, impairment charges and write-offs related to goodwill, intangible assets and fixed assets or special items 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.

Adjusted OIBDA is not a financial measure under generally accepted accounting principles (“GAAP”) and 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 GAAP.

The following table presents our reconciliation of Adjusted OIBDA to operating income (in millions):

	Three Months Ended September 30,							Nine Months Ended September 30,
	2013		2012		% Change			2013		2012		% Change
Operating income	$	16.7	$	43.1		(61	)%	$	118.5	$	1,133.7		(90	)%
Add: Depreciation		32.0		34.3		(7	)%		97.4		105.6		(8	)%
Add: Amortization of intangible assets		11.1		9.0		23	%		29.7		28.6		4	%
Add: Restructuring costs		19.0		0.4		NM			28.1		7.7		NM
Add: Equity-based compensation		11.8		11.1		6	%		31.4		28.3		11	%
Add: Asset impairments and write-offs		29.0		0.2		NM			30.4		3.0		NM
Add: Losses/(gains) on disposal of assets, net		0.2		(0.2)		NM			(2.1)		(946.6)		(100	)%
Add: Special items		-		3.0		(100	)%		-		(71.0)		(100	)%
Adjusted OIBDA	$	119.8	$	100.9		19	%	$	333.4	$	289.3		15	%

Adjusted OIBDA increased for the three and nine months ended September 30, 2013 as compared to the same periods in 2012 due primarily to the increase in revenues and decline in general and administrative costs, partially offset by the increase in costs of revenues.

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Special items for the nine months ended September 30, 2012 include patent licensing income of $96.0 million resulting from our transaction with Microsoft, partially offset by costs related to the proxy contest of $8.8 million, costs related to the patent sale and return of the related proceeds to shareholders of $8.6 million and $7.6 million of expense relating to the Virginia sales tax settlement in the second quarter of 2012.

Segment Results of Operations

We have three reportable segments which are determined based on the properties, products and services we provide and how our chief operating decision maker (“CODM”) evaluates the business. Our segment results reflect information presented on the same basis that we use for internal management reporting. The segment profitability measure used in our internal management reporting and presented herein is Adjusted OIBDA. See “Note 11” in our accompanying consolidated financial statements for additional information on our segments and a reconciliation of total consolidated Adjusted OIBDA to operating income (loss).

The following is a summary of segment operating results for the three and nine months ended September 30, 2013 and 2012:

	Three Months Ended September 30,							Nine Months Ended September 30,
	2013		2012		% Change			2013		2012		% Change
Revenue:
Brand Group	$	192.5	$	177.0		9	%	$	572.4	$	517.0		11	%
Membership Group		204.5		221.0		(7	)%		629.8		683.8		(8	)%
AOL Networks		188.7		158.4		19	%		510.0		460.6		11	%
Corporate and Other		-		0.3		(100	)%		0.6		1.2		(50	)%
Intersegment eliminations		(24.4)		(25.0)		2	%		(71.9)		(70.4)		(2	)%
Total Revenue:	$	561.3	$	531.7		6	%	$	1,640.9	$	1,592.2		3	%
Adjusted OIBDA:
Brand Group	$	10.9	$	(9.6)		NM		$	4.6	$	(41.6)		NM
Membership Group		149.8		156.4		(4	)%		447.8		474.2		(6	)%
AOL Networks		(7.1)		0.3		NM			(20.9)		0.9		NM
Corporate and Other		(33.8)		(46.2)		27	%		(98.1)		(144.2)		32	%
Total Adjusted OIBDA:	$	119.8	$	100.9		19	%	$	333.4	$	289.3		15	%

Brand Group

Brand Group revenue increased for the three and nine months ended September 30, 2013 as compared to the same periods in 2012, reflecting an increase in global display revenue of $10.8 million and $33.2 million, respectively, and an increase in search revenue of $4.3 million and $23.4 million, respectively. Global display revenue increased for the three months ended September 30, 2013 as compared to the same period in 2012 driven by an increase in pricing. Global display revenue increased for the nine months ended September 30, 2013 as compared to the same period in 2012 driven by increased impressions sold on AOL Properties. The increase in search revenues for the three and nine months ended September 30, 2013 as compared to the same periods in 2012 was driven by an increase in revenue per search.

Brand Group Adjusted OIBDA increased for the three and nine months ended September 30, 2013 as compared to the same periods in 2012, reflecting the increases in revenue discussed above and declines in

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marketing and general and administrative costs, including at Patch, partially offset by an increase in TAC as a result of our marketing-related efforts on search. Brand Group Adjusted OIBDA for the nine months ended September 30, 2013 as compared to the same period in 2012 also decreased as a result of our continued cost reduction efforts, partially offset by an increase in personnel expenses in areas of strategic focus.

Membership Group

Membership Group revenue decreased for the three and nine months ended September 30, 2013, respectively, as compared to the same periods in 2012. The declines were due to the 13% decline in our domestic AOL-brand access subscribers, which resulted in a decline in subscription revenue of $23.2 million and $78.2 million, respectively. This decline was partially offset by an increase in ARPU of 9% for both the three and nine months ended September 30, 2013 as compared to the same periods in 2012 which resulted in an increase in subscription revenue of $13.2 million and $47.0 million, respectively. This increase is primarily due to the simplified pricing structure initiated in late 2011 which continued in 2012 and 2013 as well as an increase related to our value plan strategy that provides additional features and services provided to subscribers.

Membership Group Adjusted OIBDA decreased for the three and nine months ended September 30, 2013 as compared to the same periods in 2012 due to the decrease in revenue discussed above, partially offset by declines in costs associated with the declines in domestic AOL-brand access subscribers and the disposition of a claim regarding a legal matter in the third quarter of 2013.

AOL Networks

AOL Networks revenue increased for the three and nine months ended September 30, 2013 as compared to the same periods in 2012 primarily due to growth in the sale of premium formats, primarily video, across our programmatic platform. AOL Networks revenue for the three and nine months ended September 30, 2013 includes $17.6 million related to Adap.tv, which was acquired in September 2013. The increase in AOL Networks revenue was partially offset by the absence of revenue from StudioNow due to the divestiture in Q1 2013. For the three and nine months ended September 30, 2012, StudioNow contributed $2.3 million and $6.1 million, respectively, in revenue to AOL Networks. To a lesser extent, AOL Networks revenue increases were offset by a decline in the sale of AOL Properties inventory through the Third Party Network.

AOL Networks Adjusted OIBDA decreased for the three and nine months ended September 30, 2013 as compared to the same periods in 2012 due to continued investment in premium formats and our demand side and supply side platforms, which offset the increase in revenues net of TAC. AOL Networks Adjusted OIBDA for the nine months ended September 30, 2013 as compared to the same period in 2012 was also impacted by higher variable costs due to our increasing revenues.

Corporate and Other

In addition to the above reportable segments, we have a corporate and other category that includes activities that are not directly attributable or allocable to a specific segment. This category primarily consists of costs associated with broad corporate functions including legal, human resources, finance and accounting, and activities not directly attributable to a segment such as tax settlements and other general business costs.

For the three and nine months ended September 30, 2013 as compared to the same periods in 2012, corporate and other Adjusted OIBDA improved primarily due to declines in marketing and personnel costs as a result of cost reduction efforts. Corporate and other Adjusted OIBDA also improved for the nine months ended

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September 30, 2013 as compared to the same period in 2012 due to declines in outside services costs as a result of cost reduction efforts and a favorable resolution of a dispute over amounts to be reimbursed to us from escrow related to a prior acquisition in June 2013. Corporate and other Adjusted OIBDA for the three and nine months ended September 30, 2013 includes expenses associated with completing the acquisition of Adap.tv.

Liquidity and Capital Resources

Current Financial Condition

Historically, the cash we generate has been sufficient to fund our working capital, capital expenditure and financing requirements. Forecasts of future cash flows are dependent on many factors, including future economic conditions and the execution of our strategy. We currently expect to fund our ongoing working capital, investing and financing requirements, including future repurchases of common stock, through our existing cash balance, cash flows from operations and the Credit Facility Agreement. To date, we have not borrowed under the terms of the Credit Facility Agreement. See “Principal Debt Obligations” for additional information on the Credit Facility Agreement.

At September 30, 2013, our cash and equivalents totaled $168.2 million, as compared to $466.6 million at December 31, 2012. The decrease in cash and equivalents was primarily due to the acquisition of Adap.tv in the third quarter of 2013 and the repurchase of common stock during the nine months ended September 30, 2013, partially offset by cash provided by operations for the nine months ended September 30, 2013. Our cash and equivalents consist of cash and other highly liquid short-term investments that are readily convertible to cash. Approximately 35% of our cash and equivalents as of September 30, 2013 is held internationally, primarily in Luxembourg, the United Kingdom, Japan, Germany, and India, and is utilized to fund our foreign operations. Cash held internationally may be repatriated and would be available to be used to fund our domestic operations. However, repatriation of funds may result in additional tax liabilities. We believe the cash balance in the U.S. is sufficient to fund our domestic working capital needs.

Summary Cash Flow Information

Our cash flows from operations are driven by net income adjusted for non-cash items such as depreciation and amortization, equity-based compensation expense, asset impairments and write-offs and other activities impacting net income such as the gains and losses on the sale of assets or operating subsidiaries. Cash flows from investing activities consist primarily of the cash used in the acquisitions of various businesses and cash used for capital expenditures. Capital expenditures and product development costs are mainly for the purchase of computer hardware, software, network equipment, furniture, fixtures and other office equipment. Cash flows from financing activities relate primarily to repurchases of common stock, principal payments made on capital lease obligations, tax withholdings related to net share settlements of restricted stock units (“RSUs”) and proceeds from the exercise of stock options.

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Operating Activities

The following table presents cash provided by operating activities for the periods presented (in millions):

	Nine Months Ended September 30,
	2013		2012
Net income	$	55.1	$	1,012.3
Adjustments for non-cash and non-operating items:
Depreciation and amortization		127.1		134.2
Asset impairments and write-offs		30.4		3.0
(Gain) loss on step acquisition and disposal of assets, net		(1.1)		(958.7)
Equity-based compensation		31.4		28.3
Deferred income taxes		31.5		103.0
All other, net, including working capital changes		(45.5)		(33.2)
Cash provided by operating activities	$	228.9	$	288.9

Cash provided by operating activities decreased $60.0 million for the nine months ended September 30, 2013, as compared to the nine months ended September 30, 2012, primarily due to the decrease in operating income of $44.1 million (excluding the $946.1 million gain on the sale of patents during the second quarter of 2012 and the Patch impairment charges of $25.0 million during the third quarter of 2013) driven by the $96 million cash received from licensing our retained patent portfolio to Microsoft during the second quarter of 2012, higher employee bonus payments in 2013 compared to 2012 and timing of cash receipts and payments, partially offset by lower deferred compensation and restructuring payments in 2013.

Investing Activities

The following table presents cash (used) provided by investing activities for the periods presented (in millions):

	Nine Months Ended September 30,
	2013		2012
Investments and acquisitions, net of cash acquired	$	(336.9)	$	(10.3)
Proceeds from disposal of assets, net		1.1		951.5
Capital expenditures and product development costs		(52.7)		(49.0)
Cash (used) provided by investing activities	$	(388.5)	$	892.2

Cash used by investing activities was $388.5 million for the nine months ended September 30, 2013, as compared to cash provided by investing activities of $892.2 million for the nine months ended September 30, 2012. The nine months ended September 30, 2013 include $329.6 million paid to acquire Adap.tv in the third quarter of 2013. The nine months ended September 30, 2012 include $950 million in proceeds (net of transaction costs paid) from the disposition of the Sold Patents in the second quarter of 2012.

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Financing Activities

The following table presents cash used by financing activities for the periods presented (in millions):

	Nine Months Ended September 30,
	2013			2012
Repurchase of common stock	$	(102.2	)	$	(698.7	)
Principal payments on capital leases		(44.5	)		(41.1	)
Tax withholdings related to net share settlements of restricted stock units		(13.3	)		(6.3	)
Proceeds from exercise of stock options		22.7			26.1
Other financing activities		0.8			0.3
Cash used by financing activities	$	(136.5	)	$	(719.7	)

Cash used by financing activities decreased $583.2 million for the nine months ended September 30, 2013, as compared to the same period in 2012, primarily due to the $596.5 million decrease in cash paid for the repurchase of our common stock. The nine months ended September 30, 2012 includes stock repurchases under an accelerated stock repurchase program of $654.1 million.

Free Cash Flow

We use Free Cash Flow as a supplemental measure of our performance. We define Free Cash Flow as cash provided by operating activities, less capital expenditures, product development costs and principal payments on capital leases. We consider Free Cash Flow to be a liquidity measure that provides useful information to management and investors about the amount of cash generated by the business that, after capital expenditures, capitalized product development costs and principal payments on capital leases, can be used for strategic opportunities, including investing in our business, making strategic acquisitions and strengthening the balance sheet. Analysis of Free Cash Flow also facilitates management’s comparisons of our operating results to competitors’ operating results. A limitation on the use of this metric is that Free Cash Flow does not represent the total increase or decrease in cash for the period because it excludes certain non-operating cash flows.

Free Cash Flow is a non-GAAP financial measure and 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 GAAP.

The following table presents our reconciliation of Free Cash Flow to cash provided by operating activities (in millions):

	Nine Months Ended September 30,
	2013		2012
Cash provided by operating activities	$	228.9	$	288.9
Less: Capital expenditures and product development costs		52.7		49.0
Less: Principal payments on capital leases		44.5		41.1
Free Cash Flow	$	131.7	$	198.8

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Free Cash Flow decreased $67.1 million for the nine months ended September 30, 2013 as compared to the nine months ended September 30, 2012. This decrease is primarily due to the $60.0 million decrease in cash provided by operating activities, discussed in “Summary Cash Flow Information—Operating Activities” above.

Principal Debt Obligations

On July 1, 2013, we entered into the Credit Facility Agreement, which we intend to use, as necessary, for general corporate purposes. The maturity date of the Credit Facility Agreement is July 1, 2018. To date, we have not borrowed under the terms of the Credit Facility Agreement. See “Note 5” in our accompanying consolidated financial statements for additional information.

Customer Credit Risk

Customer credit risk represents the potential for financial loss if a customer is unwilling or unable to meet its agreed-upon contractual payment obligations. Credit risk originates from sales of advertising and subscription access service and is dispersed among many different counterparties. No single customer had a receivable balance at September 30, 2013 greater than 10% of total net receivables.

Customer credit risk is monitored on a company-wide basis. We maintain a comprehensive approval process prior to issuing credit to third-party customers. On an ongoing basis, we track customer exposure based on news reports, rating agency information and direct dialogue with customers. Counterparties that are determined to be of a higher risk are evaluated to assess whether the payment terms previously granted to them should be modified. We also continuously monitor payment levels from customers, and a provision for estimated uncollectible amounts is maintained based on historical experience and any specific customer collection issues that have been identified. While such uncollectible amounts have historically been within our expectations and related reserve balances, if there is a significant change in uncollectible amounts in the future or the financial condition of our counterparties across various industries or geographies deteriorates further, additional reserves may be required.

Critical Accounting Policies

Our consolidated financial statements are prepared in accordance with GAAP, which require management to make estimates, judgments and assumptions that affect the amounts reported in the consolidated financial statements and the accompanying notes. Management considers an accounting policy to be critical if it is important to our financial condition and results of operations and if it requires significant judgment and estimates on the part of management in its application. The development and selection of these critical accounting policies have been determined by our management. Due to the significant judgment involved in selecting certain of the assumptions used in these areas, it is possible that different parties could choose different assumptions and reach different conclusions. We consider the policies related to the following matters to be critical accounting policies: (a) gross versus net revenue recognition; (b) impairment of goodwill; and (c) income taxes.

The following discussion is an update to the discussion in our Annual Report regarding our critical accounting policies related to the impairment of goodwill. For additional information about our other critical accounting policies and our significant accounting policies, see “Item 7—MD&A—Critical Accounting Policies” and “Note 1” to our audited consolidated financial statements in our Annual Report.

Impairment of Goodwill

Goodwill is tested annually for impairment during the fourth quarter or earlier upon the occurrence of certain events or substantive changes in circumstances that indicate goodwill is more likely than not impaired.

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AOL INC.

PART I - ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

These indicators include a sustained, significant decline in our stock price; a decline in our expected future cash flows; significant disposition activity; a significant adverse change in the economic or business environment; and the testing for recoverability of a significant asset group, among others. The occurrence of these indicators could have a significant impact on the recoverability of goodwill and could have a material impact on our accompanying consolidated financial statements.

The testing of goodwill for impairment is required to be performed at the level referred to as the reporting unit. Based on how management evaluates the business, we concluded that we have four reporting units for purposes of the goodwill impairment test; the Brand Group, the Membership Group, AOL Networks and Patch. There are no components below these four reporting units for which discrete financial information is available and regularly reviewed by segment management. Different judgments relating to the determination of reporting units could significantly affect the testing of goodwill for impairment and the amount of any impairment recognized.

Goodwill impairment is determined using a two-step process. The first step involves a comparison of the estimated fair value of a reporting unit to its carrying amount, including goodwill. If the estimated fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not impaired and the second step of the impairment test is not necessary. If the carrying amount of a reporting unit exceeds its estimated fair value, then the second step of the goodwill impairment test must be performed. To measure the amount of impairment loss, if any, we determine the implied fair value of goodwill in the same manner as the amount of goodwill recognized in a business combination. Specifically, the estimated fair value of the reporting unit is allocated to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the price paid to acquire the reporting unit. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess.

As part of our continuing effort to reduce our expenses and invest in areas of strategic focus, on August 15, 2013, we approved a restructuring plan for our Patch operations. We determined that the restructuring of our Patch operations constituted a substantive change in circumstances that could potentially reduce the fair value of the Patch reporting unit below its carrying amount. Accordingly, we tested the Patch reporting unit for impairment as of the interim testing date.

We determined the fair value for Patch using an income approach, specifically a discounted cash flow (“DCF”) method. Determining the fair value of a reporting unit requires the exercise of significant judgment, including judgments about the appropriate discount rates, terminal growth rates, weighted average costs of capital and the amount and timing of expected future cash flows. The judgments used in determining the fair value of Patch are based on significant unobservable inputs which causes the determination of the implied fair value of goodwill to fall within level three of the GAAP fair value hierarchy. The cash flows employed in the DCF analysis are based on our most recent budgets, forecasts and business plans as well as various growth rate assumptions for years beyond the current business plan period. Discount rate assumptions are based on an assessment of the risk inherent in the future revenue streams and cash flows of the reporting unit. The discount rate utilized in the analysis performed was 20.5% and a constant terminal growth rate was used in the DCF analysis of 3%. Due to these significant judgments used in the DCF analysis, the fair value of the Patch reporting unit determined in connection with the goodwill impairment test may not necessarily be indicative of the actual value that would be recognized in future transactions.

Based on our goodwill impairment analysis as of the interim testing date, the carrying value of the Patch reporting unit exceeded its fair value. Accordingly, step two of the goodwill impairment test was performed,

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AOL INC.

PART I - ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

where we used a third party valuation specialist to assist us in determining the estimated fair value of Patch’s assets and liabilities. Determining the fair value of these assets and liabilities in the step two evaluation requires significant judgment, including judgments about appropriate discount rates and Patch’s estimated future cash flows, which are subject to change. As a result of our step two evaluation, we recorded a goodwill impairment charge of $17.5 million during the third quarter of 2013.

Recent Accounting Standards Impacting Future Periods

In March 2013, new guidance was issued related to accounting for the cumulative translation adjustment upon derecognition of certain subsidiaries or groups of assets within a foreign entity or of an investment in a foreign entity. The new guidance clarifies that companies are required to apply the guidance in the foreign currency accounting subtopic to release any related cumulative translation adjustment into net income. The guidance also applies to businesses acquired in stages (step-acquisitions).

The new guidance will become effective for us in January 2014. We do not expect the new guidance to have a material impact on the way we currently release cumulative translation adjustments into net income upon disposition or deconsolidation of a subsidiary.

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AOL INC.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in market risk from the information provided in Part II, Item 7A. “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the year ended December 31, 2012.

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AOL INC.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that the information we are required to disclose in our financial reports is recorded, processed, summarized and reported within the time periods specified by the SEC rules and forms, and that such information is accumulated and communicated to senior management, as appropriate, to allow timely decisions regarding required disclosure. Management is responsible for establishing and maintaining effective disclosure controls and procedures, as defined under Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2013. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2013, at a reasonable assurance level.

Changes to Internal Control Over Financial Reporting

We have evaluated the changes in our internal control over financial reporting that occurred during the three and nine months ended September 30, 2013 and concluded that there have not been any changes that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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AOL INC.

ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited; In millions, except per share amounts)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
Revenues:
Advertising	$	386.0	$	340.0	$	1,106.4	$	1,007.9
Subscription		161.6		173.5		493.4		531.1
Other		13.7		18.2		41.1		53.2
Total revenues		561.3		531.7		1,640.9		1,592.2
Costs of revenues		418.6		382.3		1,211.6		1,163.1
General and administrative		78.2		97.2		237.6		301.2
Amortization of intangible assets		11.1		9.0		29.7		28.6
Restructuring costs		19.0		0.4		28.1		7.7
Goodwill impairment charge		17.5		-		17.5		-
Income from licensing of intellectual property		-		-		-		(96.0)
(Gain) loss on disposal of assets, net		0.2		(0.3)		(2.1)		(946.1)
Operating income		16.7		43.1		118.5		1,133.7
Other income (loss), net		(2.1)		2.0		(5.6)		9.3
Income from operations before income taxes		14.6		45.1		112.9		1,143.0
Income tax provision		13.1		24.4		57.8		130.7
Net income	$	1.5	$	20.7	$	55.1	$	1,012.3
Net (income) loss attributable to noncontrolling interests		0.5		0.1		1.3		0.4
Net income attributable to AOL Inc.	$	2.0	$	20.8	$	56.4	$	1,012.7
Per share information attributable to AOL Inc. common stockholders:
Basic net income per common share	$	0.03	$	0.22	$	0.73	$	10.82
Diluted net income per common share	$	0.02	$	0.22	$	0.69	$	10.64
Shares used in computing basic income per common share		77.3		92.6		77.1		93.6
Shares used in computing diluted income per common share		81.2		96.0		81.4		95.2
Cash dividends declared per common share	$	-	$	5.15	$	-	$	5.15
Comprehensive income attributable to AOL Inc.:
Comprehensive income	$	1.7	$	22.6	$	49.8	$	1,000.0
Comprehensive (income) loss attributable to noncontrolling interests		0.5		0.1		3.7		0.6
Comprehensive income attributable to AOL Inc.	$	2.2	$	22.7	$	53.5	$	1,000.6

See accompanying notes.

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AOL INC.

ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS

(In millions, except per share amounts)

	September 30, 2013			December 31, 2012
	(unaudited)
Assets
Current assets:
Cash and equivalents	$	168.2		$	466.6
Accounts receivable, net of allowances of $7.8 and $6.6, respectively		385.9			351.9
Prepaid expenses and other current assets		30.8			28.5
Deferred income taxes, net		47.2			40.6
Total current assets		632.1			887.6
Property and equipment, net		454.6			478.3
Goodwill		1,360.0			1,084.1
Intangible assets, net		221.7			133.2
Long-term deferred income taxes, net		113.6			148.8
Other long-term assets		75.3			65.3
Total assets	$	2,857.3		$	2,797.3
Liabilities, Redeemable Noncontrolling Interest and Equity
Current liabilities:
Accounts payable	$	109.2		$	76.1
Accrued compensation and benefits		96.2			151.4
Accrued expenses and other current liabilities		154.7			175.3
Deferred revenue		68.9			57.8
Current portion of obligations under capital leases		52.3			49.6
Total current liabilities		481.3			510.2
Long-term portion of obligations under capital leases		42.7			56.3
Long-term deferred income taxes		4.6			5.8
Other long-term liabilities		84.8			73.8
Total liabilities		613.4			646.1
Commitments and contingencies (see Note 10)
Redeemable noncontrolling interest (see Note 1)		10.2			13.4
Equity:
Common stock, $0.01 par value, 111.9 million shares issued and 77.9 million shares outstanding as of September 30, 2013 and 110.1 million shares issued and 76.6 million shares outstanding as of December 31, 2012		1.1			1.1
Additional paid-in capital		3,568.6			3,457.5
Accumulated other comprehensive income (loss), net		(297.0	)		(294.1	)
Accumulated deficit		(129.6	)		(188.0	)
Treasury stock, at cost, 34.0 million shares as of September 30, 2013 and 33.5 million shares as of December 31, 2012		(910.3	)		(838.4	)
Total stockholders’ equity		2,232.8			2,138.1
Noncontrolling interest		0.9			(0.3	)
Total equity		2,233.7			2,137.8
Total liabilities, redeemable noncontrolling interest and equity	$	2,857.3		$	2,797.3

See accompanying notes.

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AOL INC.

ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited; In millions)

	Nine Months Ended September 30,
	2013			2012
Operating Activities
Net income	$	55.1		$	1,012.3
Adjustments for non-cash and non-operating items:
Depreciation and amortization		127.1			134.2
Asset impairments and write-offs		30.4			3.0
(Gain) loss on step acquisition and disposal of assets, net		(1.1	)		(958.7	)
Equity-based compensation		31.4			28.3
Deferred income taxes		31.5			103.0
Other non-cash adjustments		4.5			(3.2	)
Changes in operating assets and liabilities, net of acquisitions		(50.0	)		(30.0	)
Cash provided by operating activities		228.9			288.9
Investing Activities
Investments and acquisitions, net of cash acquired		(336.9	)		(10.3	)
Proceeds from disposal of assets, net		1.1			951.5
Capital expenditures and product development costs		(52.7	)		(49.0	)
Cash (used) provided by investing activities		(388.5	)		892.2
Financing Activities
Repurchase of common stock (see Note 7)		(102.2	)		(698.7	)
Principal payments on capital leases		(44.5	)		(41.1	)
Tax withholdings related to net share settlements of restricted stock units		(13.3	)		(6.3	)
Proceeds from exercise of stock options		22.7			26.1
Other financing activities		0.8			0.3
Cash used by financing activities		(136.5	)		(719.7	)
Effect of exchange rate changes on cash and equivalents		(2.3	)		(1.8	)
(Decrease) increase in cash and equivalents		(298.4	)		459.6
Cash and equivalents at beginning of period		466.6			407.5
Cash and equivalents at end of period	$	168.2		$	867.1
Supplemental disclosures of cash flow information
Cash paid for interest	$	4.2		$	4.5
Cash paid for income taxes	$	9.9		$	9.2

See accompanying notes.

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AOL INC.

ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED STATEMENTS OF EQUITY

(Unaudited; In millions)

	Common Stock					Additional Paid-In Capital		Accumulated Other Comprehensive Income (Loss), Net		Accumulated Deficit			Treasury Stock, at Cost		Non- Controlling Interest		Total Equity
	Shares			Amount
Balance at December 31, 2011		94.3		$	1.1	$	3,422.4	$	(287.5)	$	(789.8)		$	(173.6)	$	-	$	2,172.6
Net income (loss)		-			-		-		-		1,012.7			-		(0.3)		1,012.4
Unrealized gain on equity method investments		-			-		-		0.4		-			-		-		0.4
Foreign currency translation adjustments		-			-		-		(12.5)		-			-		-		(12.5)
Comprehensive income (loss)		-			-		-		(12.1)		1,012.7			-		(0.3)		1,000.3
Amounts related to equity-based compensation, net of tax withholdings		-			-		26.9		-		-			-		-		26.9
Issuance of common stock		2.2			-		26.1		-		-			-		-		26.1
Repurchase of common stock		(6.4)			-		(522.4)		-		-			(176.3)		-		(698.7)
Dividends declared		-			-		-		-		(445.1)			-		-		(445.1)
Balance at September 30, 2012		90.1		$	1.1	$	2,953.0	$	(299.6)	$	(222.2)		$	(349.9)	$	(0.3)	$	2,082.1
Balance at December 31, 2012		76.6		$	1.1	$	3,457.5	$	(294.1)	$	(188.0)		$	(838.4)	$	(0.3)	$	2,137.8
Net income (loss)		-			-		-		-		56.4			-		(0.9)		55.5
Unrealized gain on equity method investments		-			-		-		0.1		-			-		-		0.1
Foreign currency translation adjustments		-			-		-		(3.0)		-			-		(0.1)		(3.1)
Comprehensive income (loss)		-			-		-		(2.9)		56.4			-		(1.0)		52.5
Contributions from noncontrolling interest owners		-			-		-		-		-			-		2.2		2.2
Amounts related to equity-based compensation, net of tax withholdings (see Note 7)		-	��		-		23.5		-		-			-		-		23.5
Issuance of common stock		4.2			-		53.7		-		-			64.2		-		117.9
Repurchase of common stock		(2.9)			-		33.9		-		-			(136.1)		-		(102.2)
Other		-			-		-		-		2.0			-		-		2.0
Balance at September 30, 2013		77.9		$	1.1	$	3,568.6	$	(297.0)	$	(129.6	)	$	(910.3)	$	0.9	$	2,233.7

See accompanying notes.

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AOL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1—DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business

For a description of the business of AOL Inc. (“AOL” or the “Company”), see “Note 1” to the Company’s audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 (the “Annual Report”).

Basis of Presentation

Basis of Consolidation

The consolidated financial statements include 100% of the assets, liabilities, revenues, expenses and cash flows of AOL and all voting interest entities in which AOL has a controlling voting interest (“subsidiaries”) and variable interest entities in which AOL is the primary beneficiary in accordance with the consolidation accounting guidance. Intercompany accounts and transactions between consolidated companies have been eliminated in consolidation. The consolidated balances of the Company’s variable interest entities are not material to the Company’s consolidated financial statements for the periods presented.

The financial position and operating results of the majority of AOL’s foreign operations are consolidated using the local currency as the functional currency. Local currency assets and liabilities are translated at the rates of exchange on the balance sheet date, and local currency revenues and expenses are translated at average rates of exchange during the period. Resulting translation gains or losses are included in the consolidated balance sheet as a component of accumulated other comprehensive income (loss), net and in the consolidated statement of comprehensive income (loss) as a component of comprehensive income (loss).

Redeemable Noncontrolling Interest

The noncontrolling interest in a joint venture between Mitsui & Company Ltd. and AOL (“Ad.com Japan”) is classified outside of permanent equity in the Company’s consolidated balance sheet for all periods presented due to a redemption right available to the noncontrolling interest holder in the future. The noncontrolling interest holder’s right to redeem its stock is exercisable any time between July 1 and July 30 of any year, commencing with July 1, 2014. Net income in the consolidated statements of comprehensive income (loss) reflects 100 percent of the results of Ad.com Japan for all periods presented as the Company has a controlling interest in the entity. Net income is subsequently adjusted to exclude AOL’s noncontrolling interests to arrive at net income attributable to AOL Inc.

Use of Estimates

The preparation of the financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates, judgments and assumptions that affect the amounts reported in the consolidated financial statements and footnotes thereto. Actual results could differ from those estimates. Significant estimates inherent in the preparation of the consolidated financial statements include asset impairments, reserves established for doubtful accounts, equity-based compensation, depreciation and amortization, business combinations, income taxes, litigation matters and contingencies.

Interim Financial Statements

The interim consolidated financial statements are unaudited; however, in the opinion of management, they contain all the adjustments (consisting of those of a normal recurring nature) considered necessary to present

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AOL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

fairly the financial position, the results of operations and cash flows for the periods presented in conformity with GAAP applicable to interim periods. The interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements of AOL in the Annual Report.

Cash and Equivalents

Cash equivalents primarily consist of highly liquid short-term investments with an original maturity of three months or less, which include money market accounts and bank deposits that are readily convertible into cash. Cash equivalents are carried at cost plus accrued interest, which approximates fair value. These are included within cash and cash equivalents as level one fair value measurements.

NOTE 2—INCOME (LOSS) PER COMMON SHARE

Basic income per common share is calculated by dividing net income attributable to AOL common stockholders by the weighted average number of shares of common stock outstanding during the reporting period. Diluted income per common share is calculated to give effect to all potentially dilutive common shares that were outstanding during the reporting period. The dilutive effect of outstanding equity-based compensation awards is reflected in diluted income per common share by application of the treasury stock method, only in periods in which such effect would have been dilutive for the period.

For each of the three and nine months ended September 30, 2013, the Company had 1.2 million of weighted-average potentially dilutive common shares that were not included in the computation of diluted earnings per share because to do so would be anti-dilutive for that period. For the three and nine months ended September 30, 2012, the Company had 1.0 million and 5.1 million, respectively, of weighted-average potentially dilutive common shares that were not included in the computation of diluted earnings per share because to do so would be anti-dilutive for that period.

The following table is a reconciliation of basic and diluted net income attributable to AOL common stockholders per common share (in millions, except per share amounts):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
Net income attributable to AOL Inc. common stockholders	$	2.0	$	20.8	$	56.4	$	1,012.7
Shares used in computing basic income per common share		77.3		92.6		77.1		93.6
Dilutive effect of equity-based awards		3.9		3.4		4.3		1.6
Shares used in computing diluted income per common share		81.2		96.0		81.4		95.2
Basic net income per common share	$	0.03	$	0.22	$	0.73	$	10.82
Diluted net income per common share	$	0.02	$	0.22	$	0.69	$	10.64

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AOL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3—GOODWILL

A summary of changes in the Company’s goodwill during the nine months ended September 30, 2013 is as follows (in millions):

	December 31, 2012		Acquisitions		Dispositions		Impairments		Translation Adjustments		September 30, 2013
Brand Group
Gross Goodwill	$	282.2	$	1.6	$	(0.2)	$	-	$	-	$	283.6
Net Goodwill		282.2		1.6		(0.2)		-		-		283.6
Membership Group
Gross Goodwill		604.2		-		-		-		0.2		604.4
Net Goodwill		604.2		-		-		-		0.2		604.4
AOL Networks
Gross Goodwill		180.2		296.4		(3.5)		-		(1.1)		472.0
Net Goodwill		180.2		296.4		(3.5)		-		(1.1)		472.0
Patch
Gross Goodwill		17.5		-		-		-		-		17.5
Impairments		-		-		-		(17.5)		-		(17.5)
Net Goodwill		17.5		-		-		(17.5)		-		-
Corporate and Other
Gross Goodwill		35,625.1		-		-		-		-		35,625.1
Impairments		(35,625.1)		-		-		-		-		(35,625.1)
Net Goodwill		-		-		-		-		-		-
Consolidated
Gross Goodwill		36,709.2		298.0		(3.7)		-		(0.9)		37,002.6
Impairments		(35,625.1)		-		-		(17.5)		-		(35,642.6)
Net Goodwill	$	1,084.1	$	298.0	$	(3.7)	$	(17.5)	$	(0.9)	$	1,360.0

The increase in goodwill for the nine months ended September 30, 2013 was due primarily to the acquisition of adap.tv, Inc., a Delaware corporation, (“Adap.tv”) during the third quarter of 2013. See “Note 4” for additional information on this acquisition.

Interim Impairment Testing of Goodwill

As discussed in more detail in “Note 1” to the Company’s audited consolidated financial statements in the Annual Report, goodwill is tested annually for impairment during the fourth quarter or earlier upon the occurrence of certain events or substantive changes in circumstances that indicate goodwill is more likely than not impaired. In connection with the annual goodwill impairment analysis performed during the fourth quarter of 2012, the Company determined that the fair value of each of its reporting units exceeded its respective book value, and therefore no goodwill impairment charge was recorded in 2012. During the first and second quarters of 2013, the Company concluded that no events or changes in circumstances had occurred that indicated goodwill was more likely than not impaired.

However, as part of the Company’s continuing effort to reduce its expenses and invest in areas of strategic focus, on August 15, 2013, the Company approved a restructuring plan for its Patch operations. The Company

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AOL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

determined that the restructuring of its Patch operations constituted a substantive change in circumstances that could potentially reduce the fair value of the Patch reporting unit below its carrying amount. Accordingly, the Company tested the Patch reporting unit goodwill and other long-lived assets for impairment as of August 31, 2013 (the “interim testing date”). As a result of the long-lived asset impairment test, the Company recorded a $7.5 million impairment of internal-use software related to Patch.

For the goodwill impairment analysis, the Company determined the fair value for the Patch reporting unit using an income approach, specifically a discounted cash flow (“DCF”) method. Determining the fair value of a reporting unit requires the exercise of a significant judgment, including judgments about the appropriate discount rates, terminal growth rates, weighted average costs of capital and the amount and timing of expected future cash flows. The judgments used in determining the fair value of Patch are based on significant unobservable inputs which causes the determination of the implied fair value of goodwill to fall within level three of the GAAP fair value hierarchy. The cash flows employed in the DCF analysis are based on the most recent budgets, forecasts and business plans as well as various growth rate assumptions for years beyond the current business plan period. Discount rate assumptions are based on an assessment of the risk inherent in the future revenue streams and cash flows of the reporting unit. The discount rate utilized in the analysis performed was 20.5% and a constant terminal growth rate was used in the DCF analysis of 3%. Due to these significant judgments used in the DCF analysis, the fair value of the Patch reporting unit determined in connection with the goodwill impairment test may not necessarily be indicative of the actual value that would be recognized in future transactions.

Based on the goodwill impairment analysis as of the interim testing date, the carrying value of the Patch reporting unit exceeded its fair value. Accordingly, step two of the goodwill impairment test was performed, where the Company used a third party valuation specialist to assist us in determining the estimated fair value of Patch’s assets and liabilities. Determining the fair value of these assets and liabilities in the step two evaluation requires significant judgment, including judgments about appropriate discount rates and Patch’s estimated future cash flows, which are subject to change. As a result of the step two evaluation, the Company recorded a goodwill impairment charge of $17.5 million during the third quarter of 2013.

NOTE 4—BUSINESS ACQUISITIONS, DISPOSITIONS AND OTHER SIGNIFICANT TRANSACTIONS

Acquisition of Adap.tv

On September 5, 2013, the Company acquired Adap.tv for a purchase price of $405 million, subject to a working capital adjustment (which is currently estimated to increase the total consideration paid to $410 million). The consideration paid to acquire Adap.tv consisted of $329.6 million in cash, net of cash acquired, and 2.4 million shares of AOL common stock with a fair value of $80.8 million based on AOL’s closing stock price on the closing date. Adap.tv is an online video advertising company whose advertising technology platform provides advertisers and publishers the ability to buy and sell video advertising inventory across desktop, mobile, and connected TV platforms. This acquisition is expected to enhance the Company’s offerings to publishers and advertisers, and this expectation along with market conditions at the time of acquisition contributed to a purchase price that resulted in the allocation of a significant portion of the purchase price to goodwill. The results of operations of Adap.tv will be reflected within the AOL Networks segment.

In connection with the acquisition, the Company replaced unvested in-the-money options held by Adap.tv employees under the Adap.tv Stock Incentive Plan (the “Adap.tv Plan”) with unvested AOL restricted stock of

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

$35.6 million in fair value. Of the total fair value, $10.8 million was attributable to pre-acquisition service and included in the purchase price, bringing the total purchase price of Adap.tv for accounting purposes to $421.2 million. The remaining $24.8 million of restricted stock is expected to be recognized as equity-based compensation expense over the remaining award vesting periods.

AOL preliminarily recorded $296.4 million of goodwill (which is not deductible for tax purposes) and $118.6 million of intangible assets associated with this acquisition. The intangible assets associated with this acquisition consist of technology, advertiser and publisher relationships, and trade names, all of which will be amortized on a straight-line basis over a period of five years. The assets and liabilities recorded for the acquisition of Adap.tv were based on preliminary valuations and the estimates and assumptions are subject to change as the Company obtains additional information during the measurement period.

Unaudited pro forma results of operations assuming this acquisition had taken place at the beginning of each period are not provided because the historical operating results of Adap.tv were not significant and pro forma results would not be significantly different from reported results for the periods presented.

Dispositions

During the first quarter of 2013, the Company disposed of controlling interests in both StudioNow and about.me in two separate transactions. In aggregate, the Company recorded a gain of $2.2 million on these transactions which is included in gain on disposal of assets in the Company’s statement of comprehensive income (loss). The retained interests held by the Company in StudioNow and about.me are being accounted for under the cost method as the Company does not exercise significant influence over either business. Due to the Company’s significant continuing involvement with each of the disposed entities, these dispositions did not meet the criteria to be classified as discontinued operations in the Company’s financial statements.

NOTE 5—LONG-TERM DEBT AND OTHER FINANCING ARRANGEMENTS

Revolving Credit Facility

On July 1, 2013, AOL entered into a $250 million senior secured revolving credit facility agreement (the “Credit Facility Agreement”), together with the lenders named therein and JPMorgan Chase Bank, N.A., as administrative agent. Under the terms of the Credit Facility Agreement, AOL may request an increase in the commitments of up to an additional $250 million with commitments from either new lenders or increased commitments from existing lenders, subject to the satisfaction of certain conditions. The Credit Facility Agreement is guaranteed by all of AOL’s material domestic subsidiaries, as defined in the Credit Facility Agreement, and substantially all of the property and assets of AOL have been pledged as collateral, subject to customary exceptions.

Interest on borrowings under the Credit Facility Agreement is payable at rates per annum equal to, at the option of AOL: (1) a fluctuating base rate equal to JPMorgan’s adjusted base rate (“ABR”) plus the applicable margin, or (2) a periodic fixed rate equal to the Eurodollar rate plus the applicable margin. The ABR will be the highest of (i) the federal funds rate plus 0.5 percent, (ii) JPMorgan’s publicly announced prime rate, and (iii) one-month LIBOR plus 1.0 percent. The applicable margin relating to any Eurodollar loan is 2.0% and the applicable margin relating to any ABR loan is 1.0%. AOL is required to pay a commitment fee based on the unused portion of the commitments under the Credit Facility Agreement.

The Credit Facility Agreement contains various affirmative, negative and financial covenants. Financial covenants in the agreement include a ratio of debt (net of unrestricted cash up to an agreed cap) to EBITDA and a

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AOL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

ratio of EBITDA to interest expense. The debt to EBITDA ratio must not exceed a specified maximum. The EBITDA to interest expense ratio requires the Company to meet or exceed a specified minimum. Each of the above ratios are tested at the end of each fiscal quarter and measured on a rolling four-quarter basis. To date, the Company is in compliance with its covenants under the Credit Facility Agreement.

All amounts outstanding under the Credit Facility Agreement will be due and payable on July 1, 2018, and the commitments thereunder will terminate on such date. The Company intends to use borrowings under the Credit Facility Agreement for general corporate purposes. No amounts have been borrowed under the Credit Facility Agreement to date.

NOTE 6—INCOME TAXES

The Company recorded pre-tax income from operations of $14.6 million and related income tax expense of $13.1 million, which resulted in an effective tax rate of 89.7% for the three months ended September 30, 2013, as compared to an effective tax rate of 54.1% for the three months ended September 30, 2012. The effective tax rate for the three months ended September 30, 2013 differed from the statutory U.S. federal income tax rate of 35.0% primarily due to the tax impact of the goodwill impairment charge, the foreign losses that did not produce a tax benefit and the size of these items relative to the Company’s pre-tax income. The effective tax rate for the three months ended September 30, 2012 differed from the statutory U.S. federal income tax rate of 35.0% primarily due to the tax impact of foreign losses that did not produce a tax benefit.

The Company recorded pre-tax income from operations of $112.9 million and related income tax expense of $57.8 million, which resulted in an effective tax rate of 51.2% for the nine months ended September 30, 2013, as compared to an effective tax rate of 11.4% for the nine months ended September 30, 2012. The effective tax rate for the nine months ended September 30, 2013 differed from the statutory U.S. federal income tax rate of 35.0% primarily due to the impact of foreign losses that did not produce a tax benefit. The effective tax rate for the nine months ended September 30, 2012 differed substantially from the statutory U.S. federal income tax rate of 35.0% primarily due to the tax impact of the patent transaction with Microsoft in June 2012 and foreign losses that did not produce a tax benefit.

NOTE 7—STOCKHOLDERS’ EQUITY

AOL is authorized to issue up to 660 million shares of all classes of stock, consisting of 60 million shares of preferred stock, par value $0.01 per share (“Preferred Stock”), and 600 million shares of common stock, par value $0.01 per share. In August 2012, in connection with the Tax Asset Protection Plan, AOL filed a Certificate of Designation to its Amended and Restated Certificate of Incorporation creating a series of approximately 0.1 million shares of Preferred Stock designated as Series A Junior Participating Preferred Stock, par value $0.01 per share (the “Series A Preferred Stock”). The Series A Preferred Stock has the voting and such other rights as provided for in the Certificate of Designation. Rights and privileges associated with shares of Preferred Stock are subject to authorization by the Company’s Board of Directors (the “Board”) and may differ from those of any and all other series at any time outstanding. All shares of common stock will be identical and will entitle the holders thereof to the same rights and privileges.

During the nine months ended September 30, 2013, the Company recorded a $23.5 million increase to additional paid-in capital as a result of equity-based compensation transactions. Included in this amount was $33.7 million related to expense incurred under AOL’s equity-based compensation plan, which includes $2.2 million recorded within restructuring costs related to the vesting of certain equity awards granted to the Company’s former chief operating officer upon his departure in the first quarter of 2013, as well as an offsetting reduction of $10.2 million related to tax withholdings on the vesting of restricted stock units (“RSUs”).

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AOL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Accelerated Stock Repurchase Agreement

On August 26, 2012, the Company entered into a fixed dollar collared accelerated stock repurchase agreement with Barclay’s Capital Inc. (“Barclays”), as agent for Barclays Bank PLC, effective August 27, 2012 (the “ASR Agreement”). Under the ASR Agreement, on August 30, 2012, the Company paid $654.1 million from cash on hand to Barclays to repurchase outstanding shares of common stock. On April 22, 2013, the repurchase program under the ASR Agreement was completed. No shares were repurchased under the ASR Agreement during 2013.

Since the final volume-weighted average price of the Company’s stock was above the adjusted cap price established under the ASR Agreement, no additional shares were delivered upon completion of the program. The total amount of shares repurchased by the Company under the ASR Agreement was 18.4 million shares at a cap price of $32.69. The $654.1 million is reflected within treasury stock in the Company’s consolidated balance sheet as of September 30, 2013.

2013 Stock Repurchase Programs

On February 8, 2013, the Company announced that the Board approved a stock repurchase program (“Original Repurchase Program”), which authorizes us to repurchase up to $100 million of outstanding shares of AOL common stock from time to time over the twelve months following the announcement of the Original Repurchase Program. Repurchases are subject to market conditions, share price and other factors. Repurchases will be made in accordance with applicable securities laws in the open market, in block trades, pursuant to pre-arranged trading plans, private transactions, and may include derivative transactions. The Original Repurchase Program may be suspended or discontinued at any time.

Concurrent with the closing of the Credit Facility Agreement, on July 8, 2013, the Company announced that the Board approved a new stock repurchase program (the “New Repurchase Program”), which authorizes the Company to repurchase up to $150 million of outstanding shares of AOL common stock from time to time over the twelve months following the announcement of the New Repurchase Program. Repurchases are subject to market conditions, share price and other factors. The repurchases may be made in accordance with applicable securities laws in the open market, in block trades, pursuant to pre-arranged trading plans or otherwise and may include derivative transactions. The New Repurchase Program may be suspended or discontinued at any time. The New Repurchase Program does not affect in any way the terms of the Original Repurchase Program.

As of September 30, 2013, the Company repurchased a total of 2.9 million shares under these programs at a weighted-average price of $34.80 per share (approximately $102.2 million).

NOTE 8—EQUITY-BASED COMPENSATION

Acquisition of Adap.tv

In connection with the acquisition of Adap.tv, the Company replaced unvested in-the-money options held by Adap.tv employees under the Adap.tv Plan with approximately 1.1 million shares of unvested AOL restricted stock and a fair value of $35.6 million in aggregate. Of the total fair value, $10.8 million related to pre-acquisition service was included in the purchase price, and the remaining $24.8 million is expected to be recognized as equity-based compensation expense over the remaining award vesting periods. In addition, the Company also issued to Adap.tv employees approximately 0.3 million shares of unvested AOL restricted stock and a fair value of 10.5 million in aggregate. The fair value of these awards is expected to be recognized as equity-based compensation expense over the vesting period of 4 years.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Equity-Based Compensation Expense

Compensation expense recognized by AOL related to its equity-based compensation plans is as follows (in millions):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
Stock options	$	2.8	$	4.7	$	8.6	$	13.5
Restricted stock, RSUs and PSUs		8.5		6.4		21.4		14.8
Employee Stock Purchase Program		0.5		-		1.4		-
Total equity-based compensation expense	$	11.8	$	11.1	$	31.4	$	28.3
Tax benefit recognized	$	4.6	$	4.4	$	12.3	$	11.2

As of September 30, 2013, the Company had 7.2 million stock options and 3.9 million restricted stock, RSUs and Performance Stock Units (PSUs) outstanding to employees, advisors and non-employee directors. The weighted-average exercise price of the stock options and the weighted-average grant date fair value of the restricted stock, RSUs and PSUs outstanding as of September 30, 2013 were $21.43 and $31.50, respectively.

As of September 30, 2013, total unrecognized compensation cost related to unvested AOL stock option awards was $21.5 million and is expected to be recognized over a weighted-average period of approximately 2.3 years. Total unrecognized compensation cost as of September 30, 2013 related to unvested restricted stock, RSUs and PSUs was $79.3 million and is expected to be recognized over a weighted-average period of approximately 2.5 years. To the extent the actual forfeiture rate is different from what the Company has estimated, equity-based compensation expense related to these awards will be different from the Company’s expectations.

AOL Stock Options

The assumptions presented in the table below represent the weighted-average value of the applicable assumption used to value AOL stock options at their grant date for stock options granted during the periods presented:

	Nine Months Ended September 30,
	2013		2012
Expected volatility		37.4%		39.1%
Expected term to exercise from grant date		5.03 years		5.10 years
Risk-free rate		1.0%		1.1%
Expected dividend yield		0.0%		0.0%

NOTE 9—RESTRUCTURING COSTS

As part of the Company’s continuing effort to reduce its expenses and invest in areas of strategic focus, on August 15, 2013, the Company approved a restructuring plan for its Patch operations. As a result of this restructuring plan and other efforts to align the Company’s organizational structure with its strategy, the Company incurred restructuring charges of $19.0 million and $28.1 million for the three and nine months ended September 30, 2013, respectively.

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AOL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

A summary of AOL’s restructuring activity for the nine months ended September 30, 2013 is as follows (in millions):

	Employee Terminations		Other Exit Costs		Total
Liability at December 31, 2012	$	1.4	$	2.6	$	4.0
Restructuring expense		28.4		(0.3)		28.1
Foreign currency translation and other adjustments		(1.5)		0.1		(1.4)
Cash paid		(15.0)		(1.3)		(16.3)
Liability at September 30, 2013	$	13.3	$	1.1	$	14.4

At September 30, 2013, of the remaining liability of $14.4 million, $13.6 million was classified as a current liability within accrued expenses and other current liabilities, with the remaining $0.8 million classified within other long-term liabilities in the consolidated balance sheet. Amounts classified as long-term are expected to be paid through 2016.

NOTE 10—COMMITMENTS AND CONTINGENCIES

Commitments

For a description of AOL’s commitments see “Note 10” to the Company’s audited consolidated financial statements included in the Annual Report.

Contingencies

AOL is a party to a variety of claims, suits and proceedings that arise in the normal course of business, including actions with respect to intellectual property claims, tax matters, labor and unemployment claims, commercial claims, claims related to the Company’s business model for content creation and other matters.

With respect to tax matters, AOL has received tax assessments in certain states related to sales and use taxes on its business operations. AOL has appealed these tax assessments and plans to vigorously contest these matters. In addition, AOL has received assessments in certain foreign countries related to income tax and transfer pricing, and plans to vigorously contest these matters as well. In certain instances, the Company was required to pay a portion of the tax assessment in order to proceed with the dispute of the assessment.

In February 2013, the Company received notice that the Attorney General for the State of Florida is investigating a number of advertising companies, including Advertising.com, regarding the placement of allegedly deceptive third-party advertising on their online advertising networks. The Company is cooperating with the investigation and has responded to various information requests.

While the results of claims, suits, proceedings and investigations cannot be predicted with certainty, management does not believe that, based on current knowledge and the likely timing of resolution of the various matters, any additional reasonably possible potential losses above the amount accrued for such matters would be material to the Company’s financial statements. Regardless of the outcome, legal proceedings can have an adverse effect on the Company because of defense costs, diversion of management resources and other factors.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11—SEGMENT INFORMATION

The Company’s segments are determined based on the properties, products and services it provides and how the chief operating decision maker (“CODM”) evaluates the business. The Company’s chief executive officer is the Company’s CODM for the nine months ended September 30, 2013.

The CODM uses adjusted operating income before depreciation and amortization (“Adjusted OIBDA”) to evaluate the performance of the segments and allocate resources. Management considers Adjusted OIBDA to be the appropriate metric to evaluate and compare the ongoing operating performance of the Company’s business on a consistent basis across reporting periods, as it eliminates the effect of noncash items which the Company does not believe are indicative of its core operating performance. This measure of profit or loss is considered to be a non-GAAP measure, and may be different than similarly-titled non-GAAP financial measures used by other companies.

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AOL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Segment information for the three and nine months ended September 30, 2013 and 2012 is as follows (in millions):

	Brand Group		Membership Group		AOL Networks		Corporate and Other		Consolidated Total
Three months ended September 30, 2013:
Revenues from external customers
Advertising	$	170.6	$	37.2	$	178.2	$	-	$	386.0
Subscription		-		161.6		-		-		161.6
Other		5.5		1.6		6.6		-		13.7
Revenues from transactions with other segments		16.4		4.1		3.9		(24.4)		-
Total revenue	$	192.5	$	204.5	$	188.7	$	(24.4)	$	561.3
Adjusted OIBDA	$	10.9	$	149.8	$	(7.1)	$	(33.8)	$	119.8
Nine months ended September 30, 2013:
Revenues from external customers
Advertising	$	515.2	$	110.6	$	480.5	$	0.1	$	1,106.4
Subscription		-		493.4		-		-		493.4
Other		12.7		7.3		20.6		0.5		41.1
Revenues from transactions with other segments		44.5		18.5		8.9		(71.9)		-
Total revenue	$	572.4	$	629.8	$	510.0	$	(71.3)	$	1,640.9
Adjusted OIBDA	$	4.6	$	447.8	$	(20.9)	$	(98.1)	$	333.4
Three months ended September 30, 2012:
Revenues from external customers
Advertising	$	157.4	$	36.7	$	145.9	$	-	$	340.0
Subscription		-		173.5		-		-		173.5
Other		5.3		3.3		9.3		0.3		18.2
Revenues from transactions with other segments		14.3		7.5		3.2		(25.0)		-
Total revenue	$	177.0	$	221.0	$	158.4	$	(24.7)	$	531.7
Adjusted OIBDA	$	(9.6)	$	156.4	$	0.3	$	(46.2)	$	100.9
Nine months ended September 30, 2012:
Revenues from external customers
Advertising	$	466.1	$	118.6	$	423.0	$	0.2	$	1,007.9
Subscription		-		531.1		-		-		531.1
Other		12.2		11.5		28.5		1.0		53.2
Revenues from transactions with other segments		38.7		22.6		9.1		(70.4)		-
Total revenue	$	517.0	$	683.8	$	460.6	$	(69.2)	$	1,592.2
Adjusted OIBDA	$	(41.6)	$	474.2	$	0.9	$	(144.2)	$	289.3

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

The following table presents the Company’s reconciliation of Adjusted OIBDA to operating income (in millions):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
Operating income	$	16.7	$	43.1	$	118.5	$	1,133.7
Add: Depreciation		32.0		34.3		97.4		105.6
Add: Amortization of intangible assets		11.1		9.0		29.7		28.6
Add: Restructuring costs		19.0		0.4		28.1		7.7
Add: Equity-based compensation		11.8		11.1		31.4		28.3
Add: Asset impairments and write-offs		29.0		0.2		30.4		3.0
Add: Losses/(gains) on disposal of assets, net		0.2		(0.2)		(2.1)		(946.6)
Add: Special items		-		3.0		-		(71.0)
Adjusted OIBDA	$	119.8	$	100.9	$	333.4	$	289.3

Special items for the nine months ended September 30, 2012 include patent licensing income of $96.0 million, partially offset by costs related to the proxy contest of $8.8 million, costs related to the patent sale and return of the related proceeds to shareholders of $8.6 million and $7.6 million of expense relating to the Virginia sales tax settlement in the second quarter of 2012.

Due to the nature of the Company’s operations, a majority of its assets are utilized across all segments. In addition, segment assets are not reported to, or used by, the CODM function to allocate resources or assess performance of the Company’s segments. Accordingly, the Company has not disclosed asset information by segment.

Information about Geographical Areas

The following table presents revenues in different geographical locations (in millions):

	Three Months Ended September 30,(a)				Nine Months  Ended September 30,(a)
	2013		2012		2013		2012
United States	$	498.5	$	475.2	$	1,456.3	$	1,426.0
United Kingdom		22.7		23.5		70.8		71.1
Canada		12.7		10.7		35.4		27.7
Germany		9.7		7.3		28.0		24.4
Japan		8.1		9.8		24.4		24.7
Other international		9.6		5.2		26.0		18.3
Total international		62.8		56.5		184.6		166.2
Total	$	561.3	$	531.7	$	1,640.9	$	1,592.2

(a) Revenues are attributed to countries based on the location of customers.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

See “Part I – Item 1 – Financial Statements – Note 10 Commitments and Contingencies” for information about our legal proceedings.

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PART II. OTHER INFORMATION

ITEM 1A. RISK FACTORS

The following Risk Factor has been included as a result of the Company’s entry into a senior secured revolving credit agreement and should be read in conjunction with the Risk Factors set forth in “Item 1A—Risk Factors,” in the Annual Report.

The terms of our new revolving credit facility contain restrictive covenants which limit our business and financing activities.

The terms of our new revolving credit facility include customary covenants which impose restrictions on our business and financing activities, subject to certain exceptions or the consent of our lenders including, among other things, limits on our ability to incur additional debt, create liens, enter into merger, acquisition and divestiture transactions, pay dividends and engage in transactions with affiliates. The credit facility contains certain customary affirmative covenants, including a requirement that we maintain a maximum consolidated leverage ratio and a minimum consolidated interest coverage ratio, and customary events of default. Our ability to comply with these covenants may be adversely affected by events beyond our control, including economic, financial and industry conditions. A breach of any of the credit facility covenants, including a failure to maintain a required ratio or meet a required test, may result in an event of default. This may allow our lenders to terminate the commitments under the credit facility, declare all amounts outstanding under the credit facility (if any), together with accrued interest, to be immediately due and payable and exercise other rights and remedies. If this occurs, we may not be able to refinance the accelerated indebtedness on acceptable terms, or at all, or otherwise repay the accelerated indebtedness.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Unregistered Sales of Equity Securities

On September 5, 2013, the Company issued 2.4 million shares of AOL common stock as consideration for the acquisition of Adap.tv, Inc. The shares were issued pursuant to an exemption from the registration requirements of the Securities Act as provided by Section 4(2).

Repurchases of Equity Securities

The following is a summary of common shares repurchased by the Company under its stock repurchase program:

Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(a) (b)		Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs(a) (b)
July 1, - July 31, 2013		-	$	-		-	$	50,200,000
August 1, - August 31, 2013		-	$	-		-	$	200,200,000
September 1, - September 30, 2013		1,537,200	$	34.04		1,537,200	$	147,900,000
Total		1,537,200	$	34.04		1,537,200	$	147,900,000

(a) On February 8, 2013, we announced that the Board of Directors (the “Board”) approved a stock repurchase program (the “Original Repurchase Program”), which authorizes us to repurchase up to

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PART II. OTHER INFORMATION

$100 million of our outstanding shares of common stock from time to time over the twelve months following the announcement of the Original Repurchase Program. Repurchases are subject to market conditions, share price and other factors. Repurchases will be made in accordance with applicable securities laws in the open market, in block trades, pursuant to pre-arranged trading plans, private transactions, and may include derivative transactions. The Original Repurchase Program may be suspended or discontinued at any time.

(b) Concurrent with the closing of the Credit Facility Agreement, the Board approved a new stock repurchase program (the “New Repurchase Program”). Under the New Repurchase Program, the Board approved a new $150 million stock repurchase authorization. The repurchases may be made from time to time over the twelve months following the announcement of the New Repurchase Program, depending on market conditions, share price and other factors. The repurchases may be made in accordance with applicable securities laws in the open market, in block trades, pursuant to pre-arranged trading plans or otherwise and may include derivative transactions. The New Repurchase Program may be suspended or discontinued at any time. The New Repurchase Program does not affect in any way the terms of the Original Repurchase Program.

The approximate dollar value of shares that may yet be repurchased under these programs excludes commissions and other fees paid in relation to purchases through September 30, 2013.

ITEM 6. EXHIBITS

See the Exhibit Index immediately following the signature page of this Quarterly Report.

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SIGNATURES

Pursuant to 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 November 5, 2013.

AOL INC.
By	/s/ Karen Dykstra
Name:	Karen Dykstra
Title:	Chief Financial Officer

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EXHIBIT INDEX

Exhibit Number	Exhibit Description	Filed Herewith	Form	Exhibit	Filing Date
2.1	Agreement and Plan of Merger among AOL Inc., a Delaware Corporation and Carmel Merger Corporation, a Delaware corporation and a wholly-owned subsidiary of AOL Inc., adap.tv, Inc. and Shareholder Representative Services LLC, a Colorado limited liability company, dated as of August 5, 2013.		8-K	2.1	9/6/13
3.1	Amended and Restated Certificate of Incorporation of the Registrant filed with the Secretary of State of the State of Delaware on December 9, 2009.		8-K	3.1	12/11/09
3.2	Amended and Restated By-laws of the Registrant.		8-K	3.2	12/11/09
4.1	Specimen Common Stock Certificate of Registrant.		8-K	4.1	12/11/09
10.1	Credit Agreement among AOL Inc. as Borrower, several lenders from time to time parties thereto and JPMorgan Chase Bank, N.A., as Administrative Agent, dated July 1, 2013.	X
10.2*	Letter Agreement between AOL Inc. and Donald Rosenthal, dated June 3, 2010.	X
10.3*	Supplement to Letter Agreement between AOL Inc. and Donald Rosenthal, dated February 25, 2011.	X
10.4*	Letter Agreement between Donald Rosenthal and AOL Inc., dated June 21, 2013.	X
10.5*	Executive Employment Agreement between Robert Lord and AOL Inc., dated July 18, 2013.	X
10.6*	Separation Agreement and Release of Claims between John Reid-Dodick and AOL Inc., dated August 6, 2013.	X
10.7*	First Amendment to the Executive Employment Agreement between Curtis Brown and AOL Inc., dated August 7, 2013.	X
10.8*	Form of Notice of Grant of Performance Share Award (Revenue).	X
10.9*	Form of Notice of Grant of Segment Performance Share Units Award (Standard).	X
10.10*	adap.tv, Inc. 2007 Stock Incentive Plan.		S-8	4.4	9/6/13
31.1	Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	X

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AOL INC.

EXHIBIT INDEX

Exhibit Number	Exhibit Description	Filed Herewith	Form	Exhibit	Filing Date
31.2	Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	X
32.1	Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.†	X
101	Interactive Data Files Pursuant to Rule 405 of RegulationS-T: (i) Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2013 and 2012, (ii) Consolidated Balance Sheets as of September 30, 2013 and December 31, 2012, (iii) Consolidated Statements of Cash Flows for the nine months ended September 30, 2013 and 2012, (iv) Consolidated Statements of Equity for the nine months ended September 30, 2013 and 2012 and (v) Notes to Consolidated Financial Statements. ††	X

* Management contract or compensatory plan arrangement.

† This certification will not be deemed “filed” for purposes of Section 18 of the Exchange Act (15 U.S.C. 78r), or otherwise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act or Exchange Act, except to the extent that the Registrant specifically incorporates it by reference.

†† In accordance with Rule 406T of Regulation S-T, the information in these exhibits is furnished and deemed not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Exchange Act of 1934, and otherwise is not subject to liability under these sections and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, except as expressly set forth by specific reference in such filing.

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