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America Online
America Online




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EXHIBIT 2
America Online, Inc. User Metrics to June 30, 1995


Dec-93 Mar-94 Jun-94 Sep-94 Dec-94 Mar-95 Jun-95
...........................................................................................................................................................................................

Paid usage (hours) 1.85 2 2.1 2.27 2.46 2.73 2.93
Projected average months™ retention 30 32 32+ 34 36 39 41
Projected average lifetime revenue $443 $496 $496 $551 $612 $667 $714
Internet usage (% time) 1% 3% 4% 5% 6% 9%
...........................................................................................................................................................................................
Part 2 Business Analysis and Valuation Tools




Source: Alex Brown & Sons, Inc., August 24, 1995.
Strategy Analysis
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Strategy Analysis




EXHIBIT 3
America Online 1995 Abridged Annual Report

REPORT OF INDEPENDENT AUDITORS

Board of Directors and Stockholders
America Online, Inc.

We have audited the accompanying consolidated balance sheets of America Online, Inc.,
as of June 30, 1995 and 1994, and the related consolidated statements of operations,
changes in stockholders™ equity and cash ¬‚ows for each of the three years in the period
ended June 30, 1995. These ¬nancial statements are the responsibility of the Company™s




America Online
management. Our responsibility is to express an opinion on these ¬nancial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable assur-
ance about whether the ¬nancial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and disclosures in
the ¬nancial statements. An audit also includes assessing the accounting principles used
and signi¬cant estimates made by management, as well as evaluating the overall ¬nan-
cial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the ¬nancial statements referred to above present fairly, in all material
respects, the consolidated ¬nancial position of America Online, Inc. at June 30, 1995
and 1994, and the consolidated results of their operations and their cash ¬‚ows for each
of the three years in the period ended June 30, 1995, in conformity with generally
accepted accounting principles.
As discussed in Note 9 to the consolidated ¬nancial statements, in ¬scal 1994 the Com-
pany changed its method of accounting for income taxes. As discussed in Note 2 to the
consolidated ¬nancial statements, in ¬scal 1995 the Company changed its method of
accounting for short-term investments in certain debt and equity securities.

Ernst & Young LLP
Vienna, Virginia
August 25, 1995
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SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
(In Thousands, Except Per Share Data)

Year Ended June 30,
..................................................................................................

1995 1994 1993 1992 1991
..................................................................................................................................................
Statements of Operations
Data:
Online service revenues $358,498 $100,993 $38,462 $26,226 $19,515
Other revenues 35,792 14,729 13,522 12,527 10,646
Total Revenues 394,290 115,722 51,984 38,753 30,161
America Online




Income (loss) from operations (19,294) 4,608 1,925 3,685 1,341
Income (loss) before extraordi-
nary items (33,647) 2,550 399 2,344 1,100
Net income (loss) (1) (33,647) 2,550 1,532 3,768 1,761
Income (loss) per common
share:
Income (loss) before extra-
ordinary item $ (0.99) $ 0.07 $ 0.01 $ 0.10 $ 0.06
Net income (loss) $ (0.99) $ 0.07 $ 0.05 $ 0.17 $ 0.09
Weighted average shares
outstanding 33,986 34,208 29,286 22,828 19,304
..................................................................................................................................................


As of June 30,
..................................................................................................

1995 1994 1993 1992 1991
..................................................................................................................................................
Balance Sheet Data:
Working capital (de¬ciency) $ (456) $47,890 $10,498 $12,363 $ (966)
Total assets 406,464 154,584 39,279 31,144 11,534
Total debt 21,810 9,302 2,959 2,672 1,865
Stockholders™ equity (de¬-
ciency) 217,944 98,297 23,785 21,611 (8,623)
Other data (at ¬scal year end):
Subscribers 3,005 903 303 182 131
..................................................................................................................................................
(1) Net loss in the fiscal year ended June 30, 1995, includes charges of $50.3 million for acquired research and development and $2.2 million
for merger expenses. See Note 3 of the Notes to Consolidated Financial Statements.
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Strategy Analysis




MANAGEMENT™S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS

Overview The online services market is highly competitive.
The Company believes that existing competitors,
which include, among others, CompuServe, Prodigy
The Company has experienced a signi¬cant
and MSN, are likely to enhance their service offer-
increase in revenues over the past three ¬scal years.
ings. In addition, new competitors have announced
The higher revenues have been principally produced
plans to enter the online services market, resulting in
by increases in the Company™s subscriber base
greater competition for the Company. The competi-
resulting from growth of the online services market,
tive environment could require new pricing pro-
the introduction of a Windows version of America
grams and increased spending on marketing,
Online in the middle of ¬scal 1993, which greatly




America Online
content procurement and product development;
increased the available market for the Company™s
limit the Company™s opportunities to enter into and/
service, as well as the expansion of its services and
or renew agreements with content providers and
content. Additionally, revenues have increased as
distribution partners; limit the Company™s ability to
the average monthly revenue per subscriber has
grow its subscriber base; and result in increased
risen steadily during the past three years, primarily
attrition in the Company™s subscriber base. Any of
as a result of an increase in the average monthly
the foregoing events could result in an increase in
paid hours of use per subscriber.
costs as a percentage of revenues, and may have a
The Company™s online service revenues are material adverse effect on the Company™s ¬nancial
generated primarily from subscribers paying a condition and operating results.
monthly member™s fee and hourly charges based on
During September 1995, the Company modi-
usage in excess of the number of hours of usage
¬ed the components of subscriber acquisition costs
provided as part of the monthly fee. Through
deferred and will be expensing certain subscriber
December 31, 1994, the Company™s standard
acquisition cost as incurred, effective July 1, 1995.
monthly membership fee, which includes ¬ve hours
All costs capitalized before this change will continue
of service, was $9.95, with a $3.50 hourly fee for
to be amortized. The effect of this change for the
usage in excess of ¬ve hours per month. Effective
year ended June 30, 1995 (including the amortiza-
January 1, 1995, the hourly fee for usage in excess
tion of amounts capitalized as of June 30, 1994)
of ¬ve hours per month decreased from $3.50 to
would have been to increase marketing costs by
$2.95, while the monthly membership fee remained
approximately $8 million. This change will have a
unchanged at $9.95.
greater impact on the Company™s marketing costs
The Company™s other revenues are generated in ¬scal 1996, as the Company expects to signi¬-
primarily from providing new media and interactive cantly increase subscriber acquisition activity, includ-
marketing services, data network services, and mul- ing those subscriber acquisition expenditures which
timedia and CD-ROM production services. Addition- the Company will be expensing as incurred.
ally, the Company generates revenues related to
In addition, effective July 1, 1995, the Com-
online transactions and advertising, as well as
pany changed the period over which it amortizes
development and licensing fees.
subscriber acquisition cost from twelve and eighteen
In ¬scal 1995 the Company acquired RCC, months to twenty-four months. Based on the Com-
NaviSoft, BookLink, ANS, WAIS, Medior and Global pany™s historical average customer life experience,
Network Navigator, Inc. Additionally, in August the change in amortization period is being made to
1995, the Company entered into an agreement to more appropriately match subscriber acquisition
acquire Ubique. For additional information relating costs with associated online service revenues. The
to these acquisitions, refer to Notes 3 and 13 of the effect of this change in accounting estimate for the
Notes to Consolidated Financial Statements. year ended June 30, 1995 would have been to
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decrease the amount of the amortization of sub- decreased as a percentage of total revenues from
scriber acquisition costs by approximately $27 mil- 59.7% to 58.3%.
lion. While this change will thereby positively impact The increase in cost of revenues was primarily
operating margins, the Company expects that any attributable to an increase in data communication
such positive impact will be partially offset by costs, customer support costs and royalties paid to
increased investments in marketing and other busi- information and service providers. Data communi-
ness activities during ¬scal 1996 and the decision, cation costs increased primarily as a result of the
effective July 1, 1995, to expense certain subscriber larger customer base and more usage by customers.
acquisition costs as incurred. Customer support costs, which include personnel
and telephone costs associated with providing cus-
Results of Operations tomer support, were higher as a result of the larger
customer base and a large number of new sub-
America Online




Fiscal 1995 Compared to Fiscal 1994
scriber registrations. Royalties paid to information
Online Service Revenues. For ¬scal 1995, online and service providers increased as a result of a
service revenues increased from $100,993,000 to larger customer base and more usage and the
$358,498,000, or 255%, over ¬scal 1994. This Company™s addition of more service content to

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