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increase was primarily attributable to a 289% broaden the appeal of the America Online service.
increase in revenues from IBM-compatible subscrib-
The decrease in cost of revenues as a percent-
ers and a 196% increase in revenues from Macin-
age of total revenues is primarily attributable to a
tosh subscribers as a result of a 273% increase in
decrease in expenses related to marketing services
the number of IBM-compatible subscribers and a
and personnel related costs as a percentage of total
143% increase in the number of Macintosh subscrib-
revenues, partially offset by an increase in data
ers. The percentage increase in online service reve-
communication costs as a percentage of total reve-
nues in ¬scal 1995 was greater than the percentage
nues, primarily resulting from an increase in higher
increase in subscribers principally due to an
baud speed usage at a higher variable rate as well
increase in the average monthly online service reve-
as lower hourly pricing for online service revenue
nue per subscriber, which increased from $15.00 in
which became effective January 1, 1995.
¬scal 1994 to $17.10 in ¬scal 1995.
Marketing. Marketing expenses include the
Other Revenues. Other revenues, consisting
costs to acquire and retain subscribers and other
principally of new media and interactive marketing
general marketing expenses. Subscriber acquisition
services, data network services, multimedia and CD-
costs are deferred and charged to operations over a
ROM production services, and development and
twelve or eighteen month period, using the straight-
licensing fees, increased from $14,729,000 in ¬scal
line method, beginning the month after such costs
1994 to $35,792,000 in ¬scal 1995. This increase
are incurred. For additional information regarding
was primarily attributable to data network revenues
the accounting for deferred subscriber acquisition
and multimedia and CD-ROM production service
costs, refer to Note 2 of the Notes to Consolidated
revenues from companies acquired during ¬scal
Financial Statements. For ¬scal 1995, marketing
expenses increased from $23,548,000 to
Cost of Revenues. Cost of revenues includes $77,064,000, or 227%, over ¬scal 1994, and
network-related costs, consisting primarily of data decreased as a percentage of total revenues from
and voice communication costs, costs associated 20.3% to 19.5%. The increase in marketing
with operating the data center and providing cus- expenses was primarily due to an increase in the
tomer support, royalties paid to information and number and size of marketing programs to expand
service providers and other expenses related to mar- the Company™s subscriber base. The decrease in
keting and production services. For ¬scal 1995, cost marketing expenses as a percentage of total reve-
of revenues increased from $69,043,000 to nues is primarily attributable to a decrease as a per-
$229,724,000, or 233%, over ¬scal 1994, and centage of total revenues in personnel related costs.
70 Strategy Analysis

Strategy Analysis

Product Development. Product development Other Income. Other income consists primarily
costs include research and development expenses, of investment and rental income net of interest
other product development costs and the amortiza- expense. For ¬scal 1995, other income increased
tion of software costs. For ¬scal 1995, product from $1,774,000 to $3,023,000. This increase was
development expenses increased from $4,961,000 primarily attributable to an increase in interest
to $12,842,000, or 159%, over ¬scal 1994, and income generated by higher levels of cash available
decreased as a percentage of total revenues from for investment, partially offset by a decrease in
4.3% to 3.3%. The increase in product development rental income and an increase in interest expense.
costs was primarily attributable to an increase in
Merger Expenses. Non-recurring merger ex-
personnel costs related to an increase in the number
penses totaling $2,207,000 were recognized in ¬s-
of technical employees. The decrease in product
cal 1995 in connection with the mergers of the
development costs as a percentage of total revenues
Company with RCC, WAIS and Medior.

America Online
was principally a result of the substantial growth in
revenues, which more than offset the additional Provisions for Income Taxes. The provision for
product development costs. Product development income taxes was $3,832,000 and $15,169,000 in
costs, before capitalization and amortization, ¬scal year 1994 and ¬scal 1995, respectively. For
increased by 126% in ¬scal 1995. additional information regarding income taxes,
refer to Note 9 of the Notes to Consolidated Finan-
General and Administrative. Fiscal 1995 gen-
cial Statements.
eral and administrative costs increased from
$13,562,000 to $41,966,000, or 209%, over ¬scal Net Loss. The net loss in ¬scal 1995 totaled
1994, and decreased as a percentage of total reve- $33,647,000. The net loss in ¬scal 1995 included
nues from 11.7% to 10.6%. The increase in general charges of $50,335,000 for acquired research and
and administrative expenses was principally attribut- development and $2,207,000 for merger expenses.
able to higher of¬ce and personnel expenses related
to an increase in the number of employees. The
Liquidity and Capital Resources
decrease in general and administrative costs as a
percentage of total revenues was a result of the sub-
The Company has ¬nanced its operations
stantial growth in revenues, which more than offset
through cash generated from operations, sale of its
the additional general and administrative costs,
common stock and funding by third parties for cer-
combined with the semi-variable nature of many of
tain product development activities. Net cash pro-
the general and administrative costs.
vided by operating activities was $2,205,000,
Acquired Research and Development. Acquired $1,884,000 and $15,891,000 for ¬scal 1993, ¬s-
research and development costs, totaling cal 1994 and ¬scal 1995, respectively. Included in
$50,335,000, relate to in-process research and operating activities were expenditures for deferred
development purchased pursuant to the Company™s subscriber acquisition costs of $10,685,000,
acquisition of two early-stage Internet technology $37,424,000 and $111,761,000 in ¬scal 1993, ¬s-
companies, BookLink and NaviSoft. The purchased cal 1994 and ¬scal 1995, respectively. Net cash
research and development relating to the BookLink used in investing activities was $8,915,000,
and NaviSoft acquisitions was the foundation of the $41,870,000 and $85,725,000 in ¬scal 1993, ¬s-
development of the Company™s Internet related cal 1994 and ¬scal 1995, respectively. Investing
products. activities included $20,523,000 in ¬scal 1995
related to business acquisitions, substantially all of
Amortization of Goodwill. Amortization of
which were related to the acquisition of ANS.
goodwill relates to the Company™s acquisition of
ANS, which resulted in approximately $44 million in In December 1993 the Company completed a
goodwill. The goodwill related to the ANS acquisi- public stock offering of 4,000,000 shares of com-
tion is being amortized on a straight-line basis over mon stock which generated net cash proceeds of
a ten-year period. approximately $62.7 million.
Strategy Analysis

2-39 Part 2 Business Analysis and Valuation Tools

In April 1995 the company entered into a joint of its cash for the acquisition and subsequent fund-
venture with Bertelsmann to offer interactive online ing of technologies, products or businesses comple-
services in Europe. In connection with the agree- mentary to the Company™s current business. Apart
ment, the Company received approximately $54 from its agreement to acquire Ubique, as discussed
million through the sale of approximately 5% of its below, the Company has no agreements or under-
common stock to Bertelsmann. standings to acquire any businesses. The Company
anticipates that available cash and cash provided by
The Company leases the majority of its equip-
operating activities will be suf¬cient to fund its oper-
ment under noncancelable operating leases, and as
ations for the next ¬scal year.
part of its network portfolio strategy is building AOL-
Various legal proceedings have arisen against
net, its data communications network. The buildout
the Company in the ordinary course of business. In
of this network requires a substantial investment in
the opinion of management, these proceedings will
telecommunication equipment, which the Company
America Online

not have a material effect on the ¬nancial position
plans to ¬nance principally though leasing. In addi-
of the Company.
tion, the Company has guaranteed minimum com-
mitments under certain data and voice The Company believes that in¬‚ation has not
communication agreements. The Company™s future had a material effect on its results of operations.
lease commitments and guaranteed minimums are
On August 23, 1995, the Company entered
discussed in Note 6 of the Notes to Consolidated
into a stock purchase agreement to purchase
Financial Statements.
Ubique, an Israeli company. The Company has
agreed to pay approximately $15 million ($1.5 mil-
The Company uses its working capital to
lion in cash and $13.5 million in common stock) in
¬nance ongoing operations and to fund marketing
the transaction, which is to be accounted for as a
and content programs and the development of its
purchase. Subject to the results of an in-process val-
products and services. The Company plans to con-
uation, a substantial portion of the purchase price
tinue to invest aggressively in acquisition marketing
may be allocated to in-process research and devel-
and content programs to expand its subscriber base,
opment and charged to the Company™s operations
as well as in computing and support infrastructure.
in the ¬rst quarter of ¬scal 1996.
Additionally, the Company expects to use a portion
72 Strategy Analysis

Strategy Analysis

(Amounts in Thousands, Except Per Share Data)

Year ended June 30,

1995 1994 1993
Online service revenues $358,498 $100,993 $ 38,462
Other revenues 35,792 14,729 13,522
Total revenues 394,290 115,722 51,984

America Online
Costs and expenses:
Cost of revenues 229,724 69,043 28,820
Marketing 77,064 23,548 9,745
Product development 12,842 4,961 2,913
General and administrative 41,966 13,562 8,581
Acquired research and development 50,335 ” ”
Amortization of goodwill 1,653 ” ”
Total costs and expenses 413,584 111,114 50,059
Income (loss) from operations (19,294) 4,608 1,925
Other income, net 3,023 1,774 371
Merger expenses (2,207) ” ”
Income (loss) before provision for income taxes
and extraordinary item (18,478) 6,382 2,296
Provision for income taxes (15,169) (3,832) (1,897)
Income (loss) before extraordinary item (33,647) 2,550 399
Extraordinary item”tax bene¬t arising from net
operating loss carryforward ” ” 1,133
Net income (loss) $ (33,647) $ 2,550 $ 1,532
Earnings (loss) per share:
Income (loss) before extraordinary item $ (0.99) $ 0.07 $ 0.01
Net income (loss) $ (0.99) $ 0.07 $ 0.05
Weighted average shares outstanding 33,986 34,208 29,286
See accompanying notes.
Strategy Analysis

2-41 Part 2 Business Analysis and Valuation Tools

(Amounts in Thousands)

Year ended June 30,
1995 1994 1993
Cash ¬‚ows from operating activities:
Net income (loss) $ (33,647) $ 2,550 $ 1,532
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 11,136 2,965 1,957
America Online


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