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Amortization of subscriber acquisition costs 60,924 17,922 7,038
Loss/(Gain) on sale of property and equipment 37 5 (39)
Charge for acquired research and development 50,335 ” ”
Changes in assets and liabilities:
Trade accounts receivable (14,373) (4,266) (936)
Other receivables (9,057) (681) (966)
Prepaid expenses and other current assets (19,641) (2,867) (1,494)
Deferred subscriber acquisition costs (111,761) (37,424) (10,685)
Other assets (8,432) (2,519) (89)
Trade accounts payable 60,824 10,204 2,119
Accrued personnel costs 1,846 367 336
Other accrued expenses and liabilities 5,703 9,526 1,492
Deferred revenue 7,190 2,322 1,381
Deferred income taxes 14,763 3,832 759
Deferred rent 44 (52) (200)
Total adjustments 49,538 (666) 673
Net cash provided by operating activities 15,891 1,884 2,205
Cash ¬‚ows from investing activities:
Short-term investments 5,380 (18,947) (5,105)
Purchase of property and equipment (57,751) (17,886) (2,041)
Product development costs (13,011) (5,132) (1,831)
Sale of property and equipment 180 95 62
Purchase costs of acquired businesses (20,523) ” ”
Net cash used in investing activities (85,725) (41,870) (8,915)
Cash ¬‚ows from ¬nancing activities:
Proceeds from issuance of common stock, net 61,253 67,372 609
Principal and accrued interest payments on line of
credit and long-term debt (3,298) (7,716) (6,924)
Proceeds from line of credit and issuance of long-term
debt 13,741 14,200 7,181
Tax bene¬t from stock option exercises ” ” 6
Principal payments under capital lease obligations (375) (142) (112)
74 Strategy Analysis




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Strategy Analysis




CONSOLIDATED STATEMENT OF CASH FLOWS (continued)

Year ended June 30,
..............................................................
1995 1994 1993
...................................................................................................................................................
Net cash provided by ¬nancing activities 71,321 73,714 760
Net increase (decrease) in cash and cash equivalents 1,487 33,728 (5,950)
Cash and cash equivalents at beginning of period 43,891 10,163 16,113
Cash and cash equivalents at end of period $ 45,378 $ 43,891 $ 10,163
Supplemental cash ¬‚ow information
Cash paid during the period for:




America Online
Interest 1,067 575 193
Income taxes ” ” 15
...................................................................................................................................................
See accompanying notes.




CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands, Except Per Share Data)

June 30,
....................................
1995 1994
......................................................................................................................................

ASSETS
Current assets:
Cash and cash equivalents $ 45,378 $ 43,891
Short-term investments 18,672 24,052
Trade accounts receivable 32,176 8,547
Other receivables 11,103 2,036
Prepaid expenses and other current assets 25,527 5,753
Total current assets 132,856 84,279
Property and equipment at cost, net 70,466 20,306
Other assets:
Product development costs, net 18,914 7,912
Deferred subscriber acquisition costs, net 77,229 26,392
License rights, net 5,537 53
Other assets 11,479 2,800
Deferred income taxes 35,627 12,842
Goodwill, net 54,356 ”
$406,464 $154,584
(continued)
75
Strategy Analysis




2-43 Part 2 Business Analysis and Valuation Tools




CONSOLIDATED BALANCE SHEETS (continued)


June 30,
....................................
1995 1994
......................................................................................................................................

LIABILITIES AND STOCKHOLDERS™ EQUITY
Current liabilities:
Trade accounts payable $ 84,639 $ 15,642
Accrued personnel costs 2,829 896
Other accrued expenses and liabilities 23,509 13,076
America Online




Deferred revenue 20,021 4,488
Line of credit 484 1,690
Current portion of long-term debt and capital lease obligations 1,830 597
Total current liabilities 133,312 36,389
Long-term liabilities:
Notes payable 17,369 5,836
Capital lease obligations 2,127 1,179
Deferred income taxes 35,627 12,842
Deferred rent 85 41
Total liabilities 188,520 56,287
Stockholders™ equity:
Preferred stock, $.01 par value; 5,000,000 shares authorized,
none issued ” ”
Common stock, $.01 par value; 100,000,000 shares autho-
rized, 37,554,849 and 30,771,212 shares issued and out-
standing at June 30, 1995 and 1994, respectively 375 308
Additional paid-in capital 251,539 98,836
Accumulated de¬cit (33,970) (847)
Total stockholders™ equity 217,944 98,297
$406,464 $154,584
......................................................................................................................................
See accompanying notes.
76 Strategy Analysis




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Strategy Analysis




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

is not material to the ¬nancial statements of the
1. Organization
Company.
Revenue and cost recognition “ Online service
America Online, Inc. (“the Company”) was
revenue is recognized over the period services are
incorporated in the State of Delaware in May 1985.
provided. Other revenue, consisting principally of
The Company, based in Vienna, Virginia, is a lead-
marketing, data network and multimedia production
ing provider of online services, offering its subscrib-
services, as well as development and royalty reve-
ers a wide variety of services, including e-mail,
nues, are recognized as services are rendered.
online conferences, entertainment, software, com-
Deferred revenue consists principally of third-party
puting support, interactive magazines and newspa-
development funding not yet recognized and
pers, and online classes, as well as easy and




America Online
monthly subscription fees billed in advance.
affordable access to services of the Internet. In addi-
tion, the Company is a provider of data network ser- Property and equipment “ Property and equip-
vices, new media and interactive marketing services, ment are depreciated or amortized using the
and multimedia and CD-ROM production services. straight-line method over the estimated useful life of
the asset, which ranges from 5 to 40 years, or over
the life of the lease.
2. Summary of Significant Accounting
Policies Property and equipment under capital leases
are stated at the lower of the present value of mini-
mum lease payments at the beginning of the lease
Principles of Consolidation “ The consolidated
term or fair value at inception of the lease.
¬nancial statements include the accounts of the
Deferred subscriber acquisition costs “ Sub-
Company and its subsidiaries. All signi¬cant inter-
scriber acquisition costs are deferred and charged to
company accounts and transactions have been
operations over a twelve or eighteen month period
eliminated. Investments in af¬liates owned twenty
(straight-line method) beginning the month after
percent or more and corporate joint ventures are
such costs are incurred. These costs, which relate
accounted for under the equity method. Other secu-
directly to subscriber solicitations, principally include
rities in companies owned less than twenty percent
printing, production and shipping of starter kits and
are accounted for under the cost method.
the costs of obtaining quali¬ed prospects by various
Business Combinations “ Business combinations targeted direct marketing programs (i.e., direct mar-
which have been accounted for under the purchase keting response cards, mailing lists) and from third
method of accounting include the results of opera- parties, and are recorded separately from ordinary
tions of the acquired business from the date of operating expenses. No indirect costs are included
acquisition. Net assets of the companies acquired in subscriber acquisition costs. To date, all sub-
are recorded at their fair value to the Company at scriber acquisition costs have been incurred for the
the date of acquisition. solicitation of speci¬c identi¬able prospects. Costs
incurred for other than those targeted at speci¬c
Other business combinations have been
identi¬able prospects for the Company™s services,
accounted for under the pooling of interests method
and general marketing, are expensed as incurred.
of accounting. In such cases, the assets, liabilities,
The Company™s services are sold on a monthly
and stockholders™ equity of the acquired entities
subscription basis. Subscriber acquisition costs
were combined with the Company™s respective
incurred to obtain new subscribers are recoverable
accounts at recorded values. Prior period ¬nancial
from revenues generated by such subscribers within
statements have been restated to give effect to the
a short period of time after such costs are incurred.
merger unless the effect of the business combination
77
Strategy Analysis




2-45 Part 2 Business Analysis and Valuation Tools




percent of total revenue estimates for the related
Effective July 1, 1992, the Company changed,
software product not to exceed ¬ve years, commenc-
from twelve months to eighteen months, the period
ing the month after the date of product release.
over which it amortizes the costs of deferred sub-
scriber acquisition costs relating to marketing activ-
Product development costs consist of the follow-
ities in which the Company™s starter kit is bundled
ing:
and distributed by a third-party marketing com-
pany. The change in accounting estimate was made
Year ended June 30,
to more accurately match revenues and expenses.
1995 1994
Based on the Company™s experience and the distri-
(in thousands)
bution channels used in such marketing activities,
Balance, beginning of year $ 7,912 $3,915
there is a greater time lag between the time the
Cost capitalized 13,011 5,132
Company incurs the cost for the starter kits and the
Cost amortized (2,009) (1,135)
America Online

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