FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act of
1934
For the quarterly period ended: December 31, 1999
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:
001-12143
America Online, Inc.
(Exact name of registrant as specified in its charter)
Delaware 54-1322110
-------------------------------------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
22000 AOL Way, Dulles, Virginia 20166-9323
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (703) 265-1000
Former name, former address, and former year, if changed since last report: Not
applicable
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 the number of shares outstanding of each of the Issuer's classes of
Common Stock, as of the latest practicable date.
Title of each class
Common stock $.01 par value
Shares outstanding on January 31, 2000.............................2,281,767,899
<PAGE>
AMERICA ONLINE, INC.
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets - December 31, 1999
and June 30, 1999 3
Condensed Consolidated Statements of Operations - Three and six
months ended December 31, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows - Six
months ended December 31, 1999 and 1998 5
Condensed Consolidated Statement of Changes in
Stockholders' Equity - Six months ended
December 31, 1999 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
PART II. OTHER INFORMATION 19
Item 1. Legal Proceedings 19
Item 2. Changes in Securities and Use of Proceeds 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
<PAGE>
<TABLE>
<CAPTION>
AMERICA ONLINE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in millions, except share data)
December 31, June 30,
1999 1999
------------- --------
(Unaudited)
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents........................................................... $ 2,535 $ 887
Short-term investments.............................................................. 518 537
Trade accounts receivable, less allowances of $57 and $54, respectively............. 372 323
Other receivables................................................................... 111 79
Prepaid expenses and other current assets........................................... 280 153
------------ ---------
Total current assets................................................................ 3,816 1,979
Property and equipment at cost, net................................................. 890 657
Other assets:
Investments including available-for-sale securities................................. 4,902 2,151
Product development costs, net...................................................... 122 100
Goodwill and other intangible assets, net........................................... 409 454
Other....................................................................... ....... 162 7
------------ --------
$10,301 $5,348
============ =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable.............................................................. $ 65 $ 74
Other accrued expenses and liabilities.............................................. 1,048 795
Deferred revenue.................................................................... 787 646
Accrued personnel costs............................................................. 186 134
Deferred network services credit.................................................... 76 76
------------ ---------
Total current liabilities........................................................... 2,162 1,725
Long-term liabilities:
Notes payable....................................................................... 1,581 348
Deferred revenue.................................................................... 131 30
Other liabilities................................................................... 17 15
Deferred network services credit.................................................... 159 197
------------ ---------
Total liabilities................................................................... 4,050 2,315
Stockholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares authorized, no shares issued
or outstanding at December 31 and June 30, 1999................................... - -
Common stock, $.01 par value; 6,000,000,000 shares authorized,
2,279,263,258 and 2,201,787,866 shares issued and outstanding at
December 31 and June 30, 1999, respectively....................................... 23 22
Additional paid-in capital.......................................................... 4,165 2,692
Accumulated other comprehensive income - unrealized gain on
available-for-sale securities, net................................................ 1,467 168
Retained earnings................................................................... 596 151
------------ ---------
Total stockholders' equity.......................................................... 6,251 3,033
------------ --------
$10,301 $5,348
============ =========
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AMERICA ONLINE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in millions, except per share data)
(Unaudited)
Three months ended Six months ended
December 31, December 31,
1999 1998 1999 1998
------- -------- ------- --------
Revenues:
<S> <C> <C> <C> <C>
Subscription services.................................$1,067 $ 786 $2,062 $1,509
Advertising, commerce and other....................... 437 244 787 419
Enterprise solutions.................................. 117 118 239 219
------- -------- ------- --------
Total revenues........................................ 1,621 1,148 3,088 2,147
Costs and expenses:
Cost of revenues...................................... 830 640 1,621 1,223
Sales and marketing................................... 261 202 470 376
Product development................................... 74 70 141 137
General and administrative............................ 150 95 267 177
Amortization of goodwill and other intangible assets.. 17 16 35 32
Merger charges........................................ 5 2 5 2
------- -------- ------- --------
Total costs and expenses.............................. 1,337 1,025 2,539 1,947
Income from operations... ............................ 284 123 549 200
Other income, net..................................... 160 16 197 21
------- -------- ------- --------
Income before provision for income taxes.............. 444 139 746 221
Provision for income taxes............................ (173) (24) (291) (30)
------- -------- ------- --------
Net income............................................$ 271 $ 115 $ 455 $ 191
======= ======== ======= ========
Earnings per share:
Earnings per share-basic..............................$ 0.12 $ 0.06 $ 0.20 $ 0.10
Earnings per share-diluted............................$ 0.10 $ 0.05 $ 0.18 $ 0.08
Weighted average shares outstanding-basic............. 2,259 2,025 2,240 2,007
Weighted average shares outstanding-diluted........... 2,610 2,444 2,592 2,419
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AMERICA ONLINE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in millions)
(Unaudited)
Six months ended
December 31,
1999 1998
------- -------
Cash flows from operating activities:
<S> <C> <C>
Net income ............................................................................ $ 455 $ 191
Adjustments to reconcile net income to net cash provided by operating activities:
Non-cash restructuring charges......................................................... 2 -
Amortization of deferred network services credit....................................... (38) (38)
Depreciation and amortization.......................................................... 157 139
Compensatory stock options............................................................. 6 8
Deferred income taxes.................................................................. 289 27
Gain on available-for-sale securities.................................................. (124) (2)
Changes in assets and liabilities, net of the effects of acquisitions and dispositions:
Trade accounts receivable............................................................ (49) (45)
Other receivables.................................................................... (32) (19)
Prepaid expenses and other current assets............................................ (117) (42)
Other assets......................................................................... (125) 1
Investments including available-for-sale securities.................................. (149) (19)
Accrued expenses and other current liabilities....................................... 282 40
Deferred revenue and other liabilities............................................... 239 57
------- -------
Total adjustments...................................................................... 341 107
------- -------
Net cash provided by operating activities.............................................. 796 298
Cash flows from investing activities:
Purchase of property and equipment..................................................... (329) (141)
Product development costs.............................................................. (38) (21)
Proceeds from sale of investments including available-for-sale securities.............. 20 26
Purchase of investments including available-for-sale securities....................... (302) (121)
Proceeds of short-term investments, net................................................ 18 115
Proceeds from acquisition/disposition of subsidiaries.................................. 10 25
Other investing activities............................................................. 4 (16)
------- -------
Net cash used in investing activities.................................................. (617) (133)
Cash flows from financing activities:
Proceeds from issuance of common stock, net........................................... 259 663
Principal and accrued interest payments on debt....................................... (11) (11)
Payment of deferred finance costs and other financing activities, net................. (29) 8
Proceeds from issuance of debt........................................................ 1,250 29
------ -------
Net cash provided by financing activities.............................................. 1,469 689
------ -------
Net increase in cash and cash equivalents.............................................. 1,648 854
Cash and cash equivalents at beginning of period....................................... 887 677
------- -------
Cash and cash equivalents at end of period............................................. $2,535 $1,531
======= =======
Supplemental cash flow information
Cash paid during the period for:
Interest............................................................................... $ 9 $ 9
======= =======
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
AMERICA ONLINE, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Amounts in millions, except share data)
(Unaudited)
Accumulated
Common Stock Additional Other
----------------------- Paid-In Comprehensive Retained
Shares Amount Capital Income, Net Earnings Total
-------------- ------- --------- --------------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Balances at June 30, 1999................. 2,201,787,866 $ 22 $ 2,692 $ 168 $ 151 $3,033
Effect of immaterial pooling........... 4,794,580 - 16 - (10) 6
Common stock issued:
Exercise of options, ESPP and other.. 70,551,676 1 360 - - 361
Amortization of compensatory
stock options........................ - - 6 - - 6
Unrealized gain on
available-for-sale securities, net..... - - 796 1,299 - 2,095
Conversion of debt........................ 2,129,136 - 13 - - 13
Tax benefit related to stock options...... - - 282 - - 282
Net income................................ - - - - 455 455
-------------- ------- --------- --------------- ------------ ---------
Balances at December 31, 1999............ 2,279,263,258 $ 23 $ 4,165 $ 1,467 $ 596 $6,251
============== ======= ========= =============== ============ ===========
See accompanying notes.
</TABLE>
<PAGE>
AMERICA ONLINE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements,
which include the accounts of America Online, Inc. (the "Company") and its
wholly and majority owned subsidiaries, have been prepared in accordance with
accounting principles generally accepted in the United States for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments, consisting
only of normal recurring accruals considered necessary for a fair presentation,
have been included in the accompanying unaudited financial statements. All
significant intercompany transactions and balances have been eliminated in
consolidation. Operating results for the three and six months ended December 31,
1999 are not necessarily indicative of the results that may be expected for the
full year ending June 30, 2000. For further information, refer to the
consolidated financial statements and notes thereto, included in the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 1999.
Note 2. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share for the three and six months ended December 31, 1999 and
1998:
<TABLE>
Three months ended Six months ended
December 31, December 31,
(in millions except for per share data) 1999 1998 1999 1998
-------- -------- -------- --------
Basic earnings per share:
<S> <C> <C> <C> <C>
Net income available to common shareholders................ $ 271 $ 115 $ 455 $ 191
-------- -------- -------- --------
Weighted average shares outstanding........................ 2,259 2,025 2,240 2,007
Basic earnings per share................................... $ 0.12 $ 0.06 $ 0.20 $ 0.10
======== ======== ======== ========
Diluted earnings per share:
Net income available to common shareholders................ $ 271 $ 115 $ 455 $ 191
Interest on convertible debt, net of tax................... 2 - 3 -
-------- -------- -------- --------
Adjusted net income available to common shareholders
assuming conversion..................................... $ 273 $ 115 $ 458 $ 191
-------- -------- -------- --------
Weighted average shares outstanding........................ 2,259 2,025 2,240 2,007
Effect of dilutive securities:
Employee stock options.................................. 312 362 313 355
Warrants................................................ - 57 - 57
Convertible debt........................................ 39 - 39 -
-------- -------- -------- --------
Adjusted weighted average shares and assumed conversions... 2,610 2,444 2,592 2,419
======== ======== ======== ========
Diluted earnings per share................................. $ 0.10 $ 0.05 $ 0.18 $ 0.08
======== ======== ======== ========
</TABLE>
Note 3. Comprehensive Income
For the three months ended December 31, 1999 and 1998, comprehensive
income was $1.3 billion and $142 million, respectively. For the six months ended
December 31, 1999 and 1998, comprehensive income was $1.8 billion and $173
million, respectively. The difference between net income and comprehensive
income for each period presented is due to net unrealized gains or losses on
available-for-sale securities.
Note 4. Merger and Restructuring Charges
During the quarter ended December 31, 1999, the Company recorded $5
million of direct costs related to the merger of Tegic Communications, Inc.
("Tegic"). These charges primarily consisted of investment banker fees, fees for
legal and accounting services and other expenses directly related to the
transaction. All these costs have been paid as of December 31, 1999.
<PAGE>
During fiscal 1999, the Company recorded the following charges related
to mergers and restructurings:
o Approximately $15 million of direct costs primarily related to the
mergers of MovieFone, Inc. ("MovieFone"), Spinner Networks
Incorporated ("Spinner") and Nullsoft, Inc. ("Nullsoft"). These
charges primarily consisted of investment banker fees, severance
and other personnel costs, fees for legal and accounting services
and other expenses directly related to the transaction.
o Approximately $78 million of direct costs primarily related to the
mergers of Netscape Communications Corporation ("Netscape") and
When, Inc. and the Company's reorganization plans to integrate
Netscape's operations and build on the strengths of the Netscape
brand and capabilities. This charge primarily consists of
investment banker fees, severance and other personnel costs
(related to the elimination of approximately 850 positions), fees
for legal and accounting services and other expenses directly
related to the transaction.
o Approximately $2 million in merger related costs in connection
with the merger of AtWeb, Inc. These expenses were primarily
associated with fees for investment banking, legal and accounting
services, severance costs and other related charges in connection
with the transaction.
The following table summarizes the activity during the six months ended
December 31, 1999 for the charges recorded during fiscal 1999. The balance of
the restructuring accrual is included in other accrued expenses and liabilities
on the consolidated balance sheet and is expected to be substantially paid by
the end of this fiscal year.
<TABLE>
Balance Balance
June 30, Non Cash December 31,
1999 Items Payments 1999
------------- -------- -------- --------
(Amounts in millions)
Banking, legal, regulatory
<S> <C> <C> <C> <C>
and accounting fees........... $ 4 $ - $ (4) $ -
Severance and related costs..... 11 (2) (4) 5
Facilities shutdown costs....... 8 - (1) 7
Miscellaneous expenses.......... (3) - - (3)
------------- -------- -------- --------
Total........................... $20 $ (2) $ (9) $ 9
============= ======== ======== ========
</TABLE>
Note 5. Segment Information
There are no intersegment revenues between the two reportable segments.
Shared support service functions such as human resources, facilities management
and other infrastructure support groups are allocated based on usage or
headcount, where practical, to the two operating segments. Charges that cannot
be allocated are reported as general & administrative costs and are not
allocated to the segments. Special charges determined to be significant are
reported separately in the Condensed Consolidated Statements of Operations and
are not assigned or allocated to the segments. All other accounting policies are
applied consistently to the segments, where applicable.
A summary of the segment financial information is as follows:
<TABLE>
Three months ended Six months ended
December 31, December 31,
1999 1998 1999 1998
------------ ----------- ------------ -----------
(Amounts in millions)
Revenues:
<S> <C> <C> <C> <C>
Interactive Online Services........... $1,504 $1,030 $2,849 $1,928
Enterprise Solutions.................. 117 118 239 219
------------ ----------- ------------ -----------
Total revenues.................... $1,621 $1,148 $3,088 $2,147
Income (loss) from operations:
Interactive Online Services (1)....... $ 381 $ 206 $ 713 $ 358
Enterprise Solutions (2)............. 22 (4) 48 (11)
General & Administrative.............. (114) (77) (207) (145)
Other (3) ............................ (5) (2) (5) (2)
------------ ----------- ------------ -----------
Total income from operations...... $ 284 $ 123 $ 549 $ 200
</TABLE>
<PAGE>
1. For the three months ended December 31, 1999 and 1998, Interactive Online
Services include goodwill and other intangible assets amortization of $17
million and $16 million, respectively. For the six months ended December
31, 1999 and 1998, Interactive Online Services include goodwill and other
intangible assets amortization of $35 million and $32 million,
respectively.
2. Enterprise Solutions amortization of goodwill and other intangible assets
is immaterial for all periods presented.
3. Other consists of merger related costs.
Note 6. Notes Payable
During December 1999, the Company sold $2.3 billion principal of
zero-coupon Convertible Subordinated Notes due December 6, 2019 (the "Notes")
and received net proceeds of approximately $1.2 billion. The Notes have a 3%
yield to maturity and are convertible into the Company's common stock at a
conversion rate of 5.8338 shares of common stock for each $1,000 principal
amount of the Notes (equivalent to a conversion price of $94.4938 per share
based on the initial offering price of the Notes). The Notes may be redeemed at
the option of the Company on or after December 6, 2002 at the redemption prices
set forth in the Notes. The holders can require the Company to repurchase the
Notes on December 6, 2004 at the redemption prices set forth in the Notes.
Note 7. Subsequent Events
On January 10, 2000, the Company and Time Warner Inc. ("Time Warner")
announced that they had entered into an Agreement and Plan of Merger, dated as
of January 10, 2000 (the "Merger Agreement"), which sets forth the terms and
conditions of the proposed merger of equals (the "Merger") of America Online and
Time Warner. Pursuant to the Merger Agreement, America Online and Time Warner
have formed AOL Time Warner and each holds one share of AOL Time Warner. AOL
Acquisition Sub, a newly formed and wholly owned subsidiary of AOL Time Warner,
will be merged with and into America Online, with stockholders of America Online
receiving one share of AOL Time Warner common stock for each share of America
Online Common Stock, and TW Acquisition Sub, a newly formed and wholly owned
subsidiary of AOL Time Warner, will be merged with and into Time Warner, with
common stockholders of Time Warner receiving 1.5 shares of AOL Time Warner
common stock for each share of Time Warner common stock. As a result of the
Merger, the separate corporate existence of each of AOL Acquisition Sub and TW
Acquisition Sub will cease and each of America Online and Time Warner will
survive the Merger as a wholly owned subsidiary of AOL Time Warner. The
transactions contemplated by the Merger Agreement are subject to the approval of
the stockholders of each of America Online and Time Warner and other customary
closing conditions, such as regulatory approvals.
On December 31, 1999, the underwriters exercised the overallotment
option on the Notes. As a result, on January 5, 2000, the Company sold
additional Notes with aggregate principal at maturity of approximately $55.6
million for net proceeds of approximately $30 million.
On January 25, 2000, the Company announced that its Vice Chairman,
Kenneth J. Novack, was elected to the Company's Board of Directors. Mr. Novack
will fill the seat vacated by Dr. Thomas Middelhoff, Bertelsmann AG's Chairman
and CEO, who resigned his Board position on the same date.
Note 8. Legal Proceedings
Several complaints have been filed in the Delaware Court of Chancery or
Supreme Court of New York naming America Online and one or more of (a) the
directors of America Online, (b) Time Warner Inc. and (c) the directors of Time
Warner Inc., as defendants. The complaints purport to be filed on behalf of
holders of America Online stock or Time Warner stock, as applicable, and allege
breaches of fiduciary duty by the applicable company and its directors or aiding
and abetting breaches of fiduciary duty by the other company and its directors
in connection with the proposed merger of America Online and Time Warner. The
plaintiffs in each case seek to enjoin completion of the Merger and/or damages.
The Company intends to vigorously defend against these lawsuits.
The Department of Labor ("DOL") is investigating the applicability of
the Fair Labor Standards Act ("FLSA") to the Company's Community Leader program.
The Company believes the Community Leader program reflects industry practices,
that the Community Leaders are volunteers, not employees, and that the Company's
actions comply with the law. The Company is cooperating with the DOL, but is
unable to predict the outcome of the DOL's investigation. Former volunteers have
sued the Company on behalf of an alleged class consisting of current and former
volunteers, alleging violations of the FLSA and comparable state statutes. The
Company believes the claims have no merit and intends to defend them vigorously.
The Company cannot predict the outcome of the claims or whether other former or
current volunteers will file additional actions.
The Company has been named as a defendant in several class action
lawsuits. These lawsuits contend that consumers and competing Internet service
providers have been injured because of the default selection features in AOL
5.0. These cases are at a preliminary stage, but the Company does not believe
they have merit and intends to contest them vigorously.
<PAGE>
Note 9. Business Developments
On December 22, 1999, the Company announced that it will acquire
MapQuest.com, Inc. in an all-stock transaction. The Company expects to issue
approximately 13 million shares of common stock. Shareholders of MapQuest.com
will receive 0.31558 shares of AOL common stock for each share of MapQuest
stock. The transaction is expected to close in the spring of 2000, subject to
various conditions including customary regulatory approvals and the approval of
MapQuest.com shareholders. The transaction will be accounted for as a
pooling-of-interests.
On October 28, 1999, the Board of Directors of the Company declared a
two-for-one common stock split, to be effected in the form of a stock dividend.
On the payment date of November 22, 1999, stockholders received one additional
share for each share owned on the record date of November 8, 1999. The impact of
this stock split is reflected in the accompanying financial statements.
On November 30, 1999, the Company completed its merger with Tegic. The
Company exchanged approximately 4.8 million shares of common stock for all the
outstanding common and preferred shares of Tegic in a transaction that was
accounted for as a pooling-of-interests. As Tegic's historical results of
operations were not material in relation to those of the Company, the financial
information prior to the quarter ended December 31, 1999 has not been restated
to reflect the merger.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Founded in 1985, America Online, Inc., (the "Company") based in Dulles,
Virginia, is the world's leader in interactive services, Web brands, Internet
technologies and electronic commerce services. The Company operates two
worldwide subscription based Internet online services, the AOL service, with
more than 21 million members, and the CompuServe service, with more than 2.5
million members; several leading Internet brands including ICQ, AOL Instant
Messenger and Digital City, Inc.; the Netscape Netcenter and AOL.COM Internet
portals; the Netscape Communicator client software, including the Netscape
Navigator browser; AOL MovieFone, the nation's number one movie listing guide
and ticketing service; and Spinner and Nullsoft, leaders in Internet music.
Through its strategic alliance with Sun Microsystems, Inc., the Company also
develops and offers easy-to-deploy, end-to-end electronic commerce and
enterprise solutions for companies operating in and doing business on the
Internet.
Consolidated Results of Operations
Revenues
The following table and discussion highlights the revenues of the
Company for the three and six months ended December 31, 1999 and 1998:
<TABLE>
Three Months Ended Six Months Ended
December 31, December 31,
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
(Dollars in millions)
Revenues:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Subscription services...........$1,067 65.8% $ 786 68.5% $2,062 66.8% $1,509 70.3%
Advertising, commerce and other.. 437 27.0 244 21.2 787 25.5 419 19.5
Enterprise solutions............. 117 7.2 118 10.3 239 7.7 219 10.2
------- ------- ------- ------- ------- ------- ------- -------
Total revenues..................$1,621 100.0% $1,148 100.0% $3,088 100.0% $2,147 100.0%
</TABLE>
Subscription Services Revenues
For the three months ended December 31, 1999, subscription services
revenues, which are generated mainly from subscribers paying a monthly
membership fee, increased from $786 million to $1,067 million, or 36%, over the
three months ended December 31, 1998. This increase was primarily attributable
to a 33% increase in the average number of revenue generating subscribers for
the three months ended December 31, 1999, compared to the three months ended
December 31, 1998, as well as a 2% increase in the average monthly subscription
services revenue per revenue generating subscriber.
For the six months ended December 31, 1999, subscription services
revenues increased from $1,509 million to $2,062 million, or 37%, over the six
months ended December 31, 1998. This increase was primarily attributable to a
34% increase in the average number of revenue generating subscribers for the six
months ended December 31, 1999, compared to the six months ended December 31,
1998, as well as a 2% increase in the average monthly subscription services
revenue per revenue generating subscriber.
At December 31, 1999, the Company had approximately 20.5 million AOL
service subscribers, including 17.4 million in the United States and 3.1 million
in the rest of the world. Also at that date, the Company had approximately 2.5
million CompuServe service subscribers, with 1.6 million in the United States
and 900,000 in the rest of the world. The Company also has approximately 740,000
worldwide custom solution subscribers on alternate branded services that are
provided in conjunction with the Company's partners.
<PAGE>
Advertising, Commerce and Other Revenues
The following table summarizes the material components of advertising,
commerce and other revenues for the three and six months ended December 31, 1999
and 1998:
<TABLE>
Three Months Ended Six Months Ended
December 31, December 31,
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
(Dollars in millions)
Advertising and electronic
<S> <C> <C> <C> <C> <C> <C> <C> <C>
commerce fees................$ 352 80.5% $ 188 77.1% $ 624 79.3% $ 321 76.6%
Merchandise..................... 47 10.8 33 13.5 93 11.8 53 12.7
Other........................... 38 8.7 23 9.4 70 8.9 45 10.7
------- ------- ------- ------- ------- ------- ------- -------
Total advertising, commerce
and other revenues...........$ 437 100.0% $ 244 100.0% $ 787 100.0% $ 419 100.0%
</TABLE>
Advertising, commerce and other revenues, which consist principally of
advertising and related revenues, fees associated with commerce and the sale of
merchandise across the Company's multiple brands, increased by 79%, from $244
million in the quarter ended December 31, 1998 to $437 million in the quarter
ended December 31, 1999. For the six months ended December 31, 1999,
advertising, commerce and other revenues increased 88% from $419 million in the
six months ended December 31, 1998 to $787 million in the six months ended
December 31, 1999.
Advertising and commerce fees increased by 87%, from $188 million in
the three months ended December 31, 1998 to $352 million in the three months
ended December 31, 1999. Advertising and commerce fees increased by 94%, from
$321 million in the six months ended December 31, 1998 to $624 million in the
six months ended December 31, 1999. These increases are primarily attributable
to additional advertising on the Company's AOL service, Netcenter portal, and
from the Company's other brands, as well as an increase in commerce fees. At
December 31, 1999, the Company's advertising and commerce backlog, representing
the contract value of advertising and commerce agreements signed, less revenues
already recognized from these agreements, was approximately $2.4 billion, up
approximately $1.7 billion from December 31, 1998. Merchandise sales increased
by 42%, from $33 million in the three months ended December 31, 1998 to $47
million in the three months ended December 31, 1999. Merchandise sales increased
by 75%, from $53 million in the six months ended December 31, 1998 to $93
million in the six months ended December 31, 1999. These increases are mainly
attributable to improved response rates to advertising, as well as a larger base
of subscribers.
Enterprise Solutions Revenues
Enterprise solutions revenues, which consist principally of product
licensing fees and fees from technical support, consulting and training services
decreased by 1%, from $118 million in three months ended December 31, 1998 to
$117 million in the three months ended December 31, 1999. For the six months
ended December 31, 1999, Enterprise solutions revenues increased by 9%, from
$219 million in six months ended December 31, 1998 to $239 million in the six
months ended December 31, 1999. The increase was primarily driven by revenues
generated from the alliance with Sun Microsystems, Inc., which did not exist
during the three and six months ended December 31, 1998.
<PAGE>
Costs and Expenses
The following table and discussion highlights the costs and expenses of
the Company for the three and six months ended December 31, 1999 and 1998:
<TABLE>
Three Months Ended Six Months Ended
December 31, December 31
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
(Dollars in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenues.................... $1,621 100.0% $1,148 100.0% $3,088 100.0% $2,147 100.0%
Costs and expenses:
Cost of revenues.................. $ 830 51.2% $ 640 55.7% $1,621 52.5% $1,223 57.0%
Sales and marketing............... 261 16.1 202 17.6 470 15.2 376 17.5
Product development............... 74 4.6 70 6.1 141 4.6 137 6.4
General and administrative........ 150 9.3 95 8.3 267 8.6 177 8.2
Amortization of goodwill and
other intangible assets........ 17 1.0 16 1.4 35 1.1 32 1.5
Merger charges.................... 5 0.3 2 0.2 5 0.2 2 0.1
------- ------- ------- ------- ------- ------- ------- -------
Total costs and expenses.......... $1,337 82.5% $1,025 89.3% $2,539 82.2% $1,947 90.7%
</TABLE>
Cost of Revenues
Cost of revenues includes network-related costs, consisting primarily
of data network costs; personnel and related costs associated with operating the
data centers, data network and providing customer support; billing, consulting
and technical support/training; host computer and network equipment costs; and
the costs of merchandise sold. For the three months ended December 31, 1999,
cost of revenues increased from $640 million to $830 million, or 30%, over the
three months ended December 31, 1998, and decreased as a percentage of total
revenues from 55.7% to 51.2%. For the six months ended December 31, 1999, cost
of revenues increased from $1,223 million to $1,621 million or 33% over the six
months ended December 31, 1998, and decreased as a percentage of total revenues
from 57% to 52.5%.
The increase in cost of revenues in the three and six months ended
December 31, 1999 compared to the same periods ending December 31, 1998, was
primarily attributable to increases in data network costs, as well as personnel
and related costs associated with operating the data centers, data network and
providing customer support; billing, consulting and technical support/training.
Data network costs increased primarily as a result of the larger customer base
and increased usage per customer. Personnel and related costs associated with
operating the data centers, data network and providing customer support and
billing increased primarily as a result of the requirements of supporting a
larger data network, larger customer base and increased subscription services
revenues.
The decrease in cost of revenues as a percentage of total revenues in
the three and six months ended December 31, 1999 compared to the same periods
ending December 31, 1998, was primarily attributable to growth of the higher
margin advertising, commerce and other revenues, as well as a decrease in
network-related costs as a percentage of subscription services revenue. The
decrease in network-related costs as a percentage of subscription services
revenue was primarily driven by a 21% decrease in the hourly network cost for
the three months ended December 31, 1999. The decrease in the hourly network
costs is mainly due to efficiencies the Company continues to gain as a result of
its size and scale as well as lower negotiated rates with its network providers.
This decrease was mostly offset by an increase in daily member usage, from an
average of nearly 48 minutes per day in the three months ended December 31, 1998
to an average of 57 minutes per day in the three months ended December 31, 1999.
Sales and Marketing
Sales and marketing expenses include the costs to acquire and retain
subscribers, the operating expenses associated with the sales and marketing
organizations and other general marketing costs to support the Company's
multiple brands. For the three months ended December 31, 1999, sales and
marketing expenses increased from $202 million to $261 million, or 29%, over the
three months ended December 31, 1998, and decreased as a percentage of total
revenues from 17.6% to 16.1%. For the six months ended December 31, 1999, sales
and marketing expenses increased from $376 million to $470 million, or 25% over
the six months ended December 31, 1998, and decreased as a percentage of total
revenues from 17.5% to 15.2%. The increase in sales and marketing expenses for
the three and six months ended December 31, 1999 was primarily attributable to
an increase in direct subscriber acquisition costs related to the AOL and
CompuServe services and brand advertising across multiple brands, including a
one-time charge of $30 million for the acquisition of Gateway.net subscribers.
The decrease in marketing expenses as a percentage of total revenues for the
three and six months ended December 31, 1999 was primarily a result of the
substantial growth in total revenues. Excluding the one-time charge of $30
million, sales and marketing was 14.3% and 14.2 % of total revenues for the
three and six months ended December 31, 1999, respectively.
<PAGE>
Product Development
Product development costs include research and development expenses and
other product development costs. For the three months ended December 31, 1999,
product development costs increased from $70 million to $74 million, or 6% over
the three months ended December 31, 1998, and decreased as a percentage of total
revenues from 6.1% to 4.6%. For the six months ended December 31, 1999, product
development costs increased from $137 million to $141 million, or 3% over the
six months ended December 31, 1998, and decreased as a percentage of total
revenues from 6.4% to 4.6%. The increase in product development costs for the
three and six months ended December 31, 1999 was primarily attributable to an
increase in personnel costs as a result of an increase in the number of
technical employees to support additional products across multiple brands. The
decrease in product development costs as a percentage of total revenues for the
three and six months ended December 31, 1999 was primarily a result of the
substantial growth in total revenues.
General and Administrative
For the three months ended December 31, 1999, general and administrative
expenses increased from $95 million to $150 million, or 58%, over the three
months ended December 31, 1998, and increased as a percentage of total revenues
from 8.3% to 9.3%. For the six months ended December 31, 1999, general and
administrative expenses increased from $177 million to $267 million, or 51% over
the six months ended December 31, 1998 and increased as a percentage of total
revenues from 8.2% to 8.6%. The increase in general and administrative costs and
the increase in general and administrative costs as a percentage of total
revenue, for the three and six months ended December 31, 1999 was primarily
attributable to higher personnel costs, including payroll taxes associated with
employee stock option exercises, as well as an increase in bad debt expense
related to the growth in membership coupled with the Company testing extended
and alternative collection processes.
Amortization of Goodwill and Other Intangible Assets
Amortization of goodwill and other intangible assets increased to $17
million in the three months ended December 31, 1999 from $16 million in the
three months ended December 31, 1998. Amortization of goodwill and other
intangible assets increased to $35 million in the six months ended December 31,
1999 from $32 million in the six months ended December 31, 1998. The increase in
amortization expense in the three and six months ended December 31, 1999 is
primarily attributable to goodwill associated with the acquisition of the
CompuServe online service in January 1998, with minor subsequent adjustments.
Other Income, Net
Other income, net consists primarily of investment income and
non-operating gains net of interest expense and non-operating charges. The
Company recorded other income of $160 million and $16 million in the three
months ended December 31, 1999 and 1998, respectively. The Company recorded
other income of $197 million and $21 million in the six months ended December
31, 1999 and 1998, respectively. The increase in other income in the three and
six months ended December 31, 1999 was primarily attributable to a one-time gain
of $111 million from the Company's investment in Sandpiper, which was acquired
by Digital Island in December 1999, as well as an increase in interest income.
The increase in interest income is due to a higher cash balance and interest
earned on investments.
Provision for Income Taxes
The provision for income taxes was $173 million and $24 million in the
three months ended December 31, 1999 and 1998, respectively. The provision for
income taxes was $291 million and $30 million in the six months ended December
31, 1999 and 1998 respectively. Income tax expense for the three months ended
December 31, 1999 includes $172 million for U.S. federal and state income taxes
and $1 million for foreign taxes. Income tax expense for the six months ended
December 31, 1999 includes $289 million for U.S. federal and state income taxes
and $2 million for foreign taxes. As of December 31,1999, the Company had net
operating loss carryforwards of approximately $10.2 billion, primarily resulting
from stock option exercises, available to offset future U.S. federal taxable
income.
Segment Results of Operations
The Company operates two major lines of business: Interactive Online
Services and Enterprise Solutions. For further information regarding segments,
refer to Note 5 of the Notes to Consolidated Financial Statements.
<PAGE>
A summary of the segment financial information is as follows:
<TABLE>
Three months ended Six months ended
December 31, December 31,
1999 1998 1999 1998
------------ ----------- ------------ -----------
(Amounts in millions)
Revenues:
<S> <C> <C> <C> <C>
Interactive Online Services........... $1,504 $1,030 $2,849 $1,928
Enterprise Solutions.................. 117 118 239 219
------------ ----------- ------------ -----------
Total revenues.................... $1,621 $1,148 $3,088 $2,147
Income (loss) from operations:
Interactive Online Services (1)....... $ 381 $ 206 $ 713 $ 358
Enterprise Solutions (2)............. 22 (4) 48 (11)
General & Administrative.............. (114) (77) (207) (145)
Other (3)............................ (5) (2) (5) (2)
------------ ----------- ------------ -----------
Total income from operations...... $ 284 $ 123 $ 549 $ 200
</TABLE>
1. For the three months ended December 31, 1999 and 1998, Interactive Online
Services include goodwill and other intangible assets amortization of $17
million and $16 million, respectively. For the six months ended December
31, 1999 and 1998, Interactive Online Services include goodwill and other
intangible assets amortization of $35 million and $32 million,
respectively.
2. Enterprise Solutions amortization of goodwill and other intangible assets
is immaterial for all periods presented.
3. Other represents merger related costs.
For an overview of the segment revenues, refer to the consolidated
results of operations discussion earlier in this section.
Interactive Online Services income from operations increased from $206
million in the three months ended December 31, 1998 to $381 million in the three
months ended December 31, 1999 and increased from $358 million in the six months
ended December 31, 1998 to $713 million in the six months ended December 31,
1999. These increases are primarily the result of increases in subscription
services revenues and advertising, commerce and other revenues, coupled with
improved margins and a decrease in marketing expenses as a percentage of total
revenues.
Enterprise Solutions income (loss) from operations improved from a loss
of $(4) million in the three months ended December 31, 1998 to income of $22
million in the three months ended December 31, 1999 and a loss of $(11) million
in the six months ended December 31, 1998 to income of $48 million in the six
months ended December 31, 1999. These improvements were mainly attributable to
the increase in revenues, as well as a decline in operating expenses, as the
Company began to realize efficiencies from using the Company's infrastructure to
support the Enterprise Solutions segment, as well as the other lines of
businesses. In addition, Enterprise Solutions is experiencing benefits from the
Sun Alliance, which was not in place a year ago.
Liquidity and Capital Resources
The Company is currently financing its operations primarily through
cash generated from operations. In addition, the Company has generated cash from
the sale of its capital stock, the sale of its convertible notes and the sale of
marketable securities it held. The Company has financed its investments in
telecommunications equipment principally through leasing. Net cash provided by
operating activities was $796 million and $298 million in the six months ended
December 31, 1999 and 1998, respectively, and increased primarily due to the
Company's increase in net income before taxes. Net cash used in investing
activities was $617 million and $133 million in the six months ended December
31, 1999 and 1998, respectively, and increased mainly due to the Company's
purchases of property and equipment as well as investments including
available-for-sale securities. Net cash provided by financing activities was
$1,469 million and $689 million in the six months ended December 31, 1999 and
1998, respectively. Included in financing activities for the six months ended
December 31, 1999 was $1,250 million in proceeds from the issuance of
convertible debt. Included in financing activities for the six months ended
December 31, 1998, was $550 million in aggregate net proceeds from a public
offering of its common stock. The Company currently has approximately $3.8
billion available under a shelf registration filed in May 1999.
<PAGE>
The Company expects to continue using its working capital to finance
ongoing operations and to fund marketing programs and the development of its
products and services. The Company plans to continue to invest in subscriber
acquisition, retention and brand marketing to expand its subscriber base, as
well as in network, computing and support infrastructure. Additionally, the
Company expects to use a portion of its cash for the acquisition and subsequent
funding of technologies, content, products, investments or businesses
complementary to the Company's current business. The Company anticipates that
cash on hand, cash provided by operating activities and cash available from the
capital markets and traditional lending markets will be sufficient to fund its
operations for the next twelve months.
Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA")
The following table and discussion summarizes EBITDA for the three and
six months ended December 31, 1999 and 1998:
Three Months Ended Six Months Ended
December 31, December 31,
1999 1998 1999 1998
------------ ------------ ------------ -----------
(Amounts in millions)
EBITDA.................. $400 $201 $742 $335
The Company has modified its calculation of EBITDA to now exclude
interest income as well as interest expense. The Company defines EBITDA as net
income plus: (1) provision/(benefit) for income taxes, (2) interest, (3)
depreciation and amortization and (4) special one-time charges/(gains). EBITDA
is presented and discussed because the Company considers EBITDA an important
indicator of the operational strength and performance of its business including
the ability to provide cash flows to service debt and fund capital expenditures.
EBITDA, however, should not be considered an alternative to operating or net
income as an indicator of the performance of the Company, or as an alternative
to cash flows from operating activities as a measure of liquidity, in each case
determined in accordance with accounting principles generally accepted in the
United States. In addition, EBITDA as defined herein may not be comparable to
similarly titled measures reported by other companies.
For the three months ended December 31, 1999, EBITDA increased from
$201 million to $400 million or 99% over the three months ended December 31,
1998. The EBITDA margin (EBITDA divided by total revenues) increased from 12.4%
for the three months ended December 31, 1998 to 24.7% for the three months ended
December 31, 1999. For the six months ended December 31, 1999, EBITDA increased
from $335 million to $742 million or 123% over the six months ended December 31,
1998. The EBITDA margin increased from 15.6% for the six months ended December
31, 1998 to 24.0% for the six months ended December 31, 1999. In addition, the
incremental EBITDA margin (the current quarter increase over the year ago
quarter in EBITDA of $199 million divided by the increase in revenues of $473
million for the same periods) increased to nearly 42%. This increase in the
incremental EBITDA margin is mainly due to the shared infrastructure that
supports the Company's multiple brands; as these brands begin to generate
additional revenues, a larger percentage of each incremental dollar flows to
EBITDA.
<PAGE>
Year 2000 Compliance
The Company utilizes a significant number of computer software programs
and operating systems across its entire organization, including applications
used in operating its online services and Web sites, the proprietary software of
the AOL and CompuServe services, Netscape software products, member and customer
services, network access, content providers, joint ventures and various
administrative and billing functions.
In 1997, the Company appointed a Year 2000 Task Force to perform an
audit to assess the scope of the Company's risks and bring its applications into
compliance. This Task Force has overseen testing and is continuing its
assessment of the compliance company-wide. The Company's system hardware
components, client and host software, current versions of Netscape software
products and corporate business and information systems have been tested and
continue to be reviewed. To date, the Company has experienced few problems
related to Year 2000 compliance, and the problems that have been identified
either have been addressed or are in the process of being addressed. The Company
is not aware of any remaining significant problems related to Year 2000 issues
but is continuing to monitor the status of suppliers and vendors. There can be
no assurance that the Company or one of the entities it does business with will
not experience a Year 2000 problem that could have an effect on America Online.
The costs incurred through January 25, 2000 to address Year 2000
compliance were approximately $20 million. The Company currently estimates it
will incur a total of approximately $21 million in costs to support its
compliance initiatives.
Forward-Looking Statements
This report and other oral and written statements made by the Company
to the public contain and incorporate by reference forward-looking statements
within the meaning of the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995. In particular, statements regarding the following
subjects are forward-looking: the proposed AOL/Time Warner merger; future
financial and operating results; anticipated subscriber, usage and commerce
growth; new and developing markets, products, services, features and content;
anticipated timing and benefits of acquisitions and other alliances and
relationships; the availability, benefits, and timing of deployment of new
access and distribution technologies; and regulatory developments, including the
Company's ability to shape public policy in, for example, telecommunications,
privacy and tax areas.
The forward-looking statements are based on management's current
expectations or beliefs and are subject to a number of factors and uncertainties
that could cause actual results to differ materially from those described in the
forward-looking statements. Some of these factors and uncertainties include:
inability to obtain, or meet conditions imposed for, governmental approvals for
the AOL/Time Warner merger; failure of the Company's or Time Warner stockholders
to approve the merger; costs related to the merger; the risk that the Company
and Time Warner businesses will not be integrated successfully; and other
economic, business, competitive and/or regulatory factors affecting the
Company's business generally. For a discussion of other factors that could cause
actual results to differ materially from those described in the forward-looking
statements, please refer to the section entitled "Forward-Looking Statements" in
the Company's Annual Report on Form 10-K for the year ended June 30, 1999.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the potential loss arising from adverse changes in
market rates and prices, such as foreign currency exchange and interest rates.
The Company is exposed to immaterial levels of market risks, including these
types of risks. The Company does not enter into derivatives or other financial
instruments for trading or speculative purposes. From time to time, the Company
has entered into financial instruments to manage and reduce the impact of
changes in foreign currency exchange rates. In June 1998, the Company initiated
hedging activities to mitigate the impact on intercompany balances of changes in
foreign exchange rates. The Company uses foreign currency forward exchange
contracts as a vehicle for hedging these intercompany balances. A foreign
currency forward exchange contract obligates the Company to exchange
predetermined amounts of specified foreign currencies at specified exchange
rates on specified dates and to make or receive an equivalent U.S. dollar
payment equal to the value of such exchange. For these contracts that are
designated and effective as hedges, realized and unrealized gains and losses
resulting from changes in the spot exchange rate (including those from open,
matured and terminated contracts) are included in other income and net discounts
or premiums (the difference between the spot exchange rate and the forward
exchange rate at inception of the contract) are also accreted or amortized to
other income, over the life of each contract, using the straight-line method.
These gains and losses offset gains and losses on intercompany balances, which
are also included in other income. The related amounts due to or from
counterparties are included in other assets or other liabilities. In general,
these foreign currency forward exchange contracts mature in three months or
less. The estimated fair value of the contracts are immaterial due to their
short-term nature.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Please see Note 8 to the Notes to Consolidated Financial Statements
included herewith.
Item 2. Changes in Securities and Use of Proceeds
On November 30, 1999, the Company acquired Tegic Communications, Inc.
in exchange for the issuance of 4,614,300 shares of Company Common Stock. The
Company also reserved 180,280 shares of Company Common Stock for issuance
pursuant to warrant agreements and non-plan stock options. The private placement
is exempt from registration pursuant to Section 4(2) of the Securities Act of
1933, as amended.
On December 22, 1999, the Company acquired $200 million (2,725,026
shares) of Gateway common stock in exchange for $100 million in cash and $100
million (1,212,396 shares) of the Company's common stock in connection with the
strategic relationship with Gateway, Inc.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Stockholders on October 28,
1999. Following are descriptions of the matters voted on and the results of such
meeting:
<TABLE>
Number of Shares
Matter Voted On For Against Abstain
1. Election of Directors:
<S> <C> <C> <C>
Stephen M. Case 960,909,057 3,623,411 N/A
Thomas Middelhoff 960,970,099 3,562,369 N/A
Marjorie Scardino 960,958,094 3,574,374 N/A
2. Amendment of Restated Certificate of 832,975,502 128,466,122 3,090,844
Incorporation to increase the number of authorized
shares
3. Approval of the Company's 1999 Stock Plan 710,505,063 246,826,087 7,201,318
4. Approval of the Company's Executive Incentive 935,454,630 21,217,993 7,859,845
Plan
5. Proposal to ratify the appointment of Ernst & 960,609,314 1,070,478 2,852,676
Young, LLP as the Company's independent public
accountants for the fiscal year ended June 30, 2000
</TABLE>
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
<TABLE>
Form Item # Description Filing Date
- ---- ------ ----------- -----------
<S> <C> <C> <C>
Form 8-K 5, 7 Filed to incorporate by reference the Underwriting December 2, 1999
Agreement, Form of Indenture, Form of Supplemental
Indenture and Form T-1
Form 8-K 5, 7 Announcement of entering into an Agreement and December 29, 1999
Plan of Merger, dated as of December 21, 1999 with
MapQuest.com, Inc.
Announcement of strategic relationship with
Gateway, Inc.
</TABLE>
<PAGE>
AMERICA ONLINE, INC.
SIGNATURES
Pursuant to the requirements of 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.
AMERICA ONLINE, INC.
DATE: February 14, 2000 SIGNATURE: /s/Stephen M. Case
Stephen M. Case
Chairman of the Board and
Chief Executive Officer
DATE: February 14, 2000 SIGNATURE: /s/J. Michael Kelly
J. Michael Kelly
Senior Vice President and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-END> DEC-31-1999
<CASH> 2535
<SECURITIES> 518
<RECEIVABLES> 545
<ALLOWANCES> 62
<INVENTORY> 26
<CURRENT-ASSETS> 3816
<PP&E> 1320
<DEPRECIATION> 430
<TOTAL-ASSETS> 10301
<CURRENT-LIABILITIES> 2162
<BONDS> 0
0
0
<COMMON> 23
<OTHER-SE> 6228
<TOTAL-LIABILITY-AND-EQUITY> 10301
<SALES> 3088
<TOTAL-REVENUES> 3088
<CGS> 1621
<TOTAL-COSTS> 2539
<OTHER-EXPENSES> 15
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12
<INCOME-PRETAX> 746
<INCOME-TAX> 291
<INCOME-CONTINUING> 455
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 455
<EPS-BASIC> .20
<EPS-DILUTED> .18
</TABLE>
