<PAGE>
Filed Pursuant to Rule 424(b)(4)
Registration No. 333-73449
PROSPECTUS
[LOGO]
6,500,000 SHARES
JUNO ONLINE SERVICES, INC.
COMMON STOCK
---------------
We are selling 6,500,000 shares of our common stock. The underwriters named
in this prospectus may purchase up to 975,000 additional shares of our common
stock to cover over-allotments.
This is an initial public offering of common stock. Our common stock has
been approved for quotation on the Nasdaq National Market under the symbol
"JWEB".
------------------------
INVESTING IN THE COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING
ON PAGE 9.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
------------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
------------- -------------
<S> <C> <C>
Initial Public Offering Price........................................................ $ 13.00 $ 84,500,000
Underwriting Discount(1)............................................................. $ 0.91 $ 5,915,000
Proceeds to Juno Online Services, Inc................................................ $ 12.09 $ 78,585,000
</TABLE>
(1) For a further description of underwriting compensation, please see
"Underwriting".
The underwriters are offering the shares subject to various conditions. The
underwriters expect to deliver the shares to purchasers on or about June 1,
1999.
------------------------
SALOMON SMITH BARNEY
BEAR, STEARNS & CO. INC.
PAINEWEBBER INCORPORATED
MAY 25, 1999
<PAGE>
Description of graphics on inside front, gatefold and back cover pages of
prospectus:
Inside Front Cover:
[JUNO] [Juno Logo]
The caption at the top of the page reads:
"Our multiple service levels and easy-to-use, intuitive software are designed to
attract a broad spectrum of users by offering a gradual migration path onto the
Internet."
The picture in the upper right corner depicts the "Juno Web" portion of the Juno
Web site. The sidebar text reads:
"Juno Web
Full Internet access through either of the two most popular Web browsers."
The picture in the middle depicts the "Juno Gold" portion of the Juno Web site.
The sidebar text reads:
"Juno Gold
Enhanced e-mail: send pictures, spreadsheets, word processor files, and more."
The picture in the lower left corner depicts the "Basic Free E-mail" portion of
the Juno Web site. The sidebar text reads:
"Juno's Basic Service
Basic dial-up Internet e-mail, provided to the end user for free."
The caption at the bottom of the page reads:
"Juno Online Services, Inc. is a leading provider of Internet-related services
to millions of computer users throughout the United States. Our services and
software have been designed with special attention to the needs of consumers who
are just now beginning to explore the Internet. Subscribers who are not yet
ready to use or pay for the full capabilities of the Internet can begin with our
basic e-mail service or with Juno Gold, then migrate to Juno Web once they are
ready to do so."
<PAGE>
Gatefold:
[JUNO Online Services]
The picture on these pages depicts a Juno user's inbox as it appears on that
user's computer screen. Across the top of the screen is an ad banner for Qwest,
as well as three icons representing three features of Juno Online Services:
Read, Write and Web. The numbered sidebar text points to each of the icons, and
reads:
"[1]
Click to read.
Read and organize your incoming e-mail on Juno's "Read" screen."
"[2]
Click to write.
Send messages to anyone with an Internet e-mail address -- along with pictures
and more, if you are a Juno Gold or Juno Web subscriber."
"[3]
Click to go to the Web.
As a Juno Web subscriber, you can click here to connect to the Web, starting
each session at Juno's "portal" site.
Below the ad banner and icons is the Juno user's inbox, which lists various
e-mail messages received, and below that list is the text of an e-mail message
to the Juno user, including two attachments.
Below and to the right of the picture of the computer screen is text that reads:
"Above: Version 2.0 of Juno's software."
To the right of the screen picture is a depiction of the Juno home page,
entitled "Juno Web," including a search window, as well as various hyperlinks to
other spots on the Juno Web site. The caption below it reads:
"home.juno.com
When Juno Web subscribers begin a Web session, the first pages they see provide
them with a broad set of tools and content to help them understand, navigate,
and use the Web."
[Juno Logo]
<PAGE>
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. JUNO
ONLINE SERVICES HAS NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT
INFORMATION. JUNO ONLINE SERVICES IS NOT MAKING AN OFFER OF THESE SECURITIES IN
ANY STATE WHERE THE OFFER IS NOT PERMITTED. YOU SHOULD NOT ASSUME THAT THE
INFORMATION PROVIDED BY THIS PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN
THE DATE ON THE FRONT OF THIS PROSPECTUS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary........................................................................................ 4
Risk Factors.............................................................................................. 9
Forward-Looking Statements................................................................................ 25
Use of Proceeds........................................................................................... 26
Dividend Policy........................................................................................... 26
Capitalization............................................................................................ 27
Dilution.................................................................................................. 28
Selected Consolidated Financial Data...................................................................... 29
Management's Discussion and Analysis of Financial Condition and Results of Operations..................... 31
Business.................................................................................................. 49
Management................................................................................................ 62
Certain Transactions...................................................................................... 73
Principal Stockholders.................................................................................... 76
Description of Capital Stock.............................................................................. 78
Shares Eligible for Future Sale........................................................................... 82
United States Tax Consequences to Non-United States Holders............................................... 84
Underwriting.............................................................................................. 87
Legal Matters............................................................................................. 90
Experts................................................................................................... 90
Where You Can Find Additional Information................................................................. 90
Index to Consolidated Financial Statements................................................................ F-1
</TABLE>
------------------------
Until June 19, 1999 (25 days after the date of this prospectus), all dealers
that buy, sell or trade the common stock, whether or not participating in this
offering, may be required to deliver a prospectus. This is in addition to the
dealers' obligation to deliver a prospectus when acting as underwriters and with
respect to their unsold allotments or subscriptions.
3
<PAGE>
PROSPECTUS SUMMARY
BECAUSE THIS IS ONLY A SUMMARY, IT DOES NOT CONTAIN ALL OF THE INFORMATION
THAT MAY BE IMPORTANT TO YOU. YOU SHOULD READ THE ENTIRE PROSPECTUS, INCLUDING
"RISK FACTORS" AND THE CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES THERETO,
BEFORE DECIDING TO INVEST IN OUR COMMON STOCK.
OUR COMPANY
Juno Online Services, Inc. is a leading provider of Internet-related
services to millions of computer users throughout the United States. We offer
several levels of service, ranging from basic dial-up Internet e-mail--which is
provided to the end user for free--to full, competitively priced access to the
World Wide Web. Our strategy of offering several different service levels and
our easy-to-use, intuitive software are designed to attract a broad spectrum of
users, including those who are interested only in e-mail, those who initially
begin with e-mail but over time develop a need for Web access, and those who
seek full Web access from the outset.
Our services are provided nationwide through over 1,900 local telephone
numbers, which we lease from several providers. These phone numbers can be
reached by the vast majority of the U.S. population without having to place a
long distance telephone call. Our revenues are derived primarily from the
subscription fees we charge for the use of our more advanced service levels,
from the sale of advertising, and from the direct sale of products to our
subscribers.
From the time of our inception, we have pursued a two-phase business
strategy. During the first phase, we focused on building computer systems and
related infrastructure that could be rapidly expanded to accommodate increasing
numbers of users and on maximizing the number of subscribers to our free basic
e-mail service. We believed that offering this service for free would allow us
to rapidly and cost-effectively build a large user base from which we might
ultimately expect to derive various forms of revenue. We planned to draw on our
ability to communicate inexpensively with our user base in order to display
advertising and market products to our subscribers. We believed the economics of
these activities would be enhanced by technology we had developed that allowed
us to take advantage of a substantial number of hours of customer contact while
paying for a much smaller number of hours during which customers were actually
connected by telephone to our central computers. In addition, we planned to
offer our basic e-mail users the opportunity to purchase more advanced services
including full Web access for which we would charge subscription fees. We
believed that our basic e-mail users would be more likely to purchase these
advanced services from us than from a competing service provider due to their
expected reluctance to switch e-mail addresses.
In July 1998, we commenced the second phase of our business strategy by
introducing two additional service levels, for which we receive subscription
fees. JUNO GOLD supplements our basic e-mail service by allowing users to send
and receive non-text files such as pictures, spreadsheets, and word processor
documents. JUNO WEB provides full Internet access using either of the two most
popular Web browsers.
More than 6.8 million Juno accounts have been created since the launch of
our basic e-mail service in April 1996. During the month of March 1999, an
average of 912,000 user accounts dialed into our service on any given day, with
a total of 2.4 million user accounts connecting during the full month of March,
and 3.1 million during the three-month period ending March 31, 1999. We launched
Juno Gold and Juno Web, our billable subscription services, on July 22, 1998,
and as of March 31, 1999, we had approximately 207,000 subscribers to these
services, consisting of approximately 86,000 subscribers to Juno Gold and
approximately 121,000 to Juno Web. We have initially marketed Juno Gold and Juno
Web only to our own free e-mail subscribers. We intend, however, to begin
marketing these services beyond the existing Juno user base through a
substantial external marketing campaign beginning in the second quarter of 1999.
4
<PAGE>
As of March 31, 1999, approximately 200 firms had advertised on the Juno
services. We have also entered into a number of major strategic marketing
alliances, including several that involve multi-million-dollar guaranteed
minimum payments to Juno. Our strategic marketing alliances include multi-year
agreements with First USA, Qwest, and The Hartford, as well as a one-year
agreement with AT&T Wireless Services. These advertising and strategic marketing
activities benefit from our ability to target advertising to selected segments
of the Juno subscriber base on the basis of a wide variety of information
obtained from a detailed electronic questionnaire that must be completed in
order to sign up for Juno's basic e-mail service.
MARKET OPPORTUNITY
The Internet is becoming an increasingly significant global medium for
communications, advertising, and commerce. International Data Corporation
estimates that more than 56 million individuals in the United States used the
Internet in 1998, and projects that this figure will reach 136 million by the
year 2002. IDC also projects that consumer-targeted dial-up Internet access
revenues in the U.S. will grow from $4.7 billion in 1998 to $10.6 billion in
2002. In addition, Jupiter Communications has projected that online advertising
expenditures will grow from an estimated $1.9 billion in 1998 to $7.7 billion in
2002.
OUR STRATEGY
We seek to strengthen our position as a leading provider of consumer
Internet-related services. In particular, we plan to:
- Rapidly expand our overall subscriber base
- Migrate subscribers to higher levels of service
- Leverage and expand our strategic marketing alliances and advertising
sales
- Embrace new technologies while maintaining technology independence
RECENT DEVELOPMENTS
In March 1999, Juno completed a private placement of redeemable convertible
preferred stock with a group of investors including Intel Corporation, News
Corporation, Prospect Street Ventures and Sycamore Ventures. We received net
proceeds of $61.8 million from this private placement. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
5
<PAGE>
THE OFFERING
The following information excludes 3,305,935 shares of common stock issuable
upon the exercise of stock options outstanding as of May 24, 1999, with a
weighted average exercise price of $4.55 per share.
<TABLE>
<S> <C>
Common Stock Offered................ 6,500,000 shares
Common Stock Outstanding
After this Offering............... 34,603,089 shares
Use of Proceeds..................... We intend to use the net proceeds of this offering
for subscriber acquisition, advertising, brand
marketing, continued investment in the development of
our Internet services, enhancements of our network
infrastructure, repayment of approximately $8.8
million of debt to an affiliated entity and other
general corporate purposes. We may also use a portion
of the proceeds for acquisitions, strategic
alliances, or joint ventures. See "Use of Proceeds."
Nasdaq National Market Symbol....... "JWEB"
</TABLE>
------------------------
"Juno Web" and "Juno Gold" are trademarks, and "Juno" and Juno Online
Services, Inc.'s logo are registered trademarks, of Juno Online Services, Inc.
Each trademark, trade name or service mark of any other company appearing in
this prospectus belongs to its holder.
Juno Online Services, Inc. was incorporated in Delaware on July 2, 1996 and
is the successor by merger to Juno Online Services, L.P., which was formed on
June 30, 1995 as a Delaware limited partnership. Our principal executive offices
are located at 1540 Broadway, New York, New York 10036. Our telephone number at
that location is (212) 597-9000. INFORMATION CONTAINED ON OUR WEB SITES DOES NOT
CONSTITUTE PART OF THIS PROSPECTUS. References in this prospectus to "Juno,"
"we," "our," and "us" refer to Juno Online Services, Inc., a Delaware
corporation, and its predecessor prior to the merger, Juno Online Services,
L.P., a Delaware limited partnership.
------------------------
UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS:
- REFLECTS THE STATUTORY MERGER OF JUNO ONLINE SERVICES, L.P. WITH AND INTO
JUNO ONLINE SERVICES, INC. ON MARCH 1, 1999;
- REFLECTS A 1 FOR 4.5 REVERSE STOCK SPLIT OF EACH CLASS OF OUR CAPITAL
STOCK TO BE EFFECTED PRIOR TO THE CLOSING OF THIS OFFERING;
- REFLECTS THE AUTOMATIC CONVERSION OF ALL SHARES OF REDEEMABLE CONVERTIBLE
PREFERRED STOCK INTO 27,822,751 SHARES OF OUR COMMON STOCK UPON THE
CLOSING OF THIS OFFERING; AND
- ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION.
6
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
The following table sets forth summary consolidated financial and operating
data for Juno. You should read this information together with the consolidated
financial statements and the notes to those statements appearing elsewhere in
this prospectus. See "Selected Consolidated Financial Data" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(JUNE 30, THREE MONTHS
1995) TO YEAR ENDED DECEMBER 31, ENDED MARCH 31,
DECEMBER 31, ---------------------------------- ----------------------
1995 1996 1997 1998 1998 1999
------------ ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Billable services............... $ -- $ 6 $ 1,371 $ 6,645 $ 465 $ 5,806
Advertising and transaction
fees.......................... -- 127 1,875 6,454 1,228 2,265
Direct product sales............ -- 3 5,845 8,595 2,577 1,649
------------ ---------- ---------- ---------- ---------- ----------
Total revenues................ -- 136 9,091 21,694 4,270 9,720
------------ ---------- ---------- ---------- ---------- ----------
Cost of revenues:
Billable services............... -- -- 1,053 5,606 387 4,678
Advertising and transaction
fees.......................... -- 278 1,659 3,725 825 1,080
Direct product sales............ -- 3 5,796 7,627 2,426 1,424
------------ ---------- ---------- ---------- ---------- ----------
Total cost of revenues........ -- 281 8,508 16,958 3,638 7,182
------------ ---------- ---------- ---------- ---------- ----------
Operating expenses:
Operations, free service........ -- 5,803 11,075 9,383 2,824 1,846
Subscriber acquisition.......... 592 6,993 3,140 5,334 1,453 2,700
Sales and marketing............. 389 4,276 12,593 11,584 4,270 2,312
Product development............. 2,577 3,741 4,860 7,345 1,835 1,854
General and administrative...... 275 2,172 2,897 2,760 914 704
------------ ---------- ---------- ---------- ---------- ----------
Total operating expenses...... 3,833 22,985 34,565 36,406 11,296 9,416
------------ ---------- ---------- ---------- ---------- ----------
Loss from operations.......... (3,833) (23,130) (33,982) (31,670) (10,664) (6,878)
Interest income, net.............. -- 128 243 44 74 111
------------ ---------- ---------- ---------- ---------- ----------
Net loss...................... $ (3,833) $ (23,002) $ (33,739) $ (31,626) $ (10,590) $ (6,767)
------------ ---------- ---------- ---------- ---------- ----------
------------ ---------- ---------- ---------- ---------- ----------
Pro forma basic and diluted net
loss per share (1).............. $ (1.85) $ (0.32)
---------- ----------
---------- ----------
Weighted average shares
outstanding used in pro forma
basic and diluted per share
calculation (1)................. 17,091 21,225
---------- ----------
---------- ----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------------------------------------ ----------------------
<S> <C> <C> <C> <C> <C> <C>
1995 1996 1997 1998 1998 1999
------------ ---------- ---------- ---------- ---------- ----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
SELECTED SUBSCRIBER DATA:
Total subscriber accounts as of
(2)............................. -- 1,042 3,887 6,336 4,699 6,817
Subscriber accounts that
connected in the three-month
period ended.................. -- 1,002 2,512 3,108 2,924 3,108
Subscriber accounts that
connected in the month
ended......................... -- 823 1,986 2,434 2,340 2,438
Average subscriber accounts that
connected per day in the month
ended......................... -- 280 644 887 889 912
Billable subscription service
accounts as of (3).............. -- -- -- 144 -- 207
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
MARCH 31, 1999
-------------------------
<S> <C> <C>
ACTUAL AS ADJUSTED(4)
--------- --------------
<CAPTION>
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................................................. $ 53,165 $ 121,938
Working capital....................................................................... 48,000 118,333
Total assets.......................................................................... 71,660 140,433
Total indebtedness, including current maturities...................................... 9,930 1,118
Redeemable convertible preferred stock................................................ 141,431 --
Total stockholders' equity (deficit).................................................. (98,829) 120,187
</TABLE>
- ------------------------
(1) Gives pro forma effect to the following:
- treatment of Class A limited partnership units as common stock for all
periods presented; and
- conversion of Series B redeemable convertible preferred stock for the
period following the March 1999 statutory merger.
See the consolidated financial statements and the notes to these statements
appearing elsewhere in this prospectus for the determination of the number
of shares used in computing pro forma basic and diluted loss per share.
(2) Includes all user accounts created since Juno's inception, regardless of
activity level, if any, net of accounts that have been cancelled.
(3) Billable subscription service accounts are a subset of total subscriber
accounts and, to the extent applicable, are also included in the number of
subscriber accounts shown as having connected during the periods described.
(4) As adjusted to reflect the following:
- the sale of 6,500,000 shares of common stock offered hereby at an initial
public offering price of $13.00 per share after deducting the underwriting
discount and estimated offering expenses payable by Juno;
- the repayment of approximately $8.8 million of debt; and
- the automatic conversion of all outstanding shares of redeemable
convertible preferred stock into 27,822,751 shares of common stock upon
the closing of this offering.
See "Use of Proceeds" and "Capitalization."
8
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW BEFORE MAKING AN
INVESTMENT DECISION. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS
AND FINANCIAL RESULTS MAY SUFFER. IN THAT CASE, THE TRADING PRICE OF OUR COMMON
STOCK COULD DECLINE AND YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT.
BECAUSE WE HAVE OFFERED OUR BASIC E-MAIL SERVICE FOR ONLY THREE YEARS AND OUR
BILLABLE SUBSCRIPTION SERVICES FOR LESS THAN ONE YEAR, THERE IS LIMITED
INFORMATION UPON WHICH YOU CAN EVALUATE OUR BUSINESS
We have a limited operating history upon which you can evaluate our business
and our services. We began offering our free basic e-mail service to the public
in April 1996 and first offered our initial billable subscription services to
the public in July 1998. As a company in the new and rapidly evolving market for
Internet services, we face numerous risks and uncertainties. Some of these risks
relate to our ability to:
- attract and retain subscribers to our free basic e-mail service and to
Juno Gold and Juno Web, our billable subscription services;
- anticipate and adapt to the changing Internet market;
- generate advertising revenues and direct product sales;
- maintain and develop strategic relationships with business partners to
market their products over our services;
- implement an effective marketing strategy to promote awareness of the Juno
services;
- respond to actions taken by our competitors;
- develop and deploy successive versions of the Juno software necessary to
use our services;
- operate computer systems and related infrastructure adequate to
effectively manage our growth and provide our basic e-mail service and our
billable subscription services;
- manage the billing systems used to invoice subscribers to Juno Gold and
Juno Web; and
- attract, retain and motivate qualified personnel.
Our business and financial results will depend heavily on the commercial
acceptance and profitability of our billable subscription services. If we are
unsuccessful in addressing these risks or in executing our business strategy,
our business and financial results may suffer. Please see "Management's
Discussion and Analysis of Financial Condition and Results of Operations" for
detailed information on our limited operating history.
WE HAVE A HISTORY OF LOSSES SINCE OUR INCEPTION IN 1995 AND EXPECT CONTINUED
LOSSES FOR THE FORESEEABLE FUTURE
Since our inception in 1995, we have not been profitable. We have incurred
substantial costs to create and introduce our various services, to operate these
services, to promote awareness of these services and to grow our business. We
incurred net losses of approximately $3.8 million from inception through
December 31, 1995, $23.0 million for the year ended December 31, 1996, $33.7
million for the year ended December 31, 1997, $31.6 million for the year ended
December 31, 1998 and $6.8 million for the three months ended March 31, 1999. As
of March 31, 1999, our accumulated net losses totaled $99.0 million. We incurred
negative cash flows from operations of approximately $16.4 million for the year
ended December 31, 1996, $33.6 million for the year ended December 31, 1997 and
$20.9 million for the year ended December 31, 1998. For the three months ended
March 31, 1999, we used $6.2 million in cash for working capital purposes and to
fund losses from operations. In addition, we paid $10.0 million for advertising
that may be used at any time prior to March 2001, bringing total net cash used
in operating activities to $16.2 million.
9
<PAGE>
Since we operated as a limited partnership prior to the merger of Juno
Online Services, L.P. into Juno Online Services, Inc. in March 1999, taxable
losses incurred prior to the merger were allocated to the partners of Juno
Online Services, L.P. for reporting on their income tax returns. As a result, we
will not be able to offset future taxable income, if any, against losses
incurred prior to the merger.
We expect operating losses and negative cash flows to continue for the
foreseeable future as we continue to incur significant expenses. We cannot
assure you that we will ever be successful in implementing our business
strategies or in addressing the risks and uncertainties facing our company. Even
if we do address these risks successfully, we may not be profitable in the
future. Were we to achieve profitability, we cannot assure you that we would be
able to sustain or increase profitability on a quarterly or annual basis in the
future. Please see "Selected Consolidated Financial Data" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" for
more detailed information.
JUNO'S BUSINESS IS SUBJECT TO FLUCTUATIONS IN OPERATING RESULTS WHICH MAY
NEGATIVELY IMPACT THE PRICE OF OUR STOCK
Our revenues, expenses and operating results have varied in the past and may
fluctuate significantly in the future due to a variety of factors, many of which
are outside of our control. These factors include, among others:
- the rate of new subscriber acquisitions and seasonal trends relating to
subscriber usage of our services;
- the timing and effectiveness of our marketing efforts to acquire
subscribers and promote the Juno brand;
- the timing and effectiveness of any revenue sharing arrangements or other
strategic alliances into which we enter;
- the demand for Internet advertising and seasonal trends relating to
Internet advertising spending;
- seasonal trends relating to the demand for products sold over the
Internet;
- capital expenses related to upgrading our computer systems and related
infrastructure;
- our ability to protect our systems from any telecommunications failures,
power loss, or software-related system failures;
- our ability to integrate operations and technologies from any acquisitions
or other business combinations or relationships into which we enter;
- the extent to which we experience increased competition in the markets for
Internet services, Internet advertising and direct product sales;
- changes in operating expenses including, in particular, telecommunications
expenses and the cost of providing various types of technical and
non-technical customer support to our subscribers; and
- economic conditions specific to the Internet as well as general economic
and market conditions.
Since we expect to be heavily dependent on revenues from our billable
subscription services in the foreseeable future, our revenues are likely to be
particularly affected by our ability to recruit new subscribers directly for our
billable subscription services, upgrade users of our free basic e-mail service
to our billable subscription services, and retain subscribers to our billable
subscription services. In addition, our operating expenses are based on our
expectations of our future revenues and are relatively fixed in the short term.
We may be unable to adjust spending quickly enough to offset any unexpected
revenue shortfall, which may cause our business and financial results to suffer.
10
<PAGE>
Due to all of the foregoing factors and the other risks discussed in this
section, you should not rely on quarter-to-quarter comparisons of our results of
operations as an indication of future performance. It is possible that in some
future periods our results of operations may be below the expectations of public
market analysts and investors. In this event, the price of our common stock is
likely to fall. Please see "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for detailed information on our operating
results.
OUR BUSINESS MAY SUFFER IF WE HAVE DIFFICULTY ACQUIRING SUBSCRIBERS TO OUR FREE
BASIC E-MAIL SERVICE, JUNO GOLD OR JUNO WEB
We may not succeed in acquiring a sufficiently large subscriber base for our
free basic e-mail service and our billable subscription services, or in
persuading a significant number of our free basic e-mail subscribers to upgrade
to Juno Gold and Juno Web.
To acquire new members, we currently rely on multiple distribution channels
for our free proprietary software that enables subscribers to use our services.
Our ability to recruit new subscribers may depend on our ability to enter into
additional distribution agreements and to retain our current distribution
partners. We cannot be sure that we will be able to enter into additional, or
maintain or replace our current, distribution agreements on favorable terms, or
that any of our distribution partners will be able to market our services
effectively. Many of our distribution partners also distribute competing
products, and are free to terminate our distribution arrangements at their
convenience. Our inability to recruit, manage or retain distribution partners,
or the inability of these distribution partners to effectively promote and
distribute our software, may cause our business and financial results to suffer.
Our business strategy contemplates that a significant percentage of the
subscribers to our free basic e-mail service will decide over time to upgrade to
Juno Gold and Juno Web. We are relying on this migration as a major source of
subscribers to these billable subscription services and, since July 1998, we
have conducted advertising to our free e-mail subscribers to encourage them to
upgrade. Over time, repeated exposure to these advertisements may cause their
effectiveness to decline. As a result, we expect that we will need to rely on
more expensive forms of external marketing and promotion to attract additional
users directly to our billable subscription services, as well as to attract new
users to our free basic e-mail service. If our marketing techniques fail to
generate the anticipated conversion rate from free to billable subscription
services, if the acquisition cost for subscribers acquired directly into our
billable subscription services is greater than expected, or if technical
limitations make the conversion process more difficult or time-consuming than
anticipated, our business and financial results may suffer. Please see "--Our
marketing program may not succeed in generating new subscribers or in persuading
subscribers to upgrade to Juno Gold or Juno Web" for more information on our
marketing activities.
OUR BUSINESS MAY SUFFER IF WE HAVE DIFFICULTY RETAINING SUBSCRIBERS TO OUR FREE
BASIC E-MAIL SERVICE, JUNO GOLD OR JUNO WEB
Our business and financial results are also dependent on our ability to
retain subscribers to our services. Each month, a significant number of
subscribers to our billable subscription services choose to cancel the service.
In addition, a significant number of subscribers to our free basic e-mail
service become inactive each month. As a result, the total number of subscribers
using our free basic e-mail service in a given month has remained substantially
the same over the last six months, even though we have added new subscribers
during that period. We believe that intense competition has caused, and may
continue to cause, some of our subscribers to switch to other services. It is
relatively easy for Internet users to switch to competing providers and we
cannot be certain that any steps we take will maintain or improve subscriber
retention. In addition, some new subscribers may decide to use our services out
of curiosity regarding the Internet, or to take advantage of low-cost
introductory offers for Juno Gold and Juno Web, and may later discontinue using
our services. Furthermore, we may in the
11
<PAGE>
future charge a fee for our basic e-mail service or limit the amount a
subscriber may use this service in a given period. In the event we were to
implement these kinds of charges and/or restrictions, we may lose a significant
number of our basic e-mail subscribers. If we are unable to retain subscribers
to both our basic e-mail service and our billable subscription services, or if
we experience an increase in the rate of cancellations by subscribers to our
billable subscription services, our business and financial results may suffer.
Please see "--Competition in the markets for Internet services, Internet
advertising and direct product sales is likely to increase in the future and may
harm our business" for more information concerning the competition facing our
business.
OUR MARKETING PROGRAM MAY NOT SUCCEED IN GENERATING NEW SUBSCRIBERS OR IN
PERSUADING SUBSCRIBERS TO UPGRADE TO JUNO GOLD OR JUNO WEB
We expect to use a significant portion of the proceeds from this offering
for an extensive marketing campaign. This campaign will be directed at
encouraging users to sign up directly for our billable subscription services and
persuading users of our free basic e-mail service to upgrade to our billable
subscription services. This marketing program may include forms of advertising,
such as television and radio advertising, with which we have limited experience.
There are risks that this campaign may not be effective in accomplishing one or
both of these goals. In addition, it is possible that, over time, it will become
more difficult and expensive to effectively market Juno Gold and Juno Web to
users of our free basic e-mail service and that the rate at which users of the
free basic e-mail service upgrade to our billable subscription services will
decline. We also do not know what kind of advertising our competitors will
undertake, the timing and extent of advertising by our competitors, or whether
this will impact our marketing plans or expenses. If we incur significant costs
in implementing our marketing program without generating sufficient new
subscribers to our services, our business and financial results will suffer.
COMPETITION IN THE MARKETS FOR INTERNET SERVICES, INTERNET ADVERTISING AND
DIRECT PRODUCT SALES IS LIKELY TO INCREASE IN THE FUTURE AND MAY HARM OUR
BUSINESS
The market for Internet services is extremely competitive and includes a
number of substantial participants, including America Online, Microsoft and
AT&T. The markets for Internet-based advertising and direct product sales are
also very competitive.
INTENSE COMPETITION EXISTS IN THE MARKET FOR INTERNET SERVICES
We may not be able to compete successfully against current or future
competitors, and the competitive pressures that we face may cause our business
and financial results to suffer. We believe that the primary competitive factors
determining success in these markets include a reputation for reliability and
service, effective customer support, pricing, easy-to-use software and
geographic coverage. Other important factors include the timing and introduction
of new products and services and industry and general economic trends. Our
ability to compete depends upon many factors, many of which are outside of our
control. We expect this competition to continue to increase because the markets
in which we operate face few substantial barriers to entry. Competition may also
intensify as a result of industry consolidation and the ability of some of our
competitors to bundle Internet services with other products and services. Our
current and potential competitors include many large national companies that
have substantially greater market presence and financial, technical,
distribution, marketing and other resources than we have. This may allow them to
devote greater resources than we can to the development, promotion and
distribution and sale of products and services.
In recruiting subscribers for our billable subscription services, we
currently compete, or expect to compete, with the following types of companies,
among others:
- Established online service providers such as America Online, CompuServe,
and The Microsoft Network;
12
<PAGE>
- Independent national Internet service providers such as EarthLink,
MindSpring, and Prodigy;
- Numerous independent regional and local Internet service providers which
may offer lower prices than a national Internet service provider;
- Various national and local telephone companies such as AT&T, MCI WorldCom
and Pacific Bell; and
- Companies providing Internet access through "set-top boxes" connected to a
user's television, such as WebTV, or through a "cable modem" connected to
a user's personal computer, such as @Home.
In addition, Microsoft and Netscape, publishers of the Web browsers utilized
by most Internet users, including subscribers to Juno Web, each own or are owned
by online or Internet service providers that compete with Juno Web.
In providing e-mail-related services, we compete with Web-based e-mail
services such as Microsoft's Hotmail and USA.net's Net@ddress.
In addition, we do not currently compete internationally. If the ability to
provide Internet services internationally becomes a competitive advantage in our
markets and we do not begin to provide services internationally, we will be at a
disadvantage relative to our competitors.
WE RELY ON REVENUES FROM ADVERTISING AND DIRECT PRODUCT SALES
With respect to the generation of advertising revenue, we compete with many
of the market participants listed above as well as with various
advertising-supported Web sites, including "portal" sites such as Yahoo! and
Excite, "content" sites such as CNET and CNN.com, and interactive advertising
networks and agencies such as DoubleClick and 24/7 Media. We also compete with
traditional media such as print and television for a share of advertisers' total
advertising budgets. If advertisers perceive the Internet to be a limited or
ineffective advertising medium or perceive us to be less effective or less
desirable than other Internet advertising vehicles, advertisers may be reluctant
to advertise on our services. In selling products directly to our subscribers,
we compete with other Internet-based sellers as well as with stores and other
companies that do not distribute their products through the Internet. Many of
these competitors are larger than we are, enjoy greater economies of scale than
are available to us, have substantially greater resources than we have, and may
be able to offer more products or more attractive prices than we can. We believe
that this competition is likely to increase in the future. Please see "--Our
business may be adversely affected if the market for Internet advertising fails
to develop" and "--We rely on a single external marketing partner to fulfill
most of our direct product sales" for more information regarding our advertising
and direct products sales activities.
OUR COMPETITION IS LIKELY TO INCREASE IN THE FUTURE
Our competition is likely to increase. We believe this will probably happen
as Internet service providers and online service providers consolidate and
become larger, more competitive companies, and as large diversified
telecommunications and media companies acquire Internet service providers. The
larger Internet service providers and online service providers, including
America Online, offer their subscribers services such as instant messaging,
community message boards, and personal Web page hosting that we do not currently
provide. Some diversified telecommunications and media companies, such as AT&T,
have begun to bundle other services and products with Internet access services,
potentially placing us at a significant competitive disadvantage. These
competitors may be able to charge less than we do for Internet services, causing
us to reduce, or preventing us from raising, fees for our billable subscription
services. The ability of our competitors to enter into strategic alliances or
joint ventures could also put us at a serious competitive disadvantage.
Competition could require us to increase our spending for sales and marketing as
well as for subscriber acquisition in order to maintain our position in the
marketplace, and could also result in increased subscriber attrition. Any of
these
13
<PAGE>
scenarios could harm our business and financial results, and we may not have the
resources to continue to compete successfully.
WE ARE DEPENDENT ON STRATEGIC MARKETING ALLIANCES AS A SOURCE OF REVENUES AND
OUR BUSINESS COULD SUFFER IF ANY OF THESE ALLIANCES ARE TERMINATED
Most of our strategic marketing partners have the right to terminate their
agreements with us on short notice. In February 1999, Bank of America notified
us of the termination of its agreement with us concerning the marketing of
credit cards to our subscribers, effective May 1, 1999. We have strategic
marketing alliances with a number of third parties, including AT&T Wireless,
Qwest, and The Hartford. We have also entered into a strategic marketing
alliance with First USA which became effective May 2, 1999. If any of our
strategic marketing agreements are terminated, we cannot assure you that we will
be able to replace the terminated agreement with an equally beneficial
arrangement. We also cannot assure you that we will be able to renew any of our
current agreements when they expire or, if we are, that we will be able to do so
on acceptable terms. We also do not know whether we will be successful in
entering into additional strategic marketing alliances, or that any additional
relationships, if entered into, will be on terms favorable to us. Our receipt of
revenues from our strategic marketing alliances may also be dependent on factors
which are beyond our control, such as the quality of the products or services
offered by our strategic marketing partners.
WE MUST ADAPT TO TECHNOLOGY TRENDS AND EVOLVING INDUSTRY STANDARDS OR WE WILL
NOT BE COMPETITIVE
Our failure to respond in a timely and effective manner to new and evolving
technologies, including cable modem and other broadband technology, could harm
our business and financial results. The Internet services market is
characterized by rapidly changing technology, evolving industry standards,
changes in member needs and frequent new service and product introductions. Our
business and financial results depend, in part, on our ability to use leading
technologies effectively, to develop our technical expertise, to enhance our
existing services and to develop new services that meet changing member needs on
a timely and cost-effective basis. In particular, we must provide subscribers
with the appropriate products, services and guidance required to best take
advantage of the rapidly evolving Internet. If the market for our billable
subscription services should fail to develop, develop more slowly than we
expect, become saturated with competitors, or develop in a fashion that renders
our services uncompetitive or otherwise unappealing to consumers, our business
and financial results may suffer.
We are also at risk due to fundamental changes in the way that Internet
access may be provided in the future. Currently, consumers access Internet
services primarily through computers connected by telephone lines. Broadband
connections, however, allow significantly faster access to the Internet than is
possible using the telephone-based modems currently used by all of our
subscribers. The companies currently providing or expecting to begin providing
broadband connections to consumers' homes, including cable television companies,
local and long distance telephone companies, electric utility companies and
wireless communications companies, have decided or may decide to provide
Internet access as well. For example, competitors have developed technologies
that enable cable television operators to offer high-speed Internet access
through their cable facilities. These cable television operators, as well as
other competitors, may include Internet access in their basic bundle of services
or may offer Internet access for a nominal additional charge. Moreover, these
companies could prevent us in the future from delivering Internet access through
the wire and cable connections that they own, or from doing so on a
cost-effective basis. Even if we are not prevented from delivering our Internet
services through the broadband connections owned by others, we will likely need
to develop new technology or modify our services and the technology they use to
accommodate these developments. We may also have to modify the means by which we
deliver our Internet services, in which case we would incur significant costs.
If consumers adopt alternative forms of Internet access that provide a
continuous connection to the Internet rather than relying on a series of
separate dial-up connections, then any competitive advantage that we currently
realize because our technology minimizes connect
14
<PAGE>
time may diminish. If other companies are able to prevent us from delivering our
Internet services through the wire and cable connections that they own, if we
are unable to adapt to the challenges posed by broadband technologies or if we
incur significant costs without generating sufficient revenues, our business and
financial results may suffer.
OUR BUSINESS MAY BE ADVERSELY AFFECTED IF THE MARKET FOR INTERNET ADVERTISING
FAILS TO DEVELOP
Our business and financial results are dependent on the use of the Internet
as an advertising medium. Internet-based advertising accounts for only a small
fraction of all advertising expenditures, and we cannot be sure that
Internet-based advertising will ever grow to account for a substantial
percentage of total advertising spending or when an increase might occur. Our
business may suffer if the market for Internet-based advertising fails to
develop or develops more slowly than expected. In addition, no standards have
been widely accepted to measure the effectiveness of Internet-based advertising.
If measurement standards do not develop, many advertisers may choose not to
advertise on the Internet. Different pricing models are used to sell
Internet-based advertising. Our revenues could suffer if we are unable to adapt
to new forms of, and new pricing models for, Internet-based advertising. It is
difficult to predict which, if any, forms of Internet-based advertising will
emerge as the industry standard. This makes it difficult to project our future
advertising rates and revenues. Moreover, "filter" software programs that limit
or prevent advertising from being delivered to an Internet user's computer are
available. Widespread adoption of this type of software could harm the
commercial viability of Internet-based advertising.
Sales of advertising space on our services represents an important revenue
source for us. Competition for Internet-based advertising revenues is intense,
and this competition could result in significant price erosion over time. We
cannot assure you that we will be successful in selling advertising or capturing
a significant share of the market for Internet-based advertising. We also cannot
assure you that we will be able to sell advertising at the rates we currently
project. It is also possible that we will find it necessary to lower the rates
for advertising space on our services.
We currently rely on our internal sales and marketing personnel for
generating sales leads and promoting our services to the advertising community.
In 1998, we closed some of the regional sales offices that we had previously
established. Since substantially all of our sales and marketing personnel are
now based in New York City, we may not be able to effectively market our
services to regional advertisers outside of New York. We also rely on the sales
and marketing personnel of Lycos, our Web site partner, for the sale of
advertising space on the default "portal" site used by Juno Web subscribers.
Although we have not done so in the past, we might also retain the services of
one or more external sales organizations to sell advertising space on our
network. We cannot be sure that our internal sales organization, Lycos or any
other independent sales organization will achieve our advertising sales
objectives in a cost-effective manner.
If Internet-based advertising does not continue to grow, if we are unable to
capture a sufficient share of Internet-based advertising, or if Lycos or other
independent sales organizations do not perform as we anticipate, our business
and financial results may suffer.
OUR ADVERTISING SYSTEM REQUIRES LABOR AND IMPOSES COSTS ON US BEYOND THOSE
ASSOCIATED WITH STANDARD WEB ADVERTISING
Elements of advertising on Juno's services are non-standard when compared to
advertising on the Web and may put Juno at a competitive disadvantage. The
advertisements displayed on our services require customization that would not be
required by a Web site capable of displaying previously prepared standard
advertisements. This customization work increases the time necessary to prepare
an advertisement to be displayed on our services and the costs associated with
running these ads. We must also absorb the telecommunications cost associated
with initially downloading these ads to our subscribers, which is an expense
that advertising-supported Web sites do not incur. As ads become more complex,
our telecommunications expenses may increase. Furthermore, the costs associated
with
15
<PAGE>
selling or attempting to sell advertising space on our services are significant.
These costs may be greater than the costs associated with selling advertising
space on Web sites that utilize standard Web advertising formats. Additionally,
our use of a proprietary advertising format could prevent us from packaging our
advertising space for sale by an advertising network such as DoubleClick. We
also rely on detailed data provided by our subscribers for purposes of targeting
some ads. We do not currently verify the accuracy of this data at the time it is
provided or require subscribers to update their information thereafter.
Furthermore, individuals who subscribe directly to one of our billable
subscription services are not currently required to provide this data. Any of
the above factors could discourage advertising on our network by some
advertisers.
SEASONAL TRENDS IN INTERNET USAGE AND ADVERTISING SALES MAY NEGATIVELY AFFECT
OUR BUSINESS
Seasonal trends are likely to affect the revenues we generate from operating
our Internet services. Subscribers typically use our Internet services less
during the summer months and year-end holiday periods. To the extent that our
revenues depend on the amount of usage by our subscribers, our revenues may be
lower during these periods. For example, some of the subscribers to Juno Web pay
us based on the number of hours they spend using our services in a given month.
In addition, the rate at which new subscribers sign up for our billable
subscription services, which were introduced in July 1998, may be lower during
the summer months and year-end holiday periods.
We believe that advertising sales generally are lower in the first and third
calendar quarters of each year. We have recently seen this pattern reflected in
our results of operations and believe that this seasonal trend may continue.
Since our operating expenses are based on our expectations of future
revenues, including seasonal fluctuations, it is possible that operating results
will suffer if these seasonal trends do not continue in the future or if
different seasonal trends develop in the future. Please see "Management's
Discussion and Analysis of Financial Condition and Results of Operations" for
more information on our operating results.
WE ARE DEPENDENT ON A SMALL NUMBER OF TELECOMMUNICATIONS CARRIERS AND MAY BE
UNABLE TO FIND ADEQUATE REPLACEMENTS IF THEIR RATES INCREASE, SERVICE QUALITY
DECLINES, OR IF THEY DISCONTINUE DOING BUSINESS WITH US
Our business and financial results depend in significant part on the
capacity, affordability, reliability and security of our telephone company data
networks. To use our services, subscribers must initiate telephone connections
between their personal computers and computer hardware in local or regional
facilities known as "points of presence." We contract for the use of points of
presence around the country from various telecommunications carriers. These
carriers currently include UUNET Technologies and WorldCom Advanced Networks,
both of which are operated by MCI WorldCom; Concentric Network Corporation; and
Sprint Communications Company. These telecommunications companies also carry the
data between their points of presence and our central computers located in
Cambridge, Massachusetts and Jersey City, New Jersey.
As of March 31, 1999, we had contracted for the use of over 1,900 local
telephone numbers associated with points of presence throughout the United
States. Some points of presence carry data both for our e-mail services and for
Juno Web, while others carry data only for our e-mail services or only for Juno
Web. The points of presence supporting Juno Web are not as broadly distributed
geographically as those supporting our e-mail services. As a result, a
significant minority of our subscriber base is unable to access Juno Web through
a point of presence that is within their local calling area. The inability of
some of our subscribers to easily upgrade to Juno Web or our inability to
recruit new members in some areas could harm our business. We cannot be sure if
or when additional infrastructure developments by our telecommunications
providers will result in points of presence that cover these areas.
16
<PAGE>
At various times in the past, network capacity constraints at particular
points of presence have prevented or delayed access by subscribers attempting to
connect to our services. This could happen in the future, especially during
times of peak usage. Difficulties accessing our services due to poor network
performance could cause our subscribers to terminate their membership with us.
Because we depend on third-party telecommunications carriers for crucial
portions of our network infrastructure, we do not have direct control over
network reliability and some aspects of service quality. A natural disaster or
other unanticipated problem that affects the points of presence or the
telecommunications lines we use, or that affects the nation's telecommunications
network in general, could cause interruptions in our services.
Only a small number of telecommunications companies can provide the network
services we require. This number has been reduced through consolidation in the
telecommunications industry, and there is a significant risk that further
consolidation could make us reliant on an even smaller number of providers.
Currently, we are particularly dependent on companies controlled by MCI
WorldCom, which provide more than 1,300 of the approximately 1,900 points of
presence for which we contract in the United States. Furthermore, MCI WorldCom
has recently announced that it will begin to offer consumer Internet access,
making it a direct competitor of ours. Our business could be harmed if we are
unable to maintain a favorable relationship with MCI WorldCom. We cannot assure
you that we would be able to replace the services provided to us by MCI WorldCom
were our relationship with them to be terminated.
Our financial results are highly sensitive to variations in prices for the
telecommunications services described above. We cannot assure you that
telecommunications prices will decline, or that there will not be
telecommunications price increases due to factors beyond our control. Some of
our telecommunications carriers impose minimum connection charges. Our business
could be harmed if minimum connection charges increase or become more prevalent.
We cannot assure you that our telecommunications carriers will continue to
provide us access to their points of presence on adequate price terms, or that
alternative services will be available in the event that their quality of
service declines or that our relationship with any of our current carriers is
terminated.
Most of the telecommunications services we purchase are provided to us under
short-term agreements that the providers can terminate or elect not to renew. As
a result, there is a significant risk that any or all of UUNET Technologies,
WorldCom Advanced Networks, Concentric or Sprint could end their relationship
with us. In addition, each of our telecommunications carriers provides network
access to some of our competitors, and could choose to grant those competitors
preferential network access, potentially limiting our members' ability to access
the Internet or connect to our central computers. Furthermore, each of our
telecommunications providers competes, or has announced an intention to compete,
with us in the market to provide consumer Internet access. If our
telecommunications service providers were to decrease the levels of service or
access provided to us, or if they were to terminate their relationships with us
for competitive or other reasons, our business and financial results would
suffer.
WE ARE DEPENDENT ON THIRD PARTIES FOR TECHNICAL AND CUSTOMER SERVICE SUPPORT AND
OUR BUSINESS MAY SUFFER IF THEY ARE UNABLE TO PROVIDE THESE SERVICES OR CANNOT
EXPAND TO MEET OUR NEEDS
Our business and financial results depend, in part, on the availability of
live technical and customer service support, and of inbound telemarketing and
disk distribution services. Should our ability to provide these services be
hampered, our business may suffer. Although many Internet service providers have
developed internal customer service operations designed to meet these needs, we
have elected to outsource these functions to third-party vendors. We currently
use ClientLogic Corporation for technical and customer service support and Call
Center Services, Inc. for telemarketing and disk fulfillment functions. As a
result, we maintain only a small number of internal customer service personnel.
We are thus not equipped to provide the necessary range of customer service and
17
<PAGE>
telemarketing services in the event that either of our existing external
providers becomes unable or unwilling to offer these services to us.
Our most important relationship is with ClientLogic, which, at March 31,
1999, provided us with approximately 315 full-time or part-time employees at its
facilities to service our account. The availability of call-in technical support
and customer service is especially important to acquire and retain subscribers
to Juno Gold and Juno Web, and we rely almost entirely on ClientLogic to provide
this function. At times, our subscribers have experienced lengthy waiting
periods to reach representatives trained to provide the technical or customer
support they require. As our services grow, we will need significantly more
support personnel in order to maintain current levels of technical and customer
support. If we elect to offer customer service features that we do not currently
support, such as 24-hour live support, or to enhance the overall quality of our
customer support for competitive reasons, we will require even greater
resources. We may have significantly expanded customer service requirements in
the future and it could become necessary to identify supplemental or replacement
vendors for these services. Our agreement with ClientLogic converts to a
month-to-month contract on August 1, 2000, providing either party the right to
terminate the relationship at any time upon one month's notice. Prior to that
date, ClientLogic can terminate the contract without cause upon 90 days notice.
In addition, ClientLogic may terminate the contract upon 60 days notice at any
time after August 1, 1999 if we do not reach agreement with ClientLogic with
regard to modifications ClientLogic proposes to the pricing terms of the
contract within 60 days of the modifications being proposed. If our relationship
with ClientLogic terminates and we are unable to enter into a comparable
arrangement with a replacement vendor, if ClientLogic is unable to provide
enough personnel to provide the quality and quantity of service we desire, or if
system failures, outages or other technical problems make it difficult for our
subscribers to reach customer service representatives at ClientLogic, our
business and financial results may suffer.
WE RELY ON A SINGLE EXTERNAL MARKETING PARTNER TO FULFILL MOST OF OUR DIRECT
PRODUCT SALES
If we fail to manage our direct product sales efforts in a cost-effective
manner, or if we fail to maintain the relationship with our external marketing
partner, our business may suffer. We rely primarily on Direct Alliance
Corporation, a subsidiary of Insight Enterprises, for the procurement,
warehousing, fulfillment, billing and customer service aspects of our direct
product sales. Should our relationship with this vendor be disrupted, our
ability to engage in direct product sales will be severely curtailed. In the
past, a substantial portion of our revenue has come from the sale of products
directly to our subscribers. Our ability to sell products directly to our
subscribers is dependent in part upon:
- the willingness of subscribers to overcome concerns regarding the security
of online financial transactions;
- our ability to select and profitably acquire and provide merchandise that
is interesting to our subscriber base;
- our ability to compete with established retail business and other online
sellers; and
- other factors that may be outside of our control.
In addition, if we were to experience unusually high rates of returns for the
products we sell to our subscribers or if we were unable to sell all the
products in our inventory, the net revenues we generate from our direct sales
activities would be harmed. In addition, our revenues may suffer if we face
increased competition in our direct product sales activities.
DISRUPTION OF OUR INTERNET SERVICES DUE TO SECURITY BREACHES AND SYSTEM FAILURES
COULD RESULT IN SUBSCRIBER CANCELLATIONS
Both our infrastructure and the infrastructure of our network providers are
vulnerable to security breaches or similar disruptive problems and system
failures. Our systems are also subject to telecommunications failures, power
loss, software-related system failures and various other events. Any
18
<PAGE>
of these events, whether intentional or accidental, could lead to interruptions,
delays or cessation of service to our subscribers. This could cause some of our
subscribers to stop using our Internet services. Third parties could also
potentially jeopardize the security of confidential information stored in our
computer systems or our subscribers' computer systems through their
inappropriate use of the Internet, which could cause losses to us or our
subscribers or deter some people from subscribing to our services. People may be
able to circumvent our security measures or the security measures of our third
party network providers.
We may have to interrupt, delay or cease service to our subscribers to
alleviate problems caused by computer viruses, security breaches or other
failures of network security. Any damage or failure that interrupts or delays
our operations could result in subscriber cancellations, could harm our
reputation, and could affect our business and financial results. In addition, we
expect that our subscribers will increasingly use the Internet for commercial
transactions in the future. Any network malfunction or security breach could
cause these transactions to be delayed, not completed at all or completed with
compromised security. Our subscribers or others may assert claims of liability
against us as a result of this type of failure. Furthermore, until more
comprehensive security technologies are developed, the security and privacy
concerns of existing and potential subscribers may inhibit the growth of the
Internet service industry in general and our subscriber base and revenue in
particular.
Our insurance policies may not adequately compensate us for any losses that
may occur due to any failures in our systems or interruptions in our services.
RAPID GROWTH IN OUR BUSINESS COULD STRAIN OUR MANAGERIAL, OPERATIONAL,
FINANCIAL, AND INFORMATION SYSTEMS RESOURCES
The anticipated future growth necessary to expand our operations will place
a significant strain on our managerial, operational, financial and information
systems resources. If we are unable to manage our growth effectively, our
business and financial results will suffer. In order to achieve growth in
revenues from Internet advertising, we will need to expand our sales efforts and
continue to improve and develop our software. In order to achieve growth in
revenues from Juno Gold and Juno Web, we will need to expand our marketing
efforts, promote the Juno brand, expand the computer systems and related
infrastructure we use to provide our Internet services, and increase both our
internal and outsourced customer service capabilities. We expect that we will
need to continually improve our financial and managerial controls, billing
systems, reporting systems and procedures, and we will also need to continue to
expand, train and manage our workforce. We had 65 employees at December 31,
1996, 152 employees at December 31, 1997, 144 employees at December 31, 1998 and
147 employees at March 31, 1999. In addition, as of March 31, 1999, we also
retained the services of 47 individuals in India who were as of that date
employed by an affiliate of Juno, but who are now employed by Juno through a
subsidiary. We have significantly increased our reliance on outsourced support
for customer service, technical, and back-office functions. We expect the size
of our own workforce and our reliance on outsourced services will continue to
increase for the foreseeable future.
The demand on our network infrastructure, technical staff and technical
resources has grown rapidly with our expanding subscriber base. We cannot be
certain that our infrastructure, technical staff and technical resources will
adequately accommodate or facilitate the anticipated growth of our subscriber
base. In particular, if we were to experience repeated and/or prolonged
system-wide service outages, our business and financial results would suffer.
WE FACE POTENTIAL LIABILITY FOR INFORMATION TRANSMITTED OR RETRIEVED THROUGH OUR
INTERNET SERVICES
Our business and financial results may suffer if we incur liability as a
result of information transmitted or retrieved through our services. The
liability of Internet service providers and online services companies for
information transmitted or retrieved through their services is uncertain. It is
possible that claims may be filed against us based on a variety of theories,
including defamation, obscenity, negligence, copyright or trademark
infringement, or other theories based on the nature,
19
<PAGE>
publication or distribution of this information. These types of claims have been
brought, sometimes successfully, against providers of Internet services in the
past. Such claims, with or without merit, would likely divert management time
and attention and result in significant costs to investigate and defend. In
addition, if we become subject to these types of claims and we are not
successful in our defense, we may be forced to pay substantial damages. We may
also be forced to implement expensive measures to alter the way our services are
provided to avoid any potential liability.
CHANGES IN GOVERNMENT REGULATION COULD DECREASE OUR REVENUES AND INCREASE OUR
COSTS
Changes in the regulatory environment could decrease our revenues and
increase our costs. As a provider of Internet access and e-mail services, we are
not currently subject to direct regulation by the Federal Communications
Commission. However, several telecommunications carriers are seeking to have
communications over the Internet regulated by the FCC in the same manner as
other more traditional telecommunications services. Local telephone carriers
have also petitioned the FCC to regulate Internet access providers in a manner
similar to long distance telephone carriers and to impose access fees on these
providers, and recent events suggest that they may be successful in obtaining
the treatment they seek. In addition, we operate our services throughout the
United States, and we cannot assure you that regulatory authorities at the state
level will not seek to regulate aspects of our activities as telecommunications
services. As a result, we could become subject to FCC and state regulation as
Internet services and telecommunications services converge.
We remain subject to numerous additional laws and regulations that could
affect our business. Because of the Internet's popularity and increasing use,
new laws and regulations with respect to the Internet are becoming more
prevalent. These laws and regulations have covered, or may cover in the future,
issues such as:
- user privacy;
- pricing;
- intellectual property;
- federal, state and local taxation;
- distribution; and
- characteristics and quality of products and services.
Legislation in these areas could slow the growth in use of the Internet
generally and decrease the acceptance of the Internet as a communications and
commercial medium. Additionally, because we rely on the collection and use of
personal data from our members for targeting advertisements shown on our
services, we may be harmed by any laws or regulations that restrict our ability
to collect or use this data. The Federal Trade Commission has begun
investigations into the privacy practices of companies that collect information
about individuals on the Internet. Although we are not currently subject to
direct regulation by the FTC, there can be no assurance that we will not become
subject to direct regulation in the future. It may take years to determine how
existing laws such as those governing intellectual property, privacy, libel and
taxation apply to the Internet. Any new legislation or regulation regarding the
Internet, or the application of existing laws and regulations to the Internet,
could harm us. Additionally, while we do not currently operate outside of the
United States, the international regulatory environment relating to the Internet
market could have an adverse effect on our business, especially if we should
expand internationally.
20
<PAGE>
The growth of the Internet, coupled with publicity regarding Internet fraud,
may also lead to the enactment of more stringent consumer protection laws. For
example, numerous bills have been presented to Congress and various state
legislatures designed to address the prevalence of unsolicited commercial bulk
e-mail on the Internet. These laws may impose additional burdens on our
business. The enactment of any additional laws or regulations in this area may
impede the growth of the Internet, which could decrease our potential revenues
or otherwise cause our business to suffer. Please see "Business--Government
Regulation."
IF INTERNET USAGE DOES NOT CONTINUE TO GROW, OUR BUSINESS WILL SUFFER
Our business and financial results depend on continued growth in the use of
the Internet. We cannot be certain that this growth will continue or that it
will continue in its present form. If Internet usage declines or evolves away
from our business, our growth will slow or stop and our business and financial
results will suffer.
UNANTICIPATED DELAYS OR PROBLEMS IN THE INTRODUCTION OF NEW FEATURES OR SERVICES
MAY CAUSE CUSTOMER DISSATISFACTION
If we experience problems related to the reliability and quality of our
services or delays in the introduction of new versions of or enhancements to our
services, we could experience increased subscriber cancellations, adverse
publicity and reduced sales of advertising and products. Our services are very
complex and are likely to contain a number of undetected errors and defects,
especially when new features or enhancements are first released. These errors or
defects, if significant, could harm the performance of these services, result in
ongoing redevelopment and maintenance costs and/or cause dissatisfaction on the
part of subscribers and advertisers. These costs, delays or dissatisfaction
could negatively affect our business.
WE HAVE LIMITED EXPERIENCE WITH THE SOFTWARE WE USE TO BILL SUBSCRIBERS TO JUNO
GOLD AND JUNO WEB
The operation of Juno Gold and Juno Web requires the accurate operation of
billing system software as well as our development of policies designed to
reduce the incidence of credit card fraud and other forms of uncollectable
"chargebacks." We have only limited experience with the operation of these
billing and fraud detection systems. If we encounter difficulty with the
operation of these systems, or if errors, defects or malfunctions occur in the
operation of these systems, this could result in erroneous overcharges to
customers or in the under-collection of revenue, either of which could hurt our
business and financial results.
OUR RELATIONSHIP WITH D. E. SHAW & CO., L.P. MAY PRESENT POTENTIAL CONFLICTS OF
INTEREST
The Chairman of our board of directors and our controlling stockholder, Dr.
David E. Shaw, is the Chairman and Chief Executive Officer of D. E. Shaw & Co.,
Inc., which is the general partner of D. E. Shaw & Co., L.P., a global
securities firm whose activities focus on various aspects of the intersection
between technology and finance. Dr. Shaw devotes only a portion of his time to
our company, and spends most of his time and energy engaged in business
activities unrelated to us. Dr. Shaw indirectly owns a controlling interest in
DESCO, L.P. and in some of its affiliated entities. Transactions between us and
these parties may occur in the future and could potentially result in conflicts
of interest that prove harmful to us.
We have historically contracted with DESCO, L.P. to provide accounting, tax,
payroll, insurance, employee benefits and information technology services, and
we continue to obtain some services from DESCO, L.P. These services are provided
to us on a fixed-fee basis under shared services agreements that can be
terminated by any of the parties without cause upon 90 days notice. If we were
no longer able to obtain these services through DESCO, L.P. or its affiliates,
we would be required to obtain
21
<PAGE>
these services internally or through third-party providers, and we cannot be
sure that we could do so on acceptable terms. In addition, we sublease office
space in New York City from DESCO, L.P. We cannot be sure that we would be able
to lease other space on favorable terms in the event the leases for this office
space were to be terminated.
We recently terminated an agreement with DESCO, L.P. under which individuals
employed by its affiliates located in India provided consulting services to us.
Following the termination of this agreement, these individuals became employees
of a Juno subsidiary located in Hyderabad, India. We expect to continue to
obtain some services in India from DESCO, L.P. or its affiliates.
Dr. Shaw and entities affiliated with him are likely to manage, invest in or
otherwise be involved with other technology-related business ventures apart from
our company. These relationships could also restrict our ability to transact
business with non-affiliated parties, and could negatively affect us. For a more
detailed discussion of related-party transactions and our relationship with
entities affiliated with Dr. Shaw, please see "Certain Transactions."
OUR DIRECTORS AND OFFICERS WILL EXERCISE SIGNIFICANT CONTROL OVER US FOLLOWING
THIS OFFERING
We anticipate that the executive officers, directors and persons and
entities affiliated with executive officers and/or directors will, in the
aggregate, beneficially own approximately 53.3% of our outstanding common stock
following the completion of this offering. The Chairman of our board of
directors is Dr. David E. Shaw. Dr. Shaw continues to serve as the Chairman and
Chief Executive Officer of D. E. Shaw & Co., Inc., which is the general partner
of DESCO, L.P. Dr. Shaw and persons or entities affiliated with him, including
DESCO, L.P., will, in the aggregate, beneficially own approximately 50.1% of our
outstanding common stock following the completion of this offering. Following
the completion of this offering, Dr. Shaw will be able to exercise control over
all matters requiring approval by our stockholders, including the election of
directors and approval of significant corporate transactions. This concentration
of ownership could also have the effect of delaying or preventing a change in
control of Juno. Please see "Management" and "Principal Stockholders."
IF WE FAIL TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY OR FACE A CLAIM OF
INTELLECTUAL PROPERTY INFRINGEMENT BY A THIRD PARTY, WE COULD LOSE OUR
INTELLECTUAL PROPERTY RIGHTS OR BE LIABLE FOR SIGNIFICANT DAMAGES
We have taken steps to protect our intellectual property rights, but we
cannot be certain that our efforts will be adequate to safeguard our rights to
technology we have developed. Disputes concerning the ownership or rights to use
intellectual property could be costly and time consuming to litigate, may
distract management from other tasks of operating the business, and may result
in our loss of significant rights and the loss of our ability to operate our
business.
We have been granted three U.S. patents covering aspects of our technology
for the offline display of advertisements and aspects of our technology for the
authentication and dynamic scheduling of advertisements and other messages to be
delivered to computer users. We have also filed other U.S. patent applications
covering additional aspects of our business. We cannot assure you, however, that
these applications will result in the issuance of patents; that any patents that
have been granted or that might be granted in the future will provide us with
any competitive advantages or will be exploited profitably by us; or that any of
these patents will withstand any challenges by third parties. We also cannot
assure you that others will not obtain and assert patents against us which are
essential for our business. If patents are asserted against us, we cannot assure
you that we will be able to obtain license rights to those patents on reasonable
terms or at all. If we are unable to obtain licenses, we may be prevented from
operating our business and our financial results may therefore be harmed.
Except as described above, we rely solely upon copyright and trademark law,
trade secret protection, and/or confidentiality agreements with our employees
and with some third parties to protect
22
<PAGE>
our proprietary technology, processes, and other intellectual property, to the
extent that protection is sought or secured at all. We cannot assure you that
any steps we might take will be adequate to protect against infringement and
misappropriation of our intellectual property by third parties. Similarly, we
cannot assure you that third parties will not be able to independently develop
similar or superior technology, processes, or other intellectual property.
Furthermore, we cannot assure you that third parties will not assert claims
against us for infringement and misappropriation of their intellectual property
rights nor that others will not infringe or misappropriate our intellectual
property rights, for which we may wish to assert claims.
Rights to all intellectual property that was developed for our business at
our expense by personnel assigned to Juno by DESCO, L.P. were originally held by
DESCO, L.P. Through a series of assignments, DESCO, L.P. subsequently
transferred to us its right, title and interest in this intellectual property.
In connection with these assignments, we agreed to indemnify DESCO, L.P. against
any claims relating to the assignment of, or the use of, this intellectual
property. We do not have any right, title, or interest in any other intellectual
property created, developed, produced, or used by DESCO, L.P.
PROBLEMS RESULTING FROM THE YEAR 2000 PROBLEM COULD REQUIRE US TO INCUR
UNANTICIPATED EXPENSE AND COULD DIVERT MANAGEMENT'S TIME AND ATTENTION
The Year 2000 problem could harm our business and financial results. Many
currently installed computer systems and software products are coded to accept
or recognize only two-digit entries in the date code field. These systems may
interpret the date code "00" as the year 1900 rather than the year 2000. As a
result, computer systems and/or software used by many companies and governmental
agencies may need to be upgraded or replaced to comply with Year 2000
requirements or risk system failure or miscalculations causing disruptions of
normal business activities. We have established procedures for evaluating and
managing the risks associated with the Year 2000 problem and we are in the
process of assessing our Year 2000 readiness. We are also in the process of
communicating with third-party vendors who provide us with both network services
and equipment in order to assess their plans and progress in addressing the Year
2000 problem. Our failure to correct a material Year 2000 problem could result
in an interruption in, or a failure of, aspects of our normal business
activities or operations. In addition, a significant Year 2000 problem involving
our network services or equipment provided to us by third-party vendors could
cause our customers to consider seeking alternate providers or cause an
unmanageable burden on our customer service and technical support capabilities.
Any significant Year 2000 problem could require us to incur significant
unanticipated expenses to remedy these problems and could divert management's
time and attention. Please see "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Impact of the Year 2000" for
detailed information on our state of readiness, potential risks and contingency
plans regarding the Year 2000 issue.
WE ARE DEPENDENT ON KEY MANAGEMENT PERSONNEL FOR OUR FUTURE SUCCESS
Our business and financial results depend in part on the continued service
of our key personnel. We do not carry key person life insurance on any of our
personnel. The loss of the services of any of our executive officers or the loss
of the services of other key employees could harm our business and financial
results. Mark A. Moraes, our Executive Vice President, Technology, is working at
Juno pursuant to an employment agreement with DESCO, L.P., under which he
performs services for Juno. In addition, Mr. Moraes is a citizen of India and
has been granted a waiver by the U.S. Immigration and Naturalization Service
which allows Mr. Moraes to obtain a "green card" for permanent residence status.
Since additional processing is required before the green card is issued, we
cannot assure you that Mr. Moraes will be issued a green card. Until Mr. Moraes
receives a green card, his ability to
23
<PAGE>
work in our U.S. offices is limited and, in the event that he does not
ultimately obtain a green card, it is likely that he would be unable to work in
our U.S. offices thereafter.
WE MAY NOT BE ABLE TO HIRE AND RETAIN QUALIFIED EMPLOYEES
Our business and financial results depend in part on our ability to attract,
retain and motivate highly skilled employees. Competition for employees in our
industry is intense. We may be unable to retain our key employees or attract,
assimilate or retain other highly qualified employees. We have, from time to
time, in the past experienced, and we expect to continue to experience,
difficulty in hiring and retaining highly skilled employees with appropriate
qualifications.
WE CANNOT PREDICT OUR FUTURE CAPITAL NEEDS AND WE MAY NOT BE ABLE TO SECURE
ADDITIONAL FINANCING
We currently anticipate that the net proceeds of this offering, together
with available funds, will be sufficient to meet our anticipated needs for at
least the next 12 months. We may need to raise additional funds in the future to
fund our operations, to finance subscriber acquisition costs, to enhance and/or
expand the range of Internet services we offer or to respond to competitive
pressures and/or perceived opportunities. We cannot be sure that additional
financing will be available on terms favorable to us, or at all. If adequate
funds are not available or not available when required or on acceptable terms,
we may be forced to cease our operations, and even if we are able to continue
our operations, our business and financial results may suffer.
WE MAY NOT BE ABLE TO SUCCESSFULLY MAKE ACQUISITIONS OF OR INVESTMENTS IN OTHER
COMPANIES
We have no experience in acquiring or making investments in companies,
technologies or services. From time to time we have had discussions with
companies regarding our acquiring, or investing in, their businesses, products
or services, or customers. We have no present understanding or agreement
relating to any acquisition or investment. If we buy a company, we could have
difficulty in assimilating that company's personnel and operations. In addition,
the key personnel of the acquired company may decide not to work for us. If we
make other types of acquisitions, we could have difficulty in assimilating the
acquired services, technologies or customers into our operations. These
difficulties could disrupt our ongoing business, distract our management and
employees, increase our expenses and adversely affect our results of operations
due to accounting requirements such as the amortization of goodwill.
Furthermore, we may incur debt or issue equity securities to pay for any future
acquisitions. The issuance of equity securities could be dilutive to our
existing stockholders.
WE COULD FACE ADDITIONAL REGULATORY REQUIREMENTS, TAX LIABILITIES AND OTHER
RISKS IF WE DECIDE TO EXPAND INTERNATIONALLY
We may decide to expand internationally, and believe that any international
operations would be subject to most of the risks of our business generally. In
addition, there are risks inherent in doing business in international markets,
such as changes in regulatory requirements, tariffs and other trade barriers,
fluctuations in currency exchange rates, and adverse tax consequences, and there
are likely to be different consumer preferences and requirements in such
markets. We cannot assure you that one or more of these factors would not harm
any future international operations.
FUTURE SALES OF OUR COMMON STOCK MAY NEGATIVELY AFFECT OUR STOCK PRICE
Following this offering, we will have a large number of shares of common
stock outstanding and available for resale beginning at various points in time
in the future. The market price of our common stock could decline as a result of
sales of a large number of shares of our common stock in the market following
this offering, or the perception that such sales could occur. These sales also
might make it
24
<PAGE>
more difficult for us to sell equity securities in the future at a price that we
think is appropriate, or at all. Please see "Shares Eligible for Future Sale."
THERE HAS BEEN NO PRIOR MARKET FOR OUR COMMON STOCK AND OUR STOCK PRICE MAY
EXPERIENCE EXTREME PRICE AND VOLUME FLUCTUATIONS
The stock market has experienced extreme price and volume fluctuations. The
market prices of the securities of Internet-related companies have been
especially volatile. Prior to the offering, there has been no public market for
our common stock. We cannot predict the extent to which investor interest in
Juno will lead to the development of an active trading market or how liquid that
market might become. The market price of the common stock may decline below the
initial public offering price. The initial public offering price for the shares
will be determined by negotiations between us and the representatives of the
underwriters and may not be indicative of prices that will prevail in the
trading market. Please see "Underwriting."
In the past, companies that have experienced volatility in the market price
of their stock have been the object of securities class action litigation. If we
were the object of securities class action litigation, it could result in
substantial costs and a diversion of our management's attention and resources.
WE MAY SPEND A SUBSTANTIAL PORTION OF THE NET PROCEEDS OF THIS OFFERING IN WAYS
WITH WHICH YOU MAY NOT AGREE
We intend to spend a significant portion of the net proceeds of this
offering on a marketing campaign and for the repayment of debt. Our management
will have broad discretion, however, over the allocation of a substantial
portion of the net proceeds from this offering as well as over the timing of our
expenditures. Investors may not agree with the way our management decides to
spend these proceeds. Please see "Use of Proceeds."
WE HAVE ANTI-TAKEOVER PROVISIONS WHICH MAY MAKE IT DIFFICULT FOR A THIRD PARTY
TO ACQUIRE US
Provisions of our certificate of incorporation, our bylaws and Delaware law
could make it more difficult for a third party to acquire us, even if doing so
might be beneficial to our stockholders. Please see "Description of Capital
Stock."
INVESTORS IN THIS OFFERING WILL SUFFER IMMEDIATE AND SUBSTANTIAL DILUTION
Investors purchasing shares in the offering will incur immediate and
substantial dilution in net tangible book value per share. To the extent
outstanding options to purchase common stock are exercised, there will be
further dilution. Please see "Dilution."
WE DO NOT PLAN TO PAY DIVIDENDS IN THE FORESEEABLE FUTURE AND, AS A RESULT,
STOCKHOLDERS WILL NEED TO SELL SHARES TO REALIZE A RETURN ON THEIR INVESTMENT
We have not declared or paid any cash dividends on our capital stock since
inception. We intend to retain any future earnings to finance the operation and
expansion of our business and do not anticipate paying any cash dividends in the
foreseeable future. Consequently, stockholders will need to sell shares of
common stock in order to realize a return on their investment, if any.
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements which involve risks and
uncertainties. These forward-looking statements are usually accompanied by words
such as "believes," "anticipates," "plans," "expects" and similar expressions.
Our actual results could differ materially from those expressed or implied by
these forward-looking statements as a result of various factors, including the
risk factors described above and elsewhere in this prospectus.
25
<PAGE>
USE OF PROCEEDS
The net proceeds to us from the sale of the 6,500,000 shares offered hereby,
at an initial public offering price of $13.00 per share, after deducting the
underwriting discounts and estimated offering expenses payable by us, are
estimated to be approximately $77.6 million, or $89.4 million if the
underwriters' over-allotment option is exercised in full.
We intend to use the net proceeds of this offering for subscriber
acquisition, advertising, brand marketing, continued investment in the
development of our Internet services, enhancements of our network infrastructure
and other general corporate purposes. We also intend to use the net proceeds of
this offering to repay all indebtedness to D. E. Shaw Securities Group, L.P., an
affiliated party, which totalled $8.8 million as of March 31, 1999. This
indebtedness bears interest at the Federal Funds rate plus 0.375%, which
totalled 5.355% as of March 31, 1999, and matures upon the earlier of December
31, 2000 or the date of completion of an initial public offering. Juno
originally borrowed this money for working capital and other general corporate
purposes. We may also use a portion of the proceeds of this offering for
acquisitions, strategic alliances, or joint ventures. At present, we have no
plans, arrangements or understandings related to any specific acquisitions.
Other than the repayment of debt, we have not yet determined the amount of
net proceeds to be used specifically for each of the foregoing purposes.
Accordingly, management will have significant flexibility in applying a
substantial portion of the net proceeds of the offering. Until this money is
used, we intend to invest the net proceeds in interest-bearing instruments.
DIVIDEND POLICY
We have not declared or paid any cash dividends on our capital stock since
inception. We intend to retain any future earnings to finance the operation and
expansion of our business and do not anticipate paying any cash dividends in the
foreseeable future. Consequently, stockholders will need to sell shares of
common stock in order to realize a return on their investment, if any.
26
<PAGE>
CAPITALIZATION
The following table sets forth, as of March 31, 1999, the capitalization of
Juno on an actual basis and on a basis which assumes the completion of this
offering by giving effect to the following:
- the sale of the 6,500,000 shares offered hereby at an initial public
offering price of $13.00 per share, after deducting the underwriting
discounts and estimated offering expenses payable by Juno, and the
application of the net proceeds from this offering; and
- the automatic conversion of all outstanding shares of redeemable
convertible preferred stock into 27,822,751 shares of common stock upon
the closing of this offering.
This information should be read in conjunction with Juno's consolidated
financial statements and the notes relating to these statements appearing
elsewhere in this prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1999
------------------------
ACTUAL AS ADJUSTED
----------- -----------
<S> <C> <C>
(IN THOUSANDS)
Total indebtedness, including current maturities........................................ $ 9,930 $ 1,118
----------- -----------
Redeemable convertible preferred stock, $.01 par value:
Series B: 10,138,716 shares
authorized, issued and outstanding on an actual basis; none
authorized, issued or outstanding on
an as adjusted basis................................................................ 61,853 --
Series A: 17,684,035 shares
authorized, issued and outstanding on an actual basis; none
authorized, issued or outstanding on
an as adjusted basis................................................................ 79,578 --
Stockholders' equity (deficit):
Preferred Stock, $.01 par value, 5,000,000 shares authorized; none issued or
outstanding on an actual or as adjusted basis....................................... -- --
Common Stock, $.01 par value, 133,333,334 shares authorized; 251,229 shares issued and
outstanding on an actual basis; and 34,573,980 shares issued and outstanding on an
as adjusted basis................................................................... 3 346
Additional paid-in capital............................................................ (95,724) 122,949
Unearned compensation................................................................. (691) (691)
Accumulated deficit................................................................... (2,417) (2,417)
----------- -----------
Total stockholders' equity (deficit)................................................ (98,829) 120,187
----------- -----------
Total capitalization.............................................................. $ 52,532 $ 121,305
----------- -----------
----------- -----------
</TABLE>
The table above excludes 3,305,935 shares of common stock issuable upon the
exercise of stock options outstanding as of May 24, 1999, with a weighted
average exercise price of $4.55 per share. See "Management--1999 Stock Incentive
Plan," "Description of Capital Stock" and Note 11 of Notes to Consolidated
Financial Statements.
27
<PAGE>
DILUTION
The pro forma net tangible book value of Juno as of March 31, 1999, after
giving effect to the automatic conversion of 17,684,035 shares of Series A
redeemable convertible preferred stock and 10,138,716 shares of Series B
redeemable convertible preferred stock into common stock, was $42.6 million, or
$1.52 per share of common stock. Pro forma net tangible book value per share is
equal to the amount of Juno's total tangible assets, which is defined as total
assets less intangible assets, divided by the number of shares of common stock
outstanding, on a pro forma basis, as of March 31, 1999. Assuming the sale by
Juno of the 6,500,000 shares offered hereby at an initial public offering price
of $13.00 per share and after deducting underwriting discounts and estimated
offering expenses, and the application of the estimated net proceeds therefrom,
the pro forma net tangible book value of Juno as of March 31, 1999 would have
been $120.2 million, or $3.48 per share of common stock. This represents an
immediate increase in pro forma net tangible book value of $1.96 per share to
existing stockholders and an immediate dilution in pro forma net tangible book
value of $9.52 per share to new investors. The following table illustrates this
per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share..................................... $ 13.00
Pro forma net tangible book value per share as of March 31, 1999.......... $ 1.52
Pro forma increase attributable to new investors.......................... 1.96
---------
Pro forma net tangible book value per share after the offering.............. 3.48
---------
Pro forma dilution per share to new investors............................... $ 9.52
---------
---------
</TABLE>
The following table summarizes, on a pro forma basis as of March 31, 1999,
after giving effect to the automatic conversion of all outstanding shares of
preferred stock into common stock, the total number of shares of common stock
purchased from Juno, the total consideration paid to Juno and the average price
per share paid by existing stockholders and by new investors:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------------- --------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ ----------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders............................. 28,073,980 81.2% $ 144,578,130 63.1% $ 5.15
New investors..................................... 6,500,000 18.8 84,500,000 36.9 13.00
------------ ----- -------------- -----
Total......................................... 34,573,980 100.0% $ 229,078,130 100.0%
------------ ----- -------------- -----
------------ ----- -------------- -----
</TABLE>
The foregoing tables and calculations assume no exercise of outstanding
options. At May 24, 1999, there were 3,305,935 shares of common stock reserved
for issuance upon exercise of outstanding options at a weighted average exercise
price of $4.55 per share. To the extent that these options are exercised, there
will be further dilution to new investors. See "Management--1999 Stock Incentive
Plan."
28
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the consolidated financial statements and the notes to these
statements and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this prospectus. The consolidated
statement of operations data for the period from our inception on June 30, 1995
through December 31, 1995 and for the years ended December 31, 1996, 1997 and
1998, and the consolidated balance sheet data at December 31, 1995, 1996, 1997
and 1998, are derived from the consolidated financial statements of Juno which
have been audited by PricewaterhouseCoopers LLP, independent accountants, and
are included elsewhere in this prospectus. The unaudited consolidated financial
statements have been prepared on substantially the same basis as the audited
consolidated financial statements and include all adjustments, consisting of
normal recurring adjustments, which Juno considers necessary for a fair
presentation of the financial position and results of operations for those
periods. Operating results for the three months ended March 31, 1999 are not
necessarily indicative of the results that may be expected for any other
three-month period or for the year ended December 31, 1999.
Net loss per share for the three months ended March 31, 1999 is calculated
separately for the periods prior and subsequent to the March 1999 statutory
merger. The pro forma information regarding net loss per share and weighted
average shares outstanding set forth below gives effect to the treatment of
Class A limited partnership units as shares of common stock for all periods
presented and the conversion of Series B redeemable convertible preferred stock
for the period following the March 1999 statutory merger. See the consolidated
financial statements and the notes to these statements appearing elsewhere in
this prospectus for the determination of the number of shares used in computing
historical and pro forma basic and diluted loss per share.
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(JUNE 30, THREE MONTHS
1995) YEAR ENDED DECEMBER 31, ENDED MARCH 31,
TO DECEMBER ------------------------------------- ------------------------
31, 1995 1996 1997 1998 1998 1999
------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Billable services............................. $ -- $ 6 $ 1,371 $ 6,645 $ 465 $ 5,806
Advertising and transaction fees.............. -- 127 1,875 6,454 1,228 2,265
Direct product sales.......................... -- 3 5,845 8,595 2,577 1,649
----------- ----------- ----------- ----------- ----------- -----------
Total revenues.............................. -- 136 9,091 21,694 4,270 9,720
----------- ----------- ----------- ----------- ----------- -----------
Cost of revenues:
Billable services............................. -- -- 1,053 5,606 387 4,678
Advertising and transaction fees.............. -- 278 1,659 3,725 825 1,080
Direct product sales.......................... -- 3 5,796 7,627 2,426 1,424
----------- ----------- ----------- ----------- ----------- -----------
Total cost of revenues...................... -- 281 8,508 16,958 3,638 7,182
----------- ----------- ----------- ----------- ----------- -----------
Operating expenses:
Operations, free service...................... -- 5,803 11,075 9,383 2,824 1,846
Subscriber acquisition........................ 592 6,993 3,140 5,334 1,453 2,700
Sales and marketing........................... 389 4,276 12,593 11,584 4,270 2,312
Product development........................... 2,577 3,741 4,860 7,345 1,835 1,854
General and administrative.................... 275 2,172 2,897 2,760 914 704
----------- ----------- ----------- ----------- ----------- -----------
Total operating expenses.................... 3,833 22,985 34,565 36,406 11,296 9,416
----------- ----------- ----------- ----------- ----------- -----------
Loss from operations........................ (3,833) (23,130) (33,982) (31,670) (10,664) (6,878)
Interest income, net............................ -- 128 243 44 74 111
----------- ----------- ----------- ----------- ----------- -----------
Net loss.................................... $ (3,833) $ (23,002) $ (33,739) $ (31,626) $ (10,590) $ (6,767)
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS
PERIOD FROM ENDED MARCH 31, 1999
INCEPTION --------------------------
(JUNE 30, TWO MONTHS
1995) YEAR ENDED DECEMBER 31, ENDED MONTH ENDED
TO DECEMBER ------------------------------- FEBRUARY 28, MARCH 31,
31, 1995 1996 1997 1998 1999 1999
------------- --------- --------- --------- ------------- -----------
THREE MONTHS
ENDED
MARCH 31,
1998
-------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<CAPTION>
TOTAL
---------
<S> <C>
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
EARNINGS PER SHARE CALCULATION:
Net loss....................... $ (3,833) $ (23,002) $ (33,739) $ (31,626) $ (10,590) $ (4,350) $ (2,417) $ (6,767)
--------- --------- --------- --------- ------------- ------------- ----------- ---------
--------- --------- --------- --------- ------------- ------------- ----------- ---------
Net loss attributable to common
stockholders................. $ (3,833) $ (23,002) $ (33,739) $ (31,626) $ (10,590) $ (4,350) $ (3,589) $ (6,767)
--------- --------- --------- --------- ------------- ------------- ----------- ---------
--------- --------- --------- --------- ------------- ------------- ----------- ---------
Weighted average number of:
Class A limited partnership
units...................... 519 3,281 10,500 17,091 16,054 17,684
--------- --------- --------- --------- ------------- -------------
--------- --------- --------- --------- ------------- -------------
Shares of Common Stock....... 217
-----------
-----------
Basic and diluted net loss per
Class A limited partnership
unit......................... $ (7.39) $ (7.01) $ (3.21) $ (1.85) $ (0.66) $ (0.25)
--------- --------- --------- --------- ------------- -------------
--------- --------- --------- --------- ------------- -------------
Basic and diluted net loss per
share........................ $ (16.54)
-----------
-----------
Pro forma basic and diluted net
loss per share............... $ (1.85) $ (0.32)
--------- ---------
--------- ---------
Weighted average shares
outstanding used in pro forma
basic and diluted per share
calculation.................. 17,091 21,225
--------- ---------
--------- ---------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------------------------------ -----------
1995 1996 1997 1998 1999
--------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................. $ -- $ 598 $ 13,770 $ 8,152 $ 53,165
Working capital (deficiency).............................. 92 (2,004) 6,927 (8,343) 48,000
Total assets.............................................. 92 4,774 20,133 14,703 71,660
Total indebtedness, including current maturities.......... -- -- 795 10,188 9,930
Redeemable convertible preferred stock.................... -- -- -- -- 141,431
Partners' capital (deficiency)............................ 92 (2,004) 10,504 (12,588) --
Total stockholders' equity (deficit)...................... -- -- -- -- (98,829)
</TABLE>
30
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF JUNO SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL
STATEMENTS AND THE NOTES TO THOSE STATEMENTS INCLUDED ELSEWHERE IN THIS
PROSPECTUS. THIS DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE
RISKS AND UNCERTAINTIES. JUNO'S ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE
ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS,
SUCH AS THOSE SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
Juno Online Services, Inc. is a leading provider of Internet-related
services to millions of computer users throughout the United States. We offer
several levels of service, ranging from basic dial-up Internet e-mail--which is
provided to the end user for free--to full, competitively priced access to the
World Wide Web. Our revenues are derived primarily from the fees we charge for
the use of our billable subscription services, from the sale of advertising, and
from the direct sale of products to our subscribers.
Our business strategy has encompassed two phases. The initial phase, which
began at our inception in June 1995, focused on building computer systems and
related infrastructure that could be rapidly expanded to accommodate increasing
numbers of users, and on maximizing the number of subscribers to our free basic
e-mail service, which launched in April 1996. In July 1998, we commenced the
second phase of our business strategy by introducing two additional service
levels: an enhanced e-mail service, JUNO GOLD, and a full Internet access
service, JUNO WEB.
We classify our revenues as follows:
(1) Billable services revenues, consisting of:
(a) subscription fees from subscribers to Juno Gold and Juno Web, our
billable subscription services;
(b) technical support fees received when subscribers to our free basic
e-mail service and to Juno Gold call a 900 number for live assistance
from a support technician; and
(c) charges for shipping and handling associated with mailing disks upon
request to prospective Juno subscribers, consulting revenues, and
fees for other billable services.
(2) Advertising and transaction fees, consisting of revenues earned from
advertisers and strategic marketing partners for displaying
advertisements to, and facilitating electronic commerce with, our
subscribers. The majority of these advertisements are displayed while a
Juno subscriber reads or writes e-mail offline. Advertising revenues are
also derived from banner ad impressions displayed to Juno Web subscribers
when they use our portal Web site, to which they are automatically
brought each time they use Juno to connect to the Web.
(3) Direct product sales, consisting of revenues generated from the sale of
products directly by us to our subscribers and the associated shipping
and handling fees.
The commencement of the second phase of our business strategy has affected
the composition of our revenues. On July 22, 1998, we launched our billable
subscription services, and as of March 31, 1999, we had approximately 207,000
billable service subscribers, consisting of approximately 86,000 Juno Gold
subscribers and approximately 121,000 Juno Web subscribers. Since the launch of
our billable subscription services, billable services revenues have increased,
both in absolute terms and as a percentage of our revenues.
We currently offer our billable subscription services under a number of
pricing plans, ranging from $2.95 per month for Juno Gold, billed annually in
advance, to $19.95 per month for the Juno Web
31
<PAGE>
flat-rate plan. In marketing the Juno Web service, we have typically offered a
number of promotions, such as a free month of service or a discounted rate for
an initial period. Revenues for these billable subscription services accounted
for approximately 86.2% of billable services revenues during the first quarter
of 1999.
Our strategy contemplates considerable growth in the number of subscribers
to our billable subscription services. We intend to devote significant resources
to advertising, brand marketing and referral programs designed to acquire new
subscribers directly into our billable subscription services and to encourage
migration of our free basic e-mail subscribers to these billable services. We
expect growth in the subscriber base for Juno Gold and Juno Web to result in
substantial growth in subscription fees, both in absolute dollar terms and as a
percentage of total revenues. Our strategy contemplates that revenues for
billable subscription services are likely to be the single largest source of
revenues for Juno in the immediate future.
We are subject to industry trends that affect Internet access providers
generally, including seasonality and subscriber cancellations. We believe
Internet access providers typically incur higher expenses during the last and
first calendar quarters, corresponding to heavier usage during the fall and
winter, and experience relatively lighter usage and relatively fewer account
registrations during the summer. We believe subscriber acquisition also tends to
be most effective during the first and last calendar quarters of each year, and
we may take these types of seasonal effects into consideration in scheduling our
marketing activities. The results of operations of Internet access providers,
including those of Juno, are significantly affected by subscriber cancellations.
The failure to retain subscribers to our billable subscription services, or an
increase in the rate of cancellations of those services, would cause our
business and financial results to suffer.
Additionally, our strategy contemplates increases in revenues from
advertising and transaction fees. We expect that strategic marketing alliances
will account for an increasing portion of such revenues. This is due in part to
our expectation that we may secure additional strategic marketing alliances, as
well as to our expectation that we may earn incremental performance-based
revenues beyond the minimum guaranteed revenues associated with some of these
arrangements. Furthermore, we expect that revenues from direct product sales
will decline in the future as a percentage of total revenues due to our
strategic decision to focus increasingly on higher margin activities.
Our principal expenses consist of marketing, telecommunications, customer
service, personnel and related costs, and the cost of direct product sales. We
have elected to obtain telecommunications services, customer service and
merchandising fulfillment principally from third-party providers.
We have incurred net losses of $99.0 million from our inception on June 30,
1995 through March 31, 1999. In addition, we have recorded cumulative unearned
compensation of $762,000, which represents the difference between the exercise
price and the deemed fair market value at the date of grant for shares of common
stock issuable upon the exercise of stock options. Of the total unearned
compensation amount, $34,000 was amortized for the year ended December 31, 1998
and $37,000 was amortized for the three months ended March 31, 1999. The
remaining unearned compensation amount is expected to be amortized over the
remaining vesting periods of the related options. In April 1999, we recorded an
additional $612,000 of unearned compensation for additional options granted to
purchase shares of common stock.
We have relied on private sales of equity securities, totaling $79.6 million
through December 31, 1998, and borrowings to fund our operations. In March 1999,
we raised an additional $61.8 million of net proceeds through the private
placement of Series B redeemable convertible preferred stock. We expect net
losses to continue for the foreseeable future as we continue to incur
significant expenses while pursuing our business strategy.
32
<PAGE>
Prior to March 1, 1999, we operated our business primarily through a limited
partnership, Juno Online Services, L.P. On that date, we completed a statutory
merger of Juno Online Services, L.P. into Juno Online Services, Inc., which had
been a wholly owned subsidiary of Juno Online Services, L.P. Juno Online
Services, Inc. is the surviving entity after completion of the statutory merger.
The consolidated financial statements included in the prospectus consist of the
accounts of both Juno Online Services, L.P. and Juno Online Services, Inc. All
significant intercompany accounts and transactions have been eliminated in
consolidation. Since we operated as a limited partnership prior to March 1,
1999, taxable losses incurred through that date have been allocated to the
partners for reporting on their respective income tax returns. Accordingly, as
of that date, we had no available net operating loss carryforwards available for
federal and state income tax purposes to offset future taxable income, if any.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
REVENUES
Total revenues increased approximately $5.5 million, from $4.3 million for
the three months ended March 31, 1998 to $9.7 million for the three months ended
March 31, 1999, an increase of 128%. This increase was due primarily to
increases in billable services and in advertising and transaction fees,
partially offset by a decrease in direct product sales.
BILLABLE SERVICES. Billable services revenues increased $5.3 million, from
$0.5 million for the three months ended March 31, 1998 to $5.8 million for the
three months ended March 31, 1999, an increase of 1,149%. This increase was due
primarily to the introduction of our billable subscription services in July
1998, which contributed $5.0 million of revenues in the three months ended March
31, 1999. At March 31, 1999, there were approximately 207,000 billable service
subscribers, with approximately 86,000 subscribing to Juno Gold and
approximately 121,000 subscribing to Juno Web.
ADVERTISING AND TRANSACTION FEES. Advertising and transaction fees
increased approximately $1.0 million, from $1.2 million for the three months
ended March 31, 1998 to $2.3 million for the three months ended March 31, 1999,
an increase of 84.4%. This increase was due to additional revenue from a larger
number of strategic marketing alliances. This increase was also due in part to a
contribution from revenue recognized over the shortened life of a strategic
marketing alliance which featured a minimum revenue guarantee and which was
terminated by the strategic partner effective May 1, 1999. This contribution
accounted for approximately 23.0% of advertising and transaction fees for the
three months ended March 31, 1999. The increase in advertising and transaction
fees was partially offset by declines in the number of and the aggregate revenue
generated from shorter-term ad sales contracts, reflecting our shift in emphasis
towards larger strategic deals.
DIRECT PRODUCT SALES. Direct product sales decreased approximately $0.9
million, from $2.6 million for the three months ended March 31, 1998 to $1.6
million for the three months ended March 31, 1999, a decrease of 36.0%. This
decline reflects our strategic decision in 1998 to narrow the range of our
direct product sales activities and of the types of products offered to our
subscribers. Instead, we decided to concentrate on forming strategic marketing
alliances and developing other uses for our advertising inventory that we
believe should generate revenues with higher margins than direct product sales.
COST OF REVENUES
Total cost of revenues increased approximately $3.5 million, from $3.6
million for the three months ended March 31, 1998 to $7.2 million for the three
months ended March 31, 1999, an increase of 97.4%. This increase was due
primarily to increases in costs associated with billable services and in
33
<PAGE>
advertising and transaction fees, partially offset by a decrease in costs
associated with direct product sales.
BILLABLE SERVICES. Cost of revenues related to billable services consists
primarily of the costs to provide Juno Gold and Juno Web, including
telecommunications, customer service, operator-assisted technical support,
credit card fees, and personnel and related overhead costs. In addition, cost of
revenues related to billable services includes the costs of mailing disks upon
request to prospective Juno subscribers, and the personnel and related overhead
costs associated with our performance of a short-term consulting engagement
during the three months ended March 31, 1999.
Cost of revenues related to billable services increased $4.3 million, from
$0.4 million for the three months ended March 31, 1998 to $4.7 million for the
three months ended March 31, 1999, an increase of 1,109%. This increase was due
primarily to the costs of providing our billable subscription services. Costs
related to the provision of these billable subscription services, principally
customer service, technical support and telecommunications expenses, accounted
for 76.1% of the total costs of revenues related to billable services during the
three months ended March 31, 1999 and accounted for the majority of the
increase. Cost of revenues as a percentage of billable services revenues
decreased from 83.1% for the three months ended March 31, 1998 to 80.6% for the
three months ended March 31, 1999. This decrease is primarily attributable to
the introduction of billable subscription services and the higher margins
realized from those services during the three months ended March 31, 1999.
ADVERTISING AND TRANSACTION FEES. Cost of revenues for advertising and
transaction fees consists primarily of the transmission costs associated with
downloading advertisements to the hard drives of subscribers' computers for
later display, the personnel and related costs associated with the creation and
distribution of such advertisements, and the costs associated with reporting the
results of ad campaigns to advertisers.
Cost of revenues for advertising and transaction fees increased $0.3
million, from $0.8 million for the three months ended March 31, 1998 to $1.1
million for the three months ended March 31, 1999, an increase of 30.8%. This
increase was due primarily to the impact of additional strategic marketing
alliances. Cost of revenues related to advertising and transaction fees as a
percentage of advertising and transaction fees decreased from 67.2% for the
three months ended March 31, 1998 to 47.7% for the three months ended March 31,
1999. This decrease is primarily due to a contribution from revenue recognized
over the shortened life of a strategic marketing alliance that featured a
minimum revenue guarantee, and also to decreased telecommunications rates,
faster average connection speeds and improvements in our production and
distribution methods.
DIRECT PRODUCT SALES. Cost of revenues for direct product sales consists
primarily of the costs of merchandise sold directly by us to our subscribers and
the associated shipping and handling costs.
The cost of revenues for direct product sales decreased $1.0 million, from
$2.4 million for the three months ended March 31, 1998 to $1.4 million for the
three months ended March 31, 1999, a decrease of 41.3%. This decrease
corresponds to the decrease in merchandise sold. The cost of revenues for direct
product sales as a percentage of direct product sales revenues decreased from
94.1% for the three months ended March 31, 1998 to 86.3% for the three months
ended March 31, 1999. This decrease was primarily due to efficiencies associated
with outsourcing various functions rather than performing them internally.
OPERATING EXPENSES
OPERATIONS, FREE SERVICE. Operations, free service consists of the costs
associated with providing our free basic e-mail service, comprising principally
telecommunications costs, expenses associated with
34
<PAGE>
providing customer service, depreciation of network equipment, and personnel and
related overhead costs.
Expenses associated with operations, free service decreased $1.0 million,
from $2.8 million for the three months ended March 31, 1998 to $1.8 million for
the three months ended March 31, 1999, a decrease of 34.6%. This decrease was
primarily due to declining telecommunications rates and increasing connection
speeds resulting from the use of faster modems by a portion of our subscriber
base.
SUBSCRIBER ACQUISITION. Subscriber acquisition costs include all costs
incurred to acquire subscribers to either our free basic e-mail service or one
of our billable subscription services. These costs include direct mail
campaigns, advertising through conventional and computer-based media,
telemarketing, producing advertisements to be displayed over the Juno services
and transmitting them to our subscribers, disk duplication and fulfillment, and
bounties paid to acquire subscribers, among other marketing activities. These
costs also include various subscriber retention activities, as well as personnel
and related overhead costs.
Subscriber acquisition costs increased $1.2 million, from $1.5 million for
the three months ended March 31, 1998 to $2.7 million for the three months ended
March 31, 1999, an increase of 85.8%. This increase is primarily due to ad
production and transmission costs associated with soliciting basic e-mail
subscribers to upgrade to our billable subscription services, costs associated
with preparations for large-scale marketing activities scheduled to begin in the
second quarter of 1999 and inbound telemarketing costs incurred in connection
with subscriber acquisition and retention activities. The increase in these
costs was partially offset by a decrease in expenses related to referral
bounties as various agreements that called for bounty payments expired or were
terminated. As a percentage of revenues, subscriber acquisition costs decreased
from 34.0% in the three months ended March 31, 1998 to 27.8% in the three months
ended March 31, 1999. This percentage decrease was primarily due to the increase
in revenues for the three months ended March 31, 1999. We expect that subscriber
acquisition costs will increase significantly both in absolute dollar terms and
as a percentage of total revenues in the future.
SALES AND MARKETING. Sales and marketing expenses consist primarily of the
personnel and related overhead costs of the following departments: advertising
sales and business development; direct product sales; and product marketing.
Also included are costs associated with trade advertising intended to support
our ad sales effort, corporate branding activities unrelated to subscriber
acquisition, and public relations, as well as ad production, ad transmission,
customer service and fulfillment costs associated with our direct product sales
activities.
Sales and marketing costs decreased $2.0 million, from $4.3 million for the
three months ended March 31, 1998 to $2.3 million for the three months ended
March 31, 1999, a decrease of 45.8%. This decrease is primarily due to cost
savings associated with our decision to narrow the range of our direct product
sales activities. We reduced the headcount assigned to our direct product sales
activities, as well as our inventory risk, primarily by outsourcing
substantially all of the procurement, warehousing, fulfillment, billing and
customer service aspects of the initiative. Sales and marketing expenses for the
three months ended March 31, 1998 include charges of approximately $0.3 million
relating to inventory write-offs and severance pay. As a percentage of revenues,
sales and marketing costs decreased from 100.0% in the three months ended March
31, 1998 to 23.8% in the three months ended March 31, 1999. This percentage
decrease was primarily due to the increase in revenues for the three months
ended March 31, 1999.
PRODUCT DEVELOPMENT. Product development includes research and development
expenses and other product development costs. These costs consist primarily of
personnel and related overhead costs as well as the costs associated with
research and development and other product development activities performed for
us on a contract basis by a related party in Hyderabad, India.
35
<PAGE>
Product development costs increased approximately $19,000, from $1.8 million
for the three months ended March 31, 1998 to $1.9 million for the three months
ended March 31, 1999, an increase of 1.0%. Product development costs in the
three months ended March 31, 1998 and 1999 related primarily to the continued
development of our billable subscription services and of various pieces of
software. To date, we have not capitalized any expenses related to any software
development activities.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of personnel and related overhead costs associated with executive,
finance, legal, recruiting, human resources and facilities functions, as well as
various professional expenses.
General and administrative costs decreased $0.2 million, from $0.9 million
for the three months ended March 31, 1998 to $0.7 million for the three months
ended March 31, 1999, a decrease of 23.0%. This decrease is primarily due to
reduced personnel and related overhead costs and cost containment programs. As a
percentage of revenues, general and administrative costs decreased from 21.4% in
the three months ended March 31, 1998 to 7.2% for the three months ended March
31, 1999. This decrease was primarily due to the increase in revenue for the
three months ended March 31, 1999. We expect that we will incur additional
general and administrative expenses as we hire additional personnel and incur
additional costs related to the growth of our business and our operation as a
public company, including directors' and officers' liability insurance, investor
relations programs and professional service fees. Accordingly, we anticipate
that general and administrative expenses will increase in absolute dollar terms
in the future.
INTEREST INCOME, NET. Interest income, net increased $37,000, from $74,000
for the three months ended March 31, 1998 to $111,000 for the three months ended
March 31, 1999, an increase of 50.1%. This increase is primarily due to interest
income earned on higher average cash balances in the three months ended March
31, 1999 due to the receipt of $61.8 million of net proceeds in exchange for the
issuance of redeemable convertible preferred stock in March 1999, partially
offset by higher interest payments for borrowings.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
REVENUES
Total revenues increased $12.6 million, from $9.1 million for the year ended
December 31, 1997 to $21.7 million for the year ended December 31, 1998, an
increase of 139%. This increase was due primarily to increases in billable
services and in advertising and transaction fees.
BILLABLE SERVICES. Billable services revenues increased approximately $5.3
million, from $1.4 million for the year ended December 31, 1997 to $6.6 million
for the year ended December 31, 1998, an increase of 385%. This increase was due
primarily to the introduction of our billable subscription services, which
contributed $3.6 million in subscription fees in 1998; a short-term development
consulting contract which contributed $1.0 million; and technical support fees
associated with the growth of the subscriber base of Juno's free basic e-mail
service and of Juno Gold. At December 31, 1998, there were approximately 144,000
billable services subscribers, with approximately 53,000 subscribing to Juno
Gold and approximately 91,000 subscribing to Juno Web.
ADVERTISING AND TRANSACTION FEES. Advertising and transaction fees
increased $4.6 million, from $1.9 million for the year ended December 31, 1997
to $6.5 million for the year ended December 31, 1998, an increase of 244%. This
increase was due primarily to additional advertisers and advertisements
delivered, and the impact of additional strategic marketing alliances.
From time to time, we engage in barter transactions in which we exchange
advertising with other Internet or traditional media companies, provide
advertising in exchange for software distribution services or other forms of
marketing assistance, or participate in other reciprocal service arrangements.
36
<PAGE>
Barter transactions accounted for 0.3% of total advertising and transaction fees
for the year ended December 31, 1997, and 1.9% for the year ended December 31,
1998.
DIRECT PRODUCT SALES. Direct product sales increased $2.8 million, from
$5.8 million for the year ended December 31, 1997 to $8.6 million for the year
ended December 31, 1998, an increase of 47.0%. However, revenues from direct
product sales decreased $1.0 million, from $5.0 million for the six months ended
December 31, 1997 to $4.0 million for the six months ended December 31, 1998, a
decrease of 20.1%. This decline reflects our strategic decision during the first
quarter of 1998 to narrow the range of our direct product sales activities and
of the types of products offered to our subscribers. Instead, we decided to
concentrate on forming strategic marketing alliances and developing other uses
for our advertising inventory that we believe should generate revenues with
higher margins than direct products sales.
COST OF REVENUES
Total cost of revenues increased $8.5 million, from $8.5 million for the
year ended December 31, 1997 to $17.0 million, an increase of approximately
99.3%. This increase was due primarily to increases in costs associated with
billable services and with advertising and transaction fees.
BILLABLE SERVICES. Cost of revenues related to billable services increased
approximately $4.6 million, from $1.1 million for the year ended December 31,
1997 to $5.6 million for the year ended December 31, 1998, an increase of 433%.
This increase is primarily due to the costs of providing our billable
subscription services. Costs related to the provision of these billable
subscription services, principally customer service, technical support and
telecommunications expenses, accounted for 58.0% of the total costs of revenues
related to all billable services during 1998 and accounted for a majority of the
increase. Cost of revenues related to billable services as a percentage of total
billable services revenues increased from 76.8% for the year ended December 31,
1997 to 84.4% for the year ended December 31, 1998. This increase is principally
related to the introduction of billable subscription services, the relatively
high percentage of subscribers to these services who are in their initial
months, and the higher costs incurred in the early stages of a subscriber's life
cycle. We believe that customer service and technical support costs are
substantially higher in the initial months following signup than during later
months. We also incur significant startup costs associated with training
customer service and technical support representatives and with developing
processes necessary to support the subscriber base and its anticipated future
growth. We expect that, other things being equal, these costs will be highest as
a percentage of the related revenues during periods of rapid percentage growth
in the subscriber base of our billable subscription services.
ADVERTISING AND TRANSACTION FEES. Cost of revenues for advertising and
transaction fees increased approximately $2.1 million, from $1.7 million for the
year ended December 31, 1997 to $3.7 million for the year ended December 31,
1998, an increase of 125%. This increase was principally due to additional
advertisers and advertisements delivered and the impact of additional strategic
marketing alliances. The cost of revenues for advertising and transaction fees
as a percentage of advertising and transaction fees revenue decreased from 88.5%
for the year ended December 31, 1997 to 57.7% for the year ended December 31,
1998. This decrease is primarily due to economies of scale associated with
higher volumes of ad production, decreased telecommunications rates, faster
average connection speeds, and improvements in our production and distribution
methods.
DIRECT PRODUCT SALES. The cost of revenues for direct product sales
increased $1.8 million, from $5.8 million for the year ended December 31, 1997
to $7.6 million for the year ended December 31, 1998, an increase of 31.6%. This
increase corresponds to the increase in merchandise sold. The cost of revenues
for direct product sales as a percentage of direct product sales revenue
decreased from 99.2% for the year ended December 31, 1997 to 88.7% for the year
ended December 31, 1998. This decrease
37
<PAGE>
was primarily due to efficiencies associated with outsourcing various functions
rather than performing them internally.
OPERATING EXPENSES
OPERATIONS, FREE SERVICE. Expenses associated with operations, free service
decreased $1.7 million, from $11.1 million for the year ended December 31, 1997
to $9.4 million for the year ended December 31, 1998, a decrease of 15.3%. This
decrease was primarily due to declining telecommunications rates and increasing
connection speeds resulting from the use of faster modems by a portion of our
subscriber base. These cost savings were partially offset by an increase in the
number of subscribers connecting in a given month. During the month ended
December 31, 1997, 1,986,000 subscriber accounts connected and during the month
ended December 31, 1998, 2,434,000 subscriber accounts connected.
SUBSCRIBER ACQUISITION. Subscriber acquisition costs increased $2.2
million, from $3.1 million for the year ended December 31, 1997 to $5.3 million
for the year ended December 31, 1998, an increase of 69.9%. This increase is
primarily due to direct mail and advertising costs incurred to acquire
subscribers to our free basic e-mail service in the first half of 1998, ad
production and transmission costs associated with soliciting basic e-mail
subscribers to upgrade to our billable subscription services starting in July
1998, and costs incurred during the second half of 1998 to prepare for the
large-scale marketing activities planned for 1999. The increase in these costs
was partially offset by a decrease in expenses related to referral bounties as
various agreements that called for bounty payments expired or were terminated.
As a percentage of revenues, subscriber acquisition costs decreased from 34.5%
in 1997 to 24.6% in 1998. This percentage decrease was primarily due to the
relatively larger 1998 revenues. We expect that subscriber acquisition costs
will increase significantly both in absolute dollar terms and as a percentage of
total revenue in the future.
SALES AND MARKETING. Sales and marketing costs decreased $1.0 million, from
$12.6 million for the year ended December 31, 1997 to $11.6 million for the year
ended December 31, 1998, a decrease of 8.0%. This decrease is primarily due to
reductions in the level of trade advertising we undertook in 1998 as well as to
cost savings associated with our decisions to close our regional ad sales
offices and to narrow the range of our direct product sales activities. We
reduced the headcount assigned to our direct product sales activities, as well
as inventory risk, primarily by outsourcing substantially all of the
procurement, warehousing, fulfillment, billing and customer service aspects of
this initiative. In each of the first and second quarters of 1998, sales and
marketing expenses include charges of approximately $300,000 relating to
inventory write-offs, severance pay, and lease termination costs. As a
percentage of revenues, sales and marketing costs decreased from 139% in 1997 to
53.4% in 1998. This percentage decrease was primarily due to our relatively
larger 1998 revenues.
PRODUCT DEVELOPMENT. Product development costs increased approximately $2.5
million, from $4.9 million for the year ended December 31, 1997 to $7.3 million
for the year ended December 31, 1998, an increase of 51.1%. This increase is
primarily due to the costs associated with establishing development operations
in Hyderabad, India, a project we initiated in the fourth quarter of 1997.
Product development costs in 1998 related primarily to the continued development
of our billable subscription services and of various pieces of software. To
date, we have not capitalized expenses related to any software development
activities.
GENERAL AND ADMINISTRATIVE. General and administrative costs decreased $0.1
million, from $2.9 million for the year ended December 31, 1997 to $2.8 million
for the year ended December 31, 1998, a decrease of 4.7%. This decrease is
primarily due to reduced personnel and related overhead costs, lower
professional fees, and cost containment programs. As a percentage of revenues,
general and administrative costs decreased from 31.9% for the year ended
December 31, 1997 to 12.7% for the year ended December 31, 1998. This decrease
was primarily due to the increase in revenues for the
38
<PAGE>
year ended December 31, 1998. We expect that we will incur additional general
and administrative expenses as we hire additional personnel and incur additional
costs related to the growth of our business and our operation as a public
company, including directors' and officers' liability insurance, investor
relations programs and professional service fees. Accordingly, we anticipate
that general and administrative expenses will increase in absolute dollar terms
in the future.
INTEREST INCOME, NET. Interest income, net decreased $199,000, from
$243,000 for the year ended December 31, 1997 to $44,000 for the year ended
December 31, 1998, a decrease of 81.9%. This decrease is primarily due to
interest payments for borrowings and increased capital lease obligations,
partially offset by interest income earned on higher average cash balances
during 1998.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
REVENUES
Total revenues increased $9.0 million, from $0.1 million for the year ended
December 31, 1996 to $9.1 million for the year ended December 31, 1997. This
increase was primarily due to increases in direct product sales and in
advertising and transaction fees.
BILLABLE SERVICES. Billable services revenues increased $1.4 million, from
$6,000 for the year ended December 31, 1996 to $1.4 million for the year ended
December 31, 1997. This increase is primarily due to the implementation of
fee-based technical support for subscribers to our free basic e-mail service in
January 1997 and the initiation, as of March 1997, of our policy to charge
prospective subscribers to our free basic e-mail service a shipping and handling
fee if they request that a copy of our software be sent to them by mail.
ADVERTISING AND TRANSACTION FEES. Advertising and transaction fees
increased approximately $1.7 million, from $127,000 for the year ended December
31, 1996 to $1.9 million for the year ended December 31, 1997. This increase
reflects the expansion of our sales force and the growth in the subscriber base
of our free basic e-mail service to a level sufficient to interest advertisers,
and is principally due to the significantly higher number of advertisers and
advertisements delivered.
DIRECT PRODUCT SALES. Direct product sales increased $5.8 million, from
$3,000 for the year ended December 31, 1996 to $5.8 million for the year ended
December 31, 1997. This increase reflects the first full year of direct product
sales activity and the growth of our subscriber base.
COST OF REVENUES
Cost of revenues increased $8.2 million, from $0.3 million for the year
ended December 31, 1996 to $8.5 million for the year ended December 31, 1997.
This increase was primarily due to increases in costs associated with direct
product sales and with advertising and transaction fees.
BILLABLE SERVICES. The cost of revenues related to billable services
increased $1.1 million, from $0 for the year ended December 31, 1996 to $1.1
million in 1997. This increase is primarily due to costs associated with
providing fee-based technical support to subscribers to our free basic e-mail
service starting in January 1997 and with our policy to charge prospective
subscribers to our free basic e-mail service a shipping and handling fee if they
request that a copy of our software be sent to them by mail.
ADVERTISING AND TRANSACTION FEES. The cost of revenues for advertising and
transaction fees increased $1.4 million, from $278,000 for the year ended
December 31, 1996 to $1.7 million for the year ended December 31, 1997. This
increase is principally due to additional production and transmission costs
associated with the increase in advertisements delivered.
39
<PAGE>
DIRECT PRODUCT SALES. The cost of revenues for direct product sales
increased $5.8 million, from $3,000 for the year ended December 31, 1996 to $5.8
million for the year ended December 31, 1997. This increase corresponds to the
increase in products sold.
OPERATING EXPENSES
OPERATIONS, FREE SERVICE. The expenses associated with operations, free
service increased $5.3 million, from $5.8 million for the year ended December
31, 1996 to $11.1 million for the year ended December 31, 1997, an increase of
90.8%. This increase is primarily due to the growth in the subscriber base of
our free basic e-mail service, which resulted in increased telecommunications
and customer service costs, partially offset by declining telecommunication
rates and increasing average connection speeds. During the month ended December
31, 1996, 823,000 subscriber accounts connected and during the month ended
December 31, 1997, 1,986,000 subscriber accounts connected.
SUBSCRIBER ACQUISITION. Subscriber acquisition costs decreased $3.9
million, from $7.0 million for the year ended December 31, 1996 to $3.1 million
for the year ended December 31, 1997, a decrease of 55.1%. This decrease is
primarily due to the reduction in advertising and direct mail activities in 1997
relative to those in 1996, the year in which we launched our free basic e-mail
service. The effect of this reduction in advertising and direct mail activities
was partially offset by increased referral bounty expenses in 1997.
SALES AND MARKETING. Sales and marketing expenses increased $8.3 million,
from $4.3 million for the year ended December 31, 1996 to $12.6 million for the
year ended December 31, 1997, an increase of 195%. This increase is primarily
due to the growth of our advertising sales force as well as the expansion of our
direct product sales activities, which increased our expenses related to ad
production, ad transmission, and order fulfillment. These increases were
partially offset by reductions in the level of trade advertising we undertook in
1997.
PRODUCT DEVELOPMENT. Product development costs increased approximately $1.1
million, from $3.7 million for the year ended December 31, 1996 to $4.9 million
for the year ended December 31, 1997, an increase of 29.9%. This increase is
primarily due to increased personnel and related overhead costs, due to higher
headcount. Product development costs in 1997 related primarily to development of
refinements to our advertising and electronic commerce systems and certain other
pieces of software.
GENERAL AND ADMINISTRATIVE. General and administrative costs increased $0.7
million, from $2.2 million for the year ended December 31, 1996 to $2.9 million
for the year ended December 31, 1997, an increase of 33.4%. This increase is
primarily due to increased personnel and related overhead costs, due to
increased headcount.
INTEREST INCOME, NET. Interest income, net increased $115,000, from
$128,000 for the year ended December 31, 1996 to $243,000 for the year ended
December 31, 1997, an increase of 89.8%. This increase is primarily due to
interest income earned on higher average cash balances in 1997.
QUARTERLY RESULTS OF OPERATIONS DATA
The following table sets forth unaudited quarterly statement of operations
data for each of the five quarters ended March 31, 1999, as well as the same
data expressed as a percentage of our total revenues for the periods indicated.
In our opinion, this unaudited information has been prepared substantially on
the same basis as the audited consolidated financial statements appearing
elsewhere in this prospectus, and all necessary adjustments, consisting only of
normal recurring adjustments, have been included in the amounts stated below to
present fairly the unaudited quarterly results of operations data. The quarterly
data should be read in conjunction with the consolidated financial statements
and the notes to these statements appearing elsewhere in this prospectus. The
operating results for any quarter are not necessarily indicative of the
operating results for any future period.
40
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
MAR. 31, SEPT. 30, DEC. 31,
1998 JUNE 30, 1998 1998 1998 MAR. 31, 1999
------------ ------------- ------------- ------------ -------------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Billable services........................... $ 465 $ 709 $ 1,528 $ 3,943 $ 5,806
Advertising and transaction fees............ 1,228 1,540 1,759 1,927 2,265
Direct product sales........................ 2,577 2,035 1,847 2,136 1,649
------------ ------------- ------------- ------------ -------------
Total revenues.......................... 4,270 4,284 5,134 8,006 9,720
------------ ------------- ------------- ------------ -------------
Cost of revenues:
Billable services........................... 387 580 1,306 3,333 4,678
Advertising and transaction fees............ 825 875 992 1,033 1,080
Direct product sales........................ 2,426 1,709 1,592 1,900 1,424
------------ ------------- ------------- ------------ -------------
Total cost of revenues.................. 3,638 3,164 3,890 6,266 7,182
------------ ------------- ------------- ------------ -------------
Operating expenses:
Operations, free service.................... 2,824 2,356 2,101 2,102 1,846
Subscriber acquisition...................... 1,453 427 1,067 2,387 2,700
Sales and marketing......................... 4,270 2,884 2,212 2,218 2,312
Product development......................... 1,835 1,630 1,849 2,031 1,854
General and administrative.................. 914 676 513 657 704
------------ ------------- ------------- ------------ -------------
Total operating expenses................ 11,296 7,973 7,742 9,395 9,416
------------ ------------- ------------- ------------ -------------
Loss from operations.................... (10,664) (6,853) (6,498) (7,655) (6,878)
Interest income (expense), net................ 74 (14) 6 (22) 111
------------ ------------- ------------- ------------ -------------
Net loss................................ $ (10,590) $ (6,867) $ (6,492) $ (7,677) $ (6,767)
------------ ------------- ------------- ------------ -------------
------------ ------------- ------------- ------------ -------------
PERCENTAGE OF REVENUES:
Revenues:
Billable services......................... 10.9% 16.6% 29.7% 49.3% 59.7%
Advertising and transaction fees.......... 28.8 35.9 34.3 24.1 23.3
Direct product sales...................... 60.3 47.5 36.0 26.6 17.0
------------ ------------- ------------- ------------ -------------
Total revenues.......................... 100.0 100.0 100.0 100.0 100.0
------------ ------------- ------------- ------------ -------------
Cost of revenues:
Billable services......................... 9.1 13.5 25.4 41.7 48.1
Advertising and transaction fees.......... 19.3 20.4 19.4 12.9 11.1
Direct product sales...................... 56.8 40.0 31.0 23.7 14.7
------------ ------------- ------------- ------------ -------------
Total cost of revenues.................. 85.2 73.9 75.8 78.3 73.9
------------ ------------- ------------- ------------ -------------
Operating expenses:
Operations, free service.................. 66.1 55.0 40.9 26.2 19.0
Subscriber acquisition.................... 34.0 10.0 20.7 29.8 27.8
Sales and marketing....................... 100.0 67.3 43.1 27.7 23.8
Product development....................... 43.0 38.0 36.0 25.4 19.1
General and administrative................ 21.4 15.8 10.1 8.2 7.2
------------ ------------- ------------- ------------ -------------
Total operating expenses................ 264.5 186.1 150.8 117.3 96.9
------------ ------------- ------------- ------------ -------------
Loss from operations.................... (249.7) (160.0) (126.6) (95.6) (70.8)
Interest income (expense), net.............. 1.7 (0.3) 0.1 (0.3) 1.2
------------ ------------- ------------- ------------ -------------
Net loss................................ (248.0)% (160.3)% (126.5)% (95.9)% (69.6)%
------------ ------------- ------------- ------------ -------------
------------ ------------- ------------- ------------ -------------
</TABLE>
41
<PAGE>
The following table sets forth selected subscriber data for each of the five
quarters ended March 31, 1999. This data should be read in conjunction with the
information appearing elsewhere in this prospectus. The selected subscriber data
for any quarter are not necessarily indicative of future periods.
<TABLE>
<CAPTION>
SEPT. 30, DEC. 31, MAR. 31,
SELECTED SUBSCRIBER DATA: MAR. 31, 1998 JUNE 30, 1998 1998 1998 1999
- --------------------------------------- -------------- ------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Total subscriber accounts as of (1).... 4,699,000 5,298,000 5,852,000 6,336,000 6,817,000
Subscriber accounts that connected in
the three-month period ended....... 2,924,000 3,032,000 3,121,000 3,108,000 3,108,000
Subscriber accounts that connected in
the month ended.................... 2,340,000 2,361,000 2,409,000 2,434,000 2,438,000
Average subscriber accounts that
connected per day in the month
ended.............................. 889,000 836,000 889,000 887,000 912,000
Billable subscription service accounts
as of (2)............................ -- -- 64,000 144,000 207,000
</TABLE>
- ------------------------
(1) Includes all user accounts created since Juno's inception, regardless of
activity level, if any, net of accounts that have been cancelled.
(2) Billable subscription service accounts are a subset of total subscriber
accounts and, to the extent applicable, are also included in the number of
subscriber accounts shown as having connected during the periods described.
We have historically experienced seasonality, with use of Internet services
being somewhat lower during the summer and year-end holiday periods. We believe
seasonality favorably impacts subscriber acquisition during the first and fourth
calendar quarters. We further believe that seasonality may negatively affect our
advertising revenue during the first and third calendar quarters. Finally, we
believe that direct product sales are positively affected in the fourth quarter
due to the year-end holiday buying season, although we cannot assure you that
this trend will continue in future periods. See "Risk Factors--Juno's business
is subject to fluctuations in operating results which may negatively impact the
price of our stock."
Despite the impact of seasonality, our revenues have increased in all
quarters presented. We believe that these increases occurred for a number of
reasons, including:
- the overall growth of our business and the industry's growth as a whole;
- the launch of our billable subscription services on July 22, 1998; and
- the increase in advertising and transaction fees generated by strategic
marketing alliances beginning with the third quarter of 1998.
We cannot assure you that we will not experience seasonal fluctuations and the
risks associated therewith in the future. Primarily due to our previously
described strategic decision to narrow our direct product sales activities,
direct product sales revenue decreased in all quarters except for the fourth
quarter, which we believe was positively affected by the holiday buying season.
Cost of revenues increased as a percentage of total revenues in the third
and fourth quarters of 1998 primarily due to:
- the startup costs associated with the introduction of billable
subscription services;
- the relatively high percentage of subscribers to these services who are in
their initial months;
42
<PAGE>
- the higher costs incurred in the early months of a subscriber's life
cycle; and
- the fact that most Juno Web subscribers currently receive their first
month of service at no charge.
Cost of revenues decreased, as a percentage of total revenues, from 78.3%
for the three months ended December 31, 1998 to 73.9% for the three months ended
March 31, 1999. This decrease was primarily due to the decline in the percentage
of billable subscription service users who were in their initial months
following signup, as compared to previous quarters. In addition, the cost of
revenues, as a percentage of total revenues, was positively impacted by a
contribution from revenue recognized over the shortened life of a strategic
marketing alliance that featured a minimum revenue guarantee.
Operating expenses decreased in the second quarter of 1998 due to reduced
subscriber acquisition activities, and in the second and third quarters of 1998
due to savings resulting from the narrowing of our direct product sales
activities, the closing of regional sales offices, and cost containment
programs. Operating expenses increased in the fourth quarter of 1998 principally
because of increased spending initiated during the third quarter related to
subscriber acquisition. This increase in spending reflects increased levels of
marketing conducted over the Juno service in order to promote our billable
subscription services to our free basic e-mail service subscribers, as well as
preparations for the large-scale marketing activities planned for 1999. The
increase in subscriber acquisition costs continued in the three months ended
March 31, 1999. Total operating costs remained relatively flat as compared to
the three months ended December 31, 1998 primarily due to lower costs associated
with operating the free basic e-mail service. The cost of operations, free
service decreased due to the continued decline in telecommunications rates and
increases in connection speeds resulting from the use of faster modems by a
portion of our subscriber base. We anticipate significant increases in
subscriber acquisition expenses. See "Use of Proceeds." We anticipate that this
increased spending will result in substantial fluctuations in subscriber
acquisition expenses, operating expenses, and net loss on a quarter-to-quarter
basis.
LIQUIDITY AND CAPITAL RESOURCES
Prior to the March 1999 private placement described below, we were financed
primarily through capital contributions from entities or persons affiliated with
D. E. Shaw & Co., Inc. In March 1998, we borrowed $10.0 million from D. E. Shaw
Securities Group, L.P., an affiliated party, pursuant to an unsecured note. The
note bears interest at the Federal Funds rate plus 0.375%, which totalled 5.355%
as of March 31, 1999. Outstanding principal and any accrued but unpaid interest
is required to be paid upon the earlier of December 31, 2000 and the date of
completion of an initial public offering by Juno registered under the Securities
Act of 1933, and will be repaid in full with the proceeds from this offering and
is otherwise scheduled to mature on December 31, 2000. At March 31, 1999, the
balance, including accrued interest, of the note was $8.8 million. See "Use of
Proceeds."
For the three months ended March 31, 1999, we used $6.2 million in cash for
working capital purposes and to fund losses from operations. In addition, we
paid $10.0 million for advertising that may be used at any time prior to March
2001, bringing total net cash used in operating activities to $16.2 million. Net
cash used in operating activities was $16.4 million, $33.6 million and $20.9
million for the years ended December 31, 1996, 1997 and 1998, respectively. The
decrease in net cash used in operating activities of $12.7 million from $33.6
million for the year ended December 31, 1997 to $20.9 million for the year ended
December 31, 1998 was primarily the result of deferred revenues, changes in
working capital accounts, and non-cash charges for depreciation and
amortization.
Net cash used in investing activities was $0.2 million for the three months
ended March 31, 1999. Net cash used in investing activities was $0, $3.4 million
and $1.6 million for the years ended December 31, 1996, 1997 and 1998,
respectively. The principal use of cash for the periods presented was for the
purchase of fixed assets. Prior to July 1997, we utilized fixed assets owned by
DESCO, L.P.,
43
<PAGE>
the expense relating to which was allocated to us. Beginning in July 1997,
substantially all new acquisitions of fixed assets have been made directly by
us.
Net cash provided by financing activities was $61.4 million for the three
months ended March 31, 1999. In March 1999, we received net proceeds of $61.8
million in exchange for our issuance of 10,138,716 shares of Series B redeemable
convertible preferred stock, which will automatically convert into an equivalent
number of shares of common stock upon the closing of this offering. Net cash
provided by financing activities was $17.0 million, $50.1 million and $16.9
million for the years ended December 31, 1996, 1997 and 1998, respectively.
Financing activities are primarily capital contributions, the borrowings and
repayments under the note during 1998, and capital lease obligation payments.
We do not currently have any material commitments for capital expenditures
outside of the normal course of business and recent historical trends. However,
we do anticipate that we will increase our capital expenditures and lease
commitments beyond recent historical trends to expand our infrastructure in
anticipation of the growth of our subscriber base. We may also take advantage of
opportunities to employ various cost-effective but capital-intensive approaches
to the provision of our Internet services. As a result of our outsourcing
arrangements for telecommunications services and customer service, we have
substantially reduced the level of capital expenditures that would otherwise
have been necessary to develop our product offerings. In the event that these
outsourcing arrangements were no longer available to us, significant capital
expenditures would be required and our business and financial results could
suffer. In addition, we anticipate significantly increasing subscriber
acquisition expenses in order to fund subscriber growth and help us gain market
share. Additional expenditures in connection with subscriber acquisition will
represent a material use of our cash resources.
We believe that the net proceeds of this offering, together with our
existing cash and cash equivalents, will be sufficient to meet our anticipated
cash needs for at least the next twelve months. If cash generated from
operations is insufficient to satisfy our liquidity requirements, we may seek to
sell additional equity or debt securities or to obtain a credit facility. The
sale of additional equity or convertible debt securities would result in
additional dilution to our stockholders. The incurrence of indebtedness would
result in increased fixed obligations and could result in covenants that would
restrict our operations. We have not made arrangements to obtain additional
financing and there can be no assurance that financing will be available in
amounts or on terms acceptable to us, if at all. See "Risk Factors--We cannot
predict our future capital needs and we may not be able to secure additional
financing."
IMPACT OF THE YEAR 2000
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to identify a given year. Many of the computer
programs that Juno utilizes include specialized functions that involve date
manipulation. These functions are critical to our business, and include:
- signup of new subscribers to our services;
- validation of credit cards;
- transfer, storage and processing of e-mail and advertisements;
- scheduling of advertisements and reporting of results to advertisers; and
- billing and invoicing of advertisers and subscribers to our billable
subscription services.
Juno's business is heavily dependent upon the use of operating systems and
applications that, in the aggregate, involve millions of lines of computer code.
Similarly, our business is also dependent on the coordinated functioning of a
network made up of hundreds of servers and other pieces of computer equipment,
all of which have computer code embedded in them. If any of the programs that
Juno utilizes misinterpret the date code "00" as the year 1900 rather than the
year 2000, significant errors
44
<PAGE>
could be introduced into the information we use to manage the business and the
computer systems that operate our online services. These miscalculations could
result in errors in our operations or in disruption of operations, including,
among other things, a temporary inability to process transactions, send invoices
or engage in other normal business activities.
STATE OF READINESS. We have begun to assess the Year 2000 readiness of our
information technology systems. Our overall Year 2000 readiness plan consists of
the following phases:
- preparing an inventory of all software and hardware items affected by the
Year 2000 issue;
- testing our internally developed proprietary software for quality
assurance;
- contacting providers of material information technology and other
technology;
- repairing or replacing components that are determined to not be Year 2000
compliant; and
- creating contingency plans to address potential Year 2000 failures that we
cannot control or have not previously been able to detect or repair.
Specific steps in our Year 2000 assessment to date have included:
- running several successful Year 2000 simulations on our test systems to
verify software performance by artificially moving the date forward from
December 31, 1999 to January 1, 2000;
- reviewing source code of our proprietary software to identify all
functions that process dates; and
- identifying critical suppliers and communicating with them about their
plans and progress in addressing any Year 2000 problems they may face.
The Year 2000 readiness plan described above is being carried out across the
four critical areas where we believe the Year 2000 problem might affect our
business:
- Juno product software, which consists of all software directly used by
subscribers in connection with our free basic e-mail service and/or our
billable subscription services;
- Juno product hardware, which consists of the hardware that we use directly
in connection with our free basic e-mail service and/or our billable
subscription services;
- infrastructure, which consists of hardware and software used by our staff
in the course of operating our business other than Juno product hardware
and software; and
- external agents, which includes all other hardware, software, services and
related systems provided by third parties and on which we rely.
45
<PAGE>
The following table sets forth our progress and completion targets in
assessing our Year 2000 readiness in these four critical areas. In each case our
remaining assessment and repair is significantly dependent upon the Year 2000
compliance of our suppliers and vendors.
<TABLE>
<CAPTION>
INVENTORY ASSESSMENT REPAIR/REPLACEMENT
---------------------- ---------------------- ----------------------
<S> <C> <C> <C>
Product Software......................... 100% complete 75% complete
Completion target: Completion target:
August 31, 1999 September 30, 1999
Product Hardware......................... 90% complete 80% complete
Completion target: Completion target: Completion target:
July 31, 1999 September 30, 1999 November 30, 1999
Infrastructure........................... 90% complete 70% complete
Completion target: Completion target: Completion target:
July 31, 1999 September 30, 1999 November 30, 1999
External Agents.......................... 80% complete 30% complete
Completion target: Completion target: Completion target:
July 31, 1999 October 31, 1999 December 15, 1999
</TABLE>
To address the results of our assessment to date, we have:
- enhanced several parts of our software to permit the entry of four-digit
years rather than two-digit years;
- converted all dates within our databases to four-digit years;
- upgraded some of our operating systems and applications to versions
recommended by our vendors in order to achieve Year 2000 compliance of
these components; and
- identified, prioritized and contacted third party vendors who provide us
with key services including telecommunication services and customer
service, requiring them to provide assurances of their Year 2000
compliance.
We plan to continue this Year 2000 assessment and repair process during the
remainder of 1999 with the intention of:
- monitoring our vendors' progress in their own Year 2000 assessment and
repair;
- scheduling tests to determine the ability of our systems to work with
those of our service providers; and
- reviewing non-information technology systems and embedded systems which,
if not Year 2000 compliant, could affect our business.
COSTS. To date, we have not incurred any material costs in identifying or
evaluating Year 2000 compliance issues. The cost of software tools and
consulting expenses used for detection of Year 2000 problems is not currently
expected to exceed $100,000. We expect that our existing employees or
consultants will perform all significant work for the Year 2000 project
described above. We do not anticipate hiring any additional employees or
incurring any significant consulting expenses for the Year 2000 project. To
date, no other significant information technology projects have been deferred
due to our Year 2000 efforts.
RISKS. We are not currently aware of any significant Year 2000 compliance
problems relating to our proprietary software, our information technology
systems or our other systems that would materially harm our business, results of
operations or financial condition. During our remaining assessment, we may
discover Year 2000 compliance problems in our proprietary software that may
46
<PAGE>
require substantial repair or replacement. If problems are discovered in
versions of our product software that are already in use by our subscribers, we
may need to distribute new versions of the software to those subscribers. It may
not be possible to correct these problems in a timely manner.
Material third-party software, hardware, service providers or
non-information-technology infrastructure may contain Year 2000 compliance
problems that require substantial repair and/or replacement, which could be
time-consuming and expensive. It may not be possible to repair or replace some
of these components or service providers in a timely manner.
The failure to correct any material Year 2000 problem could materially harm
our business, results of operations and financial condition because:
- new subscribers may be unable to sign up for our services, resulting in
reduced growth and lower effectiveness of our marketing efforts;
- current subscribers may be unable to upgrade to higher service levels,
resulting in reduced revenue growth and lower effectiveness of our
marketing efforts;
- current subscribers may be unable to use our services or get adequate
customer support, which may result in increased attrition, higher customer
support costs and reduced revenue; and/or
- we may be subject to claims of mismanagement, misrepresentation or breach
of contract and related litigation, which could be costly and
time-consuming to defend and, if defended unsuccessfully, could result in
the imposition of substantial fines or judgments.
In addition, we cannot assure you that governmental agencies, utility
companies, Internet access companies, third-party service providers and others
outside our control will be Year 2000 compliant. The failure by these entities
to be Year 2000 compliant could result in a systemic failure beyond our control,
including, for example, a prolonged failure of Internet, telecommunications
and/or electrical systems, which could also prevent us from providing our
services, or prevent users from accessing our services, either of which would
materially harm our business, results of operations and financial condition.
CONTINGENCY PLANS. We are still engaged in an ongoing Year 2000 assessment
and have not yet developed any contingency plans. Contingency planning will be
conducted as our ongoing assessment and as feedback received from third parties
necessitates.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." Statement 133 establishes new accounting
and reporting standards for derivative financial instruments and for hedging
activities. As of December 31, 1998, Juno had no derivative instruments.
In June 1997, FASB issued Statement No. 131 "Disclosures about Segments of
an Enterprise and Related Information." Statement 131 establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued. The statement has not had an impact on Juno's financial
statement disclosures as its financial statements reflect how the "key operating
decision makers" view the business. Accordingly, the financial statements are
presented as a single segment.
In June 1997, FASB issued Statement No. 130, "Reporting Comprehensive
Income." Statement 130 establishes standards for the reporting and display of
comprehensive income and its components in the financial statements. Statement
130 is effective for years beginning after December 15, 1997. The
47
<PAGE>
statement has not had an impact on Juno's financial statements as Juno has no
other comprehensive income to report.
In February 1997, FASB issued Statement No. 128 "Earnings Per Share."
Statement 128 replaced primary and fully diluted earnings per share with basic
and diluted earnings per share. The statement makes modifications to the
earnings per share calculations defined in the Accounting Principles Board
Opinion No. 15 "Earnings Per Share." Statement 128 is effective for years ending
after December 31, 1997. Juno has adopted Statement 128.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1 "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" which provides guidance on accounting
for the costs of computer software developed or obtained for internal use. The
pronouncement identifies the characteristics of internal use software and
provides guidance on new cost recognition principles. Statement 98-1 is
effective for financial statements for fiscal years beginning after December 15,
1998. The adoption of Statement 98-1 will not have a significant impact on
Juno's consolidated financial position, results of operations and cash flows.
48
<PAGE>
BUSINESS
OUR COMPANY
Juno Online Services, Inc. is a leading provider of Internet-related
services to millions of computer users throughout the United States. We offer
several levels of service, ranging from basic dial-up Internet e-mail--which is
provided to the end user for free--to full, competitively priced access to the
Web. Our strategy of offering several different service levels and our
easy-to-use, intuitive software are designed to attract a broad spectrum of
users, including those who are interested only in e-mail, those who initially
begin with e-mail but over time develop a need for Web access, and those who
seek full Web access from the outset.
Our services are provided nationwide through over 1,900 local telephone
numbers, which we lease from several providers. These phone numbers can be
reached by the vast majority of the U.S. population without having to place a
long distance telephone call. Our revenues are derived primarily from the
subscription fees we charge for the use of our more advanced service levels,
from the sale of advertising, and from the direct sale of products to our
subscribers.
Since our inception in 1995, we have pursued a two-phase business strategy.
The initial phase of this strategy focused on building computer systems and
related infrastructure that could be rapidly expanded to accommodate an
increasing number of users, and on maximizing the number of subscribers to our
free basic e-mail service. We chose to focus on e-mail because it is one of the
most popular activities on the Internet, and because we believed that offering
basic e-mail service for free would allow us to rapidly and cost-effectively
build a large user base from which we might then expect to derive various forms
of revenue. In particular, we planned to draw on our ability to communicate
inexpensively with our user base in order to pursue revenues derived from the
sale of advertising and the direct marketing of products to our subscribers and
to offer our basic e-mail users the opportunity to purchase more advanced
services including full Web access. We believed our basic e-mail users would be
more likely to purchase these services from us than from a competing service
provider due to their expected aversion to the process of switching e-mail
addresses. We further believed the economics of this approach would be enhanced
by technology we had developed that allowed us to take advantage of a
substantial number of hours of consumer contact while paying for a much smaller
number of hours during which customers were actually connected by telephone to
our central computers.
In July 1998, we commenced the second phase of our business strategy by
introducing two additional service levels: an enhanced e-mail service and a full
Web access service. Unlike our basic e-mail service, which is free, these
service offerings are billed at either a flat rate or a combination of a reduced
flat rate plus hourly usage fees. These services utilize the same easy-to-use
software as our basic e-mail service, and users of the current version of our
software are able to easily upgrade to our billable subscription services by
clicking on clearly labeled buttons within this environment. JUNO GOLD, the
enhanced e-mail service, supplements our basic e-mail service by allowing users
to send and receive non-text files such as pictures, spreadsheets and word
processor documents. JUNO WEB provides full Internet access utilizing a standard
Web browser of the user's choice. The home page on which all Juno users begin
each Web session is operated under an agreement with Lycos, one of the
Internet's leading "portal" sites, that provides us with a portion of any
associated advertising revenues.
Our services have been very popular, with more than 6.8 million Juno
accounts created since the launch of the basic e-mail service in April 1996.
During the month of March 1999, an average of 912,000 user accounts dialed into
our service on any given day, with a total of 2.4 million user accounts
connecting during the full month of March, and 3.1 million user accounts
connecting during the three-month period ended March 31, 1999. We launched our
billable subscription services on July 22, 1998, and as of March 31, 1999, we
had approximately 207,000 billable service subscribers, consisting of
approximately 86,000 Juno Gold subscribers and approximately 121,000 Juno Web
subscribers. We have initially marketed Juno Gold and Juno Web only to our own
free e-mail subscribers. We intend,
49
<PAGE>
however, to begin marketing these services beyond the existing Juno user base
through a substantial external marketing campaign beginning in the second
quarter of 1999.
In addition to fees payable by subscribers to our billable subscription
services, we derive revenues from the sale of advertising. As of March 31, 1999,
approximately 200 firms had advertised on the Juno services. Additionally, we
have entered into a number of major strategic marketing alliances, including
several that involve multi-million-dollar guaranteed minimum payments to Juno.
Our strategic marketing alliances include multi-year relationships with First
USA, Qwest, and The Hartford, as well as a one-year agreement with AT&T Wireless
Services.
In servicing the needs of advertisers and marketing partners, we benefit
from the high degree to which custom-tailored advertisements can be selectively
targeted to various segments of our subscriber base. Juno ads can be targeted
based not only on geography and patterns of computer use, as is often possible
in the case of Web site advertising as well, but also according to such
characteristics as age, gender, income, expected major purchases in any of 20
specified categories, hobbies, interests, family size, and/or educational
attainment. This data is obtained from the detailed "Member Profile" survey that
all subscribers to our basic e-mail service are required to complete at the time
they create their accounts.
MARKET OPPORTUNITY
The Internet is becoming an increasingly significant global medium for
communications, advertising, and commerce. International Data Corporation
estimates that more than 56 million individuals in the U.S. used the Internet in
1998, and projects that this figure will reach 136 million by the year 2002. We
expect that these increases will have a significant impact on the three main
service and product sectors in which Juno currently operates.
BILLABLE SUBSCRIPTION SERVICES REVENUES. IDC projects that
consumer-targeted dial-up Internet access revenues in the U.S. will grow from
$4.7 billion in 1998 to $10.6 billion in 2002.
ADVERTISING REVENUES. Jupiter Communications has projected that online
advertising expenditures will grow from an estimated $1.9 billion in 1998 to
$7.7 billion in 2002.
DIRECT PRODUCT SALES. We believe, based on estimates and projections from
an independent third party Internet research firm, that online sales for retail
goods other than automobiles totaled $4.8 billion in 1998, and that those sales
will increase to $50.2 billion in 2002.
OUR SERVICES
Our services and software have been designed with special attention to the
needs of consumers who are just now beginning to explore the Internet. The needs
and preferences of this large and rapidly growing body of new Internet users are
likely to differ significantly from those of technically sophisticated early
Internet users and computer hobbyists. We believe the success of our design is
reflected in studies indicating that ease of use is among the characteristics
most closely associated with Juno, and in the relatively high rate at which
members pass along copies of the Juno software to others.
In addition, we believe that Juno is unique among major online services in
offering consumers a gradual migration path onto the Internet. Subscribers who
are not yet ready to use or pay for the full capabilities of the Internet can
begin their use of the Internet with our basic e-mail service or with Juno Gold,
then migrate to Juno Web once they are ready to do so.
50
<PAGE>
BASIC E-MAIL SERVICE
Our basic e-mail service provides subscribers with the ability to send and
receive text-only e-mail over the Internet for free. Unlike Web-based e-mail
services, such as Microsoft's Hotmail, our basic service does not require the
user to have previously subscribed for access to the Web, and unlike subscribers
to most other major online services or Internet access providers, our
subscribers currently pay us no fees of any sort for the use of our basic
service.
We have expended significant effort to make our basic e-mail service easy to
use. Our fundamental design goal has been to create software that novice users
can understand at a glance, but which will continue to satisfy subscribers once
they have gained more experience. In addition to the basic e-mail
functions--sending, receiving, forwarding, printing, and replying to messages,
for example--we also offer a full-function address book, customizable mailing
lists, folders for storing mail, and a built-in spell-check feature, all within
a simple and visually attractive point-and-click environment.
After receiving a copy of our software, a new subscriber follows simple,
clearly worded on-screen instructions to install Juno on his or her computer,
and to select an e-mail address and password. In addition, in order to create a
free e-mail account, each subscriber to our free e-mail service must complete
the Member Profile survey, providing information that can be used for the
selective targeting of advertising.
JUNO GOLD
Juno Gold augments the capabilities of Juno's basic e-mail service by
providing subscribers with the ability to send and receive non-textual computer
files such as word processor documents, spreadsheets, photographs, artwork,
electronic greeting cards, audio and video files, and computer programs by
"attaching" them to e-mail messages. Subscribers who wish to send a file
attachment simply click on the "Attach File" button on the "Write" screen of the
Juno interface and choose the appropriate file from the list of files that
appears. Subscribers who receive an e-mail message containing a file attachment
can view the contents of that attachment by double-clicking on an icon that
appears inside the message on the "Read" screen of the Juno interface.
Juno Gold is presently offered at a list price of $2.95 per month, billed
annually in advance. Juno Gold subscribers also have the option of signing up
for a plan that permits them to use the Web at a rate of $2.95 per hour of Web
usage, with no monthly minimum.
JUNO WEB
Juno Web provides subscribers with the ability to explore the Web using
either Microsoft's Internet Explorer or Netscape's Navigator as their browser.
Users who wish to visit the Web can do so at any time during a Juno session by
clicking on the prominent "Web" tab on the main Juno interface, and may return
to reading or writing e-mail at any time by clicking on Juno's "Read" or "Write"
tabs. When Juno Web subscribers begin a Web session, the first Web pages they
see provide them with a broad set of tools and content to help them understand,
navigate, and use the Web. Most of the content, directory functionality, and
Internet search functions associated with this Web page are currently provided
by Lycos, one of the Internet's leading "portal" sites. In return for directing
visitors to a co-branded version of this portal site, we receive guaranteed
per-visit fees from Lycos as an advance against a share of any revenue Lycos
generates through the sale of advertisements on the various Web pages comprising
this co-branded portal site. We also intend to begin offering Juno Web
subscribers additional Web features such as home page personalization, instant
messaging, and news and information services, either through our current
agreement with Lycos or through alternate arrangements.
51
<PAGE>
In addition to Web access, Juno Web provides subscribers with all of the
features included in Juno Gold. Each higher level of Juno service thus offers
all of the features provided at any lower service level in addition to the
incremental capabilities associated with that particular service level.
Juno Web is currently marketed at a list price of $19.95 per month for a
flat-rate plan or $9.95 per month for up to seven hours of metered usage with
additional usage billed at a rate of $1.95 per hour. We have also begun testing
a variety of promotional offerings that provide periods of discounted or free
access in order to determine their impact on conversion and retention rates, and
we may experiment with other pricing plans for both services in the future.
OTHER BILLABLE SERVICES
In addition to Juno Gold and Juno Web, we offer other billable services,
including billable technical support for subscribers to our free basic e-mail
service or to Juno Gold, and currently provide consulting services under a
short-term contract with a third party.
OUR STRATEGY
Our principal objective is to strengthen our position as a leading provider
of consumer Internet-related services by capturing an increasing number of hours
of customer contact, and by expanding our billable subscription service
offerings, advertising sales, strategic marketing relationships, and electronic
commerce activities. In particular, we plan to:
RAPIDLY EXPAND OUR OVERALL SUBSCRIBER BASE. Our services are targeted to
meet the needs of consumers with little or no computer experience, who we
believe are seeking access to the Internet in increasing numbers. We intend to
make these consumers aware of our services and to rapidly expand our subscriber
base through a significant expansion of our marketing activities. These
activities may include television, radio, magazine, and newspaper advertising;
direct mail and telemarketing campaigns; the distribution of our software along
with personal computers and other technology products; paid Web advertising; the
bartering of advertising on the Juno system for advertising on various Web sites
and in other online and conventional media; various incentives for referrals by
current subscribers; and/or the acquisition of other Internet access providers.
In addition, we may consider various alternatives for international expansion.
MIGRATE SUBSCRIBERS TO HIGHER LEVELS OF SERVICE. Our software is designed
to allow users to easily move to higher levels of service when they are ready to
use and pay for them through the point-and-click activation of additional
features, and to do so without having to change e-mail addresses. We plan to
continue marketing our higher service levels to our existing subscriber base
through a variety of advertising messages and promotions delivered through the
Juno ad system. Because internal marketing of this sort is generally less
expensive for us on a per-subscriber basis than subscriber acquisition efforts
conducted through direct mail or most other external advertising channels, we
believe the upward migration of our free basic e-mail subscribers should reduce
average subscriber acquisition costs for our billable subscription services. We
may also offer additional services or service levels to meet the needs of our
users, or may restructure or change the nature or pricing of our various service
levels at some point in the future.
LEVERAGE AND EXPAND OUR STRATEGIC MARKETING ALLIANCES AND ADVERTISING
SALES. We plan to maintain our focus on initiating new strategic marketing
alliances and expanding the size and scope of our existing alliances. We believe
there may be significant opportunities to expand the scope of our relationships
with some of our existing alliance partners, which currently include AT&T
Wireless Services, First USA, Qwest and The Hartford. In addition, we believe it
may be possible to execute new category-exclusive strategic alliances with major
firms in other industries. Finally, to the extent we are able to increase the
size of our subscriber base, we believe this expansion could increase the value
of our existing strategic marketing and advertising relationships and our
ability to form similar relationships with other firms on favorable terms.
52
<PAGE>
EMBRACE NEW TECHNOLOGIES WHILE MAINTAINING TECHNOLOGY INDEPENDENCE. We
currently use several wholesalers of telecommunications services to connect our
subscribers to Juno's central computers and to the Web. Although we may at some
point consider investing in various forms of networking
infrastructure--particularly in cases where a given type of access would
otherwise be difficult or prohibitively costly to obtain--we currently expect to
continue our extensive use of these wholesale providers. We believe this
strategy will enable us to remain network-independent, and to switch providers
or technologies as cost and/or performance improvements become available. As a
result, we believe we can be flexible in responding to subscriber demand for
higher-speed access and other types of improved service. In particular, as
digital subscriber line technology, commonly known as DSL, cable modems,
high-speed wireless access, and/or other broadband technologies begin to
transform the Internet access landscape, we intend to embrace one or more of
these technologies in order to provide high-bandwidth services to our
subscribers in the most cost-effective manner then available to us.
TECHNOLOGY AND INFRASTRUCTURE
The operation of our services is supported by computer systems and related
infrastructure that have successfully sustained high levels of usage and of
growth. Since the launch of our first service, our systems have processed and
delivered more than two billion e-mail messages. Our servers routinely handle
more than two million user connections per day and more than five million e-mail
messages per day. Our members have not suffered the sorts of repeated, prolonged
system-wide outages that have reportedly affected other online services. To
enable our computer and telecommunications facilities to keep pace with the
rapid growth of our subscriber base, we have made a concerted effort to design
our systems architecture to be highly flexible, to grow quickly without
sacrificing reliability, and to handle problems quickly when they arise.
To use our services, subscribers initiate telephone connections between
their personal computers and computer hardware in local or regional facilities
known as points of presence. We contract for the use of points of presence
around the country from various telecommunications carriers, including MCI
WorldCom, through its UUNET Technologies and MCI WorldCom Advanced Networks
divisions; Concentric Network Corporation; and Sprint Communications Company.
These telecommunications companies also carry their data between the points of
presence and our central computers, which are located in Cambridge,
Massachusetts and Jersey City, New Jersey. We currently have lease commitments
for the use of over 1,900 local telephone numbers associated with points of
presence throughout the United States. Subscribers typically need bear no
expenses for communication beyond the cost, if any, of an ordinary local or
regional phone call. We estimate that our current set of local access numbers
covers the vast majority of the U.S. population. Our reliance on several
independent providers of network capacity has allowed us to provide high quality
service throughout the United States while negotiating progressively lower
telecommunications rates from these competing providers.
The time each user spends connected to our central computers is minimized
through the use of a patented architecture that allows subscribers to read and
compose e-mail messages offline, connecting automatically to Juno's central
computer facilities only for the relatively brief period necessary to download
incoming mail or upload one or more outgoing messages. Advertisements are
downloaded to a subscriber's computer along with the subscriber's incoming
e-mail messages, and are displayed not only while the subscriber is actually
connected to our central facilities, but throughout the significantly longer
period during which he or she is reading and writing e-mail messages offline,
using only his or her own computer. The relatively large ratio between average
ad display time, an important revenue-related resource, and average connect
time, an important expense item, is essential to the economics of our basic
e-mail and Juno Gold services. Moreover, because we believe that almost a
quarter of all time spent online by subscribers to the leading Internet access
service is attributable to their reading and writing e-mail messages while
connected to the service's central computers, we believe that our offline e-mail
architecture could also confer an economic advantage on Juno Web.
53
<PAGE>
SUBSCRIBER ACQUISITION
The first phase of Juno's business strategy focused on maximizing total
subscriber count through the acquisition of large numbers of subscribers to our
free basic e-mail service. A number of acquisition channels have been employed
to achieve these goals, including:
- ONLINE DISTRIBUTION. The Juno software may be downloaded free of charge
from our promotional Web site (http://www.juno.com). In addition, we have
formed relationships with a number of distribution partners who provide
direct links to our Web site from their own Web sites at no cost to us.
- DIRECT MAIL. Since early 1996, we have conducted several direct mail
campaigns employing numerous creative approaches and mailing lists.
- PASS-ALONG DISTRIBUTION. We encourage our basic e-mail subscribers to pass
along the Juno software to their friends and associates or to suggest that
they call our toll-free number to order a diskette or CD-ROM containing
our software. This practice has historically accounted for a significant
fraction of our new subscribers.
- ORIGINAL EQUIPMENT MANUFACTURER BUNDLING. At various times since the
launch of our basic e-mail service, the software necessary to use this
service has been pre-loaded into a number of personal computers
manufactured by IBM, Compaq, and Gateway, among others, and has been
bundled along with models of desktop modems manufactured by U.S. Robotics.
In February 1999, we signed an agreement with Hewlett-Packard to bundle
our software with the installation software for several of their lines of
printers.
We have recently entered the second phase of our subscriber acquisition
program, which emphasizes the development of our billable subscriber base. Since
we launched Juno Gold and Juno Web on July 22, 1998, we have focused almost
exclusively on the upward migration of our free basic e-mail subscribers to
these billable subscription services. Subscribers to Juno's basic e-mail service
are exposed to a stream of marketing messages delivered through the Juno ad
system that encourage them to upgrade to Juno Gold or Juno Web. Juno Gold
members, in turn, are encouraged to upgrade to Juno Web.
[LOGO]
54
<PAGE>
We cannot predict the ultimate rate of conversion to our billable
subscription services. We believe, however, that continuing increases in the
fraction of the general population using the Web, and in the number of e-mail
messages containing file attachments, may generate interest in the features
provided by our billable subscription services among new segments of our user
base over time. When users of Juno's basic e-mail service develop an interest in
using these types of higher-level services, we believe we are likely to benefit
from individuals' reluctance to switch e-mail addresses or split their Internet-
related activities between two service providers, which may make them more
likely to obtain advanced services from us than from another Internet access
provider. In addition, when a subscriber to our basic e-mail service is ready to
begin using a higher level of service, we believe that it will be easier and
more natural to do so by clicking on a button displayed on the Juno screen that
he or she is already using than by identifying and switching to an alternate
access provider. For risks associated with these beliefs, please see "Risk
Factors--Our business may suffer if we have difficulty acquiring subscribers to
our free basic e-mail service, Juno Gold or Juno Web."
We also plan to launch a substantial marketing campaign designed to acquire
new subscribers directly into our billable subscription services utilizing
proceeds of this offering. See "--Our Strategy."
ADVERTISING AND STRATEGIC ALLIANCES
ADVERTISING SALES
Advertising plays an important role in the business models for each of our
three levels of service. We expect to derive significant revenues from the sale
of advertising displayed to any of the millions of individuals who send and
receive e-mail through the Juno system, regardless of the level of service to
which they subscribe. In addition, we expect to derive revenues from the display
of conventional Web advertising--sold, at least initially, by Lycos under a
revenue-sharing arrangement--on the co-branded Web pages that we make available
to our Juno Web subscribers.
As of March 31, 1999, approximately 200 companies and organizations had
advertised on Juno, including a number of the world's largest advertisers. To
manage ad creation and campaign development, we maintain an in-house ad
production and client service staff. We also employ an internal sales force to
market our ad inventory, with the exception of the banner inventory on our
portal site, which is marketed by Lycos. See "--Our Services--Juno Web."
TYPES OF ADVERTISING ON JUNO'S SERVICES
In addition to Web banner ads displayed to Juno Web subscribers, we display
three distinct types of advertising:
- BANNER ADS, which are displayed in the upper right-hand corner of the main
Juno screen while the subscriber is reading or composing e-mail messages.
Banner ads are displayed on a timed rotation, with a new ad typically
appearing every 15, 20, or 30 seconds, and are interactive, offering
viewers the opportunity to click on them and respond in any of a number of
ways.
- INTERSTITIAL ADS, which are displayed while a subscriber's modem is
dialing into our central computers to send or receive e-mail, and are
displayed for the duration of this telephone connection. Interstitial ads
are approximately four times the size of a banner ad, and are displayed
prominently at a time when the subscriber is not occupied with reading or
writing mail.
- POP-UP ADS that interrupt a user's session, and with which the subscriber
must interact at least briefly before continuing with his or her session.
Pop-up ads are most commonly displayed at the start of a session,
immediately after the subscriber types in his or her password, and may
contain any of the features of banner ads.
55
<PAGE>
Advertising may be purchased on a price-per-impression,
price-per-clickthrough, or price-per-response basis, or according to special
arrangements negotiated on a case-by-case basis. Each type of ad may be targeted
to a narrowly specified subset of our subscriber base based on data provided by
each subscriber in his or her Member Profile. While our privacy policies
preclude the dissemination to advertisers or other third parties of any of the
data contained in an individual's Member Profile without that individual's
permission, aggregate statistical information about the Juno subscriber base is
routinely provided to advertisers, and can be used to target specific ads to all
subscribers satisfying any specified combination of attributes.
STRATEGIC MARKETING ALLIANCES
We have formed a number of large-scale, strategic marketing alliances that
provide for substantial guaranteed payments to Juno as advances against various
forms of revenue-sharing:
- AT&T WIRELESS SERVICES. Under this one-year agreement, AT&T will cover our
ad transmission costs and other marketing expenses, and will provide us
with a royalty payment for each new wireless subscriber recruited through
Juno as well as a percentage of the revenue stream generated by those
subscribers who do not already purchase other wireless services from AT&T.
- FIRST USA. We recently entered into a multi-year marketing agreement with
First USA which became effective on May 2, 1999. Under the terms of this
agreement, we will receive payments each year--only the first year of
which, however, is guaranteed--as a non-refundable advance against
bounties paid for each new credit card, banking, or personal loan customer
acquired through Juno. This relationship with First USA replaces a prior
relationship with Bank of America that focused exclusively on the
marketing of credit cards, and which was terminated by Bank of America
effective May 1, 1999.
- QWEST COMMUNICATIONS. Our multi-year agreement with Qwest Communications
calls for guaranteed payments to Juno as a non-refundable advance against
a substantial percentage of all revenues derived, on an ongoing basis,
from telephone customers recruited through the Juno service.
- THE HARTFORD. Our multi-year agreement with The Hartford provides for
reimbursement of our marketing expenses as well as substantial guaranteed
payments as an advance against both bounties paid when a Juno member
purchases an insurance policy and an ongoing percentage of premiums
collected from that subscriber.
The multi-year agreements described above can typically be terminated on
short notice by either party, provided, however, that in some cases, the party
terminating the agreement is required to make specified payments to the other
party.
SELECTED ADVERTISING CUSTOMERS AND STRATEGIC MARKETING PARTNERS
As of March 31, 1999, approximately 200 advertisers and strategic marketing
partners had advertised on Juno, including those listed below.
Allstate
American Airlines
American Express
Ameritrade
AT&T Wireless Services
Audio Book Club
Bank of America
BSG Laboratories
Cendant
Citibank
Columbia House
CompuCom Systems
Computer Associates
Computer Discount Warehouse
Comtrad Industries
DaimlerChrysler
DeLorme
DIRECTV
Dragon Systems
Edmark
Fidelity Investments
56
<PAGE>
First Union
First USA
Grolier
Hoechst Marion Roussel
IBM
Intel
Intuit
Invesco Funds Group
Isuzu
John Hancock
Lexmark
Market Facts
Microsoft
Microtek
National Consumer Bankruptcy Coalition
National Education Association
Network Associates
Network Solutions
Northwest Airlines
Office of National
Drug Control Policy
Okidata
Philips Electronics
PKWARE
Platinum Capital Group
PowerQuest
Procter & Gamble
Protection One
Qwest Communications
Ralston Purina
Reed Elsevier
Sheraton Hotels and Resorts
Sierra On-Line
Stock Smart
Symantec
SyQuest
The Hartford
The Learning Company
The Signature Group
The Zone Network
U.S. Army
U.S. News & World Report
ViewSonic
Zoom Telephonics
In a relatively small number of instances, we have provided advertising
credit to other companies in return for distribution of the Juno software, or
have exchanged advertising space with companies on a barter basis.
DIRECT PRODUCT SALES
In addition to selling ads to third parties, we use part of our available
advertising inventory to conduct a variety of direct response marketing
campaigns on our own behalf. Direct Alliance currently supplies the bulk of the
merchandise we sell to our subscribers. We also rely on Direct Alliance for the
warehousing, fulfillment, billing, and customer service aspects of most of our
direct product sales activities. Since initiating our direct product sales
program in late 1996, we have sold computer hardware and software, books,
consumer electronics, entertainment products, and other merchandise to our
subscribers. While the margins associated with these products are typically
lower than those associated with the sale of paid advertising, our direct
product sales activities have provided what we believe to be a valuable
demonstration to paid advertisers of Juno's effectiveness as a transaction
medium. In addition, our willingness to feature an advertiser's products in our
own direct product sales campaigns has on several occasions contributed to the
successful closing of an advertising sale. We also sometimes use our direct
product sales infrastructure to assist paid advertisers in fulfilling product
requests generated through Juno.
Since the beginning of 1998, our independent direct marketing activities
have been progressively displaced by an increasing stream of paid advertising,
strategic marketing alliances, and most recently, messages promoting Juno's own
billable subscription services. We expect that this trend will continue in the
future and, consequently, that the percentage of our revenues derived from
direct product sales will decrease over time. Even within the category of direct
marketing activities, the gradual replacement of direct product sales with
strategic marketing alliances should allow us to focus on the cost-effective
delivery of targeted direct sales messages, leaving other aspects of the direct
marketing process to specialized organizations that enjoy greater expertise,
economies of scale and other competitive advantages.
57
<PAGE>
COMPETITION
The market for Internet services is extremely competitive and includes a
number of substantial participants, including America Online, Microsoft and
AT&T. The markets for Internet-based advertising and direct product sales are
also very competitive. We believe that the primary competitive factors
determining success in these markets include a reputation for reliability and
service, effective customer support, pricing, easy-to-use software and
geographic coverage. Other important factors include the timing and introduction
of new products and services and industry and general economic trends. Our
ability to compete depends upon numerous factors, many of which are outside of
our control. We expect this competition to continue to increase because the
markets in which we operate face few substantial barriers to entry. Competition
may also intensify as a result of industry consolidation and the ability of some
of our competitors to bundle Internet services with other products and services.
Our current and potential competitors include many large national companies that
have substantially greater market presence and financial, technical,
distribution, marketing and other resources than we have. This may allow them to
devote greater resources than we can to the development, promotion and
distribution and sale of products and services.
In recruiting subscribers for our billable subscription services, we
currently compete, or expect to compete, with the following types of companies,
among others:
- Established online service providers such as America Online, CompuServe,
and The Microsoft Network;
- Independent national Internet service providers such as EarthLink,
MindSpring, and Prodigy;
- Numerous independent regional and local Internet service providers which
may offer lower prices than a national Internet service provider;
- Various national and local telephone companies such as AT&T, MCI WorldCom
and Pacific Bell; and
- Companies providing Internet access through "set-top boxes" connected to a
user's television, such as WebTV, or through a "cable modem" connected to
a user's personal computer, such as @Home.
In addition, Microsoft and Netscape, publishers of the Web browsers utilized
by most Internet users, including subscribers to Juno Web, each own or are owned
by online or Internet service providers that compete with Juno Web.
In providing e-mail-related services, we compete with Web-based e-mail
services such as Microsoft's Hotmail and USA.net's Net@ddress.
With respect to the generation of advertising revenue, we compete with many
of the market participants listed above as well as with various
advertising-supported Web sites, including "portal" sites such as Yahoo! and
Excite, "content" sites such as CNET and CNN.com, and interactive advertising
networks and agencies such as DoubleClick and 24/7 Media. We also compete with
traditional media such as print and television for a share of advertisers' total
advertising budgets. If advertisers perceive the Internet to be a limited or
ineffective advertising medium or perceive us to be less effective or less
desirable than other Internet advertising vehicles, advertisers may be reluctant
to advertise on our services. In selling products directly to our subscribers,
we compete with other Internet-based sellers as well as with stores and other
companies that do not distribute their products through the Internet. Many of
these competitors are larger than we are, enjoy greater economies of scale than
are available to us, have substantially greater resources than we have, and may
be able to offer more products or more attractive prices than we can.
58
<PAGE>
Our competition is likely to increase. We believe this will probably happen
as Internet service providers and online service providers consolidate and
become larger, more competitive companies, and as large diversified
telecommunications and media companies acquire Internet service providers. The
larger Internet service providers and online service providers, including
America Online, offer their subscribers services such as instant messaging,
community message boards, and personal Web-page hosting that we do not currently
provide. Some diversified telecommunications and media companies, such as AT&T,
have begun to bundle other services and products with Internet access services,
potentially placing us at a significant competitive disadvantage. These
competitors may be able to charge less than we do for Internet services, causing
us to reduce, or preventing us from raising, fees for our billable subscription
services. The ability of our competitors to enter into strategic alliances or
joint ventures could also put us at a serious competitive disadvantage.
Competition could require us to increase our spending for sales and marketing as
well as for subscriber acquisition in order to maintain our position in the
marketplace, and could also result in increased subscriber attrition.
For additional information, see "Risk Factors--Competition in the markets
for Internet services, Internet advertising and direct product sales is likely
to increase in the future and may harm our business."
GOVERNMENT REGULATION
Providers of Internet access and e-mail services are not subject to direct
regulation by the Federal Communications Commission, but changes in the
regulatory environment relating to the telecommunications and media industries
could have an effect on our business. For example, several telecommunications
carriers are seeking to have communications over the Internet regulated by the
FCC in the same manner as other more traditional telecommunications services.
Local telephone carriers have also petitioned the FCC to regulate Internet
access providers in a manner similar to long distance telephone carriers and to
impose access fees on these providers, and recent events suggest that they may
be successful in obtaining the treatment they seek. In addition, we operate our
services throughout the United States, and regulatory authorities at the state
level may seek to regulate aspects of our activities as telecommunications
services. As a result, we could become subject to FCC and state regulation as
Internet services and telecommunications services converge.
We remain subject to numerous additional laws and regulations that could
affect our business. Because of the Internet's popularity and increasing use,
new laws and regulations with respect to the Internet are becoming more
prevalent. These laws and regulations have covered, or may cover in the future,
issues such as:
- user privacy;
- pricing;
- intellectual property;
- federal, state and local taxation;
- distribution; and
- characteristics and quality of products and services.
Legislation in these areas could slow the growth in use of the Internet
generally and decrease the acceptance of the Internet as a communications and
commercial medium. Additionally, because we rely on the collection and use of
personal data from our members for targeting advertisements shown on our
services, we may be harmed by any laws or regulations that restrict our ability
to collect or use this data. The Federal Trade Commission has begun
investigations into the privacy practices of companies
59
<PAGE>
that collect information about individuals on the Internet. Although we are not
currently subject to direct regulation by the FTC, there can be no assurance
that we will not become subject to direct regulation in the future. It may take
years to determine how existing laws such as those governing intellectual
property, privacy, libel and taxation apply to the Internet. Any new legislation
or regulation regarding the Internet, or the application of existing laws and
regulations to the Internet, could harm us. Additionally, while we do not
currently operate outside of the United States, the international regulatory
environment relating to the Internet market could have an adverse effect on our
business, especially if we should expand internationally.
The growth of the Internet, coupled with publicity regarding Internet fraud,
may also lead to the enactment of more stringent consumer protection laws. For
example, numerous bills have been presented to Congress and various state
legislatures designed to address the prevalence of unsolicited commercial bulk
e-mail on the Internet. These laws may impose additional burdens on our
business. The enactment of any additional laws or regulations in this area may
impede the growth of the Internet, which could decrease our potential revenues
or otherwise cause our business to suffer. For additional information, see "Risk
Factors--Changes in government regulation could decrease our revenues and
increase our costs."
INTELLECTUAL PROPERTY
We have been granted three U.S. patents for technology related to the
offline display of advertisements and the authentication and dynamic scheduling
of advertisements and other messages to computer users. We have filed a number
of other patent applications relating to additional techniques for the operation
of online services and the provision of advertising messages. We cannot assure
you, however, that any of these applications will result in the issuance of
patents; that any patents that have been issued or that might be issued in the
future will provide us with any competitive advantages or will be exploited
profitably by us; or that any any of these patents will withstand any challenges
by third parties. Furthermore, we cannot assure you that we will be able to
obtain license rights to patents held by third parties that may be essential to
the successful implementation or operation of our services, or that patents held
or obtained by third parties will not otherwise harm our business or financial
results.
Except as described above, we rely solely upon copyright and trademark law,
trade secret protection, and/or confidentiality agreements with our employees
and with some third parties to protect proprietary technology, processes, and
other intellectual property to the extent that protection is sought or secured
at all. We cannot assure you that any steps we might take will be adequate to
protect against misappropriation of our intellectual property by third parties.
Similarly, we cannot assure you that third parties will not be able to
independently develop similar technology, processes, or other intellectual
property. Furthermore, we cannot assure you that third parties will not assert
claims against us for infringement of their intellectual property rights.
Rights to all intellectual property that was developed for our business at
our expense by personnel assigned to Juno by DESCO, L.P. were originally held by
DESCO, L.P. Through a series of assignments, DESCO, L.P. subsequently
transferred to us its right, title and interest in this intellectual property.
In connection with these assignments, we agreed to indemnify DESCO, L.P. against
any claims relating to the assignment of, or the use of, this intellectual
property. We do not have any right, title, or interest in any other intellectual
property created, developed, produced, or used by DESCO, L.P.
60
<PAGE>
EMPLOYEES
As of March 31, 1999, we employed 147 people, of whom 67 were in operations,
sales and marketing, and customer support; 53 were in engineering, product
development and network operations; and 27 were in finance, legal and
administration. Our employees are not covered by any collective-bargaining
arrangements, and we consider our relations with our employees to be good.
As of March 31, 1999, we also retained the services of 47 people based in
Hyderabad, India who were employed by an India-based affiliate of DESCO, L.P. on
our behalf. These individuals are engaged in selected aspects of our software
development, customer service, ad production, and other activities that we
believe can be provided more economically overseas, and were provided to us
under an agreement with DESCO, L.P. We recently terminated this agreement with
DESCO, L.P. Following the termination of the agreement, these individuals became
employees of a Juno subsidiary located in Hyderabad. Some of our back-office
support functions are provided to us by employees of DESCO, L.P. Please see
"Certain Transactions" for more information regarding our offices in New York.
FACILITIES
Our principal executive office is located in New York, New York, where we
lease approximately 26,400 square feet. In addition, we lease additional office
space in New York City and also lease offices in Cambridge, Massachusetts, in
Washington, D.C. and in Hyderabad, India. We believe that our existing
facilities are adequate for our current requirements and that additional space
can be obtained on commercially reasonable terms to meet our future
requirements. Please see "Certain Transactions" for more information regarding
our facilities in New York, Cambridge and Hyderabad.
LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
61
<PAGE>
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The directors, executive officers and key employees of Juno, and their ages
and positions as of May 24, 1999, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------- --- ------------------------------------------------------------------
<S> <C> <C>
Charles E. Ardai*...................... 29 President, Chief Executive Officer and Director
Robert H. Cherins*..................... 59 Executive Vice President, Sales and Marketing
Mark A. Moraes*........................ 33 Executive Vice President, Technology
Richard M. Eaton, Jr.*................. 38 Chief Financial Officer and Treasurer
Jordan S. Birnbaum..................... 28 Senior Vice President, Business Development
Richard D. Buchband.................... 36 Senior Vice President and General Counsel
V. S. Mani............................. 35 Senior Vice President, Database Systems
Peter D. Skopp......................... 28 Senior Vice President, Network Development
David E. Shaw.......................... 48 Chairman of the Board of Directors
Edward J. Ryeom........................ 29 Director
Louis K. Salkind....................... 41 Director
</TABLE>
- ------------------------
* Denotes Executive Officer.
CHARLES E. ARDAI has served as President of Juno since its inception in
June 1995 and was named Chief Executive Officer of Juno in May 1999. Mr. Ardai
has served as a director of Juno since October 1997. From January 1992 until
June 1995, Mr. Ardai served DESCO, L.P. in a number of positions--first as
Director of Strategic Growth from January 1992 until January 1993, where he was
responsible for the development and execution of DESCO, L.P.'s recruitment
strategies, then as Vice President from January 1993 until January 1995. From
January 1995 until June 1995, Mr. Ardai served as Senior Vice President at
DESCO, L.P., with responsibility for development of Internet-related business
ventures. Mr. Ardai also served as a Managing Director of DESCO, L.P. from
January 1998 until February 1999. Prior to joining DESCO, L.P. in January 1992,
Mr. Ardai worked at Davis Publications, where he was responsible for the
development and marketing of products derived from the firm's media properties.
During this period, he also maintained an independent career as a freelance
writer and editor. Mr. Ardai serves on the Advisory Board of the Association for
Interactive Media, and on the Markle Foundation's E-mail For All Advisory Board.
Mr. Ardai graduated SUMMA CUM LAUDE from Columbia University.
ROBERT H. CHERINS has served as Juno's Executive Vice President, Sales and
Marketing since December 1996. From March 1993 until December 1996, Mr. Cherins
served as President of Jordan, McGrath, Case & Taylor/Direct and Executive Vice
President of its corporate parent, Jordan, McGrath, Case & Taylor. Previously,
Mr. Cherins spent 12 years with McCaffrey and McCall Advertising. He served as
Chairman and CEO of McCaffrey and McCall from 1987 to 1992 and as President from
1986 to 1987. Mr. Cherins served as President of McCaffrey and McCall's Direct
Marketing Division from 1981 to 1986. Mr. Cherins graduated from Hunter College
of the City University of New York.
MARK A. MORAES has served as Juno's Executive Vice President, Technology
since February 1998. From February 1997 until February 1998, he served as a
Senior Vice President of Juno, with responsibility for the development and
operation of Juno's system and networks. From June 1995 until February 1997, Mr.
Moraes served in several positions in Juno's systems development group,
including Vice President. From April 1992 until June 1995, Mr. Moraes served as
a global systems architect at DESCO, L.P., where he designed data distribution
networks. Earlier, he made contributions to the development and roll-out of
UUNET Canada, to the X Windows environment, and to Usenet's news
62
<PAGE>
software, which is used by tens of thousands of sites around the world. Mr.
Moraes is also the moderator of Usenet's news.announce.newusers newsgroup, which
is read by tens of thousands of new Usenet users each year. Mr. Moraes received
a Bachelor of Technology degree from the Indian Institute of Technology and a
Master of Applied Science degree from the University of Toronto.
RICHARD M. EATON, JR. has served as Juno's Chief Financial Officer and
Treasurer since February 1999. From February 1998 until February 1999, Mr. Eaton
served as Juno's Senior Vice President, Finance and Administration. From
November 1996 until February 1998, he served as Juno's Vice President &
Corporate Controller. From May 1996 until November 1996, Mr. Eaton served as a
senior financial professional on a consulting basis for Think Systems
Corporation. From April 1995 to April 1996, Mr. Eaton served as Vice President &
Corporate Controller at Datalogix International, Inc. Mr. Eaton served as an
Area Controller of Finance and Administration for J. D. Edwards & Company from
August 1993 to December 1994. Mr. Eaton spent the first seven years of his
career with Coopers & Lybrand, last serving as an audit manager. Mr. Eaton
graduated SUMMA CUM LAUDE from the accelerated combined BBA/MBA degrees program
in public accountancy at Pace University, and is a member of both the
Connecticut Society of Certified Public Accountants and the American Institute
of Certified Public Accountants.
JORDAN S. BIRNBAUM has served as Juno's Senior Vice President, Business
Development since February 1998. He served as Juno's Vice President, Strategic
Marketing from February 1997 to February 1998 and as director of Juno's member
acquisition activities from October 1995 until February 1997. Prior to joining
Juno, Mr. Birnbaum held a number of positions with DESCO, L.P., most recently as
a London-based trader of equity securities from January 1994 until April 1995.
Mr. Birnbaum graduated from Cornell University.
RICHARD D. BUCHBAND has served as Juno's Senior Vice President and General
Counsel since February 1998, and is responsible for oversight of Juno's legal,
human resources and security policies. From January 1997 to February 1998, he
served as Vice President of Juno, and from September 1995 until January 1997 as
associate counsel of DESCO, L.P. Prior to September 1995, Mr. Buchband was a
corporate and transactional lawyer in New York. Mr. Buchband graduated MAGNA CUM
LAUDE with an A.B. from the Woodrow Wilson School of Public and International
Affairs at Princeton University and received his J.D. from Columbia Law School.
V. S. MANI has served as Juno's Senior Vice President, Database Systems
since February 1998. From February 1997 until February 1998, Mr. Mani served as
a Vice President, and from April 1996 until February 1997 as a software engineer
at Juno, with responsibility for the design of many of Juno's advertising and
electronic commerce systems. From February 1993 until March 1996, Mr. Mani held
a number of positions at the Matsushita Information Technology Laboratory in
Princeton, New Jersey, where he conducted research in information retrieval and
mobile computing, and, prior to that, with Digital Equipment Corporation. Mr.
Mani received his bachelor's degree with honors in Mechanical Engineering from
the Indian Institute of Technology and his M.S. in Computer Science from the
University of Wisconsin.
PETER D. SKOPP has served as Juno's Senior Vice President, Network
Development since February 1998. He served as a Vice President of Juno from
February 1997 to February 1998, with responsibility for designing Juno's server
software, and as a member of Juno's technical staff from December 1995 until
February 1997. From December 1992 until December 1995, Mr. Skopp was a manager
at the Programming Systems Laboratory of the Computer Science Department at
Columbia University. Mr. Skopp received his B.S. and M.S. degrees from Columbia
University.
DAVID E. SHAW served as Chairman of Juno Online Services, L.P. from its
inception in June 1995. He has served as a director of Juno since July 1996, and
was named Chairman of the Board of Juno in February 1999. Since November 1992,
Dr. Shaw has been the Chairman and President of D. E. Shaw &
63
<PAGE>
Co., Inc., the parent of DESCO, L.P. Prior to founding a predecessor to DESCO,
L.P. in 1988, Dr. Shaw was a Vice President at Morgan Stanley & Co., where he
managed the firm's automated trading technology group. Earlier, he served on the
faculty of the Department of Computer Science at Columbia University, and as
President and founder of Stanford Systems Corporation. In 1994, Dr. Shaw was
appointed by President Clinton to the President's Committee of Advisors on
Science and Technology, in which capacity he served as Chairman of the Panel on
Educational Technology. Dr. Shaw is also a member of the executive committee of
the Council on Competitiveness and of the board of directors of the American
Association for the Advancement of Science. He also serves as the
(non-executive) Chairman of the board of directors of Schrodinger, Inc., a
developer of computational chemistry software. Dr. Shaw graduated with highest
honors from the University of California at San Diego, and received his Ph.D.
from Stanford University following several years of research at the Stanford
Artificial Intelligence Laboratory.
EDWARD J. RYEOM has served as a director of Juno since March 1999. Since
January 1999, Mr. Ryeom has been a Partner of Prospect Street Ventures, a
venture capital firm focused on information technology investments. From May
1998 to December 1998, he was a Vice President of Prospect Street Ventures. From
August 1995 to May 1998, he was a Vice President in investment banking for
Brenner Securities. From May 1994 to June 1995, he worked at Cowen & Company, in
the information technology group. From May 1993 to May 1994, he was a consultant
with Andersen Consulting. Mr. Ryeom also serves as a director for several
private information technology companies. Mr. Ryeom graduated with a bachelor's
degree in Electrical Engineering from Columbia University, and an M.E. in
Systems Engineering from University of Virginia.
LOUIS K. SALKIND has served as a director of Juno since March 1999. Since
January 1991, Dr. Salkind has been a Managing Director of DESCO, L.P., where he
manages the firm's proprietary trading business. Since May 1993, he has also
been a Director of D. E. Shaw Securities International, a London-based affiliate
of DESCO, L.P., and since November 1997, he has been a Director of D. E. Shaw
Securities Hong Kong, Ltd. Dr. Salkind graduated CUM LAUDE with an A.B. from
Princeton University and received his M.S. and Ph.D degrees from New York
University.
COMPOSITION OF THE BOARD
Upon the completion of this offering, we intend to file a revised
certificate of incorporation pursuant to which our board of directors will be
divided into three classes, each of whose members will serve for a staggered
three-year term. Upon the expiration of the term of a class of directors,
directors in that class will be elected for three-year terms at the annual
meeting of stockholders in the year in which their term expires. Our board of
directors has resolved that Mr. Ardai will be a Class I Director whose term
expires at the 2000 annual meeting of stockholders. Dr. Salkind will be a Class
II Director whose term expires at the 2001 annual meeting of stockholders. Mr.
Ryeom and Dr. Shaw will be Class III Directors whose terms expire at the 2002
annual meeting of stockholders. With respect to each class, a director's term
will be subject to the election and qualification of their successors, or their
earlier death, resignation or removal.
BOARD COMMITTEES
The Audit Committee of the board of directors reviews, acts on and reports
to the board of directors with respect to various auditing and accounting
matters, including the recommendation of Juno's auditors, the scope of the
annual audits, fees to be paid to the auditors, the performance of Juno's
independent auditors and the accounting practices of Juno. The members of the
Audit Committee are Mr. Ryeom, and Drs. Salkind and Shaw.
64
<PAGE>
The Compensation Committee of the board of directors recommends, reviews and
oversees the salaries, benefits and stock option plans for Juno's employees,
consultants, directors and other individuals compensated by Juno. The
Compensation Committee will also administer Juno's compensation plans. The
members of the Compensation Committee are Messrs. Ardai and Ryeom, and Dr. Shaw.
DIRECTOR COMPENSATION
Other than reimbursing directors for customary and reasonable expenses of
attending board of directors or committee meetings, Juno does not currently
compensate its directors. On April 9, 1999, Drs. Salkind and Shaw, and Mr.
Ryeom, as non-employee board members, were each granted an option to purchase
22,222 shares of common stock with an exercise price of $9.00 per share, which
will become exercisable upon the completion of four months of board service
measured from that date. Additionally, under our 1999 Stock Incentive Plan each
individual who first joins the Juno board after the effective date of this
offering as a non-employee board member will automatically receive a grant of an
option on that date to purchase 22,222 shares of common stock at the time of his
or her commencement of board service. In addition, on the date of each annual
stockholders' meeting beginning in 2000, each non-employee member of the board
of directors who is to continue to serve as a non-employee board member will
automatically be granted an option to purchase 7,777 shares of common stock.
Please see "--1999 Stock Incentive Plan".
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Juno did not have a Compensation Committee during 1998. During 1998, Mr.
Ardai and Dr. Shaw made decisions relating to compensation of Juno's executive
officers, except that Mr. Ardai did not participate in discussions regarding his
own compensation. No executive officer of Juno serves on the board of directors
or compensation committee of any entity which has one or more executive officers
serving as a member of Juno's board of directors or Compensation Committee.
EMPLOYMENT, SEVERANCE AND OTHER ARRANGEMENTS
Juno has entered into an employment agreement with Charles E. Ardai, dated
April 26, 1999, which may be terminated by either party upon 30 days notice. The
agreement provides for Mr. Ardai to receive a base salary of $185,000 and to
receive semi-annual bonus payments on January 1 and July 1 of each year,
starting on July 1, 1999, of not less than $50,000 each. The agreement became
effective on May 1, 1999 for calendar year 1999. Subsequent to calendar year
1999, Mr. Ardai's base salary and bonus amount may be increased, decreased or
eliminated in the sole discretion of Juno.
Juno has entered into an employment agreement with Robert H. Cherins, dated
April 26, 1999, which may be terminated by either party upon 30 days notice. The
agreement, which incorporates the terms of a letter agreement dated November 20,
1996, provides for Mr. Cherins to receive a base salary of $150,000. The
agreement also provides for Mr. Cherins to receive a non-refundable advance of
$178,500, to be paid semi-monthly and deducted against any year-end bonus. The
agreement became effective on May 1, 1999 for calendar year 1999. Although Mr.
Cherins is eligible under the agreement to receive a year-end bonus, Juno does
not expect to pay him an additional year-end bonus with respect to calendar year
1999. Subsequent to calendar year 1999, Mr. Cherins's base salary, bonus amount
and the amount of the non-refundable advance may be increased or decreased in
the sole discretion of Juno, provided that, for each calendar year he is
employed by Juno, his base salary and the amount of the non-refundable advance
shall not be less than $328,500. In addition, in the event that Mr. Cherins is
discharged by Juno prior to January 1, 2000, unless he is terminated for cause
or becomes unable to work due to disability, Juno shall be required to offer Mr.
Cherins a one-year engagement, at a rate of $328,500 per annum, to provide those
consulting services as Juno may determine in its sole discretion, provided,
however, that if Mr. Cherins has been engaged as a consultant for Juno for the
entire nine-month period immediately following the commencement of his
consultancy,
65
<PAGE>
then Juno shall be obligated to pay three months additional severance to Mr.
Cherins at a rate of $328,500 per annum. In the event that Mr. Cherins is
discharged by Juno on or after January 1, 2000, unless he is terminated for
cause or becomes unable to work due to disability, Juno shall pay Mr. Cherins
three months of severance at a rate of $328,500 per annum.
DESCO, L.P., acting for the benefit of Juno, has entered into an employment
agreement with Mark A. Moraes, dated April 6, 1998, under which Mr. Moraes works
on a full-time basis for Juno. This agreement may be terminated by Juno or Mr.
Moraes upon 30 days notice. The agreement provides that Mr. Moraes will receive
a base salary of $150,000 for calendar year 1998 and will be eligible to receive
a bonus at the sole discretion of the President of Juno. Subsequent to calendar
year 1998, Mr. Moraes' base salary and bonus amount may be increased, decreased
or eliminated in the sole discretion of the President of Juno.
Juno has entered into an employment agreement with Richard M. Eaton, Jr.,
dated September 25, 1998, which may be terminated by either party upon 30 days
notice. Pursuant to the agreement Mr. Eaton received a base salary of $125,000
in 1998 and was eligible to receive a bonus in the sole discretion of the
President of Juno. Mr. Eaton also received a non-refundable advance in the
amount of $30,000 in 1998, which was deducted against the bonus amount paid for
1998. Subsequent to calendar year 1998, Mr. Eaton's base salary, bonus amount
and the amount of the non-refundable advance may be increased or decreased in
the sole discretion of the President of Juno. Juno has agreed to pay Mr. Eaton
$13,333 in deferred compensation on December 31, 1999, provided that he has not
voluntarily terminated his employment prior to that date or been dismissed for
cause.
Juno has also granted specified rights to some of our officers in the event
that they are terminated without cause or in the event that they voluntarily
resign following a material reduction in their duties and responsibilities or
their cash compensation or a relocation of their place of employment.
66
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to, earned by or
paid to Juno's chief executive officer and the other three executive officers of
Juno whose annual salary and bonus exceeded $100,000 in 1998 for services
rendered in all capacities during 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
(1) AWARDS
---------------------- SHARES UNDERLYING
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS
- --------------------------------------------------------------------- ---------- ---------- -----------------
<S> <C> <C> <C>
Charles E. Ardai..................................................... $ 300,000 $ -- 238,711
President and Chief Executive Officer
Robert H. Cherins.................................................... $ 150,000 $ 300,000 17,600
Executive Vice President,
Sales and Marketing
Mark A. Moraes (2)................................................... $ 150,000 $ 200,000 139,200
Executive Vice President,
Technology
Richard M. Eaton, Jr................................................. $ 125,000 $ 90,000 64,569
Chief Financial Officer and
Treasurer
</TABLE>
- ------------------------
(1) The column for "Other Annual Compensation" has been omitted because there is
no compensation required to be reported in that column. The aggregate amount
of perquisites and other personal benefits provided to each executive
officer above is less than the lesser of $50,000 and 10% of the total annual
salary and bonus of that officer.
(2) Mr. Moraes is employed by DESCO, L.P. but works for Juno under the terms of
his agreement with DESCO, L.P. Juno has agreed to pay Mr. Moraes a one-time
bonus of $100,000 in connection with overseeing the delivery to Juno of
consulting services provided by India-based affiliates of DESCO, L.P. See
"Certain Transactions--Shared Services." The 1998 portion of this one-time
bonus is $75,000 and is included in the amounts presented above. The
remaining portion of this one-time bonus will be included in Mr. Moraes'
1999 bonus.
67
<PAGE>
OPTION GRANTS IN LAST YEAR
The following table sets forth information regarding options granted to
Juno's executive officers during the year ended December 31, 1998. In the year
ended December 31, 1998, Juno Online Services, L.P. granted options to purchase
units, which converted into options to purchase 1,577,437 shares of common stock
following the statutory merger with Juno Online Services, Inc. Juno has not
granted any stock appreciation rights.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS(1) POTENTIAL REALIZABLE
------------------------------------------------------------ VALUE AT ASSUMED
NUMBER OF ANNUAL RATES
SECURITIES OF STOCK PRICE APPRECIATION
UNDERLYING % OF TOTAL EXERCISE FOR OPTION TERM(2)
OPTIONS OPTIONS GRANTED TO PRICE EXPIRATION ---------------------------------
NAME GRANTED EMPLOYEES IN 1998 PER SHARE DATE 0% 5% 10%
- ------------------------------ ----------- --------------------- ----------- ----------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Charles E. Ardai.............. 189,244 12.0% $ 0.45 02/16/08 $ 0 $ 53,557 $ 135,724
49,467 3.1 1.35 10/04/08 56,866 134,660 253,979
Robert H. Cherins............. 3,422 0.2 0.45 02/16/08 0 968 2,454
14,178 0.9 1.35 10/04/08 16,304 38,595 72,793
Mark A. Moraes................ 59,984 3.8 0.45 02/16/08 0 16,976 43,021
79,216 5.0 1.35 10/04/08 91,097 215,643 406,720
Richard M. Eaton, Jr.......... 25,852 1.6 0.45 02/16/08 0 7,316 18,541
38,717 2.5 1.35 10/04/08 44,524 105,395 198,785
</TABLE>
- ------------------------
(1) Each option represents the right to purchase one share of common stock. The
options shown in this column, which were originally granted pursuant to Juno
Online Services, L.P.'s 1997 Class B Unit Option/Issuance Plan, vest at a
rate of 20% per annum over five years, but did not become exercisable by
option holders until the statutory merger of Juno Online Services, L.P. with
and into Juno Online Services, Inc. in March 1999. See "--1999 Stock
Incentive Plan."
(2) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. The 0%, 5%
and 10% assumed annual rates of compounded stock price appreciation are
mandated by rules of the Securities and Exchange Commission and do not
represent Juno's estimate or projection of Juno's future common stock
prices. These amounts represent assumed rates of appreciation in the value
of Juno's common stock from the deemed fair market value for accounting
purposes on the date of grant. Actual gains, if any, on stock option
exercises are dependent on the future performance of the common stock and
overall stock market conditions. The amounts reflected in the table may not
necessarily be achieved.
68
<PAGE>
AGGREGATED OPTION EXERCISES IN THE YEAR ENDED DECEMBER 31, 1998 AND YEAR-END
OPTION VALUES
The following table sets forth information concerning the number and value
of unexercised options held by each of Juno's executive officers at December 31,
1998. None of the executive officers exercised options during the year ended
December 31, 1998. Under the terms of the 1997 Class B Unit Option/Issuance
Plan, options remained unexercisable by the option holders until the statutory
merger of Juno Online Services, L.P. with and into Juno Online Services, Inc. in
March 1999. This table assumes the conversion of Juno Online Services, L.P. to a
corporate form of organization as of December 31, 1998.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS
DECEMBER 31, 1998 AT DECEMBER 31, 1998(1)
-------------------------- --------------------------
<S> <C> <C> <C> <C>
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------------------------- ----------- ------------- ----------- -------------
Charles E. Ardai.......................................... 72,958 348,153 $ 204,282 $ 930,308
Robert H. Cherins......................................... 72,958 127,042 204,282 342,957
Mark A. Moraes............................................ 24,319 175,683 68,093 420,613
Richard M. Eaton, Jr...................................... 9,728 79,162 27,238 186,805
</TABLE>
- ------------------------
(1) There was no public trading market for the common stock of Juno as of
December 31, 1998. The deemed fair market value for accounting purposes on
December 31, 1998 was determined to be $3.25 per share.
1999 STOCK INCENTIVE PLAN
The 1999 Stock Incentive Plan is intended to serve as the successor equity
incentive program to Juno's 1997 Class B Limited Partnership Unit
Option/Issuance Plan. The 1999 Stock Incentive Plan became effective on March
26, 1999.
Juno has authorized 5,768,611 shares of common stock for issuance under the
1999 Stock Incentive Plan. This share reserve consists of the shares which were
available for issuance under the 1997 Limited Partnership Plan on the effective
date of the 1999 Stock Incentive Plan plus an additional increase of 2,645,855
shares. The share reserve will automatically be increased on the first trading
day of January each calendar year, beginning in January 2000, by a number of
shares equal to 1% of the total number of shares of common stock outstanding on
the last trading day of the immediately preceding calendar year, but no such
annual increase will exceed 444,444 shares. However, in no event may any one
participant in the 1999 Stock Incentive Plan receive option grants or direct
stock issuances for more than 1,111,111 shares in the aggregate per calendar
year.
Outstanding options under the 1997 Limited Partnership Plan will be
incorporated into the 1999 Stock Incentive Plan upon the date of this offering,
and no further option grants will be made under the 1997 Limited Partnership
Plan. The incorporated options will continue to be governed by their existing
terms, unless Juno's Compensation Committee extends one or more features of the
1999 Stock Incentive Plan to those options. However, except as otherwise noted
below, the outstanding options under the 1997 Limited Partnership Plan contain
substantially the same terms and conditions summarized below for the
discretionary option grant program under the 1999 Stock Incentive Plan.
The 1999 Stock Incentive Plan has four separate programs. The first program
is the discretionary option grant program under which eligible individuals in
Juno's employ or service, including officers, non-employee board members and
consultants, may be granted options to purchase shares of Juno's common stock.
The second program is the stock issuance program under which eligible
individuals may be issued shares of common stock directly, through the purchase
of such shares or as a bonus tied to the performance of services. The third
program is the salary investment option grant program under
69
<PAGE>
which executive officers and other highly compensated employees may elect to
apply a portion of their base salary to the acquisition of special below-market
stock option grants. The fourth program is the automatic option grant program
under which option grants will automatically be made at periodic intervals to
eligible non-employee board members.
The discretionary option grant and stock issuance programs will be
administered by Juno's Compensation Committee. This committee will determine
which eligible individuals are to receive option grants or stock issuances, the
time or times when option grants or stock issuances are to be made, the number
of shares subject to each grant or issuance, the exercise or purchase price for
each grant or issuance, the status of any granted option as either an incentive
stock option or a non-statutory stock option under the federal tax laws, the
vesting schedule to be in effect for the option grant or stock issuance and the
maximum term for which any granted option is to remain outstanding. The
committee will also select the executive officers and other highly compensated
employees who may participate in the salary investment option grant program in
the event that program is activated for one or more calendar years. Neither the
Compensation Committee nor the board will exercise any administrative discretion
with respect to option grants made under the salary investment option grant
program or under the automatic option grant program for the non-employee board
members.
The exercise price for the options may be paid in cash or in shares of
Juno's common stock valued at fair market value on the exercise date. The option
may also be exercised through a same-day sale program without any cash outlay by
the optionee. In addition, the Compensation Committee may allow a participant to
pay the option exercise price or direct issue price, and any associated
withholding taxes incurred in connection with the acquisition of shares, with a
full-recourse, interest-bearing promissory note.
In the event that Juno is acquired, whether by merger or asset sale or sale
by the stockholders of more than 50% of Juno's voting stock in a transaction
recommended by the board of directors, each outstanding option under the
discretionary option grant program which is not to be assumed by the successor
corporation or otherwise continued will automatically accelerate in full, and
all unvested shares under the discretionary option grant and stock issuance
programs will immediately vest, except to the extent Juno's repurchase rights
with respect to those shares are to be assigned to the successor corporation or
otherwise continued in effect. The Compensation Committee may grant options
under the discretionary option grant program which will accelerate in the event
of an acquisition even if the options are assumed or which will accelerate if
the optionee's service is subsequently terminated. The Compensation Committee
may grant options and issue shares which accelerate in connection with a hostile
change in control effected through a successful tender offer for more than 50%
of Juno's outstanding voting stock or by proxy contest for the election of board
members, or which accelerate upon a subsequent termination of an individual's
service.
Options currently outstanding under the 1997 Limited Partnership Plan may be
assumed by the successor corporation in an acquisition; such options are not by
their terms subject to acceleration at the time of an acquisition or a change in
control or upon the termination of the optionee's service following any such
transaction.
Stock appreciation rights may be issued under the discretionary option grant
program which will provide the holders with the option to surrender their
outstanding options for an appreciation distribution from Juno equal to the fair
market value of the vested shares subject to the surrendered option less the
aggregate exercise price payable for such shares. Such appreciation distribution
may be made in cash or in shares of Juno's common stock. There are currently no
outstanding stock appreciation rights under the 1997 Limited Partnership Plan.
The Compensation Committee has the authority to cancel outstanding options
under the discretionary option grant program, including options incorporated
from the 1997 Limited Partnership Plan,
70
<PAGE>
in return for the grant of new options for the same or different number of
option shares with an exercise price per share based upon the fair market value
of the common stock on the new grant date.
In the event the Compensation Committee elects to activate the salary
investment option grant program for one or more calendar years, each of Juno's
executive officers and other highly compensated employees selected for
participation may elect to reduce his or her base salary for that calendar year
by a specified dollar amount not less than $5,000 nor more than $50,000. In
return, the individual will automatically be granted, on the first trading day
in the calendar year for which the salary reduction is to be in effect, a
non-statutory option to purchase that number of shares of common stock
determined by dividing the salary reduction amount by two-thirds of the fair
market value per share of Juno's common stock on the grant date. The option
exercise price will be equal to one-third of the fair market value of the option
shares on the grant date. As a result, the fair market value of the option
shares on the grant date less the exercise price payable for those shares will
be equal to the salary reduction amount. The option will become exercisable in a
series of 12 equal monthly installments over the calendar year for which the
salary reduction is to be in effect and will be subject to full and immediate
vesting in the event of an acquisition or change in control of Juno.
Under the automatic option grant program, each individual who first joins
the Juno board after the effective date of this offering as a non-employee board
member will automatically be granted an option for 22,222 shares of Juno common
stock at the time of his or her commencement of board service. In addition, on
the date of each annual stockholders meeting, beginning with the meeting in the
year 2000, each individual who is to continue to serve as a non-employee board
member will receive an option grant to purchase 7,777 shares of Juno common
stock. Each automatic grant will have an exercise price equal to the fair market
value per share of Juno common stock on the grant date and will have a maximum
term of 10 years, subject to earlier termination following the optionee's
cessation of board service. Each 22,222-share option will become exercisable
upon the optionee's completion of 4 months of board service measured from the
option grant date and each 7,777-share option grant will become exercisable upon
the optionee's completion of 6 months of service measured from the grant date.
However, each outstanding option will immediately vest upon an acquisition or
change in control or the death or disability of the optionee while serving as a
board member.
Limited stock appreciation rights will automatically be included as part of
each grant made under the automatic option grant and salary investment option
grant programs and may be granted to one or more officers as part of their
option grants under the discretionary option grant program. Options with this
limited stock appreciation right may be surrendered to Juno upon the successful
completion of a hostile tender offer for more than 50% of Juno's outstanding
voting stock. In return for the surrendered option, the optionee will be
entitled to a cash distribution from Juno in an amount per surrendered option
share equal to the highest price per share of common stock paid in connection
with the tender offer less the exercise price payable for such share.
The board may amend or modify the 1999 Stock Incentive Plan at any time,
subject to any required stockholder approval. The 1999 Stock Incentive Plan will
terminate no later than March 25, 2009.
1999 EMPLOYEE STOCK PURCHASE PLAN
The board has approved the 1999 Employee Stock Purchase Plan, which is
expected to be approved by the stockholders prior to the date of this offering.
The plan will become effective immediately upon the execution of the
underwriting agreement for this offering. The plan is designed to allow eligible
employees of Juno and any participating subsidiaries to purchase shares of
common stock, at semi-annual intervals, through periodic payroll deductions. A
total of 555,556 shares of Juno's common stock will be issued under the plan.
71
<PAGE>
The plan will have a series of successive offering periods, each with a
maximum duration of 24 months. However, the initial offering period will begin
on the day the underwriting agreement is executed in connection with this
offering and will end on the last business day in July 2001. The next offering
period will begin on the first business day in August 2001, and subsequent
offering periods will be set by Juno's Compensation Committee.
Individuals who are eligible employees on the start date of any offering
period may enter the plan on that start date or on any subsequent semi-annual
entry date, generally February 1 or August 1 each year. Individuals who become
eligible employees after the start date of the offering period may join the plan
on any subsequent semi-annual entry date within that period.
A participant may contribute up to 15% of his or her cash earnings through
payroll deductions and the accumulated payroll deductions will be applied to the
purchase of shares on the participant's behalf on each semi-annual purchase
date, the last business day in January and July each year. The purchase price
per share will be 85% of the lower of the fair market value of Juno's common
stock on the participant's entry date into the offering period or the fair
market value on the semi-annual purchase date. The first purchase date will
occur on the last business day in January 2000. In no event, however, may any
participant purchase more than 1,667 shares, nor may all participants in the
aggregate purchase more than 138,889 shares on any one semi-annual purchase
date. Should the fair market value of Juno's common stock on any semi-annual
purchase date be less than the fair market value on the first day of the
offering period, then the current offering period will automatically end and a
new offering period will begin, based on the lower fair market value.
The board may at any time amend or modify the plan. The plan will terminate
no later than the last business day in July 2009.
72
<PAGE>
CERTAIN TRANSACTIONS
FINANCINGS PRIOR TO THE STATUTORY MERGER
From the formation of Juno Online Services, L.P. on June 30, 1995, until the
statutory merger of Juno Online Services, L.P. with Juno Online Services, Inc.
on March 1, 1999, we were financed through contributions of capital, primarily
from persons or entities affiliated with D. E. Shaw & Co., Inc. In return for
their investments, these investors received Class A limited partnership units.
On March 1, 1999, we converted from a limited partnership into a C
corporation. As part of this conversion, Class A limited partnership units were
converted into shares of Series A redeemable convertible preferred stock at a
one-to-one ratio, and options to acquire Class B limited partnership units under
our 1997 Class B Unit Option/Issuance Plan were converted into options to
acquire common stock of Juno Online Services, Inc. at a one-to-one ratio.
1999 PRIVATE EQUITY INVESTMENT
Following the statutory merger, we raised gross proceeds of $65.0 million by
completing a private placement of 10,138,716 shares of a newly authorized class
of Series B redeemable convertible preferred stock to a group of investors.
Investors in the private round of financing included Intel Corporation, News
Corporation, Prospect Street Ventures and Sycamore Ventures. We undertook this
round of financing to raise capital necessary to fund our ongoing operations,
the planned expansion of our marketing activities and other general corporate
purposes.
Upon completion of this offering, the outstanding shares of Series A
redeemable convertible preferred stock and Series B redeemable convertible
preferred stock will automatically convert to an aggregate of 27,822,751 shares
of our common stock.
SHARED SERVICES
Historically, DESCO, L.P. has provided Juno various administrative services.
These services have included numerous overhead and infrastructure items, such as
providing office space and occupancy-related services, providing insurance and
professional services, providing and maintaining some of the hardware and
software used by Juno, and administering employee benefit plans for the benefit
of Juno employees. Prior to January 1, 1998, expenses related to these and other
services were charged to Juno on the basis of allocation metrics as determined
by DESCO, L.P, based upon square footage, headcount and other resources
utilized. Effective January 1, 1998, Juno and DESCO, L.P. entered into a
services agreement pursuant to which DESCO, L.P. has agreed to provide
administrative and other services for Juno in a specified set of service
categories, in return for a set monthly fee: $152,500 per month for the period
of January 1, 1998 to April 16, 1998 and $61,600 per month for the period
thereafter. The services agreement covers the delivery of:
- telecommunications services;
- personnel-related services, including for 401(k) and other benefit plans
and workers compensation insurance;
- occupancy services through April 18, 1998 for Juno personnel working in
facilities maintained by DESCO, L.P.;
- miscellaneous administrative services;
- various professional services;
- various purchasing services; and
- various information technology services.
73
<PAGE>
The term of the services agreement extends on a month-to-month basis until
terminated by either party. The services agreement may be terminated by either
party at any time upon written notice to the other party following a material
default by the other party which remained uncured for 30 days or at any time
upon 90 days written notice to the other party. Juno believes that the amounts
charged to it under the services agreement are generally comparable to the
amounts that would have been charged by an independent third party. We do not
have any current plans to terminate the services agreement.
Prior to May 20, 1999, Juno and DESCO, L.P. were parties to a services
agreement pursuant to which DESCO, L.P., through certain affiliates based in
India, provided various consulting services to Juno. Under this agreement,
DESCO, L.P. provided technical and non-technical consulting services as well as
other consulting services agreed to by the parties. Each staff member who
performed consulting services under this agreement was categorized as either a
technical consultant or a non-technical consultant. In addition to reimbursing
DESCO, L.P. for specified expenses, such as travel costs and satellite link
charges, we paid DESCO, L.P. $3,650 per month for each technical consultant and
$2,300 per month for each non-technical consultant. The parties terminated this
agreement effective May 20, 1999, and we are presently restructuring the manner
in which Juno obtains the services that had been provided under the agreement.
We have formed a subsidiary of Juno based in Hyderabad, India, and that
subsidiary has entered into employment agreements with substantially all of the
individuals who had previously served as technical or non-technical consultants.
In the near future, we expect to enter into a more limited agreement covering
occupancy and related services that we continue to obtain from DESCO, L.P.'s
affiliated entity in India. We believe that the economic terms of the new
agreement will be generally comparable to those that could be obtained from an
independent third party.
We employ a small number of personnel in Cambridge, Massachusetts, primarily
for the purpose of maintaining Juno server equipment that is located in a space
formerly maintained by D. E. Shaw Financial Technology, L.P., an affiliate of
DESCO, L.P. Prior to January 1, 1998, expenses connected with the use and
maintenance of that server equipment and the use of adjacent office space were
charged to Juno on the basis of allocation metrics as determined by DESCO, L.P.,
based upon square footage, headcount and other resources utilized. Effective
January 1, 1998, Juno and Shaw Financial Technology entered into a services
agreement under which Shaw Financial Technology has agreed to provide
information technology, telecommunications, occupancy, and related
administrative services to us, in return for a monthly fee of $11,500. Shaw
Financial Technology has recently sold some of its assets to a third party and
we have made arrangements with this third party to continue to host our server
equipment.
TRANSACTIONS WITH NEWS CORPORATION
Juno has entered into an agreement with News America Incorporated, a
significant stockholder of Juno and an affiliate of News Corporation, to
purchase various forms of advertising on the media properties of News America
Incorporated and its affiliates. Under the March 1, 1999 agreement, Juno spent
$10.0 million for advertising that may be used at any time prior to March 2001,
to be provided by News America and its affiliates at then-current rates which
shall be no greater than those customarily applied to purchasers of similar
amounts of comparable advertising.
LEASES
Prior to November 1997, most of Juno's staff occupied offices within space
leased by DESCO, L.P. in midtown Manhattan, with leasehold and other expenses
being allocated to Juno by DESCO, L.P. based on Juno's use of this space. In
November 1997, Juno relocated its New York-based staff and its principal
executive offices to a single floor at 1540 Broadway leased from Bertelsmann
Property, Inc. under an Agreement of Lease dated September 22, 1997 between
DESCO, L.P., as lessee, and Bertelsmann. The lease permits DESCO, L.P. to sublet
all or a portion of the premises to Juno. Juno has agreed to assume the
performance of DESCO, L.P.'s payment obligations under the lease. The
74
<PAGE>
term of the lease continues until March 2003 and DESCO, L.P. has an option to
renew for an additional five-year term. The lease provides DESCO, L.P. the right
to terminate the lease effective January 1, 2000, if DESCO, L.P. delivers a
notice of termination to Bertelsmann on or prior to July 1, 1999. If DESCO, L.P.
terminates the lease under this provision, DESCO, L.P. must make specified
payments to Bertelsmann, including reimbursing it for rent that was abated at
the start of the lease. If DESCO, L.P. elects to terminate the lease pursuant to
the termination right described above, we would be required to relocate our
offices and enter into new lease arrangements. We cannot assure you that the
terms and conditions of any new lease would be as favorable to Juno as this
lease. In addition to the office space at 1540 Broadway, Juno currently occupies
two floors in an adjacent building under a subleasing arrangement with DESCO,
L.P. Although the terms of this arrangement have not been finalized, Juno
expects that the sublease will expire on April 30, 2001 and that Juno will have
the right to terminate on April 30, 2000 by providing three months prior notice
and making specified termination payments to DESCO, L.P. We believe that the
economic terms of this sublease will be generally comparable to those that could
be obtained from an independent third party.
INDEBTEDNESS TO RELATED PARTIES
Juno has incurred indebtedness that, by its terms, is required to be repaid
upon the completion of this offering, or as otherwise described below.
On March 31, 1998, Juno issued to D. E. Shaw Securities Group, L.P. a senior
note in the original principal amount of $10.0 million. The senior note bears
interest at the Federal Funds rate of interest plus 0.375%, and interest that is
not paid quarterly shall be satisfied by increasing the outstanding principal
amount of the senior note. Under the terms of the senior note, as amended, the
outstanding principal amount and any accrued but unpaid interest is to be paid
upon the earlier of December 31, 2000 or the date of completion of an initial
public offering by Juno which is registered under the Securities Act of 1933, as
amended. Juno is also required to make mandatory prepayments to Shaw Securities
in the event that Shaw Securities pays specified fees that are independently
owed to DESCO, L.P. On March 31, 1998, Shaw Securities and DESCO, L.P. entered
into a support agreement pursuant to which DESCO, L.P. agreed to pay Shaw
Securities in the event that Juno fails to make any of the mandatory
prepayments.
As of March 31, 1999, the outstanding principal and interest under the
Senior Note was $8.8 million. Juno intends to repay all amounts owed under the
senior note with a portion of the proceeds of this offering.
OPTIONS GRANTED TO EXECUTIVE OFFICERS
For information regarding the grant of stock options to executive officers
and directors, see "Management--Compensation of Directors," "--Executive
Compensation," "--1999 Stock Incentive Plan" and "Principal Stockholders."
75
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to the beneficial
ownership of the common stock as of May 24, 1999, and as adjusted to reflect the
sale of the shares of common stock offered hereby, by each person or group of
affiliated persons who is known by Juno to beneficially own 5% or more of the
common stock, each director and executive officer of Juno, and all directors and
executive officers of Juno as a group. Unless otherwise indicated, the address
of each beneficial owner listed below is c/o Juno Online Services, Inc., 1540
Broadway, New York, New York 10036.
The following table gives effect to the shares of common stock issuable
within 60 days of May 24, 1999 upon the exercise of all options and other rights
beneficially owned by the indicated stockholders on that date. Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission and includes voting and investment power with respect to
shares. Unless otherwise indicated, the persons named in the table have sole
voting and sole investment control with respect to all shares beneficially
owned.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
NUMBER OF SHARES BENEFICIALLY OWNED
BENEFICIALLY ----------------------------------
BENEFICIAL OWNER OWNED BEFORE OFFERING AFTER OFFERING
- ---------------------------------------------------------------- ----------------- ----------------- ---------------
<S> <C> <C> <C>
David E. Shaw (1)............................................... 17,332,759 61.7% 50.1%
Shaw Family Trust IV (2)........................................ 7,824,727 27.8 22.6
D. E. Shaw & Co., L.P. (3)...................................... 6,336,734 22.5 18.3
News America Incorporated (4)................................... 3,135,198 11.1 9.1
Edward J. Ryeom (5)............................................. 779,900 2.8 2.3
Louis K. Salkind (6)............................................ 166,482 * *
Charles E. Ardai (7)............................................ 147,286 * *
Robert H. Cherins (8)........................................... 73,642 * *
Mark A. Moraes (9).............................................. 48,476 * *
Richard M. Eaton, Jr. (10)...................................... 14,898 * *
All directors and executive officers as a group
(7 persons) (11).............................................. 18,563,443 65.6 53.3
</TABLE>
- ------------------------
* Less than 1%.
(1) Includes (i) 2,830,337 shares held directly by David E. Shaw, (ii) 107,627
shares held by D. E. Shaw & Co., Inc., (iii) 5,559,696 shares held by D. E.
Shaw & Co., L.P., (iv) 777,038 shares held by
D. E. Shaw Investment Group, L.P., (v) 233,334 shares held by Shaw Juno
Trust and (vi) 7,824,727 shares held by Shaw Family Trust IV. D. E. Shaw &
Co., Inc., which is wholly owned by Dr. Shaw, is the general partner of D.
E. Shaw & Co., L.P. D. E. Shaw & Co., L.P. is the general partner of D. E.
Shaw Investment Group, L.P. Although Dr. Shaw is neither the trustee nor a
beneficiary of the Shaw Juno Trust, some of the beneficiaries of the Shaw
Juno Trust reside in Dr. Shaw's household. Dr. Shaw is the trustee of the
Shaw Family Trust IV. Dr. Shaw disclaims beneficial ownership of the shares
held by D. E. Shaw & Co., L.P., D. E. Shaw Investment Group, L.P., Shaw Juno
Trust, and Shaw Family Trust IV, except to the extent of his pecuniary
interest therein. The address of the foregoing entities is 120 West 45th
Street, New York, New York 10036.
(2) Dr. Shaw is the trustee of the Shaw Family Trust IV. The address of Shaw
Family Trust IV is 120 West 45th Street, New York, New York 10036.
(3) Includes (i) 5,559,696 shares held directly by D. E. Shaw & Co., L.P. and
(ii) 777,038 shares held by D. E. Shaw Investment Group, L.P. D. E. Shaw &
Co., L.P. is the general partner of D. E. Shaw Investment Group, L.P. D. E.
Shaw & Co., L.P. disclaims beneficial ownership of the shares held by D. E.
Shaw Investment Group, L.P., except to the extent of its pecuniary interest
therein. Dr. Shaw, as President of D. E. Shaw & Co., Inc., the General
Partner of D. E. Shaw &
76
<PAGE>
Co., L.P., has voting and dispositive powers with respect to these shares.
The address of D. E. Shaw & Co., L.P. is 120 West 45th Street, New York, New
York 10036.
(4) News America Incorporated is an affiliate of News Corporation, a publicly
traded company. The address of News America Incorporated is 1211 Avenue of
the Americas, New York, New York 10036.
(5) Includes 701,910 shares held by Prospect Street NYC Discovery Fund, L.P. and
77,990 shares held by Prospect Street NYC Co-Investment Fund, L.P. Mr. Ryeom
is an officer of the general partner of each of these funds and he disclaims
beneficial ownership of the shares held by these funds except to the extent
of his pecuniary interest in each of them. The address of the foregoing
entities is 10 East 40th Street, 44th Floor, New York, New York 10016.
(6) All of these shares are held by the Louis K. Salkind 1999 Grantor Retained
Annuity Trust. Although Dr. Salkind is neither the trustee nor a beneficiary
of the Louis K. Salkind 1999 Grantor Retained Annuity Trust, some of the
beneficiaries of this trust reside in Dr. Salkind's household. The address
of the Louis K. Salkind 1999 Grantor Retained Annuity Trust is 120 West 45th
Street, New York, New York 10036.
(7) All of these shares are issuable upon the exercise of options. This number
does not include 694,659 shares issuable upon the exercise of stock options
that do not vest within 60 days of May 24, 1999.
(8) All of these shares are issuable upon the exercise of options. This number
does not include 193,025 shares issuable upon the exercise of stock options
that do not vest within 60 days of May 24, 1999.
(9) Includes 13,476 shares that are issuable upon the exercise of options. This
number does not include 218,193 shares issuable upon the exercise of stock
options that do not vest within 60 days of May 24, 1999.
(10) Includes 9,704 shares that are issuable upon the exercise of options. This
number does not include 162,881 shares issuable upon the exercise of stock
options that do not vest within 60 days of May 24, 1999.
(11) Includes 244,108 shares that are issuable upon the exercise of options.
77
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following description of Juno's common stock and preferred stock and
relevant provisions of Juno's amended and restated certificate of incorporation
as will be in effect upon the closing of this offering, and the amended and
restated bylaws as will be in effect upon the closing of this offering are
summaries thereof and are qualified by reference to our amended and restated
certificate of incorporation and the amended and restated bylaws, copies of
which have been filed with the Securities and Exchange Commission as exhibits to
Juno's Registration Statement, of which this prospectus forms a part. The
descriptions of the common stock and preferred stock reflect changes to Juno's
capital structure that will occur upon the closing of the offering in accordance
with the terms of our amended and restated certificate of incorporation.
The authorized capital stock of Juno consists of 133,333,334 shares of
common stock, par value $.01 per share, and 5,000,000 shares of preferred stock,
par value $.01 per share.
COMMON STOCK
As of May 24, 1999, there were 280,338 shares of common stock outstanding
and held of record by stockholders, without giving effect to the conversion of
our preferred stock. Based upon the number of shares outstanding as of that date
and giving effect to the issuance of the 6,500,000 shares of common stock in
this offering and the conversion of our outstanding shares of preferred stock
upon the completion of this offering, there will be 34,603,089 shares of common
stock outstanding upon the closing of this offering.
Holders of common stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Accordingly, holders of a majority of the shares of common stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Holders of common stock are entitled to receive ratably
those dividends, if any, as may be declared by the board of directors out of
funds legally available therefor, subject to any preferential dividend rights of
any outstanding preferred stock. Upon the liquidation, dissolution or winding up
of Juno, the holders of common stock are entitled to receive ratably the net
assets of Juno available after the payment of all debts and other liabilities
and subject to the prior rights of any outstanding preferred stock. Holders of
the common stock have no preemptive, subscription, redemption or conversion
rights. The outstanding shares of common stock are, and the shares offered by
Juno in the offering will be, when issued in consideration for payment thereof,
fully paid and nonassessable. The rights, preferences and privileges of holders
of common stock are subject to, and may be adversely affected by, the rights of
the holders of shares of any series of preferred stock which Juno may designate
and issue in the future. Upon the closing of the offering, there will be no
shares of preferred stock outstanding.
PREFERRED STOCK
Upon the closing of this offering, there will be no shares of redeemable
convertible preferred stock outstanding.
Upon the closing of this offering, the board of directors will be
authorized, without further stockholder approval, to issue from time to time up
to an aggregate of 5,000,000 shares of preferred stock in one or more series and
to fix or alter the designations, preferences, rights and any qualifications,
limitations or restrictions of the shares of each series thereof, including the
dividend rights, dividend rates, conversion rights, voting rights, terms of
redemption, including sinking fund provisions, redemption price or prices,
liquidation preferences and the number of shares constituting any series or
designations of series. Juno has no present plans to issue any shares of
preferred stock. See "--Anti-Takeover Effects of Various Provisions of Delaware
Law and Juno's Certificate of Incorporation and Bylaws."
78
<PAGE>
OPTIONS
Options to purchase a total of 5,768,611 shares of common stock may be
granted under the 1999 Stock Incentive Plan. As of May 24, 1999, there were
outstanding options to purchase a total of 3,305,935 shares of common stock, of
which options to purchase approximately 417,041 shares will be exercisable upon
the closing of this offering. On the date of this prospectus, Juno filed a
registration statement on Form S-8 relating to these shares. Therefore, any
shares of common stock issued upon exercise of vested options will be
immediately available for sale in the public market, subject to the terms of
lock-up agreements entered into by and between the holders of substantially all
outstanding options and the underwriters. See "Management--1999 Stock Incentive
Plan" and "Shares Eligible for Future Sale."
REGISTRATION RIGHTS
Pursuant to the terms of the Amended and Restated Registration Rights
Agreement, after the closing of this offering the holders of 27,822,751 shares
of common stock will be entitled to demand registration rights with respect to
the registration of their shares under the Securities Act. The holders of 10% or
more of these shares are entitled to demand that Juno register their shares
under the Securities Act, subject to various limitations. Juno is not required
to effect more than six of these registrations pursuant to these demand
registration rights. In addition, pursuant to the Amended and Restated
Registration Rights Agreement, these holders will be entitled to piggyback
registration rights with respect to the registration of their shares under the
Securities Act, subject to various limitations. Further, at any time after Juno
becomes eligible to file a registration statement on Form S-3, the holders of
common stock who are parties to the Amended and Restated Registration Rights
Agreement may require Juno to file registration statements under the Securities
Act on Form S-3 with respect to their shares of common stock. These registration
rights are subject to certain conditions and limitations, among them the right
of the underwriters of an offering to limit the number of shares of common stock
held by security holders with registration rights to be included in a
registration. Juno is generally required to bear all of the expenses of all of
these registrations, except underwriting discounts and selling commissions.
Registration of any of the shares of common stock held by security holders with
registration rights would result in shares becoming freely tradable without
restriction under the Securities Act immediately upon effectiveness of such
registration.
ANTI-TAKEOVER EFFECTS OF VARIOUS PROVISIONS OF DELAWARE LAW AND JUNO'S
CERTIFICATE OF INCORPORATION AND BYLAWS
Juno is subject to the provisions of Section 203 of the Delaware General
Corporation Law. Subject to some exceptions, Section 203 prohibits a publicly
held Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
interested stockholder attained that status with the approval of the board of
directors or unless the business combination is approved in a prescribed manner.
A "business combination" includes mergers, asset sales and other transactions
resulting in a financial benefit to the interested stockholder. Subject to
various exceptions, an "interested stockholder" is a person who, together with
affiliates and associates, owns, or within three years did own, 15% or more of
the corporation's voting stock. This statute could prohibit or delay the
accomplishment of mergers or other takeover or change in control attempts with
respect to Juno and, accordingly, may discourage attempts to acquire Juno.
In addition, various provisions of our amended and restated certificate of
incorporation and our amended and restated bylaws, which provisions will be in
effect upon the closing of the offering and are summarized in the following
paragraphs, may be deemed to have an anti-takeover effect and may delay, defer
or prevent a tender offer or takeover attempt that a stockholder might consider
in its best
79
<PAGE>
interest, including those attempts that might result in a premium over the
market price for the shares held by stockholders.
BOARD OF DIRECTORS VACANCIES. Juno's amended and restated certificate of
incorporation authorizes the board of directors to fill vacant directorships or
increase the size of the board of directors. This may deter a stockholder from
removing incumbent directors and simultaneously gaining control of the board of
directors by filling the vacancies created by this removal with its own
nominees.
STOCKHOLDER ACTION; SPECIAL MEETING OF STOCKHOLDERS. Juno's amended and
restated certificate of incorporation provides that stockholders may not take
action by written consent, but only at duly called annual or special meetings of
stockholders. The amended and restated certificate of incorporation further
provides that special meetings of stockholders of Juno may be called only by the
chairman of the board of directors or a majority of the board of directors.
ADVANCE NOTICE REQUIREMENTS FOR STOCKHOLDER PROPOSALS AND DIRECTOR
NOMINATIONS. Juno's amended and restated bylaws provide that stockholders
seeking to bring business before an annual meeting of stockholders, or to
nominate candidates for election as directors at an annual meeting of
stockholders, must provide timely notice thereof in writing. To be timely, a
stockholder's notice must be delivered to or mailed and received at the
principal executive offices of Juno, not less than 120 days nor more than 150
days prior to the first anniversary of the date of Juno's notice of annual
meeting provided with respect to the previous year's annual meeting of
stockholders; provided, that if no annual meeting of stockholders was held in
the previous year or the date of the annual meeting of stockholders has been
changed to be more than 30 calendar days earlier than or 60 calendar days after
this anniversary, notice by the stockholder, to be timely, must be so received
not more than 90 days nor later than the later of:
- 60 days prior to the annual meeting of stockholders or
- the close of business on the 10th day following the date on which notice
of the date of the meeting is given to stockholders or made public,
whichever occurs first.
Our amended and restated bylaws also specify certain requirements as to the
form and content of a stockholder's notice. These provisions may preclude
stockholders from bringing matters before an annual meeting of stockholders or
from making nominations for directors at an annual meeting of stockholders.
AUTHORIZED BUT UNISSUED SHARES. The authorized but unissued shares of
common stock and preferred stock are available for future issuance without
stockholder approval, subject to various limitations imposed by the Nasdaq
National Market. These additional shares may be utilized for a variety of
corporate purposes, including future public offerings to raise additional
capital, corporate acquisitions and employee benefit plans. The existence of
authorized but unissued and unreserved common stock and preferred stock could
make more difficult or discourage an attempt to obtain control of Juno by means
of a proxy contest, tender offer, merger or otherwise.
The Delaware General Corporation Law provides generally that the affirmative
vote of a majority of the shares entitled to vote on any matter is required to
amend a corporation's certificate of incorporation or bylaws, unless a
corporation's certificate of incorporation or bylaws, as the case may be,
requires a greater percentage.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
Our amended and restated certificate of incorporation provides that the
liability of a director of Juno shall be eliminated or limited to the fullest
extent permitted by the Delaware General Corporation Law. Under the Delaware
General Corporation Law, the directors have a fiduciary duty to Juno which is
not eliminated by this provision of the amended and restated certificate of
incorporation and, in appropriate circumstances, equitable remedies such as
injunctive or other forms of non-monetary
80
<PAGE>
relief will remain available. In addition, each director will continue to be
subject to liability under the Delaware General Corporation Law for:
- breach of the director's duty of loyalty to Juno;
- acts or omissions which are found by a court of competent jurisdiction to
be not in good faith or which involve intentional misconduct, or knowing
violations of law;
- actions leading to improper personal benefit to the director; and
- payment of dividends or approval of stock repurchases or redemptions that
are prohibited by the Delaware General Corporation Law.
This provision also does not affect the directors' responsibilities under any
other laws, such as the Federal securities laws or state or Federal
environmental laws.
Section 145 of the Delaware General Corporation Law empowers a corporation
to indemnify its directors and officers and to purchase insurance with respect
to liability arising out of their capacity or status as directors and officers,
provided that this provision shall not eliminate or limit the liability of a
director:
- for any breach of the director's duty of loyalty to the corporation or its
stockholders;
- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- arising under Section 174 of the Delaware General Corporation Law; or
- for any transaction from which the director derived an improper personal
benefit.
The Delaware General Corporation Law provides further that the
indemnification permitted thereunder shall not be deemed exclusive of any other
rights to which the directors and officers may be entitled under the
corporation's bylaws, any agreement, a vote of stockholders or otherwise. Our
amended and restated certificate of incorporation eliminates the personal
liability of directors to the fullest extent permitted by Section 102(b)(7) of
the Delaware General Corporation Law and provides that Juno shall fully
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative, by reason of the fact that
that person is or was a director or officer of Juno, or is or was serving at the
request of Juno as a director or officer of another corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise. This
indemnification shall be against expenses including attorney's fees, judgments,
fines and amounts paid in settlement actually and reasonably incurred by the
indemnitee in connection with such action, suit or proceeding.
Juno has also entered into agreements to indemnify its directors and
executive officers, in addition to the indemnification provided for in Juno's
amended and restated bylaws. Juno believes that these provisions and agreements
are necessary to attract and retain qualified directors and executive officers.
Juno's amended and restated bylaws also permit it to secure insurance on behalf
of any officer, director, employee or other agent for any liability arising out
of his or her actions, regardless of whether the Delaware General Corporation
Law would permit indemnification. Juno intends to obtain liability insurance for
its officers and directors.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent as to which indemnification will be
required or permitted under the amended and restated certificate of
incorporation. Juno is not aware of any threatened litigation or proceeding that
may result in a claim for this type of indemnification.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is Continental Stock
Transfer & Trust Company, New York, New York.
81
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the offering, there has not been any public market for Juno's
common stock, and no prediction can be made as to the effect, if any, that
market sales of shares of common stock or the availability of shares of common
stock for sale will have on the market price of the common stock prevailing from
time to time. Nevertheless, sales of substantial amounts of common stock in the
public market could adversely affect the market price of the common stock and
could impair Juno's future ability to raise capital through the sale of its
equity securities.
Upon the completion of this offering, Juno will have an aggregate of
34,603,089 shares of common stock outstanding, assuming no exercise of the
underwriters' over-allotment option and no exercise of outstanding options. Of
the outstanding shares, the 6,500,000 shares sold in the offering will be freely
tradable, except that any shares held by "affiliates" of Juno, as that term is
defined in Rule 144 promulgated under the Securities Act, may only be sold in
compliance with the limitations described below. The remaining 28,103,089 shares
of common stock will be deemed "restricted securities" as defined under Rule
144. Restricted securities may be sold in the public market only if registered
or if they qualify for an exemption from registration under Rules 144, 144(k) or
701 promulgated under the Securities Act, which rules are summarized below.
Subject to the lock-up agreements described below and the provisions of Rules
144, 144(k) and 701, additional shares will be available for sale in the public
market as follows:
<TABLE>
<CAPTION>
NUMBER OF
SHARES DATE
- ------------ ----------------------------------------------------------------------------------
<C> <S>
6,500,000 After the date of this prospectus, freely tradable shares sold in this offering
and shares saleable under Rule 144(k) that are not subject to the 180-day lock-up
22,090 After 90 days from the date of this prospectus, shares saleable under Rule 144 or
Rule 701 that are not subject to the 180-day lock-up
16,831,171 After 180 days from the date of this prospectus, the 180-day lock-up is released
and these shares are saleable under Rule 144 (subject, in some cases, to volume
limitations), Rule 144(k) or Rule 701
11,249,828 After 180 days from the date of this prospectus, restricted securities that are
held for less than one year and are not yet saleable under Rule 144
</TABLE>
In general, under Rule 144, as currently in effect, a person, or persons
whose shares are required to be aggregated, including an affiliate, who has
beneficially owned shares for at least one year is entitled to sell, within any
three-month period commencing 90 days after the date of this prospectus, a
number of shares that does not exceed the greater of 1% of the then outstanding
shares of common stock, which will be approximately 346,031 shares immediately
after the offering or the average weekly trading volume in the common stock
during the four calendar weeks preceding the date on which notice of such sale
is filed, subject to certain restrictions. In addition, a person who is not
deemed to have been an affiliate of Juno at any time during the 90 days
preceding a sale and who has beneficially owned the shares proposed to be sold
for at least two years would be entitled to sell such shares under Rule 144(k)
without regard to the requirements described above. To the extent that shares
were acquired from an affiliate of Juno, such person's holding period for the
purpose of effecting a sale under Rule 144 commences on the date of transfer
from the affiliate.
As of the date of this prospectus, options to purchase a total of 3,305,935
shares of common stock are outstanding, of which 417,041 are currently
exercisable. Juno has filed a Form S-8 registration statement under the
Securities Act to register all shares of common stock issuable under Juno's
option plan. This registration statement became effective upon filing.
Accordingly, shares of common stock
82
<PAGE>
underlying such options are eligible for sale in the public markets, subject to
vesting restrictions or the lock-up agreement described below. See
"Management--Compensation of Directors" and "--1999 Stock Incentive Plan."
All directors and officers and certain stockholders of Juno, holding
substantially all of the outstanding shares of common stock, have agreed,
subject to specified exceptions, that they will not, without the prior written
consent of the representatives of the underwriters, sell or otherwise dispose of
any shares of common stock or options to acquire shares of common stock during
the 180-day period following the date of this prospectus. See "Underwriting."
Juno has agreed not to sell or otherwise dispose of any shares of common
stock during the 180-day period following the date of the prospectus, except
Juno may issue, and grant options to purchase, shares of common stock under the
1999 Stock Incentive Plan. In addition, Juno may issue shares of common stock in
connection with any acquisition of another company if the terms of such issuance
provide that such common stock shall not be resold prior to the expiration of
the 180-day period referenced in the preceding sentence. See "Risk
Factors--Future sales of our common stock may negatively affect our stock
price."
Following this offering, under specified circumstances and subject to
customary conditions, holders of 27,822,751 shares of Juno's outstanding common
stock will have certain demand registration rights with respect to their shares
of common stock, subject to the 180-day lock-up arrangement described above, to
require Juno to register their shares of common stock under the Securities Act,
and certain rights to participate in any future registration of securities by
Juno. Juno is not required to effect more than an aggregate of six demand
registrations on behalf of such holders. If the holders of these registrable
securities request that Juno register their shares, and if such registration is
effected, these shares will become freely tradable without restriction under the
Securities Act. Any sales of securities by these stockholders could have a
material adverse effect on the trading price of our common stock.
83
<PAGE>
UNITED STATES TAX CONSEQUENCES TO NON-UNITED STATES HOLDERS
The following is a general discussion of the material United States federal
income and estate tax consequences of the ownership and disposition of the
common stock applicable to Non-United States Holders of this common stock. For
the purpose of this discussion, a Non-United States Holder is any holder that
for U.S. federal income tax purposes is not a U.S. person. This discussion does
not address all aspects of U.S. federal income and estate taxation that may be
relevant in light of a Non-United States Holder's particular facts and
circumstances, such as being a U.S. expatriate, and does not address any tax
consequences arising under the laws of any state, local or non-U.S. taxing
jurisdiction. Furthermore, the following discussion is based on current
provisions of the Internal Revenue Code of 1986, as amended, and administrative
and judicial interpretations thereof, all as in effect on the date hereof, and
all of which are subject to change, possibly with retroactive effect. Juno has
not and will not seek a ruling from the Internal Revenue Service with respect to
the U.S. federal income and estate tax consequences described below, and as a
result, there can be no assurance that the Internal Revenue Service will not
disagree with or challenge any of the conclusions set forth in this discussion.
For purposes of this discussion, the term U.S. person means:
- a citizen or resident of the United States;
- a corporation, partnership or other entity created or organized in the
United States or under the laws of the United States or any political
subdivision thereof;
- an estate whose income is included in gross income for U.S. federal income
tax purposes regardless of its source; or
- a trust whose administration is subject to the primary supervision of a
U.S. court and which has one or more U.S. persons who have the authority
to control all substantial decisions of the trust.
DIVIDENDS
If Juno pays a dividend, any dividend paid to a Non-United States Holder of
common stock generally will be subject to U.S. withholding tax either at a rate
of 30% of the gross amount of the dividend or such lower rate as may be
specified by an applicable tax treaty. Dividends received by a Non-United States
Holder that are effectively connected with a U.S. trade or business conducted by
the Non-United States Holder are exempt from such withholding tax. However,
those effectively connected dividends, net of certain deductions and credits,
are taxed at the same graduated rates applicable to U.S. persons.
In addition to the graduated tax described above, dividends received by a
corporate Non-United States Holder that are effectively connected with a U.S.
trade or business of the corporate Non-United States Holder may also be subject
to a branch profits tax at a rate of 30% or such lower rate as may be specified
by an applicable tax treaty.
A Non-United States Holder of common stock that is eligible for a reduced
rate of withholding tax pursuant to a tax treaty may obtain a refund of any
excess amounts currently withheld by filing an appropriate claim for refund with
the IRS.
GAIN ON DISPOSITION OF COMMON STOCK
A Non-United States Holder generally will not be subject to U.S. federal
income tax on any gain realized upon the sale or other disposition of his common
stock unless:
- the gain is effectively connected with a U.S. trade or business of the
Non-United States Holder (which gain, in the case of a corporate
Non-United States Holder, must also be taken into account for branch
profits tax purposes);
- the Non-United States Holder is an individual who holds his or her common
stock as a capital asset (generally, an asset held for investment
purposes) and who is present in the United States for a period or periods
aggregating 183 days or more during the calendar year in which the sale or
disposition occurs and certain other conditions are met; or
84
<PAGE>
- Juno is or has been a "United States real property holding corporation"
for U.S. federal income tax purposes at any time within the shorter of the
five-year period preceding the disposition or the holder's holding period
for its common stock. Juno has determined that it is not and does not
believe that it will become a "United States real property holding
corporation" for U.S. federal income tax purposes.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Generally, Juno must report annually to the Internal Revenue Service the
amount of dividends paid, the name and address of the recipient, and the amount,
if any, of tax withheld. A similar report is sent to the holder. Pursuant to tax
treaties or other agreements, the Internal Revenue Service may make its reports
available to tax authorities in the recipient's country of resident.
Dividends paid to a Non-United States Holder at an address within the U.S.
may be subject to backup withholding at a rate of 31% if the Non-United States
Holder fails to establish that it is entitled to an exemption or to provide a
correct taxpayer identification number and other information to the payer.
Backup withholding will generally not apply to dividends paid to Non-United
States Holders at an address outside the U.S. on or prior to December 31, 2000
unless the payer has knowledge that the payee is a United States person. Under
recently finalized Treasury Regulations regarding withholding and information
reporting, payment of dividends to Non-United States Holders at an address
outside the U.S. after December 31, 2000 may be subject to backup withholding at
a rate of 31% unless such Non-United States Holder satisfies various
certification requirements.
Under current Treasury Regulations, the payment of the proceeds of the
disposition of common stock to or through the U.S. office of a broker is subject
to information reporting and backup withholding at a rate of 31% unless the
holder certifies its non-U.S. status under penalties of perjury or otherwise
establishes an exemption. Generally, the payment of the proceeds of the
disposition by a Non-United States Holder of common stock outside the U.S. to or
through a foreign office of a broker will not be subject to backup withholding
but will be subject to information reporting requirements if the broker is:
- a U.S. person;
- a "controlled foreign corporation" for U.S. federal income tax purposes;
or
- a foreign person 50% or more of whose gross income for certain periods is
from the conduct of a U.S. trade or business
unless the broker has documentary evidence in its files of the holders' non-U.S.
status and certain other conditions are met, or the holder otherwise establishes
an exemption. Neither backup withholding nor information reporting generally
will apply to a payment of the proceeds of a disposition of common stock by or
through a foreign office of a foreign broker not subject to the preceding
sentence.
In general, the recently promulgated final Treasury Regulations, described
above, do not significantly alter the substantive withholding and information
reporting requirements but would alter the procedures for claiming benefits of
an income tax treaty and change the certifications procedures relating to the
receipt by intermediaries of payments on behalf of the beneficial owner of
shares of common stock. Non-United States Holders should consult their tax
advisors regarding the effect, if any, of those final Treasury Regulations on an
investment in the common stock. Those final Treasury Regulations are generally
effective for payments made after December 31, 2000.
Backup withholding is not an additional tax. Rather, the tax liability of
persons subject to backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may be
obtained, provided that the required information is furnished to the Internal
Revenue Service.
85
<PAGE>
ESTATE TAX
An individual Non-United States Holder who owns common stock at the time of
his death or had made certain lifetime transfer of an interest in common stock
will be required to include the value of that common stock in such holder's
gross estate for U.S. federal estate tax purposes, unless an applicable estate
tax treaty provides otherwise.
THE FOREGOING DISCUSSION IS A SUMMARY OF THE PRINCIPAL FEDERAL INCOME AND
ESTATE TAX CONSEQUENCES OF THE OWNERSHIP, SALE OR OTHER DISPOSITION OF COMMON
STOCK BY NON-UNITED STATES HOLDERS. ACCORDINGLY, INVESTORS ARE URGED TO CONSULT
THEIR OWN TAX ADVISORS WITH RESPECT TO THE INCOME TAX CONSEQUENCES OF THE
OWNERSHIP AND DISPOSITION OF COMMON STOCK, INCLUDING THE APPLICATION AND EFFECT
OF THE LAWS OF ANY STATE, LOCAL, FOREIGN OR OTHER TAXING JURISDICTION.
86
<PAGE>
UNDERWRITING
Subject to the terms and conditions stated in the underwriting agreement
dated the date hereof, each underwriter named below has severally agreed to
purchase and Juno has agreed to sell to each underwriter, the number of shares
set forth below opposite their respective names.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ----------------------------------------------------------------------------------------------------- ----------
<S> <C>
Salomon Smith Barney Inc............................................................................. 1,950,000
Bear, Stearns & Co. Inc.............................................................................. 1,950,000
PaineWebber Incorporated............................................................................. 1,950,000
BancBoston Robertson Stephens Inc.................................................................... 162,500
Donaldson, Lufkin & Jenrette Securities.............................................................. 162,500
ING Baring Furman Selz LLC........................................................................... 162,500
Wit Capital Corporation.............................................................................. 162,500
----------
Total............................................................................................ 6,500,000
----------
----------
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase the shares included in this offering are subject to
approval of various legal matters by counsel and to various other conditions.
The underwriters are obligated to purchase all the shares, other than those
covered by the over-allotment option described below, if they purchase any of
the shares.
The underwriters, for whom Salomon Smith Barney Inc., Bear, Stearns & Co.
Inc. and PaineWebber Incorporated are acting as representatives, propose to
offer some of the shares directly to the public at the public offering price set
forth on the cover page of this prospectus and some of the shares to various
dealers at the public offering price less a concession not in excess of $0.55
per share. The underwriters may allow, and those dealers may reallow, a
concession not in excess of $0.10 per share on sales to certain other dealers.
If all of the shares are not sold at the initial offering price, the
representatives may change the public offering price and the other selling
terms. The representatives have advised Juno that the underwriters do not intend
to confirm any sales to any accounts over which they exercise discretionary
authority.
Juno has granted to the underwriters an option, exercisable for 30 days from
the date of this prospectus, to purchase up to 975,000 additional shares of
common stock at the public offering price less the underwriting discount. The
underwriters may exercise this option solely for the purpose of covering
over-allotments, if any, in connection with this offering. To the extent the
option is exercised, each underwriter will be obligated, subject to various
conditions, to purchase a number of additional shares approximately
proportionate to each underwriter's initial purchase commitment.
Juno, its officers and directors and certain stockholders of Juno, holding
substantially all of the outstanding shares of common stock, have agreed,
subject to specified exceptions, that, for a period of 180 days from the date of
this prospectus, they will not, without the prior written consent of Salomon
Smith Barney Inc., dispose of or hedge any shares of common stock of Juno or any
securities convertible into or exchangeable for common stock. Salomon Smith
Barney Inc. in its sole discretion may release any of the securities subject to
these lock-up agreements at any time without notice.
At our request, the underwriters have reserved up to five percent (5%) of
the shares of common stock for sale, at the initial public offering price, to
employees and friends of Juno through a directed share program. The number of
shares of common stock available for sale to the general public in the public
offering will be reduced to the extent these persons purchase those reserved
shares.
Prior to this offering, there has been no public market for the common
stock. Consequently, the initial public offering price for the shares was
determined by negotiations among Juno and the representatives. Among the factors
considered in determining the initial public offering price were Juno's
87
<PAGE>
record of operations, its current financial condition, its future prospects, its
markets, the economic conditions in and future prospects for the industry in
which Juno competes, its management, and currently prevailing general conditions
in the equity securities markets, including current market valuations of
publicly traded companies considered comparable to Juno. There can be no
assurance, however, that the prices at which the shares will sell in the public
market after this offering will not be lower than the price at which they are
sold by the underwriters or that an active trading market in the common stock
will develop and continue after this offering.
Juno's common stock has been approved for quotation on the Nasdaq National
Market under the symbol "JWEB".
The following table shows the underwriting discounts and commissions to be
paid to the underwriters by Juno in connection with this offering. These amounts
are shown assuming both no exercise and full exercise of the underwriters'
option to purchase additional shares of common stock.
<TABLE>
<CAPTION>
PAID BY JUNO
--------------------------
<S> <C> <C>
FULL
NO EXERCISE EXERCISE
------------ ------------
Per share............................................................................. $ 0.91 $ 0.91
Total................................................................................. $ 5,915,000 $6,802,250
</TABLE>
In connection with the offering, Salomon Smith Barney Inc., on behalf of the
underwriters, may over-allot, or engage in syndicate covering transactions,
stabilizing transactions and penalty bids. Over-allotment involves syndicate
sales of common stock in excess of the number of shares to be purchased by the
underwriters in the offering, which creates a syndicate short position.
Syndicate covering transactions involve purchases of the common stock in the
open market after the distribution has been completed in order to cover
syndicate short positions. Stabilizing transactions consist of bids or purchases
of common stock made for the purpose of preventing or retarding a decline in the
market price of the common stock while the offering is in progress. Penalty bids
permit the underwriters to reclaim a selling concession from a syndicate member
when Salomon Smith Barney Inc., in covering syndicate short positions or making
stabilizing purchases, repurchases shares originally sold by that syndicate
member. These activities may cause the price of the common stock to be higher
than the price that otherwise would exist in the open market in the absence of
these types of transactions. These transactions may be effected on the Nasdaq
National Market or in the over-the-counter market, or otherwise, and, if
commenced, may be discontinued at any time.
Most of the shares to be sold by Juno in this offering will be sold to U.S.
purchasers, but a limited number of shares may be sold to non-U.S. purchasers.
Certain of the representatives have performed various investment banking and
advisory services for Juno for which they have received customary fees and
expenses. The representatives may, from time to time, engage in transactions
with and perform services for Juno in the ordinary course of their business.
PaineWebber Incorporated acted as Juno's exclusive placement agent in connection
with the private placement of Juno's Series B redeemable convertible preferred
stock in March 1999, in connection with which Juno paid customary placement fees
to PaineWebber. An affiliate of PaineWebber acquired 428,945 shares of Juno's
Series B redeemable convertible preferred stock in the private placement and
subsequently sold 7,800 shares of the Series B redeemable convertible preferred
stock to one of its officers. For a period of at least three years following the
date of this prospectus, these two holders will not sell, transfer, assign,
pledge or hypothecate the common stock issuable upon conversion of the 428,945
shares of Series B redeemable convertible preferred stock other than to
PaineWebber, an affiliate of PaineWebber, the underwriters or an officer or
partner thereof. Additionally, PaineWebber has agreed to pay Juno an amount
equal to the difference in price between the offering price and the private
placement price on 9,000 shares of Series B redeemable convertible preferred
stock acquired by its affiliate.
88
<PAGE>
If and to the extent that any shares are offered or sold in the United
Kingdom, each representative agrees that it:
- will not offer or sell any shares to persons in the United Kingdom except
to persons whose ordinary activities involve them in acquiring, holding,
managing or disposing of investments (whether as principal or agent) for
the purposes of their businesses or in other circumstances which do not
constitute an offer to the public in the United Kingdom for the purposes
of the Public Offers of Securities Regulation 1995 (the "Regulations");
- will comply with all applicable provisions of the Regulations and of the
Financial Services Act 1986 with respect to anything done by it in
relation to the shares of Common Stock offered hereby in, from or
otherwise involving the United Kingdom; and
- will only issue or pass on in the United Kingdom any document received by
it in connection with the issue of these shares if that person is of a
kind described in Article 11(3) of the Financial Services Act 1986
(Investment Advertisements) (Exemptions) Order 1996 (as amended) or is a
person to whom such document may otherwise lawfully be issued or passed
on.
Juno has agreed to indemnify the underwriters against various liabilities,
including liabilities under the Securities Act of 1933, or to contribute to
payments the underwriters may be required to make in respect of any of those
liabilities.
89
<PAGE>
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon for Juno by Brobeck, Phleger & Harrison LLP, New York, New York. Legal
matters in connection with the offering will be passed upon for the underwriters
by Cravath, Swaine & Moore, New York, New York.
EXPERTS
The consolidated financial statements for Juno, as of December 31, 1997 and
1998 and for each of the three years in the period ended December 31, 1998
included in this prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, appearing elsewhere herein,
upon the authority of said firm as experts in auditing and accounting.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
Juno has filed with the Securities and Exchange Commission a registration
statement on Form S-1, including exhibits, schedules and amendments filed with
the registration statement, under the Securities Act with respect to the shares
of common stock to be sold in the offering. For further information about Juno
and the shares of common stock to be sold in the offering, please refer to this
registration statement. For additional information, please refer to the exhibits
that have been filed with our registration statement on Form S-1.
You may read and copy all or any portion of the registration statement or
any other information Juno files at the Securities and Exchange Commission's
public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. You can
request copies of these documents, upon payment of a duplicating fee, by writing
to the Securities and Exchange Commission. Please call the Securities and
Exchange Commission at 1-800-SEC-0330 for further information about the public
reference rooms. Juno's Securities and Exchange Commission filings, including
the registration statement, are also available to you on the Commission's Web
site (http://www.sec.gov).
As a result of the offering, Juno will become subject to the information and
reporting requirements of the Securities Exchange Act of 1934, as amended, and,
in accordance therewith, will file periodic reports, proxy statements and other
information with the Securities and Exchange Commission. Upon approval of the
common stock for the quotation on the Nasdaq National Market, these reports,
proxy and information statements and other information may also be inspected at
the offices of Nasdaq Operations, 1735 K Street, N.W., Washington, D.C. 20006.
Juno intends to furnish its stockholders with annual reports containing
audited consolidated financial statements and make available quarterly reports
for the first three quarters of each year containing unaudited interim
consolidated financial information.
90
<PAGE>
JUNO ONLINE SERVICES, INC.
(FORMERLY JUNO ONLINE SERVICES, L.P. & SUBSIDIARY)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Accountants.......................................................................... F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998 and March 31, 1999 (unaudited)................ F-3
Consolidated Statements of Operations for the years ended December 31, 1996, 1997
and 1998 and the three months ended March 31, 1998 and 1999 (unaudited).................................. F-4
Consolidated Statement of Partners' Capital (Deficiency) for the years ended
December 31, 1996, 1997 and 1998 and Consolidated Statement of Stockholders' Equity (Deficit) for the
three months ended March 31, 1999 (unaudited)............................................................ F-6
Consolidated Statements of Cash Flows for the years ended December 31, 1996,
1997 and 1998 and the three months ended March 31, 1998 and 1999 (unaudited)............................. F-7
Notes to Consolidated Financial Statements................................................................. F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Juno Online Services, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, partners' capital (deficiency) and cash
flows present fairly, in all material respects, the financial position of Juno
Online Services, Inc. (formerly Juno Online Services, L.P. & Subsidiary) at
December 31, 1997 and 1998, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatements. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PRICEWATERHOUSECOOPERS LLP
New York, New York
March 4, 1999
F-2
<PAGE>
JUNO ONLINE SERVICES, INC.
(FORMERLY JUNO ONLINE SERVICES, L.P. & SUBSIDIARY)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, MARCH 31, MARCH 31,
-------------------- ----------- -----------
<S> <C> <C> <C> <C>
1997 1998 1999 1999
--------- --------- ----------- -----------
<CAPTION>
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................... $ 13,770 $ 8,152 $ 53,165 $ 53,165
Accounts receivable, net of allowance for doubtful accounts of
$106, $296 and $395 in 1997, 1998 and 1999, respectively...... 1,141 2,115 3,205 3,205
Merchandise inventories, net.................................... 769 60 47 47
Prepaid expenses and other current assets....................... 400 108 11,140 11,140
--------- --------- ----------- -----------
Total current assets.......................................... 16,080 10,435 67,557 67,557
Fixed assets, net................................................. 3,966 4,086 3,876 3,876
Other assets...................................................... 87 182 227 227
--------- --------- ----------- -----------
Total assets.................................................. $ 20,133 $ 14,703 $ 71,660 $ 71,660
--------- --------- ----------- -----------
--------- --------- ----------- -----------
LIABILITIES AND PARTNERS' CAPITAL (DEFICIENCY)/STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses........................... $ 8,277 $ 11,166 $ 9,884 $ 9,884
Current portion of capital lease obligations.................... 525 450 518 518
Current portion of senior note.................................. -- 1,560 1,560 1,560
Deferred revenue................................................ 351 5,602 7,595 7,595
--------- --------- ----------- -----------
Total current liabilities..................................... 9,153 18,778 19,557 19,557
Capital lease obligations......................................... 270 609 600 600
Senior note....................................................... -- 7,569 7,252 7,252
Deferred rent..................................................... 206 335 316 316
Deferred revenue.................................................. -- -- 1,333 1,333
Commitments and contingencies (Note 9)
Redeemable convertible preferred stock, $.01 par value;
Series B: 10,138,716 shares authorized, issued and outstanding
(liquidation value of $65,000).................................. 61,853 --
Series A: 17,684,035 shares authorized, issued and outstanding
(liquidation value of $79,578).................................. 79,578 --
Partners' capital (deficiency).................................... 10,504 (12,588)
Stockholders' equity (deficit):
Common stock--$.01 par value; 133,333,334 authorized, 251,229
issued and outstanding; 28,073,980 issued and outstanding, pro
forma........................................................... 3 281
Additional paid-in capital...................................... (95,724) 45,429
Unearned compensation........................................... (691) (691)
Accumulated deficit............................................. (2,417) (2,417)
----------- -----------
Total shareholders' equity (deficit).......................... (98,829) 42,602
--------- --------- ----------- -----------
Total liabilities and partners' capital (deficiency)/
stockholders' equity (deficit).............................. $ 20,133 $ 14,703 $ 71,660 $ 71,660
--------- --------- ----------- -----------
--------- --------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
JUNO ONLINE SERVICES, INC.
(FORMERLY JUNO ONLINE SERVICES, L.P. & SUBSIDIARY)
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER LIMITED PARTNERSHIP UNIT AND PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------- ----------------------
1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Revenues:
Billable services................................... $ 6 $ 1,371 $ 6,645 $ 465 $ 5,806
Advertising and transaction fees.................... 127 1,875 6,454 1,228 2,265
Direct product sales................................ 3 5,845 8,595 2,577 1,649
---------- ---------- ---------- ---------- ----------
Total revenues.................................. 136 9,091 21,694 4,270 9,720
---------- ---------- ---------- ---------- ----------
Cost of revenues:
Billable services................................... -- 1,053 5,606 387 4,678
Advertising and transaction fees.................... 278 1,659 3,725 825 1,080
Direct product sales................................ 3 5,796 7,627 2,426 1,424
---------- ---------- ---------- ---------- ----------
Total cost of revenues.......................... 281 8,508 16,958 3,638 7,182
---------- ---------- ---------- ---------- ----------
Operating expenses:
Operations, free service............................ 5,803 11,075 9,383 2,824 1,846
Subscriber acquisition.............................. 6,993 3,140 5,334 1,453 2,700
Sales and marketing................................. 4,276 12,593 11,584 4,270 2,312
Product development................................. 3,741 4,860 7,345 1,835 1,854
General and administrative.......................... 2,172 2,897 2,760 914 704
---------- ---------- ---------- ---------- ----------
Total operating expenses........................ 22,985 34,565 36,406 11,296 9,416
---------- ---------- ---------- ---------- ----------
Loss from operations............................ (23,130) (33,982) (31,670) (10,664) (6,878)
Interest income, net.................................. 128 243 44 74 111
---------- ---------- ---------- ---------- ----------
Net loss........................................ $ (23,002) $ (33,739) $ (31,626) $ (10,590) $ (6,767)
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
JUNO ONLINE SERVICES, INC.
(FORMERLY JUNO ONLINE SERVICES, L.P. & SUBSIDIARY)
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
(IN THOUSANDS, EXCEPT PER LIMITED PARTNERSHIP UNIT AND PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1999
------------------------------------
TWO MONTHS MONTH
YEAR ENDED DECEMBER 31, ENDED ENDED
---------------------------------- FEBRUARY 28, MARCH 31,
1996 1997 1998 1999 1999 TOTAL
---------- ---------- ---------- ------------ ---------- ----------
THREE
MONTHS
ENDED
MARCH 31,
1998
-----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Net loss............................. $ (23,002) $ (33,739) $ (31,626) $ (10,590) $ (4,350) $ (2,417) $ (6,767)
---------- ---------- ---------- ----------- ------------ ---------- ----------
---------- ---------- ---------- ----------- ------------ ---------- ----------
Net loss attributable to common
stockholders....................... $ (23,002) $ (33,739) $ (31,626) $ (10,590) $ (4,350) $ (3,589) $ (6,767)
---------- ---------- ---------- ----------- ------------ ---------- ----------
---------- ---------- ---------- ----------- ------------ ---------- ----------
Weighted average number of:
Class A limited partnership
units............................ 3,281 10,500 17,091 16,054 17,684
---------- ---------- ---------- ----------- ------------
---------- ---------- ---------- ----------- ------------
Shares of Common Stock............. 217
----------
----------
Basic and diluted net loss per Class
A limited partnership
unit............................... $ (7.01) $ (3.21) $ (1.85) $ (0.66) $ (0.25)
---------- ---------- ---------- ----------- ------------
---------- ---------- ---------- ----------- ------------
Basic and diluted net loss per
share.............................. $ (16.54)
----------
----------
Pro forma basic and diluted net loss
per share.......................... $ (1.85) $ (0.32)
---------- ----------
---------- ----------
Weighted average shares outstanding
used in pro forma basic and diluted
per share calculation.............. 17,091 21,225
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
JUNO ONLINE SERVICES, INC.
(FORMERLY JUNO ONLINE SERVICES, L.P. & SUBSIDIARY)
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL (DEFICIENCY)/
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
PARTNERS'
CONTRIBUTIONS COMMON STOCK ADDITION
---------------------- ------------------------ PAID-IN UNEARNED ACCUMULATED
UNITS AMOUNT SHARES AMOUNT CAPITAL COMPENSATION DEFICIT
--------- ----------- ----------- ----------- ----------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995........ 873 $ 3,925 $ (3,833)
Capital contributions........... 4,646 20,906 --
Net loss........................ -- -- (23,002)
--------- ----------- ------------
Balance, December 31, 1996........ 5,519 24,831 (26,835)
Capital contributions........... 10,275 46,247 --
Net loss........................ -- -- (33,739)
--------- ----------- ------------
Balance, December 31, 1997........ 15,794 71,078 (60,574)
Capital contributions........... 1,890 8,500 --
Net loss........................ -- -- (31,626)
Amortization of unearned
compensation.................. -- -- 34
--------- ----------- ------------
Balance, December 31, 1998........ 17,684 79,578 (92,166)
Net loss for the period January
1, 1999 to February 28, 1999
(unaudited)................... -- -- (4,350)
Effect of statutory merger (see
Note 12)...................... (17,684) (79,578) -- -- $ (95,788) $ (728) 96,516
Preferred stock accretion
(unaudited)................... -- -- (53) -- --
Issuance of common stock upon
(unaudited)................... 251 $ 3 117 -- --
Net loss for the month ended
March 31, 1999 (unaudited).... -- -- -- -- (2,417)
Amortization of unearned
compensation (unaudited)...... -- -- -- 37 --
--------- ----------- --- ----- ----------- ----- ------------
Balance, March 31, 1999
(unaudited)..................... -- $ -- 251 $ 3 $ (95,724) $ (691) $ (2,417)
--------- ----------- --- ----- ----------- ----- ------------
--------- ----------- --- ----- ----------- ----- ------------
<CAPTION>
TOTAL
---------
<S> <C>
Balance, December 31, 1995........ $ 92
Capital contributions........... 20,906
Net loss........................ (23,002)
---------
Balance, December 31, 1996........ (2,004)
Capital contributions........... 46,247
Net loss........................ (33,739)
---------
Balance, December 31, 1997........ 10,504
Capital contributions........... 8,500
Net loss........................ (31,626)
Amortization of unearned
compensation.................. 34
---------
Balance, December 31, 1998........ (12,588)
Net loss for the period January
1, 1999 to February 28, 1999
(unaudited)................... (4,350)
Effect of statutory merger (see
Note 12)...................... (79,578)
Preferred stock accretion
(unaudited)................... (53)
Issuance of common stock upon
(unaudited)................... 120
Net loss for the month ended
March 31, 1999 (unaudited).... (2,417)
Amortization of unearned
compensation (unaudited)...... 37
---------
Balance, March 31, 1999
(unaudited)..................... $ (98,829)
---------
---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
JUNO ONLINE SERVICES, INC.
(FORMERLY JUNO ONLINE SERVICES, L.P. & SUBSIDIARY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------------- ----------------------
1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss............................................ $ (23,002) $ (33,739) $ (31,626) $ (10,590) $ (6,767)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization..................... -- 161 2,438 563 567
Amortization of deferred rent..................... -- 244 157 195 (16)
Amortization of unearned compensation............. -- -- 34 -- 37
Changes in operating assets and liabilities:
Accounts receivable............................. (121) (1,020) (974) (249) (1,090)
Merchandise inventories......................... -- (769) 709 437 13
Prepaid expenses and other current assets....... (90) (214) 292 146 (11,032)
Accounts payable and accrued expenses........... 6,834 1,401 2,861 (2,055) (1,285)
Deferred revenue................................ 6 345 5,251 1,928 3,326
---------- ---------- ---------- ---------- ----------
Net cash used in operating activities......... (16,373) (33,591) (20,858) (9,625) (16,247)
---------- ---------- ---------- ---------- ----------
Cash flows from investing activities:
Purchases of fixed assets........................... -- (3,270) (1,942) (1,248) (105)
Proceeds from sale of fixed assets.................. -- -- 402 -- --
Other assets........................................ -- (87) (95) (3) (45)
---------- ---------- ---------- ---------- ----------
Net cash used in investing activities......... -- (3,357) (1,635) (1,251) (150)
---------- ---------- ---------- ---------- ----------
Cash flows from financing activities:
Payments on capital lease obligations............... -- (62) (754) (125) (193)
Proceeds from senior note........................... -- -- 10,000 10,000 --
Payments on senior note............................. -- -- (871) -- (317)
Net proceeds from issuance of redeemable convertible
preferred stock................................... -- -- -- -- 61,800
Capital contributions............................... 16,971 50,182 8,500 3,500 --
Proceeds from issuance of common stock.............. -- -- -- -- 120
---------- ---------- ---------- ---------- ----------
Net cash provided by financing activities..... 16,971 50,120 16,875 13,375 61,410
---------- ---------- ---------- ---------- ----------
Net increase (decrease) in cash and cash
equivalents................................. 598 13,172 (5,618) 2,499 45,013
Cash and cash equivalents, beginning of period........ -- 598 13,770 13,770 8,152
---------- ---------- ---------- ---------- ----------
Cash and cash equivalents, end of period.............. $ 598 $ 13,770 $ 8,152 $ 16,269 $ 53,165
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Supplemental disclosure of cash flow information:
Cash paid for interest.............................. $ -- $ 127 $ 496 $ 28 $ 145
Supplemental schedule of noncash investing and
financing activities:
Accretion of preferred stock........................ $ -- $ -- $ -- $ -- $ 53
Capital lease obligations incurred for network
equipment......................................... -- 857 1,018 878 252
Notes received for issuance of partnership units.... 3,935 -- -- -- --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
JUNO ONLINE SERVICES, INC.
(FORMERLY JUNO ONLINE SERVICES, L.P. & SUBSIDIARY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT LIMITED PARTNERSHIP UNIT AND SHARE DATA)
1. ORGANIZATION AND BUSINESS
Juno Online Services, Inc. is the surviving entity of a Statutory Merger
with Juno Online Services, L.P. This merger of entities under common control was
effected on March 1, 1999 (see Note 12, Subsequent Events).
Juno Online Services, L.P. was organized as a Delaware limited partnership
on June 30, 1995. The consolidated financial statements include the accounts of
Juno Online Services, L.P. and its wholly owned subsidiary, Juno Online
Services, Inc. (collectively, the "Company" or "Juno"). Juno Online Services,
Inc. was incorporated in the State of Delaware on July 2, 1996, and was a wholly
owned subsidiary from February 12, 1997 through March 1, 1999, the date of the
Statutory Merger. All significant intercompany accounts and transactions have
been eliminated in consolidation.
The Company is a provider of Internet-related services throughout the United
States. The Company offers several levels of service, ranging from basic dial-up
Internet e-mail -- which is provided to the end user for free -- to billable
subscription services, including full access to the World Wide Web. Revenues are
derived primarily from the subscription fees charged for billable subscription
services, from the sale of advertising, and from the direct sale of products to
the Company's subscribers.
The Company has experienced operating losses since its inception. Such
losses are due to the Company's efforts to maximize the number of subscribers to
both its free basic e-mail service and, more recently, its billable subscription
services, and to its development of computer systems and related infrastructure
that could be rapidly expanded to accommodate additional users. Juno Online
Services, Inc. expects that it will continue to incur net losses as it expends
substantial additional resources in an attempt to rapidly increase its market
share. There can be no assurance that Juno Online Services, Inc. will achieve or
sustain profitability or positive cash flow from its operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The Company's consolidated financial statements are prepared in accordance
with generally accepted accounting principles, which require management to use
its judgment in making certain estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent
liabilities at the dates of the financial statements and the reported amounts of
operating revenues and expenses during the reporting periods. It is expected
that such estimates will differ to some extent from the amounts ultimately
realized due to uncertainties inherent in any such estimation process.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The financial statements as of March 31, 1999 and for the three months ended
March 31, 1998 and 1999 are unaudited. In the opinion of management, this
unaudited information has been prepared substantially on the same basis as the
audited consolidated financial statements and all necessary adjustments,
consisting only of normal recurring adjustments, have been included in the
amounts presented to present fairly the unaudited quarterly results. The results
for a quarter are not necessarily indicative of the results for any future
period.
F-8
<PAGE>
JUNO ONLINE SERVICES, INC.
(FORMERLY JUNO ONLINE SERVICES, L.P. & SUBSIDIARY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT LIMITED PARTNERSHIP UNIT AND SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. Cash balances at
December 31, 1998 consisted of bank deposits with one institution and investment
grade overnight securities. The Company reviews the credit ratings of its
banking institution on a regular basis.
REVENUE RECOGNITION
Billable services revenues are recognized over the period services are
provided. In 1997, billable services revenues consisted primarily of technical
support fees. In 1998, billable services revenues consisted primarily of fees
charged for our billable subscription services and technical support fees.
Advertising and transaction fees are derived both from advertising and
strategic marketing alliance contracts in which the Company receives a fee for
displaying impressions (a single display of an advertisement to a subscriber) or
is compensated for generating leads or transactions. Advertising contracts are
generally structured to provide a fixed number of impressions on a
fee-per-impression basis without regard to a specific period of time. These
contracts tend to be short-term in nature and the Company's obligations are
typically fulfilled over a period of a few months. Strategic marketing alliance
contracts are generally structured over longer specific periods of time, ranging
from a few months to several years. Strategic marketing alliance contracts
generally provide the Company with guaranteed payments as advances against
various forms of revenue-sharing for generating leads or transactions, or for
producing and displaying impressions.
Revenues generated by advertising and strategic marketing alliance contracts
are generally recognized as earned, provided that the Company does not have any
significant remaining obligations and the collection of the resulting receivable
is probable. Remaining obligations include the fulfillment of a fixed or
guaranteed minimum number of impressions to be displayed or the achievement of
performance targets. The earnings process typically coincides with when the
impressions are displayed, leads or transactions are generated, or services
performed. To the extent that guaranteed minimum impressions or performance
targets exist for a specific time period, revenue is recognized at the lesser of
the ratio of the obligations delivered over total obligations, or on a
straight-line basis for the term of the contract. To the extent that guaranteed
minimum impressions or performance targets exist and are not met, the Company
defers recognition of the corresponding revenues until the remaining guaranteed
impressions are displayed or performance targets are achieved.
Costs associated with advertising and strategic marketing alliance
contracts, principally transmission, development, production and campaign
management costs, are expensed as incurred.
Revenues from direct product sales and delivery fees are recognized upon
shipment of products to subscribers.
Revenues are reported net of a provision for sales allowances. Sales
allowances and bad debt expenses were $9, $233 and $616 in 1996, 1997 and 1998,
respectively.
F-9
<PAGE>
JUNO ONLINE SERVICES, INC.
(FORMERLY JUNO ONLINE SERVICES, L.P. & SUBSIDIARY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT LIMITED PARTNERSHIP UNIT AND SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Deferred revenue consists of monthly and annual prepaid subscriber fees
related to billable subscription services and advertising and transaction fees
billed in advance of the performance of all or a portion of the related service.
MERCHANDISE INVENTORIES
Inventories, principally microcomputers and computer hardware and software,
are stated at the lower of cost (on a first-in, first-out basis) or market. As
of December 31, 1997 and 1998, merchandise inventories held in connection with
the Company's direct product sales initiative are presented net of reserves of
$150 and $11, respectively, for obsolete, slow moving and excess inventories.
FIXED ASSETS
Fixed assets are stated at cost, net of accumulated depreciation and
amortization, which is calculated on a straight-line basis over lives ranging
from 3 to 5 years or, for leasehold improvements, over the life of the lease, if
shorter.
LONG-LIVED ASSETS
The Company periodically evaluates the net realizable value of long-lived
assets, including fixed assets and other assets, relying on a number of factors
including operating results, business plans, economic projections and
anticipated future cash flows. In addition, the Company's evaluation considers
nonfinancial data such as market trends, product and development cycles, and
changes in management's market emphasis. An impairment in the carrying value of
an asset is recognized when the expected future operating cash flows derived
from the asset are less than its carrying value.
ADVERTISING AND SUBSCRIBER ACQUISITION COSTS
The Company accounts for advertising and subscriber acquisition costs
pursuant to Statement of Position ("SOP") 93-7, "Reporting on Advertising
Costs." Accordingly, the Company expenses all costs of advertising as incurred.
Advertising expenses for 1996, 1997 and 1998 were $6,178, $1,878 and $2,389,
respectively.
MAINTENANCE AND REPAIRS
These costs are charged to expense as incurred. Major renewals, betterments
and additions are capitalized.
PRODUCT DEVELOPMENT COSTS
The Company's product offerings are comprised of various features which
contribute to the overall functionality and are delivered through client-side
software, server-side software, and database applications which have been
principally developed internally. Software development costs include direct
labor and related overhead for software produced by the Company and the cost of
software licensed from third parties. All costs in the software development
process which are classified as research and development are expensed as
incurred until technological feasibility has been established,
F-10
<PAGE>
JUNO ONLINE SERVICES, INC.
(FORMERLY JUNO ONLINE SERVICES, L.P. & SUBSIDIARY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT LIMITED PARTNERSHIP UNIT AND SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
at which time such costs are capitalized until the software is generally
available. To date, the establishment of technological feasibility of the
Company's products and the general availability of such software have
substantially coincided. As a result, software development costs that qualify
for capitalization have been insignificant and therefore, the Company has not
capitalized any software development costs.
OPTION PLAN
On January 1, 1996, the Company adopted Statement of Financial Accounting
Standard ("SFAS") No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"), which permits entities to recognize as expense over the vesting period
the fair value of all equity-based awards on the date of grant. Alternatively,
SFAS 123 allows entities to continue to apply the provisions of Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," and provide pro forma disclosures for employee unit option grants
made in 1997 and future years as if the fair-value based method defined in SFAS
123 had been applied. The Company has elected to continue to apply the
provisions of APB Opinion No. 25 and apply the pro forma disclosure provisions
of SFAS 123.
INCOME TAXES
U.S. federal and state income taxes have not been provided because the
partners report their respective distributive share of the Company's income or
loss on their respective returns.
FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
The carrying values of the Company's cash and cash equivalents, accounts
receivable and accounts payable approximate fair value. Financial instruments
that potentially subject the Company to concentration of credit risk consist
principally of cash investments and trade receivables. The Company has limited
its cash investments to investment grade overnight securities. Credit is
extended to trade customers based on an evaluation of their financial condition.
The Company performs ongoing credit evaluations of its trade customers and
maintains an allowance for doubtful accounts. Credit risk with regard to the
sale of products and billable subscription services is mitigated by the
requirement of credit cards for purchases.
RECLASSIFICATION
Certain amounts in the prior year financial statements have been
reclassified to conform to the current year presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133 establishes new accounting and reporting standards for
derivative financial instruments and for hedging activities. As of December 31,
1998, the Company had no derivative instruments.
F-11
<PAGE>
JUNO ONLINE SERVICES, INC.
(FORMERLY JUNO ONLINE SERVICES, L.P. & SUBSIDIARY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT LIMITED PARTNERSHIP UNIT AND SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In June 1997, FASB issued SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes standards
for the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued. The statement has not had an impact on the Company's financial
statement disclosures as its financial statements reflect how the "key operating
decision makers" view the business. Accordingly, the financial statements are
presented as a single segment.
In June 1997, FASB issued SFAS No. 130, "Reporting Comprehensive Income"
("SFAS 130"). SFAS 130 establishes standards for the reporting and display of
comprehensive income and its components in the financial statements. SFAS 130 is
effective for years beginning after December 15, 1997. The statement has not had
an impact on the Company's financial statements as the Company has no other
comprehensive income to report.
In February 1997, FASB issued SFAS No. 128 "Earnings Per Share" ("SFAS
128"). SFAS 128 replaced primary and fully diluted earnings per share with basic
and diluted earnings per share. The statement makes certain modifications to the
earnings per share calculations defined in APB Opinion No. 15. SFAS 128 is
effective for years ending after December 31, 1997. The Company has adopted SFAS
128. Details pertaining to the earnings (loss) per share presentation and
calculation are included in Note 3 Earnings Per Share.
In March 1998, the American Institute of Certified Public Accountants issued
SOP 98-1 "Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use" ("SOP 98-1") which provides guidance on accounting for the
costs of computer software developed or obtained for internal use. The
pronouncement identifies the characteristics of internal use software and
provides guidance on new cost recognition principles. SOP 98-1 is effective for
financial statements for fiscal years beginning after December 15, 1998. The
adoption of SOP 98-1 will not have a significant impact on the Company's
consolidated financial position, results of operations, and cash flows.
F-12
<PAGE>
JUNO ONLINE SERVICES, INC.
(FORMERLY JUNO ONLINE SERVICES, L.P. & SUBSIDIARY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT LIMITED PARTNERSHIP UNIT AND SHARE DATA)
3. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted loss per
share.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1999
---------------------------------------------
TWO MONTHS
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MONTH ENDED
----------------------------------- ENDED FEBRUARY 28, MARCH 31,
1996 1997 1998 MARCH 31, 1999 1999 TOTAL
--------- ----------- ----------- 1998 ----------------- --------------- ---------
--------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Numerator:
Net loss............. $ (23,002) $ (33,739) $ (31,626) $ (10,590) $ (4,350) $ (2,417) $ (6,767)
Accrued dividend on
preferred stock.... (1,119)
Preferred stock
accretion.......... (53)
--------- ----------- ----------- -------------- ----------------- --------------- ---------
Net loss available to
common
stockholders....... $ (23,002) $ (33,739) $ (31,626) $ (10,590) $ (4,350) $ (3,589) $ $(6,767)
--------- ----------- ----------- -------------- ----------------- --------------- ---------
--------- ----------- ----------- -------------- ----------------- --------------- ---------
Denominator:
Weighted average
number of:
Class A limited
partnership
units............ 3,280,513 10,500,233 17,091,436 16,054,399 17,684,035
--------- ----------- ----------- -------------- -----------------
--------- ----------- ----------- -------------- -----------------
Shares of Common
Stock............ 216,911
---------------
---------------
Basic and diluted
net loss per
Class A limited
partnership
unit............. $ (7.01) $ (3.21) $ (1.85) $ (0.66) $ (0.25)
--------- ----------- ----------- -------------- -----------------
--------- ----------- ----------- -------------- -----------------
Basic and diluted
net loss per
share............ $ (16.54)
---------------
---------------
</TABLE>
Net loss per share for the three months ended March 31, 1999 is calculated
separately for the periods prior and subsequent to the March 1999 statutory
merger.
F-13
<PAGE>
JUNO ONLINE SERVICES, INC.
(FORMERLY JUNO ONLINE SERVICES, L.P. & SUBSIDIARY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT LIMITED PARTNERSHIP UNIT AND SHARE DATA)
3. EARNINGS PER SHARE (CONTINUED)
The pro forma information regarding net loss per share and weighted average
shares outstanding set forth below gives effect to the treatment of Class A
limited partnership units as shares of common stock and the conversion of Series
B Redeemable Convertible Preferred Stock for the period following the March 1999
statutory merger.
<TABLE>
<CAPTION>
THREE
MONTHS ENDED
YEAR ENDED MARCH 31, 1999
DECEMBER 31, 1998 --------------
----------------- (UNAUDITED)
<S> <C> <C>
Numerator:
Net loss................................................ $ (31,626) $ (6,767)
----------------- --------------
----------------- --------------
Denominator:
Weighted average number of:
Shares of common stock.............................. 74,746
Class A limited partnership units treated as shares
of common stock................................... 17,091,436
Redeemable Convertible Preferred Stock treated as shares
of common stock:
Series B............................................ 3,466,228
Series A (Class A limited partnership units prior to
March 1, 1999).................................... 17,684,035
----------------- --------------
Denominator for pro forma basic and diluted net loss
per share......................................... 17,091,436 21,225,009
----------------- --------------
----------------- --------------
Pro forma basic and diluted net loss per share............ $ (1.85) $ (0.32)
----------------- --------------
----------------- --------------
</TABLE>
4. FIXED ASSETS
Fixed assets consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
<S> <C> <C>
1997 1998
--------- ---------
Computers, network equipment and software.................................. $ 3,225 $ 5,672
Furniture and office equipment............................................. 197 187
Leasehold improvements..................................................... 705 772
--------- ---------
Subtotal............................................................... 4,127 6,631
Accumulated depreciation and amortization.................................. (161) (2,545)
--------- ---------
Total.................................................................. $ 3,966 $ 4,086
--------- ---------
--------- ---------
</TABLE>
Included in fixed assets is equipment acquired under capital leases,
principally network equipment, of $977 and $1,995 as of December 31, 1997 and
1998, less accumulated amortization of $13 and $859, respectively.
F-14
<PAGE>
JUNO ONLINE SERVICES, INC.
(FORMERLY JUNO ONLINE SERVICES, L.P. & SUBSIDIARY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT LIMITED PARTNERSHIP UNIT AND SHARE DATA)
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
<S> <C> <C>
1997 1998
--------- ---------
Trade accounts payable................................................... $ 2,067 $ 2,315
Personnel and related expenses........................................... 3,511 4,038
Telecommunications services.............................................. 728 1,210
Customer service expenses................................................ 230 857
Marketing expenses....................................................... 182 756
Other.................................................................... 1,559 1,990
--------- ---------
Total................................................................ $ 8,277 $ 11,166
--------- ---------
--------- ---------
</TABLE>
6. RELATED PARTY TRANSACTIONS
The Company is affiliated with a group of entities that are under control of
or are subject to substantial influence by D. E. Shaw & Co., Inc. ("DESCO,
Inc.") which is the general partner of the Company's general partner, D. E. Shaw
Development, L.P. The affiliated entity with which the Company interacts most
(due to that affiliate's role as management company for many of the entities) is
D. E. Shaw & Co., L.P. ("DESCO, L.P."). DESCO, Inc. is also the general partner
of DESCO, L.P. (Prior to March 1997, DESCO, L.P. was the general partner of D.
E. Shaw Development, L.P.) DESCO, L.P. became a limited partner of the Company
in October 1997.
During 1996 substantially all of the Company's personnel, management and
overhead services were provided by DESCO, L.P., the costs of which were
allocated to the Company on the basis of various metrics as determined by DESCO,
L.P. During that period, all of the individuals working on Company initiatives
were employed by DESCO, L.P. On February 22, 1997, substantially all of the
individuals working on Company initiatives were transferred to, and became
employees of, the Company's wholly owned subsidiary, Juno Online Services, Inc.
Subsequently, DESCO, L.P. continued to provide certain administrative and
support services to the Company, albeit in a decreased capacity. Effective
January 1, 1998, the Company entered into services agreements with DESCO, L.P.
and an affiliate of DESCO, L.P. for the provision of certain of these services
at fixed rates.
In addition, the Company entered into a services agreement with an
India-based affiliate of DESCO, L.P. DESCO, L.P. is paid a fixed monthly fee
for engineering and operations services rendered, and is reimbursed for
incidental expenses.
F-15
<PAGE>
JUNO ONLINE SERVICES, INC.
(FORMERLY JUNO ONLINE SERVICES, L.P. & SUBSIDIARY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT LIMITED PARTNERSHIP UNIT AND SHARE DATA)
6. RELATED PARTY TRANSACTIONS (CONTINUED)
These agreements extend on a month-to-month basis. Either party may
terminate the agreements for convenience at any time upon ninety days written
notice. The aggregate amounts and nature of the expenditures made by DESCO, L.P.
on behalf of the Company were as follows:
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
India-based engineering and operations expense.......................... $ -- $ -- $ 1,454
Personnel and related expenses.......................................... 5,499 1,561 521
Depreciation and leased equipment....................................... 1,140 617 --
Occupancy costs......................................................... 484 784 338
Other operating expenses................................................ 7,952 1,362 375
--------- --------- ---------
Total............................................................. $ 15,075 $ 4,324 $ 2,688
--------- --------- ---------
--------- --------- ---------
</TABLE>
The Company's balance sheet reflects $96 due from DESCO, L.P. under the
caption "Prepaid expenses and other current assets" at December 31, 1997.
ASSET PURCHASES AND TRANSFERS
Historically, the Company has utilized certain fixed assets, including
leasehold improvements, computers, telecommunications and server hardware, owned
by DESCO, L.P., the expense of which has been allocated to the Company.
Beginning in July 1997, substantially all new acquisitions of fixed assets have
been made by the Company directly.
In 1998, the Company transferred fixed assets with a net book value of $402
to DESCO, L.P.
Pursuant to an asset purchase agreement dated December 31, 1997, the Company
acquired various fixed assets from DESCO, L.P. These assets, principally
computers, equipment and network software, were originally purchased by DESCO,
L.P. on behalf of the Company. The total purchase price of the assets was
$1,202.
GENERAL PARTNER FEES AND OTHER COMPENSATION
As compensation for managing the affairs of the Company, the Company's
general partner is entitled to a monthly management fee equal to one-twelfth of
one percent of the aggregate value of all outstanding limited partnership Units
(or other property into which such Units have been converted) as of the most
recent Valuation Event (as specified in the limited partnership agreement, as
amended). In 1996, 1997 and 1998, the Company's general partner elected to waive
management fees of $49, $81 and $285, respectively.
F-16
<PAGE>
JUNO ONLINE SERVICES, INC.
(FORMERLY JUNO ONLINE SERVICES, L.P. & SUBSIDIARY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT LIMITED PARTNERSHIP UNIT AND SHARE DATA)
7. OBLIGATIONS UNDER CAPITAL LEASES
The following is a schedule, by year, of future minimum lease payments under
capital leases, together with the present value of the minimum lease payments as
of December 31, 1998:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- -------------------------------------------------------------------------------------
<S> <C>
1999................................................................................. $ 526
2000................................................................................. 460
2001................................................................................. 134
2002................................................................................. 40
2003................................................................................. 33
---------
Total minimum lease payments................................................... 1,193
Less: Amount representing interest................................................... (134)
---------
Present value of the minimum lease payments.................................... $ 1,059
---------
---------
</TABLE>
Included in total minimum lease payments above are $164 of obligations under
capital leases for network equipment that were assigned to the Company by DESCO,
L.P. As the original lessee, DESCO, L.P. remains responsible under these lease
agreements in the event of a default by the Company.
8. SENIOR NOTE
On March 31, 1998, the Company borrowed $10,000 from D. E. Shaw Securities
Group, L.P. ("Shaw Securities"), pursuant to an unsecured Senior Note (the
"Senior Note"). Shaw Securities, whose general partner is DESCO, L.P. is an
affiliate of the Company. The Senior Note, as amended, bears interest at the
Federal Funds Rate plus 0.375% (4.445% at December 31, 1998) and matures on
December 31, 2000 unless extended by Shaw Securities. The Senior Note requires
mandatory prepayments equal to 10% of certain distributions from Shaw Securities
to DESCO, L.P. As of March 1, 1999, DESCO, L.P. and Juno modified certain
support arrangements. As modified, these arrangements provide that Juno shall be
indebted to DESCO, L.P. under terms substantially similar to the Senior Note in
the event that Juno fails to make such mandatory prepayments and DESCO, L.P.
makes such payments on Juno's behalf. Under certain circumstances, DESCO, L.P.
shall receive Series B redeemable convertible preferred stock at $6.41 per share
in return for making such support payments. The Senior Note shall be repaid in
full at completion of an initial public offering by the Company registered under
the U.S. Securities Act of 1933, as amended. The Company may prepay the Senior
Note at any time, in whole or in part, without premium or penalty. Pursuant to
the Senior Note, the Company may not incur any additional indebtedness in an
aggregate principal amount greater than $1,000, excluding the acquisition of
fixed assets in the ordinary course of business.
The Company's interest expense under the Senior Note was approximately $418
for the year ended December 31, 1998.
F-17
<PAGE>
JUNO ONLINE SERVICES, INC.
(FORMERLY JUNO ONLINE SERVICES, L.P. & SUBSIDIARY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT LIMITED PARTNERSHIP UNIT AND SHARE DATA)
9. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
The Company has entered into various non-cancellable operating leases for
equipment. DESCO, L.P. has also entered into a leasing arrangement for office
space used by the Company. Substantially all of the Company's operations are
located in a single location that is leased by DESCO, L.P. The Company, which
benefits from the use of this office space, has agreed to assume performance of
DESCO, L.P.'s payment obligations under the lease to the extent the Company
occupies such office space. Minimum lease payments below include $1,875 related
to this arrangement with DESCO, L.P. Minimum lease payments as of December 31,
1998 under these operating leases and this arrangement are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- -------------------------------------------------------------------------------------
<S> <C>
1999................................................................................. $ 1,993
2000................................................................................. 110
---------
Total minimum lease payments................................................... $ 2,103
---------
---------
</TABLE>
The Company's rental expense under operating leases in the years ended
December 31, 1996, 1997 and 1998, was approximately $290, $889, and $1,070,
respectively.
The Company has committed to minimum usage levels for certain
telecommunications services. The remaining commitments are $570 and $90 for the
years ending December 31, 1999 and 2000, respectively. Telecommunications
services expense for the years ended December 31, 1996, 1997 and 1998 was
$2,655, $7,155 and $8,772, respectively.
CONTINGENCIES
Various claims and actions have been asserted or threatened against the
Company in the ordinary course of business. There are no threats, asserted
claims or actions, the outcome of which, in the opinion of management, would
have a materially adverse effect on the Company's consolidated financial
position, results of operations, and cash flows, taken as a whole.
10. PARTNERS' CAPITAL
Interests in Juno Online Services, L.P., which take the form of Units, are
comprised of Class A Units and Class B Units. Class A Units are senior to Class
B Units, and have several preferential attributes, including (i) a contingent
priority distribution feature that provides holders of Class A Units, at the end
of a Fiscal Period (as specified in the limited partnership agreement, as
amended), a priority distribution of net profits equivalent to a $0.41 per Unit
annual return (but only if the Company's general partner elects to declare a
distribution with respect to such Fiscal Period), and (ii) a preference upon
liquidation equal to $4.50 per Class A Unit (less certain distributions) plus
any declared and unpaid priority distributions. There have been no priority
distributions declared by the Company's general partner to date. The preference
payment upon liquidation is payable before proceeds of a liquidation are applied
to other holders of Units. As of December 31, 1998, an aggregate of 17,768,035
Class A Units were issued and outstanding. As of December 31, 1998, although
Class B Units are subject to the Company's 1997 Class B Unit Option/Issuance
Plan, no Class B Units had been issued.
F-18
<PAGE>
JUNO ONLINE SERVICES, INC.
(FORMERLY JUNO ONLINE SERVICES, L.P. & SUBSIDIARY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT LIMITED PARTNERSHIP UNIT AND SHARE DATA)
11. EMPLOYEE OPTION PLAN
The Company's 1997 Class B Unit Option/Issuance Plan (the "1997 Plan")
provides the Company's general partner the right to increase or decrease the
number of Class B Units that may be issued under the Plan. The number of Class B
Units issuable under the plan was increased to 3,366,667 in October 1998. Under
the 1997 Plan, non-qualified options to issue Units may be granted to all
employees of the Company and consultants as an incentive to remain in the
Company's service, among other reasons. The exercise price per Unit shall not be
less than 85% of the fair market value on the option grant date. For any 10%
owners of the Company, the exercise price per Unit shall not be less than 110%
of the fair market value on the option grant date. In general, the options vest
at a rate of 20% annually on the anniversary of the grant date and expire 10
years from the date of grant. However, in general, no options may be exercised
prior to the earlier of (i) the date that the Company converts to a corporate
form of organization or (ii) the expiration of the three year period measured
from the grant date. The initial date of grant was April 2, 1997. A grandfather
provision was made by the 1997 Plan Administrator to enable the commencement of
vesting, for employees involved with the Company prior to January 1, 1997, to
begin on the later of their employment date or January 1, 1996. For the year
ended December 31, 1998, the Company recorded unearned compensation of $762 for
options issued below deemed fair value for accounting purposes of the Company's
Class B Units. This amount is being charged to compensation expense over a five
year period (the vesting period of the options).
The following information relates to options issued to purchase Class B
Units under the 1997 Plan:
<TABLE>
<CAPTION>
CLASS B WEIGHTED AVERAGE
UNITS PRICE PER UNIT
---------- -----------------
<S> <C> <C>
Outstanding January 1, 1997.................................... -- $ -
Granted...................................................... 1,495,546 0.45
Exercised.................................................... -- -
Forfeited.................................................... (135,443) 0.45
----------
Outstanding January 1, 1998.................................... 1,360,103 0.45
Granted...................................................... 1,577,437 0.84
Exercised.................................................... -- -
Forfeited.................................................... (353,171) 0.45
----------
Outstanding December 31, 1998.................................. 2,584,369 0.67
----------
----------
</TABLE>
On December 31, 1998, the exercise price of outstanding options ranged from
$0.45 to $2.70. The weighted average remaining contractual life was 9.0 years.
The Company accounts for its equity-based compensation in accordance with
APB Opinion No. 25 and its related interpretations.
Had the Company's equity-based employee compensation been determined by the
fair-value based method of SFAS 123, the Company's net loss on a pro-forma basis
for the years ended December 31, 1996, 1997 and 1998 would have been $(23,002),
$(33,773) and $(31,723), respectively.
The Company has used the minimum value method to value the options issued.
The weighted average fair value of the options on the dates granted during 1997
and 1998 were $0.22 and $0.23, respectively. The fair value was based on a risk
free interest rate of 5%, zero dividend yield, and an expected life of 7 years.
F-19
<PAGE>
JUNO ONLINE SERVICES, INC.
(FORMERLY JUNO ONLINE SERVICES, L.P. & SUBSIDIARY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT LIMITED PARTNERSHIP UNIT AND SHARE DATA)
12. EMPLOYEE BENEFIT PLAN
The Company is a participating employer in a tax-qualified retirement plan
(the "Savings Plan") under Section 401(k) of the Internal Revenue Code. Under
the Savings Plan, participating employees may defer a portion of their pre-tax
earnings, up to the Internal Revenue Service annual contribution limit. The
Company matches 50% of each employee's contribution up to a maximum of 6% of the
employee's eligible earnings. In 1996, 1997 and 1998 the Company match was $0,
$159 and $238, respectively. Company matching payments vest over 7 years.
13. SUBSEQUENT EVENTS
STATUTORY MERGER AND CHANGE IN TAX STATUS
On March 1, 1999, Juno Online Services, L.P. and Juno Online Services, Inc.,
entities under common control, effected a statutory merger pursuant to which
Juno Online Services, L.P. was merged with and into Juno Online Services, Inc.,
in a manner similar to a pooling of interests (the "Statutory Merger"). This tax
free transaction resulted in the combination of Juno Online Services, L.P. (the
"Partnership") with its wholly owned subsidiary, Juno Online Services, Inc. such
that Juno Online Services, Inc. is the surviving entity. In connection with the
Statutory Merger, the Class A Units of the Partnership were converted into
Series A Redeemable Convertible Preferred Stock (see below), and accumulated
losses of the Partnership were reclassified to additional paid-in capital.
Prior to the Statutory Merger, U.S. federal and state income taxes have not
been provided because the partners reported their respective share of the
Company's losses on their respective returns. The Company has incurred
accumulated book losses of $92,200 through December 31, 1998. Accumulated tax
losses through to December 31, 1998 amounted to $81,101. Had the Company been
subject to corporate income taxes, it would have recorded a deferred tax asset
(estimated at an effective rate of 40%), subject to a full valuation allowance.
This pro forma net deferred tax asset (pro forma to exclude the effect of tax
losses which passed through to the former partners) is comprised of the
following:
<TABLE>
<S> <C>
Deferred revenue.................................................... $ 1,593
Start-up costs, capitalized for tax purposes........................ 1,417
Accrued expenses and other.......................................... 1,386
---------
4,396
Valuation allowance................................................. (4,396)
---------
$ --
---------
---------
</TABLE>
Deferred tax assets will be available to Juno Online Services, Inc. as the
successor company following the Statutory Merger.
ISSUANCE OF REDEEMABLE CONVERTIBLE PREFERRED STOCK
In March 1999, the Company, after giving effect to the Statutory Merger,
received $61,800 in proceeds net of $3,200 of issuance costs, for the issuance
of 10,138,716 shares of Series B Redeemable Convertible Preferred Stock ("Series
B Preferred"), $.01 par value. In addition, 17,684,035 shares of Series A
Redeemable Convertible Preferred Stock ("Series A Preferred"), $.01 par value,
were issued to the holders of Series A Partnership Units in connection with the
Statutory Merger.
Dividends are cumulative and payable at a rate of $0.64 per share per annum
with respect to the Series B Preferred and $0.41 per share per annum with
respect to the Series A Preferred. Dividends
F-20
<PAGE>
JUNO ONLINE SERVICES, INC.
(FORMERLY JUNO ONLINE SERVICES, L.P. & SUBSIDIARY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT LIMITED PARTNERSHIP UNIT AND SHARE DATA)
13. SUBSEQUENT EVENTS (CONTINUED)
cease to accrue upon a public offering of common stock in which the aggregate
net proceeds to the Company are at least $40 million (a "Qualified Public
Offering").
At any time on or after March 1, 2004, the holders of at least 66 2/3% of
the outstanding shares of Series B Preferred may require the Company to redeem
all shares of Series B Preferred. At any time after the holders of Series B
Preferred have demanded a redemption, the holders of a majority of the
outstanding shares of Series A Preferred may require the Company to redeem all
shares of Series A Preferred. The redemption price per share shall be $6.41 for
Series B Preferred and $4.50 for Series A Preferred (both as adjusted for any
stock dividends payable in shares of the respective series of Preferred Stock or
combinations or splits of Preferred Stock, plus any accrued but unpaid
dividends).
The holders of Preferred Stock shall have the right, at their option, at any
time, to convert such
shares of Preferred Stock into such number of fully paid and non-assessable
shares of Common Stock as is obtained by multiplying the number of shares of
Series B or Series A Preferred to be converted by the fraction obtained by
dividing the Original Series Issue Price ($6.41 for Series B Preferred and $4.50
for Series A Preferred) by the Applicable Conversion Price in effect on the date
the certificate is surrendered for conversion ($6.41 for Series B Preferred and
$4.50 for Series A Preferred on date of issuance, subject to future adjustment).
In the event that, at any time while any of the Preferred Stock shall be
outstanding, the Company completes a Qualified Public Offering, then all
outstanding shares of Preferred Stock shall be converted into shares of Common
Stock in accordance with the conversion calculation above.
If the Company for any reason (including the failure to have sufficient
funds available) fails to redeem on any redemption date the amount due to the
holders of Series B Preferred shall bear interest at the prime rate plus 6% per
annum, compounded annually. In addition, the holders of a majority of Series B
Preferred shall have the right, to the exclusion of the holders of Series A
Preferred or Common Stock, to elect a majority of the directors of the Company,
subject to certain conditions as specified in the Certificate of Incorporation.
Upon any liquidation of the Company, the holders of the Series B Preferred
shall be entitled, before any distribution is made upon any Series A Preferred
or Common Stock, to be paid with respect to each outstanding share of Series B
Preferred an amount equal to $1.91 per share (the "Series B Liquidation
Preference"). After holders of Series B Preferred have been paid the Series B
Liquidation Preference, the holders of Series A Preferred and the holders of
Series B Preferred shall be entitled, before any distribution is made upon the
Common Stock, to be paid with respect to each outstanding share of their
respective series of Preferred Stock an amount equal to $4.50 per share.
After the holders of Preferred Stock shall have been paid in full the
preferential amounts to which they are entitled as provided in the preceding
paragraph, the holders of Common Stock, together with the holders of Preferred
Stock, shall be entitled to share ratably according to the number of shares of
Common Stock held by them (or issuable to them upon conversion of shares of the
Preferred Stock).
Holders of Preferred Stock shall have one vote for each full share of Common
Stock into which their respective series of Preferred Stock are convertible on
the record date for the vote.
F-21
<PAGE>
JUNO ONLINE SERVICES, INC.
(FORMERLY JUNO ONLINE SERVICES, L.P. & SUBSIDIARY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT LIMITED PARTNERSHIP UNIT AND SHARE DATA)
13. SUBSEQUENT EVENTS (CONTINUED)
PRO FORMA INFORMATION (UNAUDITED)
The pro forma balance sheet as of March 31, 1999 reflects the conversion of
10,138,716 shares of Series B Redeemable Convertible Preferred Stock and
17,684,035 shares of Series A Redeemable Convertible Preferred Stock to
27,822,751 shares of common stock.
1999 STOCK INCENTIVE PLAN (UNAUDITED)
The 1999 Stock Incentive Plan (the "1999 Plan") is intended to serve as the
successor equity incentive program to the 1997 Plan. The 1999 Plan became
effective on March 26, 1999. Under the 1999 Plan, 5,768,611 shares have been
authorized subject to automatic increases in January of each year. On the
effective date, shares authorized for issuance under the 1997 Plan will be
incorporated into the 1999 Plan. No further option grants will be made under the
1997 Plan. Options outstanding under the 1997 Plan will be incorporated into the
1999 Plan.
The 1999 Stock Incentive Plan will include four programs. The first provides
for the discretionary grant of options to purchase common shares to employees,
consultants, and members of the board of directors. The second will allow
individuals to purchase shares or receive them as a bonus tied to the
performance of services. The third will allow executive officers and other
highly compensated employees to apply a portion of their salary to the
acquisition of special below-market stock option grants. The fourth program will
automatically grant options at periodic intervals to eligible non-employee board
members.
EMPLOYEE STOCK PURCHASE PLAN (UNAUDITED)
On April 19, 1999, the Board of Directors approved the 1999 Employee Stock
Purchase Plan (the "1999 ESPP"), subject to stockholder approval. A total of
555,556 shares are available to be issued under the 1999 ESPP. The 1999 ESPP
allows eligible employees to purchase shares of common stock at semi-annual
intervals, through periodic payroll deductions of up to 15% of cash earnings, as
defined. The purchase price per share is 85% of the lower of the fair market
value on the eligible employee's entry date or the fair market value on the
semi-annual purchase date. The 1999 ESPP will terminate no later than the last
business day in July 2009.
REVERSE STOCK SPLIT (UNAUDITED)
On April 19, 1999, the Company's Board of Directors authorized a reverse
stock split. Accordingly, all share data and limited partnership units have been
restated for the retroactive effect of the reverse split as if it had occurred
at the beginning of the earliest period presented.
F-22
<PAGE>
Back Cover:
[The Juno Member Profile]
The picture depicts each page of the electronic survey that Juno subscribers are
asked to complete. Each page contains questions relevant to its particular
topic. The upper left corner of the "General Account Information" page is
magnified to show certain information entered by a hypothetical Juno subscriber.
An arrow points from that close-up to the following text at the bottom of the
page:
"Detailed Information About Millions of Subscribers--All subscribers to Juno's
basic e-mail service are required to complete a detailed electronic survey
containing questions about age, gender, income, hobbies, interests, family size,
education, patters of computer use, expected purchases, and more. Advertisements
on our service may be targeted to a narrowly specified subset of our subscriber
base on the basis of any combination of Member Profile data."
[Juno Logo]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
6,500,000 SHARES
JUNO ONLINE SERVICES, INC.
COMMON STOCK
[LOGO]
--------
PROSPECTUS
MAY 25, 1999
--------
SALOMON SMITH BARNEY
BEAR, STEARNS & CO. INC.
PAINEWEBBER INCORPORATED
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
