<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 5, 1999
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
JUNO ONLINE SERVICES, INC.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 7370 13-3914547
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
--------------------------
1540 BROADWAY
NEW YORK, NEW YORK 10036
(212) 597-9000
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
----------------------------------
MR. CHARLES E. ARDAI
PRESIDENT
JUNO ONLINE SERVICES, INC.
1540 BROADWAY
NEW YORK, NEW YORK 10036
(212) 597-9000
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
----------------------------------
COPIES TO:
<TABLE>
<S> <C>
ALEXANDER D. LYNCH, ESQ. JOHN W. WHITE, ESQ.
BRIAN B. MARGOLIS, ESQ. CRAVATH, SWAINE & MOORE
BROBECK, PHLEGER & HARRISON LLP WORLDWIDE PLAZA
1633 BROADWAY, 47(TH) FLOOR 825 EIGHTH AVENUE
NEW YORK, NEW YORK 10019 NEW YORK, NEW YORK 10019
(212) 581-1600 (212) 474-1000
</TABLE>
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AGGREGATE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED PRICE(1)(2) FEE(2)
<S> <C> <C>
Common Stock, par value $.01 per share.................................................. $86,250,000 $23,978
</TABLE>
(1) Includes shares that the Underwriters have the option to purchase from the
Company solely to cover over-allotments, if any.
(2) Estimated pursuant to Rule 457(a) under the Securities Act of 1933, as
amended, solely for the purpose of computing the amount of the registration
fee.
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS
EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS
NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR
SALE IS NOT PERMITTED.
<PAGE>
SUBJECT TO COMPLETION, DATED MARCH 5, 1999
PROSPECTUS
[LOGO]
SHARES
JUNO ONLINE SERVICES, INC.
COMMON STOCK
---------------
We are selling shares of our common stock. The underwriters named in
this prospectus may purchase up to additional shares of our common stock
under certain circumstances.
This is an initial public offering of common stock. Juno Online Services,
Inc. currently expects the initial public offering price to be between $ and
$ per share, and will apply to have the common stock included for quotation
on the Nasdaq National Market under the symbol "JWEB".
------------------------
INVESTING IN THE COMMON STOCK INVOLVES CERTAIN 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 $ $
Underwriting Discount $ $
Proceeds to Juno Online Services, Inc. $ $
</TABLE>
The underwriters are offering the shares subject to various conditions. The
underwriters expect to deliver the shares to purchasers on or about
, 1999.
------------------------
SALOMON SMITH BARNEY
BEAR, STEARNS & CO. INC.
PAINEWEBBER INCORPORATED
, 1999
<PAGE>
[color artwork to be provided]
<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..................... 30
Business.................................................................................................. 43
Management................................................................................................ 56
Certain Transactions...................................................................................... 64
Principal Stockholders.................................................................................... 67
Description of Capital Stock.............................................................................. 69
Shares Eligible for Future Sale........................................................................... 73
United States Tax Consequences to Non-United States Holders............................................... 75
Underwriting.............................................................................................. 77
Legal Matters............................................................................................. 79
Experts................................................................................................... 79
Where You Can Find Additional Information................................................................. 79
Index to Consolidated Financial Statements................................................................ F-1
</TABLE>
------------------------
Until , 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 unique, tiered service strategy and easy-to-use, intuitive
interface are designed to attract a broad spectrum of mainstream 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 through a nationwide telecommunications network
that offers access, which we lease from several providers, through over 1,600
dial-up "points of presence." These points of presence 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 certain billable services, from the sale of highly targetable
interactive 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 a scalable
infrastructure 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 telecommunications connection hours. In
addition, we planned to "upsell" full Web access and other billable subscription
services to our basic e-mail users, who we believed would be more likely to
purchase such 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 6.6 million Juno accounts have been created since the launch of
our basic e-mail service in April 1996. During the month of February 1999, an
average of 943,000 distinct user accounts dialed into our service on any given
day, with a total of 2.4 million distinct user accounts connecting during the
full month of February, and 3.1 million during the three-month period ending
February 28, 1999. We launched our billable subscription services on July 22,
1998, and as of February 28, 1999, we had approximately 191,000 billable service
subscribers, consisting of approximately 76,000 subscribers to Juno Gold and
approximately 115,000 to Juno Web. The marketing of our billable subscription
services has initially been targeted at our own free e-mail subscribers. We
intend, however, to begin marketing these services beyond the existing Juno user
base during the second quarter of 1999 through a substantial external marketing
campaign.
4
<PAGE>
As of February 28, 1999, approximately 190 firms had advertised on the Juno
service. 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 $4.6 billion in 1998 to $12.6 billion in
2002. In addition, Jupiter Communications projects 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 current 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
<TABLE>
<S> <C>
Common Stock Offered................ shares
Common Stock Outstanding After this
Offering (1)...................... 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 debt 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."
Proposed Nasdaq National Market
Symbol............................ "JWEB"
</TABLE>
- ------------------------
(1) This information excludes shares of common stock issuable upon
the exercise of stock options outstanding as of , 1999, with a
weighted average exercise price of $ per share. See "Capitalization,"
"Management--1999 Stock Incentive Plan," and "Description of Capital Stock."
------------------------
"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.
------------------------
UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS: (1) REFLECTS
THE STATUTORY MERGER OF JUNO ONLINE SERVICES, L.P. WITH AND INTO JUNO ONLINE
SERVICES, INC. ON MARCH 1, 1999; (2) REFLECTS A FOR REVERSE STOCK SPLIT OF
EACH CLASS OF OUR CAPITAL STOCK TO BE EFFECTED PRIOR TO THE CLOSING OF THIS
OFFERING; (3) REFLECTS THE AUTOMATIC CONVERSION OF ALL SHARES OF REDEEMABLE
CONVERTIBLE PREFERRED STOCK INTO SHARES OF OUR COMMON STOCK UPON THE CLOSING
OF THIS OFFERING; AND (4) ASSUMES NO EXERCISE OF THE UNDERWRITERS'
OVER-ALLOTMENT OPTION. 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.
6
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
The following table sets forth certain 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 YEAR ENDED DECEMBER 31,
(JUNE 30, 1995) TO -------------------------------------
DECEMBER 31, 1995 1996 1997 1998
------------------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Billable services...................................... $ -- $ 6 $ 1,371 $ 6,645
Advertising and transaction fees....................... -- 127 1,875 6,454
Direct product sales................................... -- 3 5,845 8,595
------- ----------- ----------- -----------
Total revenues....................................... -- 136 9,091 21,694
------- ----------- ----------- -----------
Cost of revenues:
Billable services...................................... -- -- 1,053 5,606
Advertising and transaction fees....................... -- 278 1,659 3,725
Direct product sales................................... -- 3 5,796 7,627
------- ----------- ----------- -----------
Total cost of revenues............................... -- 281 8,508 16,958
------- ----------- ----------- -----------
Operating expenses:
Operations, free service............................... -- 5,803 11,075 9,383
Subscriber acquisition................................. 592 6,993 3,140 5,334
Sales and marketing.................................... 389 4,276 12,593 11,584
Product development.................................... 2,577 3,741 4,860 7,345
General and administrative............................. 275 2,172 2,897 2,726
------- ----------- ----------- -----------
Total operating expenses............................. 3,833 22,985 34,565 36,372
------- ----------- ----------- -----------
Loss from operations................................. (3,833) (23,130) (33,982) (31,636)
Interest income, net..................................... -- 128 243 44
------- ----------- ----------- -----------
Net loss............................................. $ (3,833) $ (23,002) $ (33,739) $ (31,592)
------- ----------- ----------- -----------
------- ----------- ----------- -----------
Pro forma basic and diluted net loss per share (1)....... $ (1.39)
-----------
-----------
Weighted average shares outstanding used in pro forma
basic and diluted per share calculation (1)............ 22,764
-----------
-----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------
<S> <C> <C> <C> <C>
1995 1996 1997 1998
------------------- ----------- ----------- -----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C>
SELECTED SUBSCRIBER DATA (2):
Total subscriber accounts as of (3)...................... -- 1,042 3,887 6,337
Subscriber accounts that connected in the three-month
period ended......................................... -- 1,002 2,512 3,109
Subscriber accounts that connected in the month
ended................................................ -- 823 1,986 2,434
Average subscriber accounts that connected per day in
the month ended...................................... -- 280 644 887
Billable subscription service accounts as of (4)......... -- -- -- 144
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-------------------------------------------
<S> <C> <C> <C>
PRO FORMA
ACTUAL PRO FORMA (1) AS ADJUSTED(5)
--------- --------------- ---------------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.............................................. $ 8,152 $ 69,952
Working capital (deficiency)........................................... (8,343) 53,457
Total assets........................................................... 14,703 76,503
Total indebtedness, including current maturities....................... 10,188 10,188
Redeemable convertible preferred stock................................. -- 141,378
Partners' capital (deficiency)......................................... (12,588) --
Total stockholders' equity (deficit)................................... (92,166)
</TABLE>
- ------------------------
(1) Gives pro forma effect to (a) Juno's March 1999 statutory merger and the
associated conversion of the partnership class A units into 14,468,757
shares of Series A redeemable convertible preferred stock and the
reclassification of $92,166 in accumulated partnership losses to additional
paid-in capital; and (b) the issuance of 8,295,320 shares of Series B
redeemable convertible preferred stock in March 1999 in consideration of net
proceeds of $61.8 million. See the consolidated financial statements and the
notes to such 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) Juno's free basic e-mail service was introduced in April 1996 and Juno's
billable subscription services--Juno Gold and Juno Web--were introduced in
July 1998.
(3) Includes all distinct user accounts created since Juno's inception
(regardless of activity level, if any), net of accounts that have been
cancelled.
(4) 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.
(5) Pro forma as adjusted to reflect (a) the sale of shares of common stock
offered hereby at an assumed initial public offering price of $ per share
after deducting the estimated underwriting discount and estimated offering
expenses payable by Juno and the retirement of certain debt and (b) the
automatic conversion of all outstanding shares of redeemable convertible
preferred stock into 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. THE RISKS DESCRIBED BELOW ARE NOT THE ONLY ONES FACING OUR
COMPANY. ADDITIONAL RISKS, INCLUDING THOSE NOT PRESENTLY KNOWN TO US, MAY ALSO
IMPAIR OUR BUSINESS OPERATIONS. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR,
OUR BUSINESS AND FINANCIAL RESULTS MAY SUFFER. IN SUCH CASE, THE TRADING PRICE
OF OUR COMMON STOCK COULD DECLINE AND YOU COULD LOSE ALL OR PART OF YOUR
INVESTMENT.
WE HAVE A LIMITED OPERATING HISTORY AND ARE INVOLVED IN A NEW AND RAPIDLY
EVOLVING INDUSTRY
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:
- anticipate and adapt to the changing Internet market;
- attract and retain subscribers to our free and billable services;
- generate advertising revenues and direct product sales;
- maintain and develop strategic relationships with business partners to
market their products over our Internet services;
- implement an effective marketing strategy;
- respond to actions taken by our competitors;
- generate additional sources of revenue;
- develop and deploy successive versions of the software needed to use our
services;
- operate a systems infrastructure adequate to effectively manage our growth
and provide our Internet services;
- manage the billing systems for the subscribers to our billable
subscription services; 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 AND EXPECT FUTURE LOSSES
Since our founding, we have not been profitable. We have incurred
substantial costs to create and introduce our various Internet services, to
operate these services, to build brand awareness 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, and $31.6 million for the year
ended December 31, 1998. As of December 31, 1998, our accumulated net losses
totaled $92.2 million. We incurred negative cash flows from operations of
approximately $16.4 for the year ended December 31, 1996, $33.6 for the year
ended December 31, 1997, and $20.9 for the year ended December 31, 1998. In
addition, 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
9
<PAGE>
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.
FLUCTUATIONS IN OUR OPERATING RESULTS MAY NEGATIVELY IMPACT OUR STOCK PRICE
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 nature of our marketing efforts;
- the timing and nature of any 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 system upgrades and 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 our markets;
- changes in operating expenses including, in particular, telecommunications
expenses; 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.
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.
10
<PAGE>
OUR BUSINESS MAY SUFFER IF WE HAVE DIFFICULTY ACQUIRING AND RETAINING
SUBSCRIBERS
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 our billable subscription services. We may also not succeed in retaining
subscribers to our services.
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 such 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
our billable subscription services. We are relying on such migration as a major
source of subscribers to our 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" for more information on our
marketing activities.
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, and may later discontinue using our services. Furthermore,
we may in the 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 may harm our business"
for more information concerning the competition facing our business.
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OUR MARKETING PROGRAM MAY NOT SUCCEED
We expect to use a significant portion of the proceeds from this offering
for an extensive marketing campaign. There are risks that this campaign may not
be effective in generating new subscribers directly into our billable
subscription services or into our free basic e-mail service, or in causing
subscribers to upgrade from our free basic e-mail service 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.
In addition, it is possible that, over time, it will become more difficult and
expensive to effectively market our billable subscription services 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 such advertising, 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 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. 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 such 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.
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In addition, Microsoft and Netscape, publishers of the Web browsers utilized
by most Internet users, including subscribers to Juno Web, each own or are
expected to be 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. 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 or if our advertising format is not effective" and "--We are
dependent on direct product sales and rely on a single external marketing
partner" for more information regarding our advertising and direct products
sales activities.
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. Such
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 scenarios could harm our business and financial results, and we may not
have the resources to continue to compete successfully. 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 competitive
disadvantage relative to our competitors.
WE ARE DEPENDENT ON STRATEGIC MARKETING ALLIANCES 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 that it will terminate an 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 will be 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
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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 MAY NOT BE ABLE TO KEEP PACE WITH TECHNOLOGICAL CHANGES
Our failure to respond in a timely and effective manner to new and evolving
technologies, including 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.
Our business and financial results may suffer if fundamental changes occur
in the way consumers access the Internet. 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 such 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 services. We would incur significant costs if we had to make such
modifications in order to adapt to these changes. Furthermore, any competitive
advantage that we currently realize because our technology minimizes connect
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 OR IF OUR ADVERTISING FORMAT IS NOT EFFECTIVE
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 any such increase might occur.
Our business may suffer if the market for Internet-based advertising fails to
develop or develops more slowly than
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expected. In addition, no standards have been widely accepted to measure the
effectiveness of Internet-based advertising. If such 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
such 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.
Elements of our advertising 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 could increase the time necessary to prepare an advertisement
to be displayed on our services and the costs associated with running such 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
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 such data at the time it is
provided or require subscribers to update such information thereafter.
Furthermore, individuals who subscribe directly to one of our billable
subscription services are not currently required to provide such data. Any of
the above factors could discourage advertising on our network by some
advertisers.
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.
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SEASONAL TRENDS MAY NEGATIVELY AFFECT OUR BUSINESS
Seasonal trends are likely to affect the revenues we generate from operating
our business. 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 "--Fluctuations in
our operating results may negatively impact our stock price" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" for
more information on our operating results.
WE ARE DEPENDENT ON OUR TELECOMMUNICATIONS CARRIERS
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 connections between
their personal computers and local or regional dial-up points of presence
("POPs") which we lease 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 carriers also supply the leased
lines between their telecommunications networks and our central computers
located in Cambridge, Massachusetts and Jersey City, New Jersey.
As of February 28, 1999, we had lease commitments for approximately 1,600
POPs throughout the United States. Certain POPs carry data both for our e-mail
services and for Juno Web, while other POPs carry data only for our e-mail
services or only for Juno Web. The POPs 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 POP 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 POPs that cover such areas.
Network capacity constraints at particular POPs, especially at times of peak
usage, can prevent or delay access by subscribers attempting to connect to those
POPs. Poor network performance could cause members 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 certain aspects of service quality. A natural
disaster or other unanticipated problem that affects the POPs 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 1,100 of the approximately 1,600 POPs we lease
in the United States. Furthermore,
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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 will be able to replace the services provided to us
by MCI WorldCom in the event our relationship with them were 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 POPs 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
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 such needs, we
have elected to outsource these functions to third-party vendors. We currently
use ClientLogic Corporation (formerly Softbank Services Group) for technical and
customer service support and Call Center Services, Inc. for certain
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 telemarketing services in
the event that either of our existing external providers becomes unable or
unwilling to offer such services to us.
Our most important relationship is with ClientLogic, which, at February 28,
1999, provided us with approximately 270 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 our billable subscription services, and we rely almost entirely on
ClientLogic to provide this function. At certain 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
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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 such 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 ARE DEPENDENT ON DIRECT PRODUCT SALES AND RELY ON A SINGLE EXTERNAL MARKETING
PARTNER
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; upon our
ability to select and profitably acquire and provide merchandise that is
interesting to our subscriber base; upon our ability to compete with established
retail business and other online sellers; and upon 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.
SECURITY BREACHES AND SYSTEM FAILURES COULD HARM US
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 of these
events, whether intentional or accidental, could lead to interruptions, delays
or cessation of service to our subscribers. 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 certain
persons 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. Our business and financial results could be harmed
by any damage or failure that interrupts or delays our operations. 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 any such 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.
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WE MAY NOT BE ABLE TO EFFECTIVELY MANAGE OUR GROWTH
The anticipated future growth necessary to expand our operations will place
a significant strain on our managerial, operational, financial and information
systems resources. 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 our billable
subscription service revenues, we will need to expand our marketing efforts,
increase our brand awareness, improve and expand our network infrastructure, 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, and 144 employees at
December 31, 1998. In addition, as of February 28, 1999, we also retained the
services of 47 consultants in India that are employed by an affiliate of Juno.
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 such outsourced services will continue to increase
for the foreseeable future. Our inability to manage growth effectively may cause
our business and financial results to suffer.
The demand on our network infrastructure, technical staff and technical
resources has grown rapidly with our expanding member base. We cannot be certain
that our infrastructure, technical staff and technical resources will adequately
accommodate or facilitate the anticipated growth of our member base. In
particular, if we were to experience repeated and/or prolonged system-wide
service outages, our business and financial results would suffer.
WE MAY BE HELD LIABLE FOR INFORMATION RETRIEVED FROM THE INTERNET
Our business and financial results may suffer if we incur liability as a
result of information retrieved through our services. The liability of Internet
service providers and online services companies for information available
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, publication or distribution of this information. These types of claims
have been brought, sometimes successfully, against providers of Internet
services in the past. If we become subject to such claims, we may have to spend
significant amounts of money defending ourselves and, if 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.
WE MAY BECOME SUBJECT TO BURDENSOME GOVERNMENT REGULATION
As a provider of Internet access and e-mail, we are not currently subject to
direct regulation by the Federal Communications Commission ("FCC"). 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 such providers and certain
recent events suggest that they may be successful in obtaining such treatment.
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. Changes in the regulatory environment
could decrease our revenues and increase our costs.
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
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Internet are becoming more prevalent. Such 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 dampen 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 such information. The Federal Trade Commission ("FTC") 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 such 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 bulk e-mail ("spam") 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."
OUR BUSINESS DEPENDS ON CONTINUED GROWTH OF THE INTERNET
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.
WE MAY EXPERIENCE PROBLEMS INTRODUCING NEW SERVICES AND WITH PRODUCT DEFECTS AND
DELAYS
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 such services, result in
ongoing redevelopment and maintenance costs and/or cause dissatisfaction on the
part of subscribers and advertisers. Such costs, delays or dissatisfaction could
negatively affect our business.
20
<PAGE>
The operation of our billable subscription services 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 such billing and fraud detection systems. If we encounter difficulty with the
operation of such systems, or if errors, defects or malfunctions occur in the
operation of such 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. ("DESCO, 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 certain 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 certain of these services from DESCO, L.P. We have also
relied on an affiliate of DESCO, L.P. to provide administrative services to us
in connection with our employees located in Cambridge, Massachusetts. 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. We have also entered into an agreement with DESCO, L.P. under which
its affiliates located in India provide consulting services to us. If we were no
longer able to obtain these services through DESCO, L.P. or its affiliates, we
would be required to obtain 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 the space for our corporate headquarters 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 lease were to be terminated by either DESCO,
L.P. or the landlord.
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. Such 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
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 % of our outstanding common stock
following the completion of the 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 % of our
outstanding common stock following the completion of the 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 the Company. Please see "Management" and "Principal Stockholders."
21
<PAGE>
WE MAY NOT BE SUCCESSFUL IN PROTECTING OUR INTELLECTUAL PROPERTY RIGHTS
We cannot be sure that the steps we have taken to protect our intellectual
property rights will be adequate. We have been granted three U.S. patents
covering certain aspects of our technology for the offline display of
advertisements and certain 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 such
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 such
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 such patents are asserted against us, we cannot
assure you that we will be able to obtain license rights to such patents on
reasonable terms or at all. If we are unable to obtain such 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 certain third parties to protect our proprietary technology, processes,
and other intellectual property to the extent that such 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. Such claims 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.
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.
THE YEAR 2000 PROBLEM MAY ADVERSELY AFFECT US
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 such 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, certain 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 such problems and
22
<PAGE>
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 PERSONNEL AND MAY HAVE DIFFICULTY ATTRACTING SKILLED
EMPLOYEES
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 certain other key employees could harm our business and
financial results. Our business and financial results also 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. Please see "Management" for detailed information on
our key personnel.
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 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 NEED ADDITIONAL CAPITAL IN THE FUTURE TO OPERATE OUR BUSINESS
We currently anticipate that the net proceeds of the 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 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 DECIDE TO MAKE ACQUISITIONS OR INVESTMENTS AND WE MAY EXPAND
INTERNATIONALLY
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 such 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 may also 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 certain risks inherent in doing business in
international markets, such as changes in regulatory requirements, tariffs and
other
23
<PAGE>
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.
THE FUTURE SALE OF SHARES MAY HURT OUR STOCK PRICE
If our stockholders sell substantial amounts of our common stock (including
shares issued upon the exercise of outstanding options) in the public market
following the offering, the market price of our common stock could fall. Such
sales also might make it more difficult for us to sell equity securities in the
future at a time and price that we deem appropriate. After the offering, we will
have outstanding shares of common stock. Of these shares, the shares being
offered hereby are freely tradeable. This leaves shares eligible for sale
in the public market as follows:
<TABLE>
<CAPTION>
NUMBER OF
SHARES DATE
- ------------ ----------------------------------------------------------------------------------------
<S> <C>
After the date of this prospectus
Upon the filing of a registration statement to register for resale shares of common
stock issuable upon the exercise of options granted under the 1999 Stock Incentive Plan
At various times after 90 days from the date of this prospectus
After 180 days from the date of this prospectus (subject, in some cases, to volume
limitations)
At various times after 180 days from the date of this prospectus
</TABLE>
Our directors and officers and certain of our stockholders have agreed,
subject to specified exceptions, that they will not sell, directly or
indirectly, any common stock without the prior written consent of Salomon Smith
Barney Inc. for a period of 180 days from the date of this prospectus.
In addition, we intend to register for resale the shares of
common stock reserved for issuance under the 1999 Stock Incentive Plan. We
expect such registration to become effective immediately upon filing. As of the
date of this prospectus, options to purchase a total of shares of
common stock are outstanding, of which options to purchase shares will be
immediately exercisable upon the closing of this offering. Upon exercise, these
shares and shares subject to options granted after the date hereof will be
covered by that registration and will be eligible for resale in the public
market from time to time subject to vesting and, in the case of certain options,
the expiration of lock-up agreements. These stock options generally have
exercise prices significantly below the assumed initial public offering of our
common stock. The possible sale of a significant number of these shares may
cause the price of our common stock to fall.
Certain stockholders, representing approximately shares of common stock,
have the right, subject to conditions, to include their shares in registration
statements relating to our securities. By exercising their registration rights
and causing a large number of shares to be registered and sold in the public
market, these holders may cause the price of the common stock to fall. In
addition, any demand to include such shares in our registration statements could
have an adverse effect on our ability to raise needed capital. Please see
"Management--1999 Stock Incentive Plan," "Principal Stockholders," "Description
of Capital Stock--Registration Rights," "Shares Eligible for Future Sale" and
"Underwriting."
24
<PAGE>
THERE HAS BEEN NO PRIOR MARKET FOR OUR COMMON STOCK AND WE ANTICIPATE THAT OUR
STOCK PRICE WILL BE HIGHLY 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." The stock market has experienced
extreme price and volume fluctuations. The market prices of the securities of
Internet-related companies have been especially volatile. 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 WILL HAVE BROAD DISCRETION IN USING A SUBSTANTIAL PORTION OF THE PROCEEDS
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. As a result, investors in this offering will be relying upon
management's judgment with only limited information about its specific
intentions regarding the use of 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
such forward-looking statements as a result of certain factors, including the
risk factors described above and elsewhere in this prospectus. We undertake no
obligation to update publicly any forward-looking statements for any reason,
even if new information becomes available or other events occur in the future.
25
<PAGE>
USE OF PROCEEDS
The net proceeds to us from the sale of the shares offered hereby, after
deducting the underwriting discounts and estimated offering expenses payable by
us, are estimated to be approximately $ ($ if the underwriters' over-allotment
option is exercised in full), assuming an initial public offering price of $
per share.
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 totaled $8.9 million as of February 28, 1999. This
indebtedness bears interest at the Federal Funds rate plus 0.375% (5.215% as of
February 28, 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. Pending any such use,
as described above, we intend to invest the net proceeds in interest-bearing
instruments. See "Risk Factors--We will have broad discretion in using a
substantial portion of the proceeds" and "--We may decide to make acquisitions
or investments and we may expand internationally."
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 December 31, 1998, the capitalization
of Juno (1) on an actual basis, (2) on a pro forma basis to give effect to (a)
Juno's March 1999 statutory merger and the associated conversion of the
partnership class A units into 14,468,757 shares of Series A redeemable
convertible preferred stock, and the reclassification of $92,166 in accumulated
partnership losses to additional paid-in capital, and (b) the issuance of
8,295,320 shares of Series B redeemable convertible preferred stock in March
1999 in consideration of net proceeds of $61.8 million, and (3) on a pro forma
basis as adjusted to give effect to (a) the sale of the shares offered
hereby at an assumed initial public offering price of $ per share, after
deducting the underwriting discounts and estimated offering expenses payable by
Juno, and the application of the net proceeds therefrom, and (b) the automatic
conversion of all outstanding shares of redeemable convertible preferred stock
into 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 such statements appearing elsewhere in this
prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
---------- ----------- -----------
<S> <C> <C> <C>
(IN THOUSANDS)
Total indebtedness, including current maturities............................ $ 10,188 $ 10,188
---------- ----------- -----------
Redeemable convertible preferred stock, $.01 par value:
Series B convertible preferred stock, 8,295,320 shares
authorized, issued and outstanding on a pro forma basis; none
authorized, issued or outstanding on a pro forma
as adjusted basis....................................................... -- 61,800
Series A convertible preferred stock, 14,468,757 shares
authorized, issued and outstanding on a pro forma basis; none
authorized, issued or outstanding on a pro forma
as adjusted basis....................................................... -- 79,578
Stockholders' equity (deficit) (1):
Preferred Stock, $.01 par value, 5,000,000 shares authorized; none issued
or outstanding on an actual, pro forma or pro forma as adjusted basis... -- --
Common Stock, $.01 par value, 109,909,090 shares authorized; 19 shares
issued and outstanding on a pro forma basis; and shares issued and
outstanding on a pro forma as adjusted basis (1)........................ -- --
Additional paid-in capital................................................ -- (92,166)
Partners' capital (deficiency)/Accumulated deficit........................ (12,588) --
---------- ----------- -----------
Total stockholders' equity (deficit).................................... (92,166)
----------- -----------
Total capitalization.................................................. $ (2,400) $ 59,400
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
- ------------------------
(1) This information excludes 2,108,926 shares of common stock issuable upon the
exercise of stock options outstanding as of December 31, 1998, with a
weighted average exercise price of $0.84 per share. See "Management--1999
Stock Incentive Plan," "Description of Capital Stock" and Note 10 of Notes
to Consolidated Financial Statements.
27
<PAGE>
DILUTION
The pro forma net tangible book value of Juno as of December 31, 1998, after
giving effect to Juno's March 1999 statutory merger and the associated
conversion of the partnership class A units into 14,468,757 shares of Series A
redeemable convertible preferred stock, the issuance of 8,295,320 shares of
Series B redeemable convertible preferred stock in March 1999 in consideration
of net proceeds of $61.8 million, and the automatic conversion of all
outstanding shares of preferred stock into common stock, was $ , or $ per
share of common stock. Pro forma net tangible book value per share is equal to
the amount of Juno's total tangible assets (total assets less intangible
assets), divided by the number of shares of common stock outstanding, on a pro
forma basis, as of December 31, 1998. Assuming the sale by Juno of the shares
offered hereby at an assumed initial public offering price of $ 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 December 31, 1998 would have been $ , or $ per share
of common stock. This represents an immediate increase in pro forma net tangible
book value of $ per share to existing stockholders and an immediate dilution in
pro forma net tangible book value of $ per share to new investors. The
following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............................. $
Pro forma net tangible book value per share as of December 31, 1998....... $
Pro forma increase attributable to new investors..........................
---------
Pro forma net tangible book value per share after the offering..............
---------
Pro forma dilution per share to new investors............................... $
---------
---------
</TABLE>
The following table summarizes, on a pro forma basis as of December 31,
1998, after giving effect to Juno's March 1999 statutory merger and the
associated conversion of the partnership class A units into 14,468,757 shares of
Series A redeemable convertible preferred stock, the issuance of 8,295,320
shares of Series B redeemable convertible preferred stock in March 1999 in
consideration of net proceeds of $61.8 million, and 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>
TOTAL CONSIDERATION
SHARES PURCHASED
---------------------- ------------------------ AVERAGE PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
--------- ----------- ----------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
Existing stockholders................................... % % $
New investors...........................................
--------- ----- --- ----- -----
Total............................................... 100.0% 100.0% $
--------- ----- --- ----- -----
--------- ----- --- ----- -----
</TABLE>
The foregoing tables and calculations assume no exercise of outstanding
options. At December 31, 1998, there were 2,108,926 shares of common stock
reserved for issuance upon exercise of outstanding options at a weighted average
exercise price of $0.84 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 such
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 June 30, 1995 (inception)
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.
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(JUNE 30, 1995) YEAR ENDED DECEMBER 31,
TO DECEMBER -------------------------------------
31, 1995 1996 1997 1998
----------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues:
Billable services.......................................... $ -- $ 6 $ 1,371 $ 6,645
Advertising and transaction fees........................... -- 127 1,875 6,454
Direct product sales....................................... -- 3 5,845 8,595
------- ----------- ----------- -----------
Total revenues........................................... -- 136 9,091 21,694
------- ----------- ----------- -----------
Cost of revenues:
Billable services.......................................... -- -- 1,053 5,606
Advertising and transaction fees........................... -- 278 1,659 3,725
Direct product sales....................................... -- 3 5,796 7,627
------- ----------- ----------- -----------
Total cost of revenues................................... -- 281 8,508 16,958
------- ----------- ----------- -----------
Operating expenses:
Operations, free service................................... -- 5,803 11,075 9,383
Subscriber acquisition..................................... 592 6,993 3,140 5,334
Sales and marketing........................................ 389 4,276 12,593 11,584
Product development........................................ 2,577 3,741 4,860 7,345
General and administrative................................. 275 2,172 2,897 2,726
------- ----------- ----------- -----------
Total operating expenses................................. 3,833 22,985 34,565 36,372
------- ----------- ----------- -----------
Loss from operations..................................... (3,833) (23,130) (33,982) (31,636)
Interest income, net......................................... -- 128 243 44
------- ----------- ----------- -----------
Net loss................................................. $ (3,833) $ (23,002) $ (33,739) $ (31,592)
------- ----------- ----------- -----------
------- ----------- ----------- -----------
Pro forma basic and diluted net loss per share (1)........... $ (1.39)
-----------
-----------
Weighted average shares outstanding used in pro forma basic
and diluted per share calculation (1)...................... 22,764
-----------
-----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------
<S> <C> <C> <C> <C>
1995 1996 1997 1998
----------------- ----------- ----------- -----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................................... $ -- $ 598 $ 13,770 $ 8,152
Working capital (deficiency)................................. 92 (2,004) 6,927 (8,343)
Total assets................................................. 92 4,774 20,133 14,703
Total indebtedness, including current maturities............. -- -- 795 10,188
Partners' capital (deficiency)............................... 92 (2,004) 10,504 (12,588)
</TABLE>
- ------------------------
(1) Gives pro forma effect to (a) Juno's March 1999 statutory merger and the
associated conversion of the partnership class A units into 14,468,757
shares of Series A redeemable convertible preferred stock; and (b) the
issuance of 8,295,320 shares of Series B redeemable convertible preferred
stock in March 1999 in consideration of net proceeds of $61.8 million. See
the consolidated financial statements and the notes to such 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.
29
<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 CERTAIN 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
our billable subscription services, from the sale of highly targetable
interactive 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 a scalable
infrastructure 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
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 Web-based banner impressions displayed to Juno Web
subscribers when they use our portal Web site, to which they are
automatically brought each time they 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 February 28, 1999, we had approximately 191,000
billable service subscribers, consisting of approximately 76,000 Juno Gold
subscribers and approximately 115,000 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 flat-rate plan. In marketing the
Juno Web service, we have typically offered a number of promotions,
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<PAGE>
such as a free month of service or a discounted rate for an initial period.
Revenues for these billable subscription services accounted for approximately
75.4% of billable services revenues during the fourth quarter of 1998.
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 such 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 $92.2 million from inception (June 30, 1995)
through December 31, 1998.
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.
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 such date, we had no available net operating loss
31
<PAGE>
carryforwards available for federal and state income tax purposes to offset
future taxable income, if any.
RESULTS OF OPERATIONS
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.
Such 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 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 personnel and related
overhead costs associated with
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<PAGE>
our performance of a short-term consulting engagement during 1998 and the costs
of mailing disks upon request to prospective Juno subscribers.
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 such 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 consists primarily of the transmission costs associated with
downloading advertisements to the hard drives of subscribers' computers for
later display, the personnel and related overhead 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
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. Cost of revenues for direct product sales consists
primarily of the cost of merchandise sold directly by us to our subscribers and
the associated shipping and handling costs.
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 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 providing customer service,
depreciation of network equipment, and personnel and related overhead costs.
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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 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 included certain personnel and related overhead costs.
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 such
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 expenses consist primarily of the
personnel and related overhead costs of the following departments: advertising
sales; business development; direct product sales; and billable services 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 $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 the relatively
larger 1998 revenues.
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.
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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 expenses consist
primarily of personnel and related overhead costs associated with executive,
finance, legal, recruiting, human resources and facilities functions, as well as
certain professional expenses.
General and administrative costs decreased $0.2 million, from $2.9 million
for the year ended December 31, 1997 to $2.7 million for the year ended December
31, 1998, a decrease of 5.9%. 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 to 12.6% in 1998 versus 31.9% in 1997. This percentage decrease
was primarily due to the relatively larger 1998 revenues. 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.
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<PAGE>
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.
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,
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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 certain unaudited quarterly statement of
operations data for each of the four quarters ended December 31, 1998, as well
as such 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 such statements appearing
elsewhere in this prospectus. The operating results for any quarter are not
necessarily indicative of the operating results for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------
<S> <C> <C> <C> <C>
MAR. 31, SEPT. 30, DEC. 31,
1998 JUNE 30, 1998 1998 1998
------------ ------------- ------------- ------------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Billable services.................................... $ 465 $ 709 $ 1,528 $ 3,943
Advertising and transaction fees..................... 1,228 1,540 1,759 1,927
Direct product sales................................. 2,577 2,035 1,847 2,136
------------ ------------- ------------- ------------
Total revenues................................... 4,270 4,284 5,134 8,006
------------ ------------- ------------- ------------
Cost of revenues:
Billable services.................................... 387 580 1,306 3,333
Advertising and transaction fees..................... 825 875 992 1,033
Direct product sales................................. 2,426 1,709 1,592 1,900
------------ ------------- ------------- ------------
Total cost of revenues........................... 3,638 3,164 3,890 6,266
------------ ------------- ------------- ------------
Operating expenses:
Operations, free service............................. 2,824 2,356 2,101 2,102
Subscriber acquisition............................... 1,453 427 1,067 2,387
Sales and marketing.................................. 4,270 2,884 2,212 2,218
Product development.................................. 1,835 1,630 1,849 2,031
General and administrative........................... 914 676 511 625
------------ ------------- ------------- ------------
Total operating expenses......................... 11,296 7,973 7,740 9,363
------------ ------------- ------------- ------------
Loss from operations............................. (10,664) (6,853) (6,496) (7,623)
Interest income (expense), net......................... 74 (14) 6 (22)
------------ ------------- ------------- ------------
Net loss......................................... $ (10,590) $ (6,867) $ (6,490) $ (7,645)
------------ ------------- ------------- ------------
------------ ------------- ------------- ------------
</TABLE>
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<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------
MAR. 31, SEPT. 30, DEC. 31,
1998 JUNE 30, 1998 1998 1998
------------ ------------- ------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
PERCENTAGE OF REVENUES:
Revenues:
Billable services.................................. 10.9% 16.6% 29.7% 49.3%
Advertising and transaction fees................... 28.8 35.9 34.3 24.1
Direct product sales............................... 60.3 47.5 36.0 26.6
------------ ------------- ------------- ------------
Total revenues................................... 100.0 100.0 100.0 100.0
------------ ------------- ------------- ------------
Cost of revenues:
Billable services.................................. 9.1 13.5 25.4 41.7
Advertising and transaction fees................... 19.3 20.4 19.4 12.9
Direct product sales............................... 56.8 40.0 31.0 23.7
------------ ------------- ------------- ------------
Total cost of revenues........................... 85.2 73.9 75.8 78.3
------------ ------------- ------------- ------------
Operating expenses:
Operations, free service........................... 66.1 55.0 40.9 26.2
Subscriber acquisition............................. 34.0 10.0 20.7 29.8
Sales and marketing................................ 100.0 67.3 43.1 27.7
Product development................................ 43.0 38.0 36.0 25.4
General and administrative......................... 21.4 15.8 10.0 7.8
------------ ------------- ------------- ------------
Total operating expenses......................... 264.5 186.1 150.7 116.9
------------ ------------- ------------- ------------
Loss from operations............................. (249.7) (160.0) (126.5) (95.2)
Interest income (expense), net....................... 1.7 (0.3) 0.1 (0.3)
------------ ------------- ------------- ------------
Net loss......................................... (248.0)% (160.3)% (126.4)% (95.5)%
------------ ------------- ------------- ------------
------------ ------------- ------------- ------------
</TABLE>
The following table sets forth certain selected subscriber data for each of
the four quarters ended December 31, 1998. 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,
SELECTED SUBSCRIBER DATA (1): MAR. 31, 1998 JUNE 30, 1998 1998 1998
- ------------------------------------------------------ -------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Total subscriber accounts as of (2)................... 4,699,000 5,298,000 5,852,000 6,337,000
Subscriber accounts that connected in the
three-month period ended.......................... 2,924,000 3,032,000 3,121,000 3,109,000
Subscriber accounts that connected in the month
ended............................................. 2,340,000 2,361,000 2,409,000 2,434,000
Average subscriber accounts that connected per day
in the month ended................................ 889,000 836,000 889,000 887,000
Billable subscription service accounts as of (3)...... -- -- 64,000 144,000
</TABLE>
- ------------------------
(1) Juno's free basic e-mail service was introduced in April 1996 and Juno's
billable subscription services--Juno Gold and Juno Web--were introduced in
July 1998.
(2) Includes all distinct 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.
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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--Fluctuations in
our operating results may negatively impact our stock price."
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 in the third and fourth calendar quarters. 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 primarily due to the startup costs associated with the
introduction of billable subscription services, the relatively high percentage
of subscribers to such services who are in their initial months, 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.
Operating expenses decreased in the second quarter due to reduced subscriber
acquisition activities, and in the second and third quarters due to savings
resulting from the narrowing of our direct product sales activities, the closing
of regional sales offices, and certain cost containment programs. Operating
expenses increased in the fourth quarter principally because of increased
spending initiated during the third quarter related to subscriber acquisition.
The increase in such 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. We anticipate significant
increases in subscriber acquisition expenses. See "Use of Proceeds." We
anticipate that such 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% (5.215% as of February
28, 1999). Outstanding principal and any accrued but unpaid interest is required
to be paid upon the earlier of (1) December 31, 2000 and (2) 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 February 28, 1999, the
balance, including accrued interest, of the note was $8.9 million. See "Use of
Proceeds."
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.
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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 certain fixed assets owned by DESCO,
L.P., 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 $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.
In March 1999, we received net proceeds of $61.8 million in exchange for our
issuance of 8,295,320 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.
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 certain 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. In March 1999, we spent $10.0 million for advertising that may be used at
any time prior to March 2001. 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 may need
additional capital in the future to operate our business."
IMPACT OF THE YEAR 2000
The Year 2000 ("Y2K") issue is the result of computer programs being written
using two digits (rather than four) to identify a given year. Computer programs
that have time-sensitive software may interpret the date code "00" as the year
1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in other normal business activities. We maintain a significant number of
computer software programs and operating systems across our entire organization,
including applications used in operating the Juno service and various
administrative and billing functions, all of which are potentially subject to
Y2K problems.
Our Y2K project is divided into four sections: Juno product software, Juno
product hardware, infrastructure, and external agents. Phases common to all
sections are: preparing inventory of all software and hardware items affected by
the Y2K issue; assessing the Y2K compliance of identified
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items; repairing or replacing items that are determined not to be Y2K compliant;
testing items; and creating contingency plans.
The Juno product software section includes all software directly used by
subscribers in connection with our free basic e-mail service and/or our billable
subscription services. We estimate that as of February 28, 1999, 75% of this
software had been assessed for Y2K compliance. The software repair and testing
phases began in September 1997. Since our subscribers use several versions of
our software, we must evaluate and possibly repair and then test each such
version. We estimate that these phases will be completed by September 30, 1999.
The assessment phase will be repeated periodically through January 2000 to
verify that any changes made to our existing software do not bring any of our
software components (client, server, or database) out of Y2K compliance. The
repair and testing steps will be repeated as necessary depending on the outcome
of the periodic assessments. Both phases are dependent on the availabilty of Y2K
compliant versions of software from some external vendors. Approximately 2% of
our active subscribers use older versions of our software which we have no plans
to evaluate. If our testing uncovers any major Y2K compliance issues in any
widely used versions of our software, it may be necessary for us to upgrade all
affected active subscribers to a newer version of our software which is Y2K
compliant. Subscribers who have not used our service for an extended period of
time need not be upgraded unless they resume activity using a version of our
software that is not Y2K compliant. Prospective subscribers may be unable to
sign up for our services from disks containing such non-compliant software. We
may need to ship our subscribers a compliant version of our software if they
contact us.
The Juno product hardware section includes the hardware that we use directly
in connection with our free basic e-mail service and/or our billable
subscription services. We estimate that as of February 28, 1999, the inventory
phase of this section was 80% complete. We estimate that as of February 28,
1999, the Y2K compliance assessment phase was 70% complete, and we expect this
phase to be completed by September 30, 1999. The repair/replacement phase and
testing phase are both expected to be completed by October 1999, although both
phases are dependent on the availability of Y2K compliant material from some
external vendors.
The infrastructure section consists of hardware and software used by our
staff in the course of operating our business, other than Juno product hardware
and software. We estimate that as of February 28, 1999, the inventory phase of
this section was 90% complete. We estimate that as of February 28, 1999, the Y2K
compliance assessment phase was 70% complete, and we expect this phase to be
completed by September 30, 1999. The repair/replacement phase and testing phase
are both expected to be completed by October 1999, although both phases are
dependent on the availability of Y2K compliant versions of certain software and
hardware.
The external agents section includes all other hardware, software and
related systems provided by third parties and on which we rely. Beginning in the
third quarter of 1998, we undertook the process of identifying and prioritizing
critical suppliers at the direct interface level and communicating with them
about their plans and progress in addressing the Y2K problem. Detailed
evaluations of certain third parties with whom we have significant relationships
have been initiated. We estimate that this section was 30% completed as of
February 28, 1998. The process of evaluating these external agents is scheduled
to be completed by September 30, 1999, with follow-up reviews scheduled through
the remainder of 1999.
We expect that our employees will perform all significant work for the Y2K
project described above. We do not anticipate hiring any additional employees
nor do we anticipate incurring any significant consulting expenses for the Y2K
project. The cost of software tools and consulting expenses used for detection
of Y2K problems is not currently expected to exceed $100,000.
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Contingency planning has not yet begun for all sections, but we expect
preliminary contingency plans to be completed by September 30, 1999. Ongoing
contingency planning will be conducted as feedback received from third parties
necessitates.
The failure to correct a material Y2K problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect our results of
operations, liquidity and financial condition, and subject us to the risk of
litigation. Due to the general uncertainty inherent in the Y2K problem,
resulting in part from the uncertainty of the Y2K readiness of third-party
suppliers and customers, we are unable to determine at this time whether the
consequences of Y2K failures will have a material impact on our results of
operations, liquidity or financial condition.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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, Juno had no
derivative instruments.
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 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 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 Juno's financial statements as Juno 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 the Accounting Principles Board
Opinion No. 15 "Earnings Per Share". SFAS 128 is effective for years ending
after December 31, 1997. Juno has adopted SFAS 128 with respect to pro forma
earnings per share. Pro forma net loss per share is computed by dividing the net
loss by the sum of the weighted average number of shares of common stock
outstanding and the shares resulting from the assumed conversion of all
outstanding shares of convertible preferred stock. Options have been excluded
from the calculation of loss per share because to include them would be
antidilutive.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("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 Juno's
consolidated financial position, results of operations and cash flows.
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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 unique, tiered service strategy is designed to attract a broad spectrum
of mainstream users as they begin to make the Internet a part of their lives,
including those who are interested only in e-mail, those who initially begin
with e-mail but over time develop a need or desire for Web access, and those who
seek full Web access from the outset.
With an eye toward the needs and preferences of the mainstream consumer, we
offer an easy-to-use interface with an intuitive "look-and-feel." Our services
are provided through a nationwide telecommunications network that offers access,
which we lease from several providers, through over 1,600 dial-up "points of
presence" ("POPs"). These POPs 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 certain billable
services, from the sale of highly targetable interactive 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 a scalable infrastructure
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 (a) the sale of highly targetable
interactive advertising and the direct marketing of products to our subscribers,
and (b) the "upselling" of full Web access and other billable subscription
services to our basic e-mail users. We believed our basic e-mail users would be
more likely to purchase such 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 telecommunications connection hours.
In July 1998, we commenced the second phase of our business strategy by
introducing two additional service levels: an enhanced e-mail service and full
Web access. 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
interface 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 from
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 6.6 million Juno
accounts created since the launch of the basic e-mail service in April 1996.
During the month of February 1999, an average of 943,000 distinct user accounts
dialed into our service on any given day, with a total of 2.4 million distinct
user accounts connecting during the full month of February, and 3.1 million
distinct user accounts connecting during the three-month period ended February
28, 1999. We launched our billable subscription services on July 22, 1998, and
as of February 28, 1999, we had approximately 191,000 billable service
subscribers, consisting of approximately 76,000 Juno Gold subscribers and
approximately
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115,000 Juno Web subscribers. The marketing of our billable subscription
services has initially been targeted at our own free e-mail subscribers. We
intend, however, to begin marketing our billable subscription services beyond
the existing Juno user base during the second quarter of 1999 through a
substantial external marketing campaign.
In addition to fees payable by subscribers to our billable subscription
services, we derive revenues from highly targetable interactive advertising. As
of February 28, 1999, approximately 190 firms had advertised on the Juno
service. 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, which are 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
$4.6 billion in 1998 to $12.6 billion in 2002.
ADVERTISING REVENUES. Jupiter Communications projects that online
advertising expenditures will grow from an estimated $1.9 billion in 1998 to
$7.7 billion in 2002.
DIRECT PRODUCT SALES. Forrester Research has estimated that online sales
for retail goods other than automobiles totaled $4.8 billion in 1998, and
projects that such 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 mainstream consumers who are just now beginning to explore the Internet
("later adopters"). The needs and preferences of this large and rapidly growing
body of later adopters are likely to differ significantly from those of
technically sophisticated early Internet users and computer hobbyists ("early
adopters"). 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 mainstream 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.
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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 Microsoft
Windows-standard 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 the graphical file attachment 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.
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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 certain 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
customer contact hours, 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 mainstream consumers, 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 "bundling" of our software with personal computers and other
technology products; paid Web advertising; the bartering of advertising on the
Juno system for subscriber acquisition 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 CURRENT 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 such internal "upselling" 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 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 such 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.
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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 certain 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 such 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 very flexible in responding to subscriber demand
for higher-speed access and other types of improved service. In particular, as
digital subscriber line ("DSL") technology, 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 a systems infrastructure that
has 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 certain 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 connections between their personal
computers and local or regional POPs which we lease 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
carriers also supply the leased lines between their telecommunications networks
and our central computers, which are located in Cambridge, Massachusetts and
Jersey City, New Jersey. We currently have lease commitments for over 1,600 POPs
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 hard disk drive 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.
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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 client software supporting this
service has been pre-loaded into certain personal computers manufactured
by IBM, Compaq, and Gateway, among others, and has been bundled along with
certain 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]
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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 such 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 inside the Juno
interface 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 and
retaining subscribers."
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 selectively targeted 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 home
and portal pages that we make available to our Juno Web subscribers.
As of February 28, 1999, approximately 190 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 within the Juno e-mail client interface:
- BANNER ADS, which are displayed in the upper right-hand corner of the main
Juno interface 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.
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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 will become operative 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. Our multi-year agreement with Qwest 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 strategic alliance with The Hartford
reimburses our marketing expenses and provides 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 such a 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 certain payments to the other
party.
SELECTED ADVERTISING CUSTOMERS AND STRATEGIC MARKETING PARTNERS
As of February 28, 1999, approximately 190 advertisers and strategic
marketing partners had advertised on Juno, including those listed below.
Allstate
American Airlines
American Express
Ameritrade
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
First Union
First USA
Grolier
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Hoechst Marion Roussel
IBM
Intel
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
Philips Electronics
PKWARE
Platinum Capital Group
PowerQuest
Procter & Gamble
Protection One
Qwest Communications
Ralston Purina
Reed Elsevier
Sheraton Hotels and Resorts
Sierra Online
Stock Smart
Symantec
SyQuest
The Hartford
The Learning Company
The Signature Group
U.S. Army
View Sonic
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 such 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 within their respective
domains.
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
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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 such 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
expected to be 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.
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
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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. Such 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 may harm
our business."
GOVERNMENT REGULATION
Providers of Internet access and e-mail services are not subject to direct
regulation by the FCC, 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 such
providers and certain recent events suggest that they may be successful in
obtaining such treatment. 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. Such 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 dampen 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 such information. The FTC 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 such 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
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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 bulk e-mail ("spam") 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--We
may become subject to burdensome regulation."
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 such 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 certain third parties to protect proprietary technology, processes, and
other intellectual property to the extent that such 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.
EMPLOYEES
As of February 28, 1999, we employed 147 people, of whom 68 were in
operations, sales and marketing, and customer support; 52 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 February 28, 1999, we also retained the services of 47 consultants
based in Hyderabad, India who are 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 are provided to us
under an
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agreement with DESCO, L.P. Certain of our back-office support functions are
provided to us by employees of DESCO, L.P. Please see "Certain Transactions" for
more information.
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 and in
Washington, D.C. 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 offices in New York and
Cambridge.
LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The directors, executive officers and key employees of Juno, and their ages
and positions as of March 5, 1999, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------- --- ------------------------------------------------------------------
<S> <C> <C>
Charles E. Ardai*...................... 29 President and Director
Robert H. Cherins*..................... 58 Executive Vice President, Sales and Marketing
Mark A. Moraes*........................ 33 Executive Vice President, Technology
Richard M. Eaton, Jr.*................. 38 Chief Financial Officer and Treasurer
Matthew H. Battles..................... 25 Senior Vice President, Product Development
Jordan S. Birnbaum..................... 27 Senior Vice President, Business Development
Richard D. Buchband.................... 35 Senior Vice President and General Counsel
V. S. Mani............................. 34 Senior Vice President, Database Systems
Peter D. Skopp......................... 28 Senior Vice President, Network Development
Walter Ward............................ 49 Senior Vice President, Advertising Sales
David E. Shaw.......................... 47 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. 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
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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.
MATTHEW H. BATTLES has served as Juno's Senior Vice President, Product
Development since February 1998. He served as a Vice President of Juno from
February 1997 to February 1998, with responsibility for Juno's e-commerce
activities. From October 1996 to February 1997, Mr. Battles headed Juno's
telecommunications group after serving in numerous marketing and product
management roles. Mr. Battles joined Juno in September 1995. In May 1995, Mr.
Battles graduated CUM LAUDE from Yale University.
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 private practice 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
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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.
WALTER WARD has served as Juno's Senior Vice President, Advertising Sales
since October 1997. From September 1996 until October 1997, Mr. Ward served as
Senior Vice President at Simmons Market Research Bureau, a leading research firm
in the magazine publishing and advertising industry. From August 1995 until
September 1996, Mr. Ward was self-employed as a sales and marketing consultant
to the financial services industry. From March 1992 until August 1995, Mr. Ward
was the Publisher of PARENTS magazine, and before that, of OUTDOOR LIFE. He has
also held advertising sales positions at MCCALL'S, PEOPLE, and READERS' DIGEST.
Mr. Ward attended the Virginia Military Institute and Case Western Reserve
University.
DAVID E. SHAW has 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 & 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
May 1998, Mr. Ryeom has been a Vice President of Prospect Street Ventures, a
venture capital firm focused on information technology investments. 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.
DIRECTORS' TERMS
The board of directors is 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 such class will be elected for three-year terms
at the annual meeting of stockholders in the year in which such term expires.
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BOARD COMMITTEES
The Audit Committee of the board of directors will be established prior to
the closing of this offering and will review, act on and report 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 Compensation Committee of the board of directors will be established
prior to the closing of this offering and will recommend, review and oversee 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.
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. Under our
1999 Stock Incentive Plan each individual who is serving as a non-employee
member of the board of directors on the date that the underwriting agreement
relating to this offering is executed will automatically receive a grant of an
option on that date to purchase shares of common stock, provided such
individual has not previously been employed by Juno or any parent or subsidiary
corporation. Each individual who first becomes a non-employee member of the
board of directors at any time thereafter will be granted an option to purchase
shares of common stock on the date such individual joins the board of
directors, provided such individual has not previously been employed by Juno or
any parent or subsidiary corporation. In addition, on the date of each annual
stockholders' meeting beginning in 2000, each non-employee member of the board
of directors will automatically be granted an option to purchase shares of
common stock, provided such individual has served as a non-employee member of
the board of directors for at least six months. Please see "--1999 Stock
Incentive Plan".
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Juno did not have a Compensation Committee during 1998. During 1998, Dr.
Shaw and Mr. Ardai made decisions relating to compensation of Juno's executive
officers, except that Mr. Ardai did not participate in discussions regarding his
own compensation.
EMPLOYMENT, SEVERANCE AND OTHER ARRANGEMENTS
Juno has entered into an employment agreement with Charles E. Ardai, dated
September 2, 1998, which may be terminated by either party upon 30 days notice.
The agreement provides that Mr. Ardai will receive a base salary of $300,000 for
calendar year 1998 and will be eligible to receive a bonus at the sole
discretion of the Chairman of the Board of Directors. Subsequent to calendar
year 1998, Mr. Ardai's base salary and bonus amount may be increased, decreased
or eliminated in the sole discretion of the Chairman of the Board of Directors.
Juno has entered into an employment agreement with Robert H. Cherins, dated
June 10, 1998, which may be terminated by either party upon 30 days notice. The
agreement, which incorporated the terms of a letter agreement dated November 20,
1996, provides, for calendar year 1998, that Mr. Cherins will receive a base
salary of $150,000 and a bonus of not less than $300,000. The agreement also
provides that Mr. Cherins is to receive a non-refundable advance in the amount
of $200,000 per year, to be paid semi-monthly, which is to be deducted against
the bonus amount paid for 1998. Subsequent to calendar year 1998, 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 the President 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
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<PAGE>
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 such
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, 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. The agreement provides that Mr. Eaton will receive a base salary of
$125,000 for calendar year 1998 and will be eligible to receive a bonus in the
sole discretion of the President of Juno. The agreement also provides that Mr.
Eaton is to receive a non-refundable advance in the amount of $30,000 per year,
to be paid semi-monthly, which is to be 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 certain rights to certain officers in the event that
they are terminated without cause or in the event that they voluntarily resign
following (1) a material reduction in their duties and responsibilities or cash
compensation or (2) a relocation of their place of employment.
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EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to, earned by or
paid to Juno's President and the other three executive officers of Juno whose
annual salary and bonus exceeded $100,000 in 1998 (the "Named Executive
Officers") 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 $ -- 195,310
President
Robert H. Cherins.................................................... $ 150,000 $ 300,000 14,400
Executive Vice President,
Sales and Marketing
Mark A. Moraes (2)................................................... $ 150,000 $ 200,000 113,892
Executive Vice President,
Technology
Richard M. Eaton, Jr................................................. $ 125,000 $ 90,000 52,830
Chief Financial Officer and
Treasurer
</TABLE>
- ------------------------
(1) In accordance with the rules of the Securities and Exchange Commission (the
"Commission"), other compensation in the form of perquisites and other
personal benefits has been omitted for the Named Executive Officers because
the aggregate amount of such perquisites and other personal benefits
constituted less than the lesser of $50,000 or 10% of the total of annual
salary and bonuses for each of such Named Executive Officers in 1998.
(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.
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OPTION GRANTS IN LAST YEAR
The following table sets forth certain information regarding options granted
to the Named Executive Officers during the year ended December 31, 1998. Juno
has not granted any stock appreciation rights.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS(1) VALUE AT ASSUMED
------------------------------------------------------------ ANNUAL RATES
NUMBER OF OF STOCK PRICE
SECURITIES APPRECIATION
UNDERLYING % OF TOTAL EXERCISE FOR OPTION TERM(3)
OPTIONS OPTIONS GRANTED TO PRICE EXPIRATION ---------------------
NAME GRANTED EMPLOYEES IN 1998(2) PER SHARE DATE 5% 10%
- ------------------------------------------ ----------- --------------------- ----------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Charles E. Ardai.......................... 154,837 12.0% $ 0.55 02/16/08 $ 53,557 $ 135,724
40,473 3.1 1.65 10/04/08 41,998 106,431
Robert H. Cherins......................... 2,800 0.2 0.55 02/16/08 968 2,454
11,600 0.9 1.65 10/04/08 12,037 30,504
Mark A. Moraes............................ 49,079 3.8 0.55 02/16/08 16,976 43,021
64,813 5.0 1.65 10/04/08 67,255 170,437
Richard M. Eaton, Jr...................... 21,152 1.6 0.55 02/16/08 7,316 18,541
31,678 2.5 1.65 10/04/08 32,872 83,303
</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) In the year ended December 31, 1998, Juno Online Services, L.P. granted
options to purchase units, which converted into options to purchase
1,290,596 shares of common stock following the merger with Juno Online
Services, Inc.
(3) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. The 5% and
10% assumed annual rates of compounded stock price appreciation are mandated
by rules of the Commission and do not represent Juno's estimate or
projection of Juno's future common stock prices. These amounts represent
certain assumed rates of appreciation in the value of Juno's common stock
from the fair market value 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.
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AGGREGATED OPTION EXERCISES IN THE YEAR ENDED DECEMBER 31, 1998 AND YEAR-END
OPTION VALUES
The following table sets forth certain information concerning the number and
value of unexercised options held by each of the Named Executive Officers at
December 31, 1998. None of the Named Executive Officers exercised options during
the year ended December 31, 1998.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS
DECEMBER 31, 1998(1)(2) AT DECEMBER 31, 1998(3)
-------------------------- --------------------------
<S> <C> <C> <C> <C>
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------------------------- ----------- ------------- ----------- -------------
Charles E. Ardai.......................................... 59,695 284,853 $ 180,876 $ 816,854
Robert H. Cherins......................................... 59,695 103,943 180,876 301,364
Mark A. Moraes............................................ 19,899 143,740 60,294 363,412
Richard M. Eaton, Jr...................................... 7,960 64,770 24,119 161,036
</TABLE>
- ------------------------
(1) See "--1999 Stock Incentive Plan" and "Principal Stockholders."
(2) 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.
(3) There was no public trading market for the common stock of Juno as of
December 31, 1998. The fair market value on December 31, 1998 was determined
by the board of directors to be $3.58 per share.
1999 STOCK INCENTIVE PLAN
Juno intends to adopt the 1999 Stock Incentive Plan (the "1999 Plan"), which
is intended to serve as the successor equity incentive program to the Company's
existing 1997 Class B Unit Option/Issuance Plan (the "Predecessor Plan"). The
1999 Plan will become effective upon its adoption by the Board of Directors and
ratification by the stockholders. shares of Common Stock will initially be
authorized for issuance under the 1999 Plan. This initial share reserve will be
comprised of (1) the shares which remain available for issuance under the
Predecessor Plan on the effective date of the 1999 Plan, including the shares
subject to outstanding options thereunder, plus (2) an additional increase of
shares. In addition, 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 % 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 shares. However, in no event
may any one participant in the 1999 Plan receive option grants or direct stock
issuances for more than shares in the aggregate per calendar year.
Outstanding options under the Predecessor Plan will be incorporated into the
1999 Plan upon the date of this Offering, and no further option grants will be
made under the Predecessor Plan. The incorporated options will continue to be
governed by their existing terms, unless the Plan Administrator elects to extend
one or more features of the 1999 Plan to those options.
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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 limited partnership form to C
corporation form through the statutory merger described above. As part of the
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 8,259,320 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.
Assuming that this offering results in net proceeds to Juno of at least
$40.0 million, the outstanding shares of Series A redeemable convertible
preferred stock and Series B redeemable convertible preferred stock will
automatically convert to an aggregate of 22,764,077 shares of our common stock
upon completion of this offering.
SHARED SERVICES
Historically, Juno has contracted with DESCO, L.P. for the provision of
certain administrative services to Juno. 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 certain 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. Effective
January 1, 1998, Juno and DESCO, L.P. entered into an alternative arrangement
governed by a services agreement (the "Services Agreement"). Under the Services
Agreement, DESCO, L.P. has agreed to provide administrative and other services
for Juno in a specified set of service categories, in return for a stipulated
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 the following administrative services by DESCO, L.P.: (1)
telecommunications services, (2) personnel-related services, including for
401(k) and other benefit plans and workers compensation insurance, (3) occupancy
services for Juno personnel working in facilities maintained by DESCO, L.P. (but
only through April 16, 1998), (4) miscellaneous administrative services, (5)
certain professional services, (6) certain purchasing services, and (7) certain
information technology services. 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 (1) at any time upon written notice to the
other party following a material default by such other party which remained
uncured for 30 days or (2) at any time upon 90 days written notice to the other
party. Juno believes that the amounts charged to it under the Services Agreement
represent the fair market value of the services it receives. We do not have any
current plans to terminate the Services Agreement.
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<PAGE>
Effective November 1, 1997, Juno and DESCO, L.P. entered into a services
agreement (the "India Agreement") pursuant to which DESCO, L.P., through certain
affiliates based in India, has agreed to provide various consulting services to
Juno. Pursuant to the terms of the India Agreement, DESCO, L.P. shall provide
(1) technical consulting services, including design, programming and testing of
hardware and software, (2) non-technical consulting services, including
advertising production services, customer support, data analysis and reporting
and (3) other consulting services agreed to by the parties. Under the India
Agreement, DESCO, L.P. is required, in consultation with Juno, to determine the
staffing it requires to perform the consulting services being provided to us.
Each staff member who performs consulting services under the India Agreement is
categorized as either a technical consultant or a non-technical consultant. In
addition to reimbursing DESCO, L.P. for certain expenses, such as certain travel
costs and satellite link charges, we are required to pay DESCO, L.P. $3,650 per
month for each technical consultant and $2,300 per month for each non-technical
consultant. The term of the India Agreement extends on a month to month basis
until terminated by either party. The India Agreement may be terminated by
either party (1) at any time upon written notice to the other party following a
material default by such other party which remained uncured for 30 days or (2)
at any time upon 90 days written notice to the other party. Juno is currently
contemplating the termination of the India Services Agreement and the
restructuring of the manner in which we obtain the services currently provided
under that agreement.
We employ a small number of personnel in Cambridge, Massachusetts, primarily
for the purpose of maintaining Juno server equipment that is located in a
machine room maintained by D. E. Shaw Financial Technology, L.P. ("DESFT"), 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 an allocated basis through the use of certain
allocation formulas. Effective January 1, 1998, Juno and DESFT entered into a
services agreement (the "Cambridge Agreement") under which DESFT has agreed to
provide certain information technology, telecommunications, occupancy, and
related administrative services to us, in return for a stipulated monthly fee of
$11,500. The term of the Cambridge Agreement extends on a month to month basis
until terminated by either party. The Cambridge Agreement may be terminated by
either party (1) at any time upon written notice to the other party following a
material default by such other party which remained uncured for 30 days or (2)
at any time upon 90 days written notice to the other party. DESFT is in the
process of selling certain of its assets to a third party. We do not expect this
sale to materially harm our business. We may be required, however, to relocate
our Cambridge operations within the near future. We believe that we would be
able to locate alternative facilities on equivalent terms without interruption
of service.
TRANSACTIONS WITH NEWS CORPORATION
Juno has entered into an agreement with News America Incorporated, an
affiliate of News Corporation, to purchase various forms of advertising on media
properties to be made available to us by 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.
LEASE
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. through the use of allocation formulas
related to Juno's proportional use of this space. In November 1997, Juno
relocated its New York-based staff to a single floor at 1540 Broadway leased
from Bertelsmann Property, Inc. (the "Landlord") under an Agreement of Lease
(the "Lease") dated September 22, 1997 between DESCO, L.P., as lessee, and the
Landlord. The Lease permits DESCO, L.P.
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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 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 the Landlord on or prior to July 1, 1999. If DESCO, L.P.
terminates the Lease under this provision, DESCO, L.P. must make certain
payments to the Landlord, including reimbursing the Landlord for rent that was
abated at the start of the Lease. The Lease provides the Landlord the right to
terminate the Lease effective January 1, 2000, if the Landlord delivers a notice
of termination to DESCO, L.P. on or prior to April 1, 1999. If the Landlord
terminates the Lease under this provision, the Landlord must make certain
payments to DESCO, L.P., including reimbursing DESCO, L.P. for the unamortized
portion of DESCO, L.P.'s improvements to the premises. If the Landlord 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 such lease would be as
favorable to Juno as the Lease.
INDEBTEDNESS TO RELATED PARTIES
Juno has incurred certain 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. ("Shaw
Securities") a senior note (the "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 (1) December 31,
2000 or (2) 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 certain mandatory prepayments (the "Mandatory Prepayments") to
Shaw Securities in the event that Shaw Securities pays certain fees that are
independently owed to DESCO, L.P. On March 31, 1998, Shaw Securities and DESCO,
L.P. entered into a support agreement (the "Support Agreement") pursuant to
which DESCO, L.P. agreed to pay Shaw Securities in the event that Juno fails to
make any Mandatory Prepayments.
As of February 28, 1999, the outstanding principal and interest under the
Senior Note was $8.9 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."
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the common stock as of March 4, 1999, and as adjusted to
reflect the sale of the shares of common stock offered hereby, by (a) each
person (or group of affiliated persons) who is known by Juno to beneficially own
5% or more of the common stock, (b) each director and Named Executive Officer of
Juno, and (c) all directors and executive officers of Juno as a group.
The following table gives effect to the shares of common stock issuable
within 60 days of March 4, 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 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)............................................... 14,181,348 62.3%
D. E. Shaw Development, L.P.(2)................................. 8,805,818 38.7
D. E. Shaw & Co., L.P. (3)...................................... 5,184,601 22.8
News America Incorporated (4)................................... 2,565,162 11.3
Edward J. Ryeom (5)............................................. 638,100 2.8
Louis K. Salkind................................................ 136,213 * *
Charles E. Ardai (6)............................................ 120,511 * *
Robert H. Cherins (7)........................................... 60,255 * *
Mark A. Moraes (8).............................................. 39,664 * *
Richard M. Eaton, Jr. (9)....................................... 12,191 * *
All directors and executive officers as a group
(7 persons) (10).............................................. 15,188,282 66.0
</TABLE>
- ------------------------
* Less than 1%.
(1) Includes (i) 19 shares held directly by David E. Shaw, (ii) 8,805,818 shares
held by D. E. Shaw Development, L.P., (iii) 4,545,455 shares held by D. E.
Shaw & Co., L.P., (iv) 639,146 shares held by
D. E. Shaw Investment Group, L.P., and (v) 190,910 shares held by Shaw Juno
Trust.
D. E. Shaw & Co., Inc., which is wholly owned by Dr. Shaw, is the general
partner of D. E. Shaw Development, L.P., and 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, certain of the beneficiaries of the Shaw Juno Trust reside in
Dr. Shaw's household. Dr. Shaw disclaims beneficial ownership of the shares
held by D. E. Shaw Development, L.P., D. E. Shaw & Co., L.P. D. E. Shaw
Investment Group, L.P. and Shaw Juno Trust, except to the extent of his
pecuniary interest therein.
(2) The address of D. E. Shaw Development, L.P. is 120 West 45th Street, New
York, New York 10036.
(3) Includes (i) 4,545,455 shares held directly by D. E. Shaw & Co., L.P., and
(ii) 639,146 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. The address of D. E. Shaw & Co., L.P. is 120 West 45th
Street, New York, New York 10036.
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<PAGE>
(4) News America Incorporated is an affiliate of News Corporation. The address
of News America Incorporated is 1211 Avenue of the Americas, New York, NY
10036.
(5) Includes 574,290 shares held by Prospect Street NYC Discovery Fund, L.P. and
63,810 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.
(6) All of these shares are issuable upon the exercise of options. This number
does not include 224,037 shares issuable upon the exercise of stock options
that do not vest within 60 days of March 4, 1999.
(7) All of these shares are issuable upon the exercise of options. This number
does not include 103,383 shares issuable upon the exercise of stock options
that do not vest within 60 days of March 4, 1999.
(8) Includes 11,027 shares that are issuable upon the exercise of options. This
number does not include 123,975 shares issuable upon the exercise of stock
options that do not vest within 60 days of March 4, 1999.
(9) Includes 7,941 shares that are issuable upon the exercise of options. This
number does not include 60,538 shares issuable upon the exercise of stock
options that do not vest within 60 days of March 4, 1999.
(10) Includes 151,480 shares issuable upon the exercise of options.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following description of Juno's common stock and preferred stock and
certain provisions of Juno's Certificate of Incorporation (as will be in effect
upon the closing of this offering, the "Certificate") and the Bylaws (as will be
in effect upon the closing of this offering, the "Bylaws") are summaries thereof
and are qualified by reference to the Certificate and the Bylaws, copies of
which have been filed with the 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 the
Certificate.
The authorized capital stock of Juno consists of 109,090,909 shares of
common stock, par value $.01 per share, and 5,000,000 shares of preferred stock,
par value $.01 per share.
COMMON STOCK
Upon the closing of this offering, and giving effect to the issuance of (1)
the shares of common stock offered by Juno hereby and (2) the
conversion of an aggregate of 22,764,077 shares of redeemable convertible
preferred stock into common stock upon the closing of this offering, there will
be shares of common stock outstanding.
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
such 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 such 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 such series. Juno has no present plans to issue any shares of
preferred stock. See "--Anti-Takeover Effects of Certain Provisions of Delaware
Law and Juno's Certificate of Incorporation and Bylaws."
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<PAGE>
OPTIONS
Options to purchase a total of shares of common stock may be granted
under the 1999 Stock Incentive Plan. As of the date of this prospectus, there
are outstanding options to purchase a total of shares of common stock, of
which options to purchase shares will be exercisable upon the closing of this
offering. Since Juno intends to file a Registration Statement on Form S-8 as
soon as practicable following the closing of this offering, any shares issued
upon exercise of these options will be immediately available for sale in the
public market, subject to the terms of lock-up agreements entered into by and
between certain optionholders 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 shares of
common stock will be entitled to certain demand registration rights with respect
to the registration of their shares under the Securities Act. The holders of 10%
or more of such shares are entitled to demand that Juno register their shares
under the Securities Act, subject to certain limitations. Juno is not required
to effect more than six such registrations pursuant to such demand registration
rights. In addition, pursuant to the Amended and Restated Registration Rights
Agreement, these holders will be entitled to certain piggyback registration
rights with respect to the registration of such shares under the Securities Act,
subject to certain 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 such
registration. Juno is generally required to bear all of the expenses of all such
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 CERTAIN 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 (as amended from time to time, the "DGCL"). Subject to certain
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
such 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 certain 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, certain provisions of the Certificate and 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 interest, including those attempts that
might result in a premium over the market price for the shares held by
stockholders.
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<PAGE>
BOARD OF DIRECTORS VACANCIES. The Certificate 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 such removal with its own nominees.
STOCKHOLDER ACTION; SPECIAL MEETING OF STOCKHOLDERS. The Certificate
provides that stockholders may not take action by written consent, but only at
duly called annual or special meetings of stockholders. The Certificate 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. The 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 such anniversary, notice by the stockholder, to be
timely, must be so received not more than 90 days nor later than the later of
(1) 60 days prior to the annual meeting of stockholders or (2) 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 first occurs. The
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 certain 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
render more difficult or discourage an attempt to obtain control of Juno by
means of a proxy contest, tender offer, merger or otherwise.
The DGCL 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
The Certificate provides that, except to the extent prohibited by DGCL,
Juno's directors shall not be personally liable to Juno or its stockholders for
monetary damages for any breach of fiduciary duty as directors of Juno. Under
the DGCL, the directors have a fiduciary duty to Juno which is not eliminated by
this provision of the Certificate and, in appropriate circumstances, equitable
remedies such as injunctive or other forms of non-monetary relief will remain
available. In addition, each director will continue to be subject to liability
under the DGCL for breach of the director's duty of loyalty to Juno, for acts or
omissions which are found by a court of competent jurisdiction to be not in good
faith or which involves intentional misconduct, or knowing violations of law,
for actions leading to improper personal benefit to the director, and for
payment of dividends or approval of stock repurchases or redemptions that are
prohibited by DGCL. 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.
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<PAGE>
Section 145 of the DGCL 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: (1) for any breach of
the director's duty of loyalty to the corporation or its stockholders; (2) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law; (3) arising under Section 174 of the DGCL; or (4) for
any transaction from which the director derived an improper personal benefit.
The DGCL 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. The Certificate eliminates the personal liability of
directors to the fullest extent permitted by Section 102(b)(7) of the DGCL 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 such 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, against expenses (including attorney's fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person 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
Bylaws. Juno believes that these provisions and agreements are necessary to
attract and retain qualified directors and executive officers. Juno's 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 DGCL would permit indemnification. Juno has obtained 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 Certificate. Juno is not aware of any threatened
litigation or proceeding that may result in a claim for such indemnification.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is Continental Stock
Transfer & Trust Company, New York, New York.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the offering, there has not been any public market for the 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 closing of the offering, Juno will have an aggregate of 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 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 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>
After the date of this prospectus
Upon the filing of a registration statement to register for resale shares of
common stock issuable upon the exercise of options granted under the 1999 Stock
Incentive Plan
At various times after 90 days from the date of this prospectus
After 180 days from the date of this prospectus (subject, in some cases to volume
limitations)
At various times after 180 days from the date of this prospectus
</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) 1% of the then
outstanding shares of common stock (approximately shares immediately after the
offering) or (2) 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 shares
of common stock are outstanding, of which are currently exercisable. Juno
intends to file a Form S-8 registration statement under the Securities Act
shortly after the date of this prospectus to register all shares of common stock
issuable under the 1999 Stock Incentive Plan. Such registration statement will
automatically become effective upon filing. Accordingly, shares covered by that
registration statement will thereupon be eligible for sale in the public
markets, unless such options are subject to vesting restrictions or the
73
<PAGE>
contractual restrictions described above. See "Management--Compensation of
Directors" and "--1999 Stock Incentive Plan."
All directors and officers and certain stockholders of Juno (holding an
aggregate of 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--The
future sale of shares may hurt our stock price."
Following the offering, holders of 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),
under certain circumstances and subject to certain conditions, 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 demand registrations on
behalf of such holders. Pursuant to the agreement pursuant to which the
registration rights were granted, holders of registrable securities have agreed
to be subject to lock-up periods of not more than 180 days following the date of
this prospectus. See "Description of Capital Stock--Registration Rights."
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UNITED STATES 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 such 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" (as defined below).
This discussion does not address all aspects of U.S. federal income and estate
taxation that may be relevant in light of such 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 (the "Code")
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 ("IRS") 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 IRS 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 U.S.; a corporation, partnership, or other entity
created or organized in the U.S. or under the laws of the U.S. 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
such Non-United States Holder are exempt from such withholding tax. However,
such 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: such 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 such common
stock as a capital asset (within the meaning of Section 1221 of the Code) and
who is present in the U.S. for a period or periods aggregating 183 days or more
during the calendar year in which such sale or disposition occurs and certain
other conditions are met; or Juno is or has been a "United States real property
holding corporation" for federal income tax purposes at any time within the
shorter of the five-year period preceding such disposition or such holder's
holding period. 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.
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BACKUP WITHHOLDING AND INFORMATION REPORTING
Generally, Juno must report annually to the IRS 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 IRS 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 certain 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, 1999 (unless the payer has knowledge that the payee is a United States
person). Under recently finalized Treasury Regulations regarding withholding and
information reporting (the "Final Regulations"), payment of dividends to
Non-United States Holders at an address outside the U.S. after December 31, 1999
may be subject to backup withholding at a rate of 31% unless such Non-United
States Holder satisfies certain 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. 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 such broker has documentary evidence
in its files of the holder's non-U.S. status and certain conditions are met or
the holder otherwise establishes an exemption.
In general, the recently promulgated Final 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 the Final Regulations on an investment in the common stock.
The Final Regulations are generally effective for payments made after December
31, 1999.
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 IRS.
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 such 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.
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<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 such underwriter, the number of shares
set forth opposite the name of such underwriter.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ----------------------------------------------------------------------------------------------------- ----------
<S> <C>
Salomon Smith Barney Inc. ..........................................................................
Bear, Stearns & Co. Inc. ..........................................................................
PaineWebber Incorporated ...........................................................................
----------
Total............................................................................................
----------
----------
</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 certain legal matters by counsel and to certain 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 certain
dealers at the public offering price less a concession not in excess of
$ per share. The underwriters may allow, and such dealers may reallow,
a concession not in excess of $ 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 additional shares of common
stock at the public offering price less the underwriting discount. The
underwriters may exercise such option solely for the purpose of covering
over-allotments, if any, in connection with this offering. To the extent such
option is exercised, each underwriter will be obligated, subject to certain
conditions, to purchase a number of additional shares approximately
proportionate to such underwriter's initial purchase commitment.
Juno, its officers and directors and certain other stockholders of Juno,
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 Salmon 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.
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 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
77
<PAGE>
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 had applied to have the common stock included 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>
NO EXERCISE FULL EXERCISE
----------------- -------------------
Per share.............................................................................. $ $
Total.................................................................................. $ $
</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 certain 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 such 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.
Certain of the representatives have performed certain 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.
Juno has agreed to indemnify the underwriters against certain 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.
78
<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 the exhibits, schedules and amendments thereto)
under the Securities Act with respect to the shares of common stock to be sold
in the offering. This prospectus does not contain all the information set forth
in the Registration Statement. For further information with respect to Juno and
the shares of common stock to be sold in the offering, reference is made to the
Registration Statement. Statements contained in this prospectus as to the
contents of any contract, agreement or other document referred to are not
necessarily complete, and in each instance reference is made to the copy of such
contract, agreement or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference.
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 on the operation
of 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, such 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.
79
<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............................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1996, 1997 and 1998......................................................................... F-4
Consolidated Statement of Partners' Capital (Deficiency) for the years
ended December 31, 1996, 1997 and 1998................................................................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1997 and 1998......................................................................... F-6
Notes to Consolidated Financial Statements................................................................. F-7
</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)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
<S> <C> <C>
1997 1998
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents................................................................. $ 13,770 $ 8,152
Accounts receivable, net of allowance for doubtful accounts of $106 in 1997 and $296 in
1998.................................................................................... 1,141 2,115
Merchandise inventories, net.............................................................. 769 60
Prepaid expenses and other current assets................................................. 400 108
--------- ---------
Total current assets.................................................................... 16,080 10,435
Fixed assets, net........................................................................... 3,966 4,086
Other assets................................................................................ 87 182
--------- ---------
Total assets............................................................................ $ 20,133 $ 14,703
--------- ---------
--------- ---------
LIABILITIES AND PARTNERS' CAPITAL (DEFICIENCY)
Current liabilities:
Accounts payable and accrued expenses..................................................... $ 8,277 $ 11,166
Current portion of capital lease obligations.............................................. 525 450
Current portion of senior note............................................................ -- 1,560
Deferred revenue.......................................................................... 351 5,602
--------- ---------
Total current liabilities............................................................... 9,153 18,778
Capital lease obligations................................................................... 270 609
Senior note................................................................................. -- 7,569
Deferred rent............................................................................... 206 335
--------- ---------
Total liabilities....................................................................... 9,629 27,291
Commitments and contingencies (Note 8)
Partners' capital (deficiency).............................................................. 10,504 (12,588)
--------- ---------
Total liabilities and partners' capital (deficiency).................................... $ 20,133 $ 14,703
--------- ---------
--------- ---------
</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 SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
<S> <C> <C> <C>
1996 1997 1998
---------- ---------- ----------
Revenues:
Billable services........................................................... $ 6 $ 1,371 $ 6,645
Advertising and transaction fees............................................ 127 1,875 6,454
Direct product sales........................................................ 3 5,845 8,595
---------- ---------- ----------
Total revenues.......................................................... 136 9,091 21,694
---------- ---------- ----------
Cost of revenues:
Billable services........................................................... -- 1,053 5,606
Advertising and transaction fees............................................ 278 1,659 3,725
Direct product sales........................................................ 3 5,796 7,627
---------- ---------- ----------
Total cost of revenues.................................................. 281 8,508 16,958
---------- ---------- ----------
Operating expenses:
Operations, free service.................................................... 5,803 11,075 9,383
Subscriber acquisition...................................................... 6,993 3,140 5,334
Sales and marketing......................................................... 4,276 12,593 11,584
Product development......................................................... 3,741 4,860 7,345
General and administrative.................................................. 2,172 2,897 2,726
---------- ---------- ----------
Total operating expenses................................................ 22,985 34,565 36,372
---------- ---------- ----------
Loss from operations.................................................... (23,130) (33,982) (31,636)
Interest income, net.......................................................... 128 243 44
---------- ---------- ----------
Net loss................................................................ $ (23,002) $ (33,739) $ (31,592)
---------- ---------- ----------
---------- ---------- ----------
Pro forma basic and diluted net loss per share................................ $ (1.39)
----------
----------
Shares of common stock used in computing pro forma basic and diluted net loss
per share................................................................... 22,764
----------
----------
</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 PARTNERS' CAPITAL (DEFICIENCY)
(IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
PARTNERS' CONTRIBUTIONS PARTNERS'
-------------------------- ACCUMULATED CAPITAL
UNITS AMOUNT LOSSES (DEFICIENCY)
----------- ------------- ------------ --------------
<S> <C> <C> <C> <C>
Balance, December 31, 1995.............................. 714 $ 3,925 $ (3,833) $ 92
Capital contributions................................. 3,801 20,906 -- 20,906
Net loss.............................................. -- -- (23,002) (23,002)
----------- ------------- ------------ --------------
Balance, December 31, 1996.............................. 4,515 24,831 (26,835) (2,004)
Capital contributions................................. 8,408 46,247 -- 46,247
Net loss.............................................. -- -- (33,739) (33,739)
----------- ------------- ------------ --------------
Balance, December 31, 1997.............................. 12,923 71,078 (60,574) 10,504
Capital contributions................................. 1,546 8,500 -- 8,500
Net loss.............................................. -- -- (31,592) (31,592)
----------- ------------- ------------ --------------
Balance, December 31, 1998.............................. 14,469 $ 79,578 $ (92,166) $ (12,588)
----------- ------------- ------------ --------------
----------- ------------- ------------ --------------
</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 STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------
<S> <C> <C> <C>
1996 1997 1998
---------- ---------- ----------
Cash flows from operating activities:
Net loss.................................................................... $ (23,002) $ (33,739) $ (31,592)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization............................................. -- 161 2,438
Amortization of deferred rent............................................. -- 244 157
Changes in operating assets and liabilities:
Accounts receivable..................................................... (121) (1,020) (974)
Merchandise inventories................................................. -- (769) 709
Prepaid expenses and other current assets............................... (90) (214) 292
Accounts payable and accrued expenses................................... 6,834 1,401 2,861
Deferred revenue........................................................ 6 345 5,251
---------- ---------- ----------
Net cash used in operating activities................................. (16,373) (33,591) (20,858)
---------- ---------- ----------
Cash flows from investing activities:
Purchases of fixed assets................................................... -- (3,270) (1,942)
Proceeds from sale of fixed assets.......................................... -- -- 402
Other assets................................................................ -- (87) (95)
---------- ---------- ----------
Net cash used in investing activities................................. -- (3,357) (1,635)
---------- ---------- ----------
Cash flows from financing activities:
Proceeds from senior note................................................... -- -- 10,000
Payments on senior note..................................................... -- -- (871)
Capitalized lease payments.................................................. -- (62) (754)
Capital contributions....................................................... 16,971 50,182 8,500
---------- ---------- ----------
Net cash provided by financing activities............................. 16,971 50,120 16,875
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents.................. 598 13,172 (5,618)
Cash and cash equivalents, beginning of period................................ -- 598 13,770
---------- ---------- ----------
Cash and cash equivalents, end of period...................................... $ 598 $ 13,770 $ 8,152
---------- ---------- ----------
---------- ---------- ----------
Supplemental disclosure of cash flow information:
Cash paid for interest...................................................... $ -- $ 127 $ 496
---------- ---------- ----------
---------- ---------- ----------
Supplemental schedule of noncash investing and financing activities:
Capital lease obligations incurred for network equipment.................... $ -- $ 857 $ 1,018
---------- ---------- ----------
---------- ---------- ----------
</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)
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).
On March 4, 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.
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 certain billable
services, from the sale of targetable, interactive 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 a scalable network infrastructure, internal
staffing, and internal systems. 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.
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
F-7
<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)
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 from both short-term and
long-term advertising contracts in which the Company delivers impressions (a
single display of an advertisement to a subscriber) for a fee or is compensated
for generating leads or transactions. Revenues generated by these contracts are
generally recognized as earned, which typically coincides with when the services
are performed, provided that the Company does not have any significant remaining
obligations and collection of the resulting receivable is probable.
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.
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.
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)
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, 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
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)
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.
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 with respect to pro forma earnings per share. Pro forma net loss per share
is computed by dividing the net loss by the sum of the weighted average number
of shares of common stock outstanding and the shares resulting from the assumed
conversion of all outstanding shares of Convertible Preferred Stock. Options
have been excluded from the calculation of loss per share because to include
them would be antidilutive.
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
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)
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.
3. 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.
4. 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>
5. 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.
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)
5. RELATED PARTY TRANSACTIONS (CONTINUED)
(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.
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.
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)
5. RELATED PARTY TRANSACTIONS (CONTINUED)
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.
6. 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.
7. 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 $7.84 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
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)
7. SENIOR NOTE (CONTINUED)
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.
8. 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.
9. 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
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)
9. PARTNERS' CAPITAL (CONTINUED)
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 $0.50 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 $5.50 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 14,468,757 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.
10. EMPLOYEE OPTION PLAN
The Company's 1997 Class B Unit Option/Issuance Plan (the "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 2,754,545 in October 1998. Under the
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 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. All options that have been
granted, were granted to employees and had an exercise price equal to the fair
market value of the Class B Units at the date of the grants, as determined by
the Plan Administrator.
The following information relates to options issued to purchase Class B
Units under the Plan:
<TABLE>
<CAPTION>
CLASS B WEIGHTED AVERAGE
UNITS PRICE PER UNIT
---------- -----------------
<S> <C> <C>
Outstanding January 1, 1997.................................... -- $ -
Granted...................................................... 1,223,572 .55
Exercised.................................................... -- -
Forfeited.................................................... (111,214) .55
----------
Outstanding January 1, 1998.................................... 1,112,358 .55
Granted...................................................... 1,290,596 1.02
Exercised.................................................... -- -
Forfeited.................................................... (294,028) .55
----------
Outstanding December 31, 1998.................................. 2,108,926 .84
----------
----------
</TABLE>
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)
10. EMPLOYEE OPTION PLAN (CONTINUED)
On December 31, 1998, the exercise price of outstanding options ranged from
$0.55 to $3.30. 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 $(31,689), 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 $0.26 and $0.28, respectively. The fair value was based on a risk
free interest rate of 5%, zero dividend yield, and an expected life of 7 years.
11. 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.
12. 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 $92,166. 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
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)
12. SUBSEQUENT EVENTS (CONTINUED)
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 8,295,320 shares of Series B Redeemable Convertible Preferred Stock ("Series
B Preferred"), $.01 par value. In addition, 14,468,757 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 $0.78 per share per annum
with respect to the Series B Preferred and $0.50 per share per annum with
respect to the Series A Preferred. Dividends 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 $7.84 for
Series B Preferred and $5.50 for Series A Preferred (both as adjusted for any
stock dividends payable in shares of the respective Preferred stock or
combinations or splits of Preferred shares, plus any accrued but unpaid
dividends).
The holders of Preferred shall have the right, at their option, at any time,
to convert such shares of Preferred into such number of fully paid and
non-assessable whole 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 ($7.84 for Series
B Preferred and $5.50 for Series A Preferred) by the Applicable Conversion Price
in effect on the date the certificate is surrendered for conversion ($7.84 for
Series B Preferred and $5.50 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.
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)
12. SUBSEQUENT EVENTS (CONTINUED)
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 or
Common shares, 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
Stock shall be entitled, before any distribution is made upon any Series A
Preferred Stock or Common Stock, to be paid with respect to each outstanding
share of Series B Preferred Stock an amount equal to $2.34 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 any common stock, to be paid with respect to each outstanding share
of their respective Preferred, an amount equal to $5.50 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 shares of Preferred are convertible on the
record date for the vote.
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)
12. SUBSEQUENT EVENTS (CONTINUED)
The following December 31, 1998 pro forma condensed balance sheet is
presented to give effect to the Statutory Merger and the issuance of the
redeemable convertible preferred stock described above.
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31,
1998
------------
<S> <C>
Current assets...................................................................................... $ 72,235
Noncurrent assets................................................................................... 4,268
------------
Total assets................................................................................ $ 76,503
------------
------------
Current liabilities................................................................................. $ 18,778
Noncurrent liabilities.............................................................................. 8,513
Commitments and contingencies
Redeemable convertible preferred stock, $.01 par value;
Series B convertible preferred stock: 8,295,320 shares authorized, issued and outstanding
(liquidation value of $65,000).................................................................... 61,800
Series A convertible preferred stock: 14,468,757 shares authorized, issued and
outstanding...................................................................................... 79,578
Stockholders' equity (deficit):
Common stock--$.01 par value; 109,090,909 authorized; 19 shares
issued and outstanding
Additional paid-in capital........................................................................ (92,166)
Accumulated deficit............................................................................... --
------------
Total stockholders' equity (deficit)........................................................ (92,166)
------------
Total liabilities and stockholders' equity (deficit)........................................ $ 76,503
------------
------------
</TABLE>
F-19
<PAGE>
[INSIDE BACK COVER]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SHARES
JUNO ONLINE SERVICES, INC.
COMMON STOCK
[LOGO]
--------
PROSPECTUS
, 1999
--------
SALOMON SMITH BARNEY
BEAR, STEARNS & CO. INC.
PAINEWEBBER INCORPORATED
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated costs and expenses, other than
the underwriting discounts and commissions, payable by the registrant in
connection with the sale of the common stock being registered.
<TABLE>
<CAPTION>
AMOUNT TO BE
PAID
------------
<S> <C>
SEC registration fee................................................................................ $ 23,978
NASD filing fee..................................................................................... 9,125
Nasdaq National Market listing fee.................................................................. 95,000
Legal fees and expenses............................................................................. 350,000
Accounting fees and expenses........................................................................ 175,000
Printing and engraving.............................................................................. 250,000
Transfer agent fees................................................................................. 10,000
Miscellaneous....................................................................................... 86,897
------------
Total........................................................................................... $ 1,000,000
------------
------------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The registrant's Amended and Restated Certificate of Incorporation in effect
as of the date hereof, and the registrant's Amended and Restated Certificate of
Incorporation to be in effect upon the closing of this offering (collectively,
the "Certificate") provides that, except to the extent prohibited by the
Delaware General Corporation Law, as amended (the "DGCL"), the registrant's
directors shall not be personally liable to the registrant or its stockholders
for monetary damages for any breach of fiduciary duty as directors of the
registrant. Under the DGCL, the directors have a fiduciary duty to the
registrant which is not eliminated by this provision of the Certificate and, in
appropriate circumstances, equitable remedies such as injunctive or other forms
of non-monetary relief will remain available. In addition, each director will
continue to be subject to liability under the DGCL for breach of the director's
duty of loyalty to the registrant, for acts or omissions which are found by a
court of competent jurisdiction to be not in good faith or involving intentional
misconduct, for knowing violations of law, for actions leading to improper
personal benefit to the director, and for payment of dividends or approval of
stock repurchases or redemptions that are prohibited by DGCL. 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. The
registrant has obtained liability insurance for its officers and directors.
Section 145 of the DGCL 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: (i) for any breach of
the director's duty of loyalty to the corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) arising under Section 174 of the DGCL, or (iv)
for any transaction from which the director derived an improper personal
benefit. The DGCL 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. The Certificate eliminates the personal liability
of directors to the fullest extent permitted by Section 102(b)(7) of the DGCL
and provides that the registrant 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
II-1
<PAGE>
(whether civil, criminal, administrative or investigative) by reason of the fact
that such person is or was a director or officer of the registrant, or is or was
serving at the request of the registrant as a director or officer of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise, against expenses (including attorney's fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding.
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 Certificate. The registrant is not aware of any
threatened litigation or proceeding that may result in a claim for such
indemnification.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The registrant has sold and issued the following securities since June 30,
1995 (inception):
PARTNERSHIP UNITS. Between June 30, 1995 and March 1, 1999, the registrant
issued a total of 14,468,757 limited partnership units for a price per unit of
$5.50. These units were all purchased by entities or persons affiliated with D.
E. Shaw & Co., Inc. Of the 14,468,757 units issued, 713,612 were issued in 1995,
3,801,353 were issued in 1996, 8,408,335 were issued in 1997 and 1,545,457 were
issued in 1998. On March 1, 1999, Juno Online Services, L.P. was merged with and
into Juno Online Services, Inc., its wholly owned subsidiary. In connection with
this merger, each outstanding partnership unit was converted into one share of
Series A Redeemable Convertible Preferred Stock. Upon the closing of this
offering, the shares of Series A Redeemable Convertible Preferred Stock will
automatically convert into shares of the registrant's common stock.
PREFERRED STOCK. On March 1, 1999 and March 4, 1999, the registrant issued
a total of 8,295,320 shares of Series B Redeemable Convertible Preferred Stock
to a group of investors including affiliates of Intel Corporation, News
Corporation, Prospect Street Ventures and Sycamore Ventures. PaineWebber
Incorporated acted as the placement agent in connection with the sale of this
Series B Redeemable Convertible Preferred Stock. Upon the closing of this
offering, the shares of Series B Redeemable Convertible Preferred Stock will
automatically convert into shares of the registrant's common stock.
OPTIONS. The registrant has from time to time granted options to purchase
partnership units to employees in reliance upon exemptions from registration
pursuant to either (i) Section 4(2) of the Securities Act of 1933, as amended,
or (ii) Rule 701 promulgated under the Securities Act of 1933, as amended. The
following table sets forth certain information regarding such grants and assumes
a for reverse stock split of the registrant's common stock to be effected
prior to the closing of this offering.
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
---------- -----------
<S> <C> <C>
June 30, 1995 (inception) to December 31, 1996......................... -- --
January 1, 1997 to December 31, 1997................................... 1,223,572 $ 0.55
January 1, 1998 to December 31, 1998................................... 1,290,596 $ 1.02
January 1, 1999 to February 28, 1999................................... 11,101 $ 3.58
</TABLE>
The above securities were offered and sold by the registrant in reliance
upon exemptions from registration pursuant to either (i) Section 4(2) of the
Securities Act of 1933, as amended, as transactions not involving any public
offering, or (ii) Rule 701 promulgated under the Securities Act of 1933, as
amended. No underwriters were involved in connection with the sales of
securities referred to in this Item 15, except for PaineWebber Incorporated,
which acted as the placement agent in connection with the sale of Series B
Redeemable Convertible Preferred Stock in March 1999.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ---------- --------------------------------------------------------------------------------------------------------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1 Certificate of Incorporation.
3.2 Certificate of Amendment to Certificate of Incorporation, filed March 1, 1999.
3.3 Certificate of Amendment to Certificate of Incorporation, filed March 1, 1999.
3.4* Form of Amended and Restated Certificate of Incorporation to be in effect upon the closing of this
offering.
3.5 Bylaws.
3.6* Form of Amended and Restated Bylaws to be in effect upon the closing of this offering.
4.1* Specimen Common Stock certificate.
4.2 See Exhibits 3.1, 3.2, 3.3, 3.4, 3.5 and 3.6 for provisions defining the rights of holders of common
stock of the registrant.
5.1* Opinion of Brobeck, Phleger & Harrison LLP.
10.1* 1999 Stock Incentive Plan.
10.2*
10.3* Amended and Restated Registration Rights Agreement.
10.4* Marketing Services Agreement, dated September 30, 1998, among the registrant and Hartford Fire Insurance
Company and its affiliates/subsidiaries.
10.5* Marketing Services Agreement, dated December 11, 1998, between the registrant and AT&T Wireless
Services, Inc.
10.6* Distributor Agreement, dated March 12, 1998, between the registrant and LCI International Telecom Corp.
10.7* Financial Services Agreement, dated February 17, 1999, between the registrant and First USA Bank, N.A.
10.8* Master Service Agreement, dated August 1, 1998, between the registrant and Softbank Services Group.
10.9* Employment Agreement between the registrant and Charles Ardai.
10.10* Employment Agreement between the registrant and Robert Cherins.
10.11* Employment Agreement between the registrant and Mark Moraes.
10.12* Employment Agreement between the registrant and Richard Eaton.
23.1* Consent of Brobeck, Phleger & Harrison LLP (included in Exhibit 5.1).
23.2 Consent of PricewaterhouseCoopers LLP.
24.1 Powers of Attorney (See Signature Page).
27.1 Financial Data Schedule.
</TABLE>
- ------------------------
* To be supplied by amendment.
II-3
<PAGE>
(b) Financial Statement Schedules.
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes to provide to the Underwriter
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act, and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424 (b)(1) or (4), or 497(h)
under the Securities Act of 1933, shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial BONA FIDE offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized in The City of New York,
State of New York, on this 5th day of March, 1999.
JUNO ONLINE SERVICES, INC.
By: /s/ CHARLES E. ARDAI
-----------------------------------------
Name: Charles E. Ardai
Title: President
POWER OF ATTORNEY
We, the undersigned directors and/or officers of Juno Online Services, Inc.
(the "Company"), hereby severally constitute and appoint Charles Ardai, Richard
Buchband and Richard Eaton, and each of them individually, with full powers of
substitution and resubstitution, our true and lawful attorneys, with full powers
to them and each of them to sign for us, in our names and in the capacities
indicated below, the Registration Statement on Form S-1 filed with the
Securities and Exchange Commission, and any and all amendments to said
Registration Statement (including post-effective amendments), and any
registration statement filed pursuant to Rule 462(b) under the Securities Act of
1933, as amended, in connection with the registration under the Securities Act
of 1933, as amended, of equity securities of the Company, and to file or cause
to be filed the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys, and each of them, full power and authority to do and perform
each and every act and thing requisite and necessary to be done in connection
therewith, as fully to all intents and purposes as each of them might or could
do in person, and hereby ratifying and confirming all that said attorneys, and
each of them, or their substitute or substitutes, shall do or cause to be done
by virtue of this Power of Attorney.
II-5
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities indicated:
SIGNATURE TITLE(S) DATE
- ------------------------------ --------------------------- -------------------
/s/ CHARLES E. ARDAI President and Director
- ------------------------------ (principal executive March 5, 1999
Charles E. Ardai officer)
Chief Financial Officer and
/s/ RICHARD M. EATON, JR. Treasurer (principal
- ------------------------------ accounting and financial March 5, 1999
Richard M. Eaton, Jr. officer)
/s/ EDWARD J. RYEOM Director
- ------------------------------ March 5, 1999
Edward J. Ryeom
/s/ LOUIS K. SALKIND Director
- ------------------------------ March 5, 1999
Louis K. Salkind
/s/ DAVID E. SHAW Director
- ------------------------------ March 5, 1999
David E. Shaw
II-6
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<S> <C>
1.1* Form of Underwriting Agreement.
3.1 Certificate of Incorporation.
3.2 Certificate of Amendment to Certificate of Incorporation, filed March 1, 1999.
3.3 Certificate of Amendment to Certificate of Incorporation, filed March 1, 1999.
3.4* Form of Amended and Restated Certificate of Incorporation to be in effect upon the closing of this
offering.
3.5 Bylaws.
3.6* Form of Amended and Restated Bylaws to be in effect upon the closing of this offering.
4.1* Specimen Common Stock certificate.
4.2 See Exhibits 3.1, 3.2, 3.3, 3.4, 3.5 and 3.6 for provisions defining the rights of holders of common
stock of the registrant.
5.1* Opinion of Brobeck, Phleger & Harrison LLP.
10.1* 1999 Stock Incentive Plan.
10.2*
10.3* Amended and Restated Registration Rights Agreement.
10.4* Marketing Services Agreement, dated September 30, 1998, among the registrant and Hartford Fire Insurance
Company and its affiliates/subsidiaries.
10.5* Marketing Services Agreement, dated December 11, 1998, between the registrant and AT&T Wireless
Services, Inc.
10.6* Distributor Agreement, dated March 12, 1998, between the registrant and LCI International Telecom Corp.
10.7* Financial Services Agreement, dated February 17, 1999, between the registrant and First USA Bank, N.A.
10.8* Master Service Agreement, dated August 1, 1998, between the registrant and Softbank Services Group.
10.9* Employment Agreement between the registrant and Charles Ardai.
10.10* Employment Agreement between the registrant and Robert Cherins.
10.11* Employment Agreement between the registrant and Mark Moraes.
10.12* Employment Agreement between the registrant and Richard Eaton.
23.1* Consent of Brobeck, Phleger & Harrison LLP (included in Exhibit 5.1).
23.2 Consent of PricewaterhouseCoopers LLP.
24.1 Powers of Attorney (See Signature Page).
27.1 Financial Data Schedule.
</TABLE>
- ------------------------
* To be supplied by amendment.
<PAGE>
Exhibit 3.1
CERTIFICATE OF INCORPORATION
OF
JUNO ONLINE SERVICES, INC.
I, the undersigned, for the purposes of incorporating and organizing
a corporation under the General Corporation Law of the State of Delaware, do
execute this Certificate of Incorporation and do hereby certify as follows:
FIRST. The name of the corporation is Juno Online Services, Inc.
SECOND. The address of the corporation's registered office in the
State of Delaware is Corporation Trust Center, 1209 Orange Street, City of
Wilmington, County of New Castle, 19801. The name of its registered agent at
such address is The Corporation Trust Company.
THIRD. The purpose of the corporation is to engage in any lawful act
or activity for which corporations may be organized under the General
Corporation Law of the State of Delaware.
FOURTH. The total number of shares of stock which the corporation
shall have authority to issue is 1,000. All such shares are to be Common Stock,
par value of $.01 per share, and are to be of one class.
FIFTH. The incorporator of the corporation is Stuart Steckler and
the address of the incorporator is 120 West 45th Street, 39th Floor, New York,
New York 10036.
SIXTH. Unless and except to the extent that the by-laws of the
corporation shall so require, the election of directors of the corporation need
not be by written ballot.
SEVENTH. In furtherance and not in limitation of the powers
conferred by the laws of the State of Delaware, the Board of Directors of the
corporation is expressly authorized to make, alter and repeal the by-laws of the
corporation, subject to the power of the stockholders of the corporation to
alter or repeal any by-law whether adopted by them or otherwise.
EIGHTH. A director of the corporation shall not be liable to the
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except to the extent such exemption from liability or
limitation thereof is not permitted under the General Corporation Law of the
State of Delaware as the same exists or may hereafter be amended. Any amendment,
modification or repeal of the foregoing sentence shall not adversely affect any
right or protection of a director of the corporation hereunder in respect of any
act or omission occurring prior to the time of such amendment, modification or
repeal.
NINTH. The corporation reserves the right at any time, and from time
to time to amend, alter, change or repeal any provision contained in this
Certificate of Incorporation, and other provisions authorized by the laws of the
State of Delaware at the time in force may be added or inserted, in the manner
now or hereafter prescribed by law, and all rights, preferences
1
<PAGE>
and privileges of whatsoever nature conferred upon stockholders, directors or
any other persons whomsoever by and pursuant to this Certificate of
Incorporation in its present form or as hereafter amended are granted subject to
the rights reserved in this article.
TENTH. The powers of the incorporator are to terminate upon the
filing of this Certificate of Incorporation with the Secretary of State of the
State of Delaware. The name and mailing address of the person who is to serve as
the initial director of the corporation until the first annual meeting of
stockholders of the corporation, or until his successor is elected and
qualified, is:
David E. Shaw
120 West 45th Street, 39th Floor
New York, NY 10036
The undersigned incorporator hereby acknowledges that the foregoing
certificate of incorporation is his act and deed on July 2, 1996.
/s/ STUART STECKLER
----------------------------------
Incorporator
Stuart Steckler
2
<PAGE>
Exhibit 3.2
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF INCORPORATION
OF
JUNO ONLINE SERVICES, INC.
Juno Online Services, Inc. (the "Corporation"), a corporation
organized and existing under and by virtue of the General Corporation Law of
Delaware, does hereby certify:
1. The name of the Corporation is Juno Online Services, Inc.
2. The Certificate of Incorporation of the Corporation is hereby
amended by striking out Article FOURTH thereof and by substituting in lieu
thereof the following:
"FOURTH. The total number of shares of stock which the Corporation
shall have authority to issue is Ninety Four Million Seven Hundred
Twenty Eight Thousand Three Hundred Thirty (94,728,330) shares,
including Fifteen Million One Hundred Fifty Thousand Two Hundred
(15,150,200) shares of Common Stock, $0.01 par value per share (the
"Common Stock") and Seventy Nine Million Five Hundred Seventy Eight
Thousand One Hundred Thirty (79,578,130) shares of Series A
Preferred Stock, $0.01 par value per share (the "Preferred Stock")."
3. The amendment of the Certificate of Incorporation herein
certified has been duly adopted in accordance with the provisions of Sections
228 and 242 of the General Corporation Law of the State of Delaware.
JUNO ONLINE SERVICES, INC.
By: /s/ CHARLES ARDAI
-------------------------------
Name: Charles Ardai
Office: President
2
<PAGE>
Exhibit 3.3
CERTIFICATE OF AMENDMENT
TO
THE CERTIFICATE OF INCORPORATION
OF
JUNO ONLINE SERVICES, INC.
Pursuant to Section 242 of the
General Corporation Law of the State of Delaware
JUNO ONLINE SERVICES, INC., a corporation organized and existing
under the laws of the State of Delaware (the "Corporation"), hereby certifies as
follows:
FIRST: that the following resolutions were duly adopted by unanimous
written consent of the Board of Directors of the Corporation, setting forth
proposed amendments to the Certificate of Incorporation of the Corporation;
determining that the capital of the Corporation will not be decreased on account
of such amendments; and declaring such amendments to be advisable and directing
that such amendments be submitted to the stockholders of the Corporation for
their approval. The resolutions are as follows:
"RESOLVED, that there is hereby adopted an amendment to the
Corporation's Certificate of Incorporation pursuant to which (i) the
authorized capital stock of the Corporation shall be changed from
15,150,200 to 600,000,000 shares of common stock, $.01 par value
(the "Common Stock"), and from 79,578,130 shares of preferred stock,
$.01 par value (the "Preferred Stock") to 121,692,724 shares of
Preferred Stock, of which 79,578,130 shares have been designated
Series A Convertible Preferred Stock and 42,114,594 shares have been
designated Series B Convertible Preferred Stock (including the
3,580,442 shares initially designated as Series B Prime Preferred
Stock), and (ii) the relative voting, dividend, liquidation,
redemption and other rights, and the qualifications, limitations and
restrictions thereof, in respect of said Preferred Stock and Common
Stock shall be restated; and, in connection with such changes,
Article FOURTH of the Certificate of Incorporation of the
Corporation shall be amended to read in its entirety as follows:
FOURTH: The total number of shares of all classes of stock
which the Corporation shall have authority to issue is 721,692,724
shares, consisting of 79,578,130 shares of Series A Convertible
Preferred Stock, $.01 par value ("Series A Preferred Stock"),
42,114,594 shares of Series B Convertible Preferred Stock, $.01 par
value (including the 3,580,442 shares initially designated as Series
B Prime Preferred Stock) (together, the "Series B Preferred Stock")
(the Series A Preferred Stock and the Series B Preferred Stock being
collectively referred to herein as the "Preferred Stock") and
600,000,000 shares of Common Stock, $.01 par value ("Common Stock").
1
<PAGE>
All cross-references in each subdivision of this Article FOURTH
refer to other paragraphs in such subdivision unless otherwise indicated.
The following is a statement of the designations, and the powers,
preferences and rights, and the qualifications, limitations or restrictions
thereof, in respect of each class of stock of the Corporation:
ARTICLE I
PREFERRED STOCK
Except as otherwise expressly provided herein, all shares of
Preferred Stock shall be identical and shall entitle the holders thereof to the
same rights and privileges.
1.1 DIVIDENDS.
(a) The holders of shares of Preferred Stock shall be entitled to
receive, out of funds legally available for such purpose, cash dividends at the
rate of $0.09 per share per annum with respect to each outstanding share of
Series A Preferred Stock and $0.14246843 per share per annum with respect to
each outstanding share of Series B Preferred Stock, and no more, payable as
provided herein or when and as declared by the Board of Directors of the
Corporation. Such dividends shall be cumulative and shall accrue from and after
the date of issue whether or not declared and whether or not there are any funds
of the Corporation legally available for the payment of dividends. Accrued but
unpaid dividends shall not bear interest. The Board of Directors of the
Corporation may fix a record date for the determination of holders of Preferred
Stock entitled to receive payment of a dividend declared thereon, which record
date shall be no more than 60 days prior to the date fixed for the payment
thereof.
(b) In the event that the Corporation shall at any time pay a
dividend on the Common Stock (other than a dividend payable solely in shares of
Common Stock) in accordance with paragraph 1.5(b), it shall, at the same time,
pay to each holder of Preferred Stock (in addition to any payment such holder is
entitled to receive pursuant to paragraph l.1(a) above), a dividend equal to the
dividend that would have been payable to such holder if the shares of Preferred
Stock held by such holder had been converted into Common Stock on the date of
determination of holders of Common Stock entitled to receive such dividend.
(c) Notwithstanding anything to the contrary contained in paragraphs
1.1(a) or 1.1(b) hereof, if the Corporation shall complete a firm commitment
underwritten public offering of shares of the Corporation's Common Stock in
which the aggregate net proceeds to the Corporation (after deduction of
underwriting discounts and commissions and expenses of the offering) shall be at
least $40,000,000 (a "Qualified Public Offering"), then the Corporation's
obligation to pay accrued and unpaid dividends on the Preferred Stock shall
cease and all rights with respect to ongoing dividends on the Preferred Stock
shall terminate.
1.2 REDEMPTION.
The shares of Preferred Stock shall be redeemable as follows:
2
<PAGE>
(a) SERIES B PREFERRED STOCK. At any time on or after March 1, 2004,
the holders of at least 20% of the outstanding shares of Series B Preferred
Stock may, by written notice (the "Series B Redemption Notice"), require the
Corporation to redeem, out of funds legally available therefor, such shares of
Series B Preferred Stock upon the terms set forth in this Section 1.2. The
redemption price per share of Series B Preferred Stock (the "Series B Redemption
Price") shall be $1.4246843 (as adjusted for any stock dividends payable in
shares of Series B Preferred Stock or combinations or splits of shares of Series
B Preferred Stock) plus all accrued but unpaid dividends thereon through, but
excluding, the date of redemption. In the event that the holders of at least 20%
of the outstanding shares of Series B Preferred Stock deliver a Series B
Redemption Notice to the Corporation, the Corporation shall promptly provide
written notice thereof to all holders of Series B Preferred Stock. For a period
of ninety (90) days following the Corporation's sending such notice to all
holders of Series B Preferred Stock, the non-requesting holders shall have the
right, but not the obligation, to require the Corporation to redeem all of their
shares of Series B Preferred Stock. In the event that holders of at least 80% of
the outstanding shares of Series B Preferred Stock so notify the Corporation of
their intention to require the Corporation to redeem all of their shares of
Series B Preferred Stock, the Corporation shall have the right, but not the
obligation, to redeem all of the outstanding shares of Series B Preferred Stock.
(b) SERIES A PREFERRED STOCK. At any time after the holders of
Series B Preferred Stock have demanded a redemption in accordance with paragraph
1.2(a) above, the holders at least 20% of the outstanding shares of Series A
Preferred Stock may, by written notice (the "Series A Redemption Notice"),
require the Corporation to redeem, out of funds legally available therefor, such
shares of Series A Preferred Stock upon the terms set forth in this Section 1.2.
The redemption price per share of Series A Preferred Stock (the "Series A
Redemption Price" and, together with the Series B Redemption Price, the
"Redemption Price") shall be $1.00 (as adjusted for any stock dividends payable
in shares of Series A Preferred Stock or combinations or splits of shares of
Series A Preferred Stock) plus all accrued but unpaid dividends thereon through,
but excluding, the date of redemption. In the event that the holders of at least
20% of the outstanding shares of Series A Preferred Stock deliver a Series A
Redemption Notice to the Corporation, the Corporation shall promptly provide
written notice thereof to all holders of Series A Preferred Stock. For a period
of ninety (90) days following the Corporation's sending such notice to all
holders of Series A Preferred Stock, the non-requesting holders shall have the
right, but not the obligation, to require the Corporation to redeem all of their
shares of Series A Preferred Stock. In the event that holders of at least 80% of
the outstanding shares of Series A Preferred Stock so notify the Corporation of
their intention to require the Corporation to redeem all of their shares of
Series A Preferred Stock, the Corporation shall have the right, but not the
obligation, to redeem all of the outstanding shares of Series A Preferred Stock.
(c) REDEMPTION MECHANICS.
(i) Upon delivery of any Series B Redemption Notice, the
Corporation shall (A) redeem 50% of those shares of Series B
Preferred Stock called for redemption pursuant to such Series B
Redemption Notice and the provisions of paragraph 1.2(a) above on
the date fixed in the Series B Redemption Notice (the "First Series
B Redemption Date"), which date shall be no less than 90 days after
the date of the Series B Redemption Notice, and (B) redeem the
remaining shares of Series B Preferred Stock
3
<PAGE>
called for redemption pursuant to such Series B Redemption Notice
and the provisions of paragraph 1.2(a) above on the first
anniversary date of the First Series B Redemption Date (the "Second
Series B Redemption Date").
(ii) Upon delivery of any Series A Redemption Notice,
the Corporation shall (A) redeem 50% of those shares of Series A
Preferred Stock called for redemption pursuant to such Series A
Redemption Notice and the provisions of paragraph 1.2(b) above on
the date fixed in the Series A Redemption Notice (the "First Series
A Redemption Date"), which date shall be no less than 90 days after
the date of the Series A Redemption Notice, and (B) redeem the
remaining shares of Series A Preferred Stock called for redemption
pursuant to such Series A Redemption Notice and the provisions of
paragraph 1.2(b) above on the first anniversary date of the First
Series A Redemption Date (the "Second Series A Redemption Date").
The First Series B Redemption Date, the Second Series B Redemption
Date, the First Series A Redemption Date, and the Second Series A
Redemption Date are each referred to as a "Redemption Date."
(iii) Notwithstanding anything contained herein, the
Corporation shall not (A) redeem any shares of Series A Preferred
Stock unless and until the shares of Series B Preferred Stock to be
redeemed on the First Series B Redemption Date have been redeemed in
full, or (B) redeem any shares of Series A Preferred Stock on the
Second Series A Redemption Date unless and until all shares of
Series B Preferred Stock have been redeemed in full.
(iv) At any time on or after any Redemption Date, the
holders of the shares of Preferred Stock to be redeemed on such
Redemption Date shall be entitled to receive the applicable
Redemption Price upon actual delivery to the Corporation or its
agents of the certificates representing the shares to be redeemed.
(v) If on or before any Redemption Date the funds
necessary for redemption on such Redemption Date shall have been set
aside so as to be and continue to be available therefor, then,
notwithstanding that any certificate for shares of Preferred Stock
to be redeemed shall not have been surrendered for cancellation,
after the close of business on such Redemption Date, the shares so
called for redemption shall no longer be deemed outstanding, the
dividends thereon shall cease to accrue, and all rights with respect
to such shares shall forthwith after the close of business on such
Redemption Date cease, except only the right of the holders thereof
to receive, upon presentation of the certificate representing shares
so called for redemption, the applicable Redemption Price therefor,
without interest thereon.
(vi) If, on or before any Redemption Date, the funds
necessary for the redemption on such date have been set aside by the
Corporation and deposited with a bank or trust company, in trust for
the pro rata benefit of the holders of the Preferred Stock then to
be redeemed, then, notwithstanding that any certificates for the
Preferred Stock then to be redeemed shall not have been surrendered
for cancellation, the shares represented thereby shall no longer be
deemed outstanding from and after such Redemption Date, and all
rights of holders of such shares shall, forthwith after such
Redemption Date, cease and terminate with respect to such shares,
excepting only the
4
<PAGE>
right to receive the funds therefor to which they are entitled. Any
interest accrued on funds so deposited shall be paid to the
Corporation at the time unclaimed amounts are paid to it. In case
the holders of such Preferred Stock shall not, within six years
after such Redemption Date, claim the amounts so deposited, any such
bank or trust company shall, upon demand, pay over to the
Corporation such unclaimed amounts and thereupon such bank or trust
company shall be relieved of all responsibility in respect thereof
to such holders and such holders shall look only to the Corporation
for the payment thereof. Any funds so deposited with a bank or trust
company which shall not be required for redemption by reason of the
exercise subsequent to the date of such deposit of the right of
conversion of any Preferred Stock shall be returned to the
Corporation.
(vii) Notwithstanding the foregoing, however, any holder
of Preferred Stock may convert any or all of the Preferred Stock
owned by such holder into Common Stock in accordance with paragraph
1.4 at any time prior to any Redemption Date.
(d) REDEEMED OR OTHERWISE ACQUIRED SHARES TO BE RETIRED. Any shares
of the Preferred Stock redeemed pursuant to this paragraph 1.2 or otherwise
acquired by the Corporation in any manner whatsoever shall be permanently
retired and shall not under any circumstances be reissued; and the Corporation
may from time to time take such appropriate corporate action as may be necessary
to reduce the number of authorized shares of Preferred Stock accordingly.
(e) SHARES OF PREFERRED STOCK TO BE REDEEMED. In case of the
redemption, for any reason, of only a part of the outstanding shares of any
series of Preferred Stock on any Redemption Date (the "Redeemable Shares"), all
Redeemable Shares shall be selected PRO RATA, and there shall be so redeemed
from each registered holder in whole shares as nearly as practicable to the
nearest share, that proportion of all the Redeemable Shares which the number of
shares of such series held of record by such holder bears to the total number of
shares of Redeemable Shares at the time outstanding.
(f) INSUFFICIENT FUNDS. If the Corporation for any reason (including
the failure to have sufficient funds legally available therefor) fails to redeem
on any Redemption Date all Series B Preferred Stock required to be redeemed on
such Redemption Date, then:
(i) notwithstanding any provision to the contrary
contained herein, the amounts due to the holders of Series B
Preferred Stock on account of redemption of their Series B Preferred
Stock shall bear interest at the prime rate published in the "Money
Rates" column of the Wall Street Journal (or its successor) in
effect on the Redemption Date on which the Corporation failed to
redeem the Series B Preferred Stock (and adjusted quarterly
thereafter) plus six percent (6%) per annum (or, if less, the
maximum rate permitted by applicable law), compounded annually,
computed from the Redemption Date on which the Corporation failed to
redeem the Series B Preferred Stock until payment of such amounts to
such holders; and
(ii) notwithstanding any provision to the contrary
contained herein or in any agreement to which the Corporation is a
party, (A) the holders of a majority of the outstanding Series B
Preferred Stock shall have the right, upon 30 days prior written
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notice to the Corporation, by written consent, or at any special or
annual meeting of the stockholders of the Corporation or any meeting
of the holders of Series B Preferred Stock, voting together as a
separate class to the exclusion of the holders of Series A Preferred
Stock and Common Stock, to elect a majority of the directors of the
Corporation, and (B) upon 30 days prior written notice to the
Corporation that such holders desire to exercise such right, the
Board of Directors shall automatically be increased effective as of
the date of the vote referred to in clause (A) by that number of
directors which, together with any director designated by the
holders of Series B Preferred Stock pursuant to any agreement then
in effect concerning the election of directors, equals a majority of
the directors. Such right shall continue until 30 days after the
Corporation is no longer in default of its obligation to redeem
Series B Preferred Stock. Each director elected by the holders of
Series B Preferred Stock pursuant to this paragraph 1.2(f) (each, an
"Additional Series B Preferred Director") shall continue to serve as
such director until the date that all obligations of the Corporation
have been satisfied in full pursuant to this paragraph 1.2. Until
the date on which all obligations of the Corporation under this
paragraph 1.2 shall have been satisfied, any Additional Series B
Preferred Director may be removed by, and shall not be removed
except by, the written consent or vote of the holders of record of a
majority of the outstanding Series B Preferred Stock. So long as a
default under this paragraph 1.2(f) shall exist, any vacancy in the
office of an Additional Series B Preferred Director shall be filled
only by the vote or written consent of the holders of a majority of
the outstanding Series B Preferred Stock.
1.3 LIQUIDATION.
(a) PREFERRED STOCK. Upon any liquidation, dissolution or winding up
of the Corporation, whether voluntary or involuntary, (i) the holders of the
shares of Series B Preferred Stock shall be entitled, before any distribution or
payment is made upon any shares of Series A Preferred Stock or Common Stock, to
be paid with respect to each outstanding share of Series B Preferred Stock an
amount equal to $0.4246843 per share (the "Series B Liquidation Preference")
with respect to each share of Series B Preferred Stock, as adjusted for any
stock dividends payable in shares of Series B Preferred Stock, combinations or
splits of the Series B Preferred Stock, (ii) only after the holders of Series B
Preferred Stock shall have received payment of such Series B Liquidation
Preference in full, the holders of the shares of Series A Preferred Stock and
the holders of the shares of Series B Preferred Stock shall be entitled, before
any distribution or payment is made upon any shares of Common Stock, to be paid
with respect to each outstanding share of Series A Preferred Stock and each
outstanding share of Series B Preferred Stock an amount equal to $1.00 per
share, plus any accrued but unpaid dividends on each such share as provided
herein (the "Combined Series A and Series B Liquidation Preference") with
respect to each share of Series A Preferred Stock and Series B Preferred Stock,
in each case as adjusted for any stock dividends payable in shares of such
series of Preferred Stock, combinations or splits of such series of Preferred
Stock, and (iii) only after the holders of Series B Preferred Stock shall have
received payment of the Series B Liquidation Preference in full and after the
holders of Series A Preferred Stock and Series B Preferred Stock shall have
received payment of the Combined Series A and Series B Liquidation Preference in
full, shall the holders of shares of Common Stock be eligible to receive any
liquidation payments (any of such liquidation payments being sometimes referred
to as the "Liquidation Payments"). If upon such
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liquidation, dissolution or winding up of the Corporation, whether voluntary or
involuntary, the assets to be distributed among the holders of the Preferred
Stock of the Corporation shall be insufficient to permit payment to such holders
of the full amount of the Liquidation Payments to which such holders are
entitled, then the entire assets of the Corporation to be so distributed shall
be distributed first among the holders of Series B Preferred Stock in proportion
to the Series B Liquidation Preference and then ratably among the holders of the
Series A Preferred Stock and the Series B Preferred Stock in proportion to the
Combined Series A and Series B Liquidation Preference, and no Liquidation
Payments shall be made to the holders of Common Stock.
Upon any such liquidation, dissolution or winding up of the
Corporation, after the holders of Preferred Stock shall have been paid in full
the preferential amounts to which they shall be 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) in all remaining assets of the Corporation
available for distribution to its stockholders. Written notice of such
liquidation, dissolution or winding up, stating a payment date, the amount of
the Liquidation Payments to be made pursuant hereto and the place where said
Liquidation Payments shall be payable shall be given by mail, postage prepaid,
not less than 30 days prior to the payment date stated therein to the holders of
record of the Preferred Stock, such notice to be addressed to each such holder
at his post office address as shown by the records of the Corporation.
(b) DEFINITIONS. As used in this paragraph 1.3, a liquidation,
dissolution or winding up of the Corporation shall be deemed to include (i) a
consolidation or merger of the Corporation with or into any other corporation
(other than a merger in which the Corporation is the surviving corporation and
which will not result in more than 50% of the voting capital stock of the
Corporation outstanding immediately after the effective date of such merger
being owned of record or beneficially by persons other than the holders of such
voting capital stock immediately prior to such merger in the same proportions in
which such shares were held immediately prior to such merger), (ii) a sale of
all or substantially all of the properties and assets of the Corporation as an
entirety to any other person, or (iii) the acquisition of "beneficial ownership"
by any "person" or "group" of voting stock of the corporation representing more
than 50% of the voting power of all outstanding shares of such voting stock,
whether by way of merger or consolidation or otherwise (collectively, an
"Acquisition"). For purposes hereof, an Acquisition shall not include any
reorganization, merger or consolidation involving (1) only a change in the state
of incorporation of the Corporation or (2) a merger of the Corporation with or
into a wholly-owned subsidiary of the Corporation that is incorporated in the
United States of America.
(c) DISTRIBUTIONS IN CASH; ECONOMIC EFFECT OF ACQUISITION. The
Liquidation Payments for the Preferred Stock shall in all events be paid in cash
to the extent possible; provided, however, that if the Liquidation Payments for
the Preferred Stock are payable in connection with an Acquisition in which the
consideration consists solely of voting securities of the acquiring entity, then
each holder of Preferred Stock shall receive payments of the Preferred Stock in
the same form of consideration as is payable with respect to the Common Stock.
In the event of any Acquisition which is desired to be treated by the Board of
Directors of the Corporation as a "pooling of interests" for accounting purposes
under Accounting Principles
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Board Opinion No. 16, the Acquisition consideration shall be reallocated among
the holders of Preferred Stock and Common Stock in a manner to give economic
effect to the intent and purpose of paragraph 1.3(a).
1.4 CONVERSION.
(a) (i) RIGHT TO CONVERT PREFERRED STOCK. Subject to the
terms and conditions of this paragraph 1.4, the holder of any share
or shares of Preferred Stock shall have the right, at its option at
any time, to convert any or all of such shares of Preferred Stock
into such number of fully paid and nonassessable whole shares of
Common Stock as is obtained by multiplying the number of shares of
Series A or Series B Preferred Stock so to be converted by the
fraction obtained by dividing the Original Series Issue Price (as
defined below) for the applicable series by the Applicable
Conversion Price (as defined below) for each such series of
Preferred Stock, determined as hereinafter provided, in effect on
the date the certificate is surrendered for conversion. The term
"Original Series Issue Price" shall mean (i) in the case of the
Series A Preferred Stock, $1.00 and (ii) in the case of the Series B
Preferred Stock, $1.4246843. The term "Applicable Conversion Price"
shall mean (i) in the case of the Series A Preferred Stock, $1.00
per share and (ii) in the case of the Series B Preferred Stock,
$1.4246843 per share, provided, however, that the Applicable
Conversion Price for each such series shall be subject to adjustment
as set forth below. Notwithstanding the foregoing, until such time
as the Series B Prime Preferred Stock becomes entitled to voting
rights as set forth in paragraph 1.5(b) hereof, any Common Stock
issued upon conversion of such Series B Prime Preferred Stock
pursuant to this paragraph 1.4(a) shall not be entitled to voting
rights until the expiration or earlier termination of the H-S-R
Waiting Period (as defined herein). However, upon any liquidation,
dissolution or winding up of the Corporation, the right of
conversion shall terminate at the close of business on the last full
business day next preceding the date fixed for payment of the amount
distributable on the Preferred Stock.
(ii) MECHANICS OF CONVERSION. The rights of conversion
contained in this paragraph 1.4(a) shall be exercised by the holder
of shares of Preferred Stock by giving written notice that such
holder elects to convert a stated number of shares of Preferred
Stock into Common Stock and by surrender of a certificate or
certificates for the shares so to be converted (with duly executed
instruments of transfer with signatures guaranteed, if requested by
the Corporation) to the Corporation at its principal office (or such
other office or agency of the Corporation as the Corporation may
designate by notice in writing to the holder or holders of the
Preferred Stock) at any time during its usual business hours on the
date set forth in such notice, together with a statement of the name
or names (with address) in which the certificate or certificates for
shares of Common Stock shall be issued.
(b) ISSUANCE OF CERTIFICATES; TIME CONVERSION EFFECTED. Promptly
after the receipt of the written notice referred to in paragraph 1.4(a) and
surrender of the certificate or certificates for the share or shares of
Preferred Stock to be converted, the Corporation shall issue and deliver, or
cause to be issued and delivered, to the holder, registered in such name or
names as such holder may direct, a certificate or certificates for the number of
whole shares of Common Stock
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issuable upon the conversion of such share or shares of Preferred Stock. To the
extent permitted by law, such conversion shall be deemed to have been effected,
and the Applicable Conversion Price for such series of Preferred Stock, shall be
determined, as of the close of business on the date on which such written notice
shall have been received by the Corporation and the certificate or certificates
for such share or shares shall have been surrendered as aforesaid, and at such
time the rights of the holder of such share or shares of Preferred Stock shall
cease, and the person or persons in whose name or names any certificate or
certificates for shares of Common Stock shall be issuable upon such conversion
shall be deemed to have become the holder or holders of record of the shares
represented thereby.
(c) FRACTIONAL SHARES; DIVIDENDS; PARTIAL CONVERSION. No fractional
shares may be issued upon conversion of the Preferred Stock into Common Stock.
At the time of each conversion, the Corporation shall pay in cash an amount
equal to all dividends, if any, declared and unpaid on the shares surrendered
for conversion to the date upon which such conversion is deemed to take place as
provided in paragraph 1.4(b). In case the number of shares of Preferred Stock
represented by the certificate or certificates surrendered pursuant to paragraph
1.4(a) exceeds the number of shares converted, the Corporation shall, upon such
conversion, execute and deliver to the holder thereof, at the expense of the
Corporation, a new certificate or certificates for the number of shares of
Preferred Stock represented by the certificate or certificates surrendered which
are not to be converted. If any fractional interest in a share of Common Stock
would, except for the provisions of the first sentence of this paragraph 1.4(c),
be deliverable upon any such conversion, the Corporation, in lieu of delivering
the fractional share thereof, shall pay to the holder surrendering the Preferred
Stock for conversion an amount in cash equal to the current market price of such
fractional interest as determined in good faith by the Board of Directors of the
Corporation.
(d) ADJUSTMENT OF PRICE UPON ISSUANCE OF COMMON STOCK. Except as
provided in paragraph 1.4(f) hereof, if and whenever the Corporation shall issue
or sell, or is in accordance with subparagraphs 1.4(d)(i) through 1.4(d)(vii)
deemed to have issued or sold, any shares of its Common Stock for a
consideration per share less than the Applicable Conversion Price for a series
of Preferred Stock in effect immediately prior to the time of such issue or
sale, then, forthwith upon such issue or sale, the Applicable Conversion Price
for such series shall be (X) in the case of the Corporation's initial public
offering of shares of its Common Stock, reduced to the public offering price of
such shares and (Y) in the case of all other issuances or sales of any shares of
its Common Stock, determined by dividing (i) an amount equal to the sum of (a)
the number of shares of Common Stock outstanding immediately prior to such issue
or sale (including as outstanding all shares of Common Stock issuable upon
conversion of outstanding Preferred Stock, exercise of Options (as defined
below), or conversion or exchange of other Convertible Securities (as defined
below)) multiplied by the then existing Applicable Conversion Price of such
series, and (b) the consideration, if any, received by the Corporation upon such
issue or sale, by (ii) the total number of shares of Common Stock outstanding
immediately after such issue or sale (including as outstanding all shares of
Common Stock issuable upon conversion of outstanding Preferred Stock, exercise
of Options, or conversion or exchange of other Convertible Securities).
For purposes of this subparagraph 1.4(d), the following
subparagraphs 1.4(d)(i) through 1.4(d)(vii) shall also be applicable:
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(i) ISSUANCE OF RIGHTS OR OPTIONS. In case at any time
the Corporation shall in any manner grant (whether directly or by
assumption in a merger or otherwise) any rights to subscribe for or
to purchase, or any options for the purchase of, Common Stock or any
stock or securities convertible into or exchangeable for Common
Stock (such rights or options being herein called "Options" and such
convertible or exchangeable stock or securities being herein called
"Convertible Securities") whether or not such Options or the right
to convert or exchange any such Convertible Securities are
immediately exercisable, and the price per share for which Common
Stock is issuable upon the exercise of such Options or upon
conversion or exchange of such Convertible Securities (determined by
dividing (i) the total amount, if any, received or receivable by the
Corporation as consideration for the granting of such Options, plus
the minimum aggregate amount of additional consideration payable to
the Corporation upon the exercise of all such Options, plus, in the
case of such Options which relate to Convertible Securities, the
minimum aggregate amount of additional consideration, if any,
payable upon the issue or sale of such Convertible Securities and
upon the conversion or exchange thereof, by (ii) the total maximum
number of shares of Common Stock issuable upon the exercise of such
Options or upon the conversion or exchange of all such Convertible
Securities issuable upon the exercise of such Options) shall be less
than the Applicable Conversion Price for any series in effect
immediately prior to the time of the granting of such Options, then
the total maximum number of shares of Common Stock issuable upon the
exercise of such Options or upon conversion or exchange of the total
maximum amount of such Convertible Securities issuable upon the
exercise of such Options shall be deemed to have been issued for
such price per share as of the date of granting of such Options and
thereafter shall be deemed to be outstanding. Except as otherwise
provided in subparagraph 1.4(d)(iii), no adjustment of the
Applicable Conversion Price of such series shall be made upon the
actual issue of such Common Stock or of such Convertible Securities
upon exercise of such Options or upon the actual issue of such
Common Stock upon conversion or exchange of such Convertible
Securities. Notwithstanding anything to the contrary contained
herein, the granting of Options pursuant to a stock option plan
approved by the Board of Directors shall not trigger any adjustment
of the Applicable Conversion Price for any series of Preferred
Stock.
(ii) ISSUANCE OF CONVERTIBLE SECURITIES. In case the
Corporation shall in any manner issue (whether directly or by
assumption in a merger or otherwise) or sell any Convertible
Securities, whether or not the rights to exchange or convert
thereunder are immediately exercisable, and the price per share for
which Common Stock is issuable upon such conversion or exchange
(determined by dividing (i) the total amount received or receivable
by the Corporation as consideration for the issue or sale of such
Convertible Securities, plus the minimum aggregate amount of
additional consideration, if any, payable to the Corporation upon
the conversion or exchange thereof, by (ii) the total maximum number
of shares of Common Stock issuable upon the conversion or exchange
of all such Convertible Securities) shall be less than the
Applicable Conversion Price for any series in effect immediately
prior to the time of such issue or sale, then the total maximum
number of shares of Common Stock issuable upon conversion or
exchange of all such Convertible Securities shall be deemed to have
been issued for such price per share as of the date of the issue or
sale of such Convertible Securities and thereafter shall
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be deemed to be outstanding, provided that (a) except as otherwise
provided in subparagraph 1.4(d)(iii) below, no adjustment of the
Applicable Conversion Price for such series of Preferred Stock shall
be made upon the actual issue of such Common Stock upon conversion
or exchange of such Convertible Securities, and (b) if any such
issue or sale of such Convertible Securities is made upon exercise
of any Option to purchase any such Convertible Securities for which
adjustments of the Applicable Conversion Price for such series of
Preferred Stock have been or are to be made pursuant to other
provisions of this paragraph 1.4(d), no further adjustment of the
Applicable Conversion Price for such series of Preferred Stock shall
be made by reason of such issue or sale.
(iii) CHANGE IN OPTION PRICE OR CONVERSION RATE. If (i)
the purchase price provided for in any Option referred to in
subparagraph 1.4(d)(i) hereof, (ii) the additional consideration, if
any, payable upon the conversion or exchange of any Convertible
Securities referred to in subparagraph 1.4(d)(i) or 1.4(d)(ii)
hereof or (iii) the rate at which any Convertible Securities
referred to in subparagraph 1.4(d)(i) or 1.4(d)(ii) hereof are
convertible into or exchangeable for Common Stock shall change at
any time (in each case other than under or by reason of provisions
designed to protect against dilution), then the Applicable
Conversion Price for each series of Preferred Stock in effect at the
time of such event shall, as required, forthwith be readjusted to
such Applicable Conversion Price for such series of Preferred Stock
which would have been in effect at such time had such Options or
Convertible Securities still outstanding provided for such changed
purchase price, additional consideration or conversion rate, as the
case may be, at the time initially granted, issued or sold; and on
the expiration of any such Option or the termination of any such
right to convert or exchange such Convertible Securities, the
Applicable Conversion Price then in effect hereunder for each series
of Preferred Stock shall, as required, forthwith be increased to the
Applicable Conversion Price for such series of Preferred Stock which
would have been in effect at the time of such expiration or
termination had such option or Convertible Securities, to the extent
outstanding immediately prior to such expiration or termination,
never been issued, and the Common Stock issuable thereunder shall no
longer be deemed to be outstanding. If the purchase price provided
for in any such Option referred to in subparagraph 1.4(d)(i) or the
rate at which any Convertible Securities referred to in subparagraph
1.4(d)(i) or 1.4(d)(ii) are convertible into or exchangeable for
Common Stock shall be reduced at any time under or by reason of
provisions with respect thereto designed to protect against
dilution, then, in case of the delivery of Common Stock upon the
exercise of any such Option or upon conversion or exchange of any
such Convertible Securities, the Applicable Conversion Price then in
effect hereunder shall, as required, forthwith be adjusted to such
respective amount as would have been obtained had such Option or
Convertible Securities never been issued as to such Common Stock and
had adjustments been made upon the issuance of the shares of Common
Stock delivered as aforesaid, but only if as a result of such
adjustment the Applicable Conversion Price then in effect hereunder
is thereby reduced.
(iv) STOCK DIVIDENDS. In case the Corporation shall
declare a dividend or make any other distribution upon any stock of
the Corporation payable in Common Stock, Options or Convertible
Securities, any Common Stock, Options or Convertible Securities, as
the case may be, issuable in payment of such dividend or
distribution shall be deemed to have been issued or sold without
consideration, and the Applicable
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Conversion Price for each series of Preferred Stock shall be reduced
as if the Corporation had subdivided its outstanding shares of
Common Stock into a greater number of shares, as provided in
paragraph 1.4(e) hereof.
(v) CONSIDERATION FOR STOCK. In case any shares of
Common Stock, Options or Convertible Securities shall be issued or
sold for cash, the consideration received therefor shall be deemed
to be the amount received by the Corporation therefor, without
deduction therefrom of any expenses incurred or any underwriting
commissions or concessions paid or allowed by the Corporation in
connection therewith. In case any shares of Common Stock, Options or
Convertible Securities shall be issued or sold for a consideration
other than cash, the amount of the consideration other than cash
received by the Corporation shall be deemed to be the fair value of
such consideration as determined in good faith by the Board of
Directors of the Corporation, without deduction therefrom of any
expenses incurred or any underwriting commissions or concessions
paid or allowed by the Corporation in connection therewith. In case
any Options shall be issued in connection with the issue and sale of
other securities of the Corporation, together comprising one
integral transaction in which no specific consideration is allocated
to such Options by the Corporation, such Options shall be deemed to
have been issued without consideration, and the Applicable
Conversion Price for each series of Preferred Stock shall be reduced
as if the Corporation had subdivided its outstanding shares of
Common Stock into a greater number of shares, as provided in
paragraph 1.4(e) hereof.
(vi) RECORD DATE. In case the Corporation shall take a
record of the holders of its Common Stock for the purpose of
entitling them (i) to receive a dividend or other distribution
payable in Common Stock, Options or Convertible Securities, or (ii)
to subscribe for or purchase Common Stock, Options or Convertible
Securities, then such record date shall be deemed to be the date of
the issue or sale of the shares of Common Stock deemed to have been
issued or sold upon the declaration of such dividend or the making
of such other distribution or the date of the granting of such right
of subscription or purchase, as the case may be, provided that such
shares of Common Stock shall in fact have been issued or sold.
(vii) TREASURY SHARES. The number of shares of Common
Stock outstanding at any given time shall not include shares owned
or held by or for the account of the Corporation, and the
disposition of any such shares shall be considered an issue or sale
of Common Stock for the purposes of this paragraph 1.4(d).
(e) SUBDIVISION OR COMBINATION OF STOCK. In case the Corporation
shall at any time subdivide its outstanding shares of Common Stock into a
greater number of shares, the Applicable Conversion Price for any series of
Preferred Stock in effect immediately prior to such subdivision shall be
proportionately reduced, and conversely, in case the outstanding shares of
Common Stock of the Corporation shall be combined into a smaller number of
shares, the Applicable Conversion Price for any series of Preferred Stock in
effect immediately prior to such combination shall be proportionately increased.
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(f) CERTAIN ISSUES OF COMMON STOCK EXCEPTED. Anything herein to the
contrary notwithstanding, the Corporation shall not be required to make any
adjustment of the Applicable Conversion Price for any series of Preferred Stock
upon the occurrence of any of the following events: (i) the issuance of Common
Stock upon conversion of outstanding shares of Preferred Stock and (ii) the
issuance of shares of Common Stock upon the exercise of options granted or to be
granted by the Corporation to employees, consultants, officers or directors of
the Corporation, such grants having been approved by the Corporation's Board of
Directors.
(g) REORGANIZATION, RECLASSIFICATION, CONSOLIDATION, MERGER OR SALE.
If any capital reorganization or reclassification of the capital stock of the
Corporation or any consolidation or merger of the Corporation with another
corporation, or the sale of all or substantially all of its assets to another
corporation shall be effected in such a way (including, without limitation, by
way of consolidation or merger) that holders of Common Stock shall be entitled
to receive stock, securities or assets with respect to or in exchange for Common
Stock, then, as a condition of such reorganization, reclassification,
consolidation, merger or sale, lawful and adequate provisions (in form
reasonably satisfactory to the holders of at least 66-2/3% of the outstanding
shares of Series B Preferred Stock and the holders of a majority of the
outstanding shares of Series A Preferred Stock, each voting separately as a
class) shall be made whereby each holder of a share or shares of such series of
Preferred Stock shall thereafter have the right to receive, upon the basis and
upon the terms and conditions specified herein and in lieu of the shares of
Common Stock of the Corporation immediately theretofore receivable upon the
conversion of such share or shares of the Preferred Stock, such shares of stock,
securities or assets as may be issued or payable with respect to or in exchange
for a number of outstanding shares of such Common Stock equal to the number of
shares of such stock immediately theretofore so receivable had such
reorganization, reclassification, consolidation, merger or sale not taken place,
and in any such case appropriate provision shall be made with respect to the
rights and interests of such holder to the end that the provisions hereof
(including, without limitation, provisions for adjustment of the Applicable
Conversion Price for such series of Preferred Stock then in effect) shall
thereafter be applicable, as nearly practicable, in relation to any shares of
stock, securities or assets thereafter deliverable upon the exercise of such
conversion rights (including if necessary to effect the adjustments contemplated
herein, an immediate adjustment, by reason of such reorganization,
reclassification, consolidation, merger or sale, of the Applicable Conversion
Price for such series of Preferred Stock to the value for the Common Stock
reflected by the terms of such reorganization, reclassification, consolidation,
merger or sale if the value so reflected is less than the Applicable Conversion
Price in effect immediately prior to such reorganization, reclassification,
consolidation, merger or sale). In the event of a merger or consolidation of the
Corporation as a result of which a greater or lesser number of shares of common
stock of the surviving corporation is issuable to holders of Common Stock of the
Corporation outstanding immediately prior to such merger or consolidation, the
Applicable Conversion Price for each series of Preferred Stock in effect
immediately prior to such merger or consolidation shall be adjusted in the same
manner as though there were a subdivision or combination of the outstanding
shares of Common Stock of the Corporation. The Corporation will not effect any
such consolidation or merger, or any sale of all or substantially all of its
assets and properties, unless prior to the consummation thereof the successor
corporation (if other than the Corporation) resulting from such consolidation or
merger or the corporation purchasing such assets shall assume by written
instrument (in form reasonably satisfactory to the holders of at least 66-2/3%
of the outstanding shares of Series B Preferred Stock and the holders of a
majority
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of the outstanding shares of Series A Preferred Stock, each voting separately as
a class), executed and mailed or delivered to each holder of shares of Preferred
Stock at the last address of such holder appearing on the books of the
Corporation, the obligation to deliver to such holder such shares of stock,
securities or assets as, in accordance with the foregoing provisions, such
holder may be entitled to receive.
(h) AUTOMATIC CONVERSION. In the event that, at any time while any
of the Preferred Stock shall be outstanding, the Corporation shall complete a
Qualified Public Offering (as defined in paragraph 1.1(c) hereof), then all
outstanding shares of Preferred Stock shall, automatically and without further
action on the part of the holders of the Preferred Stock, be converted into
shares of Common Stock in accordance with the terms of this paragraph 1.4 with
the same effect as if the certificates evidencing such shares had been
surrendered for conversion, such conversion to be effective simultaneously with
the closing of such public offering, PROVIDED, HOWEVER, that certificates
evidencing the shares of Common Stock issuable upon such conversion shall not be
issued except on surrender of the certificates for the shares of the Preferred
Stock so converted. Notwithstanding the foregoing, until such time as the Series
B Prime Preferred Stock becomes entitled to voting rights as set forth in
paragraph 1.5(b) hereof, any Common Stock issued upon conversion of such Series
B Prime Preferred Stock pursuant to this paragraph 1.4(h) shall not be entitled
to voting rights until the expiration or earlier termination of the H-S-R
Waiting Period.
(i) NOTICE OF ADJUSTMENT. Upon any adjustment of the Applicable
Conversion Price for any series of Preferred Stock, then and in each such case
the Corporation shall give written notice thereof, by either facsimile or
overnight delivery, addressed to each holder of shares of such series of
Preferred Stock at the address of such holder as shown on the books of the
Corporation, which notice shall state the Applicable Conversion Price for such
series of Preferred Stock resulting from such adjustment, setting forth in
reasonable detail the method of calculation and the facts upon which such
calculation is based.
(j) OTHER NOTICES. In case at any time:
(i) the Corporation shall declare any dividend upon its
Common Stock payable in cash or stock or make any other distribution
to the holders of its Common Stock;
(ii) the Corporation shall offer for subscription PRO
RATA to the holders of its Common Stock any additional shares of
stock of any class or other rights;
(iii) there shall be any capital reorganization or
reclassification of the capital stock of the Corporation, or a
consolidation or merger of the Corporation with, or a sale of all or
substantially all its assets to, another corporation, or, to the
Corporation's knowledge, any acquisition of "beneficial ownership"
by any "person" or "group" of voting stock of the Corporation
representing more than 50% of the voting power of all outstanding
shares of such voting stock, whether by way of merger or
consolidation or otherwise;
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(iv) there shall be a voluntary or involuntary
dissolution, liquidation or winding up of the Corporation; or
(v) the Corporation shall take any action or there shall
be any event which would result in an automatic conversion of the
Preferred Stock pursuant to paragraph 1.4(h),
then, in any one or more of said cases, the Corporation shall give,
by either facsimile or overnight delivery, addressed to each holder of any
shares of Preferred Stock at the address of such holder as shown on the books of
the Corporation, (a) at least 10 days' prior written notice of the date on which
the books of the Corporation shall close or a record shall be taken for such
dividend, distribution or subscription rights or for determining rights to vote
in respect of any such reorganization, reclassification, consolidation, merger,
sale, dissolution, liquidation or winding up, (b) in the case of any such
reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation or winding up, at least 10 days' prior written notice of the date
when the same shall take place, and (c) in the case of any event which would
result in an automatic conversion of the Preferred Stock pursuant to paragraph
1.4(h), at least 10 days' prior written notice of the date on which the same is
expected to be completed. Such notice in accordance with the foregoing clause
(a) shall also specify, in the case of any such dividend, distribution or
subscription rights, the date on which the holders of Common Stock shall be
entitled thereto, and such notice in accordance with the foregoing clause (b)
shall also specify the date on which the holders of Common Stock shall be
entitled to exchange their Common Stock for securities or other property
deliverable upon such reorganization, reclassification, consolidation, merger,
sale, dissolution, liquidation or winding up, as the case may be.
(k) STOCK TO BE RESERVED. The Corporation will at all times reserve
and keep available out of its authorized Common Stock or its treasury shares,
solely for the purpose of issue upon the conversion of the Preferred Stock as
herein provided, such number of shares of Common Stock as shall then be issuable
upon the conversion of all outstanding shares of Preferred Stock. The
Corporation covenants that all shares of Common Stock which shall be so issued
shall be duly and validly issued and fully paid and nonassessable and free from
all taxes, liens and charges with respect to the issue thereof and, without
limiting the generality of the foregoing, the Corporation covenants that it will
from time to time take all such action as may be requisite to assure that the
par value per share of the Common Stock is at all times equal to or less than
the effective Series A Applicable Conversion Price. The Corporation will take
all such action as may be necessary to assure that all such shares of Common
Stock may be so issued without violation of any applicable law or regulation, or
of any requirements of any national securities exchange upon which the Common
Stock of the Corporation may be listed. The Corporation will not take any action
which results in any adjustment of the Applicable Conversion Price for any
series of Preferred Stock if the total number of shares of Common Stock issued
and issuable after such action upon conversion of the Preferred Stock would
exceed the total number of shares of Common Stock then authorized by the
Corporation's Certificate of Incorporation.
(l) NO REISSUANCE OF PREFERRED STOCK. Shares of Preferred Stock
which are converted into shares of Common Stock as provided herein shall not be
reissued.
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(m) ISSUE TAX. The issuance of certificates for shares of Common
Stock upon conversion of the Preferred Stock shall be made without charge to the
holders thereof for any issuance tax in respect thereof, provided that the
Corporation shall not be required to pay any tax which may be payable in respect
of any transfer involved in the issuance and delivery of any certificate in a
name other than that of the holder of the Preferred Stock which is being
converted.
(n) CLOSING OF BOOKS. The Corporation will at no time close its
transfer books against the transfer of any Preferred Stock or of any shares of
Common Stock issued or issuable upon the conversion of any shares of Preferred
Stock in any manner which interferes with the timely conversion of such
Preferred Stock.
(o) DEFINITION OF COMMON STOCK. As used in this paragraph 1.4, the
term "Common Stock" shall mean and include the Corporation's authorized Common
Stock, par value $.01 per share, as constituted on the date of filing of this
Amendment to Certificate of Incorporation and shall also include any capital
stock of any class of the Corporation thereafter authorized that shall not be
limited to a fixed sum or percentage of par value in respect of the rights of
the holders thereof to participate in dividends or in the distribution of assets
upon the voluntary or involuntary liquidation, dissolution or winding up of the
Corporation; PROVIDED, HOWEVER, that such term, when used to describe the
securities receivable upon conversion of shares of the Preferred Stock of the
Corporation, shall include only shares designated as Common Stock of the
Corporation on the date of filing of this Amendment to Certificate of
Incorporation, any shares resulting from the conversion of Series B Prime
Preferred Stock referred to in paragraphs 1.4(a) and 1.4(h) hereof, any shares
resulting from any combination or subdivision thereof referred to paragraph
1.4(e), or in case of any reorganization or reclassification of the outstanding
shares thereof, the stock, securities or assets provided for in paragraph
1.4(g).
1.5 VOTING.
(a) GENERAL. Except as described in paragraph 1.5(b) below or as
otherwise required by law or this Certificate of Incorporation, the holders of
the Preferred Stock and the holders of Common Stock shall be entitled to notice
of any stockholders meeting in accordance with the By-Laws of the Corporation
and to vote upon any matter submitted to the stockholders for a vote as follows:
(i) the holders of Preferred Stock shall have one vote for each full share of
Common Stock into which their respective shares of Preferred Stock are
convertible on the record date for the vote and (ii) the holders of Common Stock
shall have one vote per share of Common Stock. Except as otherwise required by
Delaware General Corporation Law, or as set forth in paragraph 1.5 herein, the
holders of shares of Preferred Stock shall vote together (or render written
consents in lieu of a vote) with the holders of all series of Preferred Stock
and Common Stock as a single class on all matters submitted to the stockholders
of the Corporation. Such determination of "full shares" shall be based upon the
aggregate number of shares of Preferred Stock held by each holder, and not upon
each share of Preferred Stock so held by the holder. Notwithstanding the
provisions of Section 242(b)(2) of the General Corporation Law of the State of
Delaware, the holders of Common Stock shall vote together with the holders of
each series of Preferred Stock as a single class with respect to any proposed
amendment hereto that would increase the number of authorized shares of Common
Stock or Preferred Stock with each
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such share being entitled to such number of votes per share as is provided in
this Article, and the holders of Common Stock shall not be entitled to a
separate class vote with respect thereto.
(b) SERIES B PRIME PREFERRED STOCK VOTING RIGHTS. The Preferred
Stock referred to as Series B Prime Preferred Stock shall have all of the same
rights and privileges of the Series B Preferred Stock, with the exception that
the holders of the Series B Prime Preferred Stock shall not be entitled to vote
upon any matter submitted to the stockholders for a vote until the expiration or
earlier termination of the applicable waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976 (the "H-S-R Waiting Period") with respect to
such holders' holding of voting securities of the Corporation of a value in
excess of $14.999 million. Upon such expiration or earlier termination of the
H-S-R Waiting Period and notification thereof being delivered by the holders of
such Series B Prime Preferred Stock to the Corporation, the holders of Series B
Prime Preferred Stock shall automatically become entitled to the same voting
rights as the holders of Series B Preferred Stock otherwise described in this
Certificate of Amendment, and the Series B Prime Preferred Stock shall
thereafter be known as Series B Preferred Stock.
(c) SPECIAL VOTING RIGHTS. So long as any shares of Series B
Preferred Stock remain outstanding, the Corporation shall not, without the
written consent or affirmative vote of the holders of at least 66-2/3% of the
then outstanding shares of Series B Preferred Stock, given in writing or by vote
at a meeting, consenting or voting (as the case may be) together as a single
class:
(i) create, incur, assume, suffer to exist or guaranty
(however designated), directly or indirectly, any debt in an amount
greater than $10,000,000, except for (i) existing indebtedness, (ii)
indebtedness incurred in connection with the acquisition of
equipment or fixed assets and (iii) trade accounts of the
Corporation or any subsidiary arising in the ordinary course of
business;
(ii) in any manner authorize, create, designate, issue,
sell or reclassify any class or series of capital stock of the
Corporation (including any shares of treasury stock), any rights,
options, warrants or other securities convertible into or
exercisable or exchangeable for capital stock, any debt security
which by its terms is convertible into or exchangeable for any
equity security or has any other equity feature, or any security
that is a combination of debt and equity, which, in each case, as to
the payment of dividends, distribution of assets or redemptions,
including, without limitation, distributions to be made upon a
liquidation, is senior to the Series B Preferred Stock;
(iii) in any manner alter or change the terms,
designations, powers, preferences or relative, participating,
optional or other special rights, or the qualifications, limitations
or restrictions thereof, of the Series B Preferred Stock;
(iv) in any manner authorize, create, issue or sell any
additional shares of Series A Preferred Stock or Series B Preferred
Stock, PROVIDED, HOWEVER, that this provision shall not be
applicable with respect to shares of Series B Preferred Stock
issuable in connection with prepayments of amounts owed by Juno
under the Juno Senior Note;
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(v) enter into or be a party to any transaction with any
director, officer holding the title vice president or above, or
stockholder of the Corporation or its subsidiaries, or any general
partner or limited partner or affiliate of the Predecessor except
for (A) transactions contemplated by this Agreement, the Amended and
Restated Registration Rights Agreement or the Stockholders
Agreement, (B) transactions entered into pursuant to reasonable
objectives of the Corporation's or the subsidiaries' business that
are made upon terms that are no less favorable than those which
would have been obtained had the transaction been entered into with
a non-affiliated third party and, if material, that will have been
approved by the Board of Directors, (C) transactions entered into
pursuant to a strategic agreement between the Corporation and News
America Incorporated and/or its affiliates, or (D) transactions
between the Corporation and any officer holding the title vice
president or above relating to compensation, including, without
limitation, employment contracts, deferred compensation
arrangements, bonus plans, incentive plans, profit sharing plans,
stock option plans and grants thereunder, employee stock purchase
plans, retirement agreements or other employee compensation plans or
agreements;
(vi) sell or dispose of, or permit any subsidiary of the
Corporation to sell or dispose of, all, or a substantial portion, of
its assets;
(vii) amend, alter or repeal any of the provisions of
(A) the Certificate of Incorporation of the Corporation (as amended
or restated) or (B) the By-laws of the Corporation, if such
amendment, alteration or repeal would have an adverse effect on the
rights, preferences or privileges of the holders of the Series B
Preferred Stock;
(viii) merge or consolidate with or into any other
Person, or permit any other Person to consolidate or merge with or
into the Corporation, or participate in a share exchange with or
sell, lease, transfer, mortgage, pledge, encumber, contribute, or
otherwise dispose of all or any substantial part of its assets
(tangible or intangible) to any other Person, or enter into any
transaction or series of related transactions which results in a
change in the Person or Persons exercising control of the
Corporation immediately prior to such transactions;
(ix) voluntarily liquidate, dissolve or wind-up the
Corporation, make any filing under any state or federal bankruptcy,
insolvency or reorganization law or other law for relief from
creditors or the protection of debtors, make any assignment for the
benefit of creditors or consent to the appointment of a receiver for
itself or any part of its property, or conduct any form of
recapitalization or reorganization of the Corporation;
(x) declare or pay any dividend, or make any payment on
account of, or set apart assets for a sinking or other analogous
fund for, the purchase, redemption, defeasance, retirement or other
acquisition of, any shares of Preferred Stock, Common Stock, or any
class of capital stock of the Corporation ranking junior to the
Series B Preferred Stock, or any warrants or options to purchase any
such capital stock, or make any other distribution in respect
thereof, either directly or indirectly, whether in cash or property
or in obligations of the Corporation or any of its subsidiaries,
except for
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dividends on the Preferred Stock and redemptions of the Preferred
Stock in accordance with the provisions of this Certificate of
Incorporation;
(xi) agree to, or permit any subsidiary of the
Corporation to agree to, any provision in any agreement that would
impose any restriction on the ability of the Corporation to honor
the exercise of any rights of the holders of the Series B Preferred
Stock; or
(xii) create or acquire any subsidiaries other than
wholly-owned subsidiaries, provided, however, that this provision
shall not restrict the Corporation's ability to create or acquire
subsidiaries that are not wholly-owned if none of the other owners
of such subsidiary is an affiliate of D.E. Shaw & Co., L.P. and if
such subsidiary agrees to abide by certain covenants and additional
agreements specified in the Corporation's Series B Convertible
Preferred Stock Purchase Agreement.
ARTICLE II
COMMON STOCK
2.1 DIVIDENDS.
The holders of shares of Common Stock shall be entitled to receive such
dividends as from time to time may be declared by the Board of Directors of the
Corporation, subject to the provisions of Article I of this Article Four with
respect to the rights of holders of the Preferred Stock.
2.2 LIQUIDATION.
In the event of any liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, after payment shall have been
made to holders of Preferred Stock of the full amounts to which they shall
respectively be entitled as stated and expressed herein or as may be stated and
expressed pursuant hereto, the holders of Common Stock shall be entitled,
together with the holders of Preferred Stock, 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) in all remaining assets of the
Corporation available for distribution to its stockholders.
2.3 VOTING.
Except as otherwise provided by law, voting rights shall be governed by
paragraph 1.5 of Article I of this Article Four.
RESOLVED that the Board of Directors determines that the
capital of the Corporation will not be decreased on account of the
foregoing amendment, declares the foregoing amendment to the
Corporation's Certificate of Incorporation to be advisable and
directs that the amendment be submitted to the stockholders of the
Corporation for their approval pursuant to Section 242(b) of the
General Corporation Law of the State of Delaware."
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SECOND: that the Amendment of the Certificate of Incorporation
effected by this Certificate was duly authorized by the stockholders of the
Corporation, after first having been declared advisable by the Board of
Directors of the Corporation, all in accordance with the provisions of Section
242 of the General Corporation Law of the State of Delaware.
THIRD: that the capital of the Corporation will not be reduced
under, or by reason of, the foregoing amendments to the Certificate of
Incorporation of the Corporation.
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IN WITNESS WHEREOF, JUNO ONLINE SERVICES, INC. has caused this
Certificate to be signed by Charles Ardai, its President, who hereby
acknowledges under penalties of perjury that the facts herein stated are true
and that this certificate is the act and deed of the Corporation, this 1st day
of March, 1999.
JUNO ONLINE SERVICES, INC.
By: /s/ CHARLES ARDAI
----------------------------------
Name: Charles Ardai
Title: President
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Exhibit 3.5
BY-LAWS
OF
JUNO ONLINE SERVICES, INC.
ARTICLE I
Offices
SECTION 1. The registered office of the Corporation shall be in
Wilmington, Delaware.
SECTION 2. The Corporation may have offices also at such other places
within and without the State of Delaware as the board of directors may from time
to time determine or as the business of the Corporation may require.
ARTICLE II
Meetings of Stockholders
SECTION 1. Meetings of stockholders shall be held at such place, within or
without the State of Delaware, as shall be designated from time to time by the
board of directors.
SECTION 2. Annual meetings of stockholders shall be held at such time,
date and place as may be designated by the board of directors from time to time
for the election of directors and such other business as may properly be brought
before the meeting.
SECTION 3. Whenever stockholders are required or permitted to take any
action at a meeting, a written notice of the meeting shall be given that shall
state the place, date and hour of the meeting and, in the case of a special
meeting, the purpose or purposes for which the meeting is called. Unless
otherwise provided by law, by the certificate of incorporation or these by-laws,
the written notice of any meeting shall be given not less than ten nor more than
sixty days before the date of the meeting to each stockholder entitled to vote
at such meeting. If mailed, such notice shall be deemed to have been given when
deposited in the United States mail, postage prepaid, directed to the
stockholder at his address as it appears on the records of the corporation.
SECTION 4. The officer who has charge of the stock ledger of the
Corporation shall prepare and make, at least ten days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order with the address of and the number of
voting shares registered in the name of each. Such list shall be open for ten
<PAGE>
days prior to any meeting of stockholders for the purpose of examination of any
stockholder, for any purpose germane to the meeting, during ordinary business
hours, either at a place within the city where the meeting is to be held, which
place shall be specified in the notice of meeting, or, if not so specified, at
the place where the meeting is to be held, and shall be produced and kept at the
time and place of the meeting during the whole time thereof, and may be
inspected by any stockholder who is present.
SECTION 5. Special meetings of stockholders may be called only by the
board of directors, by the president or by stockholders owning a majority in
amount of the entire capital stock of the Corporation issued and outstanding and
entitled to vote.
SECTION 6. Written notice of a special meeting of stockholders, stating
the place, date, hour and purpose thereof, shall be given by the secretary to
each stockholder entitled to vote thereat not less than ten nor more than sixty
days before the date fixed for the meeting. Such notice shall state the purpose
or purposes of the proposed meeting.
SECTION 7. Business transacted at any special meeting of stockholders
shall be limited to the purposes stated in the notice.
SECTION 8. The holders of a majority of the voting power of stock issued
and outstanding and entitled to vote thereat, present in person or represented
by proxy, shall constitute a quorum at all meetings of the stockholders for the
transaction of business except as otherwise provided by statute or by the
certificate of incorporation. If, however, such quorum shall not be present or
represented at any meeting of stockholders, the stockholders entitled to vote
thereat, present in person or represented by proxy, shall have power to adjourn
the meeting from time to time without notice other than announcement at the
meeting if the adjournment is for more than thirty days and a new record date is
not fixed for the adjourned meeting, until a quorum shall be present or
represented. If a quorum shall be present or represented at such adjourned
meeting any business may be transacted which might have been transacted at the
original meeting.
SECTION 9. When a quorum is present at any meeting, the affirmative vote
of the holders of a majority of the voting power of stock voting shall decide
any question brought before such meeting, unless the question is one upon which
by express provision of the statutes or regulations or of the certificate of
incorporation or by-laws a different vote is required, in which case such
express provision shall govern and control the decision of such question.
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SECTION 10. Each stockholder shall at every meeting of stockholders be
entitled to one vote in person or by proxy for each share of the capital stock
having voting power held by such stockholder, but no proxy shall be voted on
after three years from its date, unless the proxy provides for a longer period.
Two inspectors of election may be appointed by the board of directors, or if not
so appointed, then by the presiding officer of the meeting. If inspectors of
election are appointed, all questions regarding the qualification of voters, the
validity of proxies and the acceptance or rejection of votes shall be decided by
such inspectors of election.
SECTION 11. Whenever the vote of stockholders at a meeting thereof is
required or permitted to be taken for or in connection with any corporate action
by any provisions of the applicable statutes or of the certificate of
incorporation, the meeting and vote of stockholders may be dispensed with if all
of the stockholders who would have been entitled to vote, or less than all but
not less than the holders of a majority of the stock entitled to vote upon the
action if such meeting were held shall consent in writing to such corporate
action being taken; provided that the written consent shall be signed by the
holders of outstanding stock having not less than the minimum number of votes
that would be necessary to authorize or take such action at a meeting at which
all shares entitled to vote thereon were present and voted, and provided that
prompt notice must be given to all stockholders of the taking of corporate
action without a meeting and by less than unanimous written consent. The written
consent shall bear the date of signature of each stockholder who signs the
consent. No written consent shall be effective to take the corporate action
referred to therein unless, within sixty days of the earliest dated consent
delivered to the Corporation, written consents signed by a sufficient number of
stockholders to take action are delivered to the Corporation by delivery to its
registered office in Delaware, its principal place of business, or to the
Secretary or other agent of the Corporation having custody of the minute book of
the Corporation. Delivery made to the Corporation's registered office shall be
by hand or by certified or registered mail, return receipt requested.
ARTICLE III
Directors
SECTION 1. The board of directors shall consist of one or more members,
the number thereof to be determined from time to time by the board of directors.
The directors shall be elected at the annual meeting of stockholders, except as
provided in Section 2 of this Article, and
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each director shall hold office until his successor is elected and qualified or
until his earlier resignation or removal. Any director may resign at any time
upon written notice to the Corporation. Any director or the entire board of
directors may be removed, with or without cause, at any time by the holders of a
majority of the shares then entitled to vote at an election of directors, and
the vacancy in the board of directors caused by such removal may be filled by
the stockholders at the time of such removal. Directors need not be stockholders
SECTION 2. Vacancies and newly created directorships resulting from any
increase in the authorized number of directors may be filled by a majority of
the directors then in office, though less than a quorum, and each of the
directors so chosen shall hold office until the next annual election (or, if
later, until his successor is elected and qualified) or until his earlier
resignation or removal.
SECTION 3. The business and affairs of the Corporation shall be managed by
or under the direction of its board of directors, which shall exercise all such
powers of the Corporation and do all such lawful acts and things as are not by
statute or by the certificate of incorporation or by these bylaws directed or
required to be exercised or done by the stockholders
SECTION 4. The first meeting of each newly elected board of directors
shall be held immediately following the adjournment of the annual meeting of
stockholders and at the place thereof. No notice of such meeting shall be
necessary to the directors in order legally to constitute the meeting, provided
a quorum shall be present. In the event such meeting is not so held, the meeting
may be held at such time and place as shall be specified in a notice given as
hereinafter provided for special meetings of the board of directors.
SECTION 5. The board of directors of the Corporation or any committee
thereof may hold meetings, both regular and special, either within or without
the State of Delaware. Regular meetings of the board of directors may be held
without notice at such time and at such place as shall from time to time be
determined by the board of directors. Special meetings of the board of directors
may be called by the president, and the president or the secretary shall call a
special meeting upon request of two directors or, if the Board of Directors
comprises only one director, upon request of such director. If given personally,
by telephone or by telegram, the notice shall be given at least 24 hours prior
to the meeting. Notice may be given by mail if it is mailed at least three days
before the meeting. The notice need not specify the business to be transacted.
In the event of an emergency which in the judgment of the president requires
immediate action, a
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special meeting may be convened without notice, consisting of those directors
who are immediately available in person or by telephone and can be joined in the
meeting in person or by conference telephone. The actions taken at such a
meeting shall be valid if at least a quorum of the directors participates either
personally or conference telephone.
SECTION 6. At meetings of the board of directors, a majority of the
directors at the time m office but in no event less than one-third of the full
number of directors shall constitute a quorum for the transaction of business
and the act of a majority of the directors present at any meeting at which there
is a quorum shall be the act of the board of directors. If a quorum shall not be
present at any meeting of the board of directors, the directors present thereat
may adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall be present.
SECTION 7. The board of directors may, by resolution passed by the board,
designate one or more committees of the board of directors, each committee to
consist of one or more of the directors of the Corporation, which, to the extent
provided in the resolution, shall have and may exercise the powers of the board
of directors in the management of the business and affairs of the Corporation,
including the power and authority to declare a dividend, to authorize the
issuance of stock and to adopt a certificate of ownership and merger, and may
authorize the seal of the Corporation to be affixed to all papers which may
require it; but no such committee shall have the power or authority to amend the
certificate of incorporation (other than fixing the designations and preferences
or rights of shares of stock or the number of shares of any series of stock or
increasing or decreasing the shares of any series, in each case, as authorized
in resolutions of the board of directors and as permitted by Delaware General
Corporation Law), adopt an agreement of merger or consolidation, recommend to
the stockholders the sale, lease or exchange of all or substantially all of the
Corporation's property and assets, recommend to the stockholders a dissolution
of the Corporation or a revocation of a dissolution, or amend the by-laws of the
Corporation. Such committee or committees shall have such name or names as may
be determined from time to time by resolution adopted by the board of directors.
Unless the board of directors designates one or more directors as alternate
members of any committee, who may replace an absent or disqualified member at
any meeting of the committee, the members of any such committee present at any
meeting and not disqualified from voting may, whether or not they constitute a
quorum, unanimously appoint another member of the board of directors to act at
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the meeting in the place of any absent or disqualified member of such committee.
At meetings of any such committee, a majority of the members or alternate
members of such committee shall constitute a quorum for the transaction of
business and the act of a majority of members or alternate members present at
any meeting at which there is a quorum shall be the act of the committee.
SECTION 8. The committees shall keep regular minutes of their proceedings.
SECTION 9. Any action required or permitted to be taken at any meeting of
the board of directors or of any committee thereof may be taken without a
meeting if a written consent thereto is signed by all members of the board or of
such committees, as the case may be, and such written consent is filed with the
minutes of proceedings of the board or committee.
SECTION 10. The members of the board of directors or any committee thereof
may participate in a meeting of such board or committee by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other and such participation shall
constitute presence in person at such meeting.
SECTION 11. The directors may be paid their expenses of attendance at each
meeting of the board of directors and may be paid a fixed sum for attendance at
each meeting of the board of directors or a stated salary as director. No such
payment shall preclude any director from serving the Corporation in any other
capacity and receiving compensation therefore Members of special or standing
committees may be allowed like reimbursement and compensation for attending
committee meetings.
ARTICLE IV
Notices
SECTION 1. Notices to directors and stockholders mailed to them at their
addresses appearing on the books of the Corporation shall be deemed to be given
at the time when deposited in the United States mail, postage prepaid.
SECTION 2. Whenever any notice is required to be given under the
provisions of the statutes or of the certificate of incorporation or of these
by-laws, waiver thereof in writing, signed by the person or persons entitled to
said notice, whether before or after the time stated therein, shall be deemed
equivalent of notice. Attendance of a person at a meeting shall constitute a
waiver of notice of such meeting except when the person attends a meeting for
the
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express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened.
ARTICLE V
Officers
SECTION 1. The officers of the Corporation shall be chosen by the board of
directors at its first meeting after each annual meeting of stockholders and
shall be a president and a secretary. The board of directors may choose also a
treasurer, such vice presidents and such additional officers as it may deem
advisable. The board of directors, if it so determines, may also elect, from
among its members a Chairman of the Board and a Vice Chairman of the Board. Any
number of offices may be held by the same person.
SECTION 2. The board of directors may appoint such other officers and
agents as it desires who shall hold their offices for such terms and shall
exercise such powers and perform such duties as shall be determined from time to
time by the board.
SECTION 3. The officers of the Corporation shall hold office at the
pleasure of the board of directors. Each officer shall hold his office until his
successor is elected and qualified or until his earlier resignation or removal.
Any officer may resign at any time upon written notice to the Corporation. Any
officer elected or appointed by the board of directors may be removed at any
time by the board of directors. Any vacancy occurring in any office of the
Corporation by death, resignation, removal or otherwise shall be filled by the
board of directors.
SECTION 4. The president shall be the chief executive officer of the
Corporation, shall preside at all meetings of stockholders and of the board of
directors, shall have general and active management of the business of the
Corporation and shall see that all orders and resolutions of the board of
directors are carried into effect. He shall execute on behalf of the Corporation
and may affix the seal or cause the seal to be affixed to all instruments
requiring such execution except to the extent the signing and execution thereof
shall be expressly delegated by the board of directors to some other officer or
agent of the Corporation.
SECTION 5. The vice presidents shall act under the direction of the
president. They shall perform such other duties and have such other powers as
the president or the board of directors may from time to time prescribe. The
board of directors may designate one or more executive vice presidents or may
otherwise specify the order of seniority of the vice presidents.
7
<PAGE>
SECTION 6. The secretary shall act under the direction of the president.
Subject to the direction of the president he shall attend all meetings of the
board of directors and all meetings of stockholders and record the proceedings
in a book to be kept for that purpose and shall perform like duties for the
committees designated by the board of directors when required. He shall give, or
cause to be given, notice of all meetings of stockholders and special meetings
of the board of directors, and shall perform such other duties as may be
prescribed by the president or the board of directors. He shall keep in safe
custody the seal of the Corporation and cause it to be affixed to any instrument
requiring it.
SECTION 7. The assistant secretaries in the order of their seniority,
unless otherwise determined by the president or the board of directors, shall,
in the absence or disability of the secretary, perform the duties and exercise
the powers of the secretary. They shall perform such other duties and have such
other powers as the president or the board of directors may from time to time
prescribe.
SECTION 8. The treasurer shall act under the direction of the president.
Subject to the direction of the president he shall have the custody of the
corporate funds and securities and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the Corporation and shall
deposit all moneys and other valuable effects in the name and to the credit of
the Corporation in such depositories as may be designated by the board of
directors He shall disburse the funds of the Corporation as may be ordered by
the president or the board of directors, taking proper vouchers for such
disbursements, and shall render to the president and the board of directors, at
its regular meetings, or when the board of directors so requires, an account of
all his transactions as treasurer and of the financial condition of the
Corporation. In the absence of a treasurer, the president or the secretary shall
perform the foregoing.
SECTION 9. The assistant treasurers in the order of their seniority,
unless otherwise determined by the president or the board of directors, shall in
the absence or disability of the treasurer, perform the duties and exercise the
powers of the treasurer. They shall perform such other duties and have such
other powers as the president or the board of directors may from time to time
prescribe.
8
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ARTICLE VI
Certificates of Stock
SECTION 1. Every holder of stock in the Corporation shall be entitled to
have a certificate, signed by, or in the name of the Corporation by, the
chairman, the president or a vice president and the treasurer or an assistant
treasurer or the secretary or an assistant secretary of the Corporations
certifying the number of shares owned by him in the Corporation.
SECTION 2. Any of or all the signatures on a certificate may be a
facsimile. In case any officer who has signed or whose facsimile signature has
been placed upon a certificate shall cease to be such officer before such
certificate is issued, it may be issued with the same effect as if he were such
officer at the date of issue. The seal of the Corporation or a facsimile thereof
may, but need not, be affixed to certificates of stock.
SECTION 3. The board of directors may direct a new certificate or
certificates to be issued in place of any certificate or certificates
theretofore issued by the Corporation alleged to have been lost, stolen or
destroyed, upon the making of any affidavit of that fact by the person claiming
the certificate or certificates to be lost, stolen or destroyed. When
authorizing such issue of a new certificate or certificates, the board of
directors may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen or destroyed certificate or
certificates, or his legal representative, to give the Corporation a bond in
such sum as it may direct as indemnity against any claim that may be made
against the Corporation with respect to the certificate or certificates alleged
to have been lost, stolen or destroyed.
SECTION 4. Upon surrender to the Corporation or a transfer agent of the
Corporation of a certificate for shares duly endorsed or accompanied by proper
evidence of succession, assignment or authority to transfer, it shall be the
duty of the Corporation, if it is satisfied that all provisions of the
certificate of incorporation, of the by-laws and of the law regarding the
transfer of shares have been duly complied with, to issue a new certificate to
the person entitled thereto, cancel the old certificate and record the
transaction upon its books.
SECTION 5. The Corporation shall be entitled to recognize the person
registered on its books as the owner of shares to be the exclusive owner for all
purposes including voting and dividends, and the Corporation shall not be bound
to recognize any equitable or other claim to or interest in such share or shares
on the part of any other person, whether or not it shall have express or other
notice thereof, except as otherwise provided by the laws of Delaware. Section
9
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6. In order that the Corporation may determine the stockholders entitled to
notice of or to vote at any meeting of stockholders or any adjournment thereof,
or to express consent to corporate action in writing without a meeting, or
entitled to receive payment of any dividend or other distribution or allotment
of any rights, or entitled to exercise any rights in respect of any change,
conversion or exchange of stock or for the purpose of any other lawful action,
the board of directors may fix, in advance, a record date, which shall not be
more than sixty or less than ten days before the date of such meeting, and not
more than sixty days prior to any other action. A determination of stockholders
shall apply to any adjournment of the meeting; provided, however, that the board
of directors may fix a new record date for the adjourned meeting.
ARTICLE VII
Miscellaneous
SECTION 1. There may be set aside out of any funds of the Corporation
available for dividends such sum or sums as the directors from time to time, in
their absolute discretion, think proper as a reserve or reserves to meet
contingencies, or for equalizing dividends, or for repairing or maintaining any
property of the Corporation, or for the purchase of additional property, or for
such other purpose as the director shall think conducive to the interest of the
Corporation, and the directors may modify or abolish any such reserve.
SECTION 2. All checks or demands for money and notes of the Corporation
shall be signed by such officer or officers or such other person or persons as
the board of directors may from time to time designate.
SECTION 3. The fiscal year of the Corporation shall be fixed by resolution
of the board of directors.
SECTION 4. The corporate seal (if any) shall have inscribed thereon the
name of the Corporation, the year of its organization and the words "Corporate
Seal, Delaware". The seal may be used by causing it or a facsimile thereof to be
impressed. affixed or in any other manner reproduced.
10
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ARTICLE VIII
Indemnification
SECTION 1. The Corporation shall indemnify to the full extent permitted by
law any person made or threatened to be made a party to any action, suit or
proceeding, whether civil, criminal, administrative or investigative, by reason
of the fact that such person or such person's testator intestate is or was a
director, officer or employee of the Corporation. Expenses, including attorney's
fees, incurred by any such person in defending any such action, suit or
proceeding shall be paid or reimbursed by the Corporation promptly upon receipt
by it of an undertaking of such person to repay such expenses if it shall
ultimately be determined that such person is not entitled to be indemnified by
the Corporation. The rights provided to any person by this by-law shall be
enforceable against the Corporation by such person who shall be presumed to have
relied upon it in serving or continuing to serve as a director, officer or
employee as provided above. No amendment of this Article VIII shall impair the
rights of any person arising at any time with respect to events occurring prior
to such amendment. For purposes of this by-law, the term "Corporation" shall
include any predecessor of the Corporation and any constituent corporation
(including any constituent of a constituent) absorbed by the Corporation in a
consolidation or merger.
Such right of indemnification shall not be exclusive of any other right
which such directors, officers or representatives may have or hereafter acquire
and, without limiting the generality of such statement, they shall be entitled
to their respective rights of indemnification under any by-law, agreement, vote
of stockholders, provision of law or otherwise, as well as their rights under
this Article.
SECTION 2. The board of directors may cause the Corporation to purchase
and maintain insurance on behalf of any person who is or was a director or
officer of the Corporation, or is or was serving at the request of the
Corporation as a director or officer of another corporation, or as its
representative in a partnership, joint venture, trust or other enterprise
against any liability asserted against such person and incurred in any such
capacity or arising out of such status, whether or not the Corporation would
have the power to indemnify such person.
SECTION 3. The board of directors may from time to time adopt further
by-laws with respect to indemnification and may amend these and such by-laws to
provide at all times the
11
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fullest indemnification permitted by the General Corporation Law of the State of
Delaware, as amended from time to time.
ARTICLE IX
Amendments
SECTION 1. The by-laws may be amended by the stockholders at any annual or
special meeting of stockholders, provided (if action is not taken by written
consent) notice of intention to amend shall have been contained in the notice of
the meeting.
SECTION 2. The board of directors by a majority vote of the whole board at
any meeting may amend these by-laws, including by-laws adopted by the
stockholders, provided the stockholders may from time to time specify particular
provisions of the by-laws which shall not be amended by the board of directors.
12
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 of
our report dated March 4, 1999, on our audits of the consolidated financial
statements of Juno Online Serivces, Inc. (formerly Juno Online Services, L.P.
and Subsidiary) as of December 31, 1997 and 1998 and for each of the three years
in the period ended December 31, 1998. We also consent to the reference to our
firm under the caption "Experts."
/s/ PricewaterhouseCoopers
New York, New York
March 5, 1999
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