<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(MARK ONE)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: SEPTEMBER 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____ TO _____
COMMISSION FILE NUMBER:
000-26009
JUNO ONLINE SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3914547
- ---------------------------------- ------------------------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
1540 BROADWAY, NEW YORK, NY 10036
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 597-9000
(FORMER NAME, FORMER ADDRESS, AND FORMER YEAR, IF CHANGED SINCE LAST REPORT:)
NOT APPLICABLE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes /X/ No / /
As of October 31, 1999, there were 34,639,581 shares of the Registrant's common
stock outstanding.
<PAGE>
INDEX TO FORM 10-Q
FOR
JUNO ONLINE SERVICES, INC.
PAGE
PART I. FINANCIAL INFORMATION ......................................... 3
Item 1. Condensed Consolidated Financial Statements (unaudited) ....... 3
Condensed Consolidated Balance Sheets - September 30, 1999
and December 31, 1998 ......................................... 3
Condensed Consolidated Statements of Operations - Three and
nine months ended September 30, 1999 and 1998 ................. 4
Condensed Consolidated Statement of Partners' Capital
(Deficiency)/ Statement of Stockholders' Equity - Nine
months ended September 30, 1999 .............................. 6
Condensed Consolidated Statements of Cash Flows - Nine months
ended September 30, 1999 and 1998 ............................. 7
Notes to Condensed Consolidated Financial Statements .......... 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ........................... 11
PART II. OTHER INFORMATION ............................................. 41
Item 1. Legal Proceedings ............................................. 41
Item 6. Exhibits and Report on Form 8-K ............................... 41
Item 7. Signatures .................................................... 42
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
JUNO ONLINE SERVICES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
--------- --------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ....................... $ 108,417 $ 8,152
Accounts receivable, net of allowance for
doubtful accounts of $611 and $296 in
1999 and 1998, respectively ................... 5,235 2,115
Merchandise inventories, net .................... 18 60
Prepaid expenses and other current assets ....... 12,570 108
--------- --------
Total current assets .......................... 126,240 10,435
Fixed assets, net ................................. 3,918 4,086
Other assets ...................................... 114 182
--------- --------
Total assets .................................. $ 130,272 $ 14,703
========= ========
LIABILITIES AND PARTNERS' CAPITAL (DEFICIENCY)/
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ........... $ 29,129 $ 11,166
Current portion of capital lease obligations .... 722 450
Current portion of senior note .................. -- 1,560
Deferred revenue ................................ 11,862 5,602
--------- --------
Total current liabilities ..................... 41,713 18,778
Capital lease obligations ......................... 662 609
Senior note ....................................... -- 7,569
Deferred rent ..................................... 274 335
Deferred revenue .................................. 667 --
Commitments and contingencies
Partners' capital (deficiency) .................... (12,588)
Stockholders' equity (deficit):
Preferred stock--$.01 par value; 5,000,000
authorized, none issued and outstanding ..... --
Common stock--$.01 par value; 133,333,334
authorized, 34,635,708 issued and outstanding 346
Additional paid-in capital ..................... 123,228
Unearned compensation .......................... (861)
Cumulative translation adjustment .............. (1)
Accumulated deficit ............................ (35,756)
---------
Total stockholders' equity ..................... 86,956
---------
Total liabilities and partners' capital
(deficiency)/stockholders' equity ........... $ 130,272 $ 14,703
========= ========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
<PAGE>
JUNO ONLINE SERVICES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------- -----------------------
1999 1998 1999 1998
-------- ------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Billable services .............. $ 8,654 $ 1,528 $ 21,529 $ 2,702
Advertising and transaction fees 3,367 1,759 8,335 4,527
Direct product sales ........... 1,083 1,847 4,082 6,459
-------- ------- -------- --------
Total revenues ............... 13,104 5,134 33,946 13,688
-------- ------- -------- --------
Cost of revenues:
Billable services .............. 5,960 1,306 16,119 2,273
Advertising and transaction fees 1,120 992 3,362 2,692
Direct product sales ........... 988 1,592 3,577 5,727
-------- ------- -------- --------
Total cost of revenues ....... 8,068 3,890 23,058 10,692
-------- ------- -------- --------
Operating expenses:
Operations, free service ....... 1,464 2,101 5,081 7,281
Subscriber acquisition ......... 15,028 1,067 31,648 2,947
Sales and marketing ............ 3,180 2,212 8,208 9,366
Product development ............ 1,592 1,849 5,423 5,314
General and administrative ..... 1,284 513 2,970 2,103
-------- ------- -------- --------
Total operating expenses ..... 22,548 7,742 53,330 27,011
-------- ------- -------- --------
Loss from operations ......... (17,512) (6,498) (42,442) (24,015)
Interest income, net ............. 1,430 6 2,336 66
-------- ------- -------- --------
Net loss ..................... $(16,082) $(6,492) $(40,106) $(23,949)
======== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
<PAGE>
JUNO ONLINE SERVICES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(CONTINUED)
(IN THOUSANDS, EXCEPT PER LIMITED PARTNERSHIP UNIT AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1999
---------------------------------------
SEVEN
THREE MONTHS ENDED TWO MONTHS MONTHS NINE MONTHS
SEPTEMBER 30, ENDED ENDED ENDED
---------------------- FEBRUARY 28, SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1999 TOTAL 1998
-------- ------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net loss $(16,082) $(6,492) $(4,350) $(35,756) $(40,106) $(23,949)
======== ======= ======= ======== ======== ========
Net loss attributable to
common stockholders $(16,082) $(6,492) $(4,350) $(35,907) $(40,106) $(23,949)
======== ======= ======= ======== ======== ========
Basic and diluted net loss
per Class A limited
partnership unit............ $ (0.37) $ (0.25) $ (1.42)
======= ======= ========
Basic and diluted net loss
per share.................. $ (0.46) $ (1.74)
======== ========
Weighted average number of:
Class A limited
partnership units
outstanding............... 17,684 17,684 16,894
======= ======= ========
Shares of common stock
outstanding............... 34,634 20,653
======== ========
Pro forma basic and diluted
net loss per share.......... $ (1.39)
========
Weighted average shares
outstanding used in pro
forma basic and diluted
per share calculation....... 28,869
========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
<PAGE>
JUNO ONLINE SERVICES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL (DEFICIENCY) /
STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT LIMITED PARTNERSHIP UNIT AND SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
PARTNERS' CONTRIBUTIONS COMMON STOCK ADDITIONAL CUMULATIVE
----------------------- ------------------- PAID-IN UNEARNED TRANSLATION ACCUMULATED
UNITS AMOUNT SHARES AMOUNT CAPITAL COMPENSATION ADJUSTMENT DEFICIT TOTAL
------------ -------- ---------- -------- --------- ------------ ----------- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998... 17,684,035 $ 79,578 $(92,166) $(12,588)
Net loss for the period
January 1, 1999 to
February 28, 1999........ -- -- (4,350) (4,350)
Effect of statutory merger. (17,684,035) (79,578) -- -- $(95,788) $ (728) -- 96,516 (79,578)
Preferred stock accretion.. -- -- (151) -- -- -- (151)
Issuance of common stock,
net of offering costs.... 6,500,000 $ 65 77,220 -- -- -- 77,285
Issuance of common
stock upon exercise of
stock options............ 312,957 3 152 -- -- -- 155
Proceeds from the sale of
preferred stock.......... -- 59 -- -- -- 59
Conversion of redeemable
convertible preferred
stock to common stock.... 27,822,751 278 141,251 -- -- -- 141,529
Net loss for the period
March 1, 1999 to
September 30, 1999....... -- -- -- -- -- (35,756) (35,756)
Unearned compensation...... -- 485 (485) -- -- --
Amortization of unearned
compensation............. -- -- 352 -- -- 352
Foreign currency adjustment -- -- -- $ (1) -- (1)
---------- ------- ---------- ---- -------- ----- ---- -------- -------
Balance, September 30, 1999.. $ -- $ -- 34,635,708 $346 $123,228 $(861) $ (1) $(35,756) $86,956
========== ======= ========== ==== ======== ===== ==== ======== =======
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
6
<PAGE>
JUNO ONLINE SERVICES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1999 1998
--------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss ................................................. $ (40,106) $(23,949)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization .......................... 1,696 1,781
Amortization of deferred rent .......................... (49) 171
Amortization of unearned compensation .................. 352 2
Changes in operating assets and liabilities:
Accounts receivable .................................. (3,120) (960)
Merchandise inventories .............................. 42 625
Prepaid expenses and other current assets ............ (12,462) 296
Accounts payable and accrued expenses ................ 17,950 1,213
Deferred revenue ..................................... 6,927 4,635
--------- --------
Net cash used in operating activities .............. (28,770) (16,186)
--------- --------
Cash flows from investing activities:
Purchases of fixed assets ................................ (657) (1,641)
Proceeds from sale of fixed assets ....................... -- 402
Other assets ............................................. 68 (21)
--------- --------
Net cash used in investing activities .............. (589) (1,260)
--------- --------
Cash flows from financing activities:
Payments on capital lease obligations .................... (546) (629)
Proceeds from senior note ................................ -- 10,000
Payments on senior note .................................. (9,129) (572)
Net proceeds from issuance of redeemable
convertible preferred stock ............................ 61,859 --
Capital contributions .................................... -- 8,500
Net proceeds from issuance of common stock ............... 77,285 --
Proceeds from issuance of common stock
upon exercise of stock options ......................... 155 --
--------- --------
Net cash provided by financing activities .......... 129,624 17,299
--------- --------
Net increase (decrease) in cash and cash equivalents 100,265 (147)
Cash and cash equivalents, beginning of period ............. 8,152 13,770
--------- --------
Cash and cash equivalents, end of period ................... $ 108,417 $ 13,623
========= ========
Supplemental disclosure of cash flow information:
Cash paid for interest ................................... $ 309 $ 354
Supplemental schedule of noncash
investing and financing activities:
Accretion of preferred stock ............................. $ 151 $ --
Capital lease obligations incurred for
network equipment ...................................... $ 871 $ 927
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
7
<PAGE>
JUNO ONLINE SERVICES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT LIMITED PARTNERSHIP UNIT AND SHARE DATA)
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
include the accounts of Juno Online Services, Inc. and its majority-owned,
India-based subsidiary, Juno Online Services Development Private Limited
(collectively, the "Company"). These financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all necessary adjustments, consisting only of
normal recurring adjustments, have been included in the accompanying unaudited
financial statements. All significant intercompany transactions and balances
have been eliminated in consolidation. Operating results for the three and nine
months ended September 30, 1999 are not necessarily indicative of the results
that may be expected for the full year ending December 31, 1999. For further
information, refer to the consolidated financial statements and notes thereto,
which are included in the Company's Registration Statement on Form S-1 dated May
25, 1999 (the "Registration Statement").
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 and accumulated losses of
the Partnership were reclassified to additional paid-in capital.
In May 1999, pursuant to a Registration Statement on Form S-1 (the
"Registration Statement"), the Company completed an initial public offering
("IPO") of 6,500,000 shares of the Company's common stock resulting in net
proceeds of approximately $77.3 million. Upon closing of the IPO, all Redeemable
Convertible Preferred Stock converted into common stock.
Contemporaneously with the closing of the IPO, the Company effectuated a
1-for-4.5 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.
2. FOREIGN CURRENCY TRANSLATION
The functional currency of the Company's foreign subsidiary in India is
the local currency. Accordingly, all assets and liabilities of the foreign
subsidiary are translated into U.S. dollars at period-end exchange rates and
expenses are translated using the average rates during the period. The effects
of foreign currency translation adjustments have been accumulated and are
included as a separate component of stockholders' equity.
8
<PAGE>
JUNO ONLINE SERVICES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT LIMITED PARTNERSHIP UNIT AND SHARE DATA)
(UNAUDITED)
3. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted loss
per share.
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1999
--------------------------------------
Three Months Ended Two Months Seven Months Nine Months
September 30, Ended Ended Ended
--------------------- February 28, September 30, September 30,
1999 1998 1999 1999 Total 1998
-------- -------- ------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Numerator:
Net loss $ 16,082 $ (6,492) $(4,350) $(35,756) $(40,106) $ (23,949)
Preferred stock accretion (151)
-------- -------- ------- -------- -------- ---------
Net loss available to common
stockholders $ 16,082 $ (6,492) $(4,350) $(35,907) $(40,106) $ (23,949)
======== ======== ======= ======== ======== =========
Denominator:
Weighted average number of:
Class A limited partnership units
outstanding 17,684,035 17,684,035 16,893,905
========== ========== ==========
Shares of Common Stock
outstanding 34,633,624 20,652,580
========== ==========
Basic and diluted net loss per
Class A limited partnership unit $ (0.37) $ (0.25) $ (1.42)
========== ========== ==========
Basic and diluted net loss per share $ (0.46) $ (1.74)
========== ==========
</TABLE>
Net loss per share for the nine months ended September 30, 1999 is
calculated separately for the periods prior and subsequent to the March 1999
statutory merger.
The pro forma information regarding net loss per share and weighted
average shares outstanding set forth below gives effect to the treatment of
Series A (Class A limited partnership units prior to March 1, 1999) and Series B
Redeemable Convertible Preferred Stock as shares of common stock for the period
following the March 1999 statutory merger.
Nine Months Ended
September 30, 1999
------------------
Numerator:
Net loss $ (40,106)
============
Denominator:
Weighted average number of:
Shares of common stock 16,293,985
Redeemable Convertible Preferred Stock
treated as shares of common stock:
Series B 3,182,454
Series A (Class A limited partnership units
prior to March 1, 1999) 9,392,619
------------
Denominator for pro forma basic and
diluted net loss per share 28,869,058
============
Pro forma basic and diluted net loss per share $ (1.39)
============
9
<PAGE>
JUNO ONLINE SERVICES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT LIMITED PARTNERSHIP UNIT AND SHARE DATA)
(UNAUDITED)
4. 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 D. E. Shaw & Co.,
L.P., is an affiliate of the Company. The Senior Note, as amended, bears
interest at the Federal Funds Rate plus 0.375%. In June 1999, the Company repaid
the balance of the Senior Note in full, in the amount of $8,634 including
accrued interest.
5. CREDIT FACILITY
On July 28, 1999, the Company entered into a credit facility with a bank
(the "Facility") that provides for borrowings up to $10,000. Borrowings can be
in the form of advances and/or standby letters of credit. The Facility expires
on July 27, 2000. The Facility is collateralized by substantially all of the
assets of the Company. It is not collateralized by assets established pursuant
to capital leases. Advances outstanding under the facility bear interest at the
bank's prime rate (8.25% at October 31, 1999). All outstanding borrowings under
the Facility are due upon the expiration of the Facility. The Company also pays
specified fees on the unused portion of the Facility and on any standby letters
of credit. Under the terms of the Facility, the Company is required to maintain
certain quarterly financial and operational ratios and to obtain bank approval
for certain mergers or acquisitions and fixed asset financing. As of September
30, 1999 there were no amounts outstanding under the Facility.
10
<PAGE>
ITEM 2. 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 CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS AND THE NOTES TO THOSE STATEMENTS INCLUDED ELSEWHERE IN
THIS QUARTERLY REPORT. THIS DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES. JUNO'S ACTUAL RESULTS MAY DIFFER MATERIALLY
FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF
VARIOUS FACTORS, INCLUDING, BUT NOT LIMITED TO, THOSE SET FORTH UNDER "RISK
FACTORS THAT MAY AFFECT FUTURE RESULTS" AND ELSEWHERE IN THIS QUARTERLY REPORT,
AND IN OTHER REPORTS AND DOCUMENTS FILED FROM TIME TO TIME WITH THE SECURITIES
AND EXCHANGE COMMISSION.
OVERVIEW
Juno Online Services, Inc. is a leading provider of Internet-related
services to millions of computer users throughout the United States. We offer
several levels of service, ranging from basic dial-up Internet e-mail--which is
provided to the end user for free--to full, competitively priced access to the
World Wide Web. Our revenues are derived primarily from the fees we charge for
the use of our billable subscription services, from the sale of advertising, and
from the direct sale of products to our subscribers.
Our business strategy has encompassed two phases. The initial phase,
which began at our inception in June 1995, focused on building computer systems
and related infrastructure that could be rapidly expanded to accommodate
increasing numbers of users, and on maximizing the number of subscribers to our
free basic e-mail service, which launched in April 1996. In July 1998, we
commenced the second phase of our business strategy by introducing two
additional service levels: an enhanced e-mail service, JUNO GOLD, and a full
Internet access service, JUNO WEB.
We classify our revenues as follows:
(1) Billable services revenues, consisting of:
(a) subscription fees from subscribers to Juno Gold and Juno
Web, our billable subscription services;
(b) technical support fees received when subscribers to our
free basic e-mail service and to Juno Gold call a 900
number for live assistance from a support technician;
and
(c) charges for shipping and handling associated with
mailing disks upon request to prospective Juno
subscribers, consulting revenues, and fees for other
billable services.
(2) Advertising and transaction fees, consisting of revenues earned from
advertisers and strategic marketing partners for displaying advertisements to,
and facilitating electronic commerce with, users of our services. The majority
of these advertisements are displayed while a Juno subscriber reads or writes
e-mail offline. Advertising revenues are also derived from ad impressions
displayed on our portal Web site, to which Juno Web subscribers are
automatically brought each time they use Juno to connect to the Web.
(3) Direct product sales, consisting of revenues generated from the sale
of products directly by us to users of our services 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 September 30, 1999, we had
approximately 400,000 billable service subscribers, consisting of approximately
132,000 Juno Gold
11
<PAGE>
subscribers and approximately 268,000 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. The standard list price for Juno Gold is $2.95 per month, billed
annually in advance. Juno Web's standard list price is a flat rate of $19.95 per
month, billed monthly. In marketing our billable subscription services, we have
typically offered a number of promotions, such as a free month of service or a
discounted rate for an initial period. We also have a practice of testing and
marketing other types of promotions and pricing plans--including ones with price
points lower than our standard list prices--and in light of the evolving market
for Internet access services and the emergence of competitors who may charge
less than we do for such services or not charge subscription fees at all, we
expect to continue this practice, for the purpose of assessing and generating
consumer interest. This is particularly important during the first and fourth
calendar quarters, which tend to be seasonably favorable for direct marketing.
Revenues from our billable subscription services accounted for approximately
95.6% of billable services revenues during the third quarter of 1999.
Our strategy contemplates considerable growth in the number of
subscribers to our billable subscription services. We intend to adapt our
strategy dynamically. We continue to devote significant resources to direct
marketing, 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. In
addition to direct marketing and advertising initiatives, we continually
experiment with a wide range of product offerings, promotional and pricing
plans, and features as part of our overall subscriber acquisition and retention
strategy. We expect growth in the subscriber base for Juno Gold and Juno Web to
result in continued 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 remain the single largest
source of revenues for Juno in the immediate future.
We face intense competition to acquire billable service subscribers. Our
competitors for such subscribers include companies that have substantially
greater market presence and financial, technical, distribution, marketing and
other resources than we have. This competitive environment could have a variety
of harmful effects on us, including limiting our ability to enter into and/or
renew agreements with distribution partners, driving price reductions for our
billable services, and/or driving increased spending in areas such as marketing,
telecommunications, and product development.
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. Our competitors for revenues from advertising and transaction fees
include companies that have substantially greater market presence and financial,
technical, distribution, marketing and other resources than we have. This
competitive environment could have a variety of harmful effects on us, including
driving advertising rate reductions and limiting our ability to enter into
and/or renew advertising agreements.
Our strategy contemplates decreases in revenues from direct product
sales in the future as a percentage of total revenues, and potentially in
absolute dollar terms, primarily due to our strategic decision to focus
increasingly on higher margin activities.
We are also 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
first and fourth calendar quarters, corresponding to heavier usage during the
fall and winter, and experience
12
<PAGE>
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 fourth calendar quarters of each year, and we may take these types
of seasonal effects into consideration in scheduling our marketing activities.
The results of operations of Internet access providers, including those of Juno,
are significantly affected by subscriber cancellations. The failure to retain
subscribers to our billable subscription services, or an increase in the rate of
cancellations of those services, would cause our business and financial results
to suffer.
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 $132.3 million from our inception on June
30, 1995 through September 30, 1999. We have relied on sales of equity
securities, totaling $218.7 million, and borrowings to fund our operations.
Included in this amount are $77.3 million of net proceeds from our May 1999
initial public offering of common stock and $61.9 million of net proceeds from
the March 1999 private placement of Series B redeemable convertible preferred
stock, which automatically converted into shares of common stock upon the
closing of the initial public offering. 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. Since we operated as a limited partnership prior to March 1, 1999,
taxable losses incurred through that date have been allocated to the partners
for reporting on their respective income tax returns. Accordingly, as of that
date, we had no available net operating loss carryforwards available for federal
and state income tax purposes to offset future taxable income, if any.
In May 1999, we completed the formation of Juno Online Services
Development Private Limited ("Juno India"), a majority-owned subsidiary of Juno
Online Services, Inc. Immediately following its formation, Juno India hired as
employees substantially all of the individuals who had previously served as
technical and non-technical consultants to us in India, pursuant to an agreement
with an affiliated party. At September 30, 1999, Juno India employed 54
individuals. Juno India currently is negotiating an agreement covering occupancy
and related services from an affiliated entity. Juno India currently obtains
these services from this affiliated entity on a month-to-month basis.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1998
REVENUES
Total revenues increased $8.0 million, to $13.1 million for the three
months ended September 30, 1999 from $5.1 million for the three months ended
September 30, 1998, an increase of 155%. This increase was due to increases in
billable services and in advertising and transaction fees, partially offset by a
decrease in direct product sales.
BILLABLE SERVICES. Billable services revenues increased approximately
$7.1 million, to $8.7 million for the three months ended September 30, 1999 from
$1.5 million for the three months ended September 30, 1998, an increase of 466%.
This increase was primarily due to the additional number of billable subscribers
in the three
13
<PAGE>
months ended September 30, 1999, as compared with the much smaller number in the
year ago quarter. Our billable subscription services were introduced in July
1998. At September 30, 1999, there were approximately 400,000 billable service
subscribers, with approximately 268,000 subscribing to Juno Web and
approximately 132,000 subscribing to Juno Gold. At September 30, 1998 there were
approximately 64,000 billable subscribers, which included approximately 38,000
subscribing to Juno Web and approximately 26,000 subscribing to Juno Gold.
ADVERTISING AND TRANSACTION FEES. Advertising and transaction fees
increased $1.6 million, to $3.4 million for the three months ended September 30,
1999 from $1.8 million for the three months ended September 30, 1998, an
increase of 91.4%. This increase was primarily due to larger average deal sizes
associated with the shift in our emphasis towards strategic marketing alliances.
From time to time, we engage in barter transactions in which we exchange
advertising with other Internet or media companies, provide advertising in
exchange for software distribution services or other forms of marketing
assistance, or participate in other reciprocal service arrangements. Barter
transactions accounted for approximately 10.2% of total advertising and
transaction fees for the three months ended September 30, 1999 versus 4.8% for
the three months ended September 30, 1998.
DIRECT PRODUCT SALES. Direct product sales decreased approximately $0.8
million, to $1.1 million for the three months ended September 30, 1999 from $1.8
million for the three months ended September 30, 1998, a decrease of 41.4%. This
decline reflects our strategic decision to de-emphasize direct merchandising in
favor of higher margin e-commerce activities through the formation of strategic
marketing alliances -- which are recorded on the advertising and transaction
fees revenue line.
COST OF REVENUES
Total cost of revenues increased $4.2 million, to $8.1 million for the
three months ended September 30, 1999 from $3.9 million for the three months
ended September 30, 1998, an increase of 107%. This increase was primarily due
to increases in costs associated with billable services and in advertising and
transaction fees, partially offset by a decrease in costs associated with direct
product sales.
BILLABLE SERVICES. Cost of revenues related to billable services
consists primarily of the costs to provide Juno Gold and Juno Web, including
telecommunications, customer service, operator-assisted technical support,
credit card fees, and personnel and related overhead costs. In addition, cost of
revenues related to billable services includes the costs associated with fees
charged for mailing disks upon request to prospective subscribers to our free
basic e-mail service, and the personnel and related overhead costs associated
with our performance of a short-term consulting engagement.
Cost of revenues related to billable services increased $4.7 million, to
$6.0 million for the three months ended September 30, 1999 from $1.3 million for
the three months ended September 30, 1998, an increase of 356%. This increase
was primarily due to the costs of providing our billable subscription services
to a substantially larger number of subscribers as compared with the number of
subscribers in the year ago quarter. Costs related to the provision of these
billable subscription services, principally customer service, technical support
and telecommunications expenses, accounted for 80.3% of the total costs of
revenues related to billable services during the three months ended September
30, 1999 and accounted for the majority of the increase. Cost of billable
services revenues as a percentage of billable services revenues improved to
68.9% for the three months ended September 30, 1999 from 85.5% for the three
months ended September 30, 1998. This improvement is primarily attributable to
decreased customer service costs per subscriber and declining average
telecommunications rates. This improvement occurred despite a decline in the
average monthly billable services revenue per subscriber as compared with the
year ago quarter and with the quarter ended June 30, 1999. As a
14
<PAGE>
result of this improvement, we expect to continue to experiment with promotional
and pricing plans in order to drive subscriber growth and this may further
reduce the average monthly billable services revenues realized on a per
subscriber basis. Accordingly, we expect cost of revenues related to billable
services to increase as a percentage of billable services revenues in the near
term.
ADVERTISING AND TRANSACTION FEES. Cost of revenues for advertising and
transaction fees consists primarily of the transmission costs associated with
downloading advertisements to the hard drives of subscribers' computers for
later display, the personnel and related costs associated with the creation and
distribution of such advertisements, and the costs associated with reporting the
results of ad campaigns to advertisers.
Cost of revenues for advertising and transaction fees increased $0.1
million, to $1.1 million for the three months ended September 30, 1999 from $1.0
million for the three months ended September 30, 1998, an increase of 12.9%.
This increase was primarily due to the impact of additional strategic marketing
alliances. Cost of revenues related to advertising and transaction fees as a
percentage of advertising and transaction fees improved to 33.3% for the three
months ended September 30, 1999 from 56.4% for the three months ended September
30, 1998. This improvement is primarily due to decreased telecommunications
rates, faster average connection speeds, larger average deal sizes over which to
spread production costs and improvements in our production and distribution
methods.
DIRECT PRODUCT SALES. Cost of revenues for direct product sales consists
primarily of the costs of merchandise sold directly by us to our subscribers and
the associated shipping and handling costs.
The cost of revenues for direct product sales decreased $0.6 million, to
$1.0 million for the three months ended September 30, 1999 from $1.6 million for
the three months ended September 30, 1998, a decrease of 37.9%. This decrease
corresponds to the decrease in merchandise sold. The cost of revenues for direct
product sales as a percentage of direct product sales revenues increased to
91.2% for the three months ended September 30, 1999 from 86.2% for the three
months ended September 30, 1998. This increase as a percentage of direct product
sales revenue was due primarily to additional promotional pricing in response to
increasing competition for computer hardware.
OPERATING EXPENSES
OPERATIONS, FREE SERVICE. Operations, free service consists of the costs
associated with providing our free basic e-mail service, comprising principally
of telecommunications costs, expenses associated with providing customer
service, depreciation of network equipment, and personnel and related overhead
costs.
Expenses associated with operations, free service decreased $0.6
million, to $1.5 million for the three months ended September 30, 1999 from $2.1
million for the three months ended September 30, 1998, a decrease of 30.3%. 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.
SUBSCRIBER ACQUISITION. Subscriber acquisition costs include all costs
incurred to acquire subscribers to either our free basic e-mail service or one
of our billable subscription services. These costs include direct mail
campaigns, advertising through conventional and computer-based media,
telemarketing, producing advertisements to be displayed over the Juno services
and transmitting them to our subscribers, disk duplication and fulfillment, and
bounties paid to acquire subscribers, among other marketing activities. These
costs also include various subscriber retention activities, as well as personnel
and related overhead costs.
Subscriber acquisition costs increased $14.0 million, to $15.0 million
for the three months ended September 30, 1999 from $1.1 million for the three
months ended September 30, 1998. This increase is primarily due to
15
<PAGE>
costs related to our 1999 external marketing campaign which launched in the
second quarter of 1999, including direct mail programs, television and radio
commercials, outdoor advertising and various other advertising expenditures.
This increase is also due to inbound telemarketing costs incurred in connection
with subscriber acquisition and retention activities. As a percentage of
revenues, subscriber acquisition costs increased to 115% in the three months
ended September 30, 1999 from 20.8% in the three months ended September 30,
1998. This increase as a percentage of revenues was primarily due to increased
costs related to our 1999 external marketing campaign. We expect to continue to
incur significant subscriber acquisition costs in the future.
SALES AND MARKETING. Sales and marketing expenses consist primarily of
the personnel and related overhead costs of the following departments:
advertising sales and business development; direct product sales; and product
marketing. Also included are costs associated with trade advertising intended to
support our ad sales effort, corporate branding activities unrelated to
subscriber acquisition, and public relations, as well as ad production, ad
transmission, customer service and fulfillment costs associated with our direct
product sales activities.
Sales and marketing costs increased $1.0 million, to $3.2 million for
the three months September 30, 1999 from $2.2 million for the three months ended
September 30, 1998, an increase of 43.8%. This increase is primarily due to
increased trade advertising costs and additional personnel-related expenses. As
a percentage of revenues, sales and marketing costs improved to 24.3% in the
three months ended September 30, 1999 from 43.1% in the three months ended
September 30, 1998. This improvement was primarily due to an increase in
revenues for the three months ended September 30, 1999.
PRODUCT DEVELOPMENT. Product development includes research and
development expenses and other product development costs. These costs consist
primarily of personnel and related overhead costs as well as the costs
associated with research and development and other product development
activities performed for us on a contract basis by a related party in Hyderabad,
India, prior to our hiring as employees substantially all of these individuals
in May 1999.
Product development costs decreased approximately $0.3 million, to $1.6
million for the three months ended September 30, 1999 from $1.8 million for the
three months ended September 30, 1998, a decrease of 13.9%. This decrease is
primarily due to the lower costs associated with operating our India-based
research and development efforts as a wholly-owned subsidiary, rather than
obtaining these services on a contract basis. Product development costs in the
three months ended September 30, 1999 and 1998 related primarily to the
continued development of our billable subscription services and of various
pieces of software. To date, we have not capitalized any expenses related to any
software development activities.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of personnel and related overhead costs associated with executive,
finance, legal, recruiting, human resources and facilities functions, as well as
various professional expenses.
General and administrative costs increased $0.8 million, to $1.3 million
for the three months ended September 30, 1999 from $0.5 million for the three
months ended September 30, 1998, an increase of 150%. This increase is primarily
due to increased insurance costs for directors' and officers' liability
insurance, professional service fees and additional personnel and related
overhead costs. As a percentage of revenues, general and administrative costs
were 9.8% for the three months ended September 30, 1999 and 10.0% for the three
months ended September 30, 1998. We expect that we will incur additional general
and administrative expenses as we hire additional personnel and incur additional
costs related to the growth of our business and our operation as a public
company, including directors' and officers' liability insurance, investor
relations programs and professional services fees. Accordingly, we anticipate
that general and administrative expenses will increase in absolute dollar terms
in the future.
16
<PAGE>
INTEREST INCOME, NET. Interest income, net increased to $1.4 million for
the three months ended September 30, 1999, from an insignificant amount for the
three months ended September 30, 1998. This increase is primarily due to
interest income earned on higher average cash balances in the three months ended
September 30, 1999 resulting from our initial public offering in May 1999 and
from the issuance of redeemable convertible preferred stock in March 1999.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1998
REVENUES
Total revenues increased approximately $20.3 million, to $33.9 million
for the nine months ended September 30, 1999 from $13.7 million for the nine
months ended September 30, 1998, an increase of 148%. This increase was due to
increases in billable services and in advertising and transaction fees,
partially offset by a decrease in direct product sales.
BILLABLE SERVICES. Billable services revenues increased $18.8 million,
to $21.5 million for the nine months ended September 30, 1999 from $2.7 million
for the nine months ended September 30, 1998, an increase of 697%. This increase
was due primarily to the additional number of billable subscribers in the nine
months ended September 30, 1999, as compared with the much smaller number in the
nine months ended September 30. Our billable subscription services were
introduced in July 1998. Billable services revenues contributed $19.7 million of
revenues in the nine months ended September 30, 1999 compared to $0.7 million in
the nine months ended September 30, 1998.
ADVERTISING AND TRANSACTION FEES. Advertising and transaction fees
increased $3.8 million, to $8.3 million for the nine months ended September 30,
1999 from $4.5 million for the nine months ended September 30, 1998, an increase
of 84.1%. This increase was due to larger average deal sizes associated with the
shift in our emphasis towards strategic marketing alliances. This increase was
also due in part to a contribution from revenue recognized over the shortened
life of a strategic marketing alliance which featured a minimum revenue
guarantee and which was terminated by the strategic partner effective May 1,
1999. This contribution accounted for approximately 12.8% of advertising and
transaction fees for the nine months ended September 30, 1999. The increase in
advertising and transaction fees referred to above was partially offset by
declines in the number of and the aggregate revenue generated from shorter term
ad sales contracts, reflecting our shift in emphasis towards larger strategic
alliances. Barter transactions accounted for approximately 7.6% of total
advertising and transaction fees for the nine months ended September 30, 1999
versus 2.4% for the nine months ended September 30, 1998.
DIRECT PRODUCT SALES. Direct product sales decreased $2.4 million, to
$4.1 million for the nine months ended September 30, 1999 from $6.5 million for
the nine months ended September 30, 1998, a decrease of 36.8%. This decline
reflects our strategic decision in 1998 to narrow the range of our direct
product sales activities and of the types of products offered to our
subscribers. Instead, we decided to concentrate on forming strategic marketing
alliances and developing other uses for our advertising inventory that we
believe should generate revenues with higher margins than direct product sales.
COST OF REVENUES
Total cost of revenues increased $12.4 million, to $23.1 million for the
nine months ended September 30, 1999 from $10.7 million for the nine months
ended September 30, 1998, an increase of 116%. This increase was due primarily
to increases in costs associated with billable services and in advertising and
transaction fees, partially offset by a decrease in costs associated with direct
product sales.
17
<PAGE>
BILLABLE SERVICES. Cost of revenues related to billable services
increased $13.8 million, to $16.1 million for the nine months ended September
30, 1999 from $2.3 million for the nine months ended September 30, 1998, an
increase of 609%. This increase was due primarily to the costs of providing our
billable subscription services to a substantially larger number of subscribers
in the nine months ended September 30, 1999, as compared with the number of
subscribers in the nine months ended September 30, 1998. Costs related to the
provision of these billable subscription services, principally customer service,
technical support and telecommunications expenses, accounted for 78.5% of the
total costs of revenues related to billable services during the nine months
ended September 30, 1999 and accounted for the majority of the increase. Cost of
billable services revenues as a percentage of billable services revenues
improved to 74.9% for the nine months ended September 30, 1999 from 84.1% for
the nine months ended September 30, 1998. This improvement is primarily
attributable to decreased customer service costs per subscriber and declining
average telecommunications rates.
ADVERTISING AND TRANSACTION FEES. Cost of revenues for advertising and
transaction fees increased $0.7 million, to $3.4 million for the nine months
ended September 30, 1999 from $2.7 million for the nine months ended September
30, 1998, an increase of 24.9%. This increase was due primarily to the impact of
additional strategic marketing alliances. Cost of revenues related to
advertising and transaction fees as a percentage of advertising and transaction
fees improved to 40.3% for the nine months ended September 30, 1999 from 59.5%
for the nine months ended September 30, 1998. This improvement is primarily due
to a contribution from revenue recognized over the shortened life of a strategic
marketing alliance that featured a minimum revenue guarantee, and also to
decreased telecommunications rates, faster average connection speeds, larger
average deal sizes over which to spread production costs, and improvements in
our production and distribution methods.
DIRECT PRODUCT SALES. The cost of revenues for direct product sales
decreased approximately $2.2 million, to $3.6 million for the nine months ended
September 30, 1999 from $5.7 million for the nine months ended September 30,
1998, a decrease of 37.5%. This decrease corresponds to the decrease in
merchandise sold. The cost of revenues for direct product sales as a percentage
of direct product sales revenues decreased to 87.6% for the nine months ended
September 30, 1999 from 88.7% for the nine months ended September 30, 1998. This
decrease was due primarily to efficiencies associated with outsourcing various
functions rather than performing them internally, partially offset by a greater
decline in the average retail price of merchandise sold relative to the declines
in the costs of such merchandise, and additional promotional pricing in response
to increasing competition for computer hardware.
OPERATING EXPENSES
OPERATIONS, FREE SERVICE. Expenses associated with operations, free
service decreased $2.2 million, to $5.1 million for the nine months ended
September 30, 1999 from $7.3 million for the nine months ended September 30,
1998, a decrease of 30.2%. This decrease was primarily due to declining
telecommunications rates and increasing connection speeds resulting from the use
of faster modems by a portion of our subscriber base.
SUBSCRIBER ACQUISITION. Subscriber acquisition costs increased $28.7
million, to $31.6 million for the nine months ended September 30, 1999 from $2.9
million for the nine months ended September 30, 1998. This increase is due
primarily to costs related to our 1999 external marketing campaign which
launched in the second quarter of 1999, including direct mail programs,
television and radio commercials, outdoor advertising and various other
advertising expenditures. This increase is also due to inbound telemarketing
costs incurred in connection with subscriber acquisition and retention
activities and ad production and transmission costs associated with soliciting
basic e-mail subscribers to upgrade to our billable subscription services. As a
percentage of revenues, subscriber acquisition costs increased to 93.2% in the
nine months ended September 30, 1999 from 21.5% in the nine months ended
September 30, 1998. This percentage increase was primarily due to
18
<PAGE>
increased costs related to our 1999 external marketing campaign. We expect to
continue to incur significant subscriber acquisition costs in the future.
SALES AND MARKETING. Sales and marketing costs decreased $1.2 million,
to $8.2 million for the nine months ended September 30, 1999 from $9.4 million
for the nine months ended September 30, 1998, a decrease of 12.4%. This decrease
is primarily due to cost savings associated with our 1998 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 our inventory risk, primarily by outsourcing
substantially all of the procurement, warehousing, fulfillment, billing and
customer service aspects of the initiative. In each of the first and second
quarters of 1998, sales and marketing expenses include charges of approximately
$300,000 related to inventory write-offs, severance pay and lease termination
costs. The decrease in sales and marketing costs were partially offset by
increased trade advertising costs. As a percentage of revenues, sales and
marketing costs improved to 24.2% in the nine months ended September 30, 1999
from 68.4% in the nine months ended September 30, 1998. This improvement was
primarily due to an increase in revenues for the nine months ended September 30,
1999.
PRODUCT DEVELOPMENT. Product development costs increased $0.1 million,
to $5.4 million for the nine months ended September 30, 1999 from $5.3 million
for the nine months ended September 30, 1998, an increase of 2.1%. This increase
is primarily due to additional personnel and related costs in both our domestic
and India offices, partially offset by lower costs associated with operating our
India-based research and development efforts as a wholly-owned subsidiary,
rather than obtaining these services on a contract basis. Product development
costs in the nine months ended September 30, 1999 and 1998 related primarily to
the continued development of our billable subscription services and of various
pieces of software. To date, we have not capitalized any expenses related to any
software development activities.
GENERAL AND ADMINISTRATIVE. General and administrative costs increased
$0.9 million, to $3.0 million for the nine months ended September 30, 1999 from
$2.1 million for the nine months ended September 30, 1998, an increase of 41.2%.
This increase is primarily due to increased insurance costs for directors' and
officers' liability insurance, professional service fees and additional
personnel and related overhead costs. As a percentage of revenues, general and
administrative costs decreased to 8.7% for the nine months ended September 30,
1999 from 15.4% for the nine months ended September 30, 1998. This decrease was
primarily due to the increase in revenue for the nine months ended September 30,
1999 compared to the nine months ended September 30, 1998. We expect that we
will incur additional general and administrative expenses as we hire additional
personnel and incur additional costs related to the growth of our business and
operation as a public company, including directors' and officers' liability
insurance, investor relations programs and professional service fees.
Accordingly, we anticipate that general and administrative expenses will
increase in absolute dollar terms in the future.
INTEREST INCOME, NET. Interest income, net increased $2.2 million, to
$2.3 million for the nine months ended September 30, 1999 from $0.1 million for
the nine months ended September 30, 1998. This increase is primarily due to
interest income earned on higher average cash balances in the nine months ended
September 30, 1999 resulting from our initial public offering in May 1999 and
from the issuance of redeemable convertible preferred stock in March 1999,
partially offset by higher interest payments for borrowings.
19
<PAGE>
QUARTERLY RESULTS OF OPERATIONS DATA
The following table sets forth selected subscriber data for each of the five
quarters ended September 30, 1999:
<TABLE>
<CAPTION>
SEPT. 30, JUNE 30, MAR. 31, DEC. 31, SEPT. 30,
SELECTED SUBSCRIBER DATA: 1999 1999 1999 1998 1998
- ------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Total subscriber accounts as of (1)..... 7,613,000 7,175,000 6,817,000 6,336,000 5,852,000
Subscriber Activity:
Subscriber accounts that
connected in the three-month
period ended....................... 2,910,000 2,920,000 3,108,000 3,108,000 3,121,000
Subscriber accounts that
connected in the month ended 2,276,000 2,277,000 2,438,000 2,434,000 2,409,000
Average subscriber accounts that
connected per day in the month
ended.............................. 837,000 810,000 912,000 887,000 889,000
Billable subscription service
accounts as of (2)................. 400,000 270,000 207,000 144,000 64,000
</TABLE>
- ------------------
(1) Includes all user accounts created since Juno's inception, regardless
of activity level, if any, net of accounts that have been cancelled.
(2) Billable subscription service accounts are a subset of total subscriber
accounts and, to the extent applicable, are also included in the number of
subscriber accounts shown as having connected during the periods described.
LIQUIDITY AND CAPITAL RESOURCES
Since formation, we have financed our operations from the funds
generated by the sale of equity securities and borrowings. Sales of equity
securities in 1999 include $77.3 million of net proceeds from our May 1999
initial public offering of common stock and $61.9 million of net proceeds
received from the March 1999 private placement of redeemable convertible
preferred stock, which converted into common stock upon the completion of our
initial public offering. We have incurred significant losses since inception,
totaling $132.3 million through September 30, 1999.
For the nine months ended September 30, 1999, we used $19.6 million in
cash for working capital purposes and to fund losses from operations.
Additionally, at September 30, 1999, $9.2 million remains prepaid for
advertising that may be used at any time prior to March 2001, bringing total net
cash used in operating activities to $28.8 million for the nine months then
ended. Net cash used in operating activities was $16.2 million for the nine
months ended September 30, 1998. The additional cash used in operations during
the nine months ended September 30, 1999 as compared with the comparable period
of the prior year was primarily the result of our external marketing campaign,
prepaid advertising, and partially offsetting changes in working capital
accounts.
Net cash used in investing activities was $0.6 million for the nine
months ended September 30, 1999 and $1.3 million for the nine months ended
September 30, 1998. The principal use of cash for the periods presented was for
the purchase of fixed assets.
20
<PAGE>
Net cash provided by financing activities was $129.6 million for the
nine months ended September 30, 1999 and $17.3 million for the nine months ended
September 30, 1998. Financing activities for the nine months ended September 30,
1999 primarily include $139.1 million of net proceeds received from our March
1999 private placement and our initial public offering. Of the net proceeds from
the initial public offering, $8.6 million was used to repay, in full, a note
from an affiliated party. Financing activities for the nine months ended
September 30, 1998 primarily include the proceeds from a note from an affiliated
party and capital contributions.
In July 1999, we entered into a credit facility with a bank (the
"Facility") that provides for borrowings up to $10.0 million. Borrowings can be
in the form of advances and/or standby letters of credit. The Facility expires
in July 2000. The Facility is collateralized by substantially all of the assets
of the Company. It is not collateralized by assets established pursuant to
capital leases. Advances outstanding under the Facility bear interest at the
bank's prime rate (8.25% at October 31, 1999). Under the terms of the Facility,
the Company is required to maintain certain quarterly financial and operational
ratios and to obtain bank approval for certain mergers or acquisitions and fixed
asset financing. As of October 31, 1999 there were no amounts outstanding under
the Facility.
We do not currently have any material commitments for capital
expenditures outside of the normal course of business and recent historical
trends. However, we do anticipate that we will increase our capital expenditures
and lease commitments beyond recent historical trends to expand our
infrastructure in anticipation of the growth of our subscriber base. We may also
take advantage of opportunities to employ various 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 continuing to increase subscriber acquisition
expenses in order to fund subscriber growth and help us gain or maintain market
share. Additional expenditures in connection with subscriber acquisition will
represent a material use of our cash resources.
At September 30, 1999, we had $108.4 million in cash and cash
equivalents. We currently continue to experience negative cash flow from
operations and we expect to continue to experience negative cash flow from
operations for the foreseeable future. Based upon our current business plan, we
believe that 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 additional
credit. 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. Other than the Facility, 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.
IMPACT OF THE YEAR 2000
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to identify a given year. Many of the computer
programs that Juno utilizes include specialized functions that involve date
manipulation. These functions are critical to our business, and include:
o signup of new subscribers to our services;
o validation of credit cards;
21
<PAGE>
o transfer, storage and processing of e-mail and advertisements;
o scheduling of advertisements and reporting of results to
advertisers; and
o billing and invoicing of advertisers and subscribers to our
billable subscription services.
Juno's business is heavily dependent upon the use of operating systems
and applications that, in the aggregate, involve millions of lines of computer
code. Similarly, our business is also dependent on the coordinated functioning
of a network made up of hundreds of servers and other pieces of computer
equipment, all of which have computer code embedded in them. If any of the
programs that Juno utilizes misinterpret the date code "00" as the year 1900
rather than the year 2000, significant errors could be introduced into the
information we use to manage the business and the computer systems that operate
our online services. These miscalculations could result in errors in our
operations or in disruption of operations, including, among other things, a
temporary inability to process transactions, send invoices or engage in other
normal business activities.
STATE OF READINESS. We are continuing to assess the Year 2000 readiness
of our information technology systems. Our overall Year 2000 readiness plan
consists of the following phases:
o preparing an inventory of all software and hardware items
affected by the Year 2000 issue;
o testing our internally developed proprietary software for
quality assurance;
o contacting providers of material information technology and
other technology;
o repairing or replacing components that are determined to not be
Year 2000 compliant; and
o creating contingency plans to address potential Year 2000
failures that we cannot control or have not previously been able
to detect or repair.
Specific steps in our Year 2000 assessment to date have included:
o running several successful Year 2000 simulations on our test
systems to verify software performance by artificially moving
the date forward from December 31, 1999 to January 1, 2000;
o reviewing source code of our proprietary software to identify
all functions that process dates; and
o identifying critical suppliers and communicating with them about
their plans and progress in addressing any Year 2000 problems
they may face.
The Year 2000 readiness plan described above is being carried out across
the five critical areas where we believe the Year 2000 problem might affect our
business:
o Juno product software, which consists of all software directly
used by subscribers in connection with our free basic e-mail
service and/or our billable subscription services;
o Juno service software, which consists of software provided by
third party vendors used to run our free basic e-mail service
and our billable subscription services. Some of this software
has been modified by Juno;
22
<PAGE>
o Juno service hardware, which consists of the hardware that we
use directly in connection with our free basic e-mail service
and/or our billable subscription services;
o infrastructure, which consists of hardware and software used by
our staff in the course of operating our business other than
Juno product hardware and software; and
o external agents, which includes all other hardware, software,
services and related systems provided by third parties and on
which we rely. The following table sets forth our progress and
completion targets in assessing our Year 2000 readiness in these
five critical areas. In each case our remaining assessment and
repair is significantly dependent upon the Year 2000 compliance
of our suppliers and vendors.
<TABLE>
<CAPTION>
Inventory Assessment Repair/Replacement
--------- ---------- ------------------
<S> <C> <C> <C>
Product Software........... 100% complete 100% complete Complete
Service Software........... 100% complete 95% complete Completion target
Completion target December 15, 1999
November 30, 1999
Service Hardware........... 100% complete 100% complete Completion target
November 30, 1999
Infrastructure............. 100% complete 95% complete Completion target
Completion target December 15, 1999
November 30, 1999
External Agents............ 100% complete 100% complete Completion target
December 15, 1999
</TABLE>
To address the results of our assessment to date, we have:
o enhanced several parts of our software to permit the entry of
four-digit years rather than two-digit years;
o converted all dates within our databases to four-digit years;
o upgraded some of our operating systems and applications to
versions recommended by our vendors in order to achieve Year
2000 compliance of these components; and
o identified, prioritized and contacted third party vendors who
provide us with key services including telecommunication
services and customer service, requiring them to provide
assurances of their Year 2000 compliance.
We plan to continue this Year 2000 assessment and repair process during
the remainder of 1999 with the intention of:
o monitoring our vendors' progress in their own Year 2000
assessment and repair;
o scheduling tests to determine the ability of our systems to work
with those of our service providers; and
o reviewing non-information technology systems and embedded
systems which, if not Year 2000 compliant, could affect our
business.
23
<PAGE>
COSTS. To date, we have not incurred any material costs in identifying
or evaluating Year 2000 compliance issues. The cost of software tools and
consulting expenses used for detection of Year 2000 problems is not currently
expected to exceed $100,000. We expect that our existing employees or
consultants will perform all significant work for the Year 2000 project
described above. We do not anticipate hiring any additional employees or
incurring any significant consulting expenses for the Year 2000 project. To
date, no other significant information technology projects have been deferred
due to our Year 2000 efforts.
RISKS. We are not currently aware of any significant Year 2000
compliance problems relating to our proprietary software, our information
technology systems or our other systems that would materially harm our business,
results of operations or financial condition. During our remaining assessment,
we may discover Year 2000 compliance problems in our proprietary software that
may require substantial repair or replacement. If problems are discovered in
versions of our product software that are already in use by our subscribers, we
may need to distribute new versions of the software to those subscribers. It may
not be possible to correct these problems in a timely manner.
Material third-party software, hardware, service providers or
non-information-technology infrastructure may contain Year 2000 compliance
problems that require substantial repair and/or replacement, which could be
time-consuming and expensive. It may not be possible to repair or replace some
of these components or service providers in a timely manner.
The failure to correct any material Year 2000 problem could materially
harm our business, results of operations and financial condition because:
o new subscribers may be unable to sign up for our services,
resulting in reduced growth and lower effectiveness of our
marketing efforts;
o current subscribers may be unable to upgrade to higher service
levels, resulting in reduced revenue growth and lower
effectiveness of our marketing efforts;
o current subscribers may be unable to use our services or get
adequate customer support, which may result in increased
attrition, higher customer support costs and reduced revenue;
and/or
o we may be subject to claims of mismanagement, misrepresentation
or breach of contract and related litigation, which could be
costly and time-consuming to defend and, if defended
unsuccessfully, could result in the imposition of substantial
fines or judgments.
In addition, we cannot assure you that governmental agencies, utility
companies, Internet access companies, third-party service providers and others
outside our control will be Year 2000 compliant. The failure by these entities
to be Year 2000 compliant could result in a systemic failure beyond our control,
including, for example, a prolonged failure of Internet, telecommunications
and/or electrical systems, which could also prevent us from providing our
services, or prevent users from accessing our services, either of which would
materially harm our business, results of operations and financial condition.
CONTINGENCY PLANS. We are still engaged in an ongoing Year 2000
assessment and although we have not encountered any major Year 2000 issues
through our own internal testing and through inquiries with third party vendors,
we have developed contingency plans for certain key elements of our business.
Further contingency planning will be conducted as feedback received from third
parties necessitates.
24
<PAGE>
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
BECAUSE WE HAVE OFFERED OUR BASIC E-MAIL SERVICE FOR ONLY THREE YEARS AND OUR
BILLABLE SUBSCRIPTION SERVICES FOR ONLY ONE YEAR, THERE IS LIMITED
INFORMATION UPON WHICH YOU CAN EVALUATE OUR BUSINESS
We have a limited operating history upon which you can evaluate our
business and our services. We began offering our free basic e-mail service to
the public in April 1996 and first offered our initial billable subscription
services to the public in July 1998. As a company in the new and rapidly
evolving market for Internet services, we face numerous risks and uncertainties.
Some of these risks relate to our ability to:
o attract and retain subscribers to our free basic e-mail service
and to Juno Gold and Juno Web, our billable subscription
services;
o anticipate and adapt to the changing Internet market;
o generate advertising revenues and direct product sales;
o maintain and develop strategic relationships with business
partners to market their products over our services;
o implement an effective marketing strategy to promote awareness
of the Juno services;
o respond to actions taken by our competitors;
o develop and deploy successive versions of the Juno software
necessary to use our services;
o operate computer systems and related infrastructure adequate to
effectively manage our growth and provide our basic e-mail
service and our billable subscription services;
o manage the billing systems used to invoice subscribers to Juno
Gold and Juno Web; and
o 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.
WE HAVE A HISTORY OF LOSSES SINCE OUR INCEPTION IN 1995 AND EXPECT CONTINUED
LOSSES FOR THE FORESEEABLE FUTURE
Since our inception in 1995, we have not been profitable. We have
incurred substantial costs to create and introduce our various services, to
operate these services, to promote awareness of these services and to grow our
business. We incurred net losses of approximately $3.8 million from inception
through December 31, 1995, $23.0 million for the year ended December 31, 1996,
$33.7 million for the year ended December 31, 1997, $31.6 million for the year
ended December 31, 1998 and $40.1 million for the nine months ended September
30, 1999. As of September 30, 1999, our accumulated net losses totaled $132.3
million. We incurred negative cash flows from operations of approximately $16.4
million for the year ended December 31, 1996, $33.6 million for the year ended
December 31, 1997 and $20.9 million for the year ended December 31, 1998. For
the nine months ended September 30, 1999, we used $19.6 million in cash for
working capital purposes and to fund losses from operations. Additionally, at
September 30, 1999 $9.2 million remains prepaid for advertising that may be used
at any time prior to March 2001, bringing total net cash used in operating
activities to $28.8 million for the nine months then ended. 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
25
<PAGE>
partners of Juno Online Services, L.P. for reporting on their income tax
returns. As a result, we will not be able to offset future taxable income, if
any, against losses incurred prior to the merger.
We expect operating losses and negative cash flows to continue for the
foreseeable future as we continue to incur significant expenses. We cannot
assure you that we will ever be successful in implementing our business
strategies or in addressing the risks and uncertainties facing our company. Even
if we do address these risks successfully, we may not be profitable in the
future. Were we to achieve profitability, we cannot assure you that we would be
able to sustain or increase profitability on a quarterly or annual basis in the
future.
JUNO'S BUSINESS IS SUBJECT TO FLUCTUATIONS IN OPERATING RESULTS WHICH MAY
NEGATIVELY IMPACT THE PRICE OF OUR STOCK
Our revenues, expenses and operating results have varied in the past and
may fluctuate significantly in the future due to a variety of factors, many of
which are outside of our control. These factors include, among others:
o the rate of new subscriber acquisitions and seasonal trends
relating to subscriber usage of our services;
o the timing and effectiveness of our marketing efforts to acquire
subscribers and promote the Juno brand;
o the timing and effectiveness of any revenue sharing arrangements
or other strategic alliances into which we enter;
o the demand for Internet advertising and seasonal trends relating
to Internet advertising spending;
o seasonal trends relating to the demand for products sold over
the Internet;
o capital expenses related to upgrading our computer systems and
related infrastructure;
o our ability to protect our systems from any telecommunications
failures, power loss, or software-related system failures;
o our ability to integrate operations and technologies from any
acquisitions or other business combinations or relationships
into which we enter;
o the extent to which we experience increased competition in the
markets for Internet services, Internet advertising and direct
product sales;
o changes in operating expenses including, in particular,
telecommunications expenses and the cost of providing various
types of technical and non-technical customer support to our
subscribers; and
o 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
26
<PAGE>
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.
OUR BUSINESS MAY SUFFER IF WE HAVE DIFFICULTY ACQUIRING SUBSCRIBERS TO OUR FREE
BASIC E-MAIL SERVICE, JUNO GOLD OR JUNO WEB
We may not succeed in acquiring a sufficiently large subscriber base for
our free basic e-mail service and our billable subscription services, or in
persuading a significant number of our free basic e-mail subscribers to upgrade
to Juno Gold and Juno Web.
To acquire new members, we currently rely on multiple distribution
channels for our free proprietary software that enables subscribers to use our
services. Our ability to recruit new subscribers may depend on our ability to
enter into additional distribution agreements and to retain our current
distribution partners. We cannot be sure that we will be able to enter into
additional, or maintain or replace our current, distribution agreements on
favorable terms, or that any of our distribution partners will be able to market
our services effectively. Many of our distribution partners also distribute
competing products, and are free to terminate our distribution arrangements at
their convenience. Our inability to recruit, manage or retain distribution
partners, or the inability of these distribution partners to effectively promote
and distribute our software, may cause our business and financial results to
suffer.
Our business strategy contemplates that a significant percentage of the
subscribers to our free basic e-mail service will decide over time to upgrade to
Juno Gold and Juno Web. We are relying on this migration as a major source of
subscribers to these billable subscription services and, since July 1998, we
have conducted advertising to our free e-mail subscribers to encourage them to
upgrade. Over time, repeated exposure to these advertisements may cause their
effectiveness to decline. As a result, we expect that we will need to rely on
more expensive forms of external marketing and promotion to attract additional
users directly to our billable subscription services, as well as to attract new
users to our free basic e-mail service. If our marketing techniques fail to
generate the anticipated conversion rate from free to billable subscription
services, if the acquisition cost for subscribers acquired directly into our
billable subscription services is greater than expected, or if technical
limitations make the conversion process more difficult or time-consuming than
anticipated, our business and financial results may suffer.
DIFFICULTY RETAINING SUBSCRIBERS TO OUR FREE BASIC E-MAIL SERVICE, JUNO GOLD OR
JUNO WEB MAY CAUSE OUR BUSINESS TO SUFFER
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 declined over the last
twelve 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 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 or free introductory offers for Juno Gold and Juno
Web, 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.
27
<PAGE>
OUR MARKETING PROGRAM MAY NOT SUCCEED IN GENERATING NEW SUBSCRIBERS OR IN
PERSUADING SUBSCRIBERS TO UPGRADE TO JUNO GOLD OR JUNO WEB
We plan to devote a significant portion of our working capital to an
extensive marketing campaign. This campaign, which commenced in the spring of
1999, is directed at encouraging users to sign up directly for our billable
subscription services and persuading users of our free basic e-mail service to
upgrade to our billable subscription services. This marketing program includes
forms of advertising, such as television and radio advertising, with which we
have limited experience. There are risks that this campaign may not be effective
in accomplishing one or both of these goals. In addition, it is possible that,
over time, it will become more difficult and expensive to effectively market
Juno Gold and Juno Web to users of our free basic e-mail service and that the
rate at which users of the free basic e-mail service upgrade to our billable
subscription services will decline. Many of our competitors have undertaken
significant advertising campaigns utilizing the same advertising media as we do.
It is possible that these campaigns will have an adverse affect on our own
marketing plans or expenses. If we incur significant costs in implementing our
marketing program without generating sufficient new subscribers to our services,
our business and financial results will suffer.
COMPETITION IN THE MARKETS FOR INTERNET SERVICES, INTERNET ADVERTISING AND
DIRECT PRODUCT SALES IS LIKELY TO INCREASE IN THE FUTURE AND MAY HARM
OUR BUSINESS
The market for Internet services is extremely competitive and includes a
number of substantial participants, including America Online, Microsoft and
AT&T. The markets for Internet-based advertising and direct product sales are
also very competitive.
INTENSE COMPETITION EXISTS IN THE MARKET FOR INTERNET SERVICES
We may not be able to compete successfully against current or future
competitors, and the competitive pressures that we face may cause our business
and financial results to suffer. We believe that the primary competitive factors
determining success in these markets include a reputation for reliability and
service, effective customer support, pricing, easy-to-use software and
geographic coverage. Other important factors include the timing and introduction
of new products and services and industry and general economic trends. Our
ability to compete depends upon many factors, many of which are outside of our
control. We expect this competition to continue to increase because the markets
in which we operate face few substantial barriers to entry. Competition may also
continue to 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. Some of these companies have
introduced or may introduce Web access services at prices lower than those
offered by us, have offered or may offer more aggressive promotions for new
users, and/or have offered or may offer such services entirely for free to the
consumer. We may choose to lower or eliminate the fees we charge for certain of
our billable subscription services in order to remain competitive with other
industry participants, and if we do so our business and financial results may
suffer.
In recruiting subscribers for our billable subscription services, we
currently compete, or expect to compete, with the following types of companies,
among others:
o Established online service providers such as America Online,
CompuServe, and The Microsoft Network;
o Independent national Internet service providers such as
EarthLink, MindSpring, and Prodigy, including certain companies,
such as AltaVista and NetZero, that provide Web access to
subscribers for free;
28
<PAGE>
o Numerous independent regional and local Internet service
providers which may offer lower prices than a national Internet
service provider;
o Various national and local telephone companies such as AT&T, MCI
WorldCom and Pacific Bell; and
o 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
EXCITE@HOME.
o Companies providing Internet access services using other
"broadband" technologies, including digital subscriber lines
("DSL"), such as the Regional Bell Operating Companies,
Flashcom, and various partners of Covad and NorthPoint.
In addition, Microsoft and Netscape, publishers of the Web browsers
utilized by most Internet users, including subscribers to Juno Web, each own or
are owned by online or Internet service providers that compete with Juno Web. In
providing e-mail-related services, we compete with Web-based e-mail services
such as Microsoft's Hotmail and USA.net's Net@ddress. In addition, we do not
currently compete internationally. If the ability to provide Internet services
internationally becomes a competitive advantage in our markets and we do not
begin to provide services internationally, we will be at a disadvantage relative
to our competitors.
WE RELY ON REVENUES FROM ADVERTISING AND DIRECT PRODUCT SALES
With respect to the generation of advertising revenue, we compete with
many of the market participants listed above as well as with various
advertising-supported Web sites, including "portal" sites such as Yahoo! and
Excite, "content" sites such as CNET and CNN.com, and interactive advertising
networks and agencies such as DoubleClick and 24/7 Media. We also compete with
traditional media such as print and television for a share of advertisers' total
advertising budgets. If advertisers perceive the Internet to be a limited or
ineffective advertising medium or perceive us to be less effective or less
desirable than other Internet advertising vehicles, advertisers may be reluctant
to advertise on our services. In selling products directly to our subscribers,
we compete with other Internet-based sellers as well as with stores and other
companies that do not distribute their products through the Internet. Many of
these competitors are larger than we are, enjoy greater economies of scale than
are available to us, have substantially greater resources than we have, and may
be able to offer more products or more attractive prices than we can. We believe
that this competition is likely to increase in the future.
OUR COMPETITION IS LIKELY TO INCREASE IN THE FUTURE
Our competition is likely to increase. We believe this will happen as
Internet service providers and online service providers continue to 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 on-line photo albums
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. Additionally, Internet service providers and personal computer
manufacturers have formed numerous strategic alliances to offer free or deeply
discounted computers to consumers who agree to sign up with the service provider
for a one-year or multi-year term. In a variant on this approach, some Internet
service providers have secured strategic relationships with manufacturers and/or
retailers of computer equipment in which the service provider finances a rebate
to consumers who sign up with the service provider for one or more years. We
have formed several such relationships. There can be no assurances, though, that
the relationships we have formed will be as successful as those of our
competitors as a means of attracting new subscribers, that they will be
economically favorable, or that the terms of these relationships, or any
strategic alliances we complete in the future, will turn out to be as favorable
as those achieved by our competitors. Our competitors may be able to establish
strategic alliances or form joint ventures that put us at a serious competitive
disadvantage. Additionally, our competitors may be able to charge less than
29
<PAGE>
we do for Internet services, or offer such services for free, which may put
pressure on us to reduce or eliminate, or prevent us from raising, the fees we
charge for our billable subscription services. 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. Competition could also require us to
lower the prices we charge for our billable subscriber services, or eliminate
such fees altogether, in order to maintain our marketplace position. Any of
these scenarios could harm our business and financial results, and we may not
have the resources to compete successfully.
WE ARE DEPENDENT ON STRATEGIC MARKETING ALLIANCES AS A SOURCE OF REVENUES AND
OUR BUSINESS COULD SUFFER IF ANY OF THESE ALLIANCES ARE TERMINATED
Most of our strategic marketing partners have the right to terminate
their agreements with us on short notice. We have strategic marketing alliances
with a number of third parties, including AT&T Wireless, Qwest, and The
Hartford. We also have a strategic marketing alliance with WingspanBank.com,
originally entered into with its affiliate, First USA, which became effective
May 2, 1999. If any of our strategic marketing agreements are terminated, we
cannot assure you that we will be able to replace the terminated agreement with
an equally beneficial arrangement. We also cannot assure you that we will be
able to renew any of our current agreements when they expire or, if we are, that
we will be able to do so on acceptable terms. We also do not know whether we
will be successful in entering into additional strategic marketing alliances, or
that any additional relationships, if entered into, will be on terms favorable
to us. Our receipt of revenues from our strategic marketing alliances may also
be dependent on factors which are beyond our control, such as the quality of the
products or services offered by our strategic marketing partners.
WE MUST ADAPT TO TECHNOLOGY TRENDS AND EVOLVING INDUSTRY STANDARDS OR WE WILL
NOT BE COMPETITIVE
Our failure to respond in a timely and effective manner to new and
evolving technologies, including cable modem and other broadband technology,
could harm our business and financial results. The Internet services market is
characterized by rapidly changing technology, evolving industry standards,
changes in member needs and frequent new service and product introductions. Our
business and financial results depend, in part, on our ability to use leading
technologies effectively, to develop our technical expertise, to enhance our
existing services and to develop new services that meet changing member needs on
a timely and cost-effective basis. In particular, we must provide subscribers
with the appropriate products, services and guidance required to best take
advantage of the rapidly evolving Internet. If the market for our billable
subscription services should develop more slowly than we expect, become
saturated with competitors, or develop in a fashion that renders our services
uncompetitive or otherwise unappealing to consumers, our business and financial
results may suffer.
We are also at risk due to fundamental changes in the way that Internet
access may be provided in the future. Currently, consumers access Internet
services primarily through computers connected by telephone lines. Broadband
connections, however, allow significantly faster access to the Internet than is
possible using the telephone-based analog 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,
telephone companies, electric utility companies and wireless communications
companies, have decided or may decide to provide Internet access as well. For
example, competitors have developed technologies that enable cable television
operators to offer high-speed Internet access through their cable facilities.
These cable television operators, as well as other competitors, may include
Internet access in their basic bundle of services or may offer Internet access
for a nominal additional charge. Moreover, these companies could prevent us in
the future from delivering Internet access through the wire and cable
connections that they own, or from doing so on a cost-effective basis.
30
<PAGE>
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. In the near term, we expect to launch a pilot
program for the delivery of our Internet services through DSL technology, a form
of broadband access. The installation of a broadband connection in a residence
requires complex on-site installation. There are significant risks that Juno's
broadband program will encounter unforeseen delays, that the installation of
broadband connections at consumer residences will encounter technical
difficulties or challenges, and/or that we will not be able to deliver such
broadband services in a cost-effective fashion. Additionally, Juno's program
will be conducted jointly with Covad Communications, a provider of DSL services.
If Juno experiences any of the difficulties described above, or if our
relationship with Covad is unsuccessful, or if other factors delay our ability
to offer broadband access to our subscribers, our business and financial results
may suffer.
We may also have to modify the means by which we deliver our Internet
services, in which case we would incur significant costs. If consumers adopt
alternative forms of Internet access that provide a continuous connection to the
Internet rather than relying on a series of separate dial-up connections, then
any competitive advantage that we currently realize because our technology
minimizes connect time may diminish. If other companies are able to prevent us
from delivering our Internet services through the wire, cable, and wireless
connections that they own, if we are unable to adapt to the challenges posed by
broadband technologies or if we incur significant costs without generating
sufficient revenues, our business and financial results may suffer.
OUR BUSINESS MAY BE ADVERSELY AFFECTED IF THE MARKET FOR INTERNET ADVERTISING
FAILS TO DEVELOP
Our business and financial results are dependent on the use of the
Internet as an advertising medium. Internet-based advertising accounts for only
a small fraction of all advertising expenditures, and we cannot be sure that
Internet-based advertising will ever grow to account for a substantial
percentage of total advertising spending or when an increase might occur. Our
business may suffer if the market for Internet-based advertising fails to
develop or develops more slowly than expected. In addition, no standards have
been widely accepted to measure the effectiveness of Internet-based advertising.
If measurement standards do not develop, many advertisers may choose not to
advertise on the Internet. Different pricing models are used to sell
Internet-based advertising. Our revenues could suffer if we are unable to adapt
to new forms of, and new pricing models for, Internet-based advertising. It is
difficult to predict which, if any, forms of Internet-based advertising will
emerge as the industry standard. This makes it difficult to project our future
advertising rates and revenues. Moreover, "filter" software programs that limit
or prevent advertising from being delivered to an Internet user's computer are
available. Widespread adoption of this type of software could harm the
commercial viability of Internet-based advertising.
Sales of advertising space on our services represents an important
revenue source for us. Competition for Internet-based advertising revenues is
intense, and this competition could result in significant price erosion over
time. We cannot assure you that we will be successful in selling advertising or
capturing a significant share of the market for Internet-based advertising. We
also cannot assure you that we will be able to sell advertising at the rates we
currently project. It is also possible that we will find it necessary to lower
the rates for advertising space on our services.
We currently rely on our internal sales and marketing personnel for
generating sales leads and promoting our services to the advertising community.
With substantially all of our sales and marketing personnel 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.
31
<PAGE>
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.
OURADVERTISING SYSTEM REQUIRES LABOR AND IMPOSES COSTS ON US BEYOND THOSE
ASSOCIATED WITH STANDARD WEB ADVERTISING
Elements of advertising on Juno's services are non-standard when
compared to advertising on the Web and may put Juno at a competitive
disadvantage. The advertisements displayed on our services require customization
that would not be required by a Web site capable of displaying previously
prepared standard advertisements. This customization work increases the time
necessary to prepare an advertisement to be displayed on our services and the
costs associated with running these ads. We must also absorb the
telecommunications cost associated with initially downloading these ads to our
subscribers, which is an expense that advertising-supported Web sites do not
incur. As ads become more complex, our telecommunications expenses may increase.
Furthermore, the costs associated with selling or attempting to sell advertising
space on our services are significant. These costs may be greater than the costs
associated with selling advertising space on Web sites that utilize standard Web
advertising formats. Additionally, our use of a proprietary advertising format
could prevent us from packaging our advertising space for sale by an advertising
network such as DoubleClick. We also rely on detailed data provided by our
subscribers for purposes of targeting some ads. We do not currently verify the
accuracy of this data at the time it is provided or require subscribers to
update their information thereafter. Furthermore, individuals who subscribe
directly to one of our billable subscription services are not currently required
to provide this data. Any of the above factors could discourage advertising on
our network by some advertisers.
SEASONAL TRENDS IN INTERNET USAGE AND ADVERTISING SALES MAY NEGATIVELY AFFECT
OUR BUSINESS
Seasonal trends are likely to affect the revenues we generate from
operating our Internet services. Subscribers typically use our Internet services
less during the summer months and year-end holiday periods. To the extent that
our revenues depend on the amount of usage by our subscribers, our revenues may
be lower during these periods. For example, some of the subscribers to Juno Web
pay us based on the number of hours they spend using our services in a given
month. In addition, the rate at which new subscribers sign up for our billable
subscription services, which were introduced in July 1998, may be lower during
the summer months and year-end holiday periods.
We believe that advertising sales generally are lower in the first and
third calendar quarters of each year. We have recently seen this pattern
reflected in our results of operations and believe that this seasonal trend may
continue.
Since our operating expenses are based on our expectations of future
revenues, including seasonal fluctuations, it is possible that operating results
will suffer if these seasonal trends do not continue in the future or if
different seasonal trends develop in the future.
WE ARE DEPENDENT ON A SMALL NUMBER OF TELECOMMUNICATIONS CARRIERS AND MAY BE
UNABLE TO FIND ADEQUATE REPLACEMENTS IF THEIR RATES INCREASE, SERVICE
QUALITY DECLINES, OR IF THEY DISCONTINUE DOING BUSINESS WITH US
Our business and financial results depend in significant part on the
capacity, affordability, reliability and security of our telephone company data
networks. To use our services, subscribers must initiate telephone connections
between their personal computers and computer hardware in local or regional
facilities known as "points of presence." We contract for the use of points of
presence around the country from various telecommunications carriers. These
carriers currently include UUNET Technologies and WorldCom Advanced
32
<PAGE>
Networks, both of which are operated by MCI WorldCom; Level 3 Communications,
Concentric Network Corporation; Splitrock Services, Inc.; and Sprint
Communications Company. These telecommunications companies also carry data
between their points of presence and our central computers located in Cambridge,
Massachusetts and Jersey City, New Jersey.
As of September 30, 1999, we had contracted for the use of over 2,300
local telephone numbers associated with points of presence throughout the United
States. Some points of presence carry data both for our e-mail services and for
Juno Web, while others carry data only for our e-mail services or only for Juno
Web. At various times in the past, network capacity constraints at particular
points of presence have prevented or delayed access by subscribers attempting to
connect to our services. This could happen in the future, especially during
times of peak usage. Difficulties accessing our services due to poor network
performance could cause our subscribers to terminate their membership with us.
Because we depend on third-party telecommunications carriers for crucial
portions of our network infrastructure, we do not have direct control over
network reliability and some aspects of service quality. A natural disaster or
other unanticipated problem that affects the points of presence or the
telecommunications lines we use, or that affects the nation's telecommunications
network in general, could cause interruptions in our services.
Only a small number of telecommunications companies can provide the
network services we require. This number has been reduced through consolidation
in the telecommunications industry, and there is a significant risk that further
consolidation could make us reliant on an even smaller number of providers.
Currently, we are particularly dependent on companies controlled by MCI
WorldCom, which provide more than 1,100 of the approximately 2,300 points of
presence for which we contract in the United States, and which carry a
significant percentage of our traffic. Furthermore, MCI WorldCom has announced
that it will begin to offer consumer Internet access, making it a direct
competitor of ours. Furthermore, MCI WorldCom has recently announced that it
will merge with Sprint during 2000, subject to approval of their stockholders
and the receipt of regulatory approvals. This will further concentrate our
reliance on MCI WorldCom and the companies it controls. Our business could be
significantly harmed if we are unable to maintain a favorable relationship with
MCI WorldCom. We cannot assure you that we would be able to replace the services
provided to us by MCI WorldCom were our relationship with them to be terminated.
Our financial results are highly sensitive to variations in prices for
the telecommunications services described above. We cannot assure you that
telecommunications prices will decline, or that there will not be
telecommunications price increases due to factors beyond our control. Some of
our telecommunications carriers impose minimum connection charges. Our business
could be harmed if minimum connection charges increase or become more prevalent.
We cannot assure you that our telecommunications carriers will continue to
provide us access to their points of presence on adequate price terms, or that
alternative services will be available in the event that their quality of
service declines or that our relationship with any of our current carriers is
terminated.
Most of the telecommunications services we purchase are provided to us
under short-term agreements that the providers can terminate or elect not to
renew. As a result, there is a significant risk that any or all of UUNET
Technologies, WorldCom Advanced Networks, Level 3, Concentric, Splitrock 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, the majority of our telecommunications
providers compete, or have 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.
33
<PAGE>
WE ARE DEPENDENT ON THIRD PARTIES FOR TECHNICAL AND CUSTOMER SERVICE SUPPORT AND
OUR BUSINESS MAY SUFFER IF THEY ARE UNABLE TO PROVIDE THESE SERVICES OR
CANNOT EXPAND TO MEET OUR NEEDS
Our business and financial results depend, in part, on the availability
of live technical and customer service support, and of inbound telemarketing and
disk distribution services. Should our ability to provide these services be
hampered, our business may suffer. Although many Internet service providers have
developed internal customer service operations designed to meet these needs, we
have elected to outsource these functions to third-party vendors. We currently
use ClientLogic Corporation for technical and customer service support. 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 these services to us.
Our most important relationship is with ClientLogic, which, at September
30, 1999, provided us with approximately 290 full-time or part-time employees at
its facilities to service our account. The availability of call-in technical
support and customer service is especially important to acquire and retain
subscribers to Juno Gold and Juno Web, and we rely almost entirely on
ClientLogic to provide this function. At times, our subscribers have experienced
lengthy waiting periods to reach representatives trained to provide the
technical or customer support they require. The growth and expansion of our
services has caused waiting periods for technical and customer support to
lengthen recently. Reducing these waiting periods and accommodating potential
future growth will require significantly more support personnel than are
currently available to us through ClientLogic. Additionally, 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, this will compound our need for customer service
resources. As a result, we expect that it will become necessary, in the near
future, to identify supplemental or replacement vendors for these services, or
to develop the resources ourselves to deliver these services. Our agreement with
ClientLogic converts to a month-to-month contract on August 1, 2000, providing
either party the right to terminate the relationship at any time upon one
month's notice. Prior to that date, ClientLogic can terminate the contract
without cause upon 90 days notice. In addition, ClientLogic may terminate the
contract upon 60 days notice if we do not reach agreement with ClientLogic with
regard to modifications ClientLogic proposes to the pricing terms of the
contract within 60 days of the modifications being proposed. If our relationship
with ClientLogic terminates and we are unable to enter into a comparable
arrangement with a replacement vendor, if ClientLogic is unable to provide
enough personnel to provide the quality and quantity of service we desire, if
system failures, outages or other technical problems make it difficult for our
subscribers to reach customer service representatives at ClientLogic, or if we
are required to obtain externally or develop internally additional or
replacement customer and technical support capacity, then our business and
financial results may suffer.
WE RELY ON A SINGLE EXTERNAL MARKETING PARTNER TO FULFILL MOST OF OUR DIRECT
PRODUCT SALES
If we fail to manage our direct product sales efforts in a
cost-effective manner, or if we fail to maintain the relationship with our
external marketing partner, our business may suffer. During the third quarter,
we relied almost entirely on a single external marketing partner, Direct
Alliance Corporation, a subsidiary of Insight Enterprises, for the procurement,
warehousing, fulfillment, billing and customer service aspects of our direct
product sales. We expect this relationship to terminate at the end of the fourth
quarter. We have recently entered into an arrangement with another vendor,
Shopping4Sure.com, and we expect that this vendor will replace the services
provided to us by Direct Alliance Corporation. If our relationship with our new
external vendor fails to develop, or if it is 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:
34
<PAGE>
o the willingness of subscribers to overcome concerns regarding
the security of online financial transactions;
o our ability to select and profitably acquire and provide
merchandise that is interesting to our subscriber base;
o our ability to compete with established retail business and
other online sellers; and
o other factors that may be outside of our control.
In addition, if we were to experience unusually high rates of returns
for the products we sell to our subscribers or if we were unable to sell all the
products in our inventory, the net revenues we generate from our direct sales
activities would be harmed. In addition, our revenues may suffer if we face
increased competition in our direct product sales activities.
DISRUPTION OF OUR INTERNET SERVICES DUE TO SECURITY BREACHES AND SYSTEM
FAILURES COULD RESULT IN SUBSCRIBER CANCELLATIONS
Both our infrastructure and the infrastructure of our network providers
are vulnerable to security breaches or similar disruptive problems and system
failures. Our systems are also subject to telecommunications failures, power
loss, software-related system failures and various other events. Any of these
events, whether intentional or accidental, could lead to interruptions, delays
or cessation of service to our subscribers. This could cause some of our
subscribers to stop using our Internet services. Third parties could also
potentially jeopardize the security of confidential information stored in our
computer systems or our subscribers' computer systems through their
inappropriate use of the Internet, which could cause losses to us or our
subscribers or deter some people from subscribing to our services. People may be
able to circumvent our security measures or the security measures of our third
party network providers.
We may have to interrupt, delay or cease service to our subscribers to
alleviate problems caused by computer viruses, security breaches or other
failures of network security. Any damage or failure that interrupts or delays
our operations could result in subscriber cancellations, could harm our
reputation, and could affect our business and financial results. In addition, we
expect that our subscribers will increasingly use the Internet for commercial
transactions in the future. Any network malfunction or security breach could
cause these transactions to be delayed, not completed at all or completed with
compromised security. Our subscribers or others may assert claims of liability
against us as a result of this type of failure. Furthermore, until more
comprehensive security technologies are developed, the security and privacy
concerns of existing and potential subscribers may inhibit the growth of the
Internet service industry in general and our subscriber base and revenue in
particular. Our insurance policies may not adequately compensate us for any
losses that may occur due to any failures in our systems or interruptions in our
services.
RAPID GROWTH IN OUR BUSINESS COULD STRAIN OUR MANAGERIAL, OPERATIONAL,
FINANCIAL, AND INFORMATION SYSTEMS RESOURCES
The anticipated future growth necessary to expand our operations will
place a significant strain on our managerial, operational, financial and
information systems resources. If we are unable to manage our growth
effectively, our business and financial results will suffer. In order to achieve
growth in revenues from Internet advertising, we will need to expand our sales
efforts and continue to improve and develop our software. In order to achieve
growth in revenues from Juno Gold and Juno Web, we will need to expand our
marketing efforts, promote the Juno brand, expand the computer systems and
related infrastructure we use to provide our Internet services, and increase
both our internal and outsourced customer service capabilities. We expect that
we will need to continually improve our financial and managerial controls,
billing systems, reporting systems and procedures, and we will also need to
continue to expand, train and manage our workforce. We had 65 employees
35
<PAGE>
at December 31, 1996, 152 employees at December 31, 1997, 144 employees at
December 31, 1998 and 231 employees at September 30, 1999, including 54
individuals in India. Prior to May 21, 1999, consultants used in India were
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
outsourced services will continue to increase for the foreseeable future.
The demand on our network infrastructure, technical staff and technical
resources has grown rapidly with our expanding subscriber base. We cannot be
certain that our infrastructure, technical staff and technical resources will
adequately accommodate or facilitate the anticipated growth of our subscriber
base. In particular, if we were to experience repeated and/or prolonged
system-wide service outages, our business and financial results would suffer.
WE FACE POTENTIAL LIABILITY FOR INFORMATION TRANSMITTED OR RETRIEVED THROUGH
OUR INTERNET SERVICES
Our business and financial results may suffer if we incur liability as a
result of information transmitted or retrieved through our services. The
liability of Internet service providers and online services companies for
information transmitted or retrieved through their services is uncertain. It is
possible that claims may be filed against us based on a variety of theories,
including defamation, obscenity, negligence, copyright or trademark
infringement, or other theories based on the nature, publication or distribution
of this information. These types of claims have been brought, sometimes
successfully, against providers of Internet services in the past. Such claims,
with or without merit, would likely divert management time and attention and
result in significant costs to investigate and defend. In addition, if we become
subject to these types of claims and we are not successful in our defense, we
may be forced to pay substantial damages. We may also be forced to implement
expensive measures to alter the way our services are provided to avoid any
potential liability.
CHANGES IN GOVERNMENT REGULATION COULD DECREASE OUR REVENUES AND INCREASE
OUR COSTS
Changes in the regulatory environment could decrease our revenues and
increase our costs. As a provider of Internet access and e-mail services, we are
not currently subject to direct regulation by the Federal Communications
Commission. However, several telecommunications carriers are seeking to have
communications over the Internet regulated by the FCC in the same manner as
other more traditional telecommunications services. Local telephone carriers
have also petitioned the FCC to regulate Internet access providers in a manner
similar to long distance telephone carriers and to impose access fees on these
providers, and recent events suggest that they may be successful in obtaining
the treatment they seek. In addition, we operate our services throughout the
United States, and we cannot assure you that regulatory authorities at the state
level will not seek to regulate aspects of our activities as telecommunications
services. As a result, we could become subject to FCC and state regulation as
Internet services and telecommunications services converge.
We remain subject to numerous additional laws and regulations that could
affect our business. Because of the Internet's popularity and increasing use,
new laws and regulations with respect to the Internet are becoming more
prevalent. These laws and regulations have covered, or may cover in the future,
issues such as:
o user privacy;
o pricing;
o intellectual property;
o federal, state and local taxation;
36
<PAGE>
o distribution; and
o characteristics and quality of products and services.
Legislation in these areas could slow the growth in use of the Internet
generally and decrease the acceptance of the Internet as a communications and
commercial medium. Additionally, because we rely on the collection and use of
personal data from our members for targeting advertisements shown on our
services, we may be harmed by any laws or regulations that restrict our ability
to collect or use this data. The Federal Trade Commission has begun
investigations into the privacy practices of companies that collect information
about individuals on the Internet. Although we are not currently subject to
direct regulation by the FTC, there can be no assurance that we will not become
subject to direct regulation in the future. It may take years to determine how
existing laws such as those governing intellectual property, privacy, libel and
taxation apply to the Internet. Any new legislation or regulation regarding the
Internet, or the application of existing laws and regulations to the Internet,
could harm us. Additionally, while we do not currently provide services outside
of the United States, the international regulatory environment relating to the
Internet market could have an adverse effect on our business, especially if we
should expand internationally.
The growth of the Internet, coupled with publicity regarding Internet
fraud, may also lead to the enactment of more stringent consumer protection
laws. For example, numerous bills have been presented to Congress and various
state legislatures designed to address the prevalence of unsolicited commercial
bulk e-mail on the Internet. These laws may impose additional burdens on our
business. The enactment of any additional laws or regulations in this area may
impede the growth of the Internet, which could decrease our potential revenues
or otherwise cause our business to suffer.
IF INTERNET USAGE DOES NOT CONTINUE TO GROW, OUR BUSINESS WILL SUFFER
Our business and financial results depend on continued growth in the use
of the Internet. We cannot be certain that this growth will continue or that it
will continue in its present form. If Internet usage declines or evolves away
from our business, our growth will slow or stop and our business and financial
results will suffer.
UNANTICIPATED DELAYS OR PROBLEMS IN THE INTRODUCTION OF NEW FEATURES OR SERVICES
MAY CAUSE CUSTOMER DISSATISFACTION
If we experience problems related to the reliability and quality of our
services or delays in the introduction of new versions of or enhancements to our
services, we could experience increased subscriber cancellations, adverse
publicity and reduced sales of advertising and products. Our services are very
complex and are likely to contain a number of undetected errors and defects,
especially when new features or enhancements are first released. Furthermore, in
order to introduce new features or enhancements, we may elect to license
technology from other companies rather than develop such features or
enhancements ourselves, and we may be exposed to undetected errors or defects in
third-party technology that is out of our control. Any errors or defects, if
significant, could harm the performance of these services, result in ongoing
redevelopment and maintenance costs and/or cause dissatisfaction on the part of
subscribers and advertisers. These costs, delays or dissatisfaction could
negatively affect our business.
WE HAVE LIMITED EXPERIENCE WITH THE SOFTWARE WE USE TO BILL SUBSCRIBERS TO JUNO
GOLD OR JUNO WEB
The operation of Juno Gold and Juno Web requires the accurate operation
of billing system software as well as our development of policies designed to
reduce the incidence of credit card fraud and other forms of uncollectable
"chargebacks." We have only limited experience with the operation of these
billing and fraud detection systems. If we encounter difficulty with the
operation of these systems, or if errors, defects or
37
<PAGE>
malfunctions occur in the operation of these systems, this could result in
erroneous overcharges to customers or in the under-collection of revenue, either
of which could hurt our business and financial results.
OUR RELATIONSHIP WITH D. E. SHAW & CO., L.P. MAY PRESENT POTENTIAL
CONFLICTS OF INTEREST
The Chairman of our board of directors and our controlling stockholder,
Dr. David E. Shaw, is the Chairman and Chief Executive Officer of D. E. Shaw &
Co., Inc., which is the general partner of D. E. Shaw & Co., L.P., a global
securities firm whose activities focus on various aspects of the intersection
between technology and finance. Dr. Shaw devotes only a portion of his time to
our company, and spends most of his time and energy engaged in business
activities unrelated to us. Dr. Shaw indirectly owns a controlling interest in
DESCO, L.P. and in some of its affiliated entities. Transactions between us and
these parties may occur in the future and could potentially result in conflicts
of interest that prove harmful to us.
We have historically contracted with DESCO, L.P. to provide accounting,
tax, payroll, insurance, employee benefits and information technology services.
We continue to obtain some employee benefits and information technology services
from DESCO, L.P., and these services are provided to us on a fixed-fee basis
under shared services agreements that can be terminated by any of the parties
without cause upon 90 days notice. If we were no longer able to obtain these
services through DESCO, L.P. or its affiliates, we would be required to obtain
these services internally or through third-party providers, and we cannot be
sure that we could do so on acceptable terms. In addition, we sublease office
space in New York City from DESCO, L.P. We cannot be sure that we would be able
to lease other space on favorable terms in the event the leases for this office
space were to be terminated.
We recently terminated an agreement with DESCO, L.P. under which
individuals employed by its affiliates located in India provided consulting
services to us. Following the termination of this agreement, these individuals
became employees of a Juno subsidiary located in Hyderabad, India. We expect to
continue to obtain some services in India from DESCO, L.P. or its affiliates.
Dr. Shaw and entities affiliated with him are likely to manage, invest
in or otherwise be involved with other technology-related business ventures
apart from our company. These relationships could also restrict our ability to
transact business with non-affiliated parties, and could negatively affect us.
OUR DIRECTORS AND OFFICERS WILL EXERCISE SIGNIFICANT CONTROL OVER US
As of October 31, 1999, the executive officers, directors and persons
and entities affiliated with executive officers and/or directors beneficially
own, in the aggregate, approximately 52.7% of our outstanding common stock. 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, beneficially own, in the aggregate,
approximately 49.3% of our outstanding common stock. As a result of this
concentration of ownership, Dr. Shaw is able to exercise significant influence
over matters requiring approval by our stockholders, including the election of
directors and approval of significant corporate transactions. This concentration
of ownership could also have the effect of delaying or preventing a change in
control of Juno.
IF WE FAIL TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY OR FACE A CLAIM OF
INTELLECTUAL PROPERTY INFRINGEMENT BY A THIRD PARTY, WE COULD LOSE OUR
INTELLECTUAL PROPERTY RIGHTS OR BE LIABLE FOR SIGNIFICANT DAMAGES
We have taken steps to protect our intellectual property rights, but we
cannot be certain that our efforts will be adequate to safeguard our rights to
technology we have developed. Disputes concerning the ownership or
38
<PAGE>
rights to use intellectual property could be costly and time consuming to
litigate, may distract management from other tasks of operating the business,
and may result in our loss of significant rights and the loss of our ability to
operate our business.
We have been granted three U.S. patents covering aspects of our
technology for the offline display of advertisements and aspects of our
technology for the authentication and dynamic scheduling of advertisements and
other messages to be delivered to computer users. We have also filed other U.S.
patent applications covering additional aspects of our business. We cannot
assure you, however, that these applications will result in the issuance of
patents; that any patents that have been granted or that might be granted in the
future will provide us with any competitive advantages or will be exploited
profitably by us; or that any of these patents will withstand any challenges by
third parties. We also cannot assure you that others will not obtain and assert
patents against us which are essential for our business. If patents are asserted
against us, we cannot assure you that we will be able to obtain license rights
to those patents on reasonable terms or at all. If we are unable to obtain
licenses, we may be prevented from operating our business and our financial
results may therefore be harmed.
Except as described above, we rely solely upon copyright and trademark
law, trade secret protection, and/or confidentiality agreements with our
employees and with some third parties to protect our proprietary technology,
processes, and other intellectual property, to the extent that protection is
sought or secured at all. We cannot assure you that any steps we might take will
be adequate to protect against infringement and misappropriation of our
intellectual property by third parties. Similarly, we cannot assure you that
third parties will not be able to independently develop similar or superior
technology, processes, or other intellectual property. Furthermore, we cannot
assure you that third parties will not assert claims against us for infringement
and misappropriation of their intellectual property rights nor that others will
not infringe or misappropriate our intellectual property rights, for which we
may wish to assert claims.
PROBLEMS RESULTING FROM THE YEAR 2000 PROBLEM COULD REQUIRE US TO INCUR
UNANTICIPATED EXPENSE AND COULD DIVERT MANAGEMENT'S TIME AND ATTENTION
The Year 2000 problem could harm our business and financial results.
Many currently installed computer systems and software products are coded to
accept or recognize only two-digit entries in the date code field. These systems
may interpret the date code "00" as the year 1900 rather than the year 2000. As
a result, computer systems and/or software used by many companies and
governmental agencies may need to be upgraded or replaced to comply with Year
2000 requirements or risk system failure or miscalculations causing disruptions
of normal business activities. Our failure to correct a material Year 2000
problem could result in an interruption in, or a failure of, aspects of our
normal business activities or operations. In addition, a significant Year 2000
problem involving our network services or equipment provided to us by
third-party vendors could cause our customers to consider seeking alternate
providers or cause an unmanageable burden on our customer service and technical
support capabilities. Any significant Year 2000 problem could require us to
incur significant unanticipated expenses to remedy these problems and could
divert management's time and attention.
WE ARE DEPENDENT ON KEY MANAGEMENT PERSONNEL FOR OUR FUTURE SUCCESS
Our business and financial results depend in part on the continued
service of our key personnel. We do not carry key person life insurance on any
of our personnel. The loss of the services of any of our executive officers or
the loss of the services of other key employees could harm our business and
financial results.
WE MAY NOT BE ABLE TO HIRE AND RETAIN QUALIFIED EMPLOYEES
Our business and financial results depend in part on our ability to
attract, retain and motivate highly skilled employees. Competition for employees
in our industry is intense. We may be unable to retain our key employees or
attract, assimilate or retain other highly qualified employees. We have, from
time to time, in the past
39
<PAGE>
experienced, and we expect to continue to experience, difficulty in hiring and
retaining highly skilled employees with appropriate qualifications.
WE CANNOT PREDICT OUR FUTURE CAPITAL NEEDS AND WE MAY NOT BE ABLE TO SECURE
ADDITIONAL FINANCING
We currently anticipate that our available funds will be sufficient to
meet our anticipated needs for at least the next 12 months. We may need to raise
additional funds in the future to fund our operations, to finance subscriber
acquisition costs, to enhance and/or expand the range of Internet services we
offer or to respond to competitive pressures and/or perceived opportunities. We
cannot be sure that additional financing will be available on terms favorable to
us, or at all. If adequate funds are not available or not available when
required or on acceptable terms, we may be forced to cease our operations, and
even if we are able to continue our operations, our business and financial
results may suffer.
WE MAY NOT BE ABLE TO SUCCESSFULLY MAKE ACQUISITIONS OF OR INVESTMENTS IN
OTHER COMPANIES
We have no experience in acquiring or making investments in companies,
technologies or services. From time to time we have had discussions with
companies regarding our acquiring, or investing in, their businesses, products
or services, or customers. We have no present understanding or agreement
relating to any acquisition or investment. If we buy a company, we could have
difficulty in assimilating that company's personnel and operations. In addition,
the key personnel of the acquired company may decide not to work for us. If we
make other types of acquisitions, we could have difficulty in assimilating the
acquired services, technologies or customers into our operations. These
difficulties could disrupt our ongoing business, distract our management and
employees, increase our expenses and adversely affect our results of operations
due to accounting requirements such as the amortization of goodwill.
Furthermore, we may incur debt or issue equity securities to pay for any future
acquisitions. The issuance of equity securities could be dilutive to our
existing stockholders.
WE COULD FACE ADDITIONAL REGULATORY REQUIREMENTS, TAX LIABILITIES AND OTHER
RISKS IF WE DECIDE TO EXPAND INTERNATIONALLY
We may decide to expand internationally, and believe that any
international operations would be subject to most of the risks of our business
generally. In addition, there are risks inherent in doing business in
international markets, such as changes in regulatory requirements, tariffs and
other trade barriers, fluctuations in currency exchange rates, and adverse tax
consequences, and there are likely to be different consumer preferences and
requirements in such markets. We cannot assure you that one or more of these
factors would not harm any future international operations.
FUTURE SALES OF OUR COMMON STOCK MAY NEGATIVELY AFFECT OUR STOCK PRICE
We have a large number of shares of common stock outstanding and
available for resale beginning at various points in time in the future. The
market price of our common stock could decline as a result of sales of a large
number of shares of our common stock in the market, or the perception that such
sales could occur. These sales also might make it more difficult for us to sell
equity securities in the future at a price that we think is appropriate, or at
all.
OUR STOCK PRICE MAY EXPERIENCE EXTREME PRICE AND VOLUME FLUCTUATIONS
The stock market has experienced extreme price and volume fluctuations.
The market prices of the securities of Internet-related companies have been
especially volatile. Until recently, 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. We may suffer significant declines in the market price of
our common stock.
40
<PAGE>
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 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.
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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are involved in disputes and litigation in the normal course of
business. We do not believe that the outcome of any of these disputes or
litigation will have a material adverse effect on our business, financial
condition or results of operations.
ITEM 6. EXHIBITS AND REPORT ON FORM 8-K
(a) The following exhibits are filed as part of this report:
27.1 Financial Data Schedule
No reports on Form 8-K were filed during the quarter ended September 30, 1999.
41
<PAGE>
ITEM 7. SIGNATURES
Pursuant to the requirements of the Securities Exchange Act, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized:
JUNO ONLINE SERVICES, INC.
(Registrant)
Date: November 12, 1999 /s/ Charles E. Ardai
-------------------------------------------
Name: Charles E. Ardai
Title: President, Chief Executive Officer
and Director
(principal executive officer)
Date: November 12, 1999 /s/ Richard M. Eaton, Jr.
-------------------------------------------
Name: Richard M. Eaton, Jr.
Title: Chief Financial Officer and Treasurer
(principal accounting and financial officer)
42
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 108,417
<SECURITIES> 0
<RECEIVABLES> 5,846
<ALLOWANCES> 611
<INVENTORY> 18
<CURRENT-ASSETS> 126,240
<PP&E> 8,159
<DEPRECIATION> 4,241
<TOTAL-ASSETS> 130,272
<CURRENT-LIABILITIES> 41,713
<BONDS> 0
0
0
<COMMON> 346
<OTHER-SE> 86,610
<TOTAL-LIABILITY-AND-EQUITY> 130,272
<SALES> 33,946
<TOTAL-REVENUES> 33,946
<CGS> 23,058
<TOTAL-COSTS> 23,058
<OTHER-EXPENSES> 53,330
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 284
<INCOME-PRETAX> (40,106)
<INCOME-TAX> (40,106)
<INCOME-CONTINUING> (40,106)
<DISCONTINUED> (40,106)
<EXTRAORDINARY> (40,106)
<CHANGES> (40,106)
<NET-INCOME> (40,106)
<EPS-BASIC> (1.39)
<EPS-DILUTED> (1.39)
</TABLE>
