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: June 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 |_| No |X|
As of July 31, 1999, there were 34,629,709 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 - June 30, 1999 and
December 31, 1998................................................. 3
Condensed Consolidated Statements of Operations - Three and
six months ended June 30, 1999 and 1998........................... 4
Condensed Consolidated Statement of Partners' Capital
(Deficiency)/Statement of Stockholders' Equity - Six months
ended June 30, 1999............................................... 6
Condensed Consolidated Statements of Cash Flows - Six months
ended June 30, 1999 and 1998...................................... 7
Notes to Condensed Consolidated Financial Statement............... 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................... 11
PART II. OTHER INFORMATION................................................ 39
Item 1. Legal Proceedings................................................. 39
Item 2. Changes in Securities and Use of Proceeds......................... 39
Item 3. Defaults Upon Senior Securities................................... 40
Item 4. Submission of Matters to a Vote of Security Holders............... 40
Item 5. Other Information................................................. 40
Item 6. Exhibits and Report on Form 8-K................................... 40
Item 7. Signatures........................................................ 41
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
JUNO ONLINE SERVICES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
June 30, December 31,
1999 1998
--------- ------------
(unaudited)
Assets
Current assets:
Cash and cash equivalents ........................... $ 111,383 $ 8,152
Accounts receivable, net of allowance for
doubtful accounts of $421 and $296 in
1999 and 1998, respectively ........................ 3,411 2,115
Merchandise inventories, net ........................ 24 60
Prepaid expenses and other current assets ........... 11,370 108
--------- ---------
Total current assets ............................... 126,188 10,435
Fixed assets, net ..................................... 4,027 4,086
Other assets .......................................... 111 182
--------- ---------
Total assets ....................................... $ 130,326 $ 14,703
========= =========
Liabilities and partners' capital (deficiency)/
stockholders' equity
Current liabilities:
Accounts payable and accrued expenses ............... $ 15,604 $ 11,166
Current portion of capital lease obligations ........ 735 450
Current portion of senior note ...................... -- 1,560
Deferred revenue .................................... 8,973 5,602
--------- ---------
Total current liabilities .......................... 25,312 18,778
Capital lease obligations ............................. 825 609
Senior note ........................................... -- 7,569
Deferred rent ......................................... 296 335
Deferred revenue ...................................... 1,000 --
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, 34,629,709 issued and outstanding .... 346
Additional paid-in capital .......................... 123,265
Unearned compensation ............................... (1,043)
Cumulative translation adjustment ................... (1)
Accumulated deficit ................................. (19,674)
---------
Total shareholders' equity .......................... 102,893
--------- ---------
Total liabilities and partners' capital
(deficiency)/stockholders' equity ............... $ 130,326 $ 14,703
========= =========
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)
Three Months Six Months
Ended June 30, Ended June 30,
-------------------- ------------------
1999 1998 1999 1998
-------- -------- -------- --------
Revenues:
Billable services .............. $ 7,069 $ 709 $ 12,875 $ 1,174
Advertising and transaction fees 2,703 1,540 4,968 2,768
Direct product sales ........... 1,350 2,035 2,999 4,612
-------- -------- -------- --------
Total revenues ................ 11,122 4,284 20,842 8,554
-------- -------- -------- --------
Cost of revenues:
Billable services .............. 5,481 580 10,159 967
Advertising and transaction fees 1,162 875 2,242 1,700
Direct product sales ........... 1,165 1,709 2,589 4,135
-------- -------- -------- --------
Total cost of revenues ........ 7,808 3,164 14,990 6,802
-------- -------- -------- --------
Operating expenses:
Operations, free service ....... 1,771 2,356 3,617 5,180
Subscriber acquisition ......... 13,920 427 16,620 1,880
Sales and marketing ............ 2,716 2,884 5,028 7,154
Product development ............ 1,977 1,630 3,831 3,465
General and administrative ..... 982 676 1,686 1,590
-------- -------- -------- --------
Total operating expenses ...... 21,366 7,973 30,782 19,269
-------- -------- -------- --------
Loss from operations .......... (18,052) (6,853) (24,930) (17,517)
Interest income (expense), net ... 795 (14) 906 60
-------- -------- -------- --------
Net loss ...................... $(17,257) $ (6,867) $(24,024) $(17,457)
======== ======== ======== ========
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>
Six Months Ended
June 30, 1999
-----------------------------------------
Two Four Six
Three Months Ended Months Months Months
June 30, Ended Ended Ended
------------------------- February 28, June 30, June 30,
1999 1998 1999 1999 Total 1998
-------- -------- ------------ -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net loss .................. $(17,257) $ (6,867) $ (4,350) $(19,674) $(24,024) $(17,457)
======== ======== ======== ======== ======== ========
Net loss attributable to
common stockholders ..... $(17,355) $ (6,867) $ (4,350) $(19,825) $(24,024) $(17,457)
======== ======== ======== ======== ======== ========
Basic and diluted net loss
per Class A limited
partnership unit ........ $ (0.41) $ (0.25) $ (1.06)
======== ======== ========
Basic and diluted net loss
per share ............... $ (1.29) $ (1.96)
======== ========
Weighted average number of:
Class A limited
partnership units ...... 16,943 17,684 16,499
======== ======== ========
Shares of common stock .. 13,479 10,109
======== ========
Pro forma basic and diluted
net loss per share ...... $ (0.56) $ (0.93)
======== ========
Weighted average shares
outstanding used in pro
forma basic and diluted
per share calculation ... 30,601 25,939
======== ========
</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)
(unaudited)
<TABLE>
<CAPTION>
Partners'
Contributions Common Stock Additional Cumulative
----------------------- ----------------------- Paid-in Unearned Translation
Units Amount Shares Amount Capital Compensation Adjustment
--------- --------- --------- --------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 .. 17,684 $ 79,578
Net loss for the period
January 1, 1999 to
February 28, 1999 ........ -- --
Effect of statutory merger (17,684) (79,578) -- -- $ (95,788) $ (728) --
Preferred stock accretion . -- -- (151) -- --
Issuance of common stock,
net of offering costs .... 6,500 $ 65 77,220 -- --
Issuance of common
stock upon exercise of
stock options ............ 307 3 149 -- --
Proceeds from the sale of
preferred stock .......... -- 59 -- --
Conversion of redeemable
convertible preferred
stock to common stock .... 27,823 278 141,251 -- --
Net loss for the period
March 1, 1999 to
June 30, 1999 ............ -- -- -- -- --
Unearned compensation ..... -- 525 (525) --
Amortization of unearned
compensation ............. -- -- 210 --
Foreign currency adjustment -- -- -- $ (1)
--------- --------- --------- --------- --------- --------- ---------
Balance, June 30, 1999 ...... -- $ -- 34,630 $ 346 $ 123,265 $ (1,043) $ (1)
========= ========= ========= ========= ========= ========= =========
<CAPTION>
Accumulated
Deficit Total
----------- ---------
<S> <C> <C>
Balance, December 31, 1998 .. $ (92,166) $ (12,588)
Net loss for the period
January 1, 1999 to
February 28, 1999 ........ (4,350) (4,350)
Effect of statutory merger 96,516 (79,578)
Preferred stock accretion . -- (151)
Issuance of common stock,
net of offering costs .... -- 77,285
Issuance of common
stock upon exercise of
stock options ............ -- 152
Proceeds from the sale of
preferred stock .......... -- 59
Conversion of redeemable
convertible preferred
stock to common stock .... -- 141,529
Net loss for the period
March 1, 1999 to
June 30, 1999 ............ (19,674) (19,674)
Unearned compensation ..... -- --
Amortization of unearned
compensation ............. -- 210
Foreign currency adjustment -- (1)
--------- ---------
Balance, June 30, 1999 ...... $ (19,674) $ 102,893
========= =========
</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>
Six Months Ended
June 30,
-----------------------
1999 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss .......................................................... $ (24,024) $ (17,457)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization .................................... 1,159 1,164
Amortization of deferred rent .................................... (31) 184
Amortization of unearned compensation ............................ 210 --
Changes in operating assets and liabilities:
Accounts receivable ............................................. (1,296) (836)
Merchandise inventories ......................................... 36 647
Prepaid expenses and other current assets ....................... (11,262) 315
Accounts payable and accrued expenses ........................... 4,429 (1,957)
Deferred revenue ................................................ 4,371 3,549
--------- ---------
Net cash used in operating activities .......................... (26,408) (14,391)
--------- ---------
Cash flows from investing activities:
Purchases of fixed assets ......................................... (229) (1,488)
Proceeds from sale of fixed assets ................................ -- 287
Other assets ...................................................... 71 2
--------- ---------
Net cash used in investing activities .......................... (158) (1,199)
--------- ---------
Cash flows from financing activities:
Payments on capital lease obligations ............................. (370) (239)
Proceeds from senior note ......................................... -- 10,000
Payments on senior note ........................................... (9,129) --
Net proceeds from issuance of redeemable
convertible preferred stock ...................................... 61,859 --
Capital contributions ............................................. -- 8,500
Net proceeds from issuance of common stock
upon completion of IPO ........................................... 77,285 --
Proceeds from issuance of common stock
upon exercise of stock options ................................... 152 --
--------- ---------
Net cash provided by financing activities ...................... 129,797 18,261
--------- ---------
Net increase in cash and cash equivalents ...................... 103,231 2,671
Cash and cash equivalents, beginning of period ..................... 8,152 13,770
--------- ---------
Cash and cash equivalents, end of period ........................... $ 111,383 $ 16,441
========= =========
Supplemental disclosure of cash flow information:
Cash paid for interest ............................................ $ 293 $ 68
Supplemental schedule of noncash investing and financing activities:
Accretion of preferred stock ...................................... $ 151 $ --
Capital lease obligations incurred for
network equipment ................................................ 871 869
</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 six
months ended June 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 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>
Six Months Ended June 30, 1999
--------------------------------------------
Two Months Four Months
Three Months Ended June 30, Ended Ended Six Months
---------------------------- February 28, June 30, Ended June 30,
1999 1998 1999 1999 Total 1998
------------ ------------ ------------ ------------ ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Numerator:
Net loss $ (17,257) $ (6,867) $ (4,350) $ (19,674) $ (24,024) $ (17,457)
Preferred stock accretion (98) (151)
------------ ------------ ------------ ------------ ------------ ------------
Net loss available to common
Stockholders $ (17,355) $ (6,867) $ (4,350) $ (19,825) $ (24,024) $ (17,457)
============ ============ ============ ============ ============ ============
Denominator:
Weighted average
Number of:
Class A limited partnership units 16,943,288 17,684,035 16,498,844
============ ============ ============
Shares of Common Stock 13,479,481 10,109,498
============ ============
Basic and diluted net loss per Class
A limited partnership unit $ (0.41) $ (0.25) $ (1.06)
============ ============ ============
Basic and diluted net loss per share $ (1.29) $ (1.96)
============ ============
</TABLE>
Net loss per share for the six months ended June 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.
Three Months Six Months
Ended June 30, Ended June 30,
1999 1999
-------------- --------------
Numerator:
Net loss $ (17,257) $ (24,024)
============ ============
Denominator:
Weighted average number of: shares of
Common stock 13,785,251 6,972,179
Redeemable Convertible Preferred Stock
treated as shares of common stock
Series B 6,127,795 4,800,055
Series A (Class A limited partnership units
prior to March 1, 1999) 10,688,153 14,166,768
------------ ------------
Denominator for pro forma basic and
diluted net loss per share 30,601,199 25,939,002
============ ============
Pro forma basic and diluted net loss per share ($0.56) ($0.93)
============ ============
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. SUBSEQUENT EVENT
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% at July 31, 1999). All outstanding borrowings under the
Facility are due upon the expiration of the Facility. The Company also must pay
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.
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
within the meaning of the Private Securities Litigation Reform Act of 1995 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 June 30, 1999, we had approximately 270,000
billable service subscribers, consisting of approximately 110,000 Juno Gold
subscribers and
11
<PAGE>
approximately 160,000 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, we expect to continue this practice, for the
purpose of assessing and generating consumer interest. Revenues from our
billable subscription services accounted for approximately 91.4% of billable
services revenues during the second quarter of 1999.
Our strategy contemplates considerable growth in the number of subscribers
to our billable subscription services. We intend to 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. We expect growth in the subscriber base for Juno Gold
and Juno Web to result in substantial growth in subscription fees, both in
absolute dollar terms and as a percentage of total revenues. Our strategy
contemplates that revenues for billable subscription services are likely to be
the single largest source of revenues for Juno in the immediate future.
We 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, content procurement, 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
last and first calendar quarters, corresponding to heavier usage during the fall
and winter, and experience relatively lighter usage and relatively fewer account
registrations during the summer. We believe subscriber acquisition also tends to
be most effective during the first and last calendar quarters of each year, and
we may take these types of seasonal effects into consideration in scheduling our
marketing activities. The results of operations of Internet access providers,
including those of Juno, are significantly affected by subscriber cancellations.
The failure to retain subscribers to our billable subscription services, or an
increase in the rate of cancellations of those services, would cause our
business and financial results to suffer.
12
<PAGE>
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 $116.2 million from our inception on June
30, 1995 through June 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 $61.8 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 June 30, 1999, Juno India employed 50 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 June 30, 1999 Compared to Three Months Ended June 30, 1998
Revenues
Total revenues increased $6.8 million, to $11.1 million for the three
months ended June 30, 1999 from $4.3 million for the three months ended June 30,
1998, an increase of 160%. 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 $6.4 million, to
$7.1 million for the three months ended June 30, 1999 from $0.7 million for the
three months ended June 30, 1998, an increase of 897%. This increase was due
primarily to the introduction of our billable subscription services in July
1998, which contributed $6.5 million of revenues in the three months ended June
30, 1999. At June 30, 1999, there were approximately 270,000 billable service
subscribers, with approximately 110,000 subscribing to Juno Gold and
approximately 160,000 subscribing to Juno Web.
Advertising and Transaction Fees. Advertising and transaction fees
increased $1.2 million, to $2.7 million for the three months ended June 30, 1999
from $1.5 million for the three months ended June 30, 1998, an increase of
75.5%. This increase was due to additional revenue from a larger number of
strategic marketing alliances. This increase was also due in part to a
contribution from revenue recognized over the shortened life of a strategic
marketing alliance which featured a minimum revenue guarantee and which was
terminated by the strategic partner
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<PAGE>
effective May 1, 1999. This contribution accounted for approximately 20.4% of
advertising and transaction fees for the three months ended June 30, 1999. The
increase in advertising and transaction fees was partially offset by declines in
the number of and the aggregate revenue generated from shorter-term ad sales
contracts, reflecting our shift in emphasis towards larger strategic deals.
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 10.7% of the total advertising and
transaction fees for the three months ended June 30, 1999 versus 1.4% for the
three months ended June 30, 1998.
Direct Product Sales. Direct product sales decreased approximately $0.7
million, to $1.4 million for the three months ended June 30, 1999 from $2.0
million for the three months ended June 30, 1998, a decrease of 33.7%. This
decline reflects a downward trend in average retail prices for computer hardware
and 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 $4.6 million, to $7.8 million for the
three months ended June 30, 1999 from $3.2 million for the three months ended
June 30, 1998, an increase of 147%. 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.
Billable Services. Cost of revenues related to billable services consists
primarily of the costs to provide Juno Gold and Juno Web, including
telecommunications, customer service, operator-assisted technical support,
credit card fees, and personnel and related overhead costs. In addition, cost of
revenues related to billable services includes the costs of mailing disks upon
request to prospective Juno subscribers, and the personnel and related overhead
costs associated with our performance of a short-term consulting engagement.
Cost of revenues related to billable services increased $4.9 million, to
$5.5 million for the three months ended June 30, 1999 from $0.6 million for the
three months ended June 30, 1998, an increase of 845%. This increase was due
primarily to the costs of providing our billable subscription services. Costs
related to the provision of these billable subscription services, principally
customer service, technical support and telecommunications expenses, accounted
for 78.7% of the total costs of revenues related to billable services during the
three months ended June 30, 1999 and accounted for the majority of the increase.
Cost of revenues as a percentage of billable services revenues decreased to
77.5% for the three months ended June 30, 1999 from 81.8% for the three months
ended June 30, 1998. This decrease is primarily attributable to the introduction
of billable subscription services and the higher margins realized from those
services during the three months ended June 30, 1999.
Advertising and Transaction Fees. Cost of revenues for advertising and
transaction fees consists primarily of the transmission costs associated with
downloading advertisements to the hard drives of subscribers' computers for
later display, the personnel and related costs associated with the creation and
distribution of such advertisements, and the costs associated with reporting the
results of ad campaigns to advertisers.
Cost of revenues for advertising and transaction fees increased $0.3
million, to $1.2 million for the three months ended June 30, 1999 from $0.9
million for the three months ended June 30, 1998, an increase of 32.8%. This
increase was due primarily to the impact of additional strategic marketing
alliances. Cost of revenues related to advertising and transaction fees as a
percentage of advertising and transaction fees decreased to 43.0% for the three
months ended June 30, 1999 from 56.8% for the three months ended June 30, 1998.
This decrease is primarily due to a contribution from revenue recognized over
the shortened life of a strategic marketing alliance
14
<PAGE>
that featured a minimum revenue guarantee, and also to decreased
telecommunications rates, faster average connection speeds and improvements in
our production and distribution methods.
Direct Product Sales. Cost of revenues for direct product sales consists
primarily of the costs of merchandise sold directly by us to our subscribers and
the associated shipping and handling costs.
The cost of revenues for direct product sales decreased $0.5 million, to
$1.2 million for the three months ended June 30, 1999 from $1.7 million for the
three months ended June 30, 1998, a decrease of 31.8%. 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 86.3% for
the three months ended June 30, 1999 from 84.0% for the three months ended June
30, 1998. This increase as a percentage of direct product sales revenue was
primarily due to a greater decline in the average retail price of merchandise
sold relative to the declines in the costs of such merchandise.
Operating Expenses
Operations, Free Service. Operations, free service consists of the costs
associated with providing our free basic e-mail service, comprising principally
telecommunications costs, expenses associated with providing customer service,
depreciation of network equipment, and personnel and related overhead costs.
Expenses associated with operations, free service decreased $0.6 million,
to $1.8 million for the three months ended June 30, 1999 from $2.4 million for
the three months ended June 30, 1998, a decrease of 24.8%. 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 $13.5 million, to $13.9 million for
the three months ended June 30, 1999 from $0.4 million for the three months
ended June 30, 1998. This increase is primarily due to costs related to the
rollout of our 1999 external marketing campaign, 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 125% in the
three months ended June 30, 1999 from 10.0% in the three months ended June 30,
1998. This increase as percentage of revenues was primarily due to increased
costs related to the rollout of 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 decreased $0.2 million, to $2.7 million for the
three months June 30, 1999 from $2.9 million for the three months ended June 30,
1998, a decrease of 5.8%. Sales and marketing costs for the three
15
<PAGE>
months ended June 30, 1999 include additional trade advertising costs relative
to the comparable period of 1998. However, sales and marketing costs were lower
in the second quarter of 1999 versus the comparable quarter for 1998 reflecting
a charge of approximately $300,000 recorded in the second quarter of 1998,
related to our decision to close various regional sales offices. As a percentage
of revenues, sales and marketing costs decreased to 24.4% in the three months
ended June 30, 1999 from 67.3% in the three months ended June 30, 1998. This
percentage decrease was primarily due to the increase in revenues for the three
months ended June 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 increased approximately $0.3 million, to $2.0
million for the three months ended June 30, 1999 from $1.6 million for the three
months ended June 30, 1998, an increase of 21.3%. This increase is primarily due
to additional personnel and related costs in both the domestic and India
offices. Product development costs in the three months ended June 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 $0.3 million, to $1.0 million
for the three months ended June 30, 1999 from $0.7 million for the three months
ended June 30, 1998, an increase of 45.3%. This increase is primarily due to
increased insurance costs for directors' and officers' liability insurance and
additional personnel and related overhead costs. As a percentage of revenues,
general and administrative costs decreased to 8.8% for the three months ended
June 30, 1999 from 15.8% for the three months ended June 30, 1998. This decrease
was primarily due to the increase in revenue for the three months ended June 30,
1999. We expect that we will incur additional general and administrative
expenses as we hire additional personnel and incur additional costs related to
the growth of our business and our operation as a public company, including
directors' and officers' liability insurance, investor relations programs and
professional services 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 $809,000, to $795,000
for the three months ended June 30, 1999 from $(14,000) for the three months
ended June 30, 1998. This increase is primarily due to interest income earned on
higher average cash balances in the three months ended June 30, 1999 due to the
receipt of $77.3 million of net proceeds upon the closing of our initial public
offering on June 1, 1999 and the receipt of $61.8 million of net proceeds in
exchange for the issuance of redeemable convertible preferred stock in March
1999, partially offset by higher interest payments for borrowings.
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
Revenues
Total revenues increased approximately $12.3 million, to $20.8 million for
the six months ended June 30, 1999 from $8.6 million for the six months ended
June 30, 1998, an increase of 144%. This increase was due to increases in
billable services and in advertising and transaction fees, partially offset by a
decrease in direct product sales.
16
<PAGE>
Billable Services. Billable services revenues increased $11.7 million, to
$12.9 million for the six months ended June 30, 1999 from $1.2 million for the
six months ended June 30, 1998, an increase of 997%. This increase was due
primarily to the introduction of our billable subscription services in July
1998, which contributed $11.5 million of revenues in the six months ended June
30, 1999.
Advertising and Transaction Fees. Advertising and transaction fees
increased $2.2 million, to $5.0 million for the six months ended June 30, 1999
from $2.8 million for the six months ended June 30, 1998, an increase of 79.5%.
This increase was due to additional revenue from a larger number of strategic
marketing alliances. This increase was also due in part to a contribution from
revenue recognized over the shortened life of a strategic marketing alliance
which featured a minimum revenue guarantee and which was terminated by the
strategic partner effective May 1, 1999. This contribution accounted for
approximately 21.6% of advertising and transaction fees for the six months ended
June 30, 1999. The increase in advertising and transaction fees was partially
offset by declines in the number of and the aggregate revenue generated from
shorter-term ad sales contracts, reflecting our shift in emphasis towards larger
strategic deals. Barter transactions accounted for approximately 5.8% of the
total for the six months ended June 30, 1999 versus 0.1% for the six months
ended June 30, 1998.
Direct Product Sales. Direct product sales decreased approximately $1.6
million, to $3.0 million for the six months ended June 30, 1999 from $4.6
million for the six months ended June 30, 1998, a decrease of 35.0%. This
decline reflects our strategic decision in 1998 to narrow the range of our
direct product sales activities and of the types of products offered to our
subscribers. Instead, we decided to concentrate on forming strategic marketing
alliances and developing other uses for our advertising inventory that we
believe should generate revenues with higher margins than direct product sales.
This decline also reflects a downward trend in average retail prices for
computer hardware.
Cost of Revenues
Total cost of revenues increased $8.2 million, to $15.0 million for the
six months ended June 30, 1999 from $6.8 million for the six months ended June
30, 1998, an increase of 120%. 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.
Billable Services. Cost of revenues related to billable services increased
$9.2 million, to $10.2 million for the six months ended June 30, 1999 from $1.0
million for the six months ended June 30, 1998, an increase of 951%. This
increase was due primarily to the costs of providing our billable subscription
services. Costs related to the provision of these billable subscription
services, principally customer service, technical support and telecommunications
expenses, accounted for 77.5% of the total costs of revenues related to billable
services during the six months ended June 30, 1999 and accounted for the
majority of the increase. Cost of revenues as a percentage of billable services
revenues decreased to 78.9% for the six months ended June 30, 1999 from 82.4%
for the six months ended June 30, 1998. This decrease is primarily attributable
to the introduction of billable subscription services and the higher margins
realized from those services during the six months ended June 30, 1999.
Advertising and Transaction Fees. Cost of revenues for advertising and
transaction fees increased $0.5 million, to $2.2 million for the six months
ended June 30, 1999 from $1.7 million for the six months ended June 30, 1998, an
increase of 31.9%. 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 decreased
to 45.1% for the six months ended June 30, 1999 from 61.4% for the six months
ended June 30, 1998. This decrease is primarily due to a contribution from
revenue recognized over the shortened life of a strategic marketing alliance
that featured a minimum revenue guarantee, and also to decreased
17
<PAGE>
telecommunications rates, faster average connection speeds and improvements in
our production and distribution methods.
Direct Product Sales. The cost of revenues for direct product sales
decreased $1.5 million, to $2.6 million for the six months ended June 30, 1999
from $4.1 million for the six months ended June 30, 1998, a decrease of 37.4%.
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 86.3% for the six months ended June 30, 1999 from 90.0%
for the six months ended June 30, 1998. This decrease was primarily due 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.
Operating Expenses
Operations, Free Service. Expenses associated with operations, free
service decreased $1.6 million, to $3.6 million for the six months ended June
30, 1999 from $5.2 million for the six months ended June 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 $14.7
million, to $16.6 million for the six months ended June 30, 1999 from $1.9
million for the six months ended June 30, 1998. This increase is primarily due
to costs related to the rollout of our new, external marketing campaign,
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 79.7% in the six months ended June 30, 1999 from 22.0% in the six
months ended June 30, 1998. This percentage increase was primarily due to
increased costs related to the rollout of 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 approximately
$2.1 million, to $5.0 million for the six months ended June 30, 1999 from $7.2
million for the six months ended June 30, 1998, a decrease of 29.7%. 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. As a percentage of revenues, sales and marketing costs
decreased to 24.1% in the six months ended June 30, 1999 from 83.6% in the six
months ended June 30, 1998. This percentage decrease was primarily due to the
increase in revenues for the six months ended June 30, 1999.
Product Development. Product development costs increased approximately
$0.4 million, to $3.8 million for the six months ended June 30, 1999 from $3.5
million for the six months ended June 30, 1998, an increase of 10.6%. This
increase is primarily due to additional personnel and related costs in both the
domestic and India offices. Product development costs in the six months ended
June 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
$0.1 million, to $1.7 million for the six months ended June 30, 1999 from $1.6
million for the six months ended June 30, 1998, an increase of 6.0%.
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<PAGE>
This increase is primarily due to increased insurance costs for directors' and
officers' liability insurance and additional personnel and related overhead
costs. As a percentage of revenues, general and administrative costs decreased
to 8.1% for the six months ended June 30, 1999 from 18.6% for the six months
ended June 30, 1998. This decrease was primarily due to the increase in revenue
for the six months ended June 30, 1999. We expect that we will incur additional
general and administrative expenses as we hire additional personnel and incur
additional costs related to the growth of our business and our operation as a
public company, including directors' and officers' liability insurance, investor
relations programs and professional service fees. Accordingly, we anticipate
that general and administrative expenses will increase in absolute dollar terms
in the future.
Interest Income, Net. Interest income, net increased $846,000, to $906,000
for the six months ended June 30, 1999 from $60,000 for the six months ended
June 30, 1998. This increase is primarily due to interest income earned on
higher average cash balances in the six months ended June 30, 1999 due to the
receipt of $77.3 million of net proceeds upon the closing of our initial public
offering on June 1, 1999 and the receipt of $61.8 million of net proceeds in
exchange for the issuance of redeemable convertible preferred stock in March
1999, partially offset by higher interest payments for borrowings.
Quarterly Results of Operations Data
The following table sets forth selected subscriber data for each of the five
quarters ended June 30, 1999:
<TABLE>
<CAPTION>
June 30, 1999 Mar. 31, 1999 Dec. 31, 1998 Sept. 30, 1998 June 30, 1998
------------- ------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Selected Subscriber Data:
Total subscriber accounts as of (1) ......... 7,175,000 6,817,000 6,336,000 5,852,000 5,298,000
Subscriber Activity:
Subscriber accounts that
connected in the three-month
period ended ......................... 2,920,000 3,108,000 3,108,000 3,121,000 3,032,000
Subscriber accounts that
connected in the month ended ......... 2,277,000 2,438,000 2,434,000 2,409,000 2,361,000
Average subscriber accounts that
connected per day in the month
ended ................................ 810,000 912,000 887,000 889,000 836,000
Billable subscription service
accounts as of (2) ..................... 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. Recent sales of equity
securities include $77.3 million of net proceeds from our May 1999 initial
public offering of common stock and $61.8 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 $116.2
million through June 30, 1999.
For the six months ended June 30, 1999, we used $16.9 million in cash for
working capital purposes and to fund losses from operations. Additionally, at
June 30, 1999, $9.5 million remains prepaid for advertising that may
19
<PAGE>
be used at any time prior to March 2001, bringing total net cash used in
operating activities to $26.4 million for the six months then ended. Net cash
used in operating activities was $14.4 million for the six months ended June 30,
1998. This year over year increase in cash used in operating activities was
primarily the result of the commencement of the 1999 external marketing
campaign, prepaid advertising, and partially offsetting changes in working
capital accounts.
Net cash used in investing activities was $0.2 million for the six months
ended June 30, 1999 and $1.2 million for the six months ended June 30, 1998. The
principal use of cash for the periods presented was for the purchase of fixed
assets.
Net cash provided by financing activities was $129.8 million for the six
months ended June 30, 1999 and $18.3 million for the six months ended June 30,
1998. Financing activities for the six months ended June 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 six months ended June 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% at July 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.
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 significantly increasing subscriber acquisition expenses in order to
fund subscriber growth and help us gain market share. Additional expenditures in
connection with subscriber acquisition will represent a material use of our cash
resources.
At June 30, 1999, we had $111.4 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.
20
<PAGE>
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;
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 have begun 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.
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The Year 2000 readiness plan described above is being carried out across
the four critical areas where we believe the Year 2000 problem might affect our
business:
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 product hardware, which consists of the hardware that we use
directly in connection with our free basic e-mail service and/or our
billable subscription services;
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 four critical
areas. In each case our remaining assessment and repair is
significantly dependent upon the Year 2000 compliance of our
suppliers and vendors.
Inventory Assessment Repair/Replacement
----------------- ------------------ ------------------
Product Software... 100% complete 75% complete Completion target
Completion target September 30, 1999
August 31, 1999
Product Hardware... 100% complete 90% complete Completion target
Completion target November 30, 1999
September 30, 1999
Infrastructure..... 90% complete 70% complete Completion target
Completion target Completion target November 30, 1999
August 31, 1999 October 31, 1999
External Agents.... 80% complete 50% complete Completion target
Completion target Completion target December 15, 1999
August 31, 1999 October 31, 1999
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
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o reviewing non-information technology systems and embedded systems
which, if not Year 2000 compliant, could affect our business.
Costs. To date, we have not incurred any material costs in identifying or
evaluating Year 2000 compliance issues. The cost of software tools and
consulting expenses used for detection of Year 2000 problems is not currently
expected to exceed $100,000. We expect that our existing employees or
consultants will perform all significant work for the Year 2000 project
described above. We do not anticipate hiring any additional employees or
incurring any significant consulting expenses for the Year 2000 project. To
date, no other significant information technology projects have been deferred
due to our Year 2000 efforts.
Risks. We are not currently aware of any significant Year 2000 compliance
problems relating to our proprietary software, our information technology
systems or our other systems that would materially harm our business, results of
operations or financial condition. During our remaining assessment, we may
discover Year 2000 compliance problems in our proprietary software that may
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 have not yet developed any contingency plans. Contingency planning will be
conducted as our ongoing assessment and as feedback received from third parties
necessitates.
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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 $24.0 million for the six months ended June 30, 1999. As
of June 30, 1999, our accumulated net losses totaled $116.2 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 six months ended
June 30, 1999, we used $16.4 million in cash for working capital purposes and to
fund losses from operations. In addition, we paid $10.0 million for advertising
that may be used at any time prior to March 2001, bringing total net cash used
in operating activities to $26.4 million. Since we operated as a limited
partnership prior to the merger of Juno Online Services, L.P. into Juno Online
Services, Inc. in March 1999, taxable losses incurred prior to the merger were
allocated to the partners of Juno Online Services, L.P. for reporting on their
income tax returns. As a result, we will not be able to offset future taxable
income, if any, against losses incurred prior to the merger.
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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
o 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 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.
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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
six months, even though we have added new subscribers during that period. We
believe that intense competition has caused, and may continue to cause, some of
our subscribers to switch to other services. It is relatively easy for Internet
users to switch to competing providers and we cannot be certain that any steps
we take will maintain or improve subscriber retention. In addition, some new
subscribers may decide to use our services out of curiosity regarding the
Internet, or to take advantage of low-cost introductory offers for Juno Gold and
Juno Web, and may later discontinue using our services. Furthermore, we may in
the 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.
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 the proceeds from our initial
public offering to an extensive marketing campaign. This campaign, which has
already commenced, is directed at encouraging users to sign up
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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. We also do
not know what kind of advertising our competitors will undertake, the timing and
extent of advertising by our competitors, or whether this will impact our
marketing plans or expenses. If we incur significant costs in implementing our
marketing program without generating sufficient new subscribers to our services,
our business and financial results will suffer.
Competition in the markets for Internet services, Internet advertising and
direct product sales is likely to increase in the future and may harm our
business
The market for Internet services is extremely competitive and includes a
number of substantial participants, including America Online, Microsoft and
AT&T. The markets for Internet-based advertising and direct product sales are
also very competitive.
Intense competition exists in the market for Internet services
We may not be able to compete successfully against current or future
competitors, and the competitive pressures that we face may cause our business
and financial results to suffer. We believe that the primary competitive factors
determining success in these markets include a reputation for reliability and
service, effective customer support, pricing, easy-to-use software and
geographic coverage. Other important factors include the timing and introduction
of new products and services and industry and general economic trends. Our
ability to compete depends upon many factors, many of which are outside of our
control. We expect this competition to continue to increase because the markets
in which we operate face few substantial barriers to entry. Competition may also
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 that provide
Web access to subscribers for free;
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.
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In addition, Microsoft and Netscape, publishers of the Web browsers
utilized by most Internet users, including subscribers to Juno Web, each own or
are 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 probably
happen as Internet service providers and online service providers consolidate
and become larger, more competitive companies, and as large diversified
telecommunications and media companies acquire Internet service providers. The
larger Internet service providers and online service providers, including
America Online, offer their subscribers services such as instant messaging 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, a number of Internet service providers and personal
computer manufacturers have formed 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 may
not be able to form as many such relationships as our competitors, if any, or to
negotiate terms for such relationships that are as favorable as those achieved
by our competitors; and any such relationships that we do form may prove to be
less productive than those formed by our competitors, or economically
unfavorable, or both. 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 we
do for Internet services, in the extreme case offering 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 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
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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 fail to develop, develop more slowly than we
expect, become saturated with competitors, or develop in a fashion that renders
our services uncompetitive or otherwise unappealing to consumers, our business
and financial results may suffer.
We are also at risk due to fundamental changes in the way that Internet
access may be provided in the future. Currently, consumers access Internet
services primarily through computers connected by telephone lines. Broadband
connections, however, allow significantly faster access to the Internet than is
possible using the telephone-based modems currently used by all of our
subscribers. The companies currently providing or expecting to begin providing
broadband connections to consumers' homes, including cable television companies,
local and long distance telephone companies, electric utility companies and
wireless communications companies, have decided or may decide to provide
Internet access as well. For example, competitors have developed technologies
that enable cable television operators to offer high-speed Internet access
through their cable facilities. These cable television operators, as well as
other competitors, may include Internet access in their basic bundle of services
or may offer Internet access for a nominal additional charge. Moreover, these
companies could prevent us in the future from delivering Internet access through
the wire and cable connections that they own, or from doing so on a
cost-effective basis. Even if we are not prevented from delivering our Internet
services through the broadband connections owned by others, we will likely need
to develop new technology or modify our services and the technology they use to
accommodate these developments. We may also have to modify the means by which we
deliver our Internet services, in which case we would incur significant costs.
If consumers adopt alternative forms of Internet access that provide a
continuous connection to the Internet rather than relying on a series of
separate dial-up connections, then any competitive advantage that we currently
realize because our technology minimizes connect time may diminish. If other
companies are able to prevent us from delivering our Internet services through
the wire and cable connections that they own, if we are unable to adapt to the
challenges posed by broadband technologies or if we incur significant costs
without generating sufficient revenues, our business and financial results may
suffer.
Our business may be adversely affected if the market for Internet advertising
fails to develop
Our business and financial results are dependent on the use of the
Internet as an advertising medium. Internet-based advertising accounts for only
a small fraction of all advertising expenditures, and we cannot be sure that
Internet-based advertising will ever grow to account for a substantial
percentage of total advertising spending or when an increase might occur. Our
business may suffer if the market for Internet-based advertising fails to
develop or develops more slowly than expected. In addition, no standards have
been widely accepted to measure
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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.
If Internet-based advertising does not continue to grow, if we are unable
to capture a sufficient share of Internet-based advertising, or if Lycos or
other independent sales organizations do not perform as we anticipate, our
business and financial results may suffer.
Our advertising system requires labor and imposes costs on us beyond those
associated with standard Web advertising
Elements of advertising on Juno's services are non-standard when compared
to advertising on the Web and may put Juno at a competitive disadvantage. The
advertisements displayed on our services require customization that would not be
required by a Web site capable of displaying previously prepared standard
advertisements. This customization work increases the time necessary to prepare
an advertisement to be displayed on our services and the costs associated with
running these ads. We must also absorb the telecommunications cost associated
with initially downloading these ads to our subscribers, which is an expense
that advertising-supported Web sites do not incur. As ads become more complex,
our telecommunications expenses may increase. Furthermore, the costs associated
with 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.
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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 Networks,
both of which are operated by MCI WorldCom; 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 June 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 recently
announced that it will begin to offer consumer Internet access, making it a
direct competitor of ours. Our business could be harmed if we are unable to
maintain a favorable relationship with MCI WorldCom. We cannot assure you that
we would be able to replace the services provided to us by MCI WorldCom were our
relationship with them to be terminated.
Our financial results are highly sensitive to variations in prices for the
telecommunications services described above. We cannot assure you that
telecommunications prices will decline, or that there will not be
telecommunications price increases due to factors beyond our control. Some of
our telecommunications carriers impose minimum connection charges. Our business
could be harmed if minimum connection charges increase or become more prevalent.
We cannot assure you that our telecommunications carriers will continue to
provide us
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access to their points of presence on adequate price terms, or that alternative
services will be available in the event that their quality of service declines
or that our relationship with any of our current carriers is terminated.
Most of the telecommunications services we purchase are provided to us
under short-term agreements that the providers can terminate or elect not to
renew. As a result, there is a significant risk that any or all of UUNET
Technologies, WorldCom Advanced Networks, Concentric, 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.
We are dependent on third parties for technical and customer service support and
our business may suffer if they are unable to provide these services or
cannot expand to meet our needs
Our business and financial results depend, in part, on the availability of
live technical and customer service support, and of inbound telemarketing and
disk distribution services. Should our ability to provide these services be
hampered, our business may suffer. Although many Internet service providers have
developed internal customer service operations designed to meet these needs, we
have elected to outsource these functions to third-party vendors. We currently
use ClientLogic Corporation for technical and customer service support and Call
Center Services, Inc. for telemarketing and disk fulfillment functions. As a
result, we maintain only a small number of internal customer service personnel.
We are thus not equipped to provide the necessary range of customer service and
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 June 30,
1999, provided us with approximately 265 full-time or part-time employees at its
facilities to service our account. The availability of call-in technical support
and customer service is especially important to acquire and retain subscribers
to Juno Gold and Juno Web, and we rely almost entirely on ClientLogic to provide
this function. At times, our subscribers have experienced lengthy waiting
periods to reach representatives trained to provide the technical or customer
support they require. As our services grow, we will need significantly more
support personnel in order to maintain current levels of technical and customer
support. If we elect to offer customer service features that we do not currently
support, such as 24-hour live support, or to enhance the overall quality of our
customer support for competitive reasons, we will require even greater
resources. We may have significantly expanded customer service requirements in
the future and it could become necessary to identify supplemental or replacement
vendors for these services. Our agreement with ClientLogic converts to a
month-to-month contract on August 1, 2000, providing either party the right to
terminate the relationship at any time upon one month's notice. Prior to that
date, ClientLogic can terminate the contract without cause upon 90 days notice.
In addition, ClientLogic may terminate the contract upon 60 days notice if we do
not reach agreement with ClientLogic with regard to modifications ClientLogic
proposes to the pricing terms of the contract within 60 days of the
modifications being proposed. If our relationship with ClientLogic terminates
and we are unable to enter into a comparable arrangement with a replacement
vendor, if ClientLogic is unable to provide enough personnel to provide the
quality and quantity of service we desire, or if system failures, outages or
other technical problems make it difficult for our subscribers to reach customer
service representatives at ClientLogic, our business and financial results may
suffer.
We rely on a single external marketing partner to fulfill most of our direct
product sales
If we fail to manage our direct product sales efforts in a cost-effective
manner, or if we fail to maintain the relationship with our external marketing
partner, our business may suffer. We rely almost entirely on a single external
marketing partner, currently Direct Alliance Corporation, a subsidiary of
Insight Enterprises, for the
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procurement, warehousing, fulfillment, billing and customer service aspects of
our direct product sales. Should our relationship with our external vendor be
disrupted, our ability to engage in direct product sales will be severely
curtailed. In the past, a substantial portion of our revenue has come from the
sale of products directly to our subscribers. Our ability to sell products
directly to our subscribers is dependent in part upon:
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
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increase both our internal and outsourced customer service capabilities. We
expect that we will need to continually improve our financial and managerial
controls, billing systems, reporting systems and procedures, and we will also
need to continue to expand, train and manage our workforce. We had 65 employees
at December 31, 1996, 152 employees at December 31, 1997, 144 employees at
December 31, 1998 and 207 employees at June 30, 1999, including 50 individuals
in India who are now employed by Juno through a subsidiary, but who were, prior
to May 21, 1999, 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;
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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 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.
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Our relationship with D. E. Shaw & Co., L.P. may present potential conflicts of
interest
The Chairman of our board of directors and our controlling stockholder,
Dr. David E. Shaw, is the Chairman and Chief Executive Officer of D. E. Shaw &
Co., Inc., which is the general partner of D. E. Shaw & Co., L.P., a global
securities firm whose activities focus on various aspects of the intersection
between technology and finance. Dr. Shaw devotes only a portion of his time to
our company, and spends most of his time and energy engaged in business
activities unrelated to us. Dr. Shaw indirectly owns a controlling interest in
DESCO, L.P. and in some of its affiliated entities. Transactions between us and
these parties may occur in the future and could potentially result in conflicts
of interest that prove harmful to us.
We have historically contracted with DESCO, L.P. to provide accounting,
tax, payroll, insurance, employee benefits and information technology services,
and we continue to obtain some services from DESCO, L.P. These services are
provided to us on a fixed-fee basis under shared services agreements that can be
terminated by any of the parties without cause upon 90 days notice. If we were
no longer able to obtain these services through DESCO, L.P. or its affiliates,
we would be required to obtain 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 July 31, 1999, the executive officers, directors and persons and
entities affiliated with executive officers and/or directors beneficially own,
in the aggregate, approximately 53.2% 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 50.1% of our outstanding common stock. Dr. Shaw is able to
exercise control over all matters requiring approval by our stockholders,
including the election of directors and approval of significant corporate
transactions. This concentration of ownership could also have the effect of
delaying or preventing a change in control of Juno.
If we fail to adequately protect our intellectual property or face a claim of
intellectual property infringement by a third party, we could lose our
intellectual property rights or be liable for significant damages
We have taken steps to protect our intellectual property rights, but we
cannot be certain that our efforts will be adequate to safeguard our rights to
technology we have developed. Disputes concerning the ownership or rights to use
intellectual property could be costly and time consuming to litigate, may
distract management from other tasks of operating the business, and may result
in our loss of significant rights and the loss of our ability to operate our
business.
We have been granted three U.S. patents covering aspects of our technology
for the offline display of advertisements and aspects of our technology for the
authentication and dynamic scheduling of advertisements and other messages to be
delivered to computer users. We have also filed other U.S. patent applications
covering
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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. We have established procedures for evaluating and
managing the risks associated with the Year 2000 problem and we are in the
process of assessing our Year 2000 readiness. We are also in the process of
communicating with third-party vendors who provide us with both network services
and equipment in order to assess their plans and progress in addressing the Year
2000 problem. Our failure to correct a material Year 2000 problem could result
in an interruption in, or a failure of, aspects of our normal business
activities or operations. In addition, a significant Year 2000 problem involving
our network services or equipment provided to us by third-party vendors could
cause our customers to consider seeking alternate providers or cause an
unmanageable burden on our customer service and technical support capabilities.
Any significant Year 2000 problem could require us to incur significant
unanticipated expenses to remedy these problems and could divert management's
time and attention.
We are dependent on key management personnel for our future success
Our business and financial results depend in part on the continued service
of our key personnel. We do not carry key person life insurance on any of our
personnel. The loss of the services of any of our executive officers or the loss
of the services of other key employees could harm our business and financial
results. Mark A. Moraes, our Executive Vice President, Technology, is working at
Juno pursuant to an employment agreement with D. E. Shaw & Co., L.P., an entity
affiliated with our Chairman, David E. Shaw. Under this agreement, Mr. Moraes
performs services for Juno. In addition, Mr. Moraes is a citizen of India and
has been granted a waiver by the U.S. Immigration and Naturalization Service
which allows Mr. Moraes to obtain a "green card" for permanent residence status.
Since additional processing is required before the green card is issued, we
cannot assure you that Mr. Moraes will be issued a green card. Until Mr. Moraes
receives a green card, his ability to work in our U.S. offices is limited and,
in the event that he does not ultimately obtain a green card, it is likely that
he would be unable to work in our U.S. offices thereafter.
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We may not be able to hire and retain qualified employees
Our business and financial results depend in part on our ability to
attract, retain and motivate highly skilled employees. Competition for employees
in our industry is intense. We may be unable to retain our key employees or
attract, assimilate or retain other highly qualified employees. We have, from
time to time, in the past experienced, and we expect to continue to experience,
difficulty in hiring and retaining highly skilled employees with appropriate
qualifications.
We cannot predict our future capital needs and we may not be able to secure
additional financing
We currently anticipate that 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
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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.
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 2. Changes in Securities and Use of Proceeds
(a) Changes in Securities:
None
(b) Use of Proceeds:
On May 25, 1999, the Company completed the initial public offering of
6,500,000 shares of Common Stock (the "Offering") at an initial public offering
price of $13.00 per share. The closing for the Offering occurred on June 1,
1999. The Offering resulted in gross proceeds of $84.5 million, approximately
$5.9 million of which was applied to the underwriting discount and approximately
$1.3 million was applied to related expenses. As a result, net proceeds to the
Company after expenses were approximately $77.3 million. Of the net proceeds,
approximately $8.6 million was used to repay indebtedness to an affiliated
party. From the date of receipt through June 30, 1999, the remaining net
proceeds of the Offering were used to support the Company's subscriber
acquisition, advertising and brand marketing activities, for general corporate
purposes of the Company or for the purchase of short-term, interest-bearing,
investment-grade securities.
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Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
Pursuant to Written Consents in Lieu of Meetings of the Stockholders of
the Company on March 1, 1999, holders of the requisite majorities of the then
outstanding shares of common stock of the Company approved certain amendments to
the Certificate of Incorporation of the Company and approved the merger of Juno
Online Services, L.P., a predecessor entity of the Company, with and into the
Company.
Pursuant to a Written Consent in Lieu of a Special Meeting of the
Stockholders on April 9, 1999, holders of the requisite majority of the then
outstanding shares of common stock of the Company (voting on an as-converted
basis, in the case of holders of the Company's redeemable convertible preferred
stock) approved the adoption of the Company's 1999 Stock Incentive Plan.
Pursuant to a Written Consent in Lieu of a Special Meeting of the
Stockholders on May 5, 1999, holders of the requisite majorities of the then
outstanding shares of Common Stock of the Company (voting on an as-converted
basis, in the case of holders of the Company's redeemable convertible preferred
stock) approved various resolutions in connection with the Offering.
Item 5. Other Information
None.
Item 6. Exhibits and Report on Form 8-K
(a) The following exhibits are filed as part of this report:
3.1 Certificate of Correction to Amended and Restated Certificate of
Incorporation, filed July 15, 1999
10.16 + Loan and Security Agreement, dated as of July 28, 1999 between
Silicon Valley Bank and the Company
21 Subsidiaries of the Company
27.1 Financial Data Schedule
+ Confidential treatment requested for portions of this agreement.
(c) No reports on Form 8-K were filed during the quarter ended June 30, 1999.
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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: August 12, 1999 /s/ Charles E. Ardai
---------------------
Name: Charles E. Ardai
Title: President, Chief Executive Officer and Director
(principal executive officer)
Date: August 12, 1999 /s/ Richard M. Eaton, Jr.
--------------------------
Name: Richard M. Eaton, Jr.
Title: Chief Financial Officer and Treasurer
(principal accounting and financial officer)
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Exhibit 3.1
CERTIFICATE OF CORRECTION OF
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
JUNO ONLINE SERVICES, INC.
It is hereby certified that:
1. The name of the corporation (hereinafter called the
"Corporation") is Juno Online Services, Inc.
2. The Amended and Restated Certificate of Incorporation of the
Corporation, which was filed by the Secretary of State of Delaware on June 1,
1999, is hereby corrected.
3. The inaccuracy to be corrected in said instrument is as follows:
The initial number of Directors of the Corporation.
4. The portion of the instrument in corrected form is as follows:
Article V
A. Number. The number of directors of the Corporation shall be such
number, which shall initially be seven (7), as shall be fixed from time to time
by, or in the manner provided in the Bylaws or by resolution duly adopted by the
Board of Directors, provided that no action shall be taken to decrease or
increase the authorized number of directors unless at least 66.67% of the
outstanding shares of capital stock of the Corporation entitled to vote
generally in the election of directors (considered for this purpose as one
class) cast at a meeting of the stockholders called for that purpose approve
such decrease or increase. Vacancies occurring in the Board of Directors for any
reason and newly created directorships shall be filled by a vote of a majority
of the remaining members of the Board of Directors, even if less than a quorum,
at any meeting of the Board of Directors. A director so chosen shall hold office
for the remainder of the full term of the director for which the vacancy was
created or occurred and until such director's successor shall have been duly
elected and qualified.
Signed on July 14, 1999
/s/ Charles E. Ardai
--------------------
Name: Charles E. Ardai
Title: President and Chief Executive Officer
Exhibit 10.16
LOAN AND SECURITY AGREEMENT
This LOAN AND SECURITY AGREEMENT is entered into as of July 28, 1999, by
and between SILICON VALLEY BANK, a California-chartered bank, with its principal
place of business at 3003 Tasman Drive, Santa Clara, California 95054 and with a
loan production office located at Wellesley Office Park, 40 William Street,
Suite 350, Wellesley, Massachusetts 02481, doing business under the name
"Silicon Valley East" ("Bank") and JUNO ONLINE SERVICES, INC., a Delaware
corporation with a principal place of business at 1540 Broadway, New York, New
York 10036 ("Borrower").
RECITALS
Borrower wishes to obtain credit from time to time from Bank, and Bank
desires to extend credit to Borrower. This Agreement sets forth the terms on
which Bank will advance credit to Borrower, and Borrower will repay the amounts
owing to Bank.
AGREEMENT
The parties agree as follows:
1. DEFINITIONS AND CONSTRUCTION
1.1 Definitions. As used in this Agreement, the following terms shall have
the following definitions:
"Accounts" means all presently existing and hereafter arising
accounts, contract rights, and all other forms of obligations owing to
Borrower arising out of the sale or lease of goods (including, without
limitation, the licensing of software and other technology) or the
rendering of services by Borrower, whether or not earned by performance,
and any and all credit insurance, guaranties, and other security therefor,
as well as all merchandise returned to or reclaimed by Borrower and
Borrower's Books relating to any of the foregoing.
"Advance" or "Advances" means a loan advance under the Committed
Revolving Line.
"Affiliate" means, with respect to any Person, any Person that owns
or controls directly or indirectly such Person, any Person that controls
or is controlled by or is under common control with such Person, and each
of such Person's senior executive officers, directors, partners and, for
any Person that is a limited liability company, such Person's managers and
members.
"Agreement" means this Loan and Security Agreement.
"Bank Expenses" means all reasonable out-of-pocket costs or expenses
(including reasonable attorneys' fees and expenses) incurred in connection
with the preparation, negotiation, administration, and enforcement of the
Loan Documents; and Bank's reasonable attorneys' fees and expenses
incurred in amending, enforcing or defending the Loan Documents,
(including fees and expenses of appeal or review, or those incurred in any
Insolvency Proceeding) whether or not suit is brought.
"Billable Service Revenue" in respect of any period, means the
amount specified under the line item "Billable Service Revenue" on
Borrower's consolidated statement of operations for such period.
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"Borrower's Books" means all of Borrower's books and records
including, without limitation: ledgers; records concerning Borrower's
assets or liabilities, the Collateral, business operations or financial
condition; and all computer programs, or tape files, and the equipment,
containing such information.
"Borrower's Investment Policy" means the written investment policy
of Borrower, as amended from time to time, and approved by Bank in
writing, which approval(s) shall not be unreasonably withheld.
"Business Day" means any day that is not a Saturday, Sunday, or
other day on which banks in the State of Massachusetts or California are
authorized or required to close.
[****]
"Closing Date" means the date of this Agreement.
"Code" means the Massachusetts Uniform Commercial Code.
"Collateral" means the property described on Exhibit A attached
hereto.
"Committed Revolving Line" means a credit extension in an aggregate
principal amount of up to Ten Million Dollars ($10,000,000.00) at any time
outstanding.
"Contingent Obligation" means, as applied to any Person, any direct
or indirect liability, contingent or otherwise, of that Person with
respect to (i) any indebtedness, lease, dividend, letter of credit or
other obligation of another, including, without limitation, any such
obligation directly or indirectly guaranteed, endorsed, co-made or
discounted or sold with recourse by that Person, or in respect of which
that Person is otherwise directly or indirectly liable; (ii) any
obligations with respect to undrawn letters of credit issued for the
account of that Person; and (iii) all obligations arising under any
interest rate, currency or commodity swap agreement, interest rate cap
agreement, interest rate collar agreement, or other agreement or
arrangement designated to protect a Person against fluctuation in interest
rates, currency exchange rates or commodity prices; provided, however,
that the term "Contingent Obligation" shall not include endorsements for
collection or deposit in the ordinary course of business. The amount of
any Contingent Obligation shall be deemed to be an amount equal to the
stated or determined amount of the primary obligation in respect of which
such Contingent Obligation is made or, if not stated or determinable, the
maximum reasonably anticipated liability in respect thereof as determined
by such Person in good faith; provided, however, that such amount shall
not in any event exceed the maximum amount of the obligations under the
guarantee or other support arrangement.
"Credit Extension" means each Advance, Letter of Credit, or any
other extension of credit by Bank for the benefit of Borrower hereunder.
"Current Assets" means, as of any applicable date, all amounts that
should, in accordance with GAAP, be included as current assets on the
consolidated balance sheet of Borrower and its Subsidiaries as at such
date.
"Current Liabilities" means, as of any applicable date, all amounts
that should, in accordance with GAAP, be included as current liabilities
on the consolidated balance sheet of Borrower and its Subsidiaries, as of
such date, plus, to the extent not already included therein, all
outstanding Credit Extensions made under this Agreement, including all
Indebtedness that is payable upon demand or within one year from the date
of determination thereof unless such Indebtedness is renewable or
extendable at the option of Borrower or any Subsidiary to a date more than
one year from the date of determination, but excluding Subordinated Debt.
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[****] Confidential treatment has been requested for this portion pursuant to
Rule 24b-2 promulgated under the Securities Exchange Act of 1934, as amended.
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"Equipment" means all present and future machinery, equipment,
tenant improvements, furniture, fixtures, vehicles, tools, parts and
attachments in which Borrower has any interest.
"ERISA" means the Employee Retirement Income Security Act of 1974,
as amended, and the regulations thereunder.
"GAAP" means generally accepted accounting principles as in effect
in the United States from time to time.
"Indebtedness" means (a) all indebtedness for borrowed money or the
deferred purchase price of property or services, including without
limitation reimbursement and other obligations with respect to surety
bonds and letters of credit, (b) all obligations evidenced by notes,
bonds, debentures or similar instruments, (c) all capital lease
obligations and (d) all Contingent Obligations.
"Insolvency Proceeding" means any proceeding commenced by or against
any person or entity under any provision of the United States Bankruptcy
Code, as amended, or under any other bankruptcy or insolvency law,
including assignments for the benefit of creditors, formal or informal
moratoria, compositions, extension generally with its creditors, or
proceedings seeking reorganization, arrangement, or other relief.
"Inventory" means all present and future inventory in which Borrower
has any interest, including merchandise, raw materials, parts, supplies,
packing and shipping materials, work in process and finished products
intended for sale or lease or to be furnished under a contract of service,
of every kind and description now or at any time hereafter owned by or in
the custody or possession, actual or constructive, of Borrower, including
such inventory as is temporarily out of its custody or possession or in
transit and including any returns upon any accounts or other proceeds,
including insurance proceeds, resulting from the sale or disposition of
any of the foregoing and any documents of title representing any of the
above.
"Investment" means any beneficial ownership of (including stock,
partnership interest or other securities) any Person, or any loan, advance
or capital contribution to any Person.
"IRC" means the Internal Revenue Code of 1986, as amended, and the
regulations thereunder.
"Letter of Credit" means a letter of credit or similar undertaking
issued by Bank pursuant to Section 2.1.2.
"Letter of Credit Reserve" has the meaning set forth in Section
2.1.2.
"Lien" means any mortgage, lien, deed of trust, charge, pledge,
security interest or other encumbrance.
"Loan Documents" means, collectively, this Agreement, any note or
notes executed by Borrower, and any other present or future agreement
entered into between Borrower and/or for the benefit of Bank in connection
with this Agreement, all as amended, extended or restated from time to
time.
"Material Adverse Effect" means a material adverse effect on (i) the
business operations or condition (financial or otherwise) of Borrower and
its Subsidiaries taken as a whole or (ii) the ability of Borrower to repay
the Obligations or otherwise perform its obligations under the Loan
Documents.
"Maturity Date" means one day prior to one year from the Closing
Date.
"Negotiable Collateral" means all of Borrower's present and future
letters of credit of which it is a beneficiary, and any notes, drafts,
instruments, securities, documents of title, or chattel paper, owned by or
payable to Borrower.
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"Net Worth" means total assets minus total liabilities (determined
without regard to redeemable preferred stock).
"Obligations" means all debt, principal, interest, Bank Expenses and
other amounts owed to Bank by Borrower pursuant to this Agreement or any
other Loan Documents, whether absolute or contingent, due or to become
due, now existing or hereafter arising, including any interest that
accrues after the commencement of an Insolvency Proceeding.
"Payment Date" means the first calendar day of each month commencing
on the first such date after the Closing Date and ending on the Maturity
Date.
"Permitted Indebtedness" means:
(1) Indebtedness of Borrower in favor of Bank arising under
this Agreement or any other Loan Document;
(2) Indebtedness existing on the Closing Date and disclosed in
the Schedule;
(3) Subordinated Debt;
(4) Indebtedness to trade creditors incurred in the ordinary
course of business (including, without limitation, accrued unpaid
premiums owed to insurers to the extent the same comprise
Indebtedness);
(5) Indebtedness secured by Permitted Liens;
(6) Contingent Obligations of Borrower to provide credit
support in respect of obligations incurred by any Subsidiary of
Borrower in the ordinary course of business or Contingent
Obligations of any Subsidiary of Borrower to provide credit support
in respect of obligations incurred by Borrower; and
(7) Up to an aggregate of $10,000,000 at any time outstanding
of obligations under capitalized leases (exclusive of any such lease
entered into before the date hereof and any extension or renewal
thereof) entered into to provide financing or refinancing of fixed
assets.
"Permitted Investment" means:
(8) Investments existing on the Closing Date disclosed in the
Schedule; and
(9) Investments pursuant to Borrower's Investment Policy
pertaining to investments of cash and cash equivalents, as in effect
from time to time, as adopted by the Borrower and approved by the
Borrower's Board of Directors;
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(10) Investment in or to Borrower by any Subsidiary of
Borrower and Investments in or to any Subsidiary of Borrower by
Borrower or any Subsidiary of Borrower (up to an aggregate maximum
amount of $5,000,000.00); and
(11) Investments arising from transactions permitted under
Section 7.3.
"Permitted Liens" means the following:
(12) Any Liens existing on the Closing Date and disclosed in
the Schedule or arising under this Agreement or the other Loan
Documents;
(13) Liens for taxes, fees, assessments or other governmental
charges or levies, or for obligations to materialmen, mechanics,
warehouseman, carriers or employees or other like Liens arising in
the ordinary course of business, in each case, either not delinquent
or being contested in good faith by appropriate proceedings and as
to which adequate reserves are maintained on Borrower's Books or the
books of the Borrower's affected Subsidiary, as the case may be, in
accordance with GAAP;
(14) Liens (i) upon or in any Equipment acquired or held by
Borrower or any of its Subsidiaries to secure the purchase price of
such Equipment or indebtedness incurred solely for the purpose of
financing or refinancing the acquisition of such Equipment, or (ii)
existing on such equipment at the time of its acquisition, provided
that the Lien is confined solely to the property so acquired and
improvements thereon, and the proceeds of such equipment;
(15) Leases or subleases and licenses or sublicenses granted
to others in the ordinary course of Borrower's or any of its
Subsidiaries' business not interfering in any material respect with
the business of Borrower and its Subsidiaries taken as a whole, and
any interest or title of a lessor, licensor, sublicensor or under
any lease or license or sublicense provided that such leases,
subleases, licenses and sublicenses do not prohibit the grant of the
security interest granted hereunder; and
(16) Liens incurred in connection with the extension, renewal
or refinancing of the indebtedness secured by Liens of the type
described in clauses (a) through (c) above, provided that any
extension, renewal or replacement Lien shall be limited to the
property encumbered by the existing Lien and the principal amount of
the indebtedness being extended, renewed or refinanced does not
increase.
"Person" means any individual, sole proprietorship, partnership,
limited liability company, joint venture, trust, unincorporated
organization, association, corporation, institution, public benefit
corporation, firm, joint stock company, estate, entity or governmental
agency.
"Prime Rate" means the variable rate of interest, per annum, most
recently announced by Bank, as its "prime rate," whether or not such
announced rate is the lowest rate available from Bank.
"Quick Assets" means, as of any applicable date, the consolidated
cash, cash equivalents, accounts receivable and investments with
maturities of fewer than 365 days of Borrower determined in accordance
with GAAP.
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"Responsible Officer" means each of the Chief Executive Officer, the
President, the Chief Financial Officer and the Controller of Borrower.
"Schedule" means the schedule of exceptions attached hereto, if any.
"Subordinated Debt" means any debt incurred by Borrower that is
subordinated to the debt owing by Borrower to Bank on terms reasonably
acceptable to Bank (and identified as being such by Borrower and Bank).
"Subsidiary" means with respect to any Person, corporation,
partnership, company association, joint venture, or any other business
entity of which more than fifty percent (50%) of the voting stock or other
equity interests is owned or controlled, directly or indirectly, by such
Person or one or more Affiliates of such Person.
1.2 Accounting and Other Terms. All accounting terms not specifically
defined herein shall be construed in accordance with GAAP and all calculations
and determinations made hereunder shall be made in accordance with GAAP. When
used herein, the term "financial statements" shall include the notes and
schedules thereto. The terms "including" or "includes" shall always be read as
meaning "including (or includes) without limitation", when used herein or in any
other Loan Document.
2. LOAN AND TERMS OF PAYMENT.
2.1 Credit Extensions. Borrower promises to pay to the order of Bank, in
lawful money of the United States of America, the aggregate unpaid principal
amount of all Credit Extensions made by Bank to Borrower hereunder in accordance
with the terms hereof. Borrower shall also pay interest on the unpaid principal
amount of such Credit Extensions at rates in accordance with the terms hereof.
2.1.1 (a) Subject to and upon the terms and conditions of this
Agreement, Bank agrees to make Advances to Borrower in an aggregate
outstanding amount not to exceed the Committed Revolving Line, minus the
face amount of all outstanding Letters of Credit (including drawn but
unreimbursed Letters of Credit, and any Letter of Credit Reserve). Subject
to the terms and conditions of this Agreement, amounts borrowed pursuant
to this Section 2.1 may be repaid and reborrowed at any time during the
term of this Agreement.
(b) Whenever Borrower desires an Advance, Borrower will notify Bank
by facsimile transmission or telephone no later than 3:00 p.m. Eastern
time, on the Business Day that the Advance is to be made. Each such
notification shall be promptly confirmed by a Payment/Advance Form in
substantially the form of Exhibit B hereto. Bank is authorized to make
Advances under this Agreement, based upon written instructions received
from a Responsible Officer or a designee of a Responsible Officer, or
without instructions if in Bank's discretion such Advances are necessary
to meet Obligations which have become due and remain unpaid. Bank will
credit the amount of Advances made under this Section 2.1 to Borrower's
deposit account.
(c) The Committed Revolving Line shall terminate on the Maturity
Date, at which time all Advances under this Section 2.1 and other amounts
due under this Agreement (except as otherwise expressly specified herein)
shall be immediately due and payable.
2.2 Letters of Credit.
(1) Subject to the terms and conditions of this Agreement, Bank
agrees to issue or cause to be issued Letters of Credit for the account of
Borrower in an aggregate outstanding face amount
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not to exceed (i) the Committed Revolving Line minus (ii) the then
outstanding principal balance of the Advances; provided that the face
amount of outstanding Letters of Credit (including drawn but unreimbursed
Letters of Credit and any Letter of Credit Reserve) shall not in any case
exceed Ten Million Dollars ($10,000,000.00). Each Letter of Credit shall
have an expiry date no later than three hundred sixty (360) days after the
Maturity Date provided that Borrower's Letter of Credit reimbursement
obligation shall be secured by cash collateral on terms acceptable to Bank
at any time after the Maturity Date if the term of this Agreement is not
extended by Bank. All Letters of Credit shall be, in form and substance,
acceptable to Bank in its sole discretion and shall be subject to the
terms and conditions of Bank's form of standard Application and Letter of
Credit Agreement. Unless otherwise agreed in writing by the Borrower and
Bank, the issuance fees shall be as follows:
(1) Standby Letters of Credit in individual amounts of less
than $1,000,000.00 ...... [****] of the face amount.
(2) Standby Letters of Credit in individual amounts of at
least $1,000,000.00, but less than $2,000,000.00 ...... [****] of
the face amount.
(3) Standby Letters of Credit in individual amounts of
$2,000,000.00 and greater ...... [****] of the face amount.
(2) The obligation of Borrower to immediately reimburse Bank for
drawings made under Letters of Credit shall be absolute, unconditional and
irrevocable, and shall be performed strictly in accordance with the terms
of this Agreement and such Letters of Credit, under all circumstances
whatsoever. Borrower shall indemnify, defend, protect, and hold Bank
harmless from any loss, cost, expense or liability, including, without
limitation, reasonable attorneys' fees, arising out of or in connection
with any Letters of Credit except to the extent that any such loss, cost,
expense or liability arises from Bank's own gross negligence or wilful
misconduct.
(3) Borrower may request that Bank issue a Letter of Credit payable
in a currency other than United States Dollars. If a demand for payment is
made under any such Letter of Credit, Bank shall treat such demand as an
Advance to Borrower of the equivalent of the amount thereof (plus cable
charges) in United States currency at the then prevailing rate of exchange
in San Francisco, California, for sales of that other currency for cable
transfer to the country of which it is the currency.
(4) Upon the issuance of any Letter of Credit payable in a currency
other than United States Dollars, Bank shall create a reserve (the "Letter
of Credit Reserve") under the Committed Revolving Line for letters of
credit against fluctuations in currency exchange rates, in an amount in
Dollars (determined at applicable exchange rates prevailing in New York on
the date of establishment of such reserve) equal to ten percent (10%) of
the face amount of such letter of credit. The amount of such reserve may
be amended by Bank from time to time to account for fluctuations in the
exchange rate. The availability of funds under the Committed Revolving
Line shall be reduced by the amount of such reserve for so long as such
letter of credit remains outstanding.
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[****] Confidential treatment has been requested for this portion pursuant to
Rule 24b-2 promulgated under the Securities Exchange Act of 1934, as amended.
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2.3 Overadvances. If, at any time or for any reason, the amount of
Obligations owed by Borrower to Bank pursuant to Section 2.1.1, and 2.1.2 of
this Agreement is greater than the Committed Revolving Line, Borrower shall
immediately pay to Bank, in cash, the amount of such excess.
2.4 Interest Rates, Payments, and Calculations.
(1) Interest Rate. Except as set forth in Section 2.3(b), any
Advances shall bear interest, on the average daily balance thereof, at a
fluctuating per annum rate equal to the Prime Rate as in effect from time
to time pursuant to Section 2.3(d).
(2) Default Rate. All Obligations shall bear interest, from and
after the occurrence of an Event of Default and only during the pendency
thereof, at a rate equal to three (3) percentage points above the interest
rate applicable in the absence of any continuing Event of Default.
(3) Payments. Interest hereunder shall be due and payable on each
Payment Date. Any interest not paid when due shall be compounded by
becoming a part of the Obligations, and such interest shall thereafter
accrue interest at the rate then applicable hereunder.
(4) Computation. In the event the Prime Rate is changed from time to
time hereafter, the applicable rate of interest hereunder shall be
increased or decreased effective as of 12:01 a.m. on the day the Prime
Rate is changed, by an amount equal to such change in the Prime Rate. All
interest chargeable under the Loan Documents shall be computed on the
basis of a three hundred sixty (360) day year for the actual number of
days elapsed.
2.5 Crediting Payments. Prior to the occurrence of an Event of Default,
Bank shall credit as specified by Borrower any wire transfer of funds, check or
other item of payment designated by Borrower for application against the
Obligations. Notwithstanding anything to the contrary contained herein, any wire
transfer or payment designated by Borrower for application against the
Obligations received by Bank after 3:00 P.M. Eastern time shall be deemed to
have been received by Bank as of the opening of business on the immediately
following Business Day. Whenever any payment to Bank under the Loan Documents
would otherwise be due (except by reason of acceleration) on a date that is not
a Business Day, such payment shall instead be due on the next Business Day, and
additional fees or interest, as the case may be, shall accrue and be payable for
the period of such extension.
2.6 Fees. Borrower shall pay to Bank the following:
(1) Committed Revolving Line Facility Fee. As compensation for the
Bank's maintenance of sufficient funds available for such purpose, the
Bank shall have earned a Committed Revolving Line Facility Fee (so
referred to herein), which fee shall be paid quarterly in arrears on the
last day of each calendar quarter (but pro rated in the case of any
partial such quarter), accruing at a per annum rate equal to [****] on the
average unused portion of the Committed Revolving Line during any such
calendar quarter, as determined by the Bank. The Borrower shall not be
entitled to any credit, rebate or repayment of any Committed Revolving
Line Facility Fee previously earned by the Bank pursuant to this Section
notwithstanding any termination of the within Agreement, or suspension or
termination of the Bank's obligation to make loans and advances hereunder.
Bank acknowledges that Borrower has paid as of the date of this Agreement
$5,000.00, to be credited against fees otherwise payable under this
Section 2.5;
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[****] Confidential treatment has been requested for this portion pursuant to
Rule 24b-2 promulgated under the Securities Exchange Act of 1934, as amended.
8
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(2) Financial Examination and Appraisal Fees. Bank's customary fees
and out-of-pocket expenses for Bank's audits of Borrower's Accounts
pursuant to Section 6.3, and for each appraisal of Collateral and
financial analysis and examination of Borrower performed from time to time
by Bank or its agents;
(3) Bank Expenses. Upon demand from Bank, including, without
limitation, upon the date hereof, all Bank Expenses incurred through the
date hereof, including reasonable attorneys' fees and expenses, and, after
the date hereof, all Bank Expenses, including reasonable attorneys' fees
and expenses, as and when they become due.
2.7 Additional Costs. In case any law, regulation, treaty or official
directive or in the interpretation or application thereof by any court or any
governmental authority charged with the administration thereof or the compliance
with any change after the Closing Date in any guideline or request of any
central bank or other governmental authority (whether or not having the force of
law):
(1) subjects Bank to any tax with respect to payments of principal
or interest or any other amounts payable hereunder by Borrower or
otherwise with respect to the transactions contemplated hereby (except for
taxes on the overall net income of Bank imposed by the United States of
America or any political subdivision thereof);
(2) imposes, modifies or deems applicable any deposit insurance,
reserve, special deposit or similar requirement against assets held by, or
deposits in or for the account of, or loans by, Bank; or
(3) imposes upon Bank any other condition with respect to its
performance under this Agreement,
and the result of any such change is to increase the cost to Bank, reduce the
income receivable by Bank or impose any expense upon Bank with respect to any
loans, Bank shall notify Borrower thereof. Borrower agrees to pay to Bank the
amount of such increase in cost, reduction in income or additional expense as
and when such cost, reduction or expense is incurred or determined, upon
presentation by Bank of a statement of the amount and setting forth Bank's
calculation thereof, all in reasonable detail, which statement shall be deemed
true and correct absent manifest error.
2.8 Term. Except as otherwise set forth herein, this Agreement shall
become effective on the Closing Date and, subject to Section 12.7, shall
continue in full force and effect for a term ending on the Maturity Date or such
earlier date on which both the Obligations shall have been paid in full and the
Committed Revolving Line shall have been terminated as provided herein.
Notwithstanding the foregoing, Bank shall have the right to terminate its
obligation to make Credit Extensions under this Agreement immediately and
without notice upon the occurrence and during the continuance of an Event of
Default. The Borrower may also terminate this Agreement by written notice to the
Bank. Notwithstanding termination of this Agreement, Bank's lien on the
Collateral shall remain in effect for so long as any Obligations are
outstanding.
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3. CONDITIONS OF LOANS
3.1 Conditions Precedent to Initial Credit Extension. The obligation of
Bank to make the initial Credit Extension is subject to the condition precedent
that Bank shall have received, in form and substance satisfactory to Bank, the
following:
(1) this Agreement;
(2) a Negative Pledge Agreement;
(3) a certificate of the Secretary of Borrower with respect to
articles, bylaws, incumbency and resolutions authorizing the execution and
delivery of this Agreement;
(4) an opinion of Borrower's counsel;
(5) financing statements (Forms UCC-1);
(6) insurance certificate;
(7) payment of the fees and Bank Expenses then due specified in
Section 2.5 hereof;
(8) Certificate of Good Standing and Foreign Qualification (if
applicable); and
(9) such other documents, and completion of such other matters, as
Bank may reasonably deem necessary or appropriate.
3.2 Conditions Precedent to all Credit Extensions. The obligation of Bank
to make each Credit Extension, including the initial Credit Extension, is
further subject to the following conditions:
(1) timely receipt by Bank of the Payment/Advance Form as provided
in Section 2.1; and
(2) the representations and warranties contained in Section 5 shall
be true and correct in all material respects on and as of the date of such
Payment/Advance Form and on the effective date of each Credit Extension as
though made at and as of each such date, and no Event of Default shall
have occurred and be continuing, or would result from such Credit
Extension. The making of each Credit Extension shall be deemed to be a
representation and warranty by Borrower on the date of such Credit
Extension as to the accuracy of the facts referred to in this Section
3.2(b).
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4. CREATION OF SECURITY INTEREST
4.1 Grant of Security Interest. Borrower grants and pledges to Bank a
continuing security interest in all presently existing and hereafter acquired or
arising Collateral in order to secure prompt payment of any and all Obligations
and in order to secure prompt performance by Borrower of each of its covenants
and duties under the Loan Documents. Except as set forth in the Schedule, such
security interest constitutes a valid, first priority security interest in the
presently existing Collateral, and will constitute a valid, first priority
security interest in Collateral acquired after the date hereof. Borrower
acknowledges that Bank may place a "hold" on any Deposit Account pledged as
Collateral to secure the Obligations. Notwithstanding termination of this
Agreement, Bank's Lien on the Collateral shall remain in effect for so long as
any Obligations are outstanding.
4.2 Delivery of Additional Documentation Required. Borrower shall from
time to time execute and deliver to Bank, at the request of Bank, all Negotiable
Collateral, all financing statements and other documents that Bank may
reasonably request, in form satisfactory to Bank, to perfect and continue
perfected Bank's security interests in the Collateral and in order to fully
consummate all of the transactions contemplated under the Loan Documents;
provided, however, that prior to occurrence of any continuing Event of Default,
nothing contained in the Loan Documents shall obligate Borrower or any
Subsidiary of Borrower to make any registration, recordation or filing in
respect of intellectual property rights determined by Borrower to not be
material to the business of the Borrower and its Subsidiaries taken as a whole
or to the extent that any such registration, recordation or filing is determined
by Borrower to be inconsistent with the objectives or policies of Borrower or
any of its Subsidiaries concerning protection of trade secrets of Borrower or
any of its Subsidiaries.
4.3 Right to Inspect. Bank (through any of its officers, employees, or
agents) shall have the right, upon reasonable prior notice, from time to time
during Borrower's usual business hours, to inspect Borrower's Books and to make
copies thereof and to check, test, and appraise the Collateral in order to
verify Borrower's financial condition or the amount, condition of, or any other
matter relating to, the Collateral, provided that right will be exercised no
more often than every six (6) months unless an Event of Default has occurred and
is continuing
4.4 Bank agrees to execute and deliver such documents as may reasonably be
requested by Borrower to confirm the security interest granted herein shall not
apply to any Equipment to be purchased by Borrower with financing from a lender
other than the Bank.
5. REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants as follows:
5.1 Due Organization and Qualification. Borrower and each Subsidiary is a
corporation duly existing and in good standing under the laws of its state of
incorporation and qualified and licensed to do business in, and is in good
standing in, any state in which the conduct of its business or its ownership of
property requires that it be so qualified.
5.2 Due Authorization; No Conflict. The execution, delivery, and
performance of the Loan Documents are within Borrower's powers, have been duly
authorized, and are not in conflict with nor constitute a breach of any
provision contained in Borrower's Articles/Certificate of Incorporation or
Bylaws, nor will they constitute an event of default under any material
agreement to which Borrower is a party or by which Borrower is bound.
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5.3 No Prior Encumbrances. Borrower has good and indefeasible title to the
Collateral, free and clear of Liens, except for Permitted Liens.
5.4 Name; Location of Chief Executive Office. Except as disclosed in the
Schedule, Borrower has not done business and will not without at least thirty
(30) days prior written notice to Bank do business under any name other than
that specified on the signature page hereof. The chief executive office of
Borrower is located at the address indicated in Section 10 hereof.
5.5 Litigation. There are no actions or proceedings pending, or, to
Borrower's knowledge, threatened by or against Borrower or any Subsidiary before
any court or administrative agency in which an adverse decision could have a
Material Adverse Effect or a material adverse effect on Borrower's interest or
Bank's security interest in the Collateral.
5.6 No Material Adverse Change in Financial Statements. All consolidated
financial statements related to Borrower and any Subsidiary that have been
delivered by Borrower to Bank fairly present in all material respects Borrower's
consolidated financial condition as of the date thereof and Borrower's
consolidated results of operations for the period then ended. There has not been
a material adverse change in the consolidated financial condition of Borrower
since the date of the most recent of such financial statements submitted to Bank
on or about the Closing Date or, if later, pursuant to Section 6.3.
5.7 Regulatory Compliance. Borrower and each Subsidiary has met the
minimum funding requirements of ERISA with respect to any employee benefit plans
subject to ERISA. No event has occurred resulting from Borrower's failure to
comply with ERISA that is reasonably likely to result in Borrower's incurring
any liability that could have a Material Adverse Effect. Borrower is not an
"investment company" or a company "controlled" by an "investment company" within
the meaning of the Investment Company Act of 1940. Borrower is not engaged
principally, or as one of its important activities, in the business of extending
credit for the purpose of purchasing or carrying margin stock (within the
meaning of Regulations T and U of the Board of Governors of the Federal Reserve
System). Borrower has complied with all the provisions of the Federal Fair Labor
Standards Act. Borrower has not violated any statutes, laws, ordinances or rules
applicable to it, violation of which could have a Material Adverse Effect.
5.8 Environmental Condition. None of Borrower's or any Subsidiary's
properties or assets has ever been used by Borrower or any Subsidiary or, to the
best of Borrower's knowledge, by previous owners or operators, in the disposal
of, or to produce, store, handle, treat, release, or transport, any hazardous
waste or hazardous substance other than in accordance with applicable law; to
the best of Borrower's knowledge, none of Borrower's properties or assets has
ever been designated or identified in any manner pursuant to any environmental
protection statute as a hazardous waste or hazardous substance disposal site, or
a candidate for closure pursuant to any environmental protection statute; no
lien arising under any environmental protection statute has attached to any
revenues or to any real or personal property owned by Borrower or any
Subsidiary; and neither Borrower nor any Subsidiary has received a summons,
citation, notice, or directive from the Environmental Protection Agency or any
other federal, state or other governmental agency concerning any action or
omission by Borrower or any Subsidiary resulting in the release, or other
disposition of hazardous waste or hazardous substances into the environment.
5.9 Taxes. Borrower and each Subsidiary has filed or caused to be filed
all tax returns required to be filed on a timely basis, and has paid, or has
made adequate provision for the payment of, all
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taxes reflected therein, except those being contested in good faith by proper
proceedings with adequate reserves under GAAP.
5.10 Subsidiaries. Borrower does not own any stock, partnership interest
or other equity securities of any Person, except for Permitted Investments.
5.11 Government Consents. Borrower and each Subsidiary has obtained all
consents, approvals and authorizations of, made all declarations or filings
with, and given all notices to, all governmental authorities that are necessary
for the continued operation of Borrower's business as currently conducted.
5.12 Full Disclosure. No representation, warranty or other statement made
by Borrower in any certificate or written statement furnished to Bank contains
any untrue statement of a material fact or omits to state a material fact
necessary in order to make the statements contained in such certificates or
statements not misleading.
6. AFFIRMATIVE COVENANTS
Borrower covenants and agrees that, until payment in full of all
outstanding Obligations, and for so long as Bank may have any commitment to make
a Credit Extension hereunder, Borrower shall do all of the following:
6.1 Good Standing. Borrower shall maintain its and each of its
Subsidiaries' corporate existence and good standing in its jurisdiction of
incorporation and maintain qualification in each jurisdiction in which the
failure to so qualify could have a Material Adverse Effect. Borrower shall
maintain, and shall cause each of its Subsidiaries to maintain, to the extent
consistent with prudent management of Borrower's business, in force all
licenses, approvals and agreements, the loss of which could have a Material
Adverse Effect.
6.2 Government Compliance. Borrower shall meet, and shall cause each
Subsidiary to meet, the minimum funding requirements of ERISA with respect to
any employee benefit plans subject to ERISA. Borrower shall comply, and shall
cause each Subsidiary to comply, with all statutes, laws, ordinances and
government rules and regulations to which it is subject, noncompliance with
which could have a Material Adverse Effect or a material adverse effect on the
Collateral or the priority of Bank's Lien on the Collateral.
6.3 Financial Statements, Reports, Certificates. Borrower shall deliver to
Bank: (a) as soon as available, but in any event within forty five (45) days
after the end of each quarter, a company prepared consolidated balance sheet and
income statement covering Borrower's consolidated operations during such period,
and a report of the amount of subscribers, certified by an officer of Borrower
and in a form reasonably acceptable to Bank; (b) as soon as available, but in
any event within ninety (90) days after the end of Borrower's fiscal year,
audited consolidated financial statements of Borrower prepared in accordance
with GAAP, consistently applied, together with an unqualified opinion on such
financial statements of an independent certified public accounting firm
reasonably acceptable to Bank; (c) within five (5) days of filing, copies of all
statements, reports and notices sent or made available generally by Borrower to
its security holders or to any holders of Subordinated Debt and all reports on
Form 10-K, 10-Q and 8-K filed with the Securities and Exchange Commission; (d)
promptly upon receipt of written notice thereof, a report of any legal actions
pending or threatened against Borrower or any Subsidiary that, if determined
adversely to Borrower or such Subsidiary, would result in damages or costs to
Borrower or any Subsidiary of Borrower comprising a Material Adverse Effect; and
(e) such budgets, sales projections, operating plans or other financial
information as Bank may reasonably request from time to time.
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Borrower shall deliver to Bank with the quarterly financial statements a
Compliance Certificate signed by a Responsible Officer in substantially the form
of Exhibit C hereto.
Bank shall have a right from time to time hereafter to audit Borrower's
Accounts at Borrower's expense, provided that such audits will be conducted no
more often than every six (6) months unless an Event of Default has occurred and
is continuing.
6.4 Inventory; Returns. Borrower shall keep all Inventory in good and
marketable condition, free from all material defects. Returns and allowances, if
any, as between Borrower and its account debtors shall be on the same basis and
in accordance with the usual customary practices of Borrower, as they exist at
the time of the execution and delivery of this Agreement. Borrower shall
promptly notify Bank of all returns and recoveries and of all disputes and
claims, where the return, recovery, dispute or claim in any single case involves
more than [****].
6.5 Taxes. Borrower shall make, and shall cause each Subsidiary to make,
due and timely payment or deposit of all material federal, state, and local
taxes, assessments, or contributions required of it by law, and will execute and
deliver to Bank, on demand, appropriate certificates attesting to the payment or
deposit thereof; and Borrower will make, and will cause each Subsidiary to make,
timely payment or deposit of all material tax payments and withholding taxes
required of it by applicable laws, including, but not limited to, those laws
concerning F.I.C.A., F.U.T.A., state disability, and local, state, and federal
income taxes, and will, upon request, furnish Bank with proof satisfactory to
Bank indicating that Borrower or a Subsidiary has made such payments or
deposits; provided that Borrower or a Subsidiary need not make any payment if
(i) the amount or validity of such payment is contested in good faith by
appropriate proceedings, (ii) Borrower or Subsidiary, as the case may be, has
established proper reserves (to the extent required by GAAP) and (iii) no lien
other than a Permitted Lien results.
6.6 Insurance.
(1) Borrower, at its expense, shall keep the Collateral insured
against loss or damage by fire, theft, explosion, sprinklers, and all
other hazards and risks, and in such amounts, as ordinarily insured
against by other owners in similar businesses conducted in the locations
where Borrower's business is conducted on the date hereof. Borrower shall
also maintain insurance relating to Borrower's ownership and use of the
Collateral in amounts and of a type that are customary to businesses
similar to Borrower's.
(2) All such policies of insurance shall be in such form, with such
companies, and in such amounts as are reasonably satisfactory to Bank. All
such policies of property insurance shall contain a lender's loss payable
endorsement, in a form satisfactory to Bank, showing Bank as an additional
loss payee thereof and all liability insurance policies shall show the
Bank as an additional insured, and shall specify that the insurer must
give at least twenty (20) days notice to Bank before canceling its policy
for any reason. At Bank's request, Borrower shall deliver to Bank
certified copies of such policies of insurance and evidence of the
payments of all premiums therefor. All proceeds payable under any such
policy shall, at the option of Bank, be payable to Bank to be applied on
account of the Obligations.
- ----------
[****] Confidential treatment has been requested for this portion pursuant to
Rule 24b-2 promulgated under the Securities Exchange Act of 1934, as amended.
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6.7 Principal Depository. Borrower shall maintain an operating account
with Bank, and shall maintain, at all times, a balance of [****] in a depositary
account at the Bank
6.8 Quick Ratio. Borrower shall maintain, as of the last day of each
quarter, a ratio of Quick Assets to Current Liabilities less the current portion
of deferred revenue of at least [****].
6.9 Billable Service Revenue. Borrower shall satisfy, as of the last day
of each quarter, [****]
6.10 Further Assurances. At any time and from time to time Borrower shall
execute and deliver such further instruments and take such further action as may
reasonably be requested by Bank to effect the purposes of this Agreement.
7. NEGATIVE COVENANTS
Borrower covenants and agrees that, so long as any Credit Extension
hereunder shall be available and until payment in full of the outstanding
Obligations or for so long as Bank may have any commitment to make any Advances,
Borrower will not do any of the following:
7.1 Dispositions. Convey, sell, lease, transfer or otherwise dispose of
(collectively, a "Transfer") all or any part of its business or property, other
than Transfers: (i) of inventory in the ordinary course of business, (ii) of
non-exclusive licenses and similar arrangements for the use of the property of
Borrower or its Subsidiaries in the ordinary course of business; (iii) that
constitute payment of normal and usual operating expenses in the ordinary course
of business; (iv) of worn-out or obsolete Equipment, or (v) of property to a
Subsidiary, up to the amount of $5,000,000.00, inclusive of any Permitted
Investments pursuant to clause (c) of the definition of Permitted Investments.
7.2 Changes in Business, Ownership, or Management, Business Locations.
Engage in any business, or permit any of its Subsidiaries to engage in any
business, other than the businesses currently engaged in by Borrower and any
business substantially similar or related thereto (or incidental thereto).
Borrower will not, without at least thirty (30) days prior written notification
to Bank, relocate its chief executive office or, without at least five (5) days
prior written notification, add any new offices or business locations.
7.3 Mergers or Acquisitions. Merge or consolidate, or permit any of its
Subsidiaries to merge or consolidate, with or into any other business
organization, or acquire, or permit any of its Subsidiaries to acquire, all or
substantially all of the capital stock or property of another Person ( without
the prior written consent of the Bank, which will not be unreasonably withheld
or delayed) unless: (i) there is no Event of Default hereunder, and (ii) that
such merger, consolidation or acquisition will not result, on a prospective
basis, in the breach of any of the covenants, terms and conditions hereunder,
and (iii) that such merger, consolidation or acquisition does not result in the
reduction of the Net Worth of the Borrower and its Subsidiaries on a
consolidated basis, of more than twenty-five percent (25.0%), and (iv) the cash
expenditures by the Borrower and its Subsidiaries for all such transactions will
be a maximum aggregate amount of [****] (inclusive of any indebtedness of the
acquired company assumed by the Borrower in connection with the transaction),
and (v) the Borrower (or Subsidiary as applicable in the event the Borrower is
not a party to such merger, consolidation, or acquisition) is the surviving
legal entity, and (vi) the Borrower's management does not change in any material
way.
- ----------
[****] Confidential treatment has been requested for this portion pursuant to
Rule 24b-2 promulgated under the Securities Exchange Act of 1934, as amended.
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7.4 Indebtedness. Create, incur, assume or be or remain liable with
respect to any Indebtedness, or permit any Subsidiary so to do, other than
Permitted Indebtedness.
7.5 Encumbrances. Create, incur, assume or suffer to exist any Lien with
respect to any of its property, or assign or otherwise convey any right to
receive income, including the sale of any Accounts, or permit any of its
Subsidiaries so to do, except for Permitted Liens.
7.6 Distributions. Pay any dividends or make any other distribution or
payment on account of or in redemption, retirement or purchase of any capital
stock.
7.7 Investments. Directly or indirectly acquire or own, or make any
Investment in or to any Person, or permit any of its Subsidiaries so to do,
other than Permitted Investments.
7.8 Transactions with Affiliates. Directly or indirectly enter into or
permit to exist any material transaction with any Affiliate of Borrower except
for transactions that are in the ordinary course of Borrower's business, upon
fair and reasonable terms that are no less favorable to Borrower than would be
obtained in an arm's length transaction with a nonaffiliated Person.
7.9 Subordinated Debt. Make any payment in respect of any Subordinated
Debt, or permit any of its Subsidiaries to make any such payment, except in
compliance with the terms of such Subordinated Debt, or amend any provision
contained in any documentation relating to the Subordinated Debt without Bank's
prior written consent.
7.10 Compliance. Become an "investment company" or a company controlled by
an "investment company," within the meaning of the Investment Company Act of
1940, or become principally engaged in, or undertake as one of its important
activities, the business of extending credit for the purpose of purchasing or
carrying margin stock, or use the proceeds of any Advance for such purpose; fail
to meet the minimum funding requirements of ERISA; permit a Reportable Event or
Prohibited Transaction, as defined in ERISA, to occur; fail to comply with the
Federal Fair Labor Standards Act or violate any other law or regulation, which
violation could have a Material Adverse Effect or a material adverse effect on
the Collateral or the priority of Bank's Lien on the Collateral; or permit any
of its Subsidiaries to do any of the foregoing.
8. EVENTS OF DEFAULT
Any one or more of the following events shall constitute an Event of
Default by Borrower under this Agreement:
8.1 Payment Default. If Borrower fails to pay, within three (3) days of
when due, any of the Obligations. During the additional period the failure to
cure the default is not an Event of Default (but no Credit Extensions will be
made during the cure period).
8.2 Covenant Default. If Borrower does not perform any obligation in
Section 6 or violates any covenant in Article 7 or does not perform or observe
any other material term, condition or covenant in this Agreement, any Loan
Documents and as to any default under a term, condition or covenant that can be
cured, has not cured the default within 10 days after it occurs, or if the
default cannot be cured within 10
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days or cannot be cured after Borrower's attempts in the 10 day period, and the
default may be cured within a reasonable time, then Borrower has an additional
time, (of not more than 30 days) to attempt to cure the default. During the
additional period the failure to cure the default is not an Event of Default
(but no Credit Extensions will be made during the cure period).
8.3 Attachment. If any material portion of Borrower's assets is attached,
seized, subjected to a writ or distress warrant, or is levied upon, or comes
into the possession of any trustee, receiver or person acting in a similar
capacity and such attachment, seizure, writ or distress warrant or levy has not
been removed, discharged or rescinded within forty-five (45) days, or if
Borrower is enjoined, restrained, or in any way prevented by court order from
continuing to conduct all or any material part of its business affairs, or if a
judgment or other claim becomes a lien or encumbrance upon any material portion
of Borrower's assets, or if a notice of lien, levy, or assessment is filed of
record with respect to any of Borrower's assets by the United States Government,
or any department, agency, or instrumentality thereof, or by any state, county,
municipal, or governmental agency, and the same is not paid within forty-five
(45) days after Borrower receives notice thereof, provided that none of the
foregoing shall constitute an Event of Default where such action or event is
stayed or an adequate bond has been posted pending a good faith contest by
Borrower (provided that no Credit Extensions will be required to be made during
such cure period);
8.4 Insolvency. If Borrower becomes insolvent, or if an Insolvency
Proceeding is commenced by Borrower, or if an Insolvency Proceeding is commenced
against Borrower and is not dismissed or stayed within 30 days (provided that no
Advances will be made prior to the dismissal of such Insolvency Proceeding);
8.5 Other Agreements. If there is a default in any agreement to which
Borrower is a party with a third party or parties resulting in acceleration of
the maturity of any Indebtedness in an amount in excess of Two Million Dollars
($2,000,000);
8.6 Subordinated Debt. If Borrower makes any payment on account of
Subordinated Debt, except to the extent such payment is allowed under any
subordination agreement entered into with Bank;
8.7 Judgments. If a judgment or judgments, not covered by insurance, for
the payment of money in an amount, individually or in the aggregate, of at least
Two Million Dollars ($2,000,000) shall be rendered against Borrower and shall
remain unsatisfied and unstayed for a period of ninety (90) days (provided that
no Credit Extensions will be made prior to the satisfaction or stay of such
judgment); or
8.8 Misrepresentations. If any material misrepresentation or material
misstatement exists now or hereafter in any warranty or representation set forth
herein or in any certificate or writing delivered to Bank by Borrower or any
Person acting on Borrower's behalf pursuant to this Agreement or to induce Bank
to enter into this Agreement or any other Loan Document.
9. BANK'S RIGHTS AND REMEDIES
9.1 Rights and Remedies. Upon the occurrence and during the continuance of
an Event of Default, Bank may, at its election, without notice of its election
and without demand, do any one or more of the following, all of which are
authorized by Borrower:
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(1) Declare all Obligations immediately due and payable (provided
that upon the occurrence of an Event of Default described in Section 8.5
all Obligations shall become immediately due and payable without any
action by Bank);
(2) Cease advancing money or extending credit to or for the benefit
of Borrower under this Agreement or under any other agreement between
Borrower and Bank;
(3) Demand that Borrower (i) deposit cash with Bank in an amount
equal to the amount of any Letters of Credit remaining undrawn, as
collateral security for the repayment of any future drawings under such
Letters of Credit, and Borrower shall forthwith deposit and pay such
amounts, and (ii) pay in advance all Letters of Credit fees scheduled to
be paid or payable over the remaining term of the Letters of Credit;
(4) Settle or adjust disputes and claims directly with account
debtors for amounts, upon terms and in whatever order that Bank reasonably
considers advisable;
(5) Without notice to or demand upon Borrower, make such payments
and do such acts as Bank considers necessary or reasonable to protect its
security interest in the Collateral. Borrower agrees to assemble the
Collateral if Bank so requires, and to make the Collateral available to
Bank as Bank may designate. Borrower authorizes Bank to enter the premises
where the Collateral is located, to take and maintain possession of the
Collateral, or any part of it, and to pay, purchase, contest, or
compromise any encumbrance, charge, or lien which in Bank's determination
appears to be prior or superior to its security interest and to pay all
expenses incurred in connection therewith. With respect to any of
Borrower's premises, Borrower hereby grants Bank a license to enter such
premises and to occupy the same, without charge in order to exercise any
of Bank's rights or remedies provided herein, at law, in equity, or
otherwise;
(6) Without notice to Borrower set off and apply to the Obligations
any and all (i) balances and deposits of Borrower held by Bank, or (ii)
indebtedness at any time owing to or for the credit or the account of
Borrower held by Bank;
(7) Ship, reclaim, recover, store, finish, maintain, repair, prepare
for sale, advertise for sale, and sell (in the manner provided for herein)
the Collateral. Bank is hereby granted a non-exclusive, royalty-free
license or other right, solely pursuant to the provisions of this Section
9.1, to use, without charge, Borrower's labels, patents, copyrights, mask
works, rights of use of any name, trade secrets, trade names, trademarks,
service marks, and advertising matter, or any property of a similar
nature, as it pertains to the Collateral, in completing production of,
advertising for sale, and selling any Collateral and, in connection with
Bank's exercise of its rights under this Section 9.1, Borrower's rights
under all licenses and all franchise agreements shall inure to Bank's
benefit;
(8) Sell the Collateral at either a public or private sale, or both,
by way of one or more contracts or transactions, for cash or on terms, in
such manner and at such places (including Borrower's premises) as Bank
determines is commercially reasonable, and apply the proceeds thereof to
the Obligations in whatever manner or order it deems appropriate; and
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<PAGE>
(9) Bank may credit bid and purchase any Collateral at any public
sale, or at any private sale as permitted by law.
Any deficiency that exists after disposition of the Collateral as provided
above will be paid immediately by Borrower.
9.2 Power of Attorney. Effective only upon the occurrence and during the
continuance of an Event of Default, Borrower hereby irrevocably appoints Bank
(and any of Bank's designated officers, or employees) as Borrower's true and
lawful attorney to: (a) send requests for verification of Accounts or notify
account debtors of Bank's security interest in the Accounts; (b) endorse
Borrower's name on any checks or other forms of payment or security that may
come into Bank's possession; (c) sign Borrower's name on any invoice or bill of
lading relating to any Account, drafts against account debtors, schedules and
assignments of Accounts, verifications of Accounts, and notices to account
debtors; (d) make, settle, and adjust all claims under and decisions with
respect to Borrower's policies of insurance; (e) to file, one or more financing
statements relative to the Collateral without the signature of Borrower; and (f)
settle and adjust disputes and claims respecting the accounts directly with
account debtors, for amounts and upon terms which Bank determines to be
reasonable; provided Bank may exercise such power of attorney to sign the name
of Borrower on any of the documents described in Section 4.2 regardless of
whether an Event of Default has occurred. The appointment of Bank as Borrower's
attorney in fact, and each and every one of Bank's rights and powers, being
coupled with an interest, is irrevocable until all of the Obligations have been
fully repaid and performed and Bank's obligation to provide advances hereunder
is terminated.
9.3 Accounts Collection. Upon the occurrence and during the continuance of
an Event of Default, Bank may notify any Person owing funds to Borrower of
Bank's security interest in such funds and verify the amount of such Account.
Borrower shall collect all amounts owing to Borrower for Bank, receive in trust
all payments as Bank's trustee, and if requested or required by Bank,
immediately deliver such payments to Bank in their original form as received
from the account debtor, with proper endorsements for deposit.
9.4 Bank Expenses. If Borrower fails to pay any amounts or furnish any
required proof of payment due to third persons or entities, as required under
the terms of this Agreement, then Bank may do any or all of the following: (a)
make payment of the same or any part thereof; (b) set up such reserves under the
Committed Revolving Line as Bank reasonably deems necessary to protect Bank from
the exposure created by such failure; or (c) obtain and maintain insurance
policies of the type discussed in Section 6.6 of this Agreement, and take any
action with respect to such policies as Bank reasonably deems prudent. Any
amounts so paid or deposited by Bank shall constitute Bank Expenses, shall be
immediately due and payable, and shall bear interest at the then applicable rate
hereinabove provided, and shall be secured by the Collateral. Any payments made
by Bank shall not constitute an agreement by Bank to make similar payments in
the future or a waiver by Bank of any Event of Default under this Agreement.
9.5 Bank's Liability for Collateral. So long as Bank complies with
reasonable banking practices, (i) Bank shall not in any way or manner be liable
or responsible for: (a) the safekeeping of the Collateral; (b) any loss or
damage thereto occurring or arising in any manner or fashion from any cause; (c)
any diminution in the value thereof; or (d) any act or default of any carrier,
warehouseman, bailee, forwarding agency, or other person whomsoever, and (ii)
all risk of loss, damage or destruction of the Collateral shall be borne by
Borrower.
9.6 Remedies Cumulative. Bank's rights and remedies under this Agreement,
the Loan Documents, and all other agreements shall be cumulative. Bank shall
have all other rights and remedies not
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expressly set forth herein as provided under the Code, by law, or in equity. No
exercise by Bank of one right or remedy shall be deemed an election, and no
waiver by Bank of any Event of Default on Borrower's part shall be deemed a
continuing waiver. No delay by Bank shall constitute a waiver, election, or
acquiescence by it. No waiver by Bank shall be effective unless made in a
written document signed on behalf of Bank and then shall be effective only in
the specific instance and for the specific purpose for which it was given.
9.7 Demand; Protest. Borrower waives demand, protest, notice of protest,
notice of default or dishonor, notice of payment and nonpayment, notice of any
default, nonpayment at maturity, release, compromise, settlement, extension, or
renewal of accounts, documents, instruments, chattel paper, and guarantees at
any time held by Bank on which Borrower may in any way be liable.
10. NOTICES
Unless otherwise provided in this Agreement, all notices or demands by any
party relating to this Agreement or any other agreement entered into in
connection herewith shall be in writing and (except for financial statements and
other informational documents which may be sent by first-class mail, postage
prepaid) shall be personally delivered or sent by a recognized overnight
delivery service, by certified mail, postage prepaid, return receipt requested,
or by telefacsimile to Borrower or to Bank, as the case may be, at its addresses
set forth below:
If to Borrower Juno Online Services, Inc.
1540 Broadway
New York, New York 10036
Attn: Mr. Richard Eaton, Chief Financial Officer
FAX: (212) 597-9100
with a copy to: Juno Online Services, Inc.
1540 Broadway
New York, New York 10036
Attn: Richard Buchband, General Counsel
FAX: (212) 597-9100
If to Bank Silicon Valley Bank
40 William Street
Wellesley, Massachusetts 02481
Attn: Douglass W. Marshall, Vice President
FAX: (781) 431-9906
with a copy to: Riemer & Braunstein LLP
Three Center Plaza
Boston, Massachusetts 02108
Attn: David A. Ephraim, Esquire
FAX: (617) 723-6831
The parties hereto may change the address at which they are to receive
notices hereunder, by notice in writing in the foregoing manner given to the
other.
20
<PAGE>
11. CHOICE OF LAW AND VENUE; JURY WAIVER
The laws of the Commonwealth of Massachusetts shall apply to this
Agreement. BORROWER ACCEPTS FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES,
UNCONDITIONALLY, THE NON-EXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT OF
COMPETENT JURISDICTION IN THE COMMONWEALTH OF MASSACHUSETTS IN ANY ACTION, SUIT,
OR PROCEEDING OF ANY KIND, AGAINST IT WHICH ARISES OUT OF OR BY REASON OF THIS
AGREEMENT;
BORROWER AND BANK EACH HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY
TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE
LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING
CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR
STATUTORY CLAIMS. EACH PARTY RECOGNIZES AND AGREES THAT THE FOREGOING WAIVER
CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS AGREEMENT. EACH
PARTY REPRESENTS AND WARRANTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL
COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS
FOLLOWING CONSULTATION WITH LEGAL COUNSEL.
12. GENERAL PROVISIONS
12.1 Successors and Assigns. This Agreement shall bind and inure to the
benefit of the respective successors and permitted assigns of each of the
parties; provided, however, that neither this Agreement nor any rights hereunder
may be assigned by Borrower without Bank's prior written consent, which consent
may be granted or withheld in Bank's sole discretion. Bank shall have the right
without the consent of or notice to Borrower to sell, transfer, negotiate, or
grant participation in all or any part of, or any interest in, Bank's
obligations, rights and benefits hereunder.
21
<PAGE>
12.2 Indemnification. Borrower shall, indemnify, defend, protect and hold
harmless Bank and its officers, employees, and agents against: (a) all
obligations, demands, claims, and liabilities claimed or asserted by any other
party in connection with the transactions contemplated by the Loan Documents;
and (b) all losses or Bank Expenses in any way suffered, incurred, or paid by
Bank as a result of or in any way arising out of, following, or consequential to
transactions between Bank and Borrower whether under the Loan Documents, or
otherwise (including without limitation reasonable attorneys fees and expenses),
except for losses caused by Bank's gross negligence or willful misconduct.
12.3 Time of Essence. Time is of the essence for the performance of all
obligations set forth in this Agreement.
12.4 Severability of Provisions. Each provision of this Agreement shall be
severable from every other provision of this Agreement for the purpose of
determining the legal enforceability of any specific provision.
12.5 Amendments in Writing, Integration. This Agreement cannot be amended
or terminated except by a writing signed by Borrower and Bank. All prior
agreements, understandings, representations, warranties, and negotiations
between the parties hereto with respect to the subject matter of this Agreement,
if any, are merged into this Agreement and the Loan Documents.
12.6 Counterparts. This Agreement may be executed in any number of
counterparts and by different parties on separate counterparts, each of which,
when executed and delivered, shall be deemed to be an original, and all of
which, when taken together, shall constitute but one and the same Agreement.
12.7 Survival. All covenants, representations and warranties made in this
Agreement shall continue in full force and effect so long as any Obligations
remain outstanding. The obligations of Borrower to indemnify Bank with respect
to the expenses, damages, losses, costs and liabilities described in Section
12.2 shall survive until all applicable statute of limitations periods with
respect to actions that may be brought against Bank have run; provided that so
long as the obligations referred to in the first sentence of this Section 12.7
have been satisfied, and Bank has no commitment to make any Credit Extensions or
to make any other loans to Borrower, Bank shall release all security interests
granted hereunder and redeliver all Collateral held by it in accordance with
applicable law.
12.8 Confidentiality. In handling any confidential information Bank shall
exercise the same degree of care that it exercises with respect to its own
proprietary information of the same types to maintain the confidentiality of any
non-public information thereby received or received pursuant to this Agreement
except that disclosure of such information may be made (i) to the subsidiaries
or affiliates of Bank in connection with their present or prospective business
relations with Borrower, (ii) to prospective transferees or purchasers of any
interest in the Loans, provided that they have entered into a comparable
confidentiality agreement in favor of Borrower and have delivered a copy to
Borrower, (iii) as required by law, regulations, rule or order, subpoena,
judicial order or similar order, (iv) as may be required in connection with the
examination, audit or similar investigation of Bank, and (v) as Bank may deem
appropriate in connection with the exercise of any remedies hereunder.
Confidential information hereunder shall not include information that either:
(a) is in the public domain or in the knowledge or possession of Bank when
disclosed to Bank, or becomes part of the public domain after disclosure to Bank
through no fault of Bank; or (b) is disclosed to Bank by a third party, provided
Bank does not have actual knowledge that such third party is prohibited from
disclosing such information.
22
<PAGE>
12.9 Countersignature. This Agreement shall become effective only when it
shall have been executed by Borrower and Bank (provided, however, in no event
shall this Agreement become effective until signed by an officer of Bank in
California).
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as a sealed instrument under the laws of the Commonwealth of
Massachusetts as of the date first above written.
JUNO ONLINE SERVICES, INC.
By: /s/ Charles Ardai
-----------------
Title: President and Chief Executive Officer
By: /s/ Richard Buchband
--------------------
Title: Senior Vice President
SILICON VALLEY BANK, d/b/a SILICON VALLEY EAST
By: /s/ Douglas W. Marshall
-----------------------
Name: Douglas W. Marshall
Title: Vice President
SILICON VALLEY BANK
By: /s/ Michelle D. Giannini
------------------------
Name: Michelle D. Giannini
Title: Assistant Vice President
(Signed in Santa Clara County, California)
23
<PAGE>
EXHIBIT A
The Collateral shall consist of all right, title and interest of Borrower
in and to the following:
(1) All goods and equipment now owned or hereafter acquired,
including, without limitation, all machinery, fixtures, vehicles
(including motor vehicles and trailers), and any interest in any of the
foregoing, and all attachments, accessories, accessions, replacements,
substitutions, additions, and improvements to any of the foregoing,
wherever located;
(2) All inventory, now owned or hereafter acquired, including,
without limitation, all merchandise, raw materials, parts, supplies,
packing and shipping materials, work in process and finished products
including such inventory as is temporarily out of Borrower's custody or
possession or in transit and including any returns upon any accounts or
other proceeds, including insurance proceeds, resulting from the sale or
disposition of any of the foregoing and any documents of title
representing any of the above, and Borrower's Books relating to any of the
foregoing;
(3) All contract rights and general intangibles now owned or
hereafter acquired, including, without limitation, goodwill, leases,
license agreements, franchise agreements, blueprints, drawings, purchase
orders, customer lists, route lists, claims, literature, reports,
catalogs, income tax refunds, payments of insurance and rights to payment
of any kind, provided however that the Collateral shall not include,
except to the extent provided for in Section 9-318(4) of the Code, any
right arising under any contract or agreement but only to the extent that
such inclusion would violate such contract or agreement;
(4) All now existing and hereafter arising accounts, contract
rights, royalties, license rights and all other forms of obligations owing
to Borrower arising out of the sale or lease of goods, the licensing of
technology or the rendering of services by Borrower, whether or not earned
by performance, and any and all credit insurance, guaranties, and other
security therefor, as well as all merchandise returned to or reclaimed by
Borrower and Borrower's Books relating to any of the foregoing;
(5) All documents, cash, deposit accounts, securities, letters of
credit, certificates of deposit, instruments and chattel paper now owned
or hereafter acquired and Borrower's Books relating to the foregoing; and
(6) Any and all claims, rights and interests in any of the above and
all substitutions for, additions and accessions to and proceeds thereof.
Notwithstanding the foregoing, the Collateral shall not be deemed to include any
copyright rights, copyright applications, copyright registrations and like
protections in each work of authorship and derivative work thereof, whether
published or unpublished, now owned or hereafter acquired; any patents,
trademarks, servicemarks and applications therefor; any trade secret rights,
including any rights to unpatented inventions, know-how, operating manuals,
license rights and agreements and confidential information, now owned or
hereafter acquired; or any claims for damages by way of any past, present and
future infringement of any of the foregoing.
24
<PAGE>
EXHIBIT B
LOAN PAYMENT/ADVANCE TELEPHONE REQUEST FORM
DEADLINE FOR SAME DAY PROCESSING IS 3:00 P.M., E.S.T.
TO: CENTRAL CLIENT SERVICE DIVISION DATE: ______________________________
FAX#: (781) 431-0755 TIME: ______________________________
FROM: JUNO ONLINE SERVICES, INC.
--------------------------
BORROWER'S NAME
FROM:___________________________________________________________________________
AUTHORIZED SIGNER'S NAME
___________________________________________________________________________
AUTHORIZED SIGNATURE
PHONE:__________________________________________________________________________
FROM ACCOUNT #___________________________ TO ACCOUNT#___________________________
- --------------------------------------------------------------------------------
REQUESTED TRANSACTION TYPE REQUEST DOLLAR AMOUNT
-------------------------- ---------------------
PRINCIPAL INCREASE (ADVANCE) $
PRINCIPAL PAYMENT (ONLY) $
INTEREST PAYMENT (ONLY) $
PRINCIPAL AND INTEREST (PAYMENT) $
OTHER INSTRUCTIONS:
- --------------------------------------------------------------------------------
All representations and warranties of Borrower stated in the Loan and
Security Agreement are true, correct and complete in all material respects as of
the date of the telephone request for and Advance confirmed by this Advance
Request; provided, however, that those representations and warranties expressly
referring to another date shall be true, correct and complete in all material
respects as of such date.
- --------------------------------------------------------------------------------
BANK USE ONLY:
TELEPHONE REQUEST:
The following person is authorized to request the loan payment transfer/loan
advance on the advance designated account and is known to me.
_________________________
Authorized Requester
___________________________________
Authorized Signature (Bank)
Phone #____________________________
- --------------------------------------------------------------------------------
25
<PAGE>
EXHIBIT C
COMPLIANCE CERTIFICATE
TO: SILICON VALLEY BANK
FROM: JUNO ONLINE SERVICES, INC.
The undersigned authorized officer of JUNO ONLINE SERVICES, INC. certifies
that in accordance with the terms and conditions of the Loan and Security
Agreement between Borrower and Bank (the "Agreement"; terms defined therein
being used herein as therein defined), in each case on behalf of the Borrower in
his or her capacity as an officer of the Borrower and not in his or her capacity
as an individual, as follows: (i) Borrower is in complete compliance for the
period ending with all required covenants except as noted below and (ii) all
representations and warranties of Borrower stated in the Agreement are true and
correct in all material respects as of the date hereof. Attached herewith are
the required documents supporting the above certification. The Officer further
certifies that these are prepared in accordance with Generally Accepted
Accounting Principles (GAAP) and are consistently applied from one period to the
next except as explained in an accompanying letter or footnotes. The Officer
expressly acknowledges that no borrowings may be requested by the Borrower at
any time or date of determination that Borrower is not in compliance with any of
the terms of the Agreement, and that such compliance is determined not just at
the date this certificate is delivered.
Please indicate compliance status by circling Yes/No under "Complies"
column.
Reporting Covenant Required Complies
- ------------------ -------- --------
Quarterly financial statements Quarterly within 45 days Yes No
Annual (CPA Audited) FYE within 90 days Yes No
10Q and 10K Within 5 days after filing
with the SEC Yes No
Financial Covenant Required Actual Complies
- ------------------ -------- ------ --------
Maintain on a Quarterly Basis:
Deposits at Bank [****] $ Yes No
Minimum Quick Ratio [****] _____:1.0 Yes No
[****]
[****]
* See Loan and Security Agreement
Comments Regarding Exceptions:
=================================
BANK USE ONLY
=================================
Received By:____________________
Date:________________
Reviewed By:____________________
Compliance Status: Yes / No
=================================
Sincerely,
JUNO ONLINE SERVICES, INC.
_______________________ Date:_______________
SIGNATURE
_______________________
TITLE
- ----------
[****] Confidential treatment has been requested for this portion pursuant to
Rule 24b-2 promulgated under the Securities Exchange Act of 1934, as amended.
26
<PAGE>
EXHIBIT E
BORROWER'S FORECAST
[****]
- ----------
[****] Confidential treatment has been requested for this portion pursuant to
Rule 24b-2 promulgated under the Securities Exchange Act of 1934, as amended.
27
Exhibit 21.1
Subsidiaries of Juno Online Services, Inc.
Subsidiary Jurisdiction of Incorporation
---------- -----------------------------
Juno Online Services Development Private Limited India
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<FISCAL-YEAR-END> DEC-31-1999
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<TOTAL-REVENUES> 20,842
<CGS> 14,990
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<INCOME-PRETAX> (24,024)
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