<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(MARK ONE)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: MARCH 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____ TO _____
COMMISSION FILE NUMBER:
000-26009
---------
JUNO ONLINE SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3914547
- ------------------------------- -----------------------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
1540 BROADWAY, NEW YORK, NY 10036
---------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 597-9000
(FORMER NAME, FORMER ADDRESS, AND FORMER YEAR, IF CHANGED SINCE LAST REPORT:)
NOT APPLICABLE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-------- --------
As of April 30, 2000, there were 38,706,502 shares of the Registrant's common
stock outstanding.
<PAGE>
INDEX TO FORM 10-Q
FOR
JUNO ONLINE SERVICES, INC.
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PART I. FINANCIAL INFORMATION....................................................................... 3
Item 1. Condensed Consolidated Financial Statements (unaudited)................................ 3
Condensed Consolidated Balance Sheets - March 31, 2000 and
December 31, 1999..................................................................... 3
Condensed Consolidated Statements of Operations - Three months ended
March 31, 2000 and 1999............................................................... 4
Condensed Consolidated Statement of Stockholders' Equity - Three months ended
March 31, 2000........................................................................ 6
Condensed Consolidated Statements of Cash Flows - Three months ended
March 31, 2000 and 1999............................................................... 7
Notes to Condensed Consolidated Financial Statements...................................... 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................................ 10
PART II. OTHER INFORMATION........................................................................... 38
Item 1. Legal Proceedings......................................................................... 38
Item 5. Other Information ........................................................................ 38
Item 6. Exhibits and Report on Form 8-K........................................................... 39
Item 7. Signatures................................................................................ 40
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
JUNO ONLINE SERVICES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
--------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $ 128,818 $ 91,497
Accounts receivable, net of allowance for
doubtful accounts of $703 and $544 in
2000 and 1999, respectively..................... 9,909 6,370
Prepaid expenses and other current assets......... 13,288 15,437
--------- ---------
Total current assets............................ 152,015 113,304
Fixed assets, net................................... 6,822 5,684
Other assets........................................ 429 100
--------- ---------
Total assets.................................... $ 159,266 $ 119,088
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses............. $ 33,796 $ 29,800
Current portion of capital lease obligations...... 1,298 1,423
Deferred revenue.................................. 16,374 14,510
--------- ---------
Total current liabilities....................... 51,468 45,733
Capital lease obligation............................ 751 1,455
Deferred rent....................................... 228 252
Deferred revenue.................................... 495 --
Commitments and contingencies
Stockholders' equity:
Preferred stock--$0.01 par value: 5,000,000 shares
authorized none issued and outstanding.......... -- --
Common stock--$0.01 par value: 133,333,334 shares
authorized, 38,645,583 and 34,833,568 shares
issued and outstanding in 2000 and 1999,
respectively.................................... 386 348
Additional paid-in capital........................ 205,706 123,530
Unearned compensation............................. (657) (745)
Cumulative translation adjustment................. (1) (1)
Accumulated deficit............................... (99,110) (51,484)
--------- ---------
Total stockholders' equity...................... 106,324 71,648
--------- ---------
Total liabilities and stockholders' equity...... $ 159,266 $ 119,088
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
JUNO ONLINE SERVICES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
2000 1999
------- -------
<S> <C> <C>
Revenues:
Billable services............................. $ 16,736 $ 5,806
Advertising and transaction fees.............. 6,409 2,265
Direct product sales.......................... 902 1,649
--------- --------
Total revenues.............................. 24,047 9,720
--------- --------
Cost of revenues:
Billable services............................. 12,040 4,678
Advertising and transaction fees.............. 1,750 1,080
Direct product sales.......................... 856 1,424
--------- --------
Total cost of revenues...................... 14,646 7,182
--------- --------
Operating expenses:
Operations, free service...................... 6,144 1,846
Subscriber acquisition........................ 44,751 2,700
Sales and marketing........................... 3,615 2,312
Product and development....................... 2,463 1,854
General and administrative.................... 1,776 704
--------- --------
Total operating expenses.................... 58,749 9,416
--------- --------
Loss from operations........................ (49,348) (6,878)
Interest income, net............................ 1,722 111
--------- --------
Net loss.................................... $ (47,626) $ (6,767)
========= ========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
<PAGE>
JUNO ONLINE SERVICES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
(IN THOUSANDS, EXCEPT PER LIMITED PARTNERSHIP UNIT AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31, 1999
---------------------------------
Three Months Two Months One Month
Ended Ended Ended
March 31, February 28, March 31,
2000 1999 1999 Total
------------ ---------- ---------- -----
<S> <C> <C> <C> <C>
Net loss attributable to common stockholders........ $ (47,626) $ (4,350) $ (2,417) $ (6,767)
========== ========= ========= =========
Basic and diluted net loss per share................ $ (1.28) $ (11.14)
========== =========
Basic and diluted net loss per Class A limited
partnership unit.................................. $ (0.25)
=========
Weighted average number of:
Shares of common stock............................ 37,086 217
========== =========
Class A limited partnership units................. 17,684
=========
Pro forma basic and diluted net loss per share...... $ (0.32)
=========
Weighted average shares outstanding used in
pro forma basic and diluted per share
calculation....................................... 21,225
=========
</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 STOCKHOLDERS' EQUITY
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Common Stock Additional Cumulative
---------------- Paid-in Unearned Translation Accumulated
Shares Amount Capital Compensation Adjustment Deficit Total
------ ------ ---------- ------------ ----------- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1999 .......... 34,834 $ 348 $ 123,530 $ (745) $ (1) $ (51,484) $ 71,648
Issuance of common stock, net of
offering costs................... 3,600 36 81,044 -- -- -- 81,080
Issuance of common stock upon
exercise of stock options........ 147 1 445 -- -- -- 446
Issuance of common stock in
connection with employee
stock purchase plan.............. 65 1 714 -- -- -- 715
Forfeitures of unearned
compensation..................... -- -- (27) 27 -- -- --
Amortization of unearned
compensation..................... -- -- -- 61 -- -- 61
Net loss........................... -- -- -- -- -- (47,626) (47,626)
------ ------ --------- ------ ------ --------- ---------
Balance, March 31, 2000.............. 38,646 $ 386 $ 205,706 $ (657) $ (1) $ (99,110) $ 106,324
====== ====== ========= ====== ====== ========= =========
</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>
Three Months Ended March 31,
----------------------------
2000 1999
-------- -------
<S> <C> <C>
Cash flows from operating activities:
Net loss...................................................... $ (47,626) $ (6,767)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................... 748 567
Amoritzation of deferred rent............................... (19) (16)
Amortization of unearned compensation....................... 61 37
Changes in operating assets and liabilities:
Accounts receivable....................................... (3,539) (1,090)
Prepaid expenses and other current assets................. 2,149 (11,019)
Accounts payable and accrued expenses..................... 3,991 (1,285)
Deferred revenue.......................................... 2,359 3,326
---------- ----------
Net cash used in operating activities................... (41,876) (16,247)
---------- ----------
Cash flows from investing activities:
Purchases of fixed assets..................................... (1,886) (105)
Other assets.................................................. (329) (45)
---------- ----------
Net cash used in investing activities................... (2,215) (150)
---------- ----------
Cash flows from financing activities:
Payments on capital lease obligations......................... (829) (193)
Payments on senior note....................................... -- (317)
Net proceeds from issuance of redeemable convertible
preferred stock............................................. -- 61,800
Net proceeds from issuance of common stock.................... 81,080 --
Proceeds from issuance of common stock in connection with
employee stock purchase plan................................ 715 --
Proceeds from issuance of common stock upon exercise of
stock options............................................... 446 120
---------- ----------
Net cash provided by financing activities............... 81,412 61,410
---------- ----------
Net increase in cash and cash equivalents............... 37,321 45,013
Cash and cash equivalents, beginning of period.................. 91,497 8,152
---------- ----------
Cash and cash equivalents, end of period........................ $ 128,818 $ 53,165
========== ==========
Supplemental disclosure of cash flow information:
Cash paid for interest........................................ $ 20 $ 145
Supplemental disclosure of noncash investing and
financing activities:
Capital lease obligations incurred for network equipment...... $ -- $ 252
</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" or "Juno"). 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 condensed consolidated financial statements. All
significant intercompany transactions and balances have been eliminated in
consolidation. Operating results for the three months ended March 31, 2000 are
not necessarily indicative of the results that may be expected for the full year
ending December 31, 2000. For further information, refer to the consolidated
financial statements and notes thereto, which are included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1999 which was filed
with the Securities and Exchange Commission on February 15, 2000.
The Company is a provider of Web access and other Internet-related
services throughout the United States. The Company offers several levels of
service, ranging from basic dial-up Internet access--which is provided to the
end user for free--to high-speed broadband Internet access, currently available
in selected markets. Revenues are derived primarily from the subscription fees
charged for use of the Company's premium services, from the sale of advertising,
and from various types of electronic commerce.
The Company announced the expansion of its free basic service to
include full Internet access on December 20, 1999. Prior to the announcement,
the Company's free basic service provided only basic dial-up e-mail
functionality.
The Company has experienced operating losses since its inception. Such
losses are due, in part, to the Company's efforts to maximize the number of
subscribers to both its free basic service and its premium services and to its
development of computer systems and related infrastructure that could be rapidly
expanded to accommodate additional users. The Company expects that it will
continue to incur net losses as it expends substantial additional resources to
continue its subscriber acquisition activities in the second quarter of 2000 and
to cover the increased costs associated with the service expansion it announced
in December 1999. There can be no assurance that the Company will achieve or
sustain profitability or positive cash flow from its operations.
Juno Online Services, Inc. is the surviving entity of a statutory
merger with Juno Online Services, L.P. (the "Partnership"). On March 1, 1999,
the Partnership and Juno Online Services, Inc., entities under common control,
effected the statutory merger pursuant to which the Partnership 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 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.
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)
2. EARNINGS PER SHARE
Basic and diluted net loss per share for the three months ended March 31,
1999 is calculated separately for the periods prior and subsequent to the March
1999 statutory merger.
The pro forma information regarding net loss per share and weighted
average shares outstanding set forth below gives effect to the treatment of
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.
<TABLE>
<CAPTION>
Three Months
Ended
March 31, 1999
--------------
<S> <C>
Numerator:
Net loss................................................ $ (6,767)
============
Denominator:
Weighted average number of:
Shares of common stock................................ 74,746
Redeemable Convertible Preferred Stock treated
as shares of common stock:
Series B............................................ 3,466,228
Series A (Class A limited partnership units
prior to March 1, 1999)........................... 17,684,035
------------
Denominator for pro forma basic and diluted
net loss per share.................................. 21,225,009
------------
Pro forma basic and diluted net loss per share............ $ (0.32)
============
</TABLE>
3. FOLLOW-ON OFFERING
On February 8, 2000, the Company completed a follow-on offering of
3,600,000 shares of common stock at $24.00 per share. Net proceeds received by
the Company, after deducting offering costs, totaled $81,080.
9
<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 AS WELL AS OUR AUDITED CONSOLIDATED FINANCIAL STATEMENTS
AND NOTES THERETO, AND THE INFORMATION UNDER THE CAPTION "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS"
CONTAINED IN OUR ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 15, 2000. THIS
DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. JUNO'S ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE EXPRESSED
OR IMPLIED BY 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 Web access and other
Internet-related services to millions of computer users throughout the United
States. We provide several levels of service, ranging from basic dial-up
Internet access--provided to the end user for free--to high-speed broadband
Internet access, currently available in selected markets. Our revenues are
derived primarily from the fees we charge for the use of our premium services,
from the sale of advertising, and from various types of electronic commerce.
We launched our basic service in April 1996. Initially, this service
provided only basic dial-up e-mail services. In July 1998, we introduced our
first premium services, which offered features ranging from enhanced e-mail
services to full access to the World Wide Web, and for which we charged
subscription fees. In December 1999, we announced a major expansion of our
services:
o Our BASIC SERVICE now provides full Internet access for free in
addition to e-mail.
o JUNO WEB provides competitively priced premium Internet access,
supplementing the features of the basic service with free live
technical support and customer service, priority access to Juno's
network, several hundred additional local access numbers, and the
elimination of a persistent advertising and navigation banner that is
displayed to our basic service users at all times while they are
connected to the Web.
o JUNO EXPRESS is a broadband service that provides all the features of
Juno Web at speeds up to 21 times faster than an ordinary dial-up
Internet connection. Among other benefits, this enables users to
rapidly download high-bandwidth content such as video, music files,
and software. Juno Express is currently being provided in 22 markets
throughout the United States.
In December 1999, in connection with the expansion of our free basic
service, we upgraded all subscribers using our enhanced e-mail service, Juno
Gold, to Juno Web at no additional cost.
The provision of full Internet access for free has significantly increased
and is expected to continue to increase the costs associated with providing our
basic service. These costs are reflected in the Operations, free service line of
our statement of operations. In addition, we anticipate that we will continue to
incur significant subscriber acquisition expenses at least through the second
quarter of 2000 in order to fund subscriber growth in an attempt to gain market
share. We believe that the expansion of our free basic service, which includes
the
10
<PAGE>
introduction of a persistent advertising and navigation banner displayed at all
times while a user is connected to the Web, will continue to generate a
substantial amount of advertising inventory, representing a significant revenue
opportunity. Our long-term strategy contemplates that we will be able to
generate additional revenues from this banner sufficient to cover the increased
costs associated with our service expansion and the cost of our subscriber
acquisition efforts. In the near term, if our advertising and transaction fee
revenues continue to rise and our telecommunication rates continue to decline on
a per-subscriber basis, we expect that revenues associated with our free basic
service could exceed the sum of the expenses reported on our Operations, free
service line and the portion of our Cost of revenues line that is associated
with the free basic service, perhaps as early as the second half of this year.
We classify our revenues as follows:
(1) Billable services revenues, consisting of:
(a) subscription fees that we receive from subscribers to our premium
services;
(b) technical support fees received when subscribers to our free
basic service and subscribers automatically upgraded from Juno
Gold to Juno Web in December 1999 call a 900 number for live
assistance from a support technician and fees for other billable
services; and
(c) fees charged, at various times, for shipping and handling
associated with mailing disks upon request to prospective Juno
subscribers, and for short-term consulting engagements.
(2) Advertising and transaction fees, consisting of revenues earned from
advertisers and strategic marketing partners for displaying
advertisements to, and facilitating electronic commerce with, our
subscribers. These advertisements are displayed on the persistent
advertising and navigation banner displayed while users of our free
basic service are connected to the Web, within the main Juno software
while a Juno subscriber reads or writes e-mail and on Juno's portal
site.
(3) Direct product sales, consisting of revenues generated from the sale
of products directly by us to our subscribers and the associated
shipping and handling fees.
The introduction of our billable premium services significantly affected
the composition of our revenues. We launched our premium services on July 22,
1998, and as of March 31, 2000, we had approximately 661,000 premium service
subscribers. Since the launch of our billable premium services, billable
services revenues have increased, in absolute terms, on a quarterly basis.
We currently offer our billable premium services under a number of pricing
plans. The list price for Juno Web is a flat rate of $19.95 per month, but since
the launch of the service, we have offered a number of promotions, such as a
free month of service or a discounted rate for an initial or prepaid period, as
well as discounted flat-rate plans. The most common pricing plan for Juno Web,
and the one we currently promote most, is a flat fee of $9.95 per month. Juno
Express is currently being offered at $49.95 per month, and new subscribers
currently receive their installation and equipment for free after a rebate of
$198. Subscription revenues for our billable premium services accounted for
approximately 97.4% of billable services revenues during the three months ended
March 31, 2000.
Our strategy contemplates continued growth in the number of subscribers to
both our free basic service and our billable premium services during the second
quarter of 2000. In the second quarter, we will devote significant resources to
advertising and brand marketing designed to acquire new subscribers directly
into each of
11
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our service levels and to encourage migration of our free basic service
subscribers to our premium services. We currently expect that we will
significantly reduce the level of direct mail and other subscriber acquisition
activities, and therefore reduce subscriber acquisition expenditures, in the
second half of 2000 as compared with the first half of 2000. In addition to
direct marketing and advertising initiatives, we continually experiment with a
wide range of product offerings, promotional and pricing plans, and features of
our service as part of our overall subscriber acquisition and retention
strategy. Our strategy contemplates that revenues for billable premium services
are likely to remain the largest source of revenues for Juno in the immediate
future.
We face intense competition to acquire both free and 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 or renew agreements with distribution partners, necessitating price
reductions for our billable services, or necessitating increased spending in
areas such as marketing, telecommunications, and product development.
We are subject to industry trends that affect Internet access providers
generally, including seasonality and subscriber cancellations. We believe
Internet access providers typically incur higher expenses during the last and
first calendar quarters, corresponding to heavier usage during the fall and
winter, and experience relatively lighter usage and relatively fewer account
registrations during the summer. We believe subscriber acquisition also tends to
be most effective during the first and last calendar quarters of each year, and
we may take these types of seasonal effects into consideration in scheduling our
marketing activities. For example, we currently plan to send little or no direct
mail during the months of June, July and August 2000. The results of operations
of Internet access providers, including those of Juno, are significantly
affected by subscriber cancellations. The subscribers to our billable premium
services, or a continued increase in the rate of cancellations of those
services, would cause our business and financial results to suffer.
Additionally, our strategy contemplates continued increases in revenues
from advertising and transaction fees. We expect that strategic marketing
alliances will continue to account for a significant 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. We expect that revenues from direct product
sales will be significantly reduced, or possibly eliminated, due to our
strategic decision to focus increasingly on higher margin activities. Our
competitors for revenues from advertising and electronic commerce 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
necessitating advertising rate reductions and limiting our ability to enter into
or renew advertising agreements.
Our principal expenses consist of marketing, telecommunications, customer
service, and personnel and related costs. We have elected to obtain a number of
services principally from third party providers. These include
telecommunications services, customer service, and services related to the sale
of certain advertising inventory and the delivery of the associated
advertisements, and merchandising fulfillment for our direct product sales
activities.
We have incurred net losses of $195.6 million from our inception on June
30, 1995 through March 31, 2000. In addition, we have recorded cumulative
unearned compensation of $1.2 million, which represents the difference between
the exercise price and the deemed fair market value at the date of grant for
shares of common stock issuable upon the exercise of stock options. Of the total
unearned compensation amount, $61,000 and $416,000 was amortized for the three
months ended March 31, 2000 and the year ended December 31, 1999, respectively.
12
<PAGE>
The remaining unearned compensation amount is expected to be amortized over the
remaining vesting periods of the related options.
We have relied on sales of equity securities, totaling $299.8 million, and
borrowings to fund our operations. Included in this amount are $81.1 million of
net proceeds from our February 2000 follow-on offering of common stock, $77.3
million of net proceeds from our May 1999 initial public offering of common
stock and $61.9 million of net proceeds from our 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. The consolidated financial statements for 1999 included herein consist
of the accounts of both Juno Online Services, L.P. and Juno Online Services,
Inc. All significant intercompany accounts and transactions have been eliminated
in consolidation. Since we operated as a limited partnership prior to March 1,
1999, taxable losses incurred through that date have been allocated to the
partners for reporting on their respective income tax returns. Accordingly, as
of that date, we had no available net operating loss carryforwards available for
federal and state income tax purposes to offset future taxable income, if any.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
REVENUES
Total revenues increased $14.3 million, to $24.0 million for the three
months ended March 31, 2000 from $9.7 million for the three months ended March
31, 1999, an increase of 147%. 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 $10.9 million, to
$16.7 million for the three months ended March 31, 2000 from $5.8 million for
the three months ended March 31, 1999, an increase of 188%. This increase was
primarily due to a greater number of billable service subscribers in the three
months ended March 31, 2000, as compared with the much smaller number in the
year ago quarter. Our billable subscription services were introduced in July
1998. At March 31, 2000, there were approximately 661,000 billable service
subscribers as compared with approximately 207,000 billable service subscribers
at March 31, 1999.
ADVERTISING AND TRANSACTION FEES. Advertising and transaction fees
increased $4.1 million, to $6.4 million for the three months ended March 31,
2000 from $2.3 million for the three months ended March 31, 1999, an increase of
183%. This increase was primarily due to larger average deal sizes associated
with the shift in our emphasis towards strategic marketing alliances, and
revenue earned from an increase in traffic to our Web site, partially offset by
declines in the number of and the aggregate revenue generated from shorter term
ad sales contracts. We expect that advertising and transaction fees will
continue to grow in the future on an absolute basis and as a percentage of our
total revenue. Barter transactions accounted for 5.5% and less than 1% of
advertising and transaction fees for the three months ended March 31, 2000 and
1999, respectively.
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DIRECT PRODUCT SALES. Direct product sales decreased $0.7 million, to $0.9
million for the three months ended March 31, 2000 from $1.6 million for the
three months ended March 31, 1999, a decrease of 45.3%. This decline reflects
our strategic decision to narrow the range of our direct product sales
activities and the types of products offered to our subscribers. Instead, we
decided to concentrate on forming strategic marketing alliances and developing
other uses for our advertising inventory that we believe should generate
revenues with higher margins than direct product sales.
COST OF REVENUES
Total cost of revenues increased approximately $7.5 million, to $14.6
million for the three months ended March 31, 2000 from $7.2 million for the
three months ended March 31, 1999, an increase of 104%. This increase was
primarily due to increases in costs associated with billable services and in
advertising and transaction fees, partially offset by a decrease in costs
associated with direct product sales.
BILLABLE SERVICES. Cost of revenues related to billable services consists
primarily of the costs to provide billable premium services, including
telecommunications, customer service, operator-assisted technical support,
credit card fees, and personnel and related overhead costs. In addition, during
the three months ended March 31, 1999, cost of revenues related to billable
services included the costs of mailing disks upon request to prospective Juno
subscribers, who had to pay for delivery of the disks at that time.
Additionally, during the three months ended March 31, 1999, cost of revenues
related to billable services included personnel and related overhead costs
associated with our performance of a short-term consulting engagement.
Cost of revenues related to billable services increased approximately $7.4
million, to $12.0 million for the three months ended March 31, 2000 from $4.7
million for the three months ended March 31, 1999, an increase of 157%. This
increase was primarily due to the costs of providing our billable subscription
services to a substantially larger number of subscribers as compared with the
number of subscribers in the year-ago quarter. Costs related to the provision of
these billable subscription services, principally telecommunications, customer
service, and technical support expenses, accounted for 88.6% of the total costs
of revenues related to billable services during the three months ended March 31,
2000 and accounted for the majority of the increase. Cost of billable services
revenues as a percentage of billable services revenues improved to 71.9% for the
three months ended March 31, 2000 from 80.6% for the three months ended March
31, 1999. This improvement is primarily attributable to decreased customer
service costs per subscriber and declining average telecommunications rates,
partially offset by increased average hours of usage per subscriber.
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 these advertisements, and the costs associated with reporting
the results of ad campaigns to advertisers.
Cost of revenues for advertising and transaction fees increased $0.7
million, to $1.8 million for the three months ended March 31, 2000 from $1.1
million for the three months ended March 31, 1999, an increase of 62.0%. This
increase was due primarily to the impact of additional strategic marketing
alliances. Cost of revenues related to advertising and transaction fees as a
percentage of advertising and transaction fees improved to 27.3% for the three
months ended March 31, 2000 from 47.7% for the three months ended March 31,
1999. This improvement is primarily due to decreased telecommunications rates,
faster average connection speeds, larger average deal sizes over which to spread
production costs, and improvements in our production and distribution methods.
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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 approximately $0.6
million, to $0.9 million for the three months ended March 31, 2000 from $1.4
million for the three months ended March 31, 1999, a decrease of 39.9%. This
decrease corresponds to the decrease in merchandise sold. The cost of revenues
for direct product sales as a percentage of direct product sales revenues
increased to 94.9% for the three months ended March 31, 2000 from 86.4% for the
three months ended March 31, 1999. This increase 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 and additional promotional pricing in response
to increasing competition in the computer hardware retail market, which category
represents the majority of our merchandise sold.
OPERATING EXPENSES
OPERATIONS, FREE SERVICE. Operations, free service consists of the costs
associated with providing our free basic service which, for most users during
the three months ended March 31, 2000, included full Internet access rather than
just e-mail functionality. During the three months ended March 31, 1999, our
free basic service provided only e-mail functionality. Costs consist principally
of telecommunications costs, expenses associated with providing customer
service, depreciation of network equipment, and personnel and related overhead
costs.
Expenses associated with operations, free service increased $4.3 million,
to $6.1 million for the three months ended March 31, 2000 from $1.8 million for
the three months ended March 31, 1999, an increase of 233%. This increase was
primarily due to additional telecommunications costs incurred as a result of the
expansion of our free service to include full Internet access. We currently
expect average hours of connection time by our free service subscribers to
increase from approximately 2 to 3 hours per active free subscriber per month in
March 2000 to more than 7 hours per active free subscriber per month by the end
of 2000. The latter connection time is approximately half the connection time we
currently experience with subscribers to our billable premium services. We
believe that the expected increases in average connection times per active
subscriber will be partially offset by declining telecommunication rates.
However, there can be no assurance that telecommunication rates will decline to
the extent expected or that average connection times will rise within
expectations.
SUBSCRIBER ACQUISITION. Subscriber acquisition costs include all costs
incurred to acquire subscribers to either our free basic service or one of our
billable premium services. These costs include the cost of direct mail
campaigns, advertising through conventional and computer-based media,
telemarketing, the production of advertisements to be displayed over the Juno
services and transmission of such advertisements 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 $42.1 million, to $44.8 million for
the three months ended March 31, 2000 from $2.7 million for the three months
ended March 31, 1999. These increases are primarily due to costs related to
external marketing, including direct mail campaigns, television and radio
commercials, outdoor advertising and various other advertising activities, all
of which are largely discretionary. This increase also reflects inbound
telemarketing costs incurred in connection with subscriber acquisition and
retention activities. As a percentage of revenues, subscriber acquisition costs
increased to 186% in the three months ended March 31, 2000 from 27.8% in the
three months ended March 31, 1999. We expect subscriber acquisition costs to
decrease slightly in the second quarter of 2000 and more significantly in the
second half of the year.
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
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marketing. Also included are costs associated with trade advertising intended to
support our advertising sales effort, corporate branding activities unrelated to
subscriber acquisition, and public relations, as well as advertising production,
advertising transmission, customer service and fulfillment costs associated with
our direct product sales activities.
Sales and marketing costs increased $1.3 million, to $3.6 million for the
three months ended March 31, 2000 from $2.3 million for the three months ended
March 31, 1999, an increase of 56.4%. This increase is primarily due to
additional personnel and related costs and commissions. As a percentage of
revenues, sales and marketing costs improved to 15.0% in the three months ended
March 31, 2000 from 23.8% in the three months ended March 31, 1999. This
improvement was primarily due to an increase in revenues for the three months
ended March 31, 2000 as compared to the year ago quarter.
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, for periods prior to May 1999,
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. We hired substantially all of these individuals as employees in May 1999.
Product development costs increased $0.6 million, to $2.5 million for the
three months ended March 31, 2000 from $1.9 million for the three months ended
March 31, 1999, an increase of 32.8%. This increase is primarily due to
additional personnel and related costs in both our domestic and India offices,
partially offset by the lower costs associated with operating our India-based
research and development efforts as a majority-owned subsidiary rather than
obtaining these services on a contract basis. 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 $1.1 million, to $1.8 million
for the three months ended March 31, 2000 from $0.7 million for the three months
ended March 31, 1999, an increase of 152%. This increase is primarily due to
increased insurance costs for directors' and officers' liability insurance,
professional service fees and additional personnel and related overhead costs.
As a percentage of revenues, general and administrative costs were 7.4% for the
three months ended March 31, 2000 and 7.2% for the three months ended March 31,
1999. We expect that we will incur additional general and administrative
expenses as we hire additional personnel and incur additional costs related to
the growth of our business and our operation as a public company, including
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 to $1.7 million for
the three months ended March 31, 2000, from $111,000 for the three months ended
March 31, 1999. This increase is primarily due to interest income earned on
higher average cash balances in the three months ended March 31, 2000 resulting
from our initial public offering in May 1999 and our follow-on offering in
February 2000.
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QUARTERLY RESULTS OF OPERATIONS DATA
The following table sets forth selected subscriber data for each of the
five quarters ended March 31, 2000:
<TABLE>
<CAPTION>
Mar. 31, Dec. 31, Sept. 30, June 30, Mar. 31,
Selected Subscriber Data: 2000 1999 1999 1999 1999
- ------------------------ ------- -------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Total registered subscriber accounts as
of (1).............................. 9,430,000 8,137,000 7,613,000 7,175,000 6,817,000
Active subscriber accounts
in month ended (2)................. 3,053,000 2,394,000 2,326,000 2,311,000 2,464,000
Active Web-enabled
subscribers in month ended (3)..... 2,358,000 771,000 268,000 160,000 121,000
Billable service accounts
as of (4).......................... 661,000 550,000 400,000 270,000 207,000
</TABLE>
- ------------------------------------------
(1) Includes all subscriber accounts created since Juno's inception, computed
after deduction of any accounts that have since been cancelled, but
regardless of current activity, if any.
(2) Encompasses all registered subscriber accounts that connected at least once
during the month, together with all subscribers to a billable service.
(Prior to this quarter, we reported the number of accounts that connected
at least once during a given period, without regard to whether such
accounts were free or billable. Application of this earlier reporting
convention to the months ended December 31, 1999 and March 31, 2000 would
have yielded active subscriber totals approximately 2.0% and 2.5% lower,
respectively, than those shown above.)
(3) Refers to the subset of active subscriber accounts that have been centrally
provisioned for, and provided with the client-side software necessary to
access, not only e-mail, but also the World Wide Web, regardless of the
extent, if any, to which such subscribers have actually used the Web.
(4) Represents the subset of active subscriber accounts that carry a charge for
premium functionality.
LIQUIDITY AND CAPITAL RESOURCES
Since our formation, we have financed our operations from funds generated
by the sale of equity securities and borrowings. Sales of equity securities
include $81.1 million of net proceeds from our February 2000 follow-on offering
of common stock, $77.3 million of net proceeds from our May 1999 initial public
offering of common stock and $61.9 million of net proceeds from our 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 $195.6 million through
March 31, 2000. As of March 31, 2000 we had $128.8 million in cash and cash
equivalents.
Net cash used in operating activities for the three months ended March 31,
2000, was $41.9 million, compared with $16.2 million for the three months ended
March 31, 1999. Cash used in operating activities during the three months ended
March 31, 2000 increased by $25.6 million as compared to the three months ended
March 31, 1999. This increase was primarily the result of additional subscriber
acquisition expenses, which comprised the significant portion of the overall
increase in the net loss, partially offset by changes in other
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working capital accounts. During 1999, we prepaid $10.0 million of advertising
costs, which are available to be used at any time prior to March 2001. At March
31, 2000, $6.5 million of the prepaid advertising remained unused.
Net cash used in investing activities was $2.2 million and $0.2 million
for the three months ended March 31, 2000, and 1999, respectively. The principal
use of cash for the periods presented was for the purchase of fixed assets.
Net cash provided by financing activities was $81.4 million and $61.4
million for the three months ended March 31, 2000 and 1999, respectively.
Financing activities for the three months ended March 31, 2000 primarily
included $81.1 million in net proceeds we received from our February 2000
follow-on offering of common stock. Financing activities for the three months
ended March 31, 1999 primarily included $61.8 million of net proceeds received
from our March 1999 private placement.
In July 1999, we entered into a credit facility with a bank that provides
for borrowings up to $10.0 million. Borrowings can be in the form of advances or
standby letters of credit. The facility expires in July 2000. The facility is
collateralized by substantially all of Juno's assets. It is not collateralized
by assets established pursuant to capital leases. Advances outstanding under the
facility bear interest at the bank's prime rate, 9.00% at March 31, 2000. Under
the terms of the facility, Juno is required to maintain certain quarterly
financial and operational ratios and to obtain bank approval for certain mergers
or acquisitions and fixed asset financing. As of the date of this report, there
were no amounts outstanding under the facility.
We do not currently have any material commitments for capital expenditures
outside of the normal course of business and recent historical trends. However,
we may increase our capital expenditures and lease commitments beyond recent
historical trends to expand our infrastructure to the extent that we anticipate
growth of our subscriber base. We may also take advantage of opportunities to
employ various cost-effective but capital-intensive approaches to the provision
of our Internet services. As a result of our outsourcing arrangements for
telecommunications services and customer service, we have substantially reduced
the level of capital expenditures that would otherwise have been necessary to
develop our product offerings. In the event that these outsourcing arrangements
were no longer available to us, significant capital expenditures would be
required and our business and financial results could suffer. The expansion of
our free basic service to include Web access may continue to significantly
increase the telecommunications costs that we incur, to the extent that Web
usage per subscriber or number of active subscribers continues to grow. We
expect subscriber acquisition costs to decrease slightly in the second quarter
of 2000 and more significantly in the second half of 2000. However, we believe
subscriber acquisition expenses are likely to be significant in the long term in
order to fund subscriber growth and help us gain market share. Expenditures
associated with the purchase of telecommunications capacity are expected to
continue to represent a material use of our cash resources. Subscriber
acquisition expenditures, to the extent we undertake these activities, would
also represent a material use of our cash resources.
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. One of
the ways we manage cash flow is by adjusting our discretionary expenditures.
Subscriber acquisition costs represent our primary discretionary expenditure and
can be adjusted in response to such factors as seasonal variations in the
cost-effectiveness of direct mail advertising, the availability of funding, and
overall market conditions. Evaluating our loss before subscriber acquisition
expenses, while not a measurement of financial performance under generally
accepted accounting principles, can be a useful way to understand the effect
that adjustments to discretionary costs might have on our cash flow. During
the three months ended March 31, 2000, loss before subscriber acquisition
expenses was $2.9 million, as compared to $4.1 million during the three
months ended March 31, 1999. Overall net loss was $47.6 million during the
three months ended March 31, 2000. We currently expect subscriber acquisition
costs to decrease slightly in the
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second quarter of the year and more significantly in the second half of 2000. We
may also seek to sell additional equity or debt securities or to increase,
extend or supplement our existing credit facility. If additional funds are
raised by our issuing equity securities, stockholders may experience dilution of
their ownership interest and the newly issued securities may have rights
superior to those of the common stock. If additional funds are raised by our
issuing debt, we may be subject to limitations on our operations. There can be
no assurance that financing will be available in amounts or on terms acceptable
to us, if at all.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In March 2000, the Financial Accounting Standards Board, issued interpretive
guidance on several implementation issues related to Accounting Principles Board
Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES ("APB 25"). Among the
issues addressed in the interpretation are the definition of "employee" for
purposes of applying APB 25, and the accounting for options that have been
repriced. The interpretation will generally be effective beginning July 1, 2000.
However, as it relates to repricings and the definition of an employee, the
effective date is December 15, 1998, to be applied prospectively as of July 1,
2000. The implementation of the interpretive guidance is not expected to have a
significant impact on Juno's consolidated financial position, results of
operations and cash flows.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
BECAUSE WE HAVE OFFERED OUR BILLABLE PREMIUM SERVICES FOR LESS THAN TWO YEARS
AND OUR FREE BASIC SERVICE IN ITS CURRENT FORM FOR LESS THAN TWO QUARTERS,
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 service to the public in its
original form in April 1996, first offered billable premium services to the
public in July 1998 and expanded our basic service to include free Internet
access in addition to e-mail in December 1999. 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 service and our
billable premium services;
o anticipate and adapt to the changing Internet market;
o generate advertising and electronic commerce revenues;
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 and the entry of new
competitors into our markets;
o develop and deploy successive versions of the Juno software;
o operate computer systems and related infrastructure adequate to
effectively manage our growth and provide our basic service and our
billable premium services;
o operate broadband Internet access services, whether independently or
in collaboration with one or more third parties;
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o manage the billing systems used to invoice subscribers to our
billable premium services; and
o attract, retain and motivate qualified personnel.
Our business and financial results will depend heavily on the commercial
acceptance and profitability of both our free basic and our billable premium
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, $55.8 for the year ended December 31, 1999 and $47.6 million
for the three months ended March 31, 2000. As of March 31, 2000, our accumulated
net losses totaled $195.6 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, $20.9 million for the year
ended December 31, 1998 and $45.1 million for the year ended December 31, 1999.
For the three months ended March 31, 2000, we used $41.9 million in cash for
working capital purposes and to fund losses from operations. At March 31, 2000,
$6.5 million remained prepaid for advertising that may be used at any time prior
to March 2001.
Since we operated as a limited partnership prior to the merger of Juno
Online Services, L.P. into Juno Online Services, Inc. in March 1999, taxable
losses incurred prior to the merger were allocated to the partners of Juno
Online Services, L.P. for reporting on their income tax returns. As a result, we
will not be able to offset future taxable income, if any, against losses
incurred prior to the merger.
We expect operating losses and negative cash flows to continue for the
foreseeable future as we continue to incur significant expenses. We cannot
assure you that we will ever be successful in implementing our business
strategies or in addressing the risks and uncertainties facing our company. Even
if we do address these risks successfully, we may not be profitable in the
future. Were we to achieve profitability, we cannot assure you that we would be
able to sustain or increase profitability on a quarterly or annual basis in the
future.
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;
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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 electronic
commerce;
o changes in operating expenses including, in particular,
telecommunications expenses and the cost of providing various types
of technical and non-technical customer support to our subscribers;
and
o economic conditions specific to the Internet as well as general
economic and market conditions.
Since we expect to be heavily dependent on revenues from our billable
premium services in the foreseeable future, our revenues are likely to be
particularly affected by our ability to recruit new subscribers directly to our
billable premium services, upgrade users of our free basic service to our
billable premium services, and retain subscribers to our billable premium
services. In addition, our operating expenses are based on our expectations of
our future revenues and are relatively fixed in the short term, except for
subscriber acquisition expenses which are, for the most part, discretionary. 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 above 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.
THE EXPANSION OF OUR FREE BASIC SERVICE TO INCLUDE FULL WEB ACCESS INCREASES OUR
TELECOMMUNICATIONS COSTS AND EXPOSES US TO ADDITIONAL BUSINESS RISKS
In December 1999, we announced the expansion of our free basic service to
include full Internet access, including access to the World Wide Web. We face
numerous costs, risks, and uncertainties associated with this expansion,
including the following:
o SIGNIFICANT INCREASES IN OUR TELECOMMUNICATIONS COSTS. When using
e-mail, subscribers need to be connected to our central computers for
the relatively short period of time required to send e-mail they have
written or download e-mail that has been sent to them. When using the
Web, a subscriber must remain continuously connected to the Internet
for the entire duration of a Web session. The expansion of our free
basic service to include Web access has increased and is expected to
increase the amount of time that users spend connected, and
correspondingly to increase our telecommunications costs both on an
absolute and a per-subscriber basis. The expansion of the service may
also continue to attract a significant number of new subscribers to
our free basic service, further increasing our telecommunications
costs on an absolute basis. Our telecommunications costs represent
one of the most significant expenses of providing our free basic
service. We cannot assure you that we will be able to
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achieve reductions in our per-subscriber telecommunications costs,
and if we are unable to achieve such reductions, our business and
financial results will suffer.
o OUR PAYING SUBSCRIBERS MAY CANCEL THEIR BILLABLE SERVICE
SUBSCRIPTIONS AND SWITCH TO THE EXPANDED FREE SERVICE. Now that users
of our basic service can access the Web for free, it is likely that
some, and possibly many, Juno Web subscribers will cancel their
billable service subscriptions and switch to the free basic service.
If the number of Juno Web subscribers who switch to the free basic
service is significant, our business and financial results may
suffer.
o USERS OF OUR EXPANDED FREE BASIC SERVICE MAY REACT NEGATIVELY TO THE
PERSISTENT ADVERTISING BANNER DISPLAYED WHILE THEY USE THE WEB. Users
of our expanded free basic service are required to view a prominent
advertising and navigation banner at all times while they are
connected to the Web. Some users, particularly those using
low-resolution computer monitors to view the Web, may consider this
banner to be intrusive to an extent that interferes with their use of
the service. Some competitors have introduced free Internet access
services that do not require the user to view an additional
advertising banner. If these competitive services become popular, or
if additional competitors introduce free Internet access services
that do not require the user to view a persistent advertising banner,
then our ability to retain users of our free basic service or our
ability to derive revenue by displaying advertisements to such users
may be harmed.
o REVENUES GENERATED FROM THE SALE OF ADDITIONAL ADVERTISING INVENTORY
CREATED BY THE EXPANSION OF OUR FREE BASIC SERVICE MAY BE
INSUFFICIENT TO COVER OUR INCREASED COSTS. The expansion of our free
basic service may make us more dependent on advertising as a source
of revenue in the future. The addition of a persistent advertising
banner displayed to users of our expanded basic service when they use
the Web has created a significant amount of additional advertising
inventory, and we have engaged a third party, 24/7 Media, to bear
primary responsibility for the sales of this inventory in return for
a commission. However, there can be no assurance that we will be able
to generate significant revenues after commissions from the sale of
this new advertising inventory, or that any portion of it that we,
24/7 Media, or any other agent that we might engage in the future,
are able to sell will be sold at favorable rates. If we are unable to
sell this inventory or to do so at favorable rates, our business and
financial results may suffer.
OUR BUSINESS MAY SUFFER IF WE HAVE DIFFICULTY ACQUIRING SUBSCRIBERS TO OUR
SERVICES
We may not succeed in acquiring a sufficiently large subscriber base for
our free basic service and our billable premium services, or in persuading a
significant number of our free basic subscribers to upgrade to our premium
services.
To acquire new subscribers, 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 service
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will decide over time to upgrade to our premium services. We are relying on this
migration as a major source of subscribers to our billable premium services and,
since July 1998, we have conducted advertising to our free basic service
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 premium services,
as well as to attract new users to our free basic service. There can be no
assurance that our capital resources will be sufficient to allow us to undertake
such, if any, marketing and promotional efforts. If our marketing techniques
fail to generate the anticipated conversion rate from free to billable premium
services, if the acquisition cost for subscribers acquired directly into our
billable premium services is greater than expected, if our available capital
resources are not sufficient to allow us to continue our marketing campaigns, 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 SERVICES 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 premium services choose to cancel the service. In
addition, each month a significant number of subscribers to our free basic
service become inactive. In the past, we have experienced lengthy periods in
which the total number of subscribers using our services in a given month
remained relatively static despite our addition of a substantial number of new
users to our services. We may experience similar patterns in the future. We
believe that intense competition has caused, and may continue to cause, some of
our subscribers to switch to other services. It is easy for Internet users to
switch to competing providers and we cannot be certain that any steps we take
will maintain or improve subscriber retention. In addition, new subscribers may
decide to use our services out of curiosity regarding the Internet, or to take
advantage of free or low-cost introductory offers for our billable premium
services, and may later discontinue using our services. Furthermore, we may in
the future charge a fee for our basic 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 or restrictions, we may lose a significant number of our basic
service subscribers. If we are unable to retain subscribers to both our basic
service and our billable premium services, or if we experience an increase in
the rate of cancellations by subscribers to our billable premium services, our
business and financial results may suffer.
SOME USERS OF OUR FREE BASIC SERVICE MAY BE UNABLE TO ACCESS THE WEB
In order to obtain access to the Web, users of our free basic service must
be equipped with the latest version of our software, version 4.0, as well as a
recent version of Microsoft Internet Explorer, the Web browsing software that
our free basic service requires. At April 30, 2000, approximately 29% of active
users of our free basic service users currently use versions of our software
older than version 4.0. Although we plan to upgrade such users' software to
version 4.0 automatically by downloading the newer version to their computer
during one of their connections, technical constraints prevent us from
completing automatic upgrades for users of the oldest versions of our software.
Instead, these users must choose to install the current version of our software
and, in some cases, need to be sent a copy of the software by mail before they
can complete this process. Approximately 4% of our free basic service users
currently use a version of the Microsoft Windows operating system older than
Windows 95, and cannot upgrade to version 4.0 of the Juno software unless they
upgrade to a more current version of Windows. There is a risk that some portion
of our basic service user base will never upgrade to version 4.0 of the Juno
software and will be unable to access the Web through our free basic service.
If a significant percentage of our basic service users do not begin using
the Web, our ability to display Web-related advertisements and generate
associated revenues may be harmed.
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OUR MARKETING PROGRAM MAY NOT SUCCEED IN GENERATING NEW SUBSCRIBERS OR IN
PERSUADING SUBSCRIBERS TO UPGRADE TO OUR PREMIUM SERVICES
We continue to incur significant costs related to the implementation of an
extensive marketing campaign. This campaign is directed at encouraging users to
sign up directly for either our free basic service or our billable premium
services and persuading users of our free basic service to upgrade to our
billable premium services. This marketing campaign 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 or that our available capital resources
will not be sufficient to enable us to continue this campaign. In addition, it
is possible that, over time, it will become more difficult and expensive to
effectively market our premium services to users of our free basic service and
that the rate at which users of the free basic service upgrade to our billable
premium services will decline. Although many of our competitors have engaged in
significant advertising campaigns for their services, we cannot predict the
timing, the type, or the extent of future advertising activities by our
competitors. Many of our competitors have greater financial resources than we do
and have undertaken significant advertising campaigns utilizing the same
advertising media that we use. It is possible that these campaigns will have an
adverse effect on our own marketing plans or expenses. If we incur significant
costs in implementing our marketing campaign without generating sufficient new
subscribers to our services, or if capital limitations prevent us from
implementing our marketing campaigns, our business and financial results will
suffer.
COMPETITION IN THE MARKETS FOR INTERNET SERVICES, INTERNET ADVERTISING AND
ELECTRONIC COMMERCE 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 electronic commerce are
also very competitive. Our ability to compete depends upon many factors, many of
which are outside of our control.
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 effective marketing to promote
brand awareness, 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. We expect competition to continue to
increase because the markets in which we operate face few substantial barriers
to entry. Competition may also intensify as a result of industry consolidation
and the ability of some of our competitors to bundle Internet services with
other products and services. Our current and potential competitors include many
large national companies that have substantially greater market presence and
financial, technical, distribution, marketing and other resources than we have.
This may allow them to devote greater resources than we can to the development,
promotion and distribution and sale of products and services. Additionally, our
competitors may be able to charge less for premium Internet services than we do
for our billable premium services, or offer services for free that we currently
provide only for a fee, which may put pressure on us to reduce or eliminate, or
prevent us from raising, the fees we charge for our billable premium services.
We may choose to lower or eliminate the fees we currently charge for our
billable premium services, or enhance the features available to users of our
free basic service, in order to remain competitive with other industry
participants. If we do so, our business and financial results may suffer.
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In recruiting subscribers for our 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 and
Prodigy, including a number of companies, such as 1stUp, NetZero and
Freei, that offer Web access for free;
o Numerous independent regional and local Internet service providers
that 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;
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; and
o Companies providing Internet access services using other broadband
technologies, including digital subscriber line technology, commonly
known as DSL, such as the Regional Bell Operating Companies and
various partners of Covad, Rhythms, and NorthPoint.
In addition, Microsoft and Netscape, publishers of the Web browsers
utilized by most Internet users, including Juno subscribers, each own or are
owned by online or Internet service providers that compete with Juno.
In addition to competition from the types of companies listed above, we
also face the risk that subscribers to our premium billable services will
migrate to our free basic service, which would result in a decrease in our
subscription revenues.
We do not currently compete internationally. If the ability to provide
Internet services internationally becomes a competitive advantage in our markets
and we do not begin to provide services internationally, we will be at a
competitive disadvantage.
WE RELY ON REVENUES FROM ADVERTISING AND ELECTRONIC COMMERCE
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.
We engage in electronic commerce activities by selling or facilitating the
sale of products and services directly to our subscribers. In doing so, we
compete with other Internet-based merchants 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.
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OUR COMPETITION IS LIKELY TO INCREASE IN THE FUTURE
Our competition has and is likely to continue 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. Other Internet service providers are likely to begin offering free
Internet access. Since our announcement of free Internet access in December
1999, a number of competitors have announced the introduction of services
similar to ours. The larger Internet service providers and online service
providers, including America Online, offer their subscribers a number of
services 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, some 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 or retailers of computer equipment in which the service provider
finances a rebate to consumers who sign up with the service provider for one or
more years. We have formed several such relationships, and have not found them
effective as a means of attracting new subscribers to our services. There can be
no assurance that any of the relationships we have formed will be successful as
a means of attracting new subscribers, that they will be economically favorable,
or that the terms of these relationships, or any strategic alliances we complete
in the future, will turn out to be as favorable as those achieved by our
competitors or favorable at all. Our competitors may be able to establish
strategic alliances or form joint ventures that put us at a serious competitive
disadvantage. Competition could require us to increase our spending for sales
and marketing as well as for subscriber acquisition in order to maintain our
position in the marketplace, and could also result in increased subscriber
attrition. Competition could also require us to lower the prices we charge for
our billable premium services, or eliminate such fees altogether, in order to
maintain our marketplace position. Any of these scenarios could harm our
business and financial results, and we may not have the resources to continue to
compete successfully.
WE ARE DEPENDENT ON STRATEGIC MARKETING ALLIANCES AS A SOURCE OF REVENUES AND
OUR BUSINESS COULD SUFFER IF ANY OF THESE ALLIANCES ARE TERMINATED
We have strategic marketing alliances with a number of third parties, and
most of our strategic marketing partners have the right to terminate their
agreements with us on short notice. 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 expect that
we will not be able to renew all 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
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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 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 analog modems currently used by most 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 other companies, the delivery of our Internet
services using broadband technology is subject to significant risks and
uncertainties, and we may be unable to adapt to the challenges posed by
broadband technologies.
We may also have to modify the means by which we deliver our Internet
services, in which case we would incur significant costs. If consumers adopt
alternative forms of Internet access that provide a continuous connection to the
Internet rather than relying on a series of separate dial-up connections, then
any competitive advantage that we currently realize because our technology
minimizes connect time may diminish. If other companies are able to prevent us
from delivering our Internet services through the wire, cable and wireless
connections that they own, if we are unable to adapt to the challenges posed by
broadband technologies or if we incur significant costs without generating
sufficient revenues, our business and financial results may suffer.
IF THE MARKET FOR BROADBAND ACCESS IN GENERAL, OR FOR JUNO EXPRESS IN
PARTICULAR, FAILS TO DEVELOP, OR IF OTHER BROADBAND TECHNOLOGIES PROVE MORE
POPULAR THAN DSL, OUR BUSINESS MAY BE HARMED
Juno Express, our premium billable service, delivers Internet access at
broadband speeds through the use of DSL technology. As the Juno Express service
is currently designed, before we can provide DSL-based service to a subscriber,
the subscriber's local telephone company must either install and configure an
additional copper telephone line at the subscriber's residence or reconfigure an
existing telephone line if a line that can be dedicated exclusively to the DSL
connection is available. Accordingly, consumers who wish to subscribe to Juno
Express currently must go through a complex installation process, for which we
are dependent on the performance of the local telephone company. We are also
currently dependent on the performance of a national supplier of DSL services,
Covad Communications, with whom we have chosen to partner for the delivery of
Juno Express. Covad is responsible for completing the installation process begun
by the local telephone company. Currently, a Covad technician must visit the
residence of each Juno Express subscriber to complete any necessary wiring and
to deliver and test DSL hardware. If our relationship with Covad is
unsuccessful, or if Juno and Covad are unable to coordinate the installation of
necessary telephone lines with local telephone companies, or if other factors
delay or otherwise hinder our ability to complete the roll-out of Juno Express
beyond the selected markets in which it is
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currently available, or if these or other factors affect our ability to
introduce or deliver broadband services in a timely and cost-effective fashion,
then our business and financial results may suffer.
The market for broadband services is in the early stages of development,
and we cannot assure you that DSL technology in particular or broadband services
in general will become popular with consumers. If alternate broadband delivery
technologies, such as cable or wireless technologies, become more popular with
consumers than DSL, we cannot assure you we will be able to gain access to such
alternate technologies at favorable rates or at all. Additionally, Juno Express
faces competition in the market for broadband services from many competitors
with significant financial resources, well-established brand names, and large
existing customer bases. Many local telephone companies are themselves in some
stage of test marketing or offering broadband services. In many markets, these
competitors already offer, or are expected to offer, broadband Internet access
at prices lower than we expect to be able to offer to potential customers for
Juno Express. If we are unable to provide competitive broadband services at
competitive rates, our business and financial results may suffer.
OUR BUSINESS MAY BE ADVERSELY AFFECTED IF THE MARKET FOR INTERNET ADVERTISING
FAILS TO DEVELOP
Our business and financial results are dependent on the use of the
Internet as an advertising medium. Internet-based advertising accounts for only
a small fraction of all advertising expenditures, and we cannot be sure that
Internet-based advertising will ever grow to account for a substantial
percentage of total advertising spending or when an increase might occur. Our
business may suffer if the market for Internet-based advertising fails to
develop or develops more slowly than expected. In addition, no standards have
been widely accepted to measure the effectiveness of Internet-based advertising.
If measurement standards do not develop, many advertisers may choose not to
advertise on the Internet. Different pricing models are used to sell
Internet-based advertising. Our revenues could suffer if we are unable to adapt
to new forms of, and new pricing models for, Internet-based advertising. It is
difficult to predict which, if any, forms of Internet-based advertising will
emerge as the industry standard. This makes it difficult to project our future
advertising rates and revenues. Moreover, "filter" software programs that limit
or prevent advertising from being delivered to an Internet user's computer are
available. Widespread adoption of this type of software could harm the
commercial viability of Internet-based advertising.
Sales of advertising space on our services represent an important revenue
source for us. Our expansion of our free basic service to include Web access may
increase our dependence on advertising revenues. 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. In addition, a substantial portion of our future advertising revenues
are expected to be derived from the sale of advertising to other Internet
companies, including companies that sell goods or services over the Web. As a
result, our advertising revenues may be susceptible to trends that affect other
Internet companies, and may be particularly dependent on whether other companies
within the Internet community have capital available to pursue advertising and
marketing campaigns that utilize our services.
We currently rely on our internal sales and marketing personnel for
generating sales leads and promoting our services to the advertising community.
We also rely on revenue arrangements under third party relationships in which
Juno receives revenue in return for the display of advertising sold by a third
party partner. These include relationships with 24/7 Media and LookSmart Ltd.
Under our agreement with 24/7 Media, we are entitled to a portion of the
revenues earned from their sale of advertising on the persistent advertising and
navigation banner that is displayed to users who access the Web using our
expanded basic service. Under our agreement with LookSmart, LookSmart provides
Internet search and directory features to our subscribers through the Juno
portal
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site, and we are entitled to receive payments based on the volume of Web pages
that are delivered to users of these features. Our relationship with LookSmart
replaces a prior relationship with Lycos in which Lycos provided similar
functionality to our users and we received a portion of revenue generated by
Lycos. Our agreement with Lycos terminated effective May 15, 2000.
We cannot be sure that our internal sales organization, 24/7 Media, 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, if 24/7 Media or other independent sales
organizations do not perform as we anticipate, our business and financial
results may suffer. We cannot be sure that our users will find the services
provided by LookSmart useful, or that they will utilize LookSmart's search and
directory features in a manner that generates significant revenue to Juno. If
usage of the LookSmart features is less than projected, or if technical or
integration issues delay the effective implementation of LookSmart's features,
then our business and financial results may suffer.
OUR ADVERTISING SYSTEM REQUIRES LABOR AND IMPOSES COSTS ON US BEYOND THOSE
ASSOCIATED WITH STANDARD WEB ADVERTISING
Some of the advertising inventory available on our services is
non-standard when compared to advertising on the Web and may put Juno at a
competitive disadvantage. Although the persistent advertising and navigation
banner shown to users of our free basic service when they access the Web
utilizes standard Web formatting, the significant advertising inventory
associated with the e-mail portion of our services employs non-standard
formatting. The advertisements displayed while a subscriber reads and writes
e-mail are created using proprietary tools that are not fully compatible with
standard Web advertising. Therefore, many 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
exclusively utilize standard Web advertising formats. Additionally, our use of a
proprietary advertising format could interfere with our packaging a significant
portion of 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 premium services are not currently required to provide this
data. Any of the above factors could discourage advertising on our network by
some advertisers.
SEASONAL TRENDS IN INTERNET USAGE AND ADVERTISING SALES MAY NEGATIVELY AFFECT
OUR BUSINESS
Seasonal trends are likely to affect the revenues we generate from
operating our Internet services. Subscribers typically use our Internet services
less during the summer months and year-end holiday periods. To the extent that
our revenues depend on the amount of usage by our subscribers, our revenues may
be lower during these periods. For example, some of the subscribers to Juno Web
pay us based on the number of hours they spend using our services in a given
month. In addition, the rate at which new subscribers sign up for our billable
premium services may be lower during the summer months and year-end holiday
periods.
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.
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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; Level 3; Concentric; Splitrock
Services; and Sprint. 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 March 31, 2000, we had contracted for the use of more than 2,800
local telephone numbers associated with points of presence throughout the United
States. Nevertheless, a significant minority of our subscriber base is unable to
access our services through a point of presence that is within their local
calling area. These users may be particularly reluctant to use the Web, either
through our free basic service or through Juno Web, due to the
telecommunications charges that they would incur during an extended connection
to the Web. The inability of some of our subscribers to access the Web with a
local call in some areas of the country could harm our business. We cannot be
sure if or when additional infrastructure developments by our telecommunications
providers will establish points of presence that cover these areas.
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 1,000 of the more than 2,800 points of
presence for which we contract in the United States, and which carry a
significant percentage of our traffic. Furthermore, MCI WorldCom has announced
that it will offer consumer Internet access, making it a direct competitor of
ours. Additionally, MCI WorldCom has announced that it will merge with Sprint
during 2000, subject to approval of their stockholders and the receipt of
regulatory approvals. This merger will further concentrate our reliance on MCI
WorldCom and the companies it controls. Our business could be significantly
harmed if we are unable to maintain a favorable relationship with MCI WorldCom.
We cannot assure you that we would be able to replace the services provided to
us by MCI WorldCom were our relationship with them to be terminated.
Our financial results are highly sensitive to variations in prices for the
telecommunications services described above. We cannot assure you that
telecommunications prices will decline, or that there will not be
telecommunications price increases due to factors beyond our control. We cannot
assure you that our telecommunications carriers will continue to provide us
access to their points of presence on our current or better
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price terms, that the price terms that they do offer us, if any, will be
sufficiently low to meet our needs, or that alternative services will be
available in the event that their quality of service declines or that our
relationship with any of our current carriers is terminated.
Most of the telecommunications services we purchase are provided to us
under short-term agreements that the providers can terminate or elect not to
renew. As a result, there is a significant risk that any or all of UUNET
Technologies, WorldCom Advanced Networks, Level 3, Concentric, Splitrock or
Sprint could end their relationship with us. In addition, each of our
telecommunications carriers provides network access to some of our competitors,
and could choose to grant those competitors preferential network access,
potentially limiting our members' ability to access the Internet or connect to
our central computers. Furthermore, the majority of our telecommunications
providers compete, or have announced an intention to compete, with us in the
market to provide consumer Internet access. If our telecommunications service
providers were to decrease the levels of service or access provided to us, or if
they were to terminate their relationships with us for competitive or other
reasons, our business and financial results would suffer.
WE MAY NOT BE ABLE TO OBTAIN FAVORABLE FIXED-PRICE TERMS FOR A SIGNIFICANT
PORTION OF OUR TELECOMMUNICATIONS NEEDS, AND THIS MAY AFFECT THE COST OF
PROVIDING OUR EXPANDED FREE BASIC SERVICE.
We currently purchase most of the telecommunications capacity we use from
our network providers on a variable-price basis. Under this variable pricing
model, we share points of presence with other Internet access providers and are
charged at a specified rate for every minute during which a Juno subscriber is
connected to one of our network providers' modems. In most cases, we have no
control over how many modems are available at any given time for our
subscribers' use or over the ratio of Juno subscribers to available modems.
We believe that purchasing telecommunications capacity on a per-modem basis
may enable us to lower our monthly per-subscriber telecommunications cost if we
maintain a higher ratio of subscribers to modems than is typical in the
industry, and that this may enable us to achieve economies in providing full
Internet access for both free and billable services. Under this fixed-price
model, we would contract for exclusive use of a certain number of modems and we
would be charged the same amount regardless of the amount of data actually
transmitted over the modems during a month.
To date, we have entered into only one agreement under which we purchase
telecommunications capacity on a per-modem basis, with a supplier operating in
only a limited number of geographic markets, and we have reached an agreement
with this supplier to reduce its obligation to provide and Juno's commitment to
purchase modem ports on a fixed-price basis. It is possible that only limited,
if any, additional modems may be available to us on fixed-price terms that are
more favorable than the usage-related terms we currently obtain. If we are
unsuccessful in securing favorable per-modem pricing from other suppliers, or if
our current supplier continues to be unable or unwilling to accommodate our
expansion, our business and financial results may 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, CANNOT
EXPAND TO MEET OUR NEEDS, OR IF THEY TERMINATE THEIR RELATIONSHIP WITH US
Our business and financial results depend, in part, on the availability of
live technical and customer service support, and of inbound telemarketing and
disk distribution services. Should our ability to provide these services be
hampered, our business may suffer. Although many Internet service providers have
developed internal customer service operations designed to meet these needs, we
have elected to outsource these functions to third-party vendors. We currently
use ClientLogic Corporation for technical and customer service support. As a
result, we maintain only a small number of internal customer service personnel.
We are not equipped to provide the
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necessary range of customer service and telemarketing services in the event that
either ClientLogic or other external providers become unable or unwilling to
offer these services to us.
At March 31, 2000, ClientLogic provided us with approximately 625
full-time or part-time employees at its facilities to service our account. We
believe the availability of call-in technical support and customer service is
especially important to acquire and retain subscribers to our billable premium
services, and we rely almost entirely on ClientLogic to provide this function.
At times, our subscribers have experienced lengthy waiting periods to reach
representatives trained to provide the technical or customer support they
require. The growth of our subscriber base has caused waiting periods for
technical and customer support to lengthen recently. Reducing these waiting
periods and accommodating potential future growth will require significantly
more support personnel than are currently available to us through ClientLogic.
Additionally, if we elect to offer customer service features that we do not
currently support, or to enhance the overall quality of our customer support for
competitive reasons, we will require even greater resources. As a result, we
expect that it may become necessary, in the near future, to identify
supplemental or replacement vendors for these services or to develop the
resources ourselves to deliver these services. Although we are currently
renegotiating the terms of our relationship with ClientLogic, our current
agreement converts to a month-to-month contract on August 1, 2000, providing
either party the right to terminate the relationship at any time upon one
month's notice. Prior to that date, ClientLogic can terminate the contract
without cause upon 90 days notice. In addition, ClientLogic may terminate the
contract upon 60 days notice if we do not reach agreement with ClientLogic with
regard to modifications ClientLogic proposes to the pricing terms of the
contract within 60 days of the modifications being proposed. If our relationship
with ClientLogic terminates and we are unable to enter into a comparable
arrangement with a replacement vendor, if ClientLogic is unable to provide
enough personnel to provide the quality and quantity of service we desire, if
system failures, outages or other technical problems make it difficult for our
subscribers to reach customer service representatives at ClientLogic, or if we
are required to obtain externally or develop internally additional or
replacement customer service and technical support capacity, our business and
financial results may suffer.
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.
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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.
IF OUR BUSINESS WERE TO GROW RAPIDLY, SUCH GROWTH COULD STRAIN OUR MANAGERIAL,
OPERATIONAL, FINANCIAL, AND INFORMATION SYSTEMS RESOURCES
If our subscriber base were to grow significantly, we would need to expand
our operations, placing a significant strain on our managerial, operational,
financial and information systems resources. If we were unable to manage such
growth effectively, our business and financial results would 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 our billable premium services, we will need to
expand our marketing efforts, promote the Juno brand, expand the computer
systems and related infrastructure we use to provide our Internet services, and
increase both our internal and outsourced customer service capabilities. We
expect that we will need to continually improve our financial and managerial
controls, billing systems, reporting systems and procedures, and we will also
need to continue to expand, train and manage our workforce. We had 65 employees
at December 31, 1996, 152 employees at December 31, 1997, 144 employees at
December 31, 1998 and 263 employees at December 31, 1999, including 60 employees
in India, and 291 employees at March 31, 2000, including 61 employees in India.
Prior to May 21, 1999, consultants used in India were employed by an affiliate
of Juno. We have significantly increased our reliance on outsourced support for
customer service, technical, and back-office functions. We expect the size of
our own workforce and our reliance on outsourced services will continue to
increase for the foreseeable future.
The demand on our network infrastructure, technical staff and technical
resources has grown rapidly as our subscriber base has expanded. We cannot be
certain that our infrastructure, technical staff and technical resources would
adequately accommodate or facilitate any future growth of our subscriber base
that we might experience. In particular, if we were to experience repeated 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
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providers in a manner similar to long distance telephone carriers and to impose
access fees on these providers and some developments suggest that they may be
successful in obtaining the treatment they seek. In addition, we operate our
services throughout the United States, and regulatory authorities at the state
level may seek to regulate aspects of our activities as telecommunications
services. As a result, we could become subject to FCC and state regulation as
Internet services and telecommunications services converge.
We remain subject to numerous additional laws and regulations that could
affect our business. Because of the Internet's popularity and increasing use,
new laws and regulations with respect to the Internet are becoming more
prevalent. These laws and regulations have covered, or may cover in the future,
issues such as:
o user privacy;
o pricing;
o intellectual property;
o federal, state and local taxation;
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 subscribers 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. In addition, the FTC is conducting an ongoing
investigation into the marketing practices of Internet-related companies,
including Juno. As part of the FTC's activities, we have been requested to
provide, and have provided, marketing-related and customer service-related
information to the FTC. Depending on the outcome of the FTC inquiry, we could be
required to modify our marketing or customer service practices in a way that
could negatively affect our business.
It may take years to determine how existing laws such as those governing
intellectual property, privacy, libel and taxation apply to the Internet. Any
new legislation or regulation regarding the Internet, or the application of
existing laws and regulations to the Internet, could harm us. Additionally,
while we do not currently operate outside of the United States, the
international regulatory environment relating to the Internet market could have
an adverse effect on our business, especially if we should expand
internationally.
The growth of the Internet, coupled with publicity regarding Internet
fraud, may also lead to the enactment of more stringent consumer protection
laws. For example, numerous bills have been presented to Congress and various
state legislatures designed to address the prevalence of unsolicited commercial
bulk e-mail on the Internet. These laws may impose additional burdens on our
business. The enactment of any additional laws or regulations in this area may
impede the growth of the Internet, which could decrease our potential revenues
or otherwise cause our business to suffer.
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 ability to grow, if any, will be harmed.
UNANTICIPATED DELAYS OR PROBLEMS IN THE INTRODUCTION OF NEW FEATURES OR SERVICES
MAY CAUSE CUSTOMER
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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 cause dissatisfaction on the part of
subscribers and advertisers. These costs, delays or dissatisfaction could
negatively affect our business.
WE ARE DEPENDENT ON THIRD-PARTY SOFTWARE TO ACCURATELY BILL SUBSCRIBERS TO OUR
BILLABLE PREMIUM SERVICES
The operation of our billable premium services requires the accurate
operation of billing system software as well as our development of policies
designed to reduce the incidence of credit card fraud and other forms of
uncollectable "chargebacks." If we encounter difficulty with the operation of
these systems, or if errors, defects or malfunctions occur in the operation of
these systems, this could result in erroneous overcharges to customers or in the
under-collection of revenue, either of which could hurt our business and
financial results.
OUR RELATIONSHIP WITH D. E. SHAW & CO., L.P. MAY PRESENT POTENTIAL CONFLICTS OF
INTEREST
The Chairman of our board of directors and our largest 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.
In the past, we have contracted with DESCO, L.P. to provide accounting,
tax, payroll, insurance, employee benefits and information technology services
to us, and we may obtain these or other services from DESCO, L.P. in the future.
At the current time, 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 this sublease were to be terminated.
In May 1999, we 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 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 EXERCISE SIGNIFICANT CONTROL OVER US
As of April 30, 2000, the executive officers, directors, and persons and
entities affiliated with executive
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officers or directors beneficially owned in the aggregate approximately 43.8% 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.
As of April 30, 2000, Dr. Shaw and persons or entities affiliated with him,
including DESCO, L.P., beneficially owned, in the aggregate, approximately 42.2%
of our outstanding common stock as of that date. As a result of this
concentration of ownership, Dr. Shaw is able to exercise significant influence
over matters requiring approval by our stockholders, including the election of
directors and approval of significant corporate transactions. This concentration
of ownership could also have the effect of delaying or preventing a change in
control of Juno.
IF WE FAIL TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY OR FACE A CLAIM OF
INTELLECTUAL PROPERTY INFRINGEMENT BY A THIRD PARTY, WE COULD LOSE OUR
INTELLECTUAL PROPERTY RIGHTS OR BE LIABLE FOR SIGNIFICANT DAMAGES
We have taken steps to protect our intellectual property rights, but we
cannot be certain that our efforts will be adequate to safeguard our rights to
technology we have developed. Disputes concerning the ownership or 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 the authentication and dynamic
scheduling of advertisements and other messages to be delivered to computer
users. We have also filed a number of other U.S. patent applications relating to
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 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.
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.
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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, and has become more pronounced recently. 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 may need to raise additional funds in the future to fund our
operations, to finance subscriber acquisition costs, to fund more aggressive
brand promotion, to enhance or expand the range of Internet services we offer or
to respond to competitive pressures 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 in
amounts or on acceptable terms, we may not be able to devote resources to
subscriber acquisition, successfully promote our brand, enhance or expand our
services, respond to competitive pressures or take advantage of opportunities,
and our business and financial results may suffer, or we could be forced to
cease our operations entirely. If additional funds are raised by our issuing
equity securities, stockholders may experience dilution of their ownership
interest and the newly issued securities may have rights superior to those of
the common stock. If additional funds are raised by our issuing debt, we may be
subject to limitations on our operations.
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. 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
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equity securities in the future at a price that we think is appropriate, or at
all.
OUR STOCK PRICE HAS EXPERIENCED, AND IS LIKELY TO CONTINUE TO EXPERIENCE,
EXTREME PRICE AND VOLUME FLUCTUATIONS
The market price of our common stock has fluctuated in the past and is
likely to continue to be highly volatile, with extreme price and volume
fluctuations. The Nasdaq National Market, where most publicly held Internet
companies are traded, has experienced substantial price and volume fluctuations.
We believe these fluctuations have sometimes been unrelated or disproportionate
to the operating performance of these companies. These broad market and industry
factors may harm the market price of our common stock, regardless of our actual
operating performance, and we could continue to 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 ordinary course of
business, including two currently pending lawsuits in which former employees of
Juno have asserted claims of sexual harassment and, in one of the cases,
wrongful termination, against us. We believe that these lawsuits are without
merit, and we intend to defend them vigorously. We do not believe that the
outcome of either of these lawsuits will have a material adverse effect on our
business, financial condition or results of operations.
ITEM 5. OTHER INFORMATION
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Our president and chief executive officer, Charles Ardai, the chairman
of our board of directors, David E. Shaw, certain trusts created by Dr. Shaw,
and certain members of the D.E. Shaw group of companies (which are affiliated
with Dr. Shaw) have each informed us that, in order to diversify their
respective investment portfolios while avoiding certain conflicts of interest
or the appearance of any such conflict, that might arise from the involvement
of Mr. Ardai and Dr. Shaw in our affairs, they have established "selling
trusts" for the purpose of gradually liquidating a portion of their respective
holdings of our common stock. These selling trusts will be managed by an
independent third-party trustee not affiliated with the various selling
stockholders or with us, and will operate under trust provisions which
require the liquidation of shares according to a predetermined schedule
(subject to, among other things, the volume limitations imposed by applicable
securities regulations), and which restrict the flow of information to this
trustee from Mr. Ardai, Dr. Shaw, and the various Shaw-affiliated entities
prior to and throughout the period of such sales.
In particular, we have been notified that D. E. Shaw & Co., Inc., D. E.
Shaw & Co., L.P., Shaw Juno Trust, Shaw Family Trust IV, and Dr. Shaw personally
have transferred 26,000, 1,388,400, 57,200, 1,851,200 and 806,000 shares of our
common stock, respectively--representing approximately 25 percent of the
holdings of each of these stockholders--into separate selling trusts with
irrevocable instructions that the trustee sell an equal fraction of those shares
each week over the 52-week period beginning September 4, 2000, subject to
certain provisions related to change of control, and without any transfer of
voting power to the trustee. We have also been notified that Mr. Ardai has
transferred options to purchase 283,080 shares of our common
stock--representing approximately 25 percent of the shares underlying all
options granted to Mr. Ardai to date--into a selling trust with irrevocable
instructions that the trustee exercise those options and sell an equal number
of the underlying shares each week over the 52-week period beginning July 17,
2000, subject to certain provisions related to change of control.
ITEM 6. EXHIBITS AND REPORT ON FORM 8-K
(a) The following exhibits are filed as part of this report:
10.12(c) First Amendment to Employment Agreement, dated February 29, 2000,
between the registrant and Charles Ardai.
10.13(c) First Amendment to Employment Agreement, dated February 29, 2000,
between the registrant and Robert Cherins.
10.14(c) First Amendment to Employment Agreement, dated February 29, 2000,
between the registrant and Mark Moraes.
10.15(b) First Amendment to Employment Agreement, dated February 29, 2000,
between the registrant and Richard Eaton.
27.1 Financial Data Schedule
No reports on Form 8-K were filed during the quarter ended March 31, 2000.
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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: May 15, 2000 /s/ Charles E. Ardai
---------------------
Name: Charles E. Ardai
Title: President, Chief Executive Officer and Director
(principal executive officer)
Date: May 15, 2000 /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 10.12c
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT dated as of the 29th day of February
2000 between Juno Online Services, Inc. (the "Company") and Charles Ardai (the
"Employee").
WHEREAS, the Company and the Employee are parties to an Employment Agreement
dated as of April 26, 1999 (the "Employment Agreement") pursuant to which the
Employee is employed by the Company;
WHEREAS, the Company and the Employee desire to amend the Employment Agreement.
NOW THEREFORE, in consideration of the premises and mutual covenants contained
herein, and for good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties agree as follows:
1. AMENDMENT TO COMPENSATION PROVISIONS. Section 2 of the Employment Agreement
is amended as follows:
a. In Section 2(a), the Compensation Period shall begin on January 1,
2000 and shall end on December 31, 2000.
b. In Section 2(a), the figure set forth as the Employee's base salary
shall be replaced with $225,000. This new figure shall remain subject
to all of the provisions of Section 2(a).
c. Section 2(b) shall be replaced in its entirety with the following:
"(b) SEMI-ANNUAL BONUS DURING THE COMPENSATION PERIOD. As
compensation for the Employee's services during the Compensation
Period, the Company shall pay the Employee a semi-annual bonus of
$50,000 on or about June 30 and December 31 of each year during
the Compensation Period, provided that Employee is employed by
the Company on such date."
2. NO OTHER AMENDMENTS. Except as expressly amended as provided herein, the
Employment Agreement shall continue to be, and shall remain, in full force
and effect
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in accordance with its terms.
3. SEVERABILITY. The holding of any provision of this amendment to be illegal,
invalid or unenforceable by a court of competent jurisdiction shall not
affect any other provision of this amendment, which shall remain in full
force and effect.
4. GOVERNING LAW. This amendment shall be governed by, and construed and
interpreted in accordance with, the laws of the State of New York (without
regard to conflicts-of-laws-principles.)
IN WITNESS WHEREOF, the parties have executed this First Amendment as of the
date first written above.
JUNO ONLINE SERVICES, INC.
By: /s/ David E. Shaw
----------------------------------
David E. Shaw
Chairman of the Board of Directors
EMPLOYEE:
/s/ Charles Ardai
----------------------------------
Charles Ardai
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Exhibit 10.13c
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT dated as of the 29th day of February
2000 between Juno Online Services, Inc. (the "Company") and Robert H. Cherins
(the "Employee").
WHEREAS, the Company and the Employee are parties to an Employment Agreement
dated as of April 26, 1999 (the "Employment Agreement") pursuant to which the
Employee is employed by the Company;
WHEREAS, the Company and the Employee desire to amend the Employment Agreement.
NOW THEREFORE, in consideration of the premises and mutual covenants contained
herein, and for good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties agree as follows:
1. AMENDMENT TO COMPENSATION PROVISIONS. Section 2 of the Employment Agreement
is amended as follows:
a. In Section 2(a), the Compensation Period shall begin on January 1,
2000 and shall end on December 31, 2000.
b. In Section 2(a), the figure set forth as the Employee's base salary
shall be replaced with $185,000. This new figure shall remain subject
to all of the provisions of Section 2(a).
c. In Section 2(d), the figure set forth as the Employee's non-refundable
advance against bonus shall be replaced with $143,500. This new figure
shall remain subject to all of the provisions of Section 2(d).
2. NO OTHER AMENDMENTS. Except as expressly amended as provided herein, the
Employment Agreement shall continue to be, and shall remain, in full force
and effect in accordance with its terms.
3. SEVERABILITY. The holding of any provision of this amendment to be illegal,
invalid or unenforceable by a court of competent jurisdiction shall not
affect any other provision of this amendment, which shall remain in full
force and effect.
<PAGE>
4. GOVERNING LAW. This amendment shall be governed by, and construed and
interpreted in accordance with, the laws of the State of New York (without
regard to conflicts-of-laws-principles.)
IN WITNESS WHEREOF, the parties have executed this First Amendment as of the
date first written above.
JUNO ONLINE SERVICES, INC.
By: /s/ Charles Ardai
-------------------------------
Charles Ardai
President and Chief Executive Officer
EMPLOYEE:
/s/ Robert H. Cherins
-------------------------------
Robert H. Cherins
<PAGE>
Exhibit 10.14c
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT dated as of the 29th day of February
2000 between Juno Online Services, Inc. (the "Company") and Mark Moraes (the
"Employee").
WHEREAS, the Company and the Employee are parties to an Employment Agreement
dated as of October 6, 1999 (the "Employment Agreement") pursuant to which the
Employee is employed by the Company;
WHEREAS, the Company and the Employee desire to amend the Employment Agreement.
NOW THEREFORE, in consideration of the premises and mutual covenants contained
herein, and for good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties agree as follows:
1. AMENDMENT TO COMPENSATION PROVISIONS. Section 2 of the Employment Agreement
is amended as follows:
a. In Section 2(a), the Compensation Period shall begin on January 1,
2000 and shall end on December 31, 2000.
b. In Section 2(a), the figure set forth as the Employee's base salary
shall be replaced with $185,000. This new figure shall remain subject
to all of the provisions of Section 2(a).
2. NO OTHER AMENDMENTS. Except as expressly amended as provided herein, the
Employment Agreement shall continue to be, and shall remain, in full force
and effect in accordance with its terms.
3. SEVERABILITY. The holding of any provision of this amendment to be illegal,
invalid or unenforceable by a court of competent jurisdiction shall not
affect any other provision of this amendment, which shall remain in full
force and effect.
<PAGE>
4. GOVERNING LAW. This amendment shall be governed by, and construed and
interpreted in accordance with, the laws of the State of New York (without
regard to conflicts-of-laws-principles.)
IN WITNESS WHEREOF, the parties have executed this First Amendment as of the
date first written above.
JUNO ONLINE SERVICES, INC.
By: /s/ Charles Ardai
--------------------------
Charles Ardai
President and Chief Executive Officer
EMPLOYEE:
/s/ Mark Moraes
--------------------------
Mark Moraes
<PAGE>
Exhibit 10.15b
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT dated as of the 29th day of February
2000 between Juno Online Services, Inc. (the "Company") and Richard Eaton (the
"Employee").
WHEREAS, the Company and the Employee are parties to an Employment Agreement
dated as of September 25, 1998 (the "Employment Agreement") pursuant to which
the Employee is employed by the Company;
WHEREAS, the Company and the Employee desire to amend the Employment Agreement.
NOW THEREFORE, in consideration of the premises and mutual covenants contained
herein, and for good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties agree as follows:
1. AMENDMENT TO COMPENSATION PROVISIONS. Section 2 of the Employment Agreement
is amended as follows:
a. In Section 2(a), the Compensation Period shall begin on January 1,
2000 and shall end on December 31, 2000.
b. In Section 2(a), the figure set forth as the Employee's base salary
shall be replaced with $160,000. This new figure shall remain subject
to all of the provisions of Section 2(a).
c. Section 2(d) entitled "Non-Refundable Advance Against Bonus" is
deleted in its entirety.
2. NO OTHER AMENDMENTS. Except as expressly amended as provided herein, the
Employment Agreement shall continue to be, and shall remain, in full force
and effect in accordance with its terms.
3. SEVERABILITY. The holding of any provision of this amendment to be illegal,
invalid or unenforceable by a court of competent jurisdiction shall not
affect any other provision of this amendment, which shall remain in full
force and effect.
<PAGE>
4. GOVERNING LAW. This amendment shall be governed by, and construed and
interpreted in accordance with, the laws of the State of New York (without
regard to conflicts-of-laws-principles.)
IN WITNESS WHEREOF, the parties have executed this First Amendment as of the
date first written above.
JUNO ONLINE SERVICES, INC.
By: /s/ Charles Ardai
-----------------------------
Charles Ardai
President and Chief Executive Officer
EMPLOYEE:
/s/ Richard Eaton
-----------------------------
Richard Eaton
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF JUNO ONLINE SERVICES, INC. AND
SUBSIDIARY FOUND IN THE COMPANY'S FORM 10-Q AS OF AND FOR THE THREE MONTHS ENDED
MARCH 31, 2000.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 128,818
<SECURITIES> 0
<RECEIVABLES> 10,612
<ALLOWANCES> 703
<INVENTORY> 0
<CURRENT-ASSETS> 152,015
<PP&E> 10,619
<DEPRECIATION> 3,797
<TOTAL-ASSETS> 159,266
<CURRENT-LIABILITIES> 51,468
<BONDS> 0
0
0
<COMMON> 386
<OTHER-SE> 205,706
<TOTAL-LIABILITY-AND-EQUITY> 159,266
<SALES> 24,047
<TOTAL-REVENUES> 24,047
<CGS> 14,646
<TOTAL-COSTS> 14,646
<OTHER-EXPENSES> 58,749
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 44
<INCOME-PRETAX> (47,626)
<INCOME-TAX> 0
<INCOME-CONTINUING> (47,626)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (47,626)
<EPS-BASIC> (1.28)
<EPS-DILUTED> (1.28)
</TABLE>
