<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 8, 2000
REGISTRATION NO. 333-94275
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
JUNO ONLINE SERVICES, INC.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 7370 13-3914547
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
------------------------
1540 BROADWAY
NEW YORK, NEW YORK 10036
(212) 597-9000
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
------------------------------
MR. CHARLES E. ARDAI
PRESIDENT AND CHIEF EXECUTIVE OFFICER
JUNO ONLINE SERVICES, INC.
1540 BROADWAY
NEW YORK, NEW YORK 10036
(212) 597-9000
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
------------------------------
COPIES TO:
<TABLE>
<S> <C>
ALEXANDER D. LYNCH, ESQ. JOHN W. WHITE, ESQ.
BRIAN B. MARGOLIS, ESQ. CRAVATH, SWAINE & MOORE
BROBECK, PHLEGER & HARRISON LLP WORLDWIDE PLAZA
1633 BROADWAY, 47(TH) FLOOR 825 EIGHTH AVENUE
NEW YORK, NEW YORK 10019 NEW YORK, NEW YORK 10019
(212) 581-1600 (212) 474-1000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
AMOUNT TO OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES REGISTERED BE REGISTERED(1) PER SHARE(2) PRICE(2) REGISTRATION FEE
<S> <C> <C> <C> <C>
COMMON STOCK, PAR VALUE $.01 PER SHARE............ 3,818,000 $28.78125 $109,886,813 $ 29,011(3)
</TABLE>
(1) Includes 498,000 shares which the underwriters have the option to purchase
to cover over-allotments, if any.
(2) Estimated solely for the purposes of computing the registration fee pursuant
to Rule 457(c) under the Securities Act of 1933, as amended (based on the
average of the high and low prices of the common stock as quoted on the
Nasdaq National Market on February 7, 2000).
(3) Previously paid.
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED FEBRUARY 8, 2000
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
Registration No. 333-94275
P R O S P E C T U S
[LOGO]
3,320,000 SHARES
JUNO ONLINE SERVICES, INC.
COMMON STOCK
$ PER SHARE
---------
We are selling 3,320,000 shares of our common stock. The underwriters named
in this prospectus may purchase up to 498,000 additional shares of our common
stock from us to cover over-allotments.
Our common stock is quoted on the Nasdaq National Market under the symbol
"JWEB". The last reported sale price of our common stock on the Nasdaq National
Market on February 7, 2000 was $26.88 per share.
--------------
INVESTING IN THE COMMON STOCK INVOLVES CERTAIN RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 8.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
--------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- ---------
<S> <C> <C>
Public Offering Price $ $
Underwriting Discount(1) $ $
Proceeds to Juno Online Services, Inc. (before expenses) $ $
</TABLE>
(1) For a further description of underwriting compensation, please see
"Underwriting".
The underwriters are offering the shares subject to various conditions. The
underwriters expect to deliver the shares to purchasers on or about
, 2000.
--------------
SALOMON SMITH BARNEY PAINEWEBBER INCORPORATED
CHASE H&Q JEFFERIES & COMPANY, INC.
, 2000
<PAGE>
Description of graphics on inside front and gatefold pages of prospectus:
Inside Front Cover:
[JUNO] [Juno Logo]
The caption at the top of the page reads:
"Our multiple service levels and easy-to-use, intuitive software are designed to
attract a broad spectrum of users by offering both free basic and billable
premium services."
The picture in the upper right corner depicts the "Juno Express" service level.
The sidebar text reads:
"Juno Express
High-speed broadband Internet access, now being tested in selected pilot
markets."
The picture in the middle depicts the "Juno Web" service level. The sidebar text
reads:
"Juno Web
Premium dial-up Internet access: free live technical support, priority access,
and more."
The picture in the lower left corner depicts "Juno's Basic Service". The sidebar
text reads:
"Juno's Basic Service
Basic dial-up Internet access, provided to the end user for free."
The caption at the bottom of the page reads:
"Juno Online Services, Inc. is a leading provider of Internet-related services
to millions of computer users throughout the United States. Our services and
software have been designed with special attention to the needs of consumers who
are just now beginning to explore the Internet. Subscribers who are not yet
ready to use or pay for premium features can begin with our free basic service,
then migrate to our premium services once they are ready to do so."
<PAGE>
Gatefold:
[JUNO Online Services]
The pictures on these pages depict Juno's portal site and version 4.0 of the
Juno software, as well as the persistent Web banner shown to subscribers to
Juno's free basic service.
The caption at the top of the left-hand page reads:
"Juno's Portal Site -- www.juno.com
When Juno subscribers begin a Web session, the first pages they see provide them
with a broad set of tools and content to help them understand, navigate, and use
the Web."
The picture below this caption depicts the home page of Juno's portal site,
including a search window, as well as various hyperlinks to other spots on the
Juno Web site.
The caption at the top of the right-hand page reads:
"Juno 4.0
Subscribers can send and receive e-mail, launch a Web session, and interact with
advertisements, all within a simple point-and-click environment."
The picture below this caption depicts the "Read" screen of the main Juno
software, including a list of e-mail messages, the text of one particular e-mail
message and a set of buttons used in connection with e-mail. At the top of the
screen is an ad banner for Qwest, as well as icons enabling a user to access the
three main features of the Juno software: Read, Write, and Web.
Numbered sidebar text points to each of the icons and reads:
"[1]
Click to read.
Read and organize your incoming e-mail on Juno's "Read" screen."
"[2]
Click to write.
Send messages, pictures and more to anyone with an Internet e-mail address."
"[3]
Click to go to the Web.
Connect to the Web, starting each session at Juno's portal site.
Superimposed over the image of Juno's portal site is an image of the advertising
and navigation banner shown to basic service subscribers while they use the Web.
The caption below the banner image reads:
"Persistent Web Banner
Members of Juno's free basic service view a persistent advertising and
navigation banner at all times when they are connected to the Web."
[Juno Logo]
<PAGE>
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. JUNO
ONLINE SERVICES HAS NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT
INFORMATION. JUNO ONLINE SERVICES IS NOT MAKING AN OFFER OF THESE SECURITIES IN
ANY JURISDICTION WHERE THE OFFER IS NOT PERMITTED. YOU SHOULD NOT ASSUME THAT
THE INFORMATION PROVIDED BY THIS PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER
THAN THE DATE ON THE FRONT OF THIS PROSPECTUS.
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Prospectus Summary.......................................... 4
Risk Factors................................................ 8
Forward-Looking Statements.................................. 28
Use of Proceeds............................................. 29
Dividend Policy............................................. 29
Price Range of Common Stock................................. 29
Capitalization.............................................. 30
Dilution.................................................... 31
Selected Consolidated Financial Data........................ 32
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 34
Business.................................................... 50
Management.................................................. 63
Certain Transactions........................................ 72
Principal Stockholders...................................... 75
Description of Capital Stock................................ 77
Shares Eligible for Future Sale............................. 81
United States Tax Consequences to Non-United States
Holders................................................... 83
Underwriting................................................ 86
Legal Matters............................................... 89
Experts..................................................... 89
Where You Can Find Additional Information................... 89
Index to Consolidated Financial Statements.................. F-1
</TABLE>
3
<PAGE>
PROSPECTUS SUMMARY
BECAUSE THIS IS ONLY A SUMMARY, IT DOES NOT CONTAIN ALL OF THE INFORMATION
THAT MAY BE IMPORTANT TO YOU. YOU SHOULD READ THE ENTIRE PROSPECTUS, INCLUDING
"RISK FACTORS" AND THE CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES THERETO,
BEFORE DECIDING TO INVEST IN OUR COMMON STOCK.
OUR COMPANY
Juno Online Services, Inc. is a leading provider of Internet-related
services to millions of computer users throughout the United States. We provide
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,
which is currently being tested in selected markets. Unlike almost all other
Internet access providers, we offer both free basic and billable premium
services, and we believe we are unique in having converted hundreds of thousands
of individuals from free to paying customers. Our strategy of offering several
different service levels and our easy-to-use, intuitive software are designed to
attract a broad spectrum of users, including those who are just now beginning to
explore the Internet.
Our services are provided nationwide through more than 2,300 local telephone
numbers, which we lease from several providers. These phone numbers can be
reached by the vast majority of the U.S. population without having to place a
long distance telephone call. Our revenues are derived primarily from the
subscription fees we charge for the use of our premium services, from the sale
of advertising, and from various types of electronic commerce.
We have been a pioneer in providing free Internet services since
April 1996, when we launched our basic service, which was the first on the
Internet to provide free e-mail. 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:
- Our BASIC SERVICE now provides full Internet access for free.
- 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
prominent advertising and navigation banner that is displayed to our basic
service users at all times while they are connected to the Web.
- JUNO EXPRESS is a broadband service that provides all the features of Juno
Web at speeds up to 15 times faster than an ordinary dial-up Internet
connection. We are now conducting a pilot test of Juno Express in selected
markets and plan to expand into additional markets over the coming year.
Our services have been very popular, with more than 8.1 million Juno
accounts created since the launch of our basic service in 1996. During the month
of December 1999, an average of 820,000 user accounts dialed into our service on
any given day, with a total of 2.3 million user accounts connecting during the
month of December, and 2.9 million user accounts connecting during the
three-month period ended December 31, 1999. As of December 31, 1999, we had
approximately 550,000 Juno Web subscribers, the majority of whom began as users
of our basic service. We initially marketed Juno Web only to our own basic
service subscribers. Following our initial public offering on May 25, 1999,
however, we began marketing Juno Web beyond the existing Juno user base through
an external marketing campaign. We plan to significantly expand our marketing
activities in 2000 in order to increase the subscriber base of our billable
premium services and, in particular, our expanded free basic service.
In operating our expanded basic service, we plan to capitalize on the size
of our existing user base, advantages we believe our technology confers on our
cost structure, and our established advertising sales and electronic commerce
activities. Our technology has been designed to maximize hours of consumer
contact and potential advertising revenues while minimizing the number of hours
each user
4
<PAGE>
actually spends connected by telephone to our central computers or to the Web, a
key component of our costs. We believe our subscribers spend significantly less
time connected to the Internet each month than those of our largest competitors,
in part because of technology we have developed that enables subscribers to read
and write e-mail offline rather than while connected. Importantly, this
technology allows us to continue displaying highly targetable interactive
advertisements throughout this offline time.
As of December 31, 1999, approximately 300 firms had advertised on the Juno
services. In addition, we derive revenues from conducting electronic commerce
both independently and with strategic marketing partners. We have entered into a
number of major strategic marketing alliances, including several that involve
multi-million-dollar guaranteed minimum payments to Juno. These alliances
include multi-year relationships with Qwest, The Hartford, and WingspanBank.com.
Our advertising and strategic marketing activities benefit from our ability to
target advertising to selected segments of the Juno subscriber base on the basis
of a wide variety of information obtained from a detailed electronic
questionnaire that must be completed in order to sign up for Juno's basic
service.
In addition to our advertising and strategic marketing relationships, we
derive revenue from relationships with providers of Web-based content and
functionality. All Juno users begin each Web session on our portal site,
WWW.JUNO.COM, which contains tools, information, and product offers supplied by
a wide range of strategic partners. Companies with whom we have formed this sort
of strategic relationship include HotJobs.com, Lycos, Mail.com, News
Corporation, and more than 50 online merchants that participate in the shopping
channel on our portal site, including eBay and 1-800-FLOWERS. We plan to
significantly increase both the number of such alliances and the associated
revenues as our Web-enabled subscriber base grows.
MARKET OPPORTUNITY
The Internet is becoming an increasingly significant global medium for
communications, advertising, and commerce. International Data Corporation
estimates that more than 80 million individuals in the U.S. used the Internet in
1999, and projects that this figure will reach 177 million by 2003. IDC also
projects that consumer-targeted dial-up Internet service provider revenues in
the U.S. will grow from $7.4 billion in 1999 to $11.1 billion in 2003. In
addition, Jupiter Communications has projected that online advertising
expenditures in the U.S. will grow from an estimated $3.2 billion in 1999 to
$11.5 billion in 2003. IDC projects that consumer electronic commerce revenues
in the U.S. will grow from $12.8 billion in 1998 to $83.5 billion in 2003.
OUR STRATEGY
We seek to strengthen our position as a leading provider of consumer
Internet-related services. In particular, we plan to:
- Rapidly expand our subscriber base
- Migrate subscribers to higher levels of service
- Leverage and expand our strategic marketing alliances and advertising
sales
- Enhance our services to provide an increasingly personalized, integrated
and engaging Internet experience
- Embrace new technologies while maintaining technology independence
5
<PAGE>
THE OFFERING
The following information excludes 4,212,368 shares of common stock issuable
upon the exercise of stock options outstanding as of January 31, 2000, with a
weighted average exercise price of $8.42 per share, and 1,272,844 additional
shares that may be issued under our stock option plan.
<TABLE>
<S> <C>
Common Stock Offered by Juno................. 3,320,000 shares
Common Stock Outstanding
After this Offering........................ 38,339,351 shares
Use of Proceeds.............................. We intend to use the net proceeds of this offering
for subscriber acquisition, advertising, brand
marketing, continued investment in the development of
our Internet services, enhancements of our network
infrastructure and other general corporate purposes.
We may also use a portion of the proceeds for
acquisitions, strategic alliances, or joint ventures.
See "Use of Proceeds."
Nasdaq National Market Symbol................ "JWEB"
</TABLE>
------------------------
"Juno Web", "Juno Express" and "Juno Gold" are trademarks, and "Juno" and
Juno Online Services, Inc.'s logo are registered trademarks, of Juno Online
Services, Inc. Each trademark, trade name or service mark of any other company
appearing in this prospectus belongs to its holder.
Juno Online Services, Inc. was incorporated in Delaware on July 2, 1996 and
is the successor by merger to Juno Online Services, L.P., which was formed on
June 30, 1995 as a Delaware limited partnership. Our principal executive offices
are located at 1540 Broadway, New York, New York 10036. Our telephone number at
that location is (212) 597-9000. INFORMATION CONTAINED ON OUR WEB SITES DOES NOT
CONSTITUTE PART OF THIS PROSPECTUS. References in this prospectus to "Juno,"
"we," "our," and "us" refer to Juno Online Services, Inc., a Delaware
corporation, and its predecessor prior to the merger, Juno Online Services,
L.P., a Delaware limited partnership.
------------------------
UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS:
- REFLECTS THE STATUTORY MERGER OF JUNO ONLINE SERVICES, L.P. WITH AND INTO
JUNO ONLINE SERVICES, INC. ON MARCH 1, 1999;
- REFLECTS THE 1-FOR-4.5 REVERSE STOCK SPLIT OF EACH CLASS OF OUR CAPITAL
STOCK EFFECTED IN CONNECTION WITH OUR MAY 1999 INITIAL PUBLIC OFFERING;
AND
- ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION.
6
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
The following table sets forth summary consolidated financial and operating
data for Juno. You should read this information together with the consolidated
financial statements and the notes to those statements appearing elsewhere in
this prospectus. See "Selected Consolidated Financial Data" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(JUNE 30,
1995) TO YEAR ENDED DECEMBER 31,
DECEMBER 31, -----------------------------------------------------
1995 1996 1997 1998 1999
------------ ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Billable services............................ $ -- $ 6 $ 1,371 $ 6,645 $ 34,545
Advertising and transaction fees............. -- 127 1,875 6,454 12,662
Direct product sales......................... -- 3 5,845 8,595 4,794
------------ ----------- ----------- ----------- -----------
Total revenues............................. -- 136 9,091 21,694 52,001
------------ ----------- ----------- ----------- -----------
Cost of revenues:
Billable services............................ -- -- 1,053 5,606 24,950
Advertising and transaction fees............. -- 278 1,659 3,725 4,675
Direct product sales......................... -- 3 5,796 7,627 4,176
------------ ----------- ----------- ----------- -----------
Total cost of revenues..................... -- 281 8,508 16,958 33,801
------------ ----------- ----------- ----------- -----------
Operating expenses:
Operations, free service..................... -- 5,803 11,075 9,383 6,698
Subscriber acquisition....................... 592 6,993 3,140 5,334 47,651
Sales and marketing.......................... 389 4,276 12,593 11,584 11,556
Product development.......................... 2,577 3,741 4,860 7,345 7,232
General and administrative................... 275 2,172 2,897 2,760 4,615
------------ ----------- ----------- ----------- -----------
Total operating expenses................... 3,833 22,985 34,565 36,406 77,752
------------ ----------- ----------- ----------- -----------
Loss from operations....................... (3,833) (23,130) (33,982) (31,670) (59,552)
Interest income, net........................... -- 128 243 44 3,718
------------ ----------- ----------- ----------- -----------
Net loss................................... $ (3,833) $ (23,002) $ (33,739) $ (31,626) $ (55,834)
============ =========== =========== =========== ===========
Pro forma basic and diluted net loss per share
(1).......................................... $ (1.85) $ (1.84)
=========== ===========
Weighted average shares outstanding used in pro
forma basic and diluted per share calculation
(1).......................................... 17,091 30,339
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-------------------------
ACTUAL AS ADJUSTED(2)
-------- --------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 91,497 $175,261
Working capital........................................... 67,571 151,335
Total assets.............................................. 119,088 202,852
Total indebtedness, including current maturities.......... 2,878 2,878
Total stockholders' equity................................ 71,648 155,412
</TABLE>
- ------------------------------
(1) Gives pro forma effect to the following:
- treatment of Class A limited partnership units as common stock for all
periods presented; and
- conversion of Series B redeemable convertible preferred stock for the
period following the March 1999 statutory merger.
See the consolidated financial statements and the notes to these statements
appearing elsewhere in this prospectus for the determination of the number
of shares used in computing pro forma basic and diluted loss per share.
(2) As adjusted to reflect the sale of 3,320,000 shares of common stock offered
by Juno hereby at an assumed offering price of $26.88 per share after
deducting the underwriting discount and estimated offering expenses payable
by Juno. See "Use of Proceeds" and "Capitalization."
7
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW BEFORE MAKING AN
INVESTMENT DECISION. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS
AND FINANCIAL RESULTS MAY SUFFER. IN THAT CASE, THE TRADING PRICE OF OUR COMMON
STOCK COULD DECLINE AND YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT.
BECAUSE WE HAVE OFFERED OUR BILLABLE PREMIUM SERVICES FOR ONLY SIX QUARTERS AND
OUR FREE BASIC SERVICE IN ITS CURRENT FORM FOR LESS THAN ONE QUARTER, 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:
- attract and retain subscribers to our free basic service and our billable
premium services;
- anticipate and adapt to the changing Internet market;
- generate advertising and electronic commerce revenues;
- maintain and develop strategic relationships with business partners to
market their products over our services;
- implement an effective marketing strategy to promote awareness of the Juno
services;
- respond to actions taken by our competitors and the entry of new
competitors into our markets;
- develop and deploy successive versions of the Juno software;
- operate computer systems and related infrastructure adequate to
effectively manage our growth and provide our basic service and our
billable premium services;
- develop, deploy and operate broadband Internet access services, whether
independently or in collaboration with one or more third parties;
- manage the billing systems used to invoice subscribers to our billable
premium services; and
- 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. Please see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for detailed information on our limited operating history.
WE HAVE A HISTORY OF LOSSES SINCE OUR INCEPTION IN 1995 AND EXPECT CONTINUED
LOSSES FOR THE FORESEEABLE FUTURE
Since our inception in 1995, we have not been profitable. We have incurred
substantial costs to create and introduce our various services, to operate these
services, to promote awareness of these services and to grow our business. We
incurred net losses of approximately $3.8 million from inception through
December 31, 1995, $23.0 million for the year ended December 31, 1996,
$33.7 million for the year ended December 31, 1997, $31.6 million for the year
ended December 31, 1998 and $55.8 million for the year ended December 31, 1999.
As of December 31, 1999, our accumulated net losses totaled $148.0 million. We
incurred negative cash flows from operations of approximately $16.4 million for
the
8
<PAGE>
year ended December 31, 1996, $33.6 million for the year ended December 31, 1997
and $20.9 million for the year ended December 31, 1998. For the year ended
December 31, 1999, we used $36.4 million in cash for working capital purposes
and to fund losses from operations. Additionally, at December 31, 1999,
$8.7 million remained prepaid for advertising that may be used at any time prior
to March 2001, bringing total net cash used in operating activities to
$45.1 million.
Since we operated as a limited partnership prior to the merger of Juno
Online Services, L.P. into Juno Online Services, Inc. in March 1999, taxable
losses incurred prior to the merger were allocated to the partners of Juno
Online Services, L.P. for reporting on their income tax returns. As a result, we
will not be able to offset future taxable income, if any, against losses
incurred prior to the merger.
We expect operating losses and negative cash flows to continue for the
foreseeable future as we continue to incur significant expenses. We cannot
assure you that we will ever be successful in implementing our business
strategies or in addressing the risks and uncertainties facing our company. Even
if we do address these risks successfully, we may not be profitable in the
future. Were we to achieve profitability, we cannot assure you that we would be
able to sustain or increase profitability on a quarterly or annual basis in the
future. Please see "Selected Consolidated Financial Data" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" for
more detailed information.
JUNO'S BUSINESS IS SUBJECT TO FLUCTUATIONS IN OPERATING RESULTS WHICH MAY
NEGATIVELY IMPACT THE PRICE OF OUR STOCK
Our revenues, expenses and operating results have varied in the past and may
fluctuate significantly in the future due to a variety of factors, many of which
are outside of our control. These factors include, among others:
- the rate of new subscriber acquisitions and seasonal trends relating to
subscriber usage of our services;
- the timing and effectiveness of our marketing efforts to acquire
subscribers and promote the Juno brand;
- the timing and effectiveness of any revenue sharing arrangements or other
strategic alliances into which we enter;
- the demand for Internet advertising and seasonal trends relating to
Internet advertising spending;
- seasonal trends relating to the demand for products sold over the
Internet;
- capital expenses related to upgrading our computer systems and related
infrastructure;
- our ability to protect our systems from any telecommunications failures,
power loss, or software-related system failures;
- our ability to integrate operations and technologies from any acquisitions
or other business combinations or relationships into which we enter;
- the extent to which we experience increased competition in the markets for
Internet services, Internet advertising and electronic commerce;
- changes in operating expenses including, in particular, telecommunications
expenses and the cost of providing various types of technical and
non-technical customer support to our subscribers; and
- economic conditions specific to the Internet as well as general economic
and market conditions.
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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. 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. Please see "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for detailed information on our operating
results.
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:
- OUR TELECOMMUNICATIONS COSTS WILL INCREASE SIGNIFICANTLY. 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 is therefore 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 attract a large 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 achieve
reductions in our per-subscriber telecommunications costs, and if we are
unable to achieve such reductions, our business and financial results will
suffer. Please see "--The economic viability of our expanded free basic
service may depend on our ability to obtain telecommunications capacity on
a fixed-price basis."
- 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.
- 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.
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- 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 is expected to create
a significant amount of advertising inventory. However, there can be no
assurance that we will be able to generate revenues from the sale of this
new advertising inventory, or that any portion of it that we 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 members, we currently rely on multiple distribution channels
for our free proprietary software that enables subscribers to use our services.
Our ability to recruit new subscribers may depend on our ability to enter into
additional distribution agreements and to retain our current distribution
partners. We cannot be sure that we will be able to enter into additional, or
maintain or replace our current, distribution agreements on favorable terms, or
that any of our distribution partners will be able to market our services
effectively. Many of our distribution partners also distribute competing
products, and are free to terminate our distribution arrangements at their
convenience. Our inability to recruit, manage or retain distribution partners,
or the inability of these distribution partners to effectively promote and
distribute our software, may cause our business and financial results to suffer.
Our business strategy contemplates that a significant percentage of the
subscribers to our free basic service 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. 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, or if technical limitations make the
conversion process more difficult or time-consuming than anticipated, our
business and financial results may suffer. Please see "--Our marketing program
may not succeed in generating new subscribers or in persuading subscribers to
upgrade to our premium services" for more information on our marketing
activities.
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. As a result, the total number of subscribers using our
services in a given month has remained at between 2.2 million and 2.4 million
since March 1998, even though we have added new subscribers during that period.
We believe that intense competition has caused, and may continue to cause, some
of our subscribers to switch to other services. It is easy for Internet users to
switch to competing providers and we cannot be certain that any steps we take
will maintain or improve subscriber retention. In addition, 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
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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. Please see
"--Competition in the markets for Internet services, Internet advertising and
electronic commerce is likely to increase in the future and may harm our
business" for more information concerning the competition facing our business.
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. Approximately 45% 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 6% 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.
In addition, to avoid straining our telecommunications resources, we are
employing a staggered roll-out strategy in upgrading basic service users'
software to version 4.0 and in notifying such users about the expansion of the
service to include Web access. Since we do not expect to complete this upgrade
process before the second quarter of 2000 at the earliest, a significant portion
of those basic service users who can be upgraded to version 4.0 may not be
upgraded for at least several months.
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.
OUR MARKETING PROGRAM MAY NOT SUCCEED IN GENERATING NEW SUBSCRIBERS OR IN
PERSUADING SUBSCRIBERS TO UPGRADE TO OUR PREMIUM SERVICES
We expect to use a significant portion of the proceeds from this offering
for an extensive marketing campaign. This campaign will be directed at
encouraging users to sign up directly for 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 program may include
forms of advertising, such as television and radio advertising, with which we
have limited experience. There are risks that this campaign may not be effective
in accomplishing one or both of these goals. In addition, it is possible that,
over time, it will become more difficult and expensive to effectively market 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. We also do not know what kind of advertising our competitors will
undertake or the timing and extent of advertising 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 program without generating sufficient new subscribers to our services,
our business and financial results will suffer.
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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.
In recruiting subscribers for our services, we currently compete, or expect
to compete, with the following types of companies, among others:
- Established online service providers such as America Online, CompuServe,
and The Microsoft Network;
- Independent national Internet service providers such as EarthLink,
MindSpring, and Prodigy, including a number of companies, such as
AltaVista and NetZero, that offer Web access for free;
- Numerous independent regional and local Internet service providers that
may offer lower prices than a national Internet service provider;
- Various national and local telephone companies such as AT&T, MCI WorldCom
and Pacific Bell;
- 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
- 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.
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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. Please see "--Our business may be adversely
affected if the market for Internet advertising fails to develop" for more
information regarding our advertising activities.
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. We believe
that this competition is likely to increase in the future.
OUR COMPETITION IS LIKELY TO INCREASE IN THE FUTURE
Our competition is likely to increase. We believe this will probably happen
as Internet service providers and online service providers consolidate and
become larger, more competitive companies, and as large diversified
telecommunications and media companies acquire Internet service providers. Other
Internet service providers are likely to begin offering free Internet access.
Since our announcement of free Internet access in December 1999, at least one
competitor has announced the introduction of a service 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
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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. In the past year, one strategic marketing
partner terminated a multi-year agreement at the end of its first year. 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 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. Please see "--If the market for broadband access in
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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."
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
We recently launched a small-scale pilot test of Juno Express, a premium
billable service which 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
into additional markets beyond those involved in the pilot test, 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
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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. Please see "--The expansion of our free basic service to include Web
access increases our telecommunications costs and exposes us to additional
business risks."
We currently rely on our internal sales and marketing personnel for
generating sales leads and promoting our services to the advertising community.
With substantially all of our sales and marketing personnel based in New York
City, we may not be able to effectively market our services to regional
advertisers outside of New York. We also rely on the sales and marketing
personnel of Lycos, our primary Web site content partner, for the sale of
advertising space on the default portal site used by Juno Web subscribers.
Although we have not done so in the past, we might also retain the services of
one or more external sales organizations to sell advertising space on our
network. We cannot be sure that our internal sales organization, Lycos or any
other independent sales organization will achieve our advertising sales
objectives in a cost-effective manner.
If Internet-based advertising does not continue to grow, if we are unable to
capture a sufficient share of Internet-based advertising, or if Lycos or other
independent sales organizations do not perform as we anticipate, our business
and financial results may suffer.
OUR ADVERTISING SYSTEM REQUIRES LABOR AND IMPOSES COSTS ON US BEYOND THOSE
ASSOCIATED WITH STANDARD WEB ADVERTISING
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. 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 prevent us from 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
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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. Please see "Management's
Discussion and Analysis of Financial Condition and Results of Operations" for
more information on our operating results.
WE ARE DEPENDENT ON A SMALL NUMBER OF TELECOMMUNICATIONS CARRIERS AND MAY BE
UNABLE TO FIND ADEQUATE REPLACEMENTS IF THEIR RATES INCREASE, SERVICE QUALITY
DECLINES, OR IF THEY DISCONTINUE DOING BUSINESS WITH US
Our business and financial results depend in significant part on the
capacity, affordability, reliability and security of our telephone company data
networks. To use our services, subscribers must initiate telephone connections
between their personal computers and computer hardware in local or regional
facilities known as "points of presence." We contract for the use of points of
presence around the country from various telecommunications carriers. These
carriers currently include UUNET Technologies and WorldCom Advanced Networks,
both of which are operated by MCI WorldCom; 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 December 31, 1999, we had contracted for the use of more than 2,300
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
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there is a significant risk that further consolidation could make us reliant on
an even smaller number of providers. Currently, we are particularly dependent on
companies controlled by MCI WorldCom, which provide more than 1,100 of the more
than 2,300 points of presence for which we contract in the United States, and
which carry a significant percentage of our traffic. Furthermore, MCI WorldCom
has announced that it will 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. Some of
our telecommunications carriers impose minimum connection charges. Our business
could be harmed if minimum connection charges increase or become more prevalent.
We cannot assure you that our telecommunications carriers will continue to
provide us access to their points of presence on adequate price terms, or that
alternative services will be available in the event that their quality of
service declines or that our relationship with any of our current carriers is
terminated.
Most of the telecommunications services we purchase are provided to us under
short-term agreements that the providers can terminate or elect not to renew. As
a result, there is a significant risk that any or all of UUNET Technologies,
WorldCom Advanced Networks, Level 3, Concentric, Splitrock or Sprint could end
their relationship with us. In addition, each of our telecommunications carriers
provides network access to some of our competitors, and could choose to grant
those competitors preferential network access, potentially limiting our members'
ability to access the Internet or connect to our central computers. Furthermore,
the majority of our telecommunications providers compete, or have announced an
intention to compete, with us in the market to provide consumer Internet access.
If our telecommunications service providers were to decrease the levels of
service or access provided to us, or if they were to terminate their
relationships with us for competitive or other reasons, our business and
financial results would suffer.
THE ECONOMIC VIABILITY OF OUR EXPANDED FREE BASIC SERVICE MAY DEPEND ON OUR
ABILITY TO OBTAIN TELECOMMUNICATIONS CAPACITY ON A FIXED-PRICE BASIS
We believe that our ability to purchase telecommunications capacity from our
network providers on a fixed-price basis may be a critical component of our
ability to cost-effectively provide full Internet access for free. We currently
purchase most of the telecommunications capacity we use 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. 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 we may be able to lower our monthly per-subscriber
telecommunications cost by purchasing telecommunications capacity on a per-modem
basis and by maintaining a higher ratio of subscribers to modems than is typical
in the industry. We have recently begun to experiment with this fixed-price
model. However, there are a number of risks and uncertainties related to this
pricing model. Under this fixed-price model, we contract for exclusive use of a
certain number of modems and are charged the same amount regardless of the
amount of data actually transmitted over the modems during a month. The
effective per-subscriber costs incurred under this model are highly sensitive to
our ability to accurately project, as much as six months in advance, our rate of
subscriber growth and the level of usage per subscriber. If we overestimate and
commit to lease too many modems, our per-subscriber costs will increase,
possibly significantly. If we underestimate and lease too few modems
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to satisfy the levels of subscriber demand we actually experience, service
quality and customer satisfaction may suffer. We cannot assure you that we will
be able to effectively project our telecommunications capacity requirements or
otherwise manage these telecommunications relationships.
We have entered into only one agreement under which we purchase
telecommunications capacity on a per-modem basis. This agreement is with a
supplier that, as of December 1999, operated in a limited number of geographic
markets, corresponding to at most one-third of our subscriber base. As of that
date, fewer than half of our subscribers within these geographic markets had
connected to modems being made available to us under a per-modem pricing model.
In order to secure exclusive use of the modems we have leased from this
supplier, we have been required to make advance commitments totaling
approximately $13.3 million for telecommunications capacity. Our agreement
provides us only limited rights to demand additional capacity from this
supplier. If we are unsuccessful in contracting with additional suppliers to
provide us with per-modem pricing, if our current supplier is unable or
unwilling to accommodate our expansion, or if we are unable to accurately
project our telecommunications needs, 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 OR CANNOT
EXPAND TO MEET OUR NEEDS
Our business and financial results depend, in part, on the availability of
live technical and customer service support, and of inbound telemarketing and
disk distribution services. Should our ability to provide these services be
hampered, our business may suffer. Although many Internet service providers have
developed internal customer service operations designed to meet these needs, we
have elected to outsource these functions to third-party vendors. We currently
use ClientLogic Corporation for technical and customer service support. As a
result, we maintain only a small number of internal customer service personnel.
We are not equipped to provide the 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.
Our most important relationship is with ClientLogic, which, at December 31,
1999, provided us with approximately 430 full-time or part-time employees at its
facilities to service our account. The availability of call-in technical support
and customer service is especially important to acquire and retain subscribers
to our billable 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, such as 24-hour live support, or to
enhance the overall quality of our customer support for competitive reasons, we
will require even greater resources. As a result, we expect that it will become
necessary, in the near future, to identify supplemental or replacement vendors
for these services or to develop the resources ourselves to deliver these
services. Our agreement with ClientLogic converts to a month-to-month contract
on August 1, 2000, providing either party the right to terminate the
relationship at any time upon one month's notice. Prior to that date,
ClientLogic can terminate the contract without cause upon 90 days notice. In
addition, ClientLogic may terminate the contract upon 60 days notice if we do
not reach agreement with ClientLogic with regard to modifications ClientLogic
proposes to the pricing terms of the contract within 60 days of the
modifications being proposed. If our relationship with ClientLogic terminates
and we are unable to enter into a comparable arrangement with a replacement
vendor, if ClientLogic is unable to provide enough personnel to provide the
quality and quantity of service we desire, if system failures, outages or other
technical problems make it difficult for our subscribers to reach customer
service representatives at ClientLogic, or if we are required to obtain
externally or develop internally
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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.
Our insurance policies may not adequately compensate us for any losses that
may occur due to any failures in our systems or interruptions in our services.
RAPID GROWTH IN OUR BUSINESS COULD STRAIN OUR MANAGERIAL, OPERATIONAL,
FINANCIAL, AND INFORMATION SYSTEMS RESOURCES
The anticipated future growth necessary to expand our operations will place
a significant strain on our managerial, operational, financial and information
systems resources. If we are unable to manage our growth effectively, our
business and financial results will suffer. In order to achieve growth in
revenues from Internet advertising, we will need to expand our sales efforts and
continue to improve and develop our software. In order to achieve growth in
revenues from 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. Prior to May 21, 1999, consultants used in India were employed by an
affiliate of Juno. We have significantly increased our reliance on outsourced
support for customer service, technical, and back-office functions. We expect
the size of our own workforce and our reliance on outsourced services will
continue to increase for the foreseeable future.
The demand on our network infrastructure, technical staff and technical
resources has grown rapidly with our expanding subscriber base. We cannot be
certain that our infrastructure, technical staff and technical resources will
adequately accommodate or facilitate the anticipated growth of our subscriber
base. In particular, if we were to experience repeated or prolonged system-wide
service outages, our business and financial results would suffer.
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WE FACE POTENTIAL LIABILITY FOR INFORMATION TRANSMITTED OR RETRIEVED THROUGH OUR
INTERNET SERVICES
Our business and financial results may suffer if we incur liability as a
result of information transmitted or retrieved through our services. The
liability of Internet service providers and online services companies for
information transmitted or retrieved through their services is uncertain. It is
possible that claims may be filed against us based on a variety of theories,
including defamation, obscenity, negligence, copyright or trademark
infringement, or other theories based on the nature, publication or distribution
of this information. These types of claims have been brought, sometimes
successfully, against providers of Internet services in the past. Such claims,
with or without merit, would likely divert management time and attention and
result in significant costs to investigate and defend. In addition, if we become
subject to these types of claims and we are not successful in our defense, we
may be forced to pay substantial damages. We may also be forced to implement
expensive measures to alter the way our services are provided to avoid any
potential liability.
CHANGES IN GOVERNMENT REGULATION COULD DECREASE OUR REVENUES AND INCREASE OUR
COSTS
Changes in the regulatory environment could decrease our revenues and
increase our costs. As a provider of Internet access and e-mail services, we are
not currently subject to direct regulation by the Federal Communications
Commission. However, several telecommunications carriers are seeking to have
communications over the Internet regulated by the FCC in the same manner as
other more traditional telecommunications services. Local telephone carriers
have also petitioned the FCC to regulate Internet access providers in a manner
similar to long distance telephone carriers and to impose access fees on these
providers, and recent events suggest that they may be successful in obtaining
the treatment they seek. In addition, we operate our services throughout the
United States, and regulatory authorities at the state level may seek to
regulate aspects of our activities as telecommunications services. As a result,
we could become subject to FCC and state regulation as Internet services and
telecommunications services converge.
We remain subject to numerous additional laws and regulations that could
affect our business. Because of the Internet's popularity and increasing use,
new laws and regulations with respect to the Internet are becoming more
prevalent. These laws and regulations have covered, or may cover in the future,
issues such as:
- user privacy;
- pricing;
- intellectual property;
- federal, state and local taxation;
- distribution; and
- characteristics and quality of products and services.
Legislation in these areas could slow the growth in use of the Internet
generally and decrease the acceptance of the Internet as a communications and
commercial medium. Additionally, because we rely on the collection and use of
personal data from our 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.
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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. Please see "Business--Government
Regulation."
IF INTERNET USAGE DOES NOT CONTINUE TO GROW, OUR BUSINESS WILL SUFFER
Our business and financial results depend on continued growth in the use of
the Internet. We cannot be certain that this growth will continue or that it
will continue in its present form. If Internet usage declines or evolves away
from our business, our growth will slow or stop and our business and financial
results will suffer.
UNANTICIPATED DELAYS OR PROBLEMS IN THE INTRODUCTION OF NEW FEATURES OR SERVICES
MAY CAUSE CUSTOMER DISSATISFACTION
If we experience problems related to the reliability and quality of our
services or delays in the introduction of new versions of or enhancements to our
services, we could experience increased subscriber cancellations, adverse
publicity and reduced sales of advertising and products. Our services are very
complex and are likely to contain a number of undetected errors and defects,
especially when new features or enhancements are first released. 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 HAVE LIMITED EXPERIENCE WITH THE SOFTWARE WE USE TO 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." We have limited experience with the operation of
these billing and fraud detection systems. If we encounter difficulty with the
operation of these systems, or if errors, defects or malfunctions occur in the
operation of these systems, this could result in erroneous overcharges to
customers or in the under-collection of revenue, either of which could hurt our
business and financial results.
OUR RELATIONSHIP WITH D. E. SHAW & CO., L.P. MAY PRESENT POTENTIAL CONFLICTS OF
INTEREST
The Chairman of our board of directors and our controlling stockholder,
Dr. David E. Shaw, is the Chairman and Chief Executive Officer of D. E. Shaw &
Co., Inc., which is the general partner of D. E. Shaw & Co., L.P., a global
securities firm whose activities focus on various aspects of the
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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 expect to
continue to obtain some services in India from DESCO, L.P. or its affiliates.
Dr. Shaw and entities affiliated with him are likely to manage, invest in or
otherwise be involved with other technology-related business ventures apart from
our company. These relationships could also restrict our ability to transact
business with non-affiliated parties, and could negatively affect us. For a more
detailed discussion of related-party transactions and our relationship with
entities affiliated with Dr. Shaw, please see "Certain Transactions."
OUR DIRECTORS AND OFFICERS WILL EXERCISE SIGNIFICANT CONTROL OVER US FOLLOWING
THIS OFFERING
As of January 31, 2000, the executive officers, directors, and persons and
entities affiliated with executive officers or directors beneficially owned in
the aggregate approximately 50.4% of our outstanding common stock. We anticipate
that the executive officers, directors and persons and entities affiliated with
executive officers or directors will, in the aggregate, beneficially own
approximately 46.1% of our outstanding common stock following the completion of
this offering. The Chairman of our board of directors is Dr. David E. Shaw.
Dr. Shaw continues to serve as the Chairman and Chief Executive Officer of
D. E. Shaw & Co., Inc., which is the general partner of DESCO, L.P. Dr. Shaw and
persons or entities affiliated with him, including DESCO, L.P., will, in the
aggregate, beneficially own approximately 44.6% of our outstanding common stock
following the completion of this offering. 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. Please see "Management" and "Principal Stockholders."
IF WE FAIL TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY OR FACE A CLAIM OF
INTELLECTUAL PROPERTY INFRINGEMENT BY A THIRD PARTY, WE COULD LOSE OUR
INTELLECTUAL PROPERTY RIGHTS OR BE LIABLE FOR SIGNIFICANT DAMAGES
We have taken steps to protect our intellectual property rights, but we
cannot be certain that our efforts will be adequate to safeguard our rights to
technology we have developed. Disputes concerning the ownership or rights to use
intellectual property could be costly and time consuming to litigate, may
distract management from other tasks of operating the business, and may result
in our loss of significant rights and the loss of our ability to operate our
business.
We have been granted three U.S. patents covering aspects of our technology
for the offline display of advertisements and 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
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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.
PROBLEMS RESULTING FROM THE YEAR 2000 PROBLEM COULD REQUIRE US TO INCUR
UNANTICIPATED EXPENSE AND COULD DIVERT MANAGEMENT'S TIME AND ATTENTION
The Year 2000 problem could harm our business and financial results. Many
currently installed computer systems and software products produced before
January 1, 2000 were coded to accept or recognize only two-digit entries in the
date code field. These systems may interpret the date code "00" as the year 1900
rather than the year 2000. As a result, computer systems and software used by
many companies and governmental agencies may need to be upgraded or replaced to
comply with Year 2000 requirements or risk system failure or miscalculations
causing disruptions of normal business activities. We are not aware of any
material Year 2000 problems that have harmed or threaten to harm our business,
but we cannot assure you that no such problems will emerge. Our failure to
correct a material Year 2000 problem could result in an interruption in, or a
failure of, aspects of our normal business activities or operations. In
addition, a significant Year 2000 problem involving our network services or
equipment provided to us by third-party vendors could cause our customers to
consider seeking alternate providers or cause an unmanageable burden on our
customer service and technical support capabilities. Any significant Year 2000
problem could require us to incur significant unanticipated expenses to remedy
these problems and could divert management's time and attention. Please see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Impact of the Year 2000" for more detailed information regarding the
Year 2000 issue.
WE ARE DEPENDENT ON KEY MANAGEMENT PERSONNEL FOR OUR FUTURE SUCCESS
Our business and financial results depend in part on the continued service
of our key personnel. We do not carry key person life insurance on any of our
personnel. The loss of the services of any of our executive officers or the loss
of the services of other key employees could harm our business and financial
results.
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
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continue to experience, difficulty in hiring and retaining highly skilled
employees with appropriate qualifications.
WE CANNOT PREDICT OUR FUTURE CAPITAL NEEDS AND WE MAY NOT BE ABLE TO SECURE
ADDITIONAL FINANCING
We currently anticipate that the net proceeds of this offering, together
with available funds, will be sufficient to meet our anticipated needs for at
least the next 12 months. We may need to raise additional funds in the future to
fund our operations, to finance subscriber acquisition costs, to enhance 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 or on acceptable terms,
we may be forced to cease our operations, and even if we are able to continue
our operations, our business and financial results may suffer.
WE MAY NOT BE ABLE TO SUCCESSFULLY MAKE ACQUISITIONS OF OR INVESTMENTS IN OTHER
COMPANIES
We have no experience in acquiring or making investments in companies,
technologies or services. From time to time we have had discussions with
companies regarding our acquiring, or investing in, their businesses, products
or services, or customers. We have no present understanding or agreement
relating to any acquisition or investment. If we buy a company, we could have
difficulty in assimilating that company's personnel and operations. In addition,
the key personnel of the acquired company may decide not to work for us. If we
make other types of acquisitions, we could have difficulty in assimilating the
acquired services, technologies or customers into our operations. These
difficulties could disrupt our ongoing business, distract our management and
employees, increase our expenses and adversely affect our results of operations
due to accounting requirements such as the amortization of goodwill.
Furthermore, we may incur debt or issue equity securities to pay for any future
acquisitions. The issuance of equity securities could be dilutive to our
existing stockholders.
WE COULD FACE ADDITIONAL REGULATORY REQUIREMENTS, TAX LIABILITIES AND OTHER
RISKS IF WE DECIDE TO EXPAND INTERNATIONALLY
We may decide to expand internationally, and believe that any international
operations would be subject to most of the risks of our business generally. In
addition, there are risks inherent in doing business in international markets,
such as changes in regulatory requirements, tariffs and other trade barriers,
fluctuations in currency exchange rates, and adverse tax consequences, and there
are likely to be different consumer preferences and requirements in such
markets. We cannot assure you that one or more of these factors would not harm
any future international operations.
FUTURE SALES OF OUR COMMON STOCK MAY NEGATIVELY AFFECT OUR STOCK PRICE
We have a large number of shares of common stock outstanding and available
for resale beginning at various points in time in the future. The market price
of our common stock could decline as a result of sales of a large number of
shares of our common stock in the market, or the perception that such sales
could occur. These sales also might make it more difficult for us to sell equity
securities in the future at a price that we think is appropriate, or at all.
Please see "Shares Eligible for Future Sale."
OUR STOCK PRICE HAS EXPERIENCED, AND IS LIKELY TO CONTINUE TO EXPERIENCE,
EXTREME PRICE AND VOLUME FLUCTUATIONS
The stock market has experienced extreme price and volume fluctuations. The
market prices of the securities of Internet-related companies have been
especially volatile. Until recently, there has been no public market for our
common stock. We cannot predict the extent to which investor interest in Juno
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will lead to the development of an active trading market or how liquid that
market might become. We may suffer significant declines in the market price of
our common stock.
In the past, companies that have experienced volatility in the market price
of their stock have been the object of securities class action litigation. If we
were the object of securities class action litigation, it could result in
substantial costs and a diversion of our management's attention and resources.
WE MAY SPEND A SUBSTANTIAL PORTION OF THE NET PROCEEDS OF THIS OFFERING IN WAYS
WITH WHICH YOU MAY NOT AGREE
We intend to spend a significant portion of the net proceeds of this
offering on our marketing activities. Our management will have broad discretion,
however, over the allocation of the net proceeds from this offering as well as
over the timing of our expenditures. Investors may not agree with the way our
management decides to spend these proceeds. Please see "Use of Proceeds."
WE HAVE ANTI-TAKEOVER PROVISIONS WHICH MAY MAKE IT DIFFICULT FOR A THIRD PARTY
TO ACQUIRE US
Provisions of our certificate of incorporation, our bylaws and Delaware law
could make it more difficult for a third party to acquire us, even if doing so
might be beneficial to our stockholders. Please see "Description of Capital
Stock."
INVESTORS IN THIS OFFERING WILL SUFFER IMMEDIATE AND SUBSTANTIAL DILUTION
Investors purchasing shares in the offering will incur immediate and
substantial dilution in net tangible book value per share. To the extent
outstanding options to purchase common stock are exercised, there will be
further dilution. Please see "Dilution."
WE DO NOT PLAN TO PAY DIVIDENDS IN THE FORESEEABLE FUTURE AND, AS A RESULT,
STOCKHOLDERS WILL NEED TO SELL SHARES TO REALIZE A RETURN ON THEIR INVESTMENT
We have not declared or paid any cash dividends on our capital stock since
inception. We intend to retain any future earnings to finance the operation and
expansion of our business and do not anticipate paying any cash dividends in the
foreseeable future. Consequently, stockholders will need to sell shares of
common stock in order to realize a return on their investment, if any.
27
<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements which involve risks and
uncertainties. These forward-looking statements are usually accompanied by words
such as "believes," "anticipates," "plans," "expects" and similar expressions.
Our actual results could differ materially from those expressed or implied by
these forward-looking statements. The following factors, among others, could
cause Juno's actual results to differ materially from those described in a
forward-looking statement:
- our limited history of offering our billable premium services and our free
basic service in its current form;
- our history of losses;
- our failure to retain or grow Juno's subscriber base;
- increasing competition from existing or new competitors;
- any failure to sustain current levels of subscriber acquisition or
retention;
- any inability to successfully migrate members to or retain members in
Juno's billable premium services;
- increased telecommunications costs resulting from the expansion of our
free basic service;
- rapid technological change;
- the possible unavailability of financing as and if needed;
- decreases in the popularity of the Internet among consumers or as an
advertising medium;
- our dependence on a limited number of vendors, including, without
limitation, third-party vendors for the provision and roll-out of the Juno
Express broadband service;
- our dependence on strategic marketing alliances as a source of revenues;
- the inability to achieve telecommunications cost savings through
utilization of per-modem pricing;
- possible industry consolidation; and
- potential fluctuations in quarterly and annual results.
This list is intended to identify only certain of the principal factors that
could cause actual results to differ. Please refer to the risk factors described
in the "Risk Factors" section and elsewhere in this prospectus.
28
<PAGE>
USE OF PROCEEDS
The net proceeds to us from the sale of the 3,320,000 shares offered by Juno
hereby, at an assumed offering price of $26.88 per share, after deducting the
underwriting discounts and estimated offering expenses payable by us, are
estimated to be approximately $83.8 million, or $96.5 million if the
underwriters' over-allotment option is exercised in full.
We intend to use the net proceeds of this offering for subscriber
acquisition, advertising, brand marketing, continued investment in the
development of our Internet services, enhancements of our network infrastructure
and other general corporate purposes. We may also use a portion of the proceeds
of this offering for acquisitions, strategic alliances, or joint ventures. At
present, we have no plans, arrangements or understandings related to any
specific acquisitions.
We have not yet determined the amount of net proceeds to be used
specifically for each of the foregoing purposes. Accordingly, management will
have significant flexibility in applying the net proceeds of the offering. Until
this money is used, we intend to invest the net proceeds in interest-bearing
instruments.
DIVIDEND POLICY
We have not declared or paid any cash dividends on our capital stock since
inception. We intend to retain any future earnings to finance the operation and
expansion of our business and do not anticipate paying any cash dividends in the
foreseeable future. Consequently, stockholders will need to sell shares of
common stock in order to realize a return on their investment, if any.
PRICE RANGE OF COMMON STOCK
Our common stock has been quoted on the Nasdaq National Market under the
symbol JWEB since our initial public offering on May 26, 1999. The following
table sets forth, for the periods indicated, the high and low sales prices per
share of the common stock as reported on the Nasdaq National Market:
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
FISCAL YEAR ENDED DECEMBER 31, 1999
Second Quarter (from May 26, 1999)...................... $29.3750 $ 8.8750
Third Quarter........................................... $27.7500 $12.0625
Fourth Quarter.......................................... $87.0000 $14.0000
FISCAL YEAR ENDED DECEMBER 31, 2000
First Quarter (through February 7, 2000)................ $48.6250 $25.0000
</TABLE>
On February 7, 2000, the last reported sales price of the common stock on
the Nasdaq National Market was $26.88 per share. As of February 7, 2000, there
were approximately 450 holders of record of our common stock.
29
<PAGE>
CAPITALIZATION
The following table sets forth, as of December 31, 1999, the capitalization
of Juno on an actual basis and on an as adjusted basis which assumes the
completion of this offering by giving effect to the sale of the
3,320,000 shares offered by Juno hereby at an assumed offering price of
$26.88 per share, after deducting the underwriting discounts and estimated
offering expenses payable by Juno, and the application of the net proceeds from
this offering.
This information should be read in conjunction with Juno's consolidated
financial statements and the notes relating to these statements appearing
elsewhere in this prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------------
ACTUAL AS ADJUSTED
--------- -----------
<S> <C> <C>
(IN THOUSANDS)
Total indebtedness, including current maturities............ $ 2,878 $ 2,878
--------- ---------
Stockholders' equity:
Preferred Stock, $.01 par value, 5,000,000 shares
authorized; none issued or outstanding on an actual or
as adjusted basis....................................... -- --
Common Stock, $.01 par value, 133,333,334 shares
authorized; 34,833,568 shares issued and outstanding on
an actual basis; and 38,153,568 shares issued and
outstanding on an as adjusted basis..................... 348 382
Additional paid-in capital................................ 123,530 207,260
Unearned compensation..................................... (745) (745)
Cumulative translation adjustment......................... (1) (1)
Accumulated deficit....................................... (51,484) (51,484)
--------- ---------
Total stockholders' equity.............................. 71,648 155,412
--------- ---------
Total capitalization.................................. $ 74,526 158,290
========= =========
</TABLE>
The table above excludes 120,972 shares of common stock that have been
issued upon the exercise of stock options since December 31, 1999; 64,811 shares
of common stock that have been issued under our Employee Stock Purchase Plan
since December 31, 1999; 4,212,368 shares of common stock issuable upon the
exercise of stock options outstanding as of January 31, 2000, with a weighted
average exercise price of $8.42 per share; and 1,272,844 additional shares that
may be issued under our stock option plan. See "Management--1999 Stock Incentive
Plan," "Description of Capital Stock" and Note 11 of Notes to Consolidated
Financial Statements.
30
<PAGE>
DILUTION
The net tangible book value of Juno as of December 31, 1999, was
$71.6 million, or $2.06 per share of common stock. Net tangible book value per
share is equal to the amount of Juno's total tangible assets, which is defined
as total assets less intangible assets, divided by the number of shares of
common stock outstanding, as of December 31, 1999. Assuming the sale by Juno of
the shares offered hereby at an assumed offering price of $26.88 per share and
after deducting underwriting discounts and estimated offering expenses payable
by Juno, and the application of the estimated net proceeds therefrom, the pro
forma net tangible book value of Juno as of December 31, 1999 would have been
$155.4 million, or $4.07 per share of common stock. This represents an immediate
increase in pro forma net tangible book value of $2.01 per share to existing
stockholders and an immediate dilution in pro forma net tangible book value of
$22.81 per share to new investors. The following table illustrates this per
share dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price per share..................... $26.88
Net tangible book value per share as of December 31,
1999.................................................... $ 2.06
Pro forma increase attributable to new investors.......... 2.01
------
Pro forma net tangible book value per share after the
offering.................................................. 4.07
------
Pro forma dilution per share to new investors............... $22.81
======
</TABLE>
The following table summarizes, on a pro forma basis as of December 31,
1999, the total number of shares of common stock purchased from Juno, the total
consideration paid to Juno and the average price per share paid by existing
stockholders and by new investors:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- -------- ------------ -------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders................... 34,833,568 91.3 $229,523,630 72.0 $ 6.59
New investors........................... 3,320,000 8.7 $ 89,225,000 28.0 $26.88
---------- ----- ------------ -----
Total............................... 38,153,568 100.0% $318,748,630 100.0%
========== ===== ============ =====
</TABLE>
The foregoing tables and calculations assume no exercise of outstanding
options. At January 31, 2000, there were 4,212,368 shares of common stock
reserved for issuance upon exercise of outstanding options at a weighted average
exercise price of $8.42 per share, and 1,272,844 additional shares that may be
issued under our stock option plan. To the extent that these options are
exercised, there will be further dilution to new investors. See
"Management--1999 Stock Incentive Plan."
31
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the consolidated financial statements and the notes to these
statements and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this prospectus. The consolidated
statement of operations data for the years ended December 31, 1997, 1998 and
1999, and the consolidated balance sheet data at December 31, 1998 and 1999, are
derived from the consolidated financial statements of Juno which have been
audited by PricewaterhouseCoopers LLP, independent accountants, and are included
elsewhere in this prospectus. The consolidated statement of operations data for
the period from our inception on June 30, 1995 through December 31, 1995 and for
the year ended December 31, 1996, and the consolidated balance sheet data at
December 31, 1995, 1996 and 1997, are derived from the audited consolidated
financial statements of Juno not included elsewhere in this prospectus.
Net loss per share for the year ended December 31, 1999 is calculated
separately for the periods prior and subsequent to the March 1999 statutory
merger. The pro forma information regarding net loss per share and weighted
average shares outstanding set forth below gives effect to the treatment of
Class A limited partnership units as shares of common stock for all periods
presented and the conversion of Series B redeemable convertible preferred stock
for the period following the March 1999 statutory merger. See the consolidated
financial statements and the notes to these statements appearing elsewhere in
this prospectus for the determination of the number of shares used in computing
historical and pro forma basic and diluted loss per share.
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(JUNE 30, 1995) YEAR ENDED DECEMBER 31,
TO DECEMBER 31, -----------------------------------------
1995 1996 1997 1998 1999
--------------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Billable services..................................... $ -- $ 6 $ 1,371 $ 6,645 $ 34,545
Advertising and transaction fees...................... -- 127 1,875 6,454 12,662
Direct product sales.................................. -- 3 5,845 8,595 4,794
------- -------- -------- -------- --------
Total revenues...................................... -- 136 9,091 21,694 52,001
------- -------- -------- -------- --------
Cost of revenues:
Billable services..................................... -- -- 1,053 5,606 24,950
Advertising and transaction fees...................... -- 278 1,659 3,725 4,675
Direct product sales.................................. -- 3 5,796 7,627 4,176
------- -------- -------- -------- --------
Total cost of revenues.............................. -- 281 8,508 16,958 33,801
------- -------- -------- -------- --------
Operating expenses:
Operations, free service.............................. -- 5,803 11,075 9,383 6,698
Subscriber acquisition................................ 592 6,993 3,140 5,334 47,651
Sales and marketing................................... 389 4,276 12,593 11,584 11,556
Product development................................... 2,577 3,741 4,860 7,345 7,232
General and administrative............................ 275 2,172 2,897 2,760 4,615
------- -------- -------- -------- --------
Total operating expenses............................ 3,833 22,985 34,565 36,406 77,752
------- -------- -------- -------- --------
Loss from operations................................ (3,833) (23,130) (33,982) (31,670) (59,552)
Interest income, net.................................... -- 128 243 44 3,718
------- -------- -------- -------- --------
Net loss............................................ $(3,833) $(23,002) $(33,739) $(31,626) $(55,834)
======= ======== ======== ======== ========
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED
PERIOD FROM DECEMBER 31, 1999
INCEPTION ----------------------------------------
(JUNE 30, TWO MONTHS TEN MONTHS
1995) YEAR ENDED DECEMBER 31, ENDED ENDED
TO DECEMBER ------------------------------ FEBRUARY 28, DECEMBER 31,
31, 1995 1996 1997 1998 1999 1999 TOTAL
----------- -------- -------- -------- ------------- ------------- --------
(IN THOUSANDS, EXCEPT PER LIMITED PARTNERSHIP UNIT AND SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
EARNINGS PER SHARE CALCULATION:
Net loss attributable to common
stockholders....................... $(3,833) $(23,002) $(33,739) $(31,626) $(4,350) $(51,484) $(55,834)
======= ======== ======== ======== ======= ======== ========
Basic and diluted net loss per
Class A limited partnership unit... $ (7.39) $ (7.01) $ (3.21) $ (1.85) $ (0.25)
======= ======== ======== ======== =======
Basic and diluted net loss per
share.............................. $ (2.07)
========
Weighted average number of:
Class A limited partnership
units............................ 519 3,281 10,500 17,091 17,684
======= ======== ======== ======== =======
Shares of common stock............. 24,877
========
Pro forma basic and diluted net loss
per share.......................... $ (1.85) $ (1.84)
======== ========
Weighted average shares outstanding
used in pro forma basic and diluted
per share calculation.............. 17,091 30,339
======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................... $ -- $ 598 $ 13,770 $ 8,152 $ 91,497
Working capital (deficiency)............................ 92 (2,004) 6,927 (8,343) 67,571
Total assets............................................ 92 4,774 20,133 14,703 119,088
Total indebtedness, including current maturities........ -- -- 795 10,188 2,878
Partners' capital (deficiency).......................... 92 (2,004) 10,504 (12,588) --
Total stockholders' equity.............................. -- -- -- -- 71,648
</TABLE>
33
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF JUNO SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL
STATEMENTS AND THE NOTES TO THOSE STATEMENTS INCLUDED ELSEWHERE IN THIS
PROSPECTUS. THIS DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE
RISKS AND UNCERTAINTIES. JUNO'S ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE
EXPRESSED OR IMPLIED BY THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS
FACTORS, SUCH AS THOSE SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS
PROSPECTUS.
OVERVIEW
Juno Online Services, Inc. is a leading provider of Internet-related
services to millions of computer users throughout the United States. We provide
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,
which is currently being tested 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:
- Our BASIC SERVICE now provides full Internet access for free in addition
to e-mail.
- 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
prominent advertising and navigation banner that is displayed to our basic
service users at all times while they are connected to the Web.
- JUNO EXPRESS is a broadband service that provides all the features of Juno
Web at speeds up to 15 times faster than an ordinary dial-up Internet
connection. We are now conducting a pilot test of Juno Express in selected
markets and plan to expand into additional markets over the coming year.
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 historical results of operations presented below do not reflect the
expansion of our services described above. This service expansion is expected to
result in increased operating expenses. The provision of full Internet access
for free is expected to significantly 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
significantly increasing subscriber acquisition expenses 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 introduction of a
persistent advertising and navigation banner displayed at all times while a user
is connected to the Web, will generate a substantial amount of additional
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 accelerated subscriber acquisition efforts. In the near
term, however, we expect that increases in revenues will be less than increases
in operating expenses.
34
<PAGE>
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
(c) charges for shipping and handling associated with mailing disks upon
request to prospective Juno subscribers, consulting revenues, and
fees for other billable services.
(2) Advertising and transaction fees, consisting of revenues earned from
advertisers and strategic marketing partners for displaying
advertisements to, and facilitating electronic commerce with, our
subscribers. These advertisements are displayed on Juno's portal site, on
the persistent advertising and navigation banner displayed while users of
our free basic service are connected to the Web, and within the main Juno
software while a Juno subscriber reads or writes e-mail.
(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 December 31, 1999, we had approximately 550,000 premium service
subscribers. Since the launch of our billable premium services, billable
services revenues have increased, both in absolute terms and as a percentage of
our revenues.
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 over
the past eighteen months 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 as low as $9.95 per month. Juno Gold was offered
for a list price of $2.95 per month, billed annually in advance. Pricing for
Juno Express will be determined over the course of the pilot test. Subscription
revenues for our billable premium services accounted for approximately 94.1% of
billable services revenues during 1999.
Our strategy contemplates considerable growth in the number of subscribers
to both our free basic service and our billable premium services. We intend to
devote significant resources to advertising and brand marketing designed to
acquire new subscribers directly into each of our service levels and to
encourage migration of our free basic service subscribers to our premium
services. In addition to direct marketing and advertising initiatives, we
continually experiment with a wide range of product offerings, promotional and
pricing plans, and features of our service as part of our overall subscriber
acquisition and retention strategy. We expect that our ongoing experiments with
discounted pricing will increase cost of revenues for billable services as a
percentage of billable service revenues in the near term, and especially in the
first calendar quarter, which tends to be a favorable time for direct marketing.
We further expect growth in the subscriber base for Juno Web and Juno Express to
result in substantial growth in subscription fees. Our strategy contemplates
that revenues for billable premium services are likely to be the single largest
source of revenues for Juno in the immediate future.
We face intense competition to acquire billable service subscribers. Our
competitors for such subscribers include companies that have substantially
greater market presence and financial, technical, distribution, marketing and
other resources than we have. This competitive environment could have a variety
of harmful effects on us, including limiting our ability to enter into 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.
35
<PAGE>
We are subject to industry trends that affect Internet access providers
generally, including seasonality and subscriber cancellations. We believe
Internet access providers typically incur higher expenses during the last and
first calendar quarters, corresponding to heavier usage during the fall and
winter, and experience relatively lighter usage and relatively fewer account
registrations during the summer. We believe subscriber acquisition also tends to
be most effective during the first and last calendar quarters of each year, and
we may take these types of seasonal effects into consideration in scheduling our
marketing activities. The results of operations of Internet access providers,
including those of Juno, are significantly affected by subscriber cancellations.
The failure to retain subscribers to our billable premium services, or an
increase in the rate of cancellations of those services, would cause our
business and financial results to suffer.
Additionally, our strategy contemplates increases in revenues from
advertising and transaction fees. We expect that strategic marketing alliances
will account for an increasing portion of such revenues. This is due in part to
our expectation that we may secure additional strategic marketing alliances, as
well as to our expectation that we may earn incremental performance-based
revenues beyond the minimum guaranteed revenues associated with some of these
arrangements. We expect that revenues from direct product sales will be
significantly reduced 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
telecommunications services and customer service, as well as merchandising
fulfillment for our direct product sales activities, principally from
third-party providers.
We have incurred net losses of $148.0 million from our inception on
June 30, 1995 through December 31, 1999. 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, $34,000 was amortized for
the year ended December 31, 1998 and $416,000 was amortized for the year ended
December 31, 1999. 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 $218.7 million, and
borrowings to fund our operations. Included in this amount are $77.3 million of
net proceeds from our May 1999 initial public offering of common stock and
$61.9 million of net proceeds from 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 included in the prospectus consist of the
accounts of both Juno Online Services, L.P. and Juno Online Services, Inc. All
significant intercompany accounts and transactions have been eliminated in
consolidation. Since we operated as a limited partnership prior to March 1,
1999, taxable losses incurred through that date have been allocated to the
partners for reporting on their respective income tax returns. Accordingly, as
of that date, we had no available net
36
<PAGE>
operating loss carryforwards available for federal and state income tax purposes
to offset future taxable income, if any.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
REVENUES
Total revenues increased $30.3 million, to $52.0 million for the year ended
December 31, 1999 from $21.7 million for the year ended December 31, 1998, an
increase of 140%. 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 $27.9 million, to
$34.5 million for the year ended December 31, 1999 from $6.6 million for the
year ended December 31, 1998, an increase of 420%. This increase was due
primarily to the additional number of subscribers to our billable premium
services in the year ended December 31, 1999, as compared with the much smaller
number in the year ended December 31, 1998. Our billable premium services were
introduced in July 1998. Revenues associated with these services contributed
$32.5 million of revenues in the year ended December 31, 1999 compared to
$3.6 million in the year ended December 31, 1998, representing an increase of
797%.
ADVERTISING AND TRANSACTION FEES. Advertising and transaction fees
increased $6.2 million, to $12.7 million for the year ended December 31, 1999
from $6.5 million for the year ended December 31, 1998, an increase of 96.2%.
This increase was due primarily to larger average deal sizes associated with the
shift in our emphasis towards strategic marketing alliances, partially offset by
declines in the number of and the aggregate revenue generated from shorter term
ad sales contracts. Barter transactions accounted for approximately 6.2% of
total advertising and transaction fees for the year ended December 31, 1999
versus 1.9% for the year ended December 31, 1998.
DIRECT PRODUCT SALES. Direct product sales decreased $3.8 million, to
$4.8 million for the year ended December 31, 1999 from $8.6 million for the year
ended December 31, 1998, a decrease of 44.2%. This decline reflects our
strategic decision in 1998 to narrow the range of our direct product sales
activities and of the types of products offered to our subscribers. Instead, we
decided to concentrate on forming strategic marketing alliances and developing
other uses for our advertising inventory that we believe should generate
revenues with higher margins than direct product sales.
COST OF REVENUES
Total cost of revenues increased $16.8 million, to $33.8 million for the
year ended December 31, 1999 from $17.0 million for the year ended December 31,
1998, an increase of 99.3%. This increase was due primarily to increases in
costs associated with higher revenues from billable services and advertising and
transaction fees, partially offset by a decrease in costs associated with direct
product sales revenues.
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, cost of
revenues related to billable services includes the costs of mailing disks upon
request to prospective Juno subscribers, and the personnel and related overhead
costs associated with our performance of a short-term consulting engagement.
Cost of revenues related to billable services increased approximately
$19.3 million, to $25.0 million for the year ended December 31, 1999 from
$5.6 million for the year ended December 31, 1998, an increase of 345%. This
increase was due primarily to the costs of providing our billable premium
37
<PAGE>
services to a substantially larger number of subscribers in the year ended
December 31, 1999, as compared with the year ended December 31, 1998. Costs
related to the provision of these billable premium services, principally
customer service, technical support and telecommunications expenses, accounted
for 80.0% of the total costs of revenues related to billable services during the
year ended December 31, 1999 and accounted for the majority of the increase.
Cost of billable services revenues as a percentage of billable services revenues
improved to 72.2% for the year ended December 31, 1999 from 84.4% for the year
ended December 31, 1998. This improvement is primarily attributable to decreased
customer service costs per subscriber and declining average telecommunications
rates.
ADVERTISING AND TRANSACTION FEES. Cost of revenues for advertising and
transaction fees 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
$1.0 million, to $4.7 million for the year ended December 31, 1999 from
$3.7 million for the year ended December 31, 1998, an increase of 25.5%. 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 36.9% for the year
ended December 31, 1999 from 57.7% for the year ended December 31, 1998. This
improvement is due primarily to decreased telecommunications rates, faster
average connection speeds, larger average deal sizes over which to spread
production costs, and improvements in our production and distribution methods.
DIRECT PRODUCT SALES. Cost of revenues for direct product sales consists
primarily of the costs of merchandise sold directly by us to our subscribers and
the associated shipping and handling costs.
The cost of revenues for direct product sales decreased approximately
$3.5 million, to $4.2 million for the year ended December 31, 1999 from
$7.6 million for the year ended December 31, 1998, a decrease of 45.2%. 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
improved to 87.1% for the year ended December 31, 1999 from 88.7% for the year
ended December 31, 1998. This improvement was due primarily to efficiencies
associated with outsourcing various functions rather than performing them
internally, partially offset by a greater decline in the average retail price of
merchandise sold relative to the declines in the costs of such merchandise, and
additional promotional pricing in response to increasing competition for
computer hardware.
OPERATING EXPENSES
OPERATIONS, FREE SERVICE. Operations, free service consists of the costs
associated with providing our free basic service, comprised principally of
telecommunications costs, expenses associated with providing customer service,
depreciation of network equipment, and personnel and related overhead costs.
Expenses associated with operations, free service decreased $2.7 million, to
$6.7 million for the year ended December 31, 1999 from $9.4 million for the year
ended December 31, 1998, a decrease of 28.6%. This decrease was primarily due to
declining telecommunications rates and increasing connection speeds resulting
from the use of faster modems by a portion of our subscriber base. The
historical results were not materially impacted by the expansion of our basic
service to provide full Internet access for free, since this expansion occurred
on December 20, 1999. We expect that this expansion of our free service will
significantly increase our operations, free service expenses.
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 direct mail
38
<PAGE>
campaigns, advertising through conventional and computer-based media,
telemarketing, producing advertisements to be displayed over the Juno services
and transmitting them to our subscribers, disk duplication and fulfillment, and
bounties paid to acquire subscribers, among other marketing activities. These
costs also include various subscriber retention activities, as well as personnel
and related overhead costs.
Subscriber acquisition costs increased approximately $42.3 million, to
$47.7 million for the year ended December 31, 1999 from $5.3 million for the
year ended December 31, 1998. This increase is due primarily to costs related to
our 1999 external marketing campaign which launched in the second quarter of
1999, including direct mail programs, television and radio commercials, outdoor
advertising and various other advertising expenditures. This increase is also
due to inbound telemarketing costs incurred in connection with subscriber
acquisition and retention activities and to ad production and transmission costs
associated with soliciting basic e-mail subscribers to upgrade to our billable
subscription services. As a percentage of revenues, subscriber acquisition costs
increased to 91.6% in the year ended December 31, 1999 from 24.6% in the year
ended December 31, 1998. This percentage increase was primarily due to increased
costs related to our 1999 external marketing campaign. In connection with the
expansion of our free service described above, we anticipate significantly
increasing subscriber acquisition expenses in order to fund subscriber growth in
an attempt to gain market share.
SALES AND MARKETING. Sales and marketing expenses consist primarily of the
personnel and related overhead costs of the following departments: advertising
sales and business development; direct product sales; and product marketing.
Also included are costs associated with trade advertising intended to support
our ad sales effort, corporate branding activities unrelated to subscriber
acquisition, and public relations, as well as ad production, ad transmission,
customer service and fulfillment costs associated with our direct product sales
activities.
Sales and marketing costs were $11.6 million for the years ended
December 31, 1999 and 1998. Sales and marketing expenses for the year ended
December 31, 1999 include increased trade advertising costs as compared to the
year ended December 31, 1998. This increase was partially offset by cost
reductions associated with our decision to scale back various direct product
sales activities. Sales and marketing costs for the year ended December 31, 1998
include one-time costs associated with this decision, as well as expenses
related to the closing of our regional advertising sales offices. As a
percentage of revenues, sales and marketing costs improved to 22.2% in the year
ended December 31, 1999 from 53.4% in the year ended December 31, 1998. This
improvement was primarily due to an increase in revenues for the year ended
December 31, 1999.
PRODUCT DEVELOPMENT. Product development includes research and development
expenses and other product development costs. These costs consist primarily of
personnel and related overhead costs as well as the costs associated with
research and development and other product development activities performed for
us on a contract basis by a related party in Hyderabad, India, prior to our
hiring as employees substantially all of these individuals in May 1999.
Product development costs decreased $0.1 million, to $7.2 million for the
year ended December 31, 1999 from $7.3 million for the year ended December 31,
1998, a decrease of 1.5%. This decrease is primarily due to lower costs
associated with operating our India-based research and development efforts as a
wholly-owned subsidiary, rather than obtaining these services on a contract
basis, partially offset by additional personnel and related costs in both our
domestic and India offices. Product development costs in the year ended
December 31, 1999 and 1998 related primarily to the continued development of our
billable premium services and of various pieces of software. To date, we have
not capitalized any expenses related to any software development activities.
39
<PAGE>
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 approximately $1.9 million, to
$4.6 million for the year ended December 31, 1999 from $2.8 million for the year
ended December 31, 1998, an increase of 67.2%. This increase is primarily due to
increased insurance costs for directors' and officers' liability insurance,
professional service fees and additional personnel and related overhead costs.
As a percentage of revenues, general and administrative costs decreased to 8.9%
for the year ended December 31, 1999 from 12.7% for the year ended December 31,
1998. This decrease was primarily due to the increase in revenue for the year
ended December 31, 1999 compared to the year ended December 31, 1998. We expect
that we will incur additional general and administrative expenses as we hire
additional personnel and incur additional costs related to the growth of our
business and operation as a public company, including directors' and officers'
liability insurance, investor relations programs and professional service fees.
Accordingly, we anticipate that general and administrative expenses will
increase in absolute dollar terms in the future.
INTEREST INCOME, NET. Interest income, net increased approximately
$3.7 million, to $3.7 million for the year ended December 31, 1999 from $44,000
for the year ended December 31, 1998. This increase is primarily due to interest
income earned on higher average cash balances in the year ended December 31,
1999 resulting from our initial public offering in May 1999 and from the
issuance of redeemable convertible preferred stock in March 1999, partially
offset by higher interest payments for borrowings.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
REVENUES
Total revenues increased $12.6 million, from $9.1 million for the year ended
December 31, 1997 to $21.7 million for the year ended December 31, 1998, an
increase of 139%. This increase was due primarily to increases in billable
services and in advertising and transaction fees.
BILLABLE SERVICES. Billable services revenues increased approximately
$5.3 million, from $1.4 million for the year ended December 31, 1997 to
$6.6 million for the year ended December 31, 1998, an increase of 385%. This
increase was due primarily to the introduction of our billable subscription
services, which contributed $3.6 million in subscription fees in 1998; a
short-term development consulting contract which contributed $1.0 million; and
technical support fees associated with the growth of the subscriber base of
Juno's free basic e-mail service and of Juno Gold. At December 31, 1998, there
were approximately 144,000 billable services subscribers, with approximately
53,000 subscribing to Juno Gold and approximately 91,000 subscribing to Juno
Web.
ADVERTISING AND TRANSACTION FEES. Advertising and transaction fees
increased $4.6 million, from $1.9 million for the year ended December 31, 1997
to $6.5 million for the year ended December 31, 1998, an increase of 244%. This
increase was due primarily to additional advertisers and advertisements
delivered, and the impact of additional strategic marketing alliances.
From time to time, we engage in barter transactions in which we exchange
advertising with other Internet or traditional media companies, provide
advertising in exchange for software distribution services or other forms of
marketing assistance, or participate in other reciprocal service arrangements.
Barter transactions accounted for 0.3% of total advertising and transaction fees
for the year ended December 31, 1997, and 1.9% for the year ended December 31,
1998.
DIRECT PRODUCT SALES. Direct product sales increased $2.8 million, from
$5.8 million for the year ended December 31, 1997 to $8.6 million for the year
ended December 31, 1998, an increase of 47.0%.
40
<PAGE>
However, revenues from direct product sales decreased $1.0 million, from
$5.0 million for the six months ended December 31, 1997 to $4.0 million for the
six months ended December 31, 1998, a decrease of 20.1%. This decline reflects
our strategic decision during the first quarter of 1998 to narrow the range of
our direct product sales activities and of the types of products offered to our
subscribers. Instead, we decided to concentrate on forming strategic marketing
alliances and developing other uses for our advertising inventory that we
believe should generate revenues with higher margins than direct products sales.
COST OF REVENUES
Total cost of revenues increased $8.5 million, from $8.5 million for the
year ended December 31, 1997 to $17.0 million, an increase of approximately
99.3%. This increase was due primarily to increases in costs associated with
billable services and with advertising and transaction fees.
BILLABLE SERVICES. Cost of revenues related to billable services increased
approximately $4.6 million, from $1.1 million for the year ended December 31,
1997 to $5.6 million for the year ended December 31, 1998, an increase of 433%.
This increase is primarily due to the costs of providing our billable
subscription services. Costs related to the provision of these billable
subscription services, principally customer service, technical support and
telecommunications expenses, accounted for 58.0% of the total costs of revenues
related to all billable services during 1998 and accounted for a majority of the
increase. Cost of revenues related to billable services as a percentage of total
billable services revenues increased from 76.8% for the year ended December 31,
1997 to 84.4% for the year ended December 31, 1998. This increase is principally
related to the introduction of billable subscription services, the relatively
high percentage of subscribers to these services who are in their initial
months, and the higher costs incurred in the early stages of a subscriber's life
cycle. We believe that customer service and technical support costs are
substantially higher in the initial months following signup than during later
months. We also incur significant startup costs associated with training
customer service and technical support representatives and with developing
processes necessary to support the subscriber base and its anticipated future
growth. We expect that, other things being equal, these costs will be highest as
a percentage of the related revenues during periods of rapid percentage growth
in the subscriber base of our billable subscription services.
ADVERTISING AND TRANSACTION FEES. Cost of revenues for advertising and
transaction fees increased approximately $2.1 million, from $1.7 million for the
year ended December 31, 1997 to $3.7 million for the year ended December 31,
1998, an increase of 125%. This increase was principally due to additional
advertisers and advertisements delivered and the impact of additional strategic
marketing alliances. The cost of revenues for advertising and transaction fees
as a percentage of advertising and transaction fees revenue decreased from 88.5%
for the year ended December 31, 1997 to 57.7% for the year ended December 31,
1998. This decrease is primarily due to economies of scale associated with
higher volumes of ad production, decreased telecommunications rates, faster
average connection speeds, and improvements in our production and distribution
methods.
DIRECT PRODUCT SALES. The cost of revenues for direct product sales
increased $1.8 million, from $5.8 million for the year ended December 31, 1997
to $7.6 million for the year ended December 31, 1998, an increase of 31.6%. This
increase corresponds to the increase in merchandise sold. The cost of revenues
for direct product sales as a percentage of direct product sales revenue
decreased from 99.2% for the year ended December 31, 1997 to 88.7% for the year
ended December 31, 1998. This decrease was primarily due to efficiencies
associated with outsourcing various functions rather than performing them
internally.
41
<PAGE>
OPERATING EXPENSES
OPERATIONS, FREE SERVICE. Expenses associated with operations, free service
decreased $1.7 million, from $11.1 million for the year ended December 31, 1997
to $9.4 million for the year ended December 31, 1998, a decrease of 15.3%. This
decrease was primarily due to declining telecommunications rates and increasing
connection speeds resulting from the use of faster modems by a portion of our
subscriber base. These cost savings were partially offset by an increase in the
number of subscribers connecting in a given month. During the month ended
December 31, 1997, 1,986,000 subscriber accounts connected and during the month
ended December 31, 1998, 2,434,000 subscriber accounts connected.
SUBSCRIBER ACQUISITION. Subscriber acquisition costs increased
$2.2 million, from $3.1 million for the year ended December 31, 1997 to
$5.3 million for the year ended December 31, 1998, an increase of 69.9%. This
increase is primarily due to direct mail and advertising costs incurred to
acquire subscribers to our free basic e-mail service in the first half of 1998,
ad production and transmission costs associated with soliciting basic e-mail
subscribers to upgrade to our billable subscription services starting in
July 1998, and costs incurred during the second half of 1998 to prepare for the
large-scale marketing activities planned for 1999. The increase in these costs
was partially offset by a decrease in expenses related to referral bounties as
various agreements that called for bounty payments expired or were terminated.
As a percentage of revenues, subscriber acquisition costs decreased from 34.5%
in 1997 to 24.6% in 1998. This percentage decrease was primarily due to the
relatively larger 1998 revenues. We expect that subscriber acquisition costs
will increase significantly both in absolute dollar terms and as a percentage of
total revenue in the future.
SALES AND MARKETING. Sales and marketing costs decreased $1.0 million, from
$12.6 million for the year ended December 31, 1997 to $11.6 million for the year
ended December 31, 1998, a decrease of 8.0%. This decrease is primarily due to
reductions in the level of trade advertising we undertook in 1998 as well as to
cost savings associated with our decisions to close our regional ad sales
offices and to narrow the range of our direct product sales activities. We
reduced the headcount assigned to our direct product sales activities, as well
as inventory risk, primarily by outsourcing substantially all of the
procurement, warehousing, fulfillment, billing and customer service aspects of
this initiative. In each of the first and second quarters of 1998, sales and
marketing expenses include charges of approximately $300,000 relating to
inventory write-offs, severance pay, and lease termination costs. As a
percentage of revenues, sales and marketing costs decreased from 139% in 1997 to
53.4% in 1998. This percentage decrease was primarily due to our relatively
larger 1998 revenues.
PRODUCT DEVELOPMENT. Product development costs increased approximately
$2.5 million, from $4.9 million for the year ended December 31, 1997 to
$7.3 million for the year ended December 31, 1998, an increase of 51.1%. This
increase is primarily due to the costs associated with establishing development
operations in Hyderabad, India, a project we initiated in the fourth quarter of
1997. Product development costs in 1998 related primarily to the continued
development of our billable subscription services and of various pieces of
software. To date, we have not capitalized expenses related to any software
development activities.
GENERAL AND ADMINISTRATIVE. General and administrative costs decreased
$0.1 million, from $2.9 million for the year ended December 31, 1997 to
$2.8 million for the year ended December 31, 1998, a decrease of 4.7%. This
decrease is primarily due to reduced personnel and related overhead costs, lower
professional fees, and cost containment programs. As a percentage of revenues,
general and administrative costs decreased from 31.9% for the year ended
December 31, 1997 to 12.7% for the year ended December 31, 1998. This decrease
was primarily due to the increase in revenues for the year ended December 31,
1998. We expect that we will incur additional general and administrative
expenses as we hire additional personnel and incur additional costs related to
the growth of our business and our operation as a public company, including
directors' and officers' liability insurance,
42
<PAGE>
investor relations programs and professional service fees. Accordingly, we
anticipate that general and administrative expenses will increase in absolute
dollar terms in the future.
INTEREST INCOME, NET. Interest income, net decreased $199,000, from
$243,000 for the year ended December 31, 1997 to $44,000 for the year ended
December 31, 1998, a decrease of 81.9%. This decrease is primarily due to
interest payments for borrowings and increased capital lease obligations,
partially offset by interest income earned on higher average cash balances
during 1998.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
REVENUES
Total revenues increased $9.0 million, from $0.1 million for the year ended
December 31, 1996 to $9.1 million for the year ended December 31, 1997. This
increase was primarily due to increases in direct product sales and in
advertising and transaction fees.
BILLABLE SERVICES. Billable services revenues increased $1.4 million, from
$6,000 for the year ended December 31, 1996 to $1.4 million for the year ended
December 31, 1997. This increase is primarily due to the implementation of
fee-based technical support for subscribers to our free basic e-mail service in
January 1997 and the initiation, as of March 1997, of our policy to charge
prospective subscribers to our free basic e-mail service a shipping and handling
fee if they request that a copy of our software be sent to them by mail.
ADVERTISING AND TRANSACTION FEES. Advertising and transaction fees
increased approximately $1.7 million, from $127,000 for the year ended
December 31, 1996 to $1.9 million for the year ended December 31, 1997. This
increase reflects the expansion of our sales force and the growth in the
subscriber base of our free basic e-mail service to a level sufficient to
interest advertisers, and is principally due to the significantly higher number
of advertisers and advertisements delivered.
DIRECT PRODUCT SALES. Direct product sales increased $5.8 million, from
$3,000 for the year ended December 31, 1996 to $5.8 million for the year ended
December 31, 1997. This increase reflects the first full year of direct product
sales activity and the growth of our subscriber base.
COST OF REVENUES
Cost of revenues increased $8.2 million, from $0.3 million for the year
ended December 31, 1996 to $8.5 million for the year ended December 31, 1997.
This increase was primarily due to increases in costs associated with direct
product sales and with advertising and transaction fees.
BILLABLE SERVICES. The cost of revenues related to billable services
increased $1.1 million, from $0 for the year ended December 31, 1996 to
$1.1 million in 1997. This increase is primarily due to costs associated with
providing fee-based technical support to subscribers to our free basic e-mail
service starting in January 1997 and with our policy to charge prospective
subscribers to our free basic e-mail service a shipping and handling fee if they
request that a copy of our software be sent to them by mail.
ADVERTISING AND TRANSACTION FEES. The cost of revenues for advertising and
transaction fees increased $1.4 million, from $278,000 for the year ended
December 31, 1996 to $1.7 million for the year ended December 31, 1997. This
increase is principally due to additional production and transmission costs
associated with the increase in advertisements delivered.
DIRECT PRODUCT SALES. The cost of revenues for direct product sales
increased $5.8 million, from $3,000 for the year ended December 31, 1996 to
$5.8 million for the year ended December 31, 1997. This increase corresponds to
the increase in products sold.
43
<PAGE>
OPERATING EXPENSES
OPERATIONS, FREE SERVICE. The expenses associated with operations, free
service increased $5.3 million, from $5.8 million for the year ended
December 31, 1996 to $11.1 million for the year ended December 31, 1997, an
increase of 90.8%. This increase is primarily due to the growth in the
subscriber base of our free basic e-mail service, which resulted in increased
telecommunications and customer service costs, partially offset by declining
telecommunication rates and increasing average connection speeds. During the
month ended December 31, 1996, 823,000 subscriber accounts connected and during
the month ended December 31, 1997, 1,986,000 subscriber accounts connected.
SUBSCRIBER ACQUISITION. Subscriber acquisition costs decreased
$3.9 million, from $7.0 million for the year ended December 31, 1996 to
$3.1 million for the year ended December 31, 1997, a decrease of 55.1%. This
decrease is primarily due to the reduction in advertising and direct mail
activities in 1997 relative to those in 1996, the year in which we launched our
free basic e-mail service. The effect of this reduction in advertising and
direct mail activities was partially offset by increased referral bounty
expenses in 1997.
SALES AND MARKETING. Sales and marketing expenses increased $8.3 million,
from $4.3 million for the year ended December 31, 1996 to $12.6 million for the
year ended December 31, 1997, an increase of 195%. This increase is primarily
due to the growth of our advertising sales force as well as the expansion of our
direct product sales activities, which increased our expenses related to ad
production, ad transmission, and order fulfillment. These increases were
partially offset by reductions in the level of trade advertising we undertook in
1997.
PRODUCT DEVELOPMENT. Product development costs increased approximately
$1.1 million, from $3.7 million for the year ended December 31, 1996 to
$4.9 million for the year ended December 31, 1997, an increase of 29.9%. This
increase is primarily due to increased personnel and related overhead costs, due
to higher headcount. Product development costs in 1997 related primarily to
development of refinements to our advertising and electronic commerce systems
and certain other pieces of software.
GENERAL AND ADMINISTRATIVE. General and administrative costs increased
$0.7 million, from $2.2 million for the year ended December 31, 1996 to
$2.9 million for the year ended December 31, 1997, an increase of 33.4%. This
increase is primarily due to increased personnel and related overhead costs, due
to increased headcount.
INTEREST INCOME, NET. Interest income, net increased $115,000, from
$128,000 for the year ended December 31, 1996 to $243,000 for the year ended
December 31, 1997, an increase of 89.8%. This increase is primarily due to
interest income earned on higher average cash balances in 1997.
QUARTERLY RESULTS OF OPERATIONS DATA
The following table sets forth unaudited quarterly statement of operations
data for each of the six quarters ended December 31, 1999, as well as the same
data expressed as a percentage of our total revenues for the periods indicated.
In our opinion, this unaudited information has been prepared substantially on
the same basis as the audited consolidated financial statements appearing
elsewhere in this prospectus, and all necessary adjustments, consisting only of
normal recurring adjustments, have been included in the amounts stated below to
present fairly the unaudited quarterly results of operations data. The quarterly
data should be read in conjunction with the consolidated financial statements
and the notes to these statements appearing elsewhere in this prospectus. The
operating results for any quarter are not necessarily indicative of the
operating results for any future period.
44
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------------------------------------
SEPT. 30, 1998 DEC. 31, 1998 MAR. 31, 1999 JUNE 30, 1999 SEPT. 30, 1999 DEC. 31, 1999
-------------- ------------- ------------- ------------- -------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Billable services............. $ 1,528 $ 3,943 $ 5,806 $ 7,069 $ 8,654 $ 13,016
Advertising and transaction
fees........................ 1,759 1,927 2,265 2,703 3,367 4,327
Direct product sales.......... 1,847 2,136 1,649 1,350 1,083 712
------- ------- ------- -------- -------- --------
Total revenues............ 5,134 8,006 9,720 11,122 13,104 18,055
------- ------- ------- -------- -------- --------
Cost of revenues:
Billable services............. 1,306 3,333 4,678 5,481 5,960 8,831
Advertising and transaction
fees........................ 992 1,033 1,080 1,162 1,120 1,313
Direct product sales.......... 1,592 1,900 1,424 1,165 988 599
------- ------- ------- -------- -------- --------
Total cost of revenues.... 3,890 6,266 7,182 7,808 8,068 10,743
------- ------- ------- -------- -------- --------
Operating expenses:
Operations, free service...... 2,101 2,102 1,846 1,771 1,464 1,617
Subscriber acquisition........ 1,067 2,387 2,700 13,920 15,028 16,003
Sales and marketing........... 2,212 2,218 2,312 2,716 3,180 3,348
Product development........... 1,849 2,031 1,854 1,977 1,592 1,809
General and administrative.... 513 657 704 982 1,284 1,645
------- ------- ------- -------- -------- --------
Total operating
expenses................ 7,742 9,395 9,416 21,366 22,548 24,422
------- ------- ------- -------- -------- --------
Loss from operations...... (6,498) (7,655) (6,878) (18,052) (17,512) (17,110)
Interest income (expense),
net........................... 6 (22) 111 795 1,430 1,382
------- ------- ------- -------- -------- --------
Net loss.................. $(6,492) $(7,677) $(6,767) $(17,257) $(16,082) $(15,728)
======= ======= ======= ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------------------------------------
SEPT. 30, 1998 DEC. 31, 1998 MAR. 31, 1999 JUNE 30, 1999 SEPT. 30, 1999 DEC. 31, 1999
-------------- ------------- ------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
PERCENTAGE OF REVENUES:
Revenues:
Billable services........... 29.7% 49.3% 59.7% 63.6% 66.0% 72.1%
Advertising and transaction
fees...................... 34.3 24.1 23.3 24.3 25.7 24.0
Direct product sales........ 36.0 26.6 17.0 12.1 8.3 3.9
------- ------- ------- -------- -------- --------
Total revenues............ 100.0 100.0 100.0 100.0 100.0 100.0
------- ------- ------- -------- -------- --------
Cost of revenues:
Billable services........... 25.4 41.7 48.1 49.3 45.5 48.9
Advertising and transaction
fees...................... 19.4 12.9 11.1 10.4 8.5 7.3
Direct product sales........ 31.0 23.7 14.7 10.5 7.5 3.3
------- ------- ------- -------- -------- --------
Total cost of revenues.... 75.8 78.3 73.9 70.2 61.6 59.5
------- ------- ------- -------- -------- --------
Operating expenses:
Operations, free service.... 40.9 26.2 19.0 15.9 11.2 9.0
Subscriber acquisition...... 20.7 29.8 27.8 125.2 114.7 88.6
Sales and marketing......... 43.1 27.7 23.8 24.4 24.3 18.6
Product development......... 36.0 25.4 19.1 17.8 12.1 10.0
General and
administrative............ 10.1 8.2 7.2 8.8 9.8 9.1
------- ------- ------- -------- -------- --------
Total operating
expenses................ 150.8 117.3 96.9 192.1 172.1 135.3
------- ------- ------- -------- -------- --------
Loss from operations...... (126.6) (95.6) (70.8) (162.3) (133.6) (94.8)
Interest income (expense),
net......................... 0.1 (0.3) 1.2 7.1 10.9 7.7
------- ------- ------- -------- -------- --------
Net loss.................. (126.5)% (95.9)% (69.6)% (155.2)% (122.7)% (87.1)%
======= ======= ======= ======== ======== ========
</TABLE>
45
<PAGE>
The following table sets forth selected subscriber data for each of the six
quarters ended December 31, 1999. This data should be read in conjunction with
the information appearing elsewhere in this prospectus. The selected subscriber
data for any quarter are not necessarily indicative of future periods.
<TABLE>
<CAPTION>
SELECTED SUBSCRIBER DATA: SEPT. 30, 1998 DEC. 31, 1998 MAR. 31, 1999 JUNE 30, 1999 SEPT. 30, 1999 DEC. 31, 1999
- ------------------------- -------------- ------------- ------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Total subscriber accounts
as of (1)............. 5,852,000 6,336,000 6,817,000 7,175,000 7,613,000 8,137,000
Subscriber accounts
that connected in the
three-month period
ended............... 3,121,000 3,108,000 3,108,000 2,920,000 2,910,000 2,961,000
Subscriber accounts
that connected in the
month ended......... 2,409,000 2,434,000 2,438,000 2,277,000 2,276,000 2,325,000
Average subscriber
accounts that
connected per day in
the month ended..... 889,000 887,000 912,000 810,000 837,000 820,000
Billable subscription
service accounts as of
(2)................... 64,000 144,000 207,000 270,000 400,000 550,000
</TABLE>
- ------------------------
(1) Includes all user accounts created since Juno's inception, regardless of
activity level, if any, net of accounts that have been cancelled.
(2) Billable subscription service accounts are a subset of total subscriber
accounts and, to the extent applicable, are also included in the number of
subscriber accounts shown as having connected during the periods described.
We have historically experienced seasonality, with use of Internet services
being somewhat lower during the summer and year-end holiday periods. We believe
seasonality favorably impacts subscriber acquisition during the first and fourth
calendar quarters. We also believe that direct product sales are positively
affected in the fourth quarter due to the year-end holiday buying season,
although we cannot assure you that any of these trends will continue in future
periods. See "Risk Factors--Juno's business is subject to fluctuations in
operating results which may negatively impact the price of our stock."
Despite the impact of seasonality, our revenues have increased in all
quarters presented. We believe that these increases occurred for a number of
reasons, including:
- the overall growth of our business and the industry's growth as a whole;
- the launch of our billable subscription services on July 22, 1998; and
- the increase in advertising and transaction fees generated by strategic
marketing alliances beginning with the third quarter of 1998.
We cannot assure you that we will not experience seasonal fluctuations and the
risks associated therewith in the future. Primarily due to our previously
described strategic decision to scale back our direct product sales activities,
direct product sales revenue decreased in all quarters except for the fourth
quarter of 1998, which we believe was positively affected by the holiday buying
season.
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Cost of revenues increased as a percentage of total revenues in the fourth
quarter of 1998 primarily due to:
- the startup costs associated with the introduction of our billable premium
services;
- the relatively high percentage of subscribers to these services who were
in their initial months;
- the higher costs incurred in the early months of a subscriber's life
cycle; and
- the fact that most Juno Web subscribers received their first month of
service at no charge.
Total cost of revenues has decreased as a percentage of revenues in each of
the four fiscal quarters in the year ended December 31, 1999, reflecting
improved margins in both billable services and advertising and transaction fee
revenues. Billable service costs decreased as a percentage of billable services
revenue as economies of scale were achieved in member service operations and as
our average telecommunications rates continued to decline. The cost of
advertising and transaction fees decreased as a percentage of advertising and
transaction fee revenues largely due to decreasing telecommunications rates and
efficiencies associated with larger average contract sizes.
Operating expenses have increased in each quarter through the three months
ended December 31, 1999 due principally to increased spending related to
subscriber acquisition. Subscriber acquisition expenses through March 31, 1999
reflect increased levels of marketing conducted over the Juno service in order
to promote our billable premium services to our free basic service subscribers.
The consecutive quarterly increase in subscriber acquisition expenses since
March 31, 1999 reflects the costs related to the launch of a significant
external marketing campaign in the second quarter of 1999. In connection with
the December 1999 expansion of our free service to include full Internet access,
we expect operating expenses to increase significantly on a quarter-to-quarter
basis, both due to the substantial increase we anticipate in subscriber
acquisition spending and the increased cost of providing full Internet access as
compared to the cost of providing basic e-mail services, which is reflected in
the Operations, Free Service line of our statement of operations. See "Use of
Proceeds."
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 in 1999
include $77.3 million of net proceeds from our May 1999 initial public offering
of common stock and $61.9 million of net proceeds 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 $148.0 million through
December 31, 1999.
Net cash used in operating activities was $33.6 million and $20.9 million
for the years ended December 31, 1997 and 1998, respectively. For the year ended
December 31, 1999, we used $36.4 million in cash for working capital purposes
and to fund losses from operations. Additionally, at December 31, 1999,
$8.7 million remained prepaid for advertising that may be used at any time prior
to March 2001, bringing total net cash used in operating activities to
$45.1 million. The increase in cash used in operating activities for the year
ended December 31, 1999 was primarily the result of an increase in the net loss
for 1999 and prepayments for advertising, partially offset by changes in
deferred revenue and other working capital accounts.
Net cash used in investing activities was $3.4 million, $1.6 million and
$1.3 million for the years ended December 31, 1997, 1998 and 1999, respectively.
The principal use of cash for the periods presented was for the purchase of
fixed assets. Prior to July 1997, we utilized fixed assets owned by DESCO, L.P.,
the expense relating to which was allocated to us. Beginning in July 1997,
substantially all new acquisitions of fixed assets have been made directly by
us.
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Net cash provided by financing activities was $50.1 million, $16.9 million
and $129.7 million for the years ended December 31, 1997, 1998 and 1999,
respectively. Financing activities prior to 1999 are primarily capital
contributions, the borrowing and repayments under a note from an affiliated
party, and capital lease obligations. Financing activities for the year ended
December 31, 1999 primarily include $139.1 million of net proceeds received from
our March 1999 private placement and our May 1999 initial public offering. Of
the net proceeds from the initial public offering, $8.6 million was used to
repay, in full, the note mentioned above.
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, 8.50% at December 31, 1999.
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 prospectus,
there were no amounts outstanding under the facility.
We do not currently have any material commitments for capital expenditures
outside of the normal course of business and recent historical trends. However,
we do anticipate that we will increase our capital expenditures and lease
commitments beyond recent historical trends to expand our infrastructure in
anticipation of the growth of our subscriber base. We may also take advantage of
opportunities to employ various 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 will
significantly increase the telecommunications costs that we incur. In addition,
we anticipate significantly increasing subscriber acquisition expenses in order
to fund subscriber growth and help us gain market share. Additional expenditures
in connection with subscriber acquisition and the purchase of telecommunications
capacity will represent material uses of our cash resources.
We believe that the net proceeds of this offering, together with our
existing cash and cash equivalents, will be sufficient to meet our anticipated
cash needs for at least the next twelve months. If existing cash and cash
equivalents is insufficient to satisfy our liquidity requirements, we may choose
to reduce discretionary expenditures, including incremental subscriber
acquisition costs associated with expanding our subscriber base, and we may seek
to sell additional equity or debt securities or to increase, extend or
supplement our existing credit facility. The sale of additional equity or
convertible debt securities would result in additional dilution to our
stockholders. The incurrence of indebtedness would result in increased fixed
obligations and could result in covenants that would restrict our operations. We
have not made arrangements to obtain additional financing and there can be no
assurance that financing will be available in amounts or on terms acceptable to
us, if at all. See "Risk Factors--We cannot predict our future capital needs and
we may not be able to secure additional financing."
IMPACT OF THE YEAR 2000
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to identify a given year. Many of the computer
programs that Juno utilizes include specialized functions that involve date
manipulation. These functions are critical to our business, and include:
- signup of new subscribers to our services;
- validation of credit cards;
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- transfer, storage and processing of e-mail and advertisements;
- scheduling of advertisements and reporting of results to advertisers; and
- billing and invoicing of advertisers and subscribers to our billable
subscription services.
Juno's business is heavily dependent upon the use of operating systems and
applications that, in the aggregate, involve millions of lines of computer code.
Similarly, our business is also dependent on the coordinated functioning of a
network made up of hundreds of servers and other pieces of computer equipment,
all of which have computer code embedded in them. We are aware of no material
cases in which our software or hardware has malfunctioned due to interpreting
the date code "00" as the year 1900 rather than the year 2000, and as such, Juno
has yet to encounter significant errors in the information we use to manage the
business and the computer systems that operate our online services. Any
miscalculations that may occur and be detected later could result in errors in
our operations or in disruption of operations, including, among other things, a
temporary inability to process transactions, send invoices or engage in other
normal business activities.
COSTS. To date, we have not incurred any material costs in identifying or
evaluating Year 2000 compliance issues. The cost of software tools and
consulting expenses used for detection of Year 2000 problems has not exceeded
$100,000. If any errors are detected, we expect that our existing employees or
consultants will perform all significant work to correct any errors discovered.
RISKS. We are not currently aware of any significant Year 2000 compliance
problems relating to our proprietary software, our information technology
systems or our other systems that would materially harm our business, results of
operations or financial condition. If problems are discovered in versions of our
product software that are already in use by our subscribers, we may need to
distribute new versions of the software to those subscribers. It may not be
possible to correct these problems in a timely manner.
To date we have not experienced Year 2000 compliance problems with material
third-party software, hardware, service providers or non-information-technology
infrastructure. If Year 2000 compliance problems are detected in the future they
may require substantial repair or replacement, which could be time-consuming and
expensive. It may not be possible to repair or replace some of these components
or service providers in a timely manner.
The failure to correct any material Year 2000 problem that may arise could
materially harm our business, results of operations and financial condition
because:
- new subscribers may be unable to sign up for our services, resulting in
reduced growth and lower effectiveness of our marketing efforts;
- current subscribers may be unable to upgrade to higher service levels,
resulting in reduced revenue growth and lower effectiveness of our
marketing efforts;
- current subscribers may be unable to use our services or get adequate
customer support, which may result in increased attrition, higher customer
support costs and reduced revenue; or
- we may be subject to claims of mismanagement, misrepresentation or breach
of contract and related litigation, which could be costly and
time-consuming to defend and, if defended unsuccessfully, could result in
the imposition of substantial fines or judgments.
In addition, we cannot assure you that governmental agencies, utility
companies, Internet access companies, third-party service providers and others
outside our control will not encounter Year 2000 problems in the future. The
failure by these entities to timely detect and correct any Year 2000 problems
that may occur could result in a systemic failure beyond our control, including,
for example, a prolonged failure of Internet, telecommunications or electrical
systems, which could also prevent us from providing our services, or prevent
users from accessing our services, either of which would materially harm our
business, results of operations and financial condition.
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BUSINESS
OUR COMPANY
Juno Online Services, Inc. is a leading provider of Internet-related
services to millions of computer users throughout the United States. We provide
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,
which is currently being tested in selected markets. Unlike almost all other
Internet access providers, we offer both free basic and billable premium
services, and we believe we are unique in having converted hundreds of thousands
of individuals from free to paying customers. Our strategy of offering several
different service levels and our easy-to-use, intuitive software are designed to
attract a broad spectrum of users, including those who are just now beginning to
explore the Internet.
Our services are provided nationwide through more than 2,300 local telephone
numbers, which we lease from several providers. These phone numbers can be
reached by the vast majority of the U.S. population without having to place a
long distance telephone call. Our revenues are derived primarily from the
subscription fees we charge for the use of our premium services, from the sale
of advertising, and from various types of electronic commerce.
We have been a pioneer in providing free Internet services since
April 1996, when we launched our basic service, which was the first on the
Internet to provide free e-mail. 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:
- Our BASIC SERVICE now provides full Internet access for free.
- 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
prominent advertising and navigation banner that is displayed to our basic
service users at all times while they are connected to the Web.
- JUNO EXPRESS is a broadband service that provides all the features of Juno
Web at speeds up to 15 times faster than an ordinary dial-up Internet
connection. We are now conducting a pilot test of Juno Express in selected
markets and plan to expand into additional markets over the coming year.
Our services have been very popular, with more than 8.1 million Juno
accounts created since the launch of our basic service in 1996. During the month
of December 1999, an average of 820,000 user accounts dialed into our service on
any given day, with a total of 2.3 million user accounts connecting during the
month of December, and 2.9 million user accounts connecting during the
three-month period ended December 31, 1999. As of December 31, 1999, we had
approximately 550,000 Juno Web subscribers, the majority of whom began as users
of our basic service. We initially marketed Juno Web only to our own basic
service subscribers. Following our initial public offering on May 25, 1999,
however, we began marketing Juno Web beyond the existing Juno user base through
an external marketing campaign. We plan to significantly expand our marketing
activities in 2000 in order to increase the subscriber base of our billable
premium services and, in particular, our expanded free basic service.
In operating our expanded basic service, we plan to capitalize on the size
of our existing user base, advantages we believe our technology confers on our
cost structure, and our established advertising sales and electronic commerce
activities. Our technology has been designed to maximize hours of consumer
contact and potential advertising revenues while minimizing the number of hours
each user actually spends connected by telephone to our central computers or to
the Web, a key component of
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our costs. We believe our subscribers spend significantly less time connected to
the Internet each month than those of our largest competitors, in part because
of technology we have developed that enables subscribers to read and write
e-mail offline rather than while connected. Importantly, this technology allows
us to continue displaying highly targetable interactive advertisements
throughout this offline time.
As of December 31, 1999, approximately 300 firms had advertised on the Juno
services. In addition, we derive revenues from conducting electronic commerce
both independently and with strategic marketing partners. We have entered into a
number of major strategic marketing alliances, including several that involve
multi-million-dollar guaranteed minimum payments to Juno. These alliances
include multi-year relationships with Qwest, The Hartford, and WingspanBank.com.
In servicing the needs of advertisers and marketing partners, we benefit
from the high degree to which custom-tailored advertisements can be selectively
targeted to various segments of our subscriber base. Juno ads can be targeted
based not only on geography and patterns of computer use, as is often possible
in the case of Web site advertising as well, but also according to such
characteristics as age, gender, income, expected major purchases in any of 20
specified categories, hobbies, interests, family size, and educational
attainment. This data is obtained from the detailed "Member Profile" survey that
all subscribers to our free basic service are required to complete, and that
most subscribers to our billable premium services choose to complete, at the
time they create their accounts.
In addition to our advertising and strategic marketing relationships, we
derive revenue from relationships with providers of Web-based content and
functionality. All Juno users begin each Web session on our portal site,
WWW.JUNO.COM, which contains tools, information, and product offers supplied by
a wide range of strategic partners. Companies with whom we have formed this sort
of strategic relationship include HotJobs.com, Lycos, Mail.com, News
Corporation, and more than 50 online merchants that participate in the shopping
channel on our portal site, including eBay and 1-800-FLOWERS. We plan to
significantly increase both the number of such alliances and the associated
revenues as our Web-enabled subscriber base grows.
MARKET OPPORTUNITY
The Internet is becoming an increasingly significant global medium for
communications, advertising, and commerce. International Data Corporation
estimates that more than 80 million individuals in the U.S. used the Internet in
1999, and projects that this figure will reach 177 million by 2003. We expect
that these increases will have a significant impact on the three main service
and product sectors in which Juno currently operates.
BILLABLE SUBSCRIPTION SERVICES REVENUES. IDC projects that
consumer-targeted dial-up Internet service provider revenues in the U.S. will
grow from $7.4 billion in 1999 to $11.1 billion in 2003.
ADVERTISING REVENUES. Jupiter Communications has projected that online
advertising expenditures in the U.S. will grow from an estimated $3.2 billion in
1999 to $11.5 billion in 2003.
ELECTRONIC COMMERCE. IDC projects that consumer electronic commerce
revenues in the U.S. will grow from $12.8 billion in 1998 to $83.5 billion in
2003.
OUR SERVICES
Our services and software have been designed with special attention to the
needs of consumers who are only now taking their first steps onto the Internet.
The needs and preferences of this large and rapidly growing body of new Internet
users are likely to differ significantly from those of technically sophisticated
early Internet users and computer hobbyists. We believe the success of our
design is reflected in studies indicating that ease of use is among the
characteristics most closely associated with
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Juno, and in the relatively high rate at which members pass along copies of the
Juno software to others.
We have expended significant effort to make our services easy to use. Our
fundamental design goal has been to create software and Web-based functionality
that novice users can understand at a glance, but which will continue to satisfy
subscribers once they have gained more experience. In addition to the basic
functions of using the Internet, such as connecting to the Web and sending and
receiving e-mail, we also offer easy-to-use tools enabling subscribers to build
their own Web pages and participate in online discussions, a variety of online
customer service resources, a full-function address book and folders for e-mail
management, and access to a wide range of content and community features, all
within a simple and visually attractive point-and-click environment.
Each time Juno subscribers begin a Web session, the first Web pages they see
provide them with a broad set of tools and information to help them understand,
navigate, and use the Web. Most of the content, directory functionality, and
Internet search functions associated with this Web site are currently provided
by third parties such as Lycos, one of the Internet's leading portal sites.
Under our agreement with Lycos, we receive guaranteed per-visit fees as an
advance against a share of any revenue Lycos generates through the sale of
advertisements on the various Web pages within the Juno portal site for which
they supply content. Both through additional revenue-generating third-party
relationships of this sort and through ongoing internal development, we intend
to continue expanding the set of features we offer our users, and to use such
features not only to generate revenue and enhance our services generally, but
also to maintain a clear differentiation between our free basic service and our
billable premium services. Subscribers who are not yet ready to use or pay for
premium features can begin their use of the Internet with our free basic
service, then migrate to our premium services once they are ready to do so.
FREE BASIC SERVICE
Our basic service provides subscribers with full Internet access, including
access to both e-mail and the World Wide Web. Our subscribers pay us no fees of
any sort for the use of our basic service. Users of the free basic service do,
however, pay a fee of $1.95 per minute if they wish to get live technical
support by phone.
We display advertisements to users of the free basic service within the main
Juno software, on the Web pages comprising Juno's portal site, and within a
separate advertising and navigation banner that is displayed at all times while
a subscriber uses the Web. This banner can be moved to any location on a user's
computer screen but cannot be removed or deactivated while the user is connected
to the Web.
After receiving a copy of our software, a new subscriber follows simple,
clearly worded on-screen instructions to install Juno on his or her computer,
and to select an e-mail address and password. In addition, in order to create an
account, each subscriber to our free basic service must complete the Member
Profile survey, providing information that can be used for the selective
targeting of advertising. Subscribers using a version of our software older than
the current version, Juno 4.0, must upgrade to version 4.0 before they can use
our basic service to connect to the Web.
JUNO WEB
Juno's premium dial-up Internet access service, Juno Web, augments the basic
service by eliminating the persistent advertising and navigation banner shown
continuously to the users of the free basic service and by adding hundreds of
local access telephone numbers across the country. Juno Web also provides a
number of other premium features, including priority access to Juno's
telecommunications network. Juno Web subscribers receive live technical support
by phone at no charge.
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Juno Web's list price of $19.95 per month is lower than the standard $21.95
price point offered by America Online and The Microsoft Network. In addition,
over the past eighteen months we have tested a variety of promotional offerings
that include periods of discounted, free or prepaid access as well as monthly
pricing plans that offer Juno Web for flat rates as low as $9.95. We intend to
continue experimenting with a variety of pricing plans in the future to
determine their impact on subscriber acquisition, conversion and retention
rates.
Between July 1998 and December 1999, we also offered a billable service
called Juno Gold which provided enhanced e-mail functionality for a list price
of $2.95 per month. As of December 1999, we incorporated Juno Gold's e-mail
functionality into the free basic service and automatically upgraded all Juno
Gold subscribers to Juno Web at no additional cost.
JUNO EXPRESS
Juno Express provides broadband Internet access at speeds up to 15 times
faster than an ordinary dial-up Internet connection. Through the use of DSL
technology provided in collaboration with Covad, one of the nation's largest
wholesalers of DSL services, Juno Express offers consumers all the features of
Juno Web plus the benefits of broadband, including the ability to run
high-bandwidth multimedia applications that include video and audio content as
well as the availability of a dedicated, continuous connection to the Internet.
We may expand the service to employ technologies other than DSL and may also
choose to directly provide some portions of the service that we currently
outsource, if it appears economically or otherwise advantageous for us to do so.
We will make these decisions as the broadband market develops and as consumer
demand for various competing broadband offerings can be assessed.
Juno Express is currently being tested in selected pilot markets. Initial
pricing for the service will be determined over the course of the pilot test.
Following completion of the test, we plan to expand the number of markets in
which Juno Express is available.
OUR STRATEGY
Our principal objective is to strengthen our position as a leading provider
of consumer Internet-related services by capturing an increasing number of hours
of customer contact, and by expanding our billable subscription service
offerings, advertising sales, strategic marketing relationships, and electronic
commerce activities. In particular, we plan to:
RAPIDLY EXPAND OUR SUBSCRIBER BASE. Our services are targeted to meet the
needs of consumers with little or no computer experience, who we believe are
seeking access to the Internet in increasing numbers. We intend to make these
consumers aware of our services and to rapidly expand our subscriber base
through a significant expansion of our marketing activities. These activities
may include television, radio, magazine, and newspaper advertising; direct mail
and telemarketing campaigns; the distribution of our software along with
personal computers and other technology products; paid Web advertising; the
bartering of advertising on the Juno system for advertising on various Web sites
and in other online and conventional media; various incentives for referrals by
current subscribers; and the acquisition of other Internet access providers. In
addition, we may consider various alternatives for international expansion.
MIGRATE SUBSCRIBERS TO HIGHER LEVELS OF SERVICE. Our software is designed
to allow users to easily move to higher levels of service when they are ready to
use and pay for them through the point-and-click activation of additional
features, and to do so without having to change e-mail addresses. We plan to
continue marketing our premium services to our existing subscriber base through
a variety of advertising messages and promotions delivered through the Juno ad
system. Because internal marketing of this sort is generally less expensive for
us on a per-subscriber basis than
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subscriber acquisition efforts conducted through direct mail or most other
external advertising channels, we believe the upward migration of our free basic
service subscribers should reduce average subscriber acquisition costs for our
billable premium services. We may also offer additional services or service
levels to meet the needs of our users, or may restructure or change the nature
or pricing of our various service levels at some point in the future.
LEVERAGE AND EXPAND OUR STRATEGIC MARKETING ALLIANCES AND ADVERTISING
SALES. We plan to maintain our focus on initiating new strategic marketing
alliances and expanding the size and scope of our existing alliances. We believe
there may be significant opportunities to expand the scope of our relationships
with some of our existing alliance partners, which currently include Qwest, The
Hartford and WingspanBank.com. In addition, we believe it may be possible to
execute new category-exclusive strategic alliances with major firms in other
industries. Finally, to the extent we are able to increase the size of our
subscriber base, we believe this expansion could increase the value of our
existing strategic marketing and advertising relationships and our ability to
form similar relationships with other firms on favorable terms.
ENHANCE OUR SERVICES TO PROVIDE AN INCREASINGLY PERSONALIZED, INTEGRATED AND
ENGAGING INTERNET EXPERIENCE. In order to maintain and enhance our subscribers'
level of satisfaction with our services, we intend to leverage our unique
assets, such as the Member Profile data we collect, the Juno software our
members use, and our current and future relationships with content and feature
providers such as Lycos and News Corporation, to enable us to offer our members
a compelling Internet experience.
EMBRACE NEW TECHNOLOGIES WHILE MAINTAINING TECHNOLOGY INDEPENDENCE. We
currently use several wholesalers of telecommunications services to connect our
subscribers to Juno's central computers and to the Web. Although we may at some
point consider investing in various forms of networking infrastructure,
particularly in cases where a given type of access would otherwise be difficult
or prohibitively costly to obtain, we currently expect to continue our extensive
use of wholesale providers. We believe this strategy enables us to remain
network-independent, and to switch providers or technologies as cost and
performance improvements become available. As a result, we believe we can be
flexible in responding to subscriber demand for higher-speed access and other
types of improved service.
TECHNOLOGY AND INFRASTRUCTURE
The operation of our services is supported by computer systems and related
infrastructure that have successfully sustained high levels of usage and growth.
Our servers routinely handle more than two million user connections per day. Our
subscribers have not suffered the sorts of repeated, prolonged system-wide
outages that have reportedly affected other online services. To enable our
computer and telecommunications facilities to keep pace with the rapid growth of
our subscriber base, we have made a concerted effort to design our systems
architecture to be highly flexible, to grow quickly without sacrificing
reliability, and to handle problems quickly when they arise.
To use our services, subscribers initiate telephone connections between
their personal computers and computer hardware in local or regional facilities
known as points of presence. We contract for the use of points of presence
around the country from various telecommunications carriers, including MCI
WorldCom, through its UUNET Technologies and MCI WorldCom Advanced Networks
divisions; Level 3; Concentric; Splitrock Services; and Sprint. These
telecommunications companies also carry data between the points of presence and
our central computers, which are located in Cambridge, Massachusetts and Jersey
City, New Jersey. We currently have lease commitments for the use of over 2,300
local telephone numbers associated with points of presence throughout the United
States. Subscribers typically bear no expenses for communication beyond the
cost, if any, of an ordinary local or regional phone call. We estimate that our
current set of local access numbers covers the vast majority of the U.S.
population. Our reliance on several independent providers of network capacity
has
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allowed us to provide high quality service throughout the United States while
negotiating progressively lower telecommunications rates from these competing
providers.
Juno Web subscribers have several hundred more local access numbers from
which to choose than do users of our free basic service. Limiting the set of
local access numbers available to our free basic service users is one mechanism
by which we can reduce the cost of providing our free basic service and enhance
the performance of our premium dial-up service. We believe we can also manage
cost and performance by purchasing the telecommunications services described
above from some of our vendors on a per-modem basis rather than a per-minute
basis. The per-modem pricing model gives us greater control of our costs by
enabling us to set the ratio of users to modems. We believe we can reduce our
effective telecommunications rate and our monthly per user cost by increasing
the number of users per modem. We believe we can maintain a higher user-to-modem
ratio than our competitors while providing a competitive level of service
quality due to our offline e-mail architecture, among other factors.
For both our free and our premium services, the time each user spends
connected to our central computers is minimized through the use of a patented
architecture that allows subscribers to read and compose e-mail messages
offline, connecting automatically to Juno's central computer facilities only for
the relatively brief period necessary to download incoming mail or upload
outgoing messages. Advertisements intended to be shown in the main Juno software
are downloaded to a subscriber's computer along with the subscriber's incoming
e-mail messages, and are displayed not only while the subscriber is actually
connected to our central facilities, but throughout the significantly longer
period during which he or she is reading and writing e-mail messages offline,
using only his or her own computer. The relatively large ratio between average
ad display time, an important revenue-related resource, and average connect
time, an important expense item, is essential to the economics of our services.
Because we believe that almost a quarter of all time spent online by subscribers
to the leading Internet access service is attributable to their reading and
writing e-mail messages while connected to the service's central computers, we
believe that our offline e-mail architecture confers an economic advantage on
our service relative to those of our competitors. Our subscribers currently
spend significantly fewer hours connected each month than reported industry
averages, and we believe our offline architecture is one of the reasons for this
relative savings.
SUBSCRIBER ACQUISITION
Since the launch of our free basic service in 1996, we have employed a
number of acquisition channels to maximize total subscriber count, including:
- ONLINE DISTRIBUTION. People with access to the Web may download the Juno
software free of charge from our Web site. Thousands of people download
the software every day.
- DIRECT MAIL. We have conducted numerous direct mail campaigns employing a
wide range of creative approaches, offers and mailing lists. Our direct
mail activities have increased significantly since the completion of our
initial public offering in May 1999.
- PASS-ALONG DISTRIBUTION. We encourage our subscribers to pass the Juno
software along to their friends and associates or to suggest that they
call our toll-free number to order a CD-ROM containing our software. This
practice has historically accounted for a significant percentage of our
new subscribers. Starting in 1999, we began rewarding pass-along
distribution by paying referral bounties ranging from $20 to $50 to any
Juno member responsible for bringing us a new Juno Web subscriber who
remained with the service for at least 90 days.
- ORIGINAL EQUIPMENT MANUFACTURER BUNDLING. At various times since the
launch of our basic service, the software necessary to use our service has
been pre-loaded into a number of lines of personal computers and
distributed with various other types of computer hardware. Most
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recently, we announced agreements to distribute the Juno software along
with various lines of desktop printers manufactured by Hewlett-Packard,
Lexmark and Samsung.
Following the launch of our first premium services in July 1998, our
marketing focused on the development of our billable subscriber base, both
through encouraging upward migration from our free basic service to our premium
services, and through the direct acquisition of billable subscribers through our
external marketing activities.
[LOGO]
Our internal marketing activities continue to focus on persuading free basic
service subscribers to migrate to our premium services. Users of the free basic
service are exposed to a stream of marketing messages delivered through the Juno
ad system that encourage them to upgrade. While we cannot predict the ultimate
rate of conversion to our billable premium services, we believe that continuing
increases in the sophistication of Internet users and in the demands they place
on their Internet services may generate interest in the features provided by our
premium services among new segments of our user base over time. In addition,
when a subscriber to our basic service is ready to begin using a higher level of
service, we believe that it will be easier and more natural to do so by clicking
on a button displayed on the Juno screen that he or she is already using than by
identifying and switching to an alternate access provider. When users of Juno's
basic service develop an interest in using premium services, we believe we are
also likely to benefit from individuals' reluctance to switch e-mail addresses,
which may make them more likely to obtain premium services from us than from
another Internet access provider. Please see "Risk Factors--Our business may
suffer if we have difficulty acquiring subscribers to our services."
Our external marketing activities now include promotions of both our free
basic service and our billable premium services. The balance between free and
billable services in our various marketing messages and channels is likely to
change over time, depending on where testing suggests that our investment in
subscriber acquisition is likely to yield the most favorable and efficient
results. Our goal is to maximize the size and value of our audience, and we
intend to significantly increase the resources we invest in subscriber
acquisition to achieve this goal. Please see "--Our Strategy."
ADVERTISING AND STRATEGIC ALLIANCES
ADVERTISING SALES
Advertising plays an important role in the business model for each of our
service levels. Regardless of the level of service to which they subscribe, Juno
users view advertisements on the portal site where
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they begin each Web session and within the main Juno software when they use
e-mail. Subscribers to the free basic service also view advertisements within
the separate advertising and navigation banner that appears at all times while
these subscribers use the Web. Because of the patented advertising technology we
have developed, we are able to display ads not only during the time a subscriber
spends connected to the Internet but also while he or she is using Juno offline
to read or write e-mail. We thus have a wide variety of advertising
opportunities which we can offer marketers interested in communicating with our
subscribers, ranging from simple one-time ad placements to broad sponsorships of
categories of content, commerce and functionality on our portal site or on the
Juno services in general.
As of December 31, 1999, approximately 300 companies and organizations had
advertised on Juno, including a number of the world's largest advertisers. To
manage ad creation and campaign development, we maintain an in-house ad
production and client service staff. We also employ an internal sales force to
market our ad inventory, with the exception of the banner inventory on our
portal site, which is currently marketed primarily by Lycos under a
revenue-sharing arrangement. Please see "--Our Services."
TYPES OF ADVERTISING ON JUNO'S SERVICES
As described above, we currently display advertising in three distinct
locations within the Juno service:
- ON THE PORTAL SITE, where most of the ads take the form of conventional
Web banner ads, supplemented by various types of sponsorship links.
- WITHIN THE MAIN JUNO SOFTWARE, where we display three types of
advertising:
- BANNER ADS, which are displayed in the upper right-hand corner of the
main Juno screen while the subscriber is reading or composing e-mail
messages. Banner ads are displayed on a timed rotation, with a new ad
typically appearing every 20 or 30 seconds, and are interactive,
offering viewers the opportunity to click on them and respond in a
number of ways.
- INTERSTITIAL ADS, which are displayed while a subscriber's modem is
dialing into our central computers to send or receive e-mail or to
connect to the Web, and are displayed for the duration of this
telephone connection. Interstitial ads are approximately four times the
size of a banner ad, and are displayed prominently at a time when the
subscriber is not yet occupied with any online activity.
- POP-UP ADS that interrupt a user's session, and with which the
subscriber must interact at least briefly before continuing with his or
her session. Pop-up ads are most commonly displayed at the start of a
session, immediately after the subscriber types in his or her password,
and may contain any of the features of banner ads.
- WITHIN THE PERSISTENT ADVERTISING AND NAVIGATION BANNER displayed to our
basic service subscribers while they are connected to the Web. In addition
to interactive banner ads similar to those shown within the main Juno
software, the advertising and navigation banner also contains buttons
which, when clicked, bring a user to an advertiser's Web site or to a Web
page featuring links to the sites of multiple advertisers.
Advertising may be purchased on a price-per-impression,
price-per-clickthrough or price-per-response basis, or according to special
arrangements negotiated on a case-by-case basis. With the exception of banner
ads sold and managed by Lycos or another third party sales force, each type of
ad may be targeted to a narrowly specified subset of our subscriber base based
on data provided by each subscriber in his or her Member Profile. While our
privacy policies preclude the dissemination to
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advertisers or other third parties of any of the data contained in an
individual's Member Profile without that individual's permission, aggregate
statistical information about the Juno subscriber base is routinely provided to
advertisers and can be used to target specific ads to all subscribers satisfying
any specified combination of attributes.
STRATEGIC MARKETING ALLIANCES
We have formed a number of large-scale, strategic marketing alliances that
provide for substantial guaranteed payments to Juno as advances against various
forms of revenue-sharing:
- QWEST COMMUNICATIONS. Our agreement with Qwest Communications calls for
guaranteed payments to Juno as a non-refundable advance against a
substantial percentage of all revenues derived, on an ongoing basis, from
telephone customers recruited through the Juno service.
- THE HARTFORD. Our agreement with The Hartford provides for reimbursement
of our marketing expenses as well as substantial guaranteed payments as an
advance against both bounties paid when a Juno member purchases an
insurance policy and an ongoing percentage of premiums collected from that
subscriber.
- WINGSPANBANK.COM. Under our agreement with WingspanBank.com, we will
receive payments each year--only the first year of which, however, is
guaranteed--as a non-refundable advance against bounties paid for each new
credit card, banking, or personal loan customer acquired through Juno.
This is an agreement we originally entered into with WingspanBank.com's
affiliate, FirstUSA.
The agreements described above can typically be terminated on short notice
by either party, provided, however, that in some cases, the party terminating
the agreement is required to make specified payments to the other party.
SELECTED ADVERTISING CUSTOMERS AND STRATEGIC MARKETING PARTNERS
As of December 31, 1999, approximately 300 advertisers and strategic
marketing partners had advertised on Juno, including those listed below.
Ameritrade
AT&T Wireless Services
Bank of America
Bose Radio
Cendant Corp.
.Comfax
Comtrad Industries
Crutchfield
DeLorme
Defenders of the Wildlife
Dragon Systems
eBay
Environmental Defense Fund
First USA
Grolier
The Hartford
Hewlett-Packard
Hoechst Marion Roussel
IBM
Intel
Intensor Gaming Chair
Intuit
Jenny Craig
Lexmark
Loews Cineplex
Market Facts
Microsoft
National Education Association
Official Airline Guides
Okidata
Office of National Drug Control Policy
Petsmart.com
Platinum Capital Group
Priceline
Prudential
Qwest
Roxy.com
Sidewalk.com
The Signature Group
SmarterKids.com
Symantec
TWEC
US Navy
WebMD
X10
Yesmail
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In a relatively small number of instances, we have provided advertising
credit to other companies in return for distribution of the Juno software, or
have exchanged advertising space with companies on a barter basis.
COMPETITION
The market for Internet services is extremely competitive and includes a
number of substantial participants, including America Online, Microsoft and
AT&T. The markets for Internet-based advertising and electronic commerce are
also very competitive. Our ability to compete depends upon many factors, many of
which are outside of our control. 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.
In recruiting subscribers for our services, we currently compete, or expect
to compete, with the following types of companies, among others:
- Established online service providers such as America Online, CompuServe,
and The Microsoft Network;
- Independent national Internet service providers such as EarthLink,
MindSpring, and Prodigy, including a number of companies, such as
AltaVista and NetZero, that offer Web access for free;
- Numerous independent regional and local Internet service providers that
may offer lower prices than a national Internet service provider;
- Various national and local telephone companies such as AT&T, MCI WorldCom
and Pacific Bell;
- 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
- Companies providing Internet access services using other broadband
technologies, including DSL technology, such as the Regional Bell
Operating Companies and various partners of Covad, Rhythms, and
NorthPoint.
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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.
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.
Our competition is likely to increase. We believe this will probably happen
as Internet service providers and online service providers consolidate and
become larger, more competitive companies, and as large diversified
telecommunications and media companies acquire Internet service providers. Other
Internet service providers are likely to begin offering free Internet access.
Since our announcement of free Internet access in December 1999, at least one
competitor has announced the introduction of a service 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.
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GOVERNMENT REGULATION
Providers of Internet access and e-mail services are not subject to direct
regulation by the Federal Communications Commission, but changes in the
regulatory environment relating to the telecommunications and media industries
could have an effect on our business. For example, several telecommunications
carriers are seeking to have communications over the Internet regulated by the
FCC in the same manner as other more traditional telecommunications services.
Local telephone carriers have also petitioned the FCC to regulate Internet
access providers in a manner similar to long distance telephone carriers and to
impose access fees on these providers, and recent events suggest that they may
be successful in obtaining the treatment they seek. In addition, we operate our
services throughout the United States, and regulatory authorities at the state
level may seek to regulate aspects of our activities as telecommunications
services. As a result, we could become subject to FCC and state regulation as
Internet services and telecommunications services converge.
We remain subject to numerous additional laws and regulations that could
affect our business. Because of the Internet's popularity and increasing use,
new laws and regulations with respect to the Internet are becoming more
prevalent. These laws and regulations have covered, or may cover in the future,
issues such as:
- user privacy;
- pricing;
- intellectual property;
- federal, state and local taxation;
- distribution; and
- characteristics and quality of products and services.
Legislation in these areas could slow the growth in use of the Internet
generally and decrease the acceptance of the Internet as a communications and
commercial medium. Additionally, because we rely on the collection and use of
personal data from our 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
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Internet, which could decrease our potential revenues or otherwise cause our
business to suffer. For additional information, see "Risk Factors--Changes in
government regulation could decrease our revenues and increase our costs."
INTELLECTUAL PROPERTY
We have been granted three U.S. patents for technology related to the
offline display of advertisements and the authentication and dynamic scheduling
of advertisements and other messages to be delivered to computer users. We have
filed a number of other U.S. patent applications relating to additional
techniques for the operation of online services and the provision of advertising
messages. We cannot assure you, however, that any of these applications will
result in the issuance of patents, that any patents that have been issued or
that might be issued in the future will provide us with any competitive
advantages or will be exploited profitably by us, or that any any of these
patents will withstand any challenges by third parties. Furthermore, we cannot
assure you that we will be able to obtain license rights to patents held by
third parties that may be essential to the successful implementation or
operation of our services, or that patents held or obtained by third parties
will not otherwise harm our business or financial results.
Except as described above, we rely solely upon copyright and trademark law,
trade secret protection and confidentiality agreements with our employees and
with some third parties to protect proprietary technology, processes, and other
intellectual property to the extent that protection is sought or secured at all.
We cannot assure you that any steps we might take will be adequate to protect
against misappropriation of our intellectual property by third parties.
Similarly, we cannot assure you that third parties will not be able to
independently develop similar technology, processes, or other intellectual
property. Furthermore, we cannot assure you that third parties will not assert
claims against us for infringement of their intellectual property rights.
EMPLOYEES
As of December 31, 1999, we employed 263 people, of whom 132 were in
operations, sales and marketing, and customer support; 84 were in engineering,
product development and network operations; and 47 were in finance, legal and
administration. Our employees are not covered by any collective-bargaining
arrangements, and we consider our relations with our employees to be good.
FACILITIES
Our principal executive office is located in New York, New York, where we
lease approximately 26,400 square feet. In addition, we lease additional office
space in New York City and also lease offices in San Francisco, California,
Cambridge, Massachusetts, Washington, D.C. and Hyderabad, India. We believe that
we will need to obtain additional space to accommodate our growing operations
and that we will be able to obtain such additional space on commercially
reasonable terms. Please see "Certain Transactions" for more information
regarding our facilities in New York, Cambridge and Hyderabad.
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 case, 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,
operations or financial condition.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The directors, executive officers and key employees of Juno, and their ages
and positions as of December 31, 1999, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------- --------
<S> <C> <C>
Charles E. Ardai*...................... 30 President, Chief Executive Officer and Director
Robert H. Cherins*..................... 59 Executive Vice President, Sales and Marketing
Mark A. Moraes*........................ 34 Executive Vice President, Technology
Richard M. Eaton, Jr.*................. 39 Chief Financial Officer and Treasurer
Jordan S. Birnbaum..................... 28 Senior Vice President, Business Development
Richard D. Buchband.................... 36 Senior Vice President and General Counsel
V. S. Mani............................. 35 Senior Vice President, Database Systems
Peter D. Skopp......................... 29 Senior Vice President, Network Development
David E. Shaw.......................... 48 Chairman of the Board of Directors
Edward J. Ryeom........................ 30 Director
Louis K. Salkind....................... 42 Director
</TABLE>
- ------------------------
* Denotes Executive Officer.
CHARLES E. ARDAI has served as President of Juno since its inception in
June 1995 and was named Chief Executive Officer of Juno in May 1999. Mr. Ardai
has served as a director of Juno since October 1997. From January 1992 until
June 1995, Mr. Ardai served DESCO, L.P. in a number of positions--first as
Director of Strategic Growth from January 1992 until January 1993, where he was
responsible for the development and execution of DESCO, L.P.'s recruitment
strategies, then as Vice President from January 1993 until January 1995. From
January 1995 until June 1995, Mr. Ardai served as Senior Vice President at
DESCO, L.P., with responsibility for development of Internet-related business
ventures. Mr. Ardai also served as a Managing Director of DESCO, L.P. from
January 1998 until February 1999. Prior to joining DESCO, L.P. in January 1992,
Mr. Ardai worked at Davis Publications, where he was responsible for the
development and marketing of products derived from the firm's media properties.
During this period, he also maintained an independent career as a freelance
writer and editor. Mr. Ardai serves on the Advisory Board of the Association for
Interactive Media, and on the Markle Foundation's E-mail For All Advisory Board.
Mr. Ardai graduated SUMMA CUM LAUDE from Columbia University.
ROBERT H. CHERINS has served as Juno's Executive Vice President, Sales and
Marketing since December 1996. From March 1993 until December 1996, Mr. Cherins
served as President of Jordan, McGrath, Case & Taylor/Direct and Executive Vice
President of its corporate parent, Jordan, McGrath, Case & Taylor. Previously,
Mr. Cherins spent 12 years with McCaffrey and McCall Advertising. He served as
Chairman and CEO of McCaffrey and McCall from 1987 to 1992 and as President from
1986 to 1987. Mr. Cherins served as President of McCaffrey and McCall's Direct
Marketing Division from 1981 to 1986. Mr. Cherins graduated from Hunter College
of the City University of New York.
MARK A. MORAES has served as Juno's Executive Vice President, Technology
since February 1998. From February 1997 until February 1998, he served as a
Senior Vice President of Juno, with responsibility for the development and
operation of Juno's system and networks. From June 1995 until February 1997,
Mr. Moraes served in several positions in Juno's systems development group,
including Vice President. From April 1992 until June 1995, Mr. Moraes served as
a global systems architect at DESCO, L.P., where he designed data distribution
networks. Earlier, he made contributions to the development and roll-out of
UUNET Canada, to the X Windows environment, and to Usenet's news
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software, which is used by tens of thousands of sites around the world.
Mr. Moraes is also the moderator of Usenet's news.announce.newusers newsgroup,
which is read by tens of thousands of new Usenet users each year. Mr. Moraes
received a Bachelor of Technology degree from the Indian Institute of Technology
and a Master of Applied Science degree from the University of Toronto.
RICHARD M. EATON, JR. has served as Juno's Chief Financial Officer and
Treasurer since February 1999. From February 1998 until February 1999,
Mr. Eaton served as Juno's Senior Vice President, Finance and Administration.
From November 1996 until February 1998, he served as Juno's Vice President &
Corporate Controller. From May 1996 until November 1996, Mr. Eaton served as a
senior financial professional on a consulting basis for Think Systems
Corporation. From April 1995 to April 1996, Mr. Eaton served as Vice
President & Corporate Controller at Datalogix International, Inc. Mr. Eaton
served as an Area Controller of Finance and Administration for J. D. Edwards &
Company from August 1993 to December 1994. Mr. Eaton spent the first seven years
of his career with Coopers & Lybrand, last serving as an audit manager.
Mr. Eaton graduated SUMMA CUM LAUDE from the accelerated combined BBA/MBA
degrees program in public accountancy at Pace University, and is a member of
both the Connecticut Society of Certified Public Accountants and the American
Institute of Certified Public Accountants.
JORDAN S. BIRNBAUM has served as Juno's Senior Vice President, Business
Development since February 1998. He served as Juno's Vice President, Strategic
Marketing from February 1997 to February 1998 and as director of Juno's member
acquisition activities from October 1995 until February 1997. Prior to joining
Juno, Mr. Birnbaum held a number of positions with DESCO, L.P., most recently as
a London-based trader of equity securities from January 1994 until April 1995.
Mr. Birnbaum graduated from Cornell University.
RICHARD D. BUCHBAND has served as Juno's Senior Vice President and General
Counsel since February 1998, and is responsible for oversight of Juno's legal,
human resources and security policies. From January 1997 to February 1998, he
served as Vice President of Juno, and from September 1995 until January 1997 as
associate counsel of DESCO, L.P. Prior to September 1995, Mr. Buchband was a
corporate and transactional lawyer in New York. Mr. Buchband graduated MAGNA CUM
LAUDE with an A.B. from the Woodrow Wilson School of Public and International
Affairs at Princeton University and received his J.D. from Columbia Law School.
V. S. MANI has served as Juno's Senior Vice President, Database Systems
since February 1998. From February 1997 until February 1998, Mr. Mani served as
a Vice President, and from April 1996 until February 1997 as a software engineer
at Juno, with responsibility for the design of many of Juno's advertising and
electronic commerce systems. From February 1993 until March 1996, Mr. Mani held
a number of positions at the Matsushita Information Technology Laboratory in
Princeton, New Jersey, where he conducted research in information retrieval and
mobile computing, and, prior to that, with Digital Equipment Corporation.
Mr. Mani received his bachelor's degree with honors in Mechanical Engineering
from the Indian Institute of Technology and his M.S. in Computer Science from
the University of Wisconsin.
PETER D. SKOPP has served as Juno's Senior Vice President, Network
Development since February 1998. He served as a Vice President of Juno from
February 1997 to February 1998, with responsibility for designing Juno's server
software, and as a member of Juno's technical staff from December 1995 until
February 1997. From December 1992 until December 1995, Mr. Skopp was a manager
at the Programming Systems Laboratory of the Computer Science Department at
Columbia University. Mr. Skopp received his B.S. and M.S. degrees from Columbia
University.
DAVID E. SHAW served as Chairman of Juno Online Services, L.P. from its
inception in June 1995. He has served as a director of Juno since July 1996, and
was named Chairman of the Board of Juno in February 1999. Since November 1992,
Dr. Shaw has been the Chairman and President of D. E. Shaw &
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Co., Inc., the parent of DESCO, L.P. Prior to founding a predecessor to DESCO,
L.P. in 1988, Dr. Shaw was a Vice President at Morgan Stanley & Co., where he
managed the firm's automated trading technology group. Earlier, he served on the
faculty of the Department of Computer Science at Columbia University, and as
President and founder of Stanford Systems Corporation. In 1994, Dr. Shaw was
appointed by President Clinton to the President's Committee of Advisors on
Science and Technology, in which capacity he served as Chairman of the Panel on
Educational Technology. Dr. Shaw is also the Treasurer of the American
Association for the Advancement of Science and a member of the executive
committee of the Council on Competitiveness. He also serves as the
(non-executive) Chairman of the board of directors of Schrodinger, Inc., a
developer of computational chemistry software. Dr. Shaw graduated with highest
honors from the University of California at San Diego, and received his Ph.D.
from Stanford University following several years of research at the Stanford
Artificial Intelligence Laboratory.
EDWARD J. RYEOM has served as a director of Juno since March 1999. Since
December 1999, Mr. Ryeom has been the Managing Partner of Axalon Ventures, a
venture capital firm focused on information technology. From January 1999
through December 1999, Mr. Ryeom was a Partner of Prospect Street Ventures, a
venture capital firm focused on information technology investments. From May
1998 to December 1998, he was a Vice President of Prospect Street Ventures. From
August 1995 to May 1998, he was a Vice President in investment banking for
Brenner Securities. From May 1994 to June 1995, he worked at Cowen & Company, in
the information technology group. From May 1993 to May 1994, he was a consultant
with Andersen Consulting. Mr. Ryeom also serves as a director for several
private information technology companies. Mr. Ryeom graduated with a bachelor's
degree in Electrical Engineering from Columbia University, and an M.E. in
Systems Engineering from the University of Virginia.
LOUIS K. SALKIND has served as a director of Juno since March 1999. Since
January 1991, Dr. Salkind has been a Managing Director of DESCO, L.P., where he
manages the firm's proprietary trading business. Since May 1993, he has also
been a Director of D. E. Shaw Securities International, a London-based affiliate
of DESCO, L.P., and since November 1997, he has been a Director of D. E. Shaw
Securities Hong Kong, Ltd. Dr. Salkind graduated CUM LAUDE with an A.B. from
Princeton University and received his M.S. and Ph.D degrees from New York
University.
COMPOSITION OF THE BOARD
Our board of directors is divided into three classes, each of whose members
serve for a staggered three-year term. Upon the expiration of the term of a
class of directors, directors in that class will be elected for three-year terms
at the annual meeting of stockholders in the year in which their term expires.
Mr. Ardai is a Class I Director whose term expires at the 2000 annual meeting of
stockholders. Dr. Salkind is a Class II Director whose term expires at the 2001
annual meeting of stockholders. Mr. Ryeom and Dr. Shaw are Class III Directors
whose terms expire at the 2002 annual meeting of stockholders. With respect to
each class, a director's term will be subject to the election and qualification
of their successors, or their earlier death, resignation or removal.
BOARD COMMITTEES
The Audit Committee of the board of directors reviews, acts on and reports
to the board of directors with respect to various auditing and accounting
matters, including the recommendation of Juno's auditors, the scope of the
annual audits, fees to be paid to the auditors, the performance of Juno's
independent auditors and the accounting practices of Juno. The members of the
Audit Committee are Mr. Ryeom, and Drs. Salkind and Shaw.
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The Compensation Committee of the board of directors recommends, reviews and
oversees the salaries, benefits and stock option plans for Juno's employees,
consultants, directors and other individuals compensated by Juno. The
Compensation Committee also administers Juno's compensation plans. The members
of the Compensation Committee are Messrs. Ardai and Ryeom, and Dr. Shaw.
DIRECTOR COMPENSATION
Other than reimbursing directors for customary and reasonable expenses of
attending board of directors or committee meetings, Juno does not currently pay
cash compensation to its directors. On April 9, 1999, Drs. Salkind and Shaw, and
Mr. Ryeom, as non-employee board members, were each granted an option to
purchase 22,222 shares of common stock with an exercise price of $9.00 per
share, which became exercisable on August 9, 1999. Additionally, under our 1999
Stock Incentive Plan each individual who first joins the Juno board after
May 25, 1999 as a non-employee board member will automatically receive a grant
of an option to purchase 22,222 shares of common stock at the time of his or her
commencement of board service. In addition, on the date of each annual
stockholders meeting beginning in 2000, each non-employee member of the board of
directors who is to continue to serve as a non-employee board member will
automatically be granted an option to purchase 7,777 shares of common stock.
Please see "--1999 Stock Incentive Plan".
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Juno did not have a Compensation Committee during the first quarter of 1999.
During that period, Mr. Ardai and Dr. Shaw made decisions relating to
compensation of Juno's executive officers, except that Mr. Ardai did not
participate in discussions regarding his own compensation. No executive officer
of Juno serves on the board of directors or compensation committee of any entity
which has one or more executive officers serving as a member of Juno's board of
directors or Compensation Committee.
EMPLOYMENT, SEVERANCE AND OTHER ARRANGEMENTS
Juno has entered into an employment agreement with Charles E. Ardai, dated
April 26, 1999, which may be terminated by either party upon 30 days notice. The
agreement provides for Mr. Ardai to receive a base salary of $185,000 and to
receive semi-annual bonus payments on January 1 and July 1 of each year,
starting on July 1, 1999, of not less than $50,000 each. The agreement became
effective on May 1, 1999 for calendar year 1999. Subsequent to calendar year
1999, Mr. Ardai's base salary and bonus amount may be increased, decreased or
eliminated in the sole discretion of Juno.
Juno has entered into an employment agreement with Robert H. Cherins, dated
April 26, 1999, which may be terminated by either party upon 30 days notice. The
agreement, which incorporates the terms of a letter agreement dated
November 20, 1996, provides for Mr. Cherins to receive a base salary of
$150,000. The agreement also provides for Mr. Cherins to receive a
non-refundable advance of $178,500, to be paid semi-monthly and deducted against
any year-end bonus. The agreement became effective on May 1, 1999 for calendar
year 1999. Mr. Cherins is eligible under the agreement to receive a year-end
bonus. Subsequent to calendar year 1999, Mr. Cherins's base salary, bonus amount
and the amount of the non-refundable advance may be increased or decreased in
the sole discretion of Juno, provided that, for each calendar year he is
employed by Juno, his base salary and the amount of the non-refundable advance
shall not be less than $328,500. In the event that Mr. Cherins is discharged by
Juno, unless he is terminated for cause or becomes unable to work due to
disability, Juno shall pay Mr. Cherins three months of severance at a rate of
$328,500 per annum.
Juno has entered into an employment agreement with Mark A. Moraes, dated
October 6, 1999, which may be terminated by either party upon 30 days notice.
The agreement provides for a base salary of $150,000 and for Mr. Moraes to be
eligible to receive a bonus at the sole discretion of Juno. The agreement became
effective on October 6, 1999 for calendar year 1999. Subsequent to calendar year
1999, Mr. Moraes's base salary and bonus amount may be increased, decreased or
eliminated in the sole discretion of Juno.
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Juno has entered into an employment agreement with Richard M. Eaton, Jr.,
dated September 25, 1998, which may be terminated by either party upon 30 days
notice. Mr. Eaton received a base salary of $125,000 in 1999. Mr. Eaton also
received non-refundable payments totalling $30,000 made semi-monthly in 1999 as
an advance against a year-end bonus. Mr. Eaton is eligible to receive additional
amounts as a year-end bonus with respect to calendar year 1999. Subsequent to
calendar year 1999, Mr. Eaton's base salary, bonus amount and the amount of the
non-refundable advance may be increased or decreased in the sole discretion of
Juno.
Juno has also granted specified rights to some of our officers in the event
that they are terminated without cause or in the event that they voluntarily
resign following a material reduction in their duties and responsibilities or
their cash compensation or following a relocation of their place of employment.
EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to, earned by or
paid to Juno's chief executive officer and the other three executive officers of
Juno whose annual salary and bonus exceeded $100,000 in 1999 for services
rendered in all capacities during 1999.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION (1) AWARDS
------------------------ SHARES UNDERLYING
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS
- --------------------------- --------- --------- -----------------
<S> <C> <C> <C>
Charles E. Ardai (2)................................... $223,353 $100,000 462,933
President and Chief Executive Officer
Robert H. Cherins (3).................................. $150,000 $178,500 150,067
Executive Vice President,
Sales and Marketing
Mark A. Moraes (4)..................................... $150,000 $ 25,000 150,067
Executive Vice President,
Technology
Richard M. Eaton, Jr. (5).............................. $125,000 $ 30,000 217,789
Chief Financial Officer and
Treasurer
</TABLE>
- ------------------------
(1) The column for "Other Annual Compensation" has been omitted because there is
no compensation required to be reported in that column. The aggregate amount
of perquisites and other personal benefits provided to each executive
officer above is less than the lesser of $50,000 and 10% of the total annual
salary and bonus of that officer.
(2) Amounts presented represent amounts paid in 1999 for services rendered in
1999. Pursuant to Mr. Ardai's employment agreement, he is eligible to
receive a discretionary bonus in 2000 relating to services rendered in 1999.
(3) Amounts presented represent amounts paid in 1999 for services rendered in
1999. The amounts shown above exclude a bonus of $100,000 paid in 1999 for
services rendered in 1998. Pursuant to Mr. Cherins' employment agreement, he
is eligible to receive a discretionary bonus in 2000 relating to services
rendered in 1999.
(4) Amounts presented represent amounts paid in 1999 for services rendered in
1999. The amounts shown above exclude a bonus of $75,000 paid in 1999 for
services rendered in 1998. Pursuant to Mr. Moraes' employment agreement, he
is also eligible to receive a discretionary bonus in 2000 relating to
services rendered in 1999.
(5) Amounts presented represent amounts paid in 1999 for services rendered in
1999. The amounts shown above exclude a bonus of $60,000 paid in 1999 for
services rendered in 1998. Pursuant to Mr. Eaton's employment agreement, he
is eligible to receive a discretionary bonus in 2000 relating to services
rendered in 1999.
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OPTION GRANTS IN LAST YEAR
The following table sets forth information regarding options granted to
Juno's executive officers during the year ended December 31, 1999. Juno has not
granted any stock appreciation rights.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS(1) POTENTIAL REALIZABLE
---------------------------------------------------- VALUE AT ASSUMED
NUMBER OF ANNUAL RATES
SECURITIES % OF TOTAL EXERCISE OF STOCK PRICE APPRECIATION
UNDERLYING OPTIONS GRANTED PRICE FOR OPTION TERM(2)
OPTIONS TO EMPLOYEES IN PER EXPIRATION ----------------------------------
NAME GRANTED 1999 SHARE DATE 0% 5% 10%
- ---- ---------- --------------- -------- ---------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Charles E. Ardai...... 105,277 3.8% $ 9.00 4/8/2009 $315,831 $ 595,873 $1,510,060
315,556 11.3 13.00 4/21/2009 -- 2,579,869 6,537,895
42,100 1.5 8.94 6/3/2009 -- 236,700 599,843
Robert H. Cherins..... 66,667 2.4 13.00 4/26/2009 -- 545,045 1,381,250
13,400 0.5 8.94 6/3/2009 -- 75,339 190,924
70,000 2.5 15.00 8/15/2009 -- 660,339 1,673,430
Mark A. Moraes........ 66,667 2.4 13.00 4/21/2009 -- 545,045 1,381,250
13,400 0.5 8.94 6/3/2009 -- 75,339 190,924
70,000 2.5 15.00 8/15/2009 -- 660,339 1,673,430
Richard M. Eaton, 88,889 3.2 13.00 4/21/2009 -- 726,724 1,841,660
Jr.................. 8,900 0.3 8.94 6/3/2009 -- 50,039 126,808
120,000 4.3 15.00 8/15/2009 -- 1,132,010 2,868,736
</TABLE>
- ------------------------
(1) Each option represents the right to purchase one share of common stock and
generally vests at a rate of 25% per annum over four years. See "--1999
Stock Incentive Plan."
(2) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. The 0%, 5%
and 10% assumed annual rates of compounded stock price appreciation are
mandated by rules of the Securities and Exchange Commission and do not
represent Juno's estimate or projection of Juno's future common stock
prices. These amounts represent assumed rates of appreciation in the value
of Juno's common stock from the deemed fair market value for accounting
purposes on the date of grant. Actual gains, if any, on stock option
exercises are dependent on the future performance of the common stock and
overall stock market conditions. The amounts reflected in the table may not
necessarily be achieved.
AGGREGATED OPTION EXERCISES IN THE YEAR ENDED DECEMBER 31, 1999 AND YEAR-END
OPTION VALUES
The following table sets forth information concerning the number and value
of unexercised options held by each of Juno's executive officers at
December 31, 1999.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS
DECEMBER 31, 1999 AT DECEMBER 31, 1999(1)
----------------------- ------------------------
<S> <C> <C> <C> <C>
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------------------------- ------- ------- ---------- -----------
Charles E. Ardai............................. 159,653 724,391 $5,584,707 $20,138,845
Robert H. Cherins............................ 58,909 218,158 2,061,570 4,232,965
Mark A. Moraes............................... 58,280 256,789 1,661,140 7,341,830
Richard M. Eaton, Jr......................... 51,681 234,804 1,220,707 5,848,651
</TABLE>
- ------------------------
(1) The last reported sale price of the common stock of Juno as of December 31,
1999 was $35.50 per share.
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1999 STOCK INCENTIVE PLAN
The 1999 Stock Incentive Plan is intended to serve as the successor equity
incentive program to Juno's 1997 Class B Limited Partnership Unit
Option/Issuance Plan. The 1999 Stock Incentive Plan became effective on
March 26, 1999.
Juno has authorized 6,116,946 shares of common stock for issuance under the
1999 Stock Incentive Plan including the automatic increase of 348,335 shares
effected on January 1, 2000. The share reserve will automatically be increased
on the first trading day of January each calendar year, beginning in
January 2000, by a number of shares equal to 1% of the total number of shares of
common stock outstanding on the last trading day of the immediately preceding
calendar year, but no such annual increase will exceed 444,444 shares. However,
in no event may any one participant in the 1999 Stock Incentive Plan receive
option grants or direct stock issuances for more than 1,111,111 shares in the
aggregate per calendar year.
Outstanding options under the 1997 Limited Partnership Plan were
incorporated into the 1999 Stock Incentive Plan following Juno's initial public
offering in May 1999, and no further option grants have been made under the 1997
Limited Partnership Plan. The incorporated options continue to be governed by
their existing terms, although Juno's Compensation Committee may extend one or
more features of the 1999 Stock Incentive Plan to those options. However, except
as otherwise noted below, the outstanding options under the 1997 Limited
Partnership Plan contain substantially the same terms and conditions summarized
below for the discretionary option grant program under the 1999 Stock Incentive
Plan.
The 1999 Stock Incentive Plan has four separate programs. The first program
is the discretionary option grant program under which eligible individuals in
Juno's employ or service, including officers, non-employee board members and
consultants, may be granted options to purchase shares of Juno's common stock.
The second program is the stock issuance program under which eligible
individuals may be issued shares of common stock directly, through the purchase
of such shares or as a bonus tied to the performance of services. The third
program is the salary investment option grant program under which executive
officers and other highly compensated employees may elect to apply a portion of
their base salary to the acquisition of special below-market stock option
grants. The fourth program is the automatic option grant program under which
option grants will automatically be made at periodic intervals to eligible
non-employee board members.
The discretionary option grant and stock issuance programs are administered
by Juno's Compensation Committee. This committee determines which eligible
individuals are to receive option grants or stock issuances, the time or times
when option grants or stock issuances are to be made, the number of shares
subject to each grant or issuance, the exercise or purchase price for each grant
or issuance, the status of any granted option as either an incentive stock
option or a non-statutory stock option under the federal tax laws, the vesting
schedule to be in effect for the option grant or stock issuance and the maximum
term for which any granted option is to remain outstanding. The committee will
also select the executive officers and other highly compensated employees who
may participate in the salary investment option grant program in the event that
program is activated for one or more calendar years. Neither the Compensation
Committee nor the board will exercise any administrative discretion with respect
to option grants made under the salary investment option grant program or under
the automatic option grant program for the non-employee board members.
The exercise price for the options may be paid in cash or in shares of
Juno's common stock valued at fair market value on the exercise date. The option
may also be exercised through a same-day sale program without any cash outlay by
the optionee. In addition, the Compensation Committee may allow a participant to
pay the option exercise price or direct issue price, and any associated
withholding taxes incurred in connection with the acquisition of shares, with a
full-recourse, interest-bearing promissory note.
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In the event that Juno is acquired, whether by merger or asset sale or sale
by the stockholders of more than 50% of Juno's voting stock in a transaction
recommended by the board of directors, each outstanding option under the
discretionary option grant program which is not to be assumed by the successor
corporation or otherwise continued will automatically accelerate in full, and
all unvested shares under the discretionary option grant and stock issuance
programs will immediately vest, except to the extent Juno's repurchase rights
with respect to those shares are to be assigned to the successor corporation or
otherwise continued in effect. The Compensation Committee may grant options
under the discretionary option grant program which will accelerate in the event
of an acquisition even if the options are assumed or which will accelerate if
the optionee's service is subsequently terminated. The Compensation Committee
may grant options and issue shares which accelerate in connection with a hostile
change in control effected through a successful tender offer for more than 50%
of Juno's outstanding voting stock or by proxy contest for the election of board
members, or which accelerate upon a subsequent termination of an individual's
service.
Options currently outstanding under the 1997 Limited Partnership Plan may be
assumed by the successor corporation in an acquisition; such options are not by
their terms subject to acceleration at the time of an acquisition or a change in
control or upon the termination of the optionee's service following any such
transaction.
Stock appreciation rights may be issued under the discretionary option grant
program which will provide the holders with the option to surrender their
outstanding options for an appreciation distribution from Juno equal to the fair
market value of the vested shares subject to the surrendered option less the
aggregate exercise price payable for such shares. Such appreciation distribution
may be made in cash or in shares of Juno's common stock. There are currently no
outstanding stock appreciation rights.
The Compensation Committee has the authority to cancel outstanding options
under the discretionary option grant program, including options incorporated
from the 1997 Limited Partnership Plan, in return for the grant of new options
for the same or different number of option shares with an exercise price per
share based upon the fair market value of the common stock on the new grant
date.
In the event the Compensation Committee elects to activate the salary
investment option grant program for one or more calendar years, each of Juno's
executive officers and other highly compensated employees selected for
participation may elect to reduce his or her base salary for that calendar year
by a specified dollar amount not less than $5,000 nor more than $50,000. In
return, the individual will automatically be granted, on the first trading day
in the calendar year for which the salary reduction is to be in effect, a
non-statutory option to purchase that number of shares of common stock
determined by dividing the salary reduction amount by two-thirds of the fair
market value per share of Juno's common stock on the grant date. The option
exercise price will be equal to one-third of the fair market value of the option
shares on the grant date. As a result, the fair market value of the option
shares on the grant date less the exercise price payable for those shares will
be equal to the salary reduction amount. The option will become exercisable in a
series of 12 equal monthly installments over the calendar year for which the
salary reduction is to be in effect and will be subject to full and immediate
vesting in the event of an acquisition or change in control of Juno.
Under the automatic option grant program, each individual who first joins
the Juno board after May 25, 1999 as a non-employee board member will
automatically be granted an option for 22,222 shares of Juno common stock at the
time of his or her commencement of board service. In addition, on the date of
each annual stockholders meeting, beginning with the meeting in the year 2000,
each individual who is to continue to serve as a non-employee board member will
receive an option grant to purchase 7,777 shares of Juno common stock. Each
automatic grant will have an exercise price equal to the fair market value per
share of Juno common stock on the grant date and will have a maximum term of
10 years, subject to earlier termination following the optionee's cessation of
board service. Each 22,222-share option will become exercisable upon the
optionee's completion of 4 months of board
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service measured from the option grant date and each 7,777-share option grant
will become exercisable upon the optionee's completion of 6 months of service
measured from the grant date. However, each outstanding option will immediately
vest upon an acquisition or change in control or the death or disability of the
optionee while serving as a board member.
Limited stock appreciation rights will automatically be included as part of
each grant made under the automatic option grant and salary investment option
grant programs and may be granted to one or more officers as part of their
option grants under the discretionary option grant program. Options with this
limited stock appreciation right may be surrendered to Juno upon the successful
completion of a hostile tender offer for more than 50% of Juno's outstanding
voting stock. In return for the surrendered option, the optionee will be
entitled to a cash distribution from Juno in an amount per surrendered option
share equal to the highest price per share of common stock paid in connection
with the tender offer less the exercise price payable for such share.
The board may amend or modify the 1999 Stock Incentive Plan at any time,
subject to any required stockholder approval. The 1999 Stock Incentive Plan will
terminate no later than March 25, 2009.
1999 EMPLOYEE STOCK PURCHASE PLAN
The 1999 Employee Stock Purchase Plan is designed to allow eligible
employees of Juno and any participating subsidiaries to purchase shares of
common stock, at semi-annual intervals, through periodic payroll deductions. A
total of 555,556 shares of Juno's common stock are reserved for issuance under
the plan.
The plan has a series of successive offering periods, each with a maximum
duration of 24 months. The initial offering period began in May 1999 and will
end on the last business day in July 2001. The next offering period will begin
on the first business day in August 2001, and subsequent offering periods will
be set by Juno's Compensation Committee.
Individuals who are eligible employees on the start date of any offering
period may enter the plan on that start date or on any subsequent semi-annual
entry date, generally February 1 or August 1 each year. Individuals who become
eligible employees after the start date of the offering period may join the plan
on any subsequent semi-annual entry date within that period.
A participant may contribute up to 15% of his or her cash earnings through
payroll deductions and the accumulated payroll deductions will be applied to the
purchase of shares on the participant's behalf on each semi-annual purchase
date, the last business day in January and July each year. The purchase price
per share will be 85% of the lower of the fair market value of Juno's common
stock on the participant's entry date into the offering period or the fair
market value on the semi-annual purchase date. The first purchase totaling
64,811 shares occurred on January 31, 2000. In no event, however, may any
participant purchase more than 1,667 shares, nor may all participants in the
aggregate purchase more than 138,889 shares on any one semi-annual purchase
date. Should the fair market value of Juno's common stock on any semi-annual
purchase date be less than the fair market value on the first day of the
offering period, then the current offering period will automatically end and a
new offering period will begin, based on the lower fair market value.
The board may at any time amend or modify the plan. The plan will terminate
no later than the last business day in July 2009.
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CERTAIN TRANSACTIONS
FINANCINGS PRIOR TO THE STATUTORY MERGER
From the formation of Juno Online Services, L.P. on June 30, 1995, until the
statutory merger of Juno Online Services, L.P. with Juno Online Services, Inc.
on March 1, 1999, we were financed through contributions of capital, primarily
from persons or entities affiliated with D. E. Shaw & Co., Inc. In return for
their investments, these investors received Class A limited partnership units.
On March 1, 1999, we converted from a limited partnership into a C
corporation. As part of this conversion, Class A limited partnership units were
converted into shares of Series A redeemable convertible preferred stock at a
one-to-one ratio, and options to acquire Class B limited partnership units under
our 1997 Class B Limited Partnership Unit Option/Issuance Plan were converted
into options to acquire common stock of Juno Online Services, Inc. at a
one-to-one ratio.
1999 PRIVATE EQUITY INVESTMENT
Following the statutory merger, we raised gross proceeds of $65.0 million by
completing a private placement of 10,138,716 shares of a newly authorized class
of Series B redeemable convertible preferred stock to a group of investors.
Investors in the private round of financing included Intel Corporation, News
Corporation, Prospect Street Ventures and Sycamore Ventures. We undertook this
round of financing to raise capital necessary to fund our ongoing operations,
the planned expansion of our marketing activities and other general corporate
purposes.
Upon completion of our initial public offering on May 25, 1999, the
outstanding shares of Series A redeemable convertible preferred stock and
Series B redeemable convertible preferred stock automatically converted into an
aggregate of 27,822,751 shares of our common stock.
SHARED SERVICES
Historically, DESCO, L.P. has provided Juno various administrative services.
These services have included numerous overhead and infrastructure items, such as
providing office space and occupancy-related services, providing insurance and
professional services, providing and maintaining some of the hardware and
software used by Juno, and administering employee benefit plans for the benefit
of Juno employees. Prior to January 1, 1998, expenses related to these and other
services were charged to Juno on the basis of allocation metrics as determined
by DESCO, L.P, based upon square footage, headcount and other resources
utilized. Effective January 1, 1998, Juno and DESCO, L.P. entered into a
services agreement pursuant to which DESCO, L.P. has agreed to provide
administrative and other services for Juno in a specified set of service
categories, in return for a set monthly fee: $152,500 per month for the period
of January 1, 1998 to April 16, 1998, $61,600 per month for the period
April 17, 1998 to December 31, 1999 and $11,000 per month, primarily for
telecommunications services, for the period thereafter. The services agreement
covers the delivery of:
- telecommunications services;
- personnel-related services, including for 401(k) and other benefit plans
and workers' compensation insurance;
- occupancy services through April 18, 1998 for Juno personnel working in
facilities maintained by DESCO, L.P.;
- miscellaneous administrative services;
- various professional services;
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- various purchasing services; and
- various information technology services.
The term of the services agreement extends on a month-to-month basis until
terminated by either party. The services agreement may be terminated by either
party at any time upon written notice to the other party following a material
default by the other party which remained uncured for 30 days or at any time
upon 90 days written notice to the other party. Juno believes that the amounts
charged to it under the services agreement are generally comparable to the
amounts that would have been charged by an independent third party. We do not
have any current plans to terminate the services agreement.
Prior to May 20, 1999, Juno and DESCO, L.P. were parties to a services
agreement pursuant to which DESCO, L.P., through certain affiliates based in
India, provided various consulting services to Juno. Under this agreement,
DESCO, L.P. provided technical and non-technical consulting services as well as
other consulting services agreed to by the parties. Each staff member who
performed consulting services under this agreement was categorized as either a
technical consultant or a non-technical consultant. In addition to reimbursing
DESCO, L.P. for specified expenses, such as travel costs and satellite link
charges, we paid DESCO, L.P. $3,650 per month for each technical consultant and
$2,300 per month for each non-technical consultant. The parties terminated this
agreement effective May 20, 1999, and we are presently restructuring the manner
in which Juno obtains the services that had been provided under the agreement.
We have formed a subsidiary of Juno based in Hyderabad, India, and that
subsidiary has entered into employment agreements with substantially all of the
individuals who had previously served as technical or non-technical consultants.
In the near future, we expect to enter into a more limited agreement covering
occupancy and related services that we continue to obtain from DESCO, L.P.'s
affiliated entity in India. We believe that the economic terms of the new
agreement will be generally comparable to those that could be obtained from an
independent third party.
We employ a small number of personnel in Cambridge, Massachusetts, primarily
for the purpose of maintaining Juno server equipment that is located in a space
formerly maintained by D. E. Shaw Financial Technology, L.P., an affiliate of
DESCO, L.P. Prior to January 1, 1998, expenses connected with the use and
maintenance of that server equipment and the use of adjacent office space were
charged to Juno on the basis of allocation metrics as determined by DESCO, L.P.,
based upon square footage, headcount and other resources utilized. Effective
January 1, 1998, Juno and Shaw Financial Technology entered into a services
agreement under which Shaw Financial Technology has agreed to provide
information technology, telecommunications, occupancy, and related
administrative services to us, in return for a monthly fee of $11,500. Shaw
Financial Technology sold some of its assets to a third party and we have made
arrangements with this third party to continue to host our server equipment.
TRANSACTIONS WITH NEWS CORPORATION
Juno has entered into an agreement with News America Incorporated, a
significant stockholder of Juno and an affiliate of News Corporation, to
purchase various forms of advertising on the media properties of News America
Incorporated and its affiliates. Under the March 1, 1999 agreement, Juno spent
$10.0 million for advertising that may be used at any time prior to March 2001,
to be provided by News America and its affiliates at then-current rates which
shall be no greater than those customarily applied to purchasers of similar
amounts of comparable advertising.
On September 29, 1999, Juno entered into an agreement with News America
Digital Publishing, an affiliate of News Corporation, to use Fox-branded news,
sports, entertainment and business content within co-branded channels on the
Juno portal site. As of the date of this prospectus, News America Digital
Publishing has not yet begun supplying content to Juno.
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<PAGE>
LEASES
Prior to November 1997, most of Juno's staff occupied offices within space
leased by DESCO, L.P. in midtown Manhattan, with leasehold and other expenses
being allocated to Juno by DESCO, L.P. based on Juno's use of this space. In
November 1997, Juno relocated its New York-based staff and its principal
executive offices to a single floor at 1540 Broadway leased from Bertelsmann
Property, Inc. under an Agreement of Lease dated September 22, 1997 between
DESCO, L.P., as lessee, and Bertelsmann. The lease permits DESCO, L.P. to sublet
all or a portion of the premises to Juno. Juno has agreed to assume the
performance of DESCO, L.P.'s payment obligations under the lease. The term of
the lease continues until March 2003 and DESCO, L.P. has an option to renew for
an additional five-year term. In addition to the office space at 1540 Broadway,
Juno currently occupies two floors in an adjacent building under a subleasing
arrangement with DESCO, L.P. Although the terms of this arrangement have not
been finalized, Juno expects that the sublease will expire on April 30, 2001. We
believe that the economic terms of this sublease will be generally comparable to
those that could be obtained from an independent third party.
OPTIONS GRANTED TO EXECUTIVE OFFICERS
For information regarding the grant of stock options to executive officers
and directors, see "Management--Director Compensation," "--Executive
Compensation," "--1999 Stock Incentive Plan" and "Principal Stockholders."
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to the beneficial
ownership of the common stock as of January 31, 2000, and as adjusted to reflect
the sale of the shares of common stock offered hereby, by each person or group
of affiliated persons who is known by Juno to beneficially own 5% or more of the
common stock, each director and executive officer of Juno, and all directors and
executive officers of Juno as a group. Unless otherwise indicated, the address
of each beneficial owner listed below is c/o Juno Online Services, Inc., 1540
Broadway, New York, New York 10036.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting and investment power with
respect to shares. Unless otherwise indicated, the persons named in the table
have sole voting and sole investment control with respect to all shares
beneficially owned.
<TABLE>
<CAPTION>
PERCENT BENEFICIALLY OWNED
NUMBER --------------------------------
NAME OF SHARES BEFORE OFFERING AFTER OFFERING
- ---- ---------- --------------- --------------
<S> <C> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS
David E. Shaw (1)...................................... 17,103,548 48.8 44.6
Charles E. Ardai (2)................................... 362,132 1.0 *
Louis K. Salkind (3)................................... 188,704 * *
Mark A. Moraes (4)..................................... 151,700 * *
Richard M. Eaton, Jr. (5).............................. 86,816 * *
Robert H. Cherins (6).................................. 76,908 * *
Edward J. Ryeom (7).................................... 22,222 * *
All directors and executive officers as a group (7
persons) (8)......................................... 17,992,031 50.4 46.1
5% STOCKHOLDERS
Shaw Family Trust IV (9)............................... 7,824,727 22.3 20.4
D. E. Shaw & Co., L.P. (10)............................ 6,336,735 18.1 16.5
News America Incorporated (11)......................... 3,135,208 9.0 8.2
</TABLE>
- ------------------------
* Less than 1%.
(1) Includes (i) 2,812,237 shares held directly by David E. Shaw, (ii) 107,627
shares held by D. E. Shaw & Co., Inc., (iii) 5,559,697 shares held by D. E.
Shaw & Co., L.P., (iv) 777,038 shares held by D. E. Shaw Investment Group,
L.P., (v) 7,824,727 shares held by Shaw Family Trust IV and (vi) 22,222
shares that are issuable upon the exercise of stock options. Dr. Shaw
disclaims beneficial ownership of the shares held by D. E. Shaw & Co., L.P.,
D. E. Shaw Investment Group, L.P., and Shaw Family Trust IV, except to the
extent of his pecuniary interest therein. The address of the foregoing
entities is 120 West 45th Street, New York, New York 10036. In addition to
the shares included above, 233,334 shares are held by the Shaw Juno Trust.
For a description of the relationship between David E. Shaw and Juno, please
see "Certain Transactions."
(2) Includes 361,969 shares that are issuable upon the exercise of options. This
number does not include 522,075 shares issuable upon the exercise of stock
options that do not vest within 60 days of January 31, 2000.
(3) Includes shares held by the Louis K. Salkind 1999 Grantor Retained Annuity
Trust and 22,222 shares that are issuable upon the exercise of stock
options. Although Dr. Salkind is neither the trustee nor a beneficiary of
the Louis K. Salkind 1999 Grantor Retained Annuity Trust, some of the
beneficiaries of this trust reside in Dr. Salkind's household. The address
of the Louis K. Salkind 1999 Grantor Retained Annuity Trust is 120 West 45th
Street, New York, New York 10036.
(4) Includes 115,264 shares that are issuable upon the exercise of stock
options. This number does not include 199,805 shares issuable upon the
exercise of stock options that do not vest within 60 days of January 31,
2000.
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<PAGE>
(5) Includes 80,797 shares that are issuable upon the exercise of stock options.
This number does not include 205,688 shares issuable upon the exercise of
stock options that do not vest within 60 days of January 31, 2000.
(6) Includes 76,787 shares that are issuable upon the exercise of stock options.
This number does not include 200,580 shares issuable upon the exercise of
stock options that do not vest within 60 days of January 31, 2000.
(7) Includes 22,222 shares that are issuable upon the exercise of stock options.
The address of Mr. Ryeom is 70 West 36th Street, Suite 906, New York, New
York 10018.
(8) Includes 701,183 shares that are issuable upon the exercise of stock
options.
(9) Dr. Shaw is the trustee of the Shaw Family Trust IV. The address of Shaw
Family Trust IV is 120 West 45th Street, New York, New York 10036. For a
description of the relationship between Shaw Family Trust IV and Juno,
please see "Certain Transactions."
(10) Includes (i) 5,559,697 shares held directly by D. E. Shaw & Co., L.P. and
(ii) 777,038 shares held by D. E. Shaw Investment Group, L.P. D. E. Shaw &
Co., Inc., which is wholly owned by David E. Shaw, is the general partner of
D. E. Shaw & Co., L.P. D. E. Shaw & Co., L.P. disclaims beneficial ownership
of the shares held by D. E. Shaw Investment Group, L.P., except to the
extent of its pecuniary interest therein. Dr. Shaw, as President of
D. E. Shaw & Co., Inc., has voting and dispositive powers with respect to
these shares. The address of D. E. Shaw & Co., L.P. is 120 West 45th Street,
New York, New York 10036. For a description of the relationship between
D. E. Shaw & Co., L.P. and Juno, please see "Certain Transactions."
(11) News America Incorporated is an affiliate of News Corporation, a publicly
traded company. The address of News America Incorporated is 1211 Avenue of
the Americas, New York, New York 10036. For a description of the
relationship between News America Incorporated and Juno, please see "Certain
Transactions."
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following description of Juno's common stock and preferred stock and
relevant provisions of Juno's amended and restated certificate of incorporation,
and Juno's amended and restated bylaws are summaries thereof and are qualified
by reference to our amended and restated certificate of incorporation and the
amended and restated bylaws, copies of which have been filed with the Securities
and Exchange Commission.
The authorized capital stock of Juno consists of 133,333,334 shares of
common stock, par value $0.01 per share, and 5,000,000 shares of preferred
stock, par value $0.01 per share.
COMMON STOCK
As of January 31, 2000, there were 35,019,351 shares of common stock
outstanding and held of record by approximately 450 stockholders. Based upon the
number of shares outstanding as of that date and giving effect to the issuance
of the 3,320,000 shares of common stock offered by Juno in this offering, there
will be 38,339,351 shares of common stock outstanding upon the closing of this
offering.
Holders of common stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Accordingly, holders of a majority of the shares of common stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Holders of common stock are entitled to receive ratably
those dividends, if any, as may be declared by the board of directors out of
funds legally available therefor, subject to any preferential dividend rights of
any outstanding preferred stock. Upon the liquidation, dissolution or winding up
of Juno, the holders of common stock are entitled to receive ratably the net
assets of Juno available after the payment of all debts and other liabilities
and subject to the prior rights of any outstanding preferred stock. Holders of
the common stock have no preemptive, subscription, redemption or conversion
rights. The outstanding shares of common stock are, and the shares offered by
Juno in the offering will be, when issued in consideration for payment thereof,
fully paid and nonassessable. The rights, preferences and privileges of holders
of common stock are subject to, and may be adversely affected by, the rights of
the holders of shares of any series of preferred stock which Juno may designate
and issue in the future.
PREFERRED STOCK
The board of directors is authorized, without further stockholder approval,
to issue from time to time up to an aggregate of 5,000,000 shares of preferred
stock in one or more series and to fix or alter the designations, preferences,
rights and any qualifications, limitations or restrictions of the shares of each
series thereof, including the dividend rights, dividend rates, conversion
rights, voting rights, terms of redemption, including sinking fund provisions,
redemption price or prices, liquidation preferences and the number of shares
constituting any series or designations of series. Juno has no present plans to
issue any shares of preferred stock. See "--Anti-Takeover Effects of Various
Provisions of Delaware Law and Juno's Certificate of Incorporation and Bylaws."
OPTIONS
Options to purchase a total of 6,116,946 shares of common stock may be
granted under the 1999 Stock Incentive Plan. As of January 31, 2000, there were
outstanding options to purchase a total of 4,212,368 shares of common stock, of
which options to purchase approximately 1,127,595 shares were exercisable. As of
January 31, 2000, there were 1,272,844 additional shares of common stock
available for issuance under this plan. Any shares of common stock issued upon
exercise of vested options are immediately available for sale in the public
market, subject to the terms of lock-up agreements entered into by and between
certain holders of outstanding options and the underwriters. See "Management--
1999 Stock Incentive Plan" and "Shares Eligible for Future Sale."
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<PAGE>
REGISTRATION RIGHTS
Pursuant to the terms of an Amended and Restated Registration Rights
Agreement dated March 1, 1999, after the closing of this offering the holders of
27,744,207 shares of common stock will be entitled to demand registration rights
with respect to the registration of their shares under the Securities Act. The
holders of 10% or more of these shares are entitled to demand that Juno register
their shares under the Securities Act, subject to various limitations. Juno is
not required to effect more than six of these registrations pursuant to these
demand registration rights. In addition, pursuant to the Amended and Restated
Registration Rights Agreement, these holders are entitled to piggyback
registration rights with respect to the registration of their shares under the
Securities Act, subject to various limitations. Further, at any time after Juno
becomes eligible to file a registration statement on Form S-3, the holders of
common stock who are parties to the Amended and Restated Registration Rights
Agreement may require Juno to file registration statements under the Securities
Act on Form S-3 with respect to their shares of common stock. These registration
rights are subject to certain conditions and limitations, among them the right
of the underwriters of an offering to limit the number of shares of common stock
held by security holders with registration rights to be included in a
registration. Juno is generally required to bear all of the expenses of all of
these registrations, except underwriting discounts and selling commissions.
Registration of any of the shares of common stock held by security holders with
registration rights would result in shares becoming freely tradable without
restriction under the Securities Act immediately upon effectiveness of such
registration.
ANTI-TAKEOVER EFFECTS OF VARIOUS PROVISIONS OF DELAWARE LAW AND JUNO'S
CERTIFICATE OF INCORPORATION AND BYLAWS
Juno is subject to the provisions of Section 203 of the Delaware General
Corporation Law. Subject to some exceptions, Section 203 prohibits a publicly
held Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
interested stockholder attained that status with the approval of the board of
directors or unless the business combination is approved in a prescribed manner.
A "business combination" includes mergers, asset sales and other transactions
resulting in a financial benefit to the interested stockholder. Subject to
various exceptions, an "interested stockholder" is a person who, together with
affiliates and associates, owns, or within three years did own, 15% or more of
the corporation's voting stock. This statute could prohibit or delay the
accomplishment of mergers or other takeover or change in control attempts with
respect to Juno and, accordingly, may discourage attempts to acquire Juno.
In addition, various provisions of our amended and restated certificate of
incorporation and our amended and restated bylaws, which provisions are
summarized in the following paragraphs, may be deemed to have an anti-takeover
effect and may delay, defer or prevent a tender offer or takeover attempt that a
stockholder might consider in its best interest, including those attempts that
might result in a premium over the market price for the shares held by
stockholders.
BOARD OF DIRECTORS VACANCIES. Juno's amended and restated certificate of
incorporation authorizes the board of directors to fill vacant directorships or
increase the size of the board of directors. This may deter a stockholder from
removing incumbent directors and simultaneously gaining control of the board of
directors by filling the vacancies created by this removal with its own
nominees.
STOCKHOLDER ACTION; SPECIAL MEETING OF STOCKHOLDERS. Juno's amended and
restated certificate of incorporation provides that stockholders may not take
action by written consent, but only at duly called annual or special meetings of
stockholders. The amended and restated certificate of incorporation further
provides that special meetings of stockholders of Juno may be called only by the
chairman of the board of directors or a majority of the board of directors.
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<PAGE>
ADVANCE NOTICE REQUIREMENTS FOR STOCKHOLDER PROPOSALS AND DIRECTOR
NOMINATIONS. Juno's amended and restated bylaws provide that stockholders
seeking to bring business before an annual meeting of stockholders, or to
nominate candidates for election as directors at an annual meeting of
stockholders, must provide timely notice thereof in writing. To be timely, a
stockholder's notice must be delivered to or mailed and received at the
principal executive offices of Juno, not less than 120 days nor more than
150 days prior to the first anniversary of the date of Juno's notice of annual
meeting provided with respect to the previous year's annual meeting of
stockholders; provided, that if no annual meeting of stockholders was held in
the previous year or the date of the annual meeting of stockholders has been
changed to be more than 30 calendar days earlier than or 60 calendar days after
this anniversary, notice by the stockholder, to be timely, must be so received
not more than 90 days nor later than the later of:
- 60 days prior to the annual meeting of stockholders or
- the close of business on the 10th day following the date on which notice
of the date of the meeting is given to stockholders or made public,
whichever occurs first.
Our amended and restated bylaws also specify certain requirements as to the
form and content of a stockholder's notice. These provisions may preclude
stockholders from bringing matters before an annual meeting of stockholders or
from making nominations for directors at an annual meeting of stockholders.
AUTHORIZED BUT UNISSUED SHARES. The authorized but unissued shares of
common stock and preferred stock are available for future issuance without
stockholder approval, subject to various limitations imposed by the Nasdaq
National Market. These additional shares may be utilized for a variety of
corporate purposes, including future public offerings to raise additional
capital, corporate acquisitions and employee benefit plans. The existence of
authorized but unissued and unreserved common stock and preferred stock could
make more difficult or discourage an attempt to obtain control of Juno by means
of a proxy contest, tender offer, merger or otherwise.
The Delaware General Corporation Law provides generally that the affirmative
vote of a majority of the shares entitled to vote on any matter is required to
amend a corporation's certificate of incorporation or bylaws, unless a
corporation's certificate of incorporation or bylaws, as the case may be,
requires a greater percentage.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
Our amended and restated certificate of incorporation provides that the
liability of a director of Juno shall be eliminated or limited to the fullest
extent permitted by the Delaware General Corporation Law. Under the Delaware
General Corporation Law, the directors have a fiduciary duty to Juno which is
not eliminated by this provision of the amended and restated certificate of
incorporation and, in appropriate circumstances, equitable remedies such as
injunctive or other forms of non-monetary relief will remain available. In
addition, each director will continue to be subject to liability under the
Delaware General Corporation Law for:
- breach of the director's duty of loyalty to Juno;
- acts or omissions which are found by a court of competent jurisdiction to
be not in good faith or which involve intentional misconduct, or knowing
violations of law;
- actions leading to improper personal benefit to the director; and
- payment of dividends or approval of stock repurchases or redemptions that
are prohibited by the Delaware General Corporation Law.
This provision also does not affect the directors' responsibilities under any
other laws, such as the Federal securities laws or state or Federal
environmental laws.
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Section 145 of the Delaware General Corporation Law empowers a corporation
to indemnify its directors and officers and to purchase insurance with respect
to liability arising out of their capacity or status as directors and officers,
provided that this provision shall not eliminate or limit the liability of a
director:
- for any breach of the director's duty of loyalty to the corporation or its
stockholders;
- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- arising under Section 174 of the Delaware General Corporation Law; or
- for any transaction from which the director derived an improper personal
benefit.
The Delaware General Corporation Law provides further that the
indemnification permitted thereunder shall not be deemed exclusive of any other
rights to which the directors and officers may be entitled under the
corporation's bylaws, any agreement, a vote of stockholders or otherwise. Our
amended and restated certificate of incorporation eliminates the personal
liability of directors to the fullest extent permitted by Section 102(b)(7) of
the Delaware General Corporation Law and provides that Juno shall fully
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative, by reason of the fact that
that person is or was a director or officer of Juno, or is or was serving at the
request of Juno as a director or officer of another corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise. This
indemnification shall be against expenses including attorney's fees, judgments,
fines and amounts paid in settlement actually and reasonably incurred by the
indemnitee in connection with such action, suit or proceeding.
Juno has also entered into agreements to indemnify its directors and
executive officers, in addition to the indemnification provided for in Juno's
amended and restated bylaws. Juno believes that these provisions and agreements
are necessary to attract and retain qualified directors and executive officers.
Juno's amended and restated bylaws also permit it to secure insurance on behalf
of any officer, director, employee or other agent for any liability arising out
of his or her actions, regardless of whether the Delaware General Corporation
Law would permit indemnification. Juno has obtained liability insurance for its
officers and directors.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is Continental Stock
Transfer & Trust Company, New York, New York.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of common stock in the public market could
adversely affect the market price of the common stock and could impair Juno's
future ability to raise capital through the sale of its equity securities. Upon
the completion of this offering, Juno will have an aggregate of 38,339,351
shares of common stock outstanding, assuming no exercise of the underwriters'
over-allotment option and no exercise of outstanding options. Of the outstanding
shares, the 3,320,000 shares sold in this offering, the 6,500,000 shares sold in
the May 1999 initial public offering and an aggregate of 496,259 shares of
common stock that were either (i) formerly restricted securities but which have
been sold by their holders pursuant to an exemption from the registration
requirements of the Securities Act or (ii) shares of common stock registered on
a Form S-8 registration statement issued upon the exercise of stock options will
be freely tradable following this offering, except that any shares held by
"affiliates" of Juno, as that term is defined in Rule 144 promulgated under the
Securities Act, may only be sold in compliance with the limitations described
below. The remaining 28,023,092 shares of common stock will be deemed
"restricted securities" as defined under Rule 144. Restricted securities may be
sold in the public market only if registered or if they qualify for an exemption
from registration under Rules 144, 144(k) or 701 promulgated under the
Securities Act, which rules are summarized below. Subject to the lock-up
agreements described below and the provisions of Rules 144, 144(k) and 701,
additional shares will be available for sale in the public market as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES DATE OF AVAILABILITY FOR RESALE INTO THE PUBLIC MARKET
---------------- ------------------------------------------------------
<C> <S>
10,633,758 Immediately
10,283,862 Commencing March 1, 2000, due to the requirements of the
federal securities laws.
17,421,731 60 days after the date of this prospectus due to an
agreement these stockholders have with the underwriters.
However, the underwriters can waive this restriction and
allow these stockholders to sell their shares at any time
without prior notice.
</TABLE>
In general, under Rule 144, as currently in effect, a person, or persons
whose shares are required to be aggregated, including an affiliate, who has
beneficially owned shares for at least one year is entitled to sell, within any
three-month period, a number of shares that does not exceed the greater of 1% of
the then outstanding shares of common stock, which will be approximately 383,394
shares immediately after this offering, or the average weekly trading volume in
the common stock during the four calendar weeks preceding the date on which
notice of such sale is filed, subject to certain restrictions. In addition, a
person who is not deemed to have been an affiliate of Juno at any time during
the 90 days preceding a sale and who has beneficially owned the shares proposed
to be sold for at least two years would be entitled to sell such shares under
Rule 144(k) without regard to the requirements described above. To the extent
that shares were acquired from an affiliate of Juno, such person's holding
period for the purpose of effecting a sale under Rule 144 commences on the date
of transfer from the affiliate.
As of January 31, 2000, options to purchase a total of 4,212,368 shares of
common stock are outstanding, of which 1,127,595 are exercisable. Juno has
filed a Form S-8 registration statement under the Securities Act to register all
shares of common stock issuable under Juno's option plan. This registration
statement became effective upon filing. Accordingly, shares of common stock
underlying such options are eligible for sale in the public markets, subject to
vesting restrictions or the lock-up agreement described below. See
"Management--Director Compensation" and "--1999 Stock Incentive Plan."
All directors and executive officers and certain stockholders of Juno have
agreed, subject to specified exceptions, that they will not, without the prior
written consent of Salomon Smith Barney Inc., sell or otherwise dispose of any
shares of common stock or options to acquire shares of common stock during the
60-day period following the date of this prospectus. See "Underwriting."
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Juno has agreed not to sell or otherwise dispose of any shares of common
stock during the 60-day period following the date of the prospectus, except Juno
may issue, and grant options to purchase, shares of common stock under the 1999
Stock Incentive Plan. In addition, Juno may issue shares of common stock in
connection with any acquisition of another company if the terms of such issuance
provide that such common stock shall not be resold prior to the expiration of
the 60-day period referenced in the preceding sentence. See "Risk
Factors--Future sales of our common stock may negatively affect our stock
price."
Following this offering, under specified circumstances and subject to
customary conditions, holders of 27,744,207 shares of Juno's outstanding common
stock will have certain demand registration rights with respect to their shares
of common stock, subject to the 60-day lock-up arrangement described above, as
applicable, to require Juno to register their shares of common stock under the
Securities Act, and certain rights to participate in any future registration of
securities by Juno. Juno is not required to effect more than an aggregate of six
demand registrations on behalf of such holders. If the holders of these
registrable securities request that Juno register their shares, and if such
registration is effected, these shares will become freely tradable without
restriction under the Securities Act. Any sales of securities by these
stockholders could have a material adverse effect on the trading price of our
common stock.
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UNITED STATES TAX CONSEQUENCES TO NON-UNITED STATES HOLDERS
The following is a general discussion of the material United States federal
income and estate tax consequences of the ownership and disposition of the
common stock applicable to Non-United States Holders of this common stock. For
the purpose of this discussion, a Non-United States Holder is any holder that
for U.S. federal income tax purposes is not a U.S. person. This discussion does
not address all aspects of U.S. federal income and estate taxation that may be
relevant in light of a Non-United States Holder's particular facts and
circumstances, such as being a U.S. expatriate, and does not address any tax
consequences arising under the laws of any state, local or non-U.S. taxing
jurisdiction. Furthermore, the following discussion is based on current
provisions of the Internal Revenue Code of 1986, as amended, and administrative
and judicial interpretations thereof, all as in effect on the date hereof, and
all of which are subject to change, possibly with retroactive effect. Juno has
not and will not seek a ruling from the Internal Revenue Service with respect to
the U.S. federal income and estate tax consequences described below, and as a
result, there can be no assurance that the Internal Revenue Service will not
disagree with or challenge any of the conclusions set forth in this discussion.
For purposes of this discussion, the term U.S. person means:
- a citizen or resident of the United States;
- a corporation, partnership or other entity created or organized in the
United States or under the laws of the United States or any political
subdivision thereof;
- an estate whose income is included in gross income for U.S. federal income
tax purposes regardless of its source; or
- a trust whose administration is subject to the primary supervision of a
U.S. court and which has one or more U.S. persons who have the authority
to control all substantial decisions of the trust.
DIVIDENDS
If Juno pays a dividend, any dividend paid to a Non-United States Holder of
common stock generally will be subject to U.S. withholding tax either at a rate
of 30% of the gross amount of the dividend or such lower rate as may be
specified by an applicable tax treaty. Dividends received by a Non-United States
Holder that are effectively connected with a U.S. trade or business conducted by
the Non-United States Holder are exempt from such withholding tax. However,
those effectively connected dividends, net of certain deductions and credits,
are taxed at the same graduated rates applicable to U.S. persons.
In addition to the graduated tax described above, dividends received by a
corporate Non-United States Holder that are effectively connected with a U.S.
trade or business of the corporate Non-United States Holder may also be subject
to a branch profits tax at a rate of 30% or such lower rate as may be specified
by an applicable tax treaty.
A Non-United States Holder of common stock that is eligible for a reduced
rate of withholding tax pursuant to a tax treaty may obtain a refund of any
excess amounts currently withheld by filing an appropriate claim for refund with
the IRS.
GAIN ON DISPOSITION OF COMMON STOCK
A Non-United States Holder generally will not be subject to U.S. federal
income tax on any gain realized upon the sale or other disposition of his common
stock unless:
- the gain is effectively connected with a U.S. trade or business of the
Non-United States Holder (which gain, in the case of a corporate
Non-United States Holder, must also be taken into account for branch
profits tax purposes);
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- the Non-United States Holder is an individual who holds his or her common
stock as a capital asset (generally, an asset held for investment
purposes) and who is present in the United States for a period or periods
aggregating 183 days or more during the calendar year in which the sale or
disposition occurs and certain other conditions are met; or
- Juno is or has been a "United States real property holding corporation"
for U.S. federal income tax purposes at any time within the shorter of the
five-year period preceding the disposition or the holder's holding period
for its common stock. Juno has determined that it is not and does not
believe that it will become a "United States real property holding
corporation" for U.S. federal income tax purposes.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Generally, Juno must report annually to the Internal Revenue Service the
amount of dividends paid, the name and address of the recipient, and the amount,
if any, of tax withheld. A similar report is sent to the holder. Pursuant to tax
treaties or other agreements, the Internal Revenue Service may make its reports
available to tax authorities in the recipient's country of resident.
Dividends paid to a Non-United States Holder at an address within the U.S.
may be subject to backup withholding at a rate of 31% if the Non-United States
Holder fails to establish that it is entitled to an exemption or to provide a
correct taxpayer identification number and other information to the payer.
Backup withholding will generally not apply to dividends paid to Non-United
States Holders at an address outside the U.S. on or prior to December 31, 2000
unless the payer has knowledge that the payee is a United States person. Under
recently finalized Treasury Regulations regarding withholding and information
reporting, payment of dividends to Non-United States Holders at an address
outside the U.S. after December 31, 2000 may be subject to backup withholding at
a rate of 31% unless such Non-United States Holder satisfies various
certification requirements.
Under current Treasury Regulations, the payment of the proceeds of the
disposition of common stock to or through the U.S. office of a broker is subject
to information reporting and backup withholding at a rate of 31% unless the
holder certifies its non-U.S. status under penalties of perjury or otherwise
establishes an exemption. Generally, the payment of the proceeds of the
disposition by a Non-United States Holder of common stock outside the U.S. to or
through a foreign office of a broker will not be subject to backup withholding
but will be subject to information reporting requirements if the broker is:
- a U.S. person;
- a "controlled foreign corporation" for U.S. federal income tax purposes;
or
- a foreign person 50% or more of whose gross income for certain periods is
from the conduct of a U.S. trade or business
unless the broker has documentary evidence in its files of the holders' non-U.S.
status and certain other conditions are met, or the holder otherwise establishes
an exemption. Neither backup withholding nor information reporting generally
will apply to a payment of the proceeds of a disposition of common stock by or
through a foreign office of a foreign broker not subject to the preceding
sentence.
In general, the recently promulgated final Treasury Regulations, described
above, do not significantly alter the substantive withholding and information
reporting requirements but would alter the procedures for claiming benefits of
an income tax treaty and change the certifications procedures relating to the
receipt by intermediaries of payments on behalf of the beneficial owner of
shares of common stock. Non-United States Holders should consult their tax
advisors regarding the effect, if any, of those final Treasury Regulations on an
investment in the common stock. Those final Treasury Regulations are generally
effective for payments made after December 31, 2000.
84
<PAGE>
Backup withholding is not an additional tax. Rather, the tax liability of
persons subject to backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may be
obtained, provided that the required information is furnished to the Internal
Revenue Service.
ESTATE TAX
An individual Non-United States Holder who owns common stock at the time of
his death or had made certain lifetime transfers of an interest in common stock
will be required to include the value of that common stock in such holder's
gross estate for U.S. federal estate tax purposes, unless an applicable estate
tax treaty provides otherwise.
THE FOREGOING DISCUSSION IS A SUMMARY OF THE PRINCIPAL FEDERAL INCOME AND
ESTATE TAX CONSEQUENCES OF THE OWNERSHIP, SALE OR OTHER DISPOSITION OF COMMON
STOCK BY NON-UNITED STATES HOLDERS. ACCORDINGLY, INVESTORS ARE URGED TO CONSULT
THEIR OWN TAX ADVISORS WITH RESPECT TO THE INCOME TAX CONSEQUENCES OF THE
OWNERSHIP AND DISPOSITION OF COMMON STOCK, INCLUDING THE APPLICATION AND EFFECT
OF THE LAWS OF ANY STATE, LOCAL, FOREIGN OR OTHER TAXING JURISDICTION.
85
<PAGE>
UNDERWRITING
Subject to the terms and conditions stated in the underwriting agreement
dated , 2000, each underwriter named below has severally agreed to
purchase, and Juno has agreed to sell to each underwriter, the number of shares
set forth below opposite their respective names.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ----------- ---------
<S> <C>
Salomon Smith Barney Inc....................................
PaineWebber Incorporated....................................
Hambrecht & Quist LLC.......................................
Jefferies & Company, Inc....................................
---------
Total................................................... 3,320,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase the shares included in this offering are subject to
approval of various legal matters by counsel and to various other conditions.
The underwriters are obligated to purchase all the shares, other than those
covered by the over-allotment option described below, if they purchase any of
the shares.
Salomon Smith Barney Inc. is acting as book-running lead manager for this
offering. Salomon Smith Barney Inc. and PaineWebber Incorporated are acting as
joint lead managers. The underwriters, for whom Salomon Smith Barney Inc.,
PaineWebber Incorporated, Hambrecht & Quist LLC and
Jefferies & Company, Inc. are acting as representatives, propose to offer some
of the shares directly to the public at the public offering price set forth on
the cover page of this prospectus and some of the shares to various dealers at
the public offering price less a concession not in excess of $ per share. The
underwriters may allow, and those dealers may reallow, a concession not in
excess of $ per share on sales to certain other dealers. If all of the shares
are not sold at the initial offering price, the representatives may change the
public offering price and the other selling terms.
Juno has granted to the underwriters an option, exercisable for 30 days from
the date of this prospectus, to purchase up to 498,000 additional shares of
common stock at the public offering price less the underwriting discount. The
underwriters may exercise this option solely for the purpose of covering
over-allotments, if any, in connection with this offering. To the extent the
option is exercised, each underwriter will be obligated, subject to various
conditions, to purchase a number of additional shares approximately
proportionate to each underwriter's initial purchase commitment.
Juno, its officers and directors and certain stockholders of Juno have
agreed, subject to specified exceptions, that, for a period of 60 days from the
date of this prospectus, they will not, without the prior written consent of
Salomon Smith Barney Inc., dispose of or hedge any shares of common stock of
Juno or any securities convertible into or exchangeable for common stock.
Salomon Smith Barney Inc. in its sole discretion may release any of the
securities subject to these lock-up agreements at any time without notice.
Juno's common stock is quoted on the Nasdaq National Market under the symbol
"JWEB".
86
<PAGE>
The following table shows the underwriting discounts and commissions to be
paid to the underwriters by Juno in connection with this offering. These amounts
are shown assuming both no exercise and full exercise of the underwriters'
option to purchase additional shares of common stock.
<TABLE>
<CAPTION>
PAID BY JUNO
---------------------------
NO EXERCISE FULL EXERCISE
----------- -------------
<S> <C> <C>
Per share................................................... $ $
Total....................................................... $ $
</TABLE>
In connection with the offering, Salomon Smith Barney Inc. and PaineWebber
Incorporated, on behalf of the underwriters, may over-allot, or engage in
syndicate covering transactions, stabilizing transactions and penalty bids.
Over-allotment involves syndicate sales of common stock in excess of the number
of shares to be purchased by the underwriters in the offering, which creates a
syndicate short position. Syndicate covering transactions involve purchases of
the common stock in the open market after the distribution has been completed in
order to cover syndicate short positions. Stabilizing transactions consist of
bids or purchases of common stock made for the purpose of preventing or
retarding a decline in the market price of the common stock while the offering
is in progress. Penalty bids permit the underwriters to reclaim a selling
concession from a syndicate member when Salomon Smith Barney Inc. and
PaineWebber Incorporated, in covering syndicate short positions or making
stabilizing purchases, repurchase shares originally sold by that syndicate
member. These activities may cause the price of the common stock to be higher
than the price that otherwise would exist in the open market in the absence of
these types of transactions. These transactions may be effected on the Nasdaq
National Market or in the over-the-counter market, or otherwise, and, if
commenced, may be discontinued at any time.
We estimate that the total expenses of this offering, excluding underwriting
discounts, will be $1,000,000.
Most of the shares to be sold by Juno in this offering will be sold to U.S.
purchasers, but a limited number of shares may be sold to non-U.S. purchasers.
Certain of the representatives have performed various investment banking and
advisory services for Juno for which they have received customary fees and
expenses. The representatives may, from time to time, engage in transactions
with and perform services for Juno in the ordinary course of their business.
PaineWebber Incorporated acted as Juno's exclusive placement agent in connection
with the private placement of Juno's Series B redeemable convertible preferred
stock in March 1999, in connection with which Juno paid customary placement fees
to PaineWebber. An affiliate of PaineWebber acquired 428,945 shares of Juno's
Series B redeemable convertible preferred stock in the private placement and
subsequently sold 7,800 shares of the Series B redeemable convertible preferred
stock to one of its officers. For a period of at least three years following
May 25, 1999 (the date of Juno's initial public offering), these two holders
will not sell, transfer, assign, pledge or hypothecate the common stock issued
upon conversion of the 428,945 shares of Series B redeemable convertible
preferred stock other than to PaineWebber, an affiliate of PaineWebber, the
underwriters or an officer or partner thereof. Additionally, PaineWebber paid
Juno an amount equal to the difference in price between the initial public
offering price and the private placement price on 9,000 shares of Series B
redeemable convertible preferred stock acquired by its affiliate.
If and to the extent that any shares are offered or sold in the United
Kingdom, each representative agrees that it:
- will not offer or sell any shares to persons in the United Kingdom except
to persons whose ordinary activities involve them in acquiring, holding,
managing or disposing of investments (whether as principal or agent) for
the purposes of their businesses or in other circumstances
87
<PAGE>
which do not constitute an offer to the public in the United Kingdom for
the purposes of the Public Offers of Securities Regulation 1995 (the
"Regulations");
- will comply with all applicable provisions of the Regulations and of the
Financial Services Act 1986 with respect to anything done by it in
relation to the shares of Common Stock offered hereby in, from or
otherwise involving the United Kingdom; and
- will only issue or pass on in the United Kingdom any document received by
it in connection with the issue of these shares if that person is of a
kind described in Article 11(3) of the Financial Services Act 1986
(Investment Advertisements) (Exemptions) Order 1996 (as amended) or is a
person to whom such document may otherwise lawfully be issued or passed
on.
Juno has agreed to indemnify the underwriters against various liabilities,
including liabilities under the Securities Act of 1933, or to contribute to
payments the underwriters may be required to make in respect of any of those
liabilities.
88
<PAGE>
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon for Juno by Brobeck, Phleger & Harrison LLP, New York, New York. Certain
partners of Brobeck, Phleger & Harrison LLP own an aggregate of 2,300 shares of
our common stock. Legal matters in connection with the offering will be passed
upon for the underwriters by Cravath, Swaine & Moore, New York, New York.
EXPERTS
The consolidated financial statements for Juno, as of December 31, 1998 and
1999 and for each of the three years in the period ended December 31, 1999
included in this prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, appearing elsewhere herein,
upon the authority of said firm as experts in auditing and accounting.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
Juno has filed with the Securities and Exchange Commission a registration
statement on Form S-1, including exhibits, schedules and amendments filed with
the registration statement, under the Securities Act with respect to the shares
of common stock to be sold in the offering. For further information about Juno
and the shares of common stock to be sold in the offering, please refer to this
registration statement. For additional information, please refer to the exhibits
that have been filed with our registration statement on Form S-1.
You may read and copy all or any portion of the registration statement or
any other information Juno files at the Securities and Exchange Commission's
public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. You can
request copies of these documents, upon payment of a duplicating fee, by writing
to the Securities and Exchange Commission. Please call the Securities and
Exchange Commission at 1-800-SEC-0330 for further information about the public
reference rooms. Juno's Securities and Exchange Commission filings, including
the registration statement, are also available to you on the Commission's Web
site (http://www.sec.gov).
Juno is subject to the information and reporting requirements of the
Securities Exchange Act of 1934, as amended, and, in accordance therewith, files
periodic reports, proxy statements and other information with the Securities and
Exchange Commission. These reports, proxy and information statements and other
information may also be inspected at the offices of Nasdaq Operations,
1735 K Street, N.W., Washington, D.C. 20006.
Juno intends to furnish its stockholders with annual reports containing
audited consolidated financial statements and make available quarterly reports
for the first three quarters of each year containing unaudited interim
consolidated financial information.
89
<PAGE>
JUNO ONLINE SERVICES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Report of Independent Accountants........................... F-2
Consolidated Balance Sheets as of December 31, 1998 and
1999...................................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1997, 1998 and 1999.......................... F-4
Consolidated Statement of Partners' Capital
(Deficiency)/Statement of Stockholders' Equity for the
years ended December 31, 1997, 1998 and 1999.............. F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1997,
1998 and 1999............................................. F-7
Notes to Consolidated Financial Statements.................. F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Juno Online Services, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, partners' capital
(deficiency)/stockholders' equity and cash flows present fairly, in all material
respects, the financial position of Juno Online Services, Inc. and Subsidiary at
December 31, 1998 and 1999, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatements. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PRICEWATERHOUSECOOPERS LLP
New York, New York
January 19, 2000
F-2
<PAGE>
JUNO ONLINE SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 8,152 $ 91,497
Accounts receivable, net of allowance for doubtful
accounts of $296 and $544 in 1998 and 1999,
respectively............................................ 2,115 6,370
Prepaid expenses and other current assets................. 168 15,437
------- --------
Total current assets.................................... 10,435 113,304
Fixed assets, net........................................... 4,086 5,684
Other assets................................................ 182 100
------- --------
Total assets............................................ $14,703 $119,088
======= ========
LIABILITIES AND PARTNERS' DEFICIENCY/STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses..................... $11,166 $ 29,800
Current portion of capital lease obligations.............. 450 1,423
Current portion of senior note............................ 1,560 --
Deferred revenue.......................................... 5,602 14,510
------- --------
Total current liabilities............................... 18,778 45,733
Capital lease obligations................................... 609 1,455
Senior note................................................. 7,569 --
Deferred rent............................................... 335 252
Commitments and contingencies (Note 9)
Partners' capital (deficiency).............................. (12,588)
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, 34,833,568 shares issued and outstanding.... 348
Additional paid-in capital................................ 123,530
Unearned compensation..................................... (745)
Cumulative translation adjustment......................... (1)
Accumulated deficit....................................... (51,484)
--------
Total stockholders' equity.............................. 71,648
------- --------
Total liabilities and partners' capital
(deficiency)/stockholders' equity..................... $14,703 $119,088
======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
JUNO ONLINE SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER LIMITED PARTNERSHIP UNIT AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Billable services......................................... $ 1,371 $ 6,645 $ 34,545
Advertising and transaction fees.......................... 1,875 6,454 12,662
Direct product sales...................................... 5,845 8,595 4,794
-------- -------- --------
Total revenues........................................ 9,091 21,694 52,001
-------- -------- --------
Cost of revenues:
Billable services......................................... 1,053 5,606 24,950
Advertising and transaction fees.......................... 1,659 3,725 4,675
Direct product sales...................................... 5,796 7,627 4,176
-------- -------- --------
Total cost of revenues................................ 8,508 16,958 33,801
-------- -------- --------
Operating expenses:
Operations, free service.................................. 11,075 9,383 6,698
Subscriber acquisition.................................... 3,140 5,334 47,651
Sales and marketing....................................... 12,593 11,584 11,556
Product development....................................... 4,860 7,345 7,232
General and administrative................................ 2,897 2,760 4,615
-------- -------- --------
Total operating expenses.............................. 34,565 36,406 77,752
-------- -------- --------
Loss from operations.................................. (33,982) (31,670) (59,552)
Interest income, net........................................ 243 44 3,718
-------- -------- --------
Net loss.............................................. $(33,739) $(31,626) $(55,834)
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
JUNO ONLINE SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
(IN THOUSANDS, EXCEPT PER LIMITED PARTNERSHIP UNIT AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
--------------------------------------
YEAR ENDED TWO MONTHS TEN MONTHS
DECEMBER 31, ENDED ENDED
------------------- FEBRUARY 28, DECEMBER 31,
1997 1998 1999 1999 TOTAL
-------- -------- ------------ ------------ --------
<S> <C> <C> <C> <C> <C>
Net loss attributable to common
stockholders........................... $(33,739) $(31,626) $ (4,350) $(51,484) $(55,834)
======== ======== ======== ======== ========
Basic and diluted net loss per Class A
limited partnership unit............... $ (3.21) $ (1.85) $ (0.25)
======== ======== ========
Basic and diluted net loss per share..... $ (2.07)
========
Weighted average number of:
Class A limited partnership units...... 10,500 17,091 17,684
======== ======== ========
Shares of common stock................. 24,877
========
Pro forma basic and diluted net loss per
share.................................. $ (1.85) $ (1.84)
======== ========
Weighted average shares outstanding used
in pro forma basic and diluted per
share calculation...................... 17,091 30,339
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
JUNO ONLINE SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL (DEFICIENCY)/
STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
PARTNERS'
CONTRIBUTIONS COMMON STOCK ADDITION CUMULATIVE
------------------- ------------------- PAID-IN UNEARNED TRANSLATION ACCUMULATED
UNITS AMOUNT SHARES AMOUNT CAPITAL COMPENSATION ADJUSTMENT DEFICIT
-------- -------- -------- -------- -------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996.... 5,519 24,831 (26,835)
Capital contributions....... 10,275 46,247 --
Net loss.................... -- -- (33,739)
------- -------- --------
Balance, December 31, 1997.... 15,794 71,078 (60,574)
Capital contributions....... 1,890 8,500 --
Net loss.................... -- -- (31,626)
Amortization of unearned
compensation.............. -- -- 34
------- -------- --------
Balance, December 31, 1998.... 17,684 79,578 (92,166)
Net loss for the period
January 1, 1999 to
February 28, 1999......... -- -- -- (4,350)
Effect of statutory merger
(see Note 1).............. (17,684) (79,578) -- -- $(95,788) $(728) -- 96,516
Preferred stock accretion... -- -- (151) -- -- --
Issuance of common stock,
net of offering costs..... 6,500 $ 65 77,220 -- -- --
Issuance of common stock
upon exercise of stock
options................... 511 5 506 -- -- --
Proceeds from the sale of
preferred stock........... -- 59 -- -- --
Conversion of redeemable
convertible preferred
stock to common stock..... 27,823 278 141,251 -- -- --
Net loss for the ten months
ended December 31, 1999... -- -- -- -- -- (51,484)
Unearned compensation....... -- 433 (433) -- --
Amortization of unearned
compensation.............. -- -- -- 416 -- --
Foreign currency
adjustment................ -- -- -- $ (1) --
------- -------- ------ ---- -------- ----- ---- --------
Balance, December 31, 1999.... -- $ -- 34,834 $348 $123,530 $(745) $ (1) $(51,484)
======= ======== ====== ==== ======== ===== ==== ========
<CAPTION>
TOTAL
--------
<S> <C>
Balance, December 31, 1996.... (2,004)
Capital contributions....... 46,247
Net loss.................... (33,739)
--------
Balance, December 31, 1997.... 10,504
Capital contributions....... 8,500
Net loss.................... (31,626)
Amortization of unearned
compensation.............. 34
--------
Balance, December 31, 1998.... (12,588)
Net loss for the period
January 1, 1999 to
February 28, 1999......... (4,350)
Effect of statutory merger
(see Note 1).............. (79,578)
Preferred stock accretion... (151)
Issuance of common stock,
net of offering costs..... 77,285
Issuance of common stock
upon exercise of stock
options................... 511
Proceeds from the sale of
preferred stock........... 59
Conversion of redeemable
convertible preferred
stock to common stock..... 141,529
Net loss for the ten months
ended December 31, 1999... (51,484)
Unearned compensation....... --
Amortization of unearned
compensation.............. 416
Foreign currency
adjustment................ (1)
--------
Balance, December 31, 1999.... $ 71,648
========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
JUNO ONLINE SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(33,739) $(31,626) $(55,834)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 161 2,438 2,396
Amortization of deferred rent........................... 244 157 (66)
Amortization of unearned compensation................... -- 34 416
Changes in operating assets and liabilities:
Accounts receivable................................... (1,020) (974) (4,255)
Prepaid expenses and other current assets............. (983) 1,001 (15,269)
Accounts payable and accrued expenses................. 1,401 2,861 18,616
Deferred revenue...................................... 345 5,251 8,908
-------- -------- --------
Net cash used in operating activities............... (33,591) (20,858) (45,088)
-------- -------- --------
Cash flows from investing activities:
Purchases of fixed assets................................. (3,270) (1,942) (1,359)
Proceeds from sale of fixed assets........................ -- 402 --
Other assets.............................................. (87) (95) 82
-------- -------- --------
Net cash used in investing activities............... (3,357) (1,635) (1,277)
-------- -------- --------
Cash flows from financing activities:
Payments on capital lease obligations..................... (62) (754) (816)
Proceeds from senior note................................. -- 10,000 --
Payments on senior note................................... -- (871) (9,129)
Net proceeds from issuance of redeemable convertible
preferred stock......................................... -- -- 61,859
Capital contributions..................................... 50,182 8,500 --
Net proceeds from issuance of common stock................ -- -- 77,285
Proceeds from issuance of common stock upon exercise of
stock options........................................... -- -- 511
-------- -------- --------
Net cash provided by financing activities........... 50,120 16,875 129,710
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents....................................... 13,172 (5,618) 83,345
Cash and cash equivalents, beginning of period.............. 598 13,770 8,152
-------- -------- --------
Cash and cash equivalents, end of period.................... $ 13,770 $ 8,152 $ 91,497
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest.................................... $ 127 $ 496 $ 370
Supplemental schedule of noncash investing and financing
activities:
Capital lease obligations incurred for network
equipment............................................... $ 857 $ 1,018 $ 2,635
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
JUNO ONLINE SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT LIMITED PARTNERSHIP UNIT AND SHARE DATA)
1. ORGANIZATION AND BUSINESS
Juno Online Services, Inc. (the "Company" or "Juno") is a provider of
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,
which is currently being tested 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 results of operations presented have not been materially impacted by the
expansion.
The Company has experienced operating losses since its inception. Such
losses are due to the Company's efforts to maximize the number of subscribers to
both its free basic 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 accelerate its
subscriber acquisition activities 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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its majority-owned, India-based subsidiary, Juno Online Services
Development Private Limited. All intercompany accounts and transactions have
been eliminated in consolidation.
USE OF ESTIMATES
The Company's consolidated financial statements are prepared in accordance
with generally accepted accounting principles, which require management to use
its judgment in making certain estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent
liabilities at the dates of the financial statements and the reported amounts of
operating revenues and expenses during the reporting periods. It is expected
that such estimates, primarily
F-8
<PAGE>
JUNO ONLINE SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT LIMITED PARTNERSHIP UNIT AND SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
valuation allowances, will differ to some extent from the amounts ultimately
realized due to uncertainties inherent in any such estimation process.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. Cash balances at
December 31, 1999 consisted of bank deposits with one institution and investment
grade overnight securities. The Company reviews the credit ratings of its
banking institutions on a regular basis.
REVENUE RECOGNITION
Billable services revenues are recognized over the period services are
provided. Prior to 1997, billable services revenues consisted primarily of
technical support fees. Since 1998, billable services revenues consisted
primarily of fees charged for our billable subscription services and technical
support fees.
Advertising and transaction fees are derived both from advertising,
including the sale of impressions and sponsorships, and strategic marketing
alliance contracts in which the Company receives a fee for displaying
impressions or is compensated for generating leads or transactions. Impression-
based contracts are generally structured to provide a fixed number of
impressions on a fee-per-impression basis without regard to a specific period of
time. These contracts tend to be short-term in nature and the Company's
obligations are typically fulfilled over a period of a few months. Sponsorship
contracts typically involve integration with the Company's portal site, such as
placement of buttons that provide users with direct links to the advertiser's
Web site. These contracts generally are for a fixed term and during 1999, the
typical length of sponsorship contracts tended to be less than one year.
Strategic marketing alliance contracts are generally structured over longer
specific periods of time, ranging from a few months to several years. Strategic
marketing alliance contracts generally provide the Company with guaranteed
payments as advances against various forms of revenue-sharing for generating
leads or transactions, or for producing and displaying impressions.
Revenues generated by advertising and strategic marketing alliance contracts
are generally recognized as earned, provided that the Company does not have any
significant remaining obligations and collection is probable. Remaining
obligations include the fulfillment of a fixed or guaranteed minimum number of
impressions to be displayed or the achievement of performance targets. The
earnings process typically coincides with when the impressions are displayed,
leads or transactions are generated, or services performed. To the extent that
guaranteed minimum impressions or performance targets exist for a specific time
period, revenue is recognized at the lesser of the ratio of the obligations
delivered over total obligations, or on a straight-line basis for the term of
the contract. To the extent that guaranteed minimum impressions or performance
targets exist and are not met, the Company defers recognition of the
corresponding revenues until the remaining guaranteed impressions are displayed
or performance targets are achieved.
Costs associated with advertising and strategic marketing alliance
contracts, principally transmission, development, production and campaign
management costs, are expensed as incurred.
F-9
<PAGE>
JUNO ONLINE SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT LIMITED PARTNERSHIP UNIT AND SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenues from direct product sales and delivery fees are recognized upon
shipment of products to subscribers.
Revenues are reported net of a provision for sales allowances. Sales
allowances and bad debt expenses were $233, $616 and $449 in 1997, 1998 and
1999, respectively.
Deferred revenue consists of monthly and annual prepaid subscriber fees
related to billable subscription services and advertising and transaction fees
billed in advance of the performance of all or a portion of the related service.
FIXED ASSETS
Fixed assets are stated at cost, net of accumulated depreciation and
amortization, which is calculated on a straight-line basis over lives ranging
from 3 to 5 years or, for leasehold improvements, over the life of the lease, if
shorter.
LONG-LIVED ASSETS
The Company periodically evaluates the net realizable value of long-lived
assets, including fixed assets and other assets, relying on a number of factors
including operating results, business plans, economic projections and
anticipated future cash flows. In addition, the Company's evaluation considers
nonfinancial data such as market trends, product and development cycles, and
changes in management's market emphasis. An impairment in the carrying value of
an asset is recognized when the expected future operating cash flows derived
from the asset are less than its carrying value.
FOREIGN CURRENCY TRANSLATION
The functional currency of the Company's foreign subsidiary in India is the
local currency. Accordingly, all assets and liabilities of the foreign
subsidiary are translated into U.S. dollars at period-end exchange rates and
expenses are translated using the average rates during the period. The effects
of foreign currency translation adjustments have been accumulated and are
included as a separate component of stockholders' equity.
ADVERTISING AND SUBSCRIBER ACQUISITION COSTS
The Company accounts for advertising and subscriber acquisition costs
pursuant to Statement of Position ("SOP") 93-7, "Reporting on Advertising
Costs." Accordingly, the Company expenses all costs of advertising as incurred.
Advertising expenses for 1997, 1998 and 1999 were $1,878, $2,389 and $39,871,
respectively.
MAINTENANCE AND REPAIRS
These costs are charged to expense as incurred. Major renewals, betterments
and additions are capitalized.
F-10
<PAGE>
JUNO ONLINE SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT LIMITED PARTNERSHIP UNIT AND SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PRODUCT DEVELOPMENT COSTS
The Company's product offerings are comprised of various features which
contribute to the overall functionality and are delivered through client-side
software, server-side software, and database applications which have been
principally developed internally. Software development costs include direct
labor and related overhead for software produced by the Company and the cost of
software licensed from third parties. All costs in the software development
process which are classified as research and development are expensed as
incurred until technological feasibility has been established, at which time
such costs are capitalized until the software is generally available. To date,
the establishment of technological feasibility of the Company's products and the
general availability of such software have substantially coincided. As a result,
software development costs that qualify for capitalization have been
insignificant and therefore, the Company has not capitalized any software
development costs.
OPTION PLANS
On January 1, 1996, the Company adopted Statement of Financial Accounting
Standard ("SFAS") No. 123, "Accounting for Stock-Based Compensation"
("SFAS 123"), which permits entities to recognize as expense over the vesting
period the fair value of all equity-based awards on the date of grant.
Alternatively, SFAS 123 allows entities to continue to apply the provisions of
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees," and provide pro forma disclosures for employee unit option grants
made in 1997 and future years as if the fair-value based method defined in
SFAS 123 had been applied. The Company has elected to continue to apply the
provisions of APB Opinion No. 25 and apply the pro forma disclosure provisions
of SFAS 123.
INCOME TAXES
Income taxes are accounted for under the assets and liability method.
Deferred income taxes are recorded for temporary differences between financial
statement carrying amounts and the tax basis of assets and liabilities. Deferred
tax assets and liabilities reflect the tax rates expected to be in effect for
the years in which the differences are expected to reverse. A valuation
allowance is provided if it is more likely than not that some or all of the
deferred tax asset will not be realized.
Prior to the statutory merger on March 1, 1999, U.S. federal and state
income taxes had not been provided for because the partners report their
respective distributive share of the Company's income or loss on their
respective returns.
F-11
<PAGE>
JUNO ONLINE SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT LIMITED PARTNERSHIP UNIT AND SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
The carrying values of the Company's cash and cash equivalents, accounts
receivable and accounts payable approximate fair value. Financial instruments
that potentially subject the Company to concentration of credit risk consist
principally of cash investments and trade receivables. The Company has limited
its cash investments to investment grade overnight securities. Credit is
extended to trade customers based on an evaluation of their financial condition.
The Company performs ongoing credit evaluations of its trade customers and
maintains an allowance for doubtful accounts. Credit risk with regard to the
sale of products and billable subscription services is mitigated by the
requirement of credit cards for purchases.
RECLASSIFICATION
Certain amounts in the prior year financial statements have been
reclassified to conform to the current year presentation.
3. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted loss per
share.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
-------------------------------------------
TWO MONTHS TEN MONTHS
YEAR ENDED DECEMBER 31, ENDED ENDED
--------------------------- FEBRUARY 28, DECEMBER 31,
1997 1998 1999 1999 TOTAL
------------ ------------ ----------------- ------------ --------
<S> <C> <C> <C> <C> <C>
Numerator:
Net loss available to common stockholders...... $ (33,739) $ (31,626) $ (4,350) $ (51,484) $(55,834)
============ ============ =========== =========== ========
Denominator:
Weighted average number of:
Class A limited partnership units............ 10,500,233 17,091,436 17,684,035
============ ============ ===========
Shares of Common Stock....................... 24,876,607
===========
Basic and diluted net loss per Class A
limited partnership unit................... $ (3.21) $ (1.85) $ (0.25)
============ ============ ===========
Basic and diluted net loss per share......... $ (2.07)
===========
</TABLE>
Net loss per share for the year ended December 31, 1999 is calculated
separately for the periods prior and subsequent to the March 1999 statutory
merger.
F-12
<PAGE>
JUNO ONLINE SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT LIMITED PARTNERSHIP UNIT AND SHARE DATA)
3. EARNINGS PER SHARE (CONTINUED)
The pro forma information regarding net loss per share and weighted average
shares outstanding set forth below gives effect to the treatment of Class A
limited partnership units as shares of common stock and the conversion of
Series B Redeemable Convertible Preferred Stock for the period following the
March 1999 statutory merger.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1999
-------------- --------------
<S> <C> <C>
Numerator:
Net loss.................................. $ (31,626) $ (55,834)
=========== ===========
Denominator:
Weighted average number of:
Shares of common stock................ 20,933,828
Class A limited partnership units
treated as shares of common stock... 17,091,436
Redeemable Convertible Preferred Stock
treated as shares of common stock:
Series B.............................. 2,380,301
Series A (Class A limited partnership
units prior to March 1, 1999)....... 7,025,165
----------- -----------
Denominator for pro forma basic and
diluted net loss per share.......... 17,091,436 30,339,294
=========== ===========
Pro forma basic and diluted net loss per
share..................................... $ (1.85) $ (1.84)
=========== ===========
</TABLE>
4. FIXED ASSETS
Fixed assets consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Computers, network equipment and software................... $5,672 $9,657
Furniture and office equipment.............................. 187 196
Leasehold improvements...................................... 772 772
------ ------
Subtotal................................................ 6,631 10,625
Accumulated depreciation and amortization................... (2,545) (4,941)
------ ------
Total................................................... $4,086 $5,684
====== ======
</TABLE>
Included in fixed assets is equipment acquired under capital leases,
principally network equipment, of $1,995 and $4,621 as of December 31, 1998 and
1999, less accumulated amortization of $859 and $1,761, respectively.
F-13
<PAGE>
JUNO ONLINE SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT LIMITED PARTNERSHIP UNIT AND SHARE DATA)
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Trade accounts payable.................................... $ 2,315 $ 5,738
Personnel and related expenses............................ 4,038 5,437
Telecommunications services............................... 1,210 7,228
Customer service expenses................................. 857 1,199
Marketing expenses........................................ 756 5,430
Other..................................................... 1,990 4,768
------- -------
Total................................................. $11,166 $29,800
======= =======
</TABLE>
6. RELATED PARTY TRANSACTIONS
The Company is affiliated with a group of entities that are under control of
or are subject to substantial influence by D. E. Shaw & Co., Inc.
("DESCO, Inc."). In 1997, D.E. Shaw & Co., L.P. ("DESCO, L.P."), an affiliate of
DESCO, Inc., provided certain administrative and support services to the
Company. Subsequent to 1997, DESCO, L.P. continues to provide these services to
the Company at substantially reduced levels.
The Company also leases office space from DESCO, L.P. on a month-to-month
basis. DESCO, L.P. is paid a fee for certain occupancy costs.
Prior to May 1999, the Company was a party to a services agreement with an
India-based affiliate of DESCO, L.P. DESCO, L.P. was paid a fixed monthly fee
for engineering and operations services rendered, and was reimbursed for
incidental expenses. In May 1999, this agreement was terminated. The Company is
currently obtaining occupancy and related services from an affiliate of DESCO,
L.P. on a month-to-month basis.
The aggregate amounts and nature of the expenditures made by DESCO, L.P. and
its affiliate on behalf of the Company were as follows:
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
India-based engineering and operations expense.............. $ -- $1,454 $ 870
Personnel and related expenses.............................. 1,561 521 244
Depreciation and leased equipment........................... 617 -- --
Occupancy costs............................................. 784 338 867
Other operating expenses.................................... 1,362 375 150
------ ------ ------
Total................................................. $4,324 $2,688 $2,131
====== ====== ======
</TABLE>
In 1998, the Company transferred fixed assets with a net book value of $402
to DESCO, L.P.
F-14
<PAGE>
JUNO ONLINE SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT LIMITED PARTNERSHIP UNIT AND SHARE DATA)
6. RELATED PARTY TRANSACTIONS (CONTINUED)
GENERAL PARTNER FEES AND OTHER COMPENSATION
Prior to the Statutory Merger, the Partnership's general partner was
entitled to a monthly management fee equal to one-twelfth of one percent of the
aggregate value of all outstanding limited partnership Units (or other property
into which such Units have been converted) as of the most recent Valuation Event
(as specified in the limited partnership agreement, as amended) as compensation
for managing the affairs of the Partnership. In 1997, 1998 and 1999, the
Partnership's general partner elected to waive management fees of $81, $285 and
$52, respectively.
7. OBLIGATIONS UNDER CAPITAL LEASES
The following is a schedule, by year, of future minimum lease payments under
capital leases, together with the present value of the minimum lease payments as
of December 31, 1999:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- ------------------------
<S> <C>
2000........................................................ $1,555
2001........................................................ 1,209
2002........................................................ 306
2003........................................................ 36
------
Total minimum lease payments.......................... 3,106
Less: Amount representing interest.......................... (228)
------
Present value of the minimum lease payments........... $2,878
======
</TABLE>
Included in total minimum lease payments above are $67 of obligations under
capital leases for network equipment that were assigned to the Company by DESCO,
L.P. As the original lessee, DESCO, L.P. remains responsible under these lease
agreements in the event of a default by the Company.
8. BORROWINGS
SENIOR NOTE
On March 31, 1998, the Company borrowed $10,000 from D. E. Shaw Securities
Group, L.P. ("Shaw Securities"), pursuant to an unsecured Senior Note (the
"Senior Note"). Shaw Securities, whose general partner is DESCO, L.P. is an
affiliate of the Company. The Senior Note, as amended, had an interest rate
computed at the Federal Funds Rate plus 0.375%. In June 1999, the Company repaid
the balance of the Senior Note in the amount of $8,634, including accrued
interest.
The Company's interest expense under the Senior Note was approximately $418
and $182 for the years ended December 31, 1998 and 1999, respectively.
CREDIT FACILITY
On July 28, 1999, the Company entered into a credit facility with a bank
(the "Facility") that provides for borrowings up to $10,000. Borrowings can be
in the form of advances and/or standby letters of credit. The Facility expires
on July 27, 2000. The Facility is collateralized by substantially all
F-15
<PAGE>
JUNO ONLINE SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT LIMITED PARTNERSHIP UNIT AND SHARE DATA)
8. BORROWINGS (CONTINUED)
of the assets of the Company. It is not collateralized by assets established
pursuant to capital leases. Advances outstanding under the facility bear
interest at the bank's prime rate (8.50% at December 31, 1999). All outstanding
borrowings under the Facility are due upon the expiration of the Facility. The
Company also pays specified fees on the unused portion of the Facility and on
any standby letters of credit. Under the terms of the Facility, the Company is
required to maintain certain quarterly financial and operational ratios and to
obtain bank approval for certain mergers or acquisitions and fixed asset
financing. As of December 31, 1999 there were no amounts outstanding under the
Facility.
9. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
The Company has committed to minimum usage levels for certain
telcommunications services. In connection with the Company's expansion of its
free basic service to include full Internet access announced in December 1999,
the Company entered into a port leasing agreement for telecommunications
services requiring minimum payments of $13.3 million. The remaining commitments
as of December 31, 1999, under these agreements are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- ------------------------
<S> <C>
2000........................................................ $11,470
2001........................................................ 1,947
-------
Total minmum lease payments................................. $13,417
=======
</TABLE>
Telecommunications services expense for the years ending December 31, 1997,
1998 and 1999 was $7,155, $8,772 and $14,394, respectively.
The Company has also entered into various non-cancellable operating leases.
DESCO, L.P. has also entered into a leasing arrangement for office space used by
the Company. A portion of the Company's operations are located in a single
location that is leased by DESCO, L.P. The Company, which benefits from the use
of this office space, has agreed to assume performance of DESCO, L.P.'s payment
obligations under the lease to the extent the Company occupies such office
space. Minimum lease payments below include $3.2 million related to this
arrangement with DESCO, L.P. The remaining commitments under these operating
leases and this arrangement are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- ------------------------
<S> <C>
2000........................................................ $1,067
2001........................................................ 981
2002........................................................ 1,000
2003........................................................ 245
------
Total minimum lease payments................................ $3,293
======
</TABLE>
The Company's rental expense under operating leases in the years ended
December 31, 1997, 1998 and 1999, was approximately $889, $1,070 and $2,100,
respectively.
F-16
<PAGE>
JUNO ONLINE SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT LIMITED PARTNERSHIP UNIT AND SHARE DATA)
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
CONTINGENCIES
Various claims and actions have been asserted or threatened against the
Company in the ordinary course of business. There are no threats, asserted
claims or actions, the outcome of which, in the opinion of management, would
have a materially adverse effect on the Company's consolidated financial
position, results of operations, and cash flows.
10. PARTNERS' CAPITAL AND STOCKHOLDERS' EQUITY
REVERSE STOCK SPLIT
On April 19, 1999, the Company's Board of Directors authorized a reverse
stock split. Accordingly, all share data and limited partnership units have been
restated for the retroactive effect of the reverse split as if it had occurred
at the beginning of the earliest period presented.
REDEEMABLE CONVERTIBLE PREFERRED STOCK
In 1999, the Company, after giving effect to the Statutory Merger, received
$61,859 in proceeds net of $3,200 of issuance costs, for the issuance of
10,138,716 shares of Series B Redeemable Convertible Preferred Stock ("Series B
Preferred"), $0.01 par value. In addition, 17,684,035 shares of Series A
Redeemable Convertible Preferred Stock ("Series A Preferred") were issued to the
holders of Series A Partnership Units in connection with the Statutory Merger.
Each share of the Series A Preferred and Series B Preferred were automatically
converted into one share of Common Stock upon consummation of the initial public
offering of the Company's common stock on May 25, 1999.
INITIAL PUBLIC OFFERING
On May 25, 1999, the Company completed its initial public offering of
6,500,000 shares of Common Stock at $13.00 per share. Net proceeds received by
the Company, after deducting offering costs, totaled $77,285.
PARTNERS' CAPITAL
Prior to the Statutory Merger, interests in the Partnership, in the form of
Units, were comprised of Class A Units and Class B Units. As of the date of the
Statutory Merger, an aggregate of 17,768,035 Class A Units were issued and
outstanding and no Class B Units had been issued. 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 (see Note 1,
Organization and Business).
11. INCOME TAXES
Subsequent to the Statutory Merger, the Company elected to be treated as a C
Corporation under the Internal Revenue Code ("IRC"). Since March 1, 1999, the
date of the Statutory Merger, the Company has incurred losses and generated a
net operating loss carryforward of approximately $63,054
F-17
<PAGE>
JUNO ONLINE SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT LIMITED PARTNERSHIP UNIT AND SHARE DATA)
11. INCOME TAXES (CONTINUED)
at December 31, 1999. This carryforward is available to offset future taxable
income and expires in 2019.
Section 382 of the IRC, as amended, places a limitation on the utilization
of federal net operating loss carryforwards upon the occurrence of an ownership
change. In general, a change in ownership occurs when a greater than 50 percent
change in ownership takes place over a three year testing period. The annual
utilization of net operating loss carryforwards generated prior to such change
is limited, in any one year, to a percentage of the entity's fair value at the
time of the change in ownership.
The net operating loss carryforward and temporary differences between
carrying amounts of assets and liabilities for financial reporting and income
tax purposes result in a net deferred tax benefit of $27,923 (estimated at an
effective rate of 40%) at December 31, 1999. The Company's operating plans
anticipate taxable income in future periods; however, such plans make
significant assumptions which cannot be reasonably assured. Therefore, in
consideration of the Company's losses and the uncertainty of its ability to
utilize this deferred tax benefit in the future, the Company has recorded a
valuation allowance in the amount of $27,923 at December 31, 1999 to offset the
deferred tax benefit amount.
Significant components of the deferred tax asset at December 31, 1999 are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------
<S> <C>
Deferred tax assets:
Net operating loss........................................ $25,222
Start-up costs, capitalized for tax purposes.............. 767
Accruals, reserves and other.............................. 1,423
Depreciation.............................................. 511
-------
Total deferred tax assets............................... 27,923
Less: valuation allowance................................... (27,923)
-------
Deferred tax asset, net..................................... $ --
=======
</TABLE>
Prior to the Statutory Merger on March 1, 1999, U.S. federal and state
income taxes had not been provided because the partners reported their
respective share of the Partnership's losses on their respective returns. The
Partnership had incurred accumulated book and tax losses of $96,516 and $82,513,
respectively, through February 28, 1999. Had the Partnership been subject to
corporate income taxes, it would have recorded a deferred tax asset (estimated
at an effective rate of 40%), subject to a full valuation allowance.
The information above includes the remaining portion of a deferred tax asset
of $5,246 (estimated at an effective rate of 40%), subject to a full valuation
allowance, which was generated by the Partnership through March 1, 1999, the
date of the Statutory Merger. This deferred tax asset was made
F-18
<PAGE>
JUNO ONLINE SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT LIMITED PARTNERSHIP UNIT AND SHARE DATA)
11. INCOME TAXES (CONTINUED)
available to Juno Online Services, Inc., as the successor company following the
Statutory Merger, and was comprised of the following:
<TABLE>
<CAPTION>
<S> <C>
Deferred revenue............................................ $ 2,610
Start-up costs, capitalized for tax purposes................ 1,314
Accrued expenses and other.................................. 1,322
-------
5,246
Valuation allowance......................................... (5,246)
-------
Deferred tax asset, net, at March 1, 1999................... $ --
=======
</TABLE>
12. EMPLOYEE BENEFIT PLANS
STOCK OPTION PLANS
In March 1999, the Company implemented its 1999 Stock Incentive Plan (the
"1999 Plan"). The 1999 Plan serves as the successor equity incentive program to
the 1997 Class B Unit Option/Issuance Plan (the "1997 Plan"). Under the 1999
Plan, 5,768,611 shares have been authorized subject to automatic increases in
January of each year. On the effective date of the 1999 Plan, shares authorized
for issuance and options issued and outstanding under the 1997 Plan were
incorporated into the 1999 Plan. No further option grants will be made under the
1997 Plan. The exercise price shall not be less than the fair market value on
the date of grant of the option and shall not be less than 110% of the fair
market value on the date of grant to any 10% owners of the Company. In general,
the options vest at a rate of 25% annually on the anniversary of the grant date
and expire 10 years from the date of grant.
For the years ended December 31, 1998 and 1999, the Company recorded
unearned compensation of $762 and $433, respectively, for options issued below
deemed fair value for accounting purposes. This amount is being charged to
compensation expense over a four year period (the vesting period of the
options).
The 1999 Stock Incentive Plan includes four programs. The first provides for
the discretionary grant of options to purchase common shares to employees,
consultants, and members of the board of directors. The second allows
individuals to purchase shares or receive them as a bonus tied to the
performance of services. The third allows executive officers and other highly
compensated employees to apply a portion of their salary to the acquisition of
special below-market stock option grants. No such grants have been made to date.
The fourth program automatically grants options at periodic intervals to
eligible non-employee board members.
F-19
<PAGE>
JUNO ONLINE SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT LIMITED PARTNERSHIP UNIT AND SHARE DATA)
12. EMPLOYEE BENEFIT PLANS (CONTINUED)
The following information relates to options issued to purchase common stock
under the 1999 Plan:
<TABLE>
<CAPTION>
1997 1998 1999
-------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
SHARES AVERAGE SHARES AVERAGE SHARES AVERAGE
UNDER EXERCISE UNDER EXERCISE UNDER EXERCISE
OPTION PRICE OPTION PRICE OPTION PRICE
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding, beginning of year... -- $ -- 1,360,103 $0.45 2,584,369 $0.67
Options granted.......................... 1,495,546 0.45 1,577,437 0.84 2,798,843 13.06
Options exercised........................ -- -- -- -- (510,762) 0.99
Options forfeited........................ (135,443) 0.45 (353,171) 0.45 (515,883) 4.49
Options outstanding, end of year......... 1,360,103 $0.45 2,584,369 $0.67 4,356,567 $8.15
</TABLE>
<TABLE>
<CAPTION>
OPTIONS WEIGHTED
OUTSTANDING WEIGHTED AVERAGE
AT AVERAGE REMAINING
DECEMBER 31, EXERCISE CONTRACTUAL
1999 PRICE LIFE IN YEARS
------------- -------- -------------
<S> <C> <C> <C>
At $0.45 to $0.90.......................................... 1,272,417 $0.46 7.8
At $1.35 to $5.18.......................................... 503,103 1.43 8.8
At $8.94 to $13.00......................................... 1,447,969 11.33 9.3
At $14.25 to $19.88........................................ 1,116,278 15.50 9.7
At $22.94 to $45.00........................................ 16,800 28.19 9.6
</TABLE>
The Company accounts for its equity-based compensation in accordance with
APB Opinion No. 25 and its related interpretations.
Had the Company's equity-based employee compensation been determined by the
fair-value based method of SFAS 123, the Company's net loss on a pro-forma basis
for the years ended December 31, 1999 would have been $(58,662). Net loss on a
pro-forma basis was not materially impacted for the years ended December 31,
1997 and 1998.
For disclosure purposes, the fair value of all options granted during 1999
was determined using the Black-Scholes option-pricing model. The fair value for
1999 option grants was based on an average risk-free interest rate of 4.92%,
zero dividend yield, volatility of 85%, and an expected life of 5 years.
STOCK PURCHASE PLAN
In April, 1999, the Company adopted the 1999 Employee Stock Purchase Plan
(the "1999 ESPP"). A total of 555,556 shares are available to be issued under
the 1999 ESPP. The 1999 ESPP allows eligible employees to purchase shares of
common stock at semi-annual intervals, through periodic payroll deductions of up
to 15% of cash earnings, as defined. The purchase price per share is 85% of the
lower of the fair market value on the eligible employee's entry date or the fair
market value on the semi-annual purchase date. The 1999 ESPP will terminate no
later than the last business day in July 2009.
F-20
<PAGE>
JUNO ONLINE SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT LIMITED PARTNERSHIP UNIT AND SHARE DATA)
12. EMPLOYEE BENEFIT PLANS (CONTINUED)
DEFINED CONTRIBUTION PLAN
The Company is a participating employer in a tax-qualified retirement plan
(the "Savings Plan") under Section 401(k) of the IRC. Under the Savings Plan,
participating employees may defer a portion of their pre-tax earnings, up to the
Internal Revenue Service ("IRS") annual contribution limit. The Company matches
50% of each employee's contribution up to a maximum of 6% of the employee's
eligible earnings. In 1997, 1998 and 1999, the Company match was $159, $238 and
$394, respectively. Company matching payments vest over 7 years.
13. SUBSEQUENT EVENTS
SAVINGS PLAN
Effective January 1, 2000, the Company implemented the Juno Online
Services, Inc. 401(k) Plan (the "2000 Savings Plan") under Section 401(k) of the
IRC. Under the 2000 Savings Plan, eligible employees may defer a portion of
their pre-tax earnings, up to 15% of their pre-tax earnings not to exceed the
IRS annual limit. The Company will match 50% of each employee's contribution up
to a maximum of 12% of the employee's eligible earnings. Company matching
contributions vest over 4 years. Concurrent with this implementation, all
balances from the Savings Plan were rolled into the 2000 Savings Plan and the
vesting periods were retroactively adjusted to 4 years for all Company matching
contributions.
FOLLOW-ON OFFERING
On January 5, 2000, the Board of Directors authorized management to obtain
registration under the Securities Act of 1933 of up to 3.5 million shares of
common stock to be issued and sold by the Company in a follow-on offering,
subject to a 15% over-allotment option granted to the underwriters.
F-21
<PAGE>
Description of graphics on inside back cover of prospectus:
[The Juno Member Profile]
The picture depicts each page of the electronic survey that Juno subscribers are
asked to complete. Each page contains questions relevant to its particular
topic. The upper left corner of the initial "Juno Signup" page is magnified to
show certain information entered by a hypothetical Juno subscriber. An arrow
points from that close-up to the following text at the bottom of the page:
"Detailed Information About Millions of Subscribers--All subscribers to Juno's
basic service are required to complete a detailed electronic survey containing
questions about age, gender, income, hobbies, interests, family size, education,
patterns of computer use, expected purchases, and more. Advertisements on our
service may be targeted to a narrowly specified subset of our subscriber base on
the basis of any combination of Member Profile data."
[Juno Logo]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3,320,000 SHARES
JUNO ONLINE SERVICES, INC.
COMMON STOCK
[LOGO]
-------------
PROSPECTUS
, 2000
-------------
SALOMON SMITH BARNEY
PAINEWEBBER INCORPORATED
CHASE H&Q
JEFFERIES & COMPANY, INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated costs and expenses, other than
the underwriting discounts and commissions, payable by the registrant in
connection with the sale of the common stock being registered.
<TABLE>
<CAPTION>
AMOUNT TO
BE PAID
----------
<S> <C>
SEC registration fee........................................ $ 29,011
NASD filing fee............................................. 11,489
Nasdaq National Market listing fee.......................... 17,500
Legal fees and expenses..................................... 250,000
Accounting fees and expenses................................ 175,000
Printing and engraving...................................... 250,000
Transfer agent fees......................................... 10,000
Miscellaneous............................................... 257,000
----------
Total................................................... $1,000,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The registrant's Amended and Restated Certificate of Incorporation in effect
as of the date hereof, and the registrant's Amended and Restated Certificate of
Incorporation to be in effect upon the closing of this offering (collectively,
the "Certificate") provides that the liability of a director of the registrant
shall be eliminated or limited to the fullest extent permitted by the Delaware
General Corporation Law, as amended (the "DGCL"). Under the DGCL, the directors
have a fiduciary duty to the registrant which is not eliminated by this
provision of the Certificate and, in appropriate circumstances, equitable
remedies such as injunctive or other forms of non-monetary relief will remain
available. In addition, each director will continue to be subject to liability
under the DGCL for breach of the director's duty of loyalty to the registrant,
for acts or omissions which are found by a court of competent jurisdiction to be
not in good faith or involving intentional misconduct, for knowing violations of
law, for actions leading to improper personal benefit to the director, and for
payment of dividends or approval of stock repurchases or redemptions that are
prohibited by DGCL. This provision also does not affect the directors'
responsibilities under any other laws, such as the Federal securities laws or
state or Federal environmental laws. The registrant intends to obtain liability
insurance for its officers and directors.
Section 145 of the DGCL empowers a corporation to indemnify its directors
and officers and to purchase insurance with respect to liability arising out of
their capacity or status as directors and officers, provided that this provision
shall not eliminate or limit the liability of a director: (i) for any breach of
the director's duty of loyalty to the corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) arising under Section 174 of the DGCL, or
(iv) for any transaction from which the director derived an improper personal
benefit. The DGCL provides further that the indemnification permitted thereunder
shall not be deemed exclusive of any other rights to which the directors and
officers may be entitled under the corporation's bylaws, any agreement, a vote
of stockholders or otherwise. The Certificate eliminates the personal liability
of directors to the fullest extent permitted by Section 102(b)(7) of the DGCL
and provides that the registrant shall fully indemnify any person who was or is
a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding whether civil, criminal, administrative or
investigative, by reason of the fact that such person is or was a
II-1
<PAGE>
director or officer of the registrant, or is or was serving at the request of
the registrant as a director or officer of another corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise, against
expenses (including attorney's fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by such person in connection with
such action, suit or proceeding.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The registrant has sold and issued the following securities since June 30,
1995 (inception):
PARTNERSHIP UNITS. Between June 30, 1995 and March 1, 1999, the registrant
issued a total of 17,684,035 limited partnership units for a price per unit of
$4.50. These units were all purchased by entities or persons affiliated with
D. E. Shaw & Co., Inc. Of the 17,684,035 units issued, 872,192 were issued in
1995, 4,646,098 were issued in 1996, 10,276,854 were issued in 1997 and
1,888,891 were issued in 1998. On March 1, 1999, Juno Online Services, L.P. was
merged with and into Juno Online Services, Inc., its wholly owned subsidiary. In
connection with this merger, each outstanding partnership unit was converted
into one share of Series A Redeemable Convertible Preferred Stock. Upon the
closing of this offering, the shares of Series A Redeemable Convertible
Preferred Stock will automatically convert into shares of the registrant's
common stock.
PREFERRED STOCK. On March 1, 1999 and March 4, 1999, the registrant issued
a total of 10,138,716 shares of Series B Redeemable Convertible Preferred Stock
to a group of investors including affiliates of Intel Corporation, News
Corporation, Prospect Street Ventures and Sycamore Ventures. PaineWebber
Incorporated acted as the placement agent in connection with the sale of this
Series B Redeemable Convertible Preferred Stock. Upon the closing of this
offering, the shares of Series B Redeemable Convertible Preferred Stock will
automatically convert into shares of the registrant's common stock.
OPTIONS. The registrant has from time to time granted options to purchase
shares of common stock to employees in reliance upon exemptions from
registration pursuant to either (i) Section 4(2) of the Securities Act of 1933,
as amended, or (ii) Rule 701 promulgated under the Securities Act of 1933, as
amended. The following table sets forth information regarding these grants and
refects the 1 for 4.5 reverse stock split of the registrant's common stock
effected in connection with the closing of the registrant's May 1999 initial
public offering.
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
--------- --------
<S> <C> <C>
June 30, 1995 (inception) to December 31, 1996........... -- --
January 1, 1997 to December 31, 1997..................... 1,495,546 $ 0.45
January 1, 1998 to December 31, 1998..................... 1,577,437 $ 0.84
January 1, 1999 to May 24, 1999.......................... 1,127,123 $12.08
</TABLE>
The above securities were offered and sold by the registrant in reliance
upon exemptions from registration pursuant to either (i) Section 4(2) of the
Securities Act of 1933, as amended, as transactions not involving any public
offering, or (ii) Rule 701 promulgated under the Securities Act of 1933, as
amended. No underwriters were involved in connection with the sales of
securities referred to in this Item 15, except for PaineWebber Incorporated,
which acted as the placement agent in connection with the sale of Series B
Redeemable Convertible Preferred Stock in March 1999.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ ------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1** Certificate of Incorporation.
3.2** Certificate of Amendment to Certificate of Incorporation,
filed March 1, 1999.
3.3** Certificate of Amendment to Certificate of Incorporation,
filed March 1, 1999.
3.4** Certificate of Amendment to Certificate of Incorporation,
filed March 4, 1999.
3.5** Form of Amended and Restated Certificate of Incorporation to
be in effect upon the closing of this offering.
3.6** Bylaws.
3.7** Form of Amended and Restated Bylaws to be in effect upon the
closing of this offering.
4.1** Specimen Common Stock certificate.
4.2** See Exhibits 3.1, 3.2, 3.3, 3.4, 3.5 and 3.6 for provisions
defining the rights of holders of common stock of the
registrant.
5.1** Opinion of Brobeck, Phleger & Harrison LLP.
10.1** 1999 Stock Incentive Plan.
10.2** 1999 Employee Stock Purchase Plan.
10.3** Amended and Restated Registration Rights Agreement.
10.4**+ Marketing Services Agreement, dated September 30, 1998,
among the registrant and Hartford Fire Insurance Company and
its affiliates/subsidiaries.
10.5**+ Marketing Services Agreement, dated December 11, 1998,
between the registrant and AT&T Wireless Services, Inc.
10.6**+ Distributor Agreement, dated March 12, 1998, between the
registrant and LCI International Telecom Corp.
10.7**+ Financial Services Marketing Agreement, dated February 17,
1999, between the registrant and First USA Bank, N.A.
10.8**+ Master Service Agreement, dated August 1, 1998, between the
registrant and Softbank Services Group.
10.9** India Services Agreement, dated November 1, 1997, between
the registrant and D. E. Shaw & Co., L.P.
10.10** Services Agreement, dated January 1, 1998, between the
registrant and D. E. Shaw & Co., L.P.
10.11** Advertising Agreement, dated March 1, 1999, between the
registrant and News America Incorporated.
10.12(a)** Employment Agreement, dated September 2, 1998, between the
registrant and Charles Ardai.
10.12(b)** Employment Agreement, dated April 26, 1999, between the
registrant and Charles Ardai.
10.13(a)** Employment Agreement, dated June 10, 1998, between the
registrant and Robert Cherins.
10.13(b)** Employment Agreement, dated April 26, 1999, between the
registrant and Robert Cherins.
10.14(a)** Employment Agreement, dated April 6, 1998, between the
registrant and Mark Moraes.
10.14(b)** Employment Agreement, dated October 6, 1999, between the
registrant and Mark Moraes.
10.15** Employment Agreement, dated September 25, 1998, between the
registrant and Richard Eaton.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ ------------------------------------------------------------
<C> <S>
23.1** Consent of Brobeck, Phleger & Harrison LLP (included in
Exhibit 5.1).
23.2** Consent of PricewaterhouseCoopers LLP.
24.1** Powers of Attorney (included in the signature page).
27.1** Financial Data Schedule for the twelve months ended
December 31, 1998.
27.2** Financial Data Schedule for the twelve months ended
December 31, 1999.
</TABLE>
- ------------------------
** Previously filed.
+ Confidential treatment requested for portions of this agreement.
(b) Financial Statement Schedule.
SCHEDULE II -- Valuation and Qualifying Accounts
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes to provide to the Underwriter
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act, and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424 (b)(1) or (4), or 497(h)
under the Securities Act of 1933, shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial BONA FIDE offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Amendment to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized in The City
of New York, State of New York, on this 8th day of February, 2000.
<TABLE>
<S> <C> <C>
JUNO ONLINE SERVICES, INC.
By: /s/ CHARLES E. ARDAI
-----------------------------------------
Name: Charles E. Ardai
Title: President and Chief Executive
Officer
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment to the Registration Statement has been signed by the following persons
in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE(S) DATE
--------- -------- ----
<C> <S> <C>
President, Chief Executive
/s/ CHARLES E. ARDAI Officer and Director
------------------------------------------- (principal executive February 8, 2000
Charles E. Ardai officer)
Chief Financial Officer and
/s/ RICHARD M. EATON, JR. Treasurer (principal
------------------------------------------- accounting and financial February 8, 2000
Richard M. Eaton, Jr. officer)
*
------------------------------------------- Director February 8, 2000
Edward J. Ryeom
*
------------------------------------------- Director February 8, 2000
Louis K. Salkind
*
------------------------------------------- Director February 8, 2000
David E. Shaw
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ CHARLES E. ARDAI
--------------------------------------
Charles E. Ardai
ATTORNEY-IN-FACT
</TABLE>
II-5
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- --------------------- ------------------------------------------------------------ --------
<C> <S> <C>
1.1 Form of Underwriting Agreement..............................
3.1** Certificate of Incorporation................................
3.2** Certificate of Amendment to Certificate of Incorporation,
filed March 1, 1999.......................................
3.3** Certificate of Amendment to Certificate of Incorporation,
filed March 1, 1999.......................................
3.4** Certificate of Amendment to Certificate of Incorporation,
filed March 4, 1999.......................................
3.5** Form of Amended and Restated Certificate of Incorporation to
be in effect upon the closing of this offering............
3.6** Bylaws......................................................
3.7** Form of Amended and Restated Bylaws to be in effect upon the
closing of this offering..................................
4.1** Specimen Common Stock certificate...........................
4.2** See Exhibits 3.1, 3.2, 3.3, 3.4, 3.5 and 3.6 for provisions
defining the rights of holders of common stock of the
registrant................................................
5.1** Opinion of Brobeck, Phleger & Harrison LLP..................
10.1** 1999 Stock Incentive Plan...................................
10.2** 1999 Employee Stock Purchase Plan...........................
10.3** Amended and Restated Registration Rights Agreement..........
10.4**+ Marketing Services Agreement, dated September 30, 1998,
among the registrant and Hartford Fire Insurance Company
and its affiliates/subsidiaries...........................
10.5**+ Marketing Services Agreement, dated December 11, 1998,
between the registrant and AT&T Wireless Services, Inc....
10.6**+ Distributor Agreement, dated March 12, 1998, between the
registrant and LCI International Telecom Corp.............
10.7**+ Financial Services Marketing Agreement, dated February 17,
1999, between the registrant and First USA Bank, N.A......
10.8**+ Master Service Agreement, dated August 1, 1998, between the
registrant and Softbank Services Group....................
10.9** India Services Agreement, dated November 1, 1997, between
the registrant and D. E. Shaw & Co., L.P..................
10.10** Services Agreement, dated January 1, 1998, between the
registrant and D. E. Shaw & Co., L.P......................
10.11** Advertising Agreement, dated March 1, 1999, between the
registrant and News America Incorporated..................
10.12(a)** Employment Agreement, dated September 2, 1998, between the
registrant and Charles Ardai..............................
10.12(b)** Employment Agreement, dated April 26, 1999, between the
registrant and Charles Ardai..............................
10.13(a)** Employment Agreement, dated June 10, 1998, between the
registrant and Robert Cherins.............................
10.13(b)** Employment Agreement, dated April 26, 1999, between the
registrant and Robert Cherins.............................
10.14(a)** Employment Agreement, dated April 6, 1998, between the
registrant and Mark Moraes................................
10.14(b)** Employment Agreement, dated October 6, 1999, between the
registrant and Mark Moraes................................
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- --------------------- ------------------------------------------------------------ --------
<C> <S> <C>
10.15** Employment Agreement, dated September 25, 1998, between the
registrant and Richard Eaton..............................
23.1** Consent of Brobeck, Phleger & Harrison LLP (included in
Exhibit 5.1)..............................................
23.2** Consent of PricewaterhouseCoopers LLP.......................
24.1** Powers of Attorney (included in the signature page).........
27.1** Financial Data Schedule for the twelve months ended
December 31, 1998.........................................
27.2** Financial Data Schedule for the twelve months ended
December 31, 1999.........................................
</TABLE>
- ------------------------
** Previously filed.
+ Confidential treatment requested for portions of this agreement.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Juno Online Services, Inc.:
In connection with our audits of the consolidated financial statements of
Juno Online Services, Inc. (formerly Juno Online Services, L.P. & Subsidiary) as
of December 31, 1998 and 1999, and for each of the three years in the period
ended December 31, 1999, which financial statements are included in the
registration statement on Form S-1, we have also audited the financial statement
schedule listed in Item 16(b) herein.
In our opinion, the financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly, in
all material respects, the information required to be included therein.
/s/ PricewaterhouseCoopers LLP
New York, New York
January 19, 2000
S-1
<PAGE>
SCHEDULE II- VALUATION AND QUALIFYING ACCOUNTS
JUNO ONLINE SERVICES, INC.
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS BALANCE AT
BEGINNING COSTS AND END OF
CLASSIFICATION OF PERIOD EXPENSES DEDUCTIONS(A) PERIOD
- -------------- ---------- --------- ------------- ----------
<S> <C> <C> <C> <C>
Year ended December 31, 1997:
Allowance for doubtful accounts............... $ 9 $ 233 $(136) $ 106
Year ended December 31, 1998:
Allowance for doubtful accounts............... $106 $ 377 $(187) $ 296
Year ended December 31, 1999:
Allowance for doubtful accounts............... $296 $ 449 $(201) $ 544
Valuation allowance-deferred tax assets....... $ -- $27,923 $ -- $27,923
</TABLE>
- ------------------------
(a) Represents sales concessions and accounts written-off as uncollectible.
S-2
<PAGE>
Exhibit 1.1
[Draft--2/8/00]
Juno Online Services, Inc.
3,000,000 Shares (1)
Common Stock
($.01 par value)
Underwriting Agreement
New York, New York
February [ ], 2000
Salomon Smith Barney Inc.
PaineWebber Incorporated
Hambrecht & Quist LLC
Jefferies & Company, Inc.
As Representatives of the several Underwriters,
c/o Salomon Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
Ladies and Gentlemen:
Juno Online Services, Inc., a corporation organized under the laws
of Delaware (the "Company"), proposes to sell to the several underwriters named
in Schedule I hereto (the "Underwriters"), for whom you (the "Representatives")
are acting as representatives, [3,000,000] shares of Common Stock, $.01 par
value ("Common Stock") of the Company (said shares to be issued and sold by the
Company being hereinafter called the "Underwritten Securities"). The Company
also proposes to grant to the Underwriters an option to purchase up to 450,000
additional shares of Common Stock to cover over-allotments (the "Option
Securities"; the Option Securities, together with the Underwritten Securities,
being hereinafter called the "Securities"). To the extent there are no
additional Underwriters listed on Schedule I other than you, the term
Representatives as used herein shall mean you, as Underwriters, and the terms
Representatives and Underwriters shall mean either the singular or plural as the
context requires. Certain terms used herein are defined in Section 17 hereof.
1. Representations and Warranties. The Company represents and
warrants to, and agrees with, each Underwriter that:
- ----------
(1) Plus an option to purchase from the Company up to 450,000 additional
Securities to cover over-allotments.
<PAGE>
2
(1) The Company has prepared and filed with the Commission a
registration statement (file number 333-94275) on Form S-1, including a
related preliminary prospectus, for registration under the Act of the
offering and sale of the Securities. The Company may have filed one or
more amendments thereto, including a related preliminary prospectus, each
of which has previously been furnished to you. The Company will next file
with the Commission either (1) prior to the Effective Date of such
registration statement, a further amendment to such registration statement
(including the form of final prospectus) or (2) after the Effective Date
of such registration statement, a final prospectus in accordance with
Rules 430A and 424(b). In the case of clause (2), the Company has included
in such registration statement, as amended at the Effective Date, all
information (other than Rule 430A Information) required by the Act and
the rules thereunder to be included in such registration statement and the
Prospectus. As filed, such amendment and form of final prospectus, or such
final prospectus, shall contain all Rule 430A Information, together with
all other such required information, and, except to the extent the
Representatives shall agree in writing to a modification, shall be in all
substantive respects in the form furnished to you prior to the Execution
Time or, to the extent not completed at the Execution Time, shall contain
only such specific additional information and other changes (beyond that
contained in the latest Preliminary Prospectus) as the Company has advised
you, prior to the Execution Time, will be included or made therein.
(2) On the Effective Date, the Registration Statement did or will,
and when the Prospectus is first filed (if required) in accordance with
Rule 424(b) and on the Closing Date (as defined herein) and on any date on
which Option Securities are purchased, if such date is not the Closing
Date (a "settlement date"), the Prospectus (and any supplements thereto)
will, comply in all material respects with the applicable requirements of
the Act and the rules thereunder; on the Effective Date and at the
Execution Time, the Registration Statement did not or will not contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein not misleading; and, on the Effective Date, the Prospectus, if not
filed pursuant to Rule 424(b), will not, and on the date of any filing
pursuant to Rule 424(b) and on the Closing Date and any settlement date,
the Prospectus (together with any supplement thereto) will not, include
any untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided,
however, that the Company makes no representations or warranties as to the
information contained in or omitted from the Registration Statement, or
the Prospectus (or any supplement thereto) in reliance upon and in
conformity with information furnished in writing to the Company by or on
behalf of any Underwriter through the Representatives
<PAGE>
3
specifically for inclusion in the Registration Statement or the Prospectus
(or any supplement thereto).
(3) The Company has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the jurisdiction of
its incorporation with full corporate power and authority to own or lease,
as the case may be, and to operate its properties and conduct its business
as described in the Prospectus, and is duly qualified to do business as a
foreign corporation and is in good standing under the laws of each
jurisdiction which requires such qualification, except where the failure
to be so qualified or be in good standing would not have a material
adverse effect on the condition (financial or otherwise), prospects,
earnings, business or properties of the Company and any of its
subsidiaries considered as one enterprise (a "Material Adverse Effect").
(4) The Company's authorized equity capitalization is as set forth
in the Prospectus; the capital stock of the Company conforms in all
material respects to the description thereof contained in the Prospectus;
the outstanding shares of Common Stock have been duly and validly
authorized and issued and are fully paid and nonassessable; the Securities
have been duly and validly authorized, and, when issued and delivered to
and paid for by the Underwriters pursuant to this Agreement, will be fully
paid and nonassessable; the Securities are duly listed, and admitted and
authorized for trading, subject to official notice of issuance, on the
Nasdaq National Market; the certificates for the Securities comply with
the requirements of Delaware law; the holders of outstanding shares of
capital stock of the Company are not entitled to preemptive or other
rights to subscribe for the Securities except for such rights as have been
effectively waived; and, except as set forth in the Prospectus, no
options, warrants or other rights to purchase, agreements or other
obligations to issue, or rights to convert any obligations into or
exchange any securities for, shares of capital stock of or ownership
interests in the Company are outstanding.
(5) There is no franchise, contract or other document of a character
required to be described in the Registration Statement or Prospectus, or
to be filed as an exhibit thereto, which is not described or filed as
required.
(6) This Agreement has been duly authorized, executed and delivered
by the Company and constitutes a valid and binding obligation of the
Company.
(7) The Company is not and, after giving effect to the offering and
sale of the Securities and the application of the proceeds thereof as
described in the Prospectus, will not be an "investment company" as
defined in the Investment Company Act of 1940, as amended.
<PAGE>
4
(8) No consent, approval, authorization, filing with or order of any
court or governmental agency or body is required in connection with the
transactions contemplated herein, except such as have been obtained under
the Act and such as may be required (i) under the blue sky laws of any
jurisdiction in connection with the purchase and distribution of the
Securities by the Underwriters in the manner contemplated herein and in
the Prospectus, (ii) by the National Association of Securities Dealers,
LLC (the "NASD") and (iii) by the federal and provincial laws of Canada.
(9) Neither the issue and sale of the Securities nor the
consummation of any other of the transactions herein contemplated nor the
fulfillment of the terms hereof will (a) conflict with, result in a breach
or violation or imposition of any lien, charge or encumbrance upon any
property or assets of the Company pursuant to the charter or by-laws of
the Company, (b) conflict with, result in a material breach or violation
or imposition of any lien, charge or encumbrance upon any property or
assets of the Company pursuant to (i) the terms of any indenture,
contract, lease, mortgage, deed of trust, note agreement, loan agreement
or other agreement, obligation, condition, covenant or instrument to which
the Company is a party or bound or to which its property is subject or
(ii) any statute, law, rule, regulation, judgment, order or decree
applicable to the Company of any court, regulatory body, administrative
agency, governmental body, arbitrator or other authority having
jurisdiction over the Company or any of its properties.
(10) Except as disclosed in the Registration Statement, no holders
of securities of the Company have rights to the registration of such
securities under the Registration Statement.
(11) The historical financial statements and schedules of the
Company included in the Prospectus and the Registration Statement present
fairly in all material respects the financial condition, results of
operations and cash flows of the Company as of the dates and for the
periods indicated, comply as to form with the applicable accounting
requirements of the Act and have been prepared in conformity with
generally accepted accounting principles applied on a consistent basis
throughout the periods involved (except as otherwise noted therein). The
selected financial and subscriber data set forth under the caption
"Selected Consolidated Financial Data" in the Prospectus and Registration
Statement fairly present, on the basis stated in the Prospectus and the
Registration Statement, the information included therein.
(12) Except as disclosed in the Registration Statement, no action,
suit or proceeding by or before any court or governmental agency,
authority or body or any arbitrator involving the Company or its property
is pending or, to the best knowledge
<PAGE>
5
of the Company, threatened that (i) could reasonably be expected to have a
material adverse effect on the performance of this Agreement or the
consummation of any of the transactions contemplated hereby or (ii) could
reasonably be expected to have a Material Adverse Effect, whether or not
arising from transactions in the ordinary course of business, except as
set forth in or contemplated in the Prospectus (exclusive of any
supplement thereto).
(13) The Company owns or leases all such properties as are
reasonably necessary to the conduct of its operations as presently
conducted.
(14) The Company is not in violation or default of (i) any provision
of its charter or bylaws, (ii) the terms of any indenture, contract,
lease, mortgage, deed of trust, note agreement, loan agreement or other
agreement, obligation, condition, covenant or instrument to which it is a
party or bound or to which its property is subject, or (iii) any statute,
law, rule, regulation, judgment, order or decree of any court, regulatory
body, administrative agency, governmental body, arbitrator or other
authority having jurisdiction over the Company or any of its properties,
as applicable, except in the case of clauses (ii) or (iii), any such
violation or default which would not, singly or in the aggregate, result
in a Material Adverse Effect.
(15) PricewaterhouseCoopers LLP, who have certified certain
financial statements of the Company and delivered their report with
respect to the audited financial statements and schedules included in the
Prospectus, are independent public accountants with respect to the Company
within the meaning of the Act and the applicable published rules and
regulations thereunder.
(16) There are no transfer taxes or other similar fees or charges
under Federal law or the laws of any state, or any political subdivision
thereof, required to be paid in connection with the execution and delivery
of this Agreement or the issuance by the Company or sale by the Company of
the Securities.
(17) The Company has filed all foreign, federal, state and local tax
returns that are required to be filed or has requested extensions thereof
(except in any case in which the failure so to file would not have a
Material Adverse Effect, whether or not arising from transactions in the
ordinary course of business, except as set forth in or contemplated in the
Prospectus (exclusive of any supplement thereto)) and has paid all taxes
required to be paid by it and any other assessment, fine or penalty levied
against it, to the extent that any of the foregoing is due and payable,
except for any such assessment, fine or penalty that is currently being
contested in good faith or as would not have a Material Adverse Effect,
whether or not arising from transactions in the ordinary course of
business, except as set forth in or contemplated in the Prospectus
(exclusive of any supplement thereto).
<PAGE>
6
(18) To the Company's knowledge, no labor problem or dispute with
the employees of the Company exists or is threatened or imminent, and the
Company is not aware of any existing or imminent labor disturbance by the
employees of any of its principal suppliers, contractors or customers,
that could have a Material Adverse Effect, whether or not arising from
transactions in the ordinary course of business, except as set forth in or
contemplated in the Prospectus (exclusive of any supplement thereto).
(19) The Company is insured by insurers of recognized financial
responsibility against such losses and risks and in such amounts as are
adequate in accordance with customary industry standards in the businesses
in which it is engaged; all policies of insurance and fidelity or surety
bonds insuring the Company or its businesses, assets, employees, officers
and directors are in full force and effect; the Company is in compliance
with the terms of such policies and instruments in all material respects;
and there are no claims by the Company under any such policy or instrument
as to which any insurance company is denying liability or defending under
a reservation of rights clause; and the Company has no reason to believe
that it will not be able to renew its existing insurance coverage as and
when such coverage expires or to obtain similar coverage from similar
insurers as may be necessary to continue its business at a cost that would
not have a Material Adverse Effect, whether or not arising from
transactions in the ordinary course of business, except as set forth in or
contemplated in the Prospectus (exclusive of any supplement thereto).
(20) The Company possesses all licenses, certificates, permits and
other authorizations issued by the appropriate federal, state or foreign
regulatory authorities necessary to conduct its businesses, except where
the failure to possess such licenses, certificates, permits and
authorization, would not, singly or in the aggregate, result in a Material
Adverse Effect, and the Company has not received any notice of proceedings
relating to the revocation or modification of any such certificate,
authorization or permit which, singly or in the aggregate, if the subject
of an unfavorable decision, ruling or finding, would have a Material
Adverse Effect, whether or not arising from transactions in the ordinary
course of business, except as set forth in or contemplated in the
Prospectus (exclusive of any supplement thereto).
(21) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurance that (i) transactions are
executed in accordance with management's general or specific
authorizations; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain asset accountability;
<PAGE>
7
(iii) access to assets is permitted only in accordance with management's
general or specific authorization; and (iv) the recorded accountability
for assets is compared with the existing assets at reasonable intervals
and appropriate action is taken with respect to any differences.
(22) The Company has not taken, directly or indirectly, any action
designed to or which has constituted or which might reasonably be expected
to cause or result, under the Exchange Act or otherwise, in stabilization
or manipulation of the price of any security of the Company to facilitate
the sale or resale of the Securities.
(23) The Company (i) is in compliance with any and all applicable
foreign, federal, state and local laws and regulations relating to the
protection of human health and safety, the environment or hazardous or
toxic substances or wastes, pollutants or contaminants ("Environmental
Laws"), (ii) has received and is in compliance with all permits, licenses
or other approvals required of them under applicable Environmental Laws to
conduct its businesses and (iii) to its knowledge, has not received notice
of any actual or potential liability for the investigation or remediation
of any disposal or release of hazardous or toxic substances or wastes,
pollutants or contaminants, except where such non-compliance with
Environmental Laws, failure to receive required permits, licenses or other
approvals, or liability would not, individually or in the aggregate, have
a Material Adverse Effect, whether or not arising from transactions in the
ordinary course of business, except as set forth in or contemplated in the
Prospectus (exclusive of any supplement thereto). The Company has not been
named as a "potentially responsible party" under the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980, as
amended.
(24) The Company has fulfilled its obligations, if any, under the
minimum funding standards of Section 302 of the United States Employee
Retirement Income Security Act of 1974 ("ERISA") and the regulations and
published interpretations thereunder with respect to each "plan" (as
defined in Section 3(3) of ERISA and such regulations and published
interpretations) in which employees of the Company are eligible to
participate and each such plan is in compliance in all material respects
with the presently applicable provisions of ERISA and such regulations and
published interpretations. The Company has not incurred any unpaid
liability to the Pension Benefit Guaranty Corporation (other than for the
payment of premiums in the ordinary course) or to any such plan under
Title IV of ERISA.
<PAGE>
8
(25) The Company owns, possesses, licenses or has other rights to
use, on reasonable terms, all patents, patent applications, trade and
service marks, trade and service mark registrations, trade names,
copyrights, licenses, inventions, trade secrets, technology, know-how and
other intellectual property (collectively, the "Intellectual Property")
necessary for the conduct of the Company's business as now conducted or as
proposed in the Prospectus to be conducted. Except as set forth in the
Prospectus under the caption "Business--Intellectual Property," (a) to the
Company's knowledge, there are no rights of third parties to any such
Intellectual Property; (b) to the Company's knowledge, there is no
material infringement by third parties of any such Intellectual Property;
(c) there is no pending or, to the Company's knowledge, threatened action,
suit, proceeding or claim by others challenging the Company's rights in or
to any such Intellectual Property, and the Company is unaware of any facts
which would form a reasonable basis for any such claim; (d) to the
Company's knowledge, there is no pending or threatened action, suit,
proceeding or claim by others challenging the validity or scope of any
such Intellectual Property, and the Company is unaware of any facts which
would form a reasonable basis for any such claim; (e) there is no pending
or, to the Company's knowledge, threatened action, suit, proceeding or
claim by others that the Company infringes or otherwise violates any
patent, trademark, copyright, trade secret or other proprietary rights of
others, and the Company is unaware of any other fact which would form a
reasonable basis for any such claim; (f) to the Company's knowledge, there
is no U.S. patent or published U.S. patent application which contains
claims that dominate any Intellectual Property described in the Prospectus
as being owned by or licensed to the Company or that interferes with the
issued or pending claims of any such Intellectual Property; and (g) there
is no prior act of which the Company is aware that would render any U.S.
patent held by the Company invalid or any U.S. patent application held by
the Company unpatentable which has not been disclosed to the U.S. Patent
and Trademark Office.
(26) The statements contained in the Prospectus under the captions
"Risk Factors -- 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" and "Business -- Intellectual Property," insofar as
such statements summarize legal matters, agreements, documents, or
proceedings discussed therein, are accurate and fair summaries of such
legal matters, agreements, documents or proceedings.
(27) The Company has implemented a comprehensive, detailed program
to analyze and address the risk that the computer hardware and software
used by it may be unable to recognize and properly execute date-sensitive
functions involving certain dates prior to and any dates after December
31, 1999 (the "Year 2000 Problem"), and has determined that such risk will
be remedied on a timely basis
<PAGE>
9
without material expense and will not have a Material Adverse Effect; and
the Company believes that each supplier, vendor, customer service
organization used by the Company has remedied or will remedy on a timely
basis the Year 2000 Problem, except to the extent that a failure to remedy
by any such supplier, vendor or customer service organization would not
have a Material Adverse Effect. The Company is in substantial compliance
with the Commission's staff legal bulletin No. 5 dated January 12, 1998
related to Year 2000 compliance, as amended to date.
Any certificate signed by any officer of the Company and delivered
to the Representatives or counsel for the Underwriters in connection with the
offering of the Securities shall be deemed a representation and warranty by the
Company, as to matters covered thereby, to each Underwriter.
2. Purchase and Sale. (a) Subject to the terms and conditions and in
reliance upon the representations and warranties herein set forth, the Company
agrees to sell to each Underwriter, and each Underwriter agrees, severally and
not jointly, to purchase from the Company, at a purchase price of $[ ] per
share, the amount of the Underwritten Securities set forth opposite such
Underwriter's name in Schedule I hereto.
(2) Subject to the terms and conditions and in reliance upon the
representations and warranties herein set forth, the Company hereby grants an
option to the several Underwriters to purchase, severally and not jointly, up to
450,000 Option Securities at the same purchase price per share as the
Underwriters shall pay for the Underwritten Securities. Said option may be
exercised only to cover over-allotments in the sale of the Underwritten
Securities by the Underwriters. Said option may be exercised in whole or in part
at any time (but not more than once) on or before the 30th day after the date of
the Prospectus upon written or telegraphic notice by the Representatives to the
Company setting forth the number of shares of the Option Securities as to which
the several Underwriters are exercising the option and the settlement date. The
number of Option Securities to be purchased by each Underwriter shall be the
same percentage of the total number of shares of the Option Securities to be
purchased by the several Underwriters as such Underwriter is purchasing of the
Underwritten Securities, subject to such adjustments as you in your absolute
discretion shall make to eliminate any fractional shares.
3. Delivery and Payment. Delivery of and payment for the
Underwritten Securities and the Option Securities (if the option provided for in
Section 2(b) hereof shall have been exercised on or before the third Business
Day prior to the Closing Date) shall be made at 10:00 AM, New York City time, on
[ ], 2000, or at such time on such later date not more than three Business Days
after the foregoing date as the Representatives shall designate, which date and
time may be postponed by agreement among the Representatives and the Company or
as provided in Section 9 hereof (such date and time of delivery and payment for
the Securities being herein called the "Closing Date"). Delivery of the
<PAGE>
10
Securities shall be made to the Representatives for the respective accounts of
the several Underwriters against payment by the several Underwriters through the
Representatives of the respective aggregate purchase prices of the Securities
being sold by the Company to or upon the order of the Company by wire transfer
payable in same-day funds to the account specified by the Company. Delivery of
the Underwritten Securities and the Option Securities shall be made through the
facilities of The Depository Trust Company unless the Representatives shall
otherwise instruct.
If the option provided for in Section 2(b) hereof is exercised after
the third Business Day prior to the Closing Date, the Company will deliver the
Option Securities (at the expense of the Company) through the facilities of The
Depository Trust Company, unless the Representatives shall otherwise instruct,
for the respective accounts of the several Underwriters, against payment by the
several Underwriters through the Representatives of the purchase price thereof
to or upon the order of the Company by wire transfer payable in same-day funds
to the account specified by the Company. If settlement for the Option Securities
occurs after the Closing Date, the Company will deliver to the Representatives
on the settlement date for the Option Securities, and the obligation of the
Underwriters to purchase the Option Securities shall be conditioned upon receipt
of, supplemental opinions, certificates and letters confirming as of such date
the opinions, certificates and letters delivered on the Closing Date pursuant to
Section 6 hereof.
4. Offering by Underwriters. It is understood that the several
Underwriters propose to offer the Securities for sale to the public as set forth
in the Prospectus.
5. Agreements. The Company agrees with the several Underwriters
that:
<PAGE>
11
(28) The Company will use its best efforts to cause the Registration
Statement, if not effective at the Execution Time, and any amendment
thereof, to become effective. Prior to the termination of the offering of
the Securities, the Company will not file any amendment of the
Registration Statement or supplement to the Prospectus or any Rule 462(b)
Registration Statement unless the Company has furnished you a copy for
your review prior to filing and will not file any such proposed amendment
or supplement to which you reasonably object. Subject to the foregoing
sentence, if the Registration Statement has become or becomes effective
pursuant to Rule 430A, or filing of the Prospectus is otherwise required
under Rule 424(b), the Company will cause the Prospectus, properly
completed, and any supplement thereto to be filed with the Commission
pursuant to the applicable paragraph of Rule 424(b) within the time period
prescribed and will provide evidence satisfactory to the Representatives
of such timely filing. The Company will promptly advise the
Representatives (1) when the Registration Statement, if not effective at
the Execution Time, shall have become effective, (2) when the Prospectus,
and any supplement thereto, shall have been filed (if required) with the
Commission pursuant to Rule 424(b) or when any Rule 462(b) Registration
Statement shall have been filed with the Commission, (3) when, prior to
termination of the offering of the Securities, any amendment to the
Registration Statement shall have been filed or become effective, (4) of
any request by the Commission or its staff for any amendment of the
Registration Statement, or any Rule 462(b) Registration Statement, or for
any supplement to the Prospectus or for any additional information, (5) of
the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or the institution or
threatening of any proceeding for that purpose and (6) of the receipt by
the Company of any notification with respect to the suspension of the
qualification of the Securities for sale in any jurisdiction or the
institution or threatening of any proceeding for such purpose. The Company
will use its best efforts to prevent the issuance of any such stop order
or the suspension of any such qualification and, if issued, to obtain as
soon as possible the withdrawal thereof.
(29) If, at any time when a prospectus relating to the Securities is
required to be delivered under the Act, any event occurs as a result of
which the Prospectus as then supplemented would include any untrue
statement of a material fact or omit to state any material fact necessary
to make the statements therein in the light of the circumstances under
which they were made not misleading, or if, in the reasonable discretion
of the Company, after consultation with the Representatives, it shall be
necessary to amend the Registration Statement or supplement the Prospectus
to comply with the Act or the rules thereunder, the Company promptly will
(1) notify the Representatives of any such event, (2) prepare and file
with the Commission, subject to the second sentence of paragraph (a) of
this Section 5, an amendment or supplement which will correct such
statement or omission or effect such compliance;
<PAGE>
12
and (3) supply any supplemented Prospectus to you in such quantities as
you may reasonably request.
(30) As soon as practicable, the Company will make generally
available to its security holders and to the Representatives an earnings
statement or statements of the Company which will satisfy the provisions
of Section 11(a) of the Act and Rule 158 under the Act.
(31) The Company will furnish to the Representatives and counsel for
the Underwriters signed copies of the Registration Statement (including
exhibits thereto) and to each other Underwriter a copy of the Registration
Statement (without exhibits thereto) and, so long as delivery of a
prospectus by an Underwriter or dealer may be required by the Act, as many
copies of each Preliminary Prospectus and the Prospectus and any
supplement thereto as the Representatives may reasonably request.
(32) The Company will arrange, if necessary, for the qualification
of the Securities for sale under the laws of such jurisdictions as the
Representatives may designate and will maintain such qualifications in
effect so long as required for the distribution of the Securities;
provided that in no event shall the Company be obligated to qualify to do
business in any jurisdiction where it is not now so qualified or to take
any action that would subject it to service of process in suits, other
than those arising out of the offering or sale of the Securities, in any
jurisdiction where it is not now so subject.
(33) The Company will not, without the prior written consent of
Salomon Smith Barney Inc., offer, sell, contract to sell, pledge, or
otherwise dispose of, (or enter into any transaction which is designed to,
or might reasonably be expected to, result in the disposition (whether by
actual disposition or effective economic disposition due to cash
settlement or otherwise) by the Company or any affiliate of the Company or
any person in privity with the Company) directly or indirectly, including
the filing (or participation in the filing) of a registration statement
with the Commission in respect of, or establish or increase a put
equivalent position or liquidate or decrease a call equivalent position
within the meaning of Section 16 of the Exchange Act, any other shares of
Common Stock or any securities convertible into, or exercisable, or
exchangeable for, shares of Common Stock or publicly announce an intention
to effect any such transaction, for a period of 90 days after the date of
the Underwriting Agreement, provided, however, that the Company may issue
and sell Common Stock pursuant to any employee stock option plan, stock
ownership plan or dividend reinvestment plan of the Company in effect at
the Execution Time and the Company may issue Common Stock issuable upon
the conversion of securities or the exercise of warrants outstanding at
the Execution Time and, provided, further, that the Company may issue
shares of Common Stock
<PAGE>
13
in connection with any acquisition of another company if the terms of such
issuance provide that such Common Stock shall not be resold prior to the
expiration of the 90-day period referenced in this paragraph (f).
(34) The Company will not take, directly or indirectly, any action
designed to or which has constituted or which might reasonably be expected
to cause or result, under the Exchange Act or otherwise, in stabilization
or manipulation of the price of any security of the Company to facilitate
the sale or resale of the Securities.
(35) The Company agrees to pay the costs and expenses relating to
the following matters: (i) the preparation, printing or reproduction and
filing with the Commission of the Registration Statement (including
financial statements and exhibits thereto), each Preliminary Prospectus,
the Prospectus, and each amendment or supplement to any of them; (ii) the
printing (or reproduction) and delivery (including postage, air freight
charges and charges for counting and packaging) of such copies of the
Registration Statement, each Preliminary Prospectus, the Prospectus, and
all amendments or supplements to any of them, as may, in each case, be
reasonably requested for use in connection with the offering and sale of
the Securities; (iii) the preparation, printing, authentication, issuance
and delivery of certificates for the Securities, including any stamp or
transfer taxes in connection with the issuance and sale of the Securities;
(iv) the printing (or reproduction) and delivery of this Agreement, any
blue sky memorandum and all other agreements or documents printed (or
reproduced) and delivered in connection with the offering of the
Securities; (v) the registration of the Securities under the Exchange Act
and the listing of the Securities on the Nasdaq National Market; (vi) any
registration or qualification of the Securities for offer and sale under
the securities or blue sky laws of the several states (including filing
fees and the reasonable fees and expenses of counsel for the Underwriters
relating to such registration and qualification); (vii) any filings
required to be made with the National Association of Securities Dealers,
Inc. (including filing fees and the reasonable fees and expenses of
counsel for the Underwriters relating to such filings); (viii) the
transportation and other expenses incurred by or on behalf of Company
representatives in connection with presentations to prospective purchasers
of the Securities; (ix) the fees and expenses of the Company's accountants
and the fees and expenses of counsel (including local and special counsel,
if any) for the Company; and (x) all other costs and expenses incident to
the performance by the Company of its obligations hereunder.
<PAGE>
14
6. Conditions to the Obligations of the Underwriters. The
obligations of the Underwriters to purchase the Underwritten Securities and the
Option Securities, as the case may be, shall be subject to the accuracy of the
representations and warranties on the part of the Company contained herein as of
the Execution Time, the Closing Date and any settlement date pursuant to Section
3 hereof, to the accuracy of the statements of the Company made in any
certificates pursuant to the provisions hereof, to the performance by the
Company of its obligations hereunder and to the following additional conditions:
(36) If the Registration Statement has not become effective prior to
the Execution Time, unless the Representatives agree in writing to a later
time, the Registration Statement will become effective not later than (i)
6:00 PM New York City time on the date of determination of the public
offering price, if such determination occurred at or prior to 3:00 PM New
York City time on such date or (ii) 9:30 AM on the Business Day following
the day on which the public offering price was determined, if such
determination occurred after 3:00 PM New York City time on such date; if
filing of the Prospectus, or any supplement thereto, is required pursuant
to Rule 424(b), the Prospectus, and any such supplement, will be filed in
the manner and within the time period required by Rule 424(b); and no stop
order suspending the effectiveness of the Registration Statement shall
have been issued and no proceedings for that purpose shall have been
instituted or threatened.
(37) The Company shall have requested and caused Brobeck, Phleger &
Harrison LLP, counsel for the Company, to have furnished to the
Representatives their opinion, dated the Closing Date and addressed to the
Representatives, to the effect that:
(1) the Company is duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of
Delaware; the Company has the corporate power and authority to
own or lease, as the case may be, and to operate its
properties and conduct its business as described in the
Registration Statement and the Prospectus (and any amendment
or supplement thereto); and the Company is duly qualified to
transact business and is in good standing under the laws of
the State of New York;
(2) the authorized capital stock of the Company under the heading
"Actual" under the caption "Capitalization" is as set forth in
the Prospectus; the statements set forth under the caption
"Description of Capital Stock" in the Prospectus, insofar as
such statements purport to summarize certain provisions of the
capital stock of the Company, provide a fair summary of such
provisions; the shares of Common Stock of the Company
outstanding prior to the issuance of the
<PAGE>
15
Securities have been duly authorized and validly issued and,
to such counsel's knowledge, are fully paid and nonassessable;
the Securities have been duly authorized, and, when issued and
delivered to the Underwriters against payment therefor in
accordance with the terms of this Agreement, will be fully
paid and nonassessable; the Securities have been approved for
quotation on the Nasdaq National Market, upon issuance as
contemplated by this Agreement; the form of certificate for
the Securities conforms in all material respects to the
requirements of the Delaware General Corporation Law; to such
counsel's knowledge, the holders of outstanding shares of
capital stock of the Company are not entitled to preemptive or
other rights to subscribe for the Securities except for such
rights as have been effectively waived; and, to such counsel's
knowledge, except as described in the Prospectus, there are no
outstanding securities of the Company convertible or
exchangeable into, or evidencing the right to purchase or
subscribe for, any shares of capital stock of the Company and
there are no outstanding or authorized options, warrants or
rights of a similar character obligating the Company to issue
any shares of its capital stock or any securities convertible
or exchangeable into or evidencing the right to purchase or
subscribe for, any shares of such stock;
(3) to the knowledge of such counsel (A) there are no legal or
governmental proceedings pending or threatened against the
Company, or to which the Company or any of its properties are
subject, which are required to be disclosed in the
Registration Statement or Prospectus (or any amendment or
supplement thereto) that are not so described and (B) there
are no agreements, contracts, indentures, leases or other
instruments that are required to be described in the
Registration Statement or Prospectus (or any amendment or
supplement thereto) or to be filed as an exhibit to the
Registration Statement that are not so described or filed, as
the case may be;
(4) the Registration Statement and all post-effective amendments,
if any, have become effective under the Act; any required
filing of the Prospectus, and any supplements thereto,
pursuant to Rule 424(b) has been made in accordance with Rule
424(b); to the knowledge of such counsel, no stop order
suspending the effectiveness of the Registration Statement has
been issued and no proceedings for that purpose are pending
before or contemplated by the Commission;
<PAGE>
16
(5) this Agreement has been duly authorized, executed and
delivered by the Company;
(6) the Company is not an Investment Company as defined in the
Investment Company Act of 1940, as amended;
(7) no consent, approval, authorization or other order of, or
registration or filing with, any court, regulatory body,
administrative agency or other governmental body, agency or
official is required on the part of the Company (except (A) as
have been obtained under the Act or (B) such as may be
required under state securities or Blue Sky laws governing the
purchase and distribution of the Securities, as to which such
counsel expresses no opinion) for the valid issuance and sale
of the Securities to the Underwriters as contemplated by this
Agreement;
(8) none of the offer, sale or delivery of the Securities, the
execution, delivery or performance by the Company of this
Agreement, compliance by the Company with the provisions of
this Agreement, nor the consummation by the Company of the
transactions herein contemplated (A) violates the charter or
by-laws of the Company, or (B) constitutes a breach of, or a
default under, any agreement, indenture, lease, or other
instrument to which the Company is a party or any of its
properties is bound (i) as a result of the private placement
of the Company's Series B Convertible Preferred Stock in March
1999 or (ii) that is an exhibit to the Registration Statement,
which breach or default, individually or in the aggregate,
would reasonably be expected to have a Material Adverse Effect
on the Company or (C) will result in any violation of any
existing law or regulation (other than applicable state
securities and blue sky laws, as to which such counsel need
express no opinion), or any ruling, judgment, injunction,
order or decree known to us and applicable to the Company or
any of its or their properties; and
(9) to such counsel's knowledge and except as disclosed in the
Prospectus, no holders of securities of the Company have the
right to have any Common Stock or other securities of the
Company included in the Registration Statement (except for
such rights as have been effectively waived).
<PAGE>
17
In addition, such counsel shall state that:
Such counsel participated in conferences with certain officers and
other representatives of the Company, its independent public accountants,
the Underwriters and the Underwriters' counsel at which the contents of
the Registration Statement, the Prospectus and related matters were
discussed. Such counsel is not, however, passing upon, and does not assume
any responsibility for, and has not independently checked or verified, the
accuracy, completeness or fairness of the information contained in the
Registration Statement and the Prospectus.
Such counsel shall state, however, that based upon their
participation as described in the preceding paragraph, (i) they are of the
opinion that the Registration Statement and Prospectus (other than the
consolidated financial statements, including the notes and schedules
thereto, and the other financial and statistical data included in the
Registration Statement and Prospectus, as to which they express no
opinion), at the time the Registration Statement became effective,
complied as to form in all material respects with the requirements of the
Act and the applicable rules and regulations thereunder, (ii) they confirm
that they have no reason to believe that the Registration Statement (other
than the consolidated financial statements including notes and schedules
and other financial statistical information included in the Registration
Statement, as to which they express no belief), at the time the
Registration Statement became effective, contained any untrue statement of
a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, or
(iii) they confirm that they have no reason to believe the Prospectus
(other than the consolidated financial statements included the notes and
schedules thereto, and the other financial and statistical data included
in the Prospectus, as to which they express no belief), on the date such
opinion is delivered, contains any untrue statement of a material fact or
omitted to state a material fact necessary to make the statements therein,
in the light of the circumstances under which they were made, not
misleading.
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws of any jurisdiction other than the State of
Delaware or the Federal laws of the United States, to the extent they deem
proper and specified in such opinion, upon the opinion of other counsel of good
standing whom they believe to be reliable and who are satisfactory to counsel
for the Underwriters and (B) as to matters of fact, to the extent they deem
proper, on certificates of responsible officers of the Company and public
officials. References to the Prospectus in this paragraph (b) include any
supplements thereto at the Closing Date.
(38) The Representatives shall have received from Cravath, Swaine &
Moore, counsel for the Underwriters, such opinion or opinions, dated the
Closing
<PAGE>
18
Date and addressed to the Representatives, with respect to the issuance
and sale of the Securities, the Registration Statement, the Prospectus
(together with any supplement thereto) and other related matters as the
Representatives may reasonably require, and the Company shall have
furnished to such counsel such documents as they request for the purpose
of enabling them to pass upon such matters.
(39) The Company shall have furnished to the Representatives a
certificate of the Company, signed by the Chairman of the Board or the
President and the principal financial or accounting officer of the
Company, dated the Closing Date, to the effect that the signers of such
certificate have examined the Registration Statement, the Prospectus, any
supplements to the Prospectus and this Agreement and that:
(1) the representations and warranties of the Company in this
Agreement are true and correct in all material respects on and
as of the Closing Date with the same effect as if made on the
Closing Date and the Company has complied with all the
agreements and satisfied all the conditions on its part to be
performed or satisfied at or prior to the Closing Date;
(2) no stop order suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that purpose
have been instituted or, to the Company's knowledge,
threatened; and
(3) since the date of the most recent financial statements
included in the Prospectus (exclusive of any supplement
thereto), there has been no Material Adverse Effect, whether
or not arising from transactions in the ordinary course of
business, except as set forth in or contemplated in the
Prospectus (exclusive of any supplement thereto).
(40) The Company shall have requested and caused
PricewaterhouseCoopers LLP to have furnished to the Representatives, at
the Execution Time and at the Closing Date, letters, dated respectively as
of the Execution Time and as of the Closing Date, in form and substance
satisfactory to the Representatives, confirming that they are independent
accountants within the meaning of the Act and the applicable rules and
regulations adopted by the Commission thereunder, stating in effect that:
(1) in their opinion the audited financial statements and
financial statement schedules included in the Registration
Statement and the Prospectus and reported on by them comply as
to form in all material
<PAGE>
19
respects with the applicable accounting requirements of the
Act and the related rules and regulations adopted by the
Commission; and
(2) they have performed certain other specified procedures as a
result of which they determined that certain information of an
accounting, financial or statistical nature (which is limited
to accounting, financial or statistical information derived
from the general accounting records of the Company) set forth
in the Registration Statement and the Prospectus, including
the information set forth under the captions "Management's
Discussion and Analysis of Financial Condition and Results of
Operations", "Selected Consolidated Financial Data",
"Prospectus Summary", "Capitalization", "Business" and "Risk
Factors" in the Prospectus, agrees with the accounting records
of the Company, excluding any questions of legal
interpretation.
References to the Prospectus in this paragraph (g) include any
supplement thereto at the date of the letter.
(41) Subsequent to the Execution Time or, if earlier, the dates as
of which information is given in the Registration Statement (exclusive of
any amendment thereof) and the Prospectus (exclusive of any supplement
thereto), there shall not have been (i) any change or decrease specified
in the letter or letters referred to in paragraph (g) of this Section 6 or
(ii) any change, or any development involving a prospective change, in or
affecting the condition (financial or otherwise), earnings, business or
properties of the Company, whether or not arising from transactions in the
ordinary course of business, except as set forth in or contemplated in the
Prospectus (exclusive of any supplement thereto) the effect of which, in
any case referred to in clause (i) or (ii) above, is, in the sole judgment
of the Representatives, so material and adverse as to make it impractical
or inadvisable to proceed with the offering or delivery of the Securities
as contemplated by the Registration Statement (exclusive of any amendment
thereof) and the Prospectus (exclusive of any supplement thereto).
(42) The Securities shall have been approved for inclusion on the
Nasdaq National Market, subject only to official notice of issuance.
(43) Prior to the Closing Date, the Company shall have furnished to
the Representatives such further information, certificates and documents
as the Representatives may reasonably request.
<PAGE>
20
If any of the conditions specified in this Section 6 shall not have
been fulfilled in all material respects when and as provided in this Agreement,
or if any of the opinions and certificates mentioned above or elsewhere in this
Agreement shall not be in all material respects reasonably satisfactory in form
and substance to the Representatives and counsel for the Underwriters, this
Agreement and all obligations of the Underwriters hereunder may be canceled at,
or at any time prior to, the Closing Date by the Representatives. Notice of
such cancelation shall be given to the Company in writing or by telephone or
facsimile confirmed in writing.
The documents required to be delivered by this Section 6 shall be
delivered at the office of Brobeck, Phleger & Harrison LLP, counsel for the
Company, at 1633 Broadway, 47th Floor, New York, New York 10019 on the Closing
Date.
7. Reimbursement of Underwriters' Expenses. If the sale of the
Securities provided for herein is not consummated because any condition to the
obligations of the Underwriters set forth in Section 6 hereof is not satisfied,
because of any termination pursuant to Section 10 hereof or because of any
refusal, inability or failure on the part of the Company to perform any
agreement herein or comply with any provision hereof other than by reason of a
default by any of the Underwriters, the Company will reimburse the Underwriters
severally through Salomon Smith Barney on demand for all out-of-pocket expenses
(including reasonable fees and disbursements of counsel) that shall have been
reasonably incurred by them in connection with the proposed purchase and sale of
the Securities.
8. Indemnification and Contribution. (a) The Company agrees to
indemnify and hold harmless each Underwriter, the directors, officers, employees
and agents of each Underwriter and each person who controls any Underwriter
within the meaning of either the Act or the Exchange Act against any and all
losses, claims, damages or liabilities, joint or several, to which they or any
of them may become subject under the Act, the Exchange Act or other Federal or
state statutory law or regulation, at common law or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon any untrue statement or alleged untrue statement of a
material fact contained in the registration statement for the registration of
the Securities as originally filed or in any amendment thereof, or in any
Preliminary Prospectus or the Prospectus, or in any amendment thereof or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and agrees to reimburse
each such indemnified party, as incurred, for any legal or other expenses
reasonably incurred by them in connection with investigating or defending any
such loss, claim, damage, liability or action; provided, however, that the
Company will not be liable in any such case to the extent that any such loss,
claim, damage or liability arises out of or is based upon any such untrue
statement or alleged untrue statement or omission or alleged omission made
therein in reliance upon and
<PAGE>
21
in conformity with written information furnished to the Company by or on behalf
of any Underwriter through the Representatives specifically for inclusion
therein. This indemnity agreement will be in addition to any liability which the
Company may otherwise have.
(b) Each Underwriter severally and not jointly agrees to indemnify
and hold harmless the Company, each of its directors, each of its officers who
signs the Registration Statement, and each person who controls the Company
within the meaning of either the Act or the Exchange Act, to the same extent as
the foregoing indemnity from the Company to each Underwriter, but only with
reference to written information relating to such Underwriter furnished to the
Company by or on behalf of such Underwriter through the Representatives
specifically for inclusion in the documents referred to in the foregoing
indemnity. This indemnity agreement will be in addition to any liability which
any Underwriter may otherwise have. The Company acknowledges that the statements
set forth in the last paragraph of the cover page regarding delivery of the
Securities and, under the heading "Underwriting", (i) the list of Underwriters
and their respective participation in the sale of the Securities, (ii) the
sentences related to concessions and reallowances and (iii) the paragraph
related to stabilization, syndicate covering transactions and penalty bids in
any Preliminary Prospectus and the Prospectus constitute the only information
furnished in writing by or on behalf of the several Underwriters for inclusion
in any Preliminary Prospectus or the Prospectus.
(c) Promptly after receipt by an indemnified party under this
Section 8 of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against the indemnifying party
under this Section 8, notify the indemnifying party in writing of the
commencement thereof; but the failure so to notify the indemnifying party (i)
will not relieve it from liability under paragraph (a) or (b) above unless and
to the extent it did not otherwise learn of such action and such failure results
in the forfeiture by the indemnifying party of substantial rights and defenses
and (ii) will not, in any event, relieve the indemnifying party from any
obligations to any indemnified party other than the indemnification obligation
provided in paragraph (a) or (b) above. The indemnifying party shall be entitled
to appoint counsel of the indemnifying party's choice at the indemnifying
party's expense to represent the indemnified party in any action for which
indemnification is sought (in which case the indemnifying party shall not
thereafter be responsible for the fees and expenses of any separate counsel
retained by the indemnified party or parties except as set forth below);
provided, however, that such counsel shall be satisfactory to the indemnified
party. Notwithstanding the indemnifying party's election to appoint counsel to
represent the indemnified party in an action, the indemnified party shall have
the right to employ separate counsel (including local counsel), and the
indemnifying party shall bear the reasonable fees, costs and expenses of such
separate counsel if (i) the use of counsel chosen by the indemnifying party to
represent the indemnified party would present such counsel with a conflict of
interest, (ii) the actual or potential defendants in, or targets of, any such
action include both the indemnified party and
<PAGE>
22
the indemnifying party and the indemnified party shall have reasonably concluded
that there may be legal defenses available to it and/or other indemnified
parties which are different from or additional to those available to the
indemnifying party, (iii) the indemnifying party shall not have employed counsel
satisfactory to the indemnified party to represent the indemnified party within
a reasonable time after notice of the institution of such action or (iv) the
indemnifying party shall authorize the indemnified party to employ separate
counsel at the expense of the indemnifying party. An indemnifying party will
not, without the prior written consent of the indemnified parties, settle or
compromise or consent to the entry of any judgment with respect to any pending
or threatened claim, action, suit or proceeding in respect of which
indemnification or contribution may be sought hereunder (whether or not the
indemnified parties are actual or potential parties to such claim or action)
unless such settlement, compromise or consent includes an unconditional release
of each indemnified party from all liability arising out of such claim, action,
suit or proceeding.
(d) In the event that the indemnity provided in paragraph (a) or (b)
of this Section 8 is unavailable to or insufficient to hold harmless an
indemnified party for any reason, the Company and the Underwriters severally
agree to contribute to the aggregate losses, claims, damages and liabilities
(including legal or other expenses reasonably incurred in connection with
investigating or defending same) (collectively "Losses") to which the Company
and one or more of the Underwriters may be subject in such proportion as is
appropriate to reflect the relative benefits received by the Company on the one
hand and by the Underwriters on the other from the offering of the Securities;
provided, however, that in no case shall any Underwriter (except as may be
provided in any agreement among underwriters relating to the offering of the
Securities) be responsible for any amount in excess of the underwriting discount
or commission applicable to the Securities purchased by such Underwriter
hereunder. If the allocation provided by the immediately preceding sentence is
unavailable for any reason, the Company and the Underwriters severally shall
contribute in such proportion as is appropriate to reflect not only such
relative benefits but also the relative fault of the Company on the one hand and
of the Underwriters on the other in connection with the statements or omissions
which resulted in such Losses as well as any other relevant equitable
considerations. Benefits received by the Company shall be deemed to be equal to
the total net proceeds from the offering (before deducting expenses) received by
it, and benefits received by the Underwriters shall be deemed to be equal to the
total underwriting discounts and commissions, in each case as set forth on the
cover page of the Prospectus. Relative fault shall be determined by reference
to, among other things, whether any untrue or any alleged untrue statement of a
material fact or the omission or alleged omission to state a material fact
relates to information provided by the Company on the one hand or the
Underwriters on the other, the intent of the parties and their relative
knowledge, access to information and opportunity to correct or prevent such
untrue statement or omission. The Company and the Underwriters agree that it
would not be just and equitable if contribution were determined by pro rata
allocation or any other method of allocation which does not take account of the
equitable considerations referred to above. Notwithstanding the provisions of
this paragraph (d), no person guilty of fraudulent misrepre-
<PAGE>
23
sentation (within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. For purposes of this Section 8, each person who controls an
Underwriter within the meaning of either the Act or the Exchange Act and each
director, officer, employee and agent of an Underwriter shall have the same
rights to contribution as such Underwriter, and each person who controls the
Company within the meaning of either the Act or the Exchange Act, each officer
of the Company who shall have signed the Registration Statement and each
director of the Company shall have the same rights to contribution as the
Company, subject in each case to the applicable terms and conditions of this
paragraph (d).
9. Default by an Underwriter. If any one or more Underwriters shall
fail to purchase and pay for any of the Securities agreed to be purchased by
such Underwriter or Underwriters hereunder and such failure to purchase shall
constitute a default in the performance of its or their obligations under this
Agreement, the remaining Underwriters shall be obligated severally to take up
and pay for (in the respective proportions which the amount of Securities set
forth opposite their names in Schedule I hereto bears to the aggregate amount of
Securities set forth opposite the names of all the remaining Under writers) the
Securities which the defaulting Underwriter or Underwriters agreed but failed to
purchase; provided, however, that in the event that the aggregate amount of
Securities which the defaulting Underwriter or Underwriters agreed but failed to
purchase shall exceed 10% of the aggregate amount of Securities set forth in
Schedule I hereto, the remaining Underwriters shall have the right to purchase
all, but shall not be under any obligation to purchase any, of the Securities,
and if such nondefaulting Underwriters do not purchase all the Securities, this
Agreement will terminate without liability to any nondefaulting Underwriter or
the Company. In the event of a default by any Underwriter as set forth in this
Section 9, the Closing Date shall be postponed for such period, not exceeding
five Business Days, as the Representatives shall determine in order that the
required changes in the Registration Statement and the Prospectus or in any
other documents or arrangements may be effected. Nothing contained in this
Agreement shall relieve any defaulting Underwriter of its liability, if any, to
the Company and any nondefaulting Underwriter for damages occasioned by its
default hereunder.
10. Termination. This Agreement shall be subject to termination in
the absolute discretion of the Representatives, by notice given to the Company
prior to delivery of and payment for the Securities, if at any time prior to
such time (i) trading in the Company's Common Stock shall have been suspended by
the Commission or the Nasdaq National Market or trading in securities generally
on the New York Stock Exchange or the Nasdaq National Market shall have been
suspended or limited or minimum prices shall have been established on either of
such Exchange or the Nasdaq National Market, (ii) a banking moratorium shall
have been declared either by Federal or New York State authorities or (iii)
there shall have occurred any outbreak or escalation of hostilities, declaration
by the United States of a national emergency or war, or other calamity or crisis
the effect of which
<PAGE>
24
on financial markets is such as to make it, in the sole judgment of the
Representatives, impractical or inadvisable to proceed with the offering or
delivery of the Securities as contemplated by the Prospectus (exclusive of any
supplement thereto).
11. Representations and Indemnities to Survive. The respective
agreements, representations, warranties, indemnities and other statements of the
Company or its officers, and of the Underwriters set forth in or made pursuant
to this Agreement will remain in full force and effect, regardless of any
investigation made by or on behalf of any Underwriter or the Company or any of
the officers, directors, employees, agents or controlling persons referred to in
Section 8 hereof, and will survive delivery of and payment for the Securities.
The provisions of Sections 7 and 8 hereof shall survive the termination or
cancelation of this Agreement.
12. Notices. All communications hereunder will be in writing and
effective only on receipt, and, if sent to the Representatives, will be mailed,
delivered or telefaxed to the Salomon Smith Barney Inc. General Counsel (fax
no.: (212) 816-7912) and confirmed to the General Counsel, Salomon Smith Barney
Inc., at 388 Greenwich Street, New York, New York, 10013, Attention: General
Counsel; or, if sent to the Company, will be mailed, delivered or telefaxed to
Richard Buchband, Senior Vice President and General Counsel, and confirmed to it
at 1540 Broadway, 27th Floor, New York, NY 10036, attention of the Legal
Department.
13. Successors. This Agreement will inure to the benefit of and be
binding upon the parties hereto and their respective successors and the
officers, directors, employees, agents and controlling persons referred to in
Section 8 hereof, and no other person will have any right or obligation
hereunder.
14. Applicable Law. This Agreement will be governed by and construed
in accordance with the laws of the State of New York applicable to contracts
made and to be performed within the State of New York.
15. Counterparts. This Agreement may be signed in one or more
counterparts, each of which shall constitute an original and all of which
together shall constitute one and the same agreement.
16. Headings. The section headings used herein are for convenience
only and shall not affect the construction hereof.
17. Definitions. The terms which follow, when used in this
Agreement, shall have the meanings indicated.
<PAGE>
25
"Act" shall mean the Securities Act of 1933, as amended, and the
rules and regulations of the Commission promulgated thereunder.
"Business Day" shall mean any day other than a Saturday, a Sunday or
a legal holiday or a day on which banking institutions or trust companies
are authorized or obligated by law to close in New York City.
"Commission" shall mean the Securities and Exchange Commission.
"Effective Date" shall mean each date and time that the Registration
Statement, any post-effective amendment or amendments thereto and any
Rule 462(b) Registration Statement became or become effective.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, and the rules and regulations of the Commission promulgated
thereunder.
"Execution Time" shall mean the date and time that this Agreement is
executed and delivered by the parties hereto.
"Preliminary Prospectus" shall mean any preliminary prospectus
referred to in paragraph 1(a) above and any preliminary prospectus
included in the Registration Statement at the Effective Date that omits
Rule 430A Information.
"Prospectus" shall mean the prospectus relating to the Securities
that is first filed pursuant to Rule 424(b) after the Execution Time or,
if no filing pursuant to Rule 424(b) is required, shall mean the form of
final prospectus relating to the Securities included in the Registration
Statement at the Effective Date.
"Registration Statement" shall mean the registration statement
referred to in paragraph 1(a) above, including exhibits and financial
statements, as amended at the Execution Time (or, if not effective at the
Execution Time, in the form in which it shall become effective) and, in
the event any post-effective amendment thereto or any Rule 462(b)
Registration Statement becomes effective prior to the Closing Date, shall
also mean such registration statement as so amended or such Rule 462(b)
Registration Statement, as the case may be. Such term shall include any
Rule 430A Information deemed to be included therein at the Effective Date
as provided by Rule 430A.
"Rule 424", "Rule 430A" and "Rule 462" refer to such rules under the
Act.
<PAGE>
26
"Rule 430A Information" shall mean information with respect to the
Securities and the offering thereof permitted to be omitted from the
Registration Statement when it becomes effective pursuant to Rule 430A.
"Rule 462(b) Registration Statement" shall mean a registration
statement and any amendments thereto filed pursuant to Rule 462(b)
relating to the offering covered by the registration statement referred to
in Section 1(a) hereof.
<PAGE>
27
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicate hereof, whereupon
this letter and your acceptance shall represent a binding agreement among the
Company and the several Underwriters.
Very truly yours,
JUNO ONLINE SERVICES, INC.
By:_______________________
Name:
Title:
<PAGE>
28
The foregoing Agreement is hereby confirmed and accepted as of the date first
above written.
Salomon Smith Barney Inc.
PaineWebber Incorporated
By: Salomon Smith Barney Inc.
By:
Name:
Title:
For themselves and the other several Underwriters named in Schedule I to the
foregoing Agreement.
<PAGE>
29
SCHEDULE I
Number of Underwritten
Securities to be
Underwriters Purchased
- ------------ ----------------------
Salomon Smith Barney Inc.
PaineWebber Incorporated
Hambrecht & Quist LLC
Jefferies & Company, Inc.
Total 3,000,000
---------
<PAGE>
EXHIBIT A
Juno Online Services, Inc.
Public Offering of Common Stock
January , 2000
Salomon Smith Barney Inc.
PaineWebber Incorporated
Chase H&Q, Inc.
Jefferies & Company, Incorporated
As Representatives of the several Underwriters,
in care of:
Salomon Smith Barney Inc. PaineWebber Incorporated
388 Greenwich Street 1285 Avenue of the Americas
New York, New York 10013 New York, New York 10019
Ladies and Gentlemen:
This letter is being delivered to you in connection with the
proposed Underwriting Agreement (the "Underwriting Agreement"), between Juno
Online Services, Inc., a Delaware corporation (the "Company"), and each of you
as representatives of a group of Underwriters named therein, relating to an
underwritten public offering of Common Stock, $0.01 par value (the "Common
Stock"), of the Company.
In order to induce you and the other Underwriters to enter into the
Underwriting Agreement, the undersigned will not, without the prior written
consent of Salomon Smith Barney Inc., offer, sell, contract to sell, pledge or
otherwise dispose of (or enter into any transaction which is designed to, or
might reasonably be expected to, result in the disposition (whether by actual
disposition or effective economic disposition due to cash settlement or
otherwise) by the Company or any affiliate of the Company or any person in
privity with the Company or any affiliate of the Company) directly or
indirectly, including the filing of (or participation in the filing of) a
registration statement with the Securities and Exchange Commission in respect
of, or establish or increase a put equivalent position or liquidate or decrease
a call equivalent position within the meaning of Section 16 of the Securities
Exchange Act of 1934, as amended, and the rules and regulations of the
Securities and Exchange Commission promulgated thereunder with respect to, any
shares of capital stock of the Company or any securities convertible into, or
exercisable or exchangeable for such capital stock, or publicly announce an
intention to effect any such transaction, for a period of 90 days after the date
of the Underwriting Agreement.
<PAGE>
Notwithstanding the foregoing, the undersigned may transfer the
Common Stock (i) as a bona fide gift or gifts, provided that the donee or donees
thereof agree to be bound by the restrictions set forth herein, (ii) as a
distribution to partners, members or stockholders of the undersigned, provided
that such distributees agree in writing to be bound by the restrictions set
forth herein, or (iii) to any trust for the direct or indirect benefit of the
undersigned or the immediate familly of the undersigned, provided that the
trustee of the trust agrees to be bound by the restrictions set forth herein.
For purposes herein, "immediate family" shall mean any relationship by blood,
marriage or adoption, not more remote than first cousin.
Notwithstanding the foregoing, this letter shall not include any
shares of capital stock acquired by the undersigned in the public markets after
the date of the Underwriting Agreement.
If for any reason the Underwriting Agreement shall be terminated
prior to the Closing Date (as defined in the Underwriting Agreement), the
agreement set forth above shall likewise be terminated.
Yours very truly,
