<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(MARK ONE)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: SEPTEMBER 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____ TO _____
COMMISSION FILE NUMBER:
000-26009
JUNO ONLINE SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3914547
------------------------------- ------------------------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
1540 BROADWAY, NEW YORK, NY 10036
-----------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 597-9000
(FORMER NAME, FORMER ADDRESS, AND FORMER YEAR, IF CHANGED SINCE LAST REPORT:)
NOT APPLICABLE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
As of October 31, 2000, there were 40,823,174 shares of the Registrant's common
stock outstanding.
<PAGE>
INDEX TO FORM 10-Q
FOR
JUNO ONLINE SERVICES, INC.
PAGE
PART I. FINANCIAL INFORMATION............................................... 3
Item 1. Condensed Consolidated Financial Statements (unaudited)............. 3
Condensed Consolidated Balance Sheets - September 30, 2000 and
December 31, 1999............................................... 3
Condensed Consolidated Statements of Operations - Three and
nine months ended September 30, 2000 and 1999................... 4
Condensed Consolidated Statement of Stockholders'
Equity - Nine months ended September 30, 2000................... 6
Condensed Consolidated Statements of Cash Flows - Nine
months ended September 30, 2000 and 1999........................ 7
Notes to Condensed Consolidated Financial Statements................ 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................... 12
PART II. OTHER INFORMATION................................................... 46
Item 1. Legal Proceedings................................................... 46
Item 6. Exhibits and Report on Form 8-K..................................... 46
Item 7. Signatures.......................................................... 47
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
JUNO ONLINE SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................... $ 68,648 $ 91,497
Accounts receivable, net of allowance for
doubtful accounts of $1,557 and $544 in 2000
and 1999, respectively .................................... 13,573 6,370
Prepaid expenses and other current assets ................... 7,506 15,437
--------- ---------
Total current assets ...................................... 89,727 113,304
Fixed assets, net ............................................. 9,386 5,684
Other assets .................................................. 902 100
--------- ---------
Total assets .............................................. $ 100,015 $ 119,088
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ....................... $ 36,031 $ 29,800
Current portion of capital lease obligations ................ 1,184 1,423
Deferred revenue ............................................ 17,077 14,510
--------- ---------
Total current liabilities ................................... 54,292 45,733
Capital lease obligations ................................... 238 1,455
Deferred rent ............................................... 177 252
Deferred revenue ............................................ 128 --
Liabilities expected to be settled with common stock ........ 10,100 --
Commitments and contingencies
Stockholders' equity:
Preferred stock--$0.01 par value; 5,000,000 shares
authorized, none issued and outstanding ................... -- --
Common stock--$0.01 par value; 133,333,334 shares authorized,
38,936,504, and 34,833,568 shares issued and outstanding
in 2000, and 1999, respectively ........................... 389 348
Additional paid-in capital .................................. 206,400 123,530
Unearned compensation ....................................... (411) (745)
Cumulative translation adjustment ........................... (1) (1)
Accumulated deficit ......................................... (171,297) (51,484)
--------- ---------
Total stockholders' equity ................................ 35,080 71,648
--------- ---------
Total liabilities and stockholders' equity ................ $ 100,015 $ 119,088
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
<PAGE>
JUNO ONLINE SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------- -------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Billable services .............. $ 18,962 $ 8,654 $ 54,127 $ 21,529
Advertising and transaction fees 11,105 3,367 28,199 8,335
Direct product sales ........... 78 1,083 1,419 4,082
--------- --------- --------- ---------
Total revenues ............... 30,145 13,104 83,745 33,946
--------- --------- --------- ---------
Cost of revenues:
Billable services .............. 12,130 5,960 36,727 16,119
Advertising and transaction fees 2,174 1,120 6,186 3,362
Direct product sales ........... 74 988 1,344 3,577
--------- --------- --------- ---------
Total cost of revenues ....... 14,378 8,068 44,257 23,058
--------- --------- --------- ---------
Operating expenses:
Operations, free service ....... 11,773 1,464 27,423 5,081
Subscriber acquisition ......... 24,874 15,028 107,744 31,648
Sales and marketing ............ 5,010 3,180 14,235 8,208
Product development ............ 2,470 1,592 8,033 5,423
General and administrative ..... 2,139 1,284 6,401 2,970
--------- --------- --------- ---------
Total operating expenses ..... 46,266 22,548 163,836 53,330
--------- --------- --------- ---------
Loss from operations ......... (30,499) (17,512) (124,348) (42,442)
Interest income, net ............. 1,163 1,430 4,535 2,336
--------- --------- --------- ---------
Net loss ....................... $ (29,336) $ (16,082) $(119,813) $ (40,106)
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
<PAGE>
JUNO ONLINE SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
(IN THOUSANDS, EXCEPT PER LIMITED PARTNERSHIP UNIT AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1999
---------------------------------------
NINE MONTHS TWO MONTHS SEVEN MONTHS
SEPTEMBER 30, ENDED ENDED ENDED
----------------------- SEPTEMBER 30, FEBRUARY 28, SEPTEMBER 30,
2000 1999 2000 1999 1999 TOTAL
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net loss ..................................... $ (29,336) $ (16,082) $(119,813) $ (4,350) $ (35,756) $ (40,106)
========= ========= ========= ========= ========= =========
Basic and diluted net loss per share ......... $ (0.75) $ (0.46) $ (3.13) $ (1.73)
========= ========= ========= =========
Basic and diluted net loss per Class A limited
partnership unit ........................... $ (0.25)
=========
Weighted average number of:
Shares of common stock ..................... 38,866 34,634 38,225 20,653
========= ========= ========= =========
Class A limited partnership units .......... 17,684
=========
Pro forma basic and diluted net loss per share $ (1.39)
=========
Weighted average shares outstanding used in
pro forma basic and diluted per share
calculation ................................ 28,869
=========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
<PAGE>
JUNO ONLINE SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL CUMULATIVE
---------------------- PAID-IN UNEARNED TRANSLATION ACCUMULATED
SHARES AMOUNT CAPITAL COMPENSATION ADJUSTMENT DEFICIT TOTAL
--------- --------- --------- ------------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1999 ........... 34,834 $ 348 $ 123,530 $ (745) $ (1) $ (51,484) $ 71,648
Issuance of common stock, net of
offering costs ................... 3,600 36 81,044 -- -- -- 81,080
Issuance of common stock upon
exercise of stock options ........ 380 4 830 -- -- -- 834
Issuance of common stock in
connection with employee
stock purchase plan .............. 123 1 1,165 -- -- -- 1,166
Forfeitures of unearned compensation -- -- (169) 169 -- -- --
Amortization of unearned
compensation ..................... -- -- -- 165 -- -- 165
Net loss ........................... -- -- -- -- -- (119,813) (119,813)
--------- --------- --------- --------- --------- --------- ---------
Balance, September 30, 2000 .......... 38,937 $ 389 $ 206,400 $ (411) $ (1) $(171,297) $ 35,080
========= ========= ========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements
6
<PAGE>
JUNO ONLINE SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2000 1999
--------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss ................................................. $(119,813) $ (40,106)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization .......................... 2,743 1,696
Stock-based subscriber acquisition ..................... 10,100 --
Amortization of deferred rent .......................... (61) (49)
Amortization of unearned compensation .................. 165 352
Changes in operating assets and liabilities: -
Accounts receivable .................................. (7,203) (3,120)
Prepaid expenses and other current assets ............ 7,931 (12,420)
Accounts payable and accrued expenses ................ 6,217 17,950
Deferred revenue ..................................... 2,695 6,927
--------- ---------
Net cash used in operating activities .............. (97,226) (28,770)
--------- ---------
Cash flows from investing activities:
Purchases of fixed assets ................................ (6,445) (657)
Other assets ............................................. (802) 68
--------- ---------
Net cash used in investing activities .............. (7,247) (589)
--------- ---------
Cash flows from financing activities:
Payments on capital lease obligations .................... (1,456) (546)
Payments on senior note .................................. -- (9,129)
Net proceeds from issuance of redeemable
convertible preferred stock ............................ -- 61,859
Net proceeds from issuance of common stock ............... 81,080 77,285
Proceeds from issuance of common stock
in connection with employee stock purchase plan ........ 1,166 --
Proceeds from issuance of common stock
upon exercise of stock options ......................... 834 155
--------- ---------
Net cash provided by financing activities .......... 81,624 129,624
--------- ---------
Net (decrease) increase in cash and cash equivalents (22,849) 100,265
Cash and cash equivalents, beginning of period ............. 91,497 8,152
--------- ---------
Cash and cash equivalents, end of period ................... $ 68,648 $ 108,417
========= =========
Supplemental disclosure of cash flow information:
Cash paid for interest ................................... $ 126 $ 309
Supplemental disclosure of noncash
investing and financing activities:
Capital lease obligations incurred for
network equipment ...................................... $ -- $ 871
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
7
<PAGE>
JUNO ONLINE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT LIMITED PARTNERSHIP UNIT AND SHARE DATA)
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
include the accounts of Juno Online Services, Inc.; its wholly owned subsidiary,
Juno Internet Services, Inc.; and its majority-owned, India-based subsidiary,
Juno Online Services Development Private Limited (collectively, the "Company" or
"Juno"). These financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all the information and footnotes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all necessary adjustments, consisting only of normal
recurring adjustments, have been included in the accompanying unaudited
condensed consolidated financial statements. All significant intercompany
transactions and balances have been eliminated in consolidation. Operating
results for the three and nine months ended September 30, 2000 are not
necessarily indicative of the results that may be expected for the full year
ending December 31, 2000. For further information, refer to the consolidated
financial statements and notes thereto, which are included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1999, and other
filings with the Securities and Exchange Commission.
The Company is a leading provider of Internet access to millions of
computer users throughout the United States. The Company offers multiple levels
of service, including free basic Internet access, billable premium dial-up
service, and (in certain markets) high-speed broadband access. Revenues are
derived primarily from the fees charged for the use of the Company's premium
services, from the sale of advertising, and from various forms of electronic
commerce.
The Company announced the expansion of its free basic service to include
full Internet access on December 20, 1999. Prior to this announcement, the
Company's free basic service provided only basic dial-up e-mail functionality.
The Company has experienced operating losses since its inception. Such
losses have been due, in part, to the Company's historical 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
resources in the operation of its business. 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.
Certain reclassifications have been made to the prior year's financial
statements to conform to the current period presentation.
8
<PAGE>
JUNO ONLINE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT LIMITED PARTNERSHIP UNIT AND SHARE DATA)
(UNAUDITED)
2. LIABILITIES EXPECTED TO BE SETTLED WITH COMMON STOCK
The Company has entered into subscriber referral agreements with two
former providers of free Internet access, WorldSpy and Freewwweb, under which
the Company is obligated to pay certain amounts based on the number of
"Qualified Referred Subscribers" generated by referral activities specified
in the agreements. A new Juno subscriber referred to Juno by WorldSpy or
Freewwweb is a Qualified Referred Subscriber if he or she meets certain
qualification criteria defined in the relevant subscriber referral agreement.
Under the terms of these agreements, Juno has the right to settle a portion
of the liabilities incurred in connection with acquiring the Qualified
Referred Subscribers through the issuance of shares of its common stock. At
September 30, 2000, the Company established liabilities of $10.1 million as
an estimate of the amounts to be settled through the issuance of its common
stock. On October 31, 2000, the Company issued 1,836,282 shares of its common
stock in satisfaction of approximately 48% of this estimated liability. The
closing price of the Company's common stock on October 31, 2000 was $2.63 per
share.
3. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
The Company has entered into a number of telecommunications agreements
that commit the Company to minimum usage levels for certain telecommunications
services. Total commitments pursuant to these telecommunications agreements are
as follows: $5,354 for the three months ended December 31, 2000, and $7,585 for
the year ended December 31, 2001. Telecommunications services expense for the
nine-month periods ended September 30, 2000 and 1999 were approximately $48,277
and $10,572, respectively.
The Company has also entered into various non-cancelable operating leases.
D.E. Shaw & Co., L.P. ("DESCO, L.P.") has also entered into a leasing
arrangement for office space used by the Company. A portion of the Company's
operations is 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
$8,198 related to this arrangement with DESCO, L.P. The remaining commitments
under these operating leases are $1,307 for the three months ended December 31,
2000 and $4,586, $4,073, $1,318, $859 and $215 for the years ending December 31,
2001, 2002, 2003, 2004 and 2005, respectively. The Company's rental expense
under operating leases in the nine months ended September 30, 2000 and 1999 was
approximately $4,164 and $1,633, respectively.
CONTINGENCIES
Various claims and actions have been asserted or threatened against the
Company in the ordinary course of business. In the opinion of management, the
outcome of these asserted or threatened claims or actions would not have a
materially adverse effect on the Company's consolidated financial position,
results of operations, and cash flows, taken as a whole, except possibly as
discussed below.
The Federal Trade Commission has been investigating the advertising,
billing and cancellation practices of various Internet-related companies,
including the Company. At the FTC's request, the Company has provided
marketing-related and customer service-related information concerning our
services. On the basis of these submissions, the FTC staff has claimed, among
other things, that the Company's disclosure practices about the possibility
of users incurring telephone charges were insufficient, and that the
Company's cancellation policies for subscribers to its billable services were
unduly restrictive. On the basis of the Company's discussions with the FTC
staff, the Company has begun implementing modifications to the disclosure we
make about telecommunications charges that users might incur and to our
billable services cancellation practices. Depending on the final outcome of
the FTC inquiry, the Company could be required, under a consent order or
otherwise, to make compensatory payments and implement additional
modifications to its business practices. The Company believes that there is
at least a reasonable possibility of an unfavorable outcome, but is unable to
estimate the possible loss or range of loss at this time.
9
<PAGE>
JUNO ONLINE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT LIMITED PARTNERSHIP UNIT AND SHARE DATA)
(UNAUDITED)
4. EARNINGS PER SHARE
Basic and diluted net loss per share for the nine months ended September
30, 1999 is calculated separately for the periods before and after the March
1999 statutory merger.
The pro forma information regarding net loss per share and weighted
average shares outstanding set forth below gives effect to the treatment of
Series A (Class A limited partnership units prior to March 1, 1999) and Series B
Redeemable Convertible Preferred Stock as shares of common stock for the period
following the March 1999 statutory merger.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
1999
------------
<S> <C>
Numerator:
Net loss ................................................. $ (40,106)
============
Denominator:
Weighted average number of:
Shares of common stock ................................. 16,293,985
Redeemable Convertible Preferred Stock
treated as shares of common stock:
Series B ............................................. 3,182,454
Series A (Class A limited partnership
units prior to March 1, 1999) ...................... 9,392,619
------------
Denominator for pro forma basic and
diluted net loss per share ........................... 28,869,058
============
Pro forma basic and diluted net loss per share ............. $ (1.39)
============
</TABLE>
5. SUBSEQUENT EVENT
During October 2000, the Company secured an equity financing commitment
from a private investment fund in the form of an "equity line" facility. Under
certain circumstances, the Company would have the right (but not the obligation)
under this facility to obtain as much as $125 million through the issuance of
common stock to the fund in a series of drawdowns over a two-year period.
However, the amount actually available to the Company, if any, will be limited
by, among other things, various volume- and price-related limitations, and is
currently expected to be much lower than $125 million. Any stock issued to the
fund under this facility will be purchased at a price equal to 94 percent of the
volume-weighted average price of the Company's common shares on each purchase
day. However, the fund will generally not be obligated to purchase shares from
the Company on any day when the purchase price would be less than $2.50 per
share. The Company will control the timing and frequency of any sales, subject
to the facility's volume- and price-related limitations, and will have no
obligation to draw down any minimum amount or number of times. However, the
facility may be terminated if the Company does not sell any shares to the
10
<PAGE>
JUNO ONLINE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT LIMITED PARTNERSHIP UNIT AND SHARE DATA)
(UNAUDITED)
fund for a period of four consecutive months. The Company has agreed that,
prior to any sale of shares to the fund under this facility, the Company will
register such securities for resale under the Securities Act of 1933. Juno
expects to file a registration statement with the Securities and Exchange
Commission prior to December 1, 2000. The Company will not be able to draw on
the facility until such time, if any, as this registration statement is
declared effective by the Securities and Exchange Commission.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF JUNO SHOULD BE READ IN CONJUNCTION WITH THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS AND THE NOTES TO THOSE STATEMENTS INCLUDED ELSEWHERE IN
THIS QUARTERLY REPORT AS WELL AS OUR AUDITED CONSOLIDATED FINANCIAL STATEMENTS
AND NOTES THERETO, AND THE INFORMATION UNDER THE CAPTION "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS"
CONTAINED IN OUR ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31,
1999, AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 15, 2000.
THIS DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. JUNO'S ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE EXPRESSED
OR IMPLIED BY THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS,
INCLUDING, BUT NOT LIMITED TO, THOSE SET FORTH UNDER "RISK FACTORS THAT MAY
AFFECT FUTURE RESULTS" AND ELSEWHERE IN THIS QUARTERLY REPORT, AND IN OTHER
REPORTS AND DOCUMENTS FILED FROM TIME TO TIME WITH THE SECURITIES AND EXCHANGE
COMMISSION.
OVERVIEW
Juno Online Services, Inc. is a leading provider of Internet access to
millions of computer users throughout the United States. We offer several levels
of service, including free basic Internet access, billable premium dial-up
service, and (in certain markets) high-speed broadband access. 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 forms of electronic commerce.
We launched our basic service in April 1996. Initially, this service
provided only basic dial-up e-mail services. In July 1998, we introduced our
first premium services, which offered features ranging from enhanced e-mail
services to full access to the World Wide Web, and for which we charged
subscription fees. In December 1999, we announced a major expansion of our
services:
o Our BASIC SERVICE now provides full Internet access for free in
addition to e-mail.
o JUNO WEB provides competitively priced premium Internet access,
supplementing the features of the basic service with free live
technical support and customer service, priority access to Juno's
network through several hundred additional local access numbers, and
the elimination of a persistent advertising and navigation banner
that is displayed to our basic service users at all times while they
are connected to the Web.
o JUNO EXPRESS is a broadband service, available through multiple
technologies, that provides all the features of Juno Web at speeds
up to 21 times faster than an ordinary dial-up Internet connection.
Among other benefits, this enables users to rapidly download
high-bandwidth content such as video, music files, and software.
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.
In the month of September 2000, our base of active subscribers increased
to 3.70 million, up from 3.38 million in the month of June 2000. Our billable
subscriber base also continued to grow during the third quarter of 2000, to
750,000 at September 30, 2000, up from 730,000 at June 30, 2000. During the same
period, our total registered subscriber base grew by 16% to 12.77 million. As of
September 2000, 88% of our active subscribers had full Web access, up from 85%
in June 2000. Given our current focus on the continued reduction of expenses,
and in particular our expectation that we will reduce subscriber acquisition
expenditures significantly, our billable subscriber base and our overall active
subscriber base are unlikely to grow during the fourth quarter of 2000. See
Selected Subscriber Data after the Results of Operations section in this Item
for a presentation of subscriber data over the last 5 fiscal quarters. Our base
of active subscribers encompasses all registered subscriber accounts that
connected at least once during the month, together with all subscribers to a
billable service, in each case regardless of the type of activity or activities
engaged in by such subscribers.
12
<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 those subscribers to Juno Web who are
subscribed at our lowest price points call a 900 number for
live assistance from a support technician, as well as fees for
other billable services; and
(c) fees charged, at various times, for shipping and handling
associated with mailing copies of the Juno software upon
request to prospective Juno subscribers, and for short-term
consulting engagements.
(2) Advertising and transaction fees, consisting of revenues earned from
advertisers and strategic marketing partners for displaying
advertisements to, and facilitating electronic commerce with, our
subscribers. These advertisements are displayed on the persistent
advertising and navigation banner that is displayed to our free
subscribers at all times while they use the Web, within the main
Juno software while a Juno subscriber reads or writes e-mail and on
Juno's Web portal site.
(3) Direct product sales, consisting of revenues generated from the sale
of products directly by us to our subscribers and the associated
shipping and handling fees. The Company began phasing out its direct
product sales activities during 1999, and completed this process in
August 2000.
We currently offer our billable premium services under a number of pricing
plans. The list price for Juno Web is a flat rate of $19.95 per month, but since
the launch of the service, we have offered a number of promotions, such as a
free month of service or a discounted rate for an initial or prepaid period, as
well as discounted flat-rate plans. The most common pricing plan for Juno Web is
a flat fee of $9.95 per month following a free initial month. Juno ExpressSM is
currently offered through a number of different broadband technologies,
including digital subscriber line ("DSL") technology and mobile wireless
technology, at price points starting at $49.95 per month. To date, DSL
subscribers have received their installation and equipment for free after a
manufacturer rebate of $198, an offer we may or may not continue to extend in
the future. Roughly 2,000 subscribers had signed up for broadband service
through Juno Express as of September 30, 2000, although not all such subscribers
had completed the installation and set-up process by such date. Subscription
revenues for our billable premium services accounted for approximately 97% of
billable services revenues during both the three months and the nine months
ended September 30, 2000.
We believe that the expansion of our free basic service, which included
the introduction of a persistent advertising and navigation banner that is
displayed to our free subscribers at all times while they use the Web, has
generated and will continue to generate a substantial amount of advertising
inventory available for potential sale to advertising customers. The provision
of full Internet access for free has also significantly increased the costs
associated with providing our basic service due to significantly increased
telecommunications connection time per subscriber per month. These costs are
reflected in the Operations, free service line of our statement of operations.
Our long-term strategy contemplates our generating sufficient additional
revenues from this persistent advertising banner and from other advertising
inventory we control to cover the increased costs associated with our service
expansion. However, we have not yet been able to generate sufficient additional
revenues to cover these increased costs. 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.
Additionally, we believe that overall demand for Internet-related advertising
inventory has declined in recent quarters, leading to reduced near-term
expectations with regard to advertising-related revenues for a number of
companies in the Internet sector, including Juno.
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Advertising and transaction fees and direct product sales increased only
slightly on a combined basis in the third quarter of 2000, to $11.2 million, as
compared with $11.1 million in the second quarter. On a per subscriber basis,
revenues associated with our free basic service declined approximately 8% in the
third quarter of 2000 as compared with the second quarter, principally due to
softness in the overall market for Internet advertising. The impact on us of
this general softness in demand for Internet advertising was exacerbated by an
increase in the percentage of our advertisers that are Internet-related
companies; such companies represented a significant majority of our advertisers
in the third quarter of 2000. Its impact is also reflected in our backlog of
advertising contracts, which remained essentially unchanged between the end of
the second quarter and the end of the third quarter; in the reduction or
cancellation of some advertising contracts; and in an increased risk of
uncollectible receivables. In addition, sales to date of advertising inventory
associated with the persistent advertising banner shown to users of our free
service have lagged relative to sales of other categories of advertising
inventory. In the quarter ended September 30, 2000, this persistent advertising
banner represented approximately one-third of our advertising inventory
available for sale but generated less than 15% of our advertising and electronic
commerce revenue for the quarter. We are currently in arbitration with 24/7
Media, the third party sales force we granted the exclusive right to sell
substantially all of our persistent advertising banner inventory, to resolve a
dispute regarding guaranteed minimum payments owed to Juno.
We expect that revenues associated with the free basic service will
continue to be exceeded by the sum of the expenses reported on the Operations,
free service line and the portion of the Cost of revenues line associated with
the free service through at least the end of this year. Our business may suffer
if the market for Internet-based advertising fails to continue to develop, or
develops more slowly than expected. Our strategy contemplates that subscription
fees for billable premium services are likely to remain the largest source of
revenues for Juno in the immediate future. Given our current focus on the
continued reduction of expenses and on the continued improvement of bottom-line
performance, our firmwide revenues are unlikely to increase during the fourth
quarter of 2000.
As of September 30, 2000, we held a total of $68.6 million in cash and
cash equivalents. We believe that changes in the market environment over the
past nine months have increased the value of corporate cash reserves as well as
the relative importance of bringing expenses more in line with revenues over
time and reducing our reliance on external sources of capital. We continue to
place a high value on flexibility, and may well respond on an opportunistic
basis to further changes within the industry, but for the time being we expect
to continue our recent shift of focus from the aggressive, cash intensive growth
of our subscriber base to the reduction of cash outflows and subscriber
acquisition investments overall and to the exploration and development of
additional potential revenue sources.
Instead of focusing on overall subscriber acquisition, we expect to
concentrate over the coming quarters on segmenting our subscriber base and
identifying ways to extract value from the most productive and least costly
segments while taking steps to control the costs associated with the least
productive and most costly. We believe that approximately 5% of the active
subscribers to our free basic service are responsible for more than half the
total hours that service is used to access the Web, and therefore a
disproportionate fraction of the related telecommunications expense. One of our
goals is to improve the balance between revenues and expenses by encouraging
heavy users of our free service to upgrade to one of our billable services,
participate in other revenue-generating activities, or modify their usage
patterns. While these measures are likely to result in some amount of subscriber
attrition, we believe this increased emphasis on the profitability of various
segments of our subscriber base to be appropriate, particularly in light of
recent changes in the Internet market environment.
To the extent that we might wish to acquire either free or billable
service subscribers, we face intense competition. 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 placing us at a competitive disadvantage if we do not maintain or increase
our spending in areas such as marketing, telecommunications, and product
development.
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We are subject to industry trends that affect Internet access providers
generally, including seasonality and subscriber cancellations. We believe
Internet access providers may incur higher expenses during the last and first
calendar quarters, corresponding to heavier usage during the fall and winter,
and may experience relatively lighter usage and relatively fewer account
registrations during the summer. We believe certain subscriber acquisition
methods also tend to be most effective during the first and last calendar
quarters of each year, and if we were to pursue such subscriber acquisition
activities at some point in the future, we may take these types of seasonal
effects into consideration in scheduling such marketing campaigns. Although we
have relied heavily on direct mail in the past, we do not currently plan to use
direct mail for subscriber acquisition in the near term. 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. Advertising revenues also depend in part on the size of our overall
active subscriber base. Any reduction in our overall active subscriber base due
to subscriber attrition would reduce the amount of ad inventory we have
available to sell and may also have the effect of reducing our advertising
revenue.
Our principal expenses consist of marketing, telecommunications, customer
service, and personnel and related costs. We have elected to obtain a number of
services principally from third-party providers. Services obtained from such
providers include telecommunications services, customer service and technical
support, services related to the sale of certain advertising inventory and the
delivery of the associated advertisements, and merchandising fulfillment for our
direct product sales activities. Our business and financial results would be
harmed were we no longer able to obtain these services at competitive rates.
We have incurred net losses of $267.8 million from our inception on June
30, 1995 through September 30, 2000. We expect net losses to continue for the
foreseeable future. We have relied primarily on sales of equity securities,
totaling $299.8 million, to fund our operations. Included in this amount are
$81.1 million of net proceeds from our February 2000 follow-on offering of
common stock, $77.3 million of net proceeds from our May 1999 initial public
offering of common stock and $61.9 million of net proceeds from our March 1999
private placement of Series B redeemable convertible preferred stock, which
automatically converted into shares of common stock upon the closing of the
initial public offering. During October 2000, the Company secured an equity
financing commitment from a private investment fund in the form of an "equity
line" facility. See "Liquidity and Capital Resources" of this Item for
additional information about this facility.
Prior to March 1, 1999, we operated our business primarily through a
limited partnership, Juno Online Services, L.P. On that date, we completed a
statutory merger of Juno Online Services, L.P. into Juno Online Services, Inc.,
which had been a wholly owned subsidiary of Juno Online Services, L.P. Juno
Online Services, Inc. is the surviving entity after completion of the statutory
merger. The consolidated financial statements for 1999 included herein consist
of the accounts of both Juno Online Services, L.P. and Juno Online Services,
Inc. All significant intercompany accounts and transactions have been eliminated
in consolidation. Since we operated as a limited partnership prior to March 1,
1999, taxable losses incurred through that date have been allocated to the
partners for reporting on their respective income tax returns. Accordingly, as
of that date, we had no available net operating loss carryforwards available for
federal and state income tax purposes to offset future taxable income, if any.
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RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1999
REVENUES
Total revenues increased $17.0 million, to $30.1 million for the three
months ended September 30, 2000 from $13.1 million for the three months ended
September 30, 1999, an increase of 130%. This increase was due to increases in
billable services revenues and in advertising and transaction fees, partially
offset by a decrease in direct product sales. We currently expect that total
revenues are unlikely to increase during the fourth quarter of 2000.
BILLABLE SERVICES. Billable services revenues increased $10.3 million, to
$19.0 million for the three months ended September 30, 2000 from $8.7 million
for the three months ended September 30, 1999, an increase of 119%. This
increase was due primarily to a greater number of billable service subscribers
in the three months ended September 30, 2000, as compared with the much smaller
number in the year-ago quarter, partially offset by a decrease in the average
monthly revenue per subscriber. At September 30, 2000, there were approximately
750,000 billable service subscribers as compared with approximately 400,000
billable service subscribers at September 30, 1999. Given our current focus on
the continued reduction of expenses, we believe our billable subscriber base is
unlikely to grow during the fourth quarter of 2000.
ADVERTISING AND TRANSACTION FEES. Advertising and transaction fees
increased $7.7 million, to $11.1 million for the three months ended September
30, 2000 from $3.4 million for the three months ended September 30, 1999, an
increase of 230%. This increase was due primarily to the increase in our number
of Web-enabled subscribers associated with the expansion of our free basic
service to include full Web access. We believe this expansion made our
subscriber base and ad inventory more attractive to some categories of
advertisers, particularly those interested in attracting traffic to their own
Web sites, and may account in part for our year-over-year increase in sales both
overall and especially to Internet-related companies. Barter transactions
accounted for approximately 3.6% and 2.7% of total revenues and approximately
9.7% and 10.2% of advertising and transaction fees for the three months ended
September 30, 2000 and 1999, respectively.
DIRECT PRODUCT SALES. Direct product sales decreased $1.0 million, to $0.1
million for the three months ended September 30, 2000 from $1.1 million for the
three months ended September 30, 1999, a decrease of 92.8%. This decline
reflects our strategic decision to narrow the range of our direct product sales
activities and the types of products offered to our subscribers and to gradually
replace direct product sales with other forms of electronic commerce.
Specifically, 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. Pursuant to
this decision, in May 2000, we provided 90 days notice to our third-party
provider of merchandising fulfillment that we were canceling our contract.
Substantially all remaining direct product sales activities were eliminated in
August 2000.
COST OF REVENUES
Total cost of revenues increased approximately $6.3 million, to $14.4
million for the three months ended September 30, 2000 from $8.1 million for the
three months ended September 30, 1999, an increase of 78.2%. This increase was
due primarily to increases in costs associated with billable services and in
advertising and transaction fees, partially offset by a decrease in costs
associated with direct product sales.
BILLABLE SERVICES. Cost of revenues related to billable services
consists primarily of the costs to provide billable premium services,
including telecommunications, customer service, operator-assisted technical
support, credit card fees, and personnel and related overhead costs. In
addition, during the three and nine months ended September 30, 1999, cost of
revenues related to billable services included the costs of mailing copies of
the Juno software upon request to prospective Juno subscribers, who had to
pay for delivery of the disks at that time. We are likely to resume this
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practice for prospective subscribers to our free basic service in the future.
Further, during the three and nine months ended September 30, 1999, cost of
revenues related to billable services included personnel and related overhead
costs associated with our performance of a short-term consulting engagement.
Cost of revenues related to billable services increased approximately $6.2
million, to $12.1 million for the three months ended September 30, 2000 from
$6.0 million for the three months ended September 30, 1999, an increase of 104%.
This increase was due primarily to the costs of providing our billable premium
services to a substantially larger number of subscribers as compared with the
number of subscribers in the year-ago quarter. Costs related to the provision of
these billable subscription services, principally telecommunications, customer
service, and technical support expenses, accounted for 92.4% of the total costs
of revenues related to billable services during the three months ended September
30, 2000 and accounted for the majority of the increase relative to the year-ago
quarter. These expenses accounted for 92.7% of the total costs of revenues
during the three months ended September 30, 1999. Cost of billable services
revenues as a percentage of billable services revenues improved to 64.0% for the
three months ended September 30, 2000 from 68.9% for the three months ended
September 30, 1999. This improvement is primarily attributable to decreased
customer service costs per subscriber and declining average telecommunications
rates, partially offset by increased average hours of usage per subscriber.
ADVERTISING AND TRANSACTION FEES. Cost of revenues for advertising and
transaction fees consists primarily of the transmission costs associated with
downloading advertisements to the hard drives of subscribers' computers for
later display, the personnel and related costs associated with the creation and
distribution of these advertisements, and the costs associated with reporting
the results of ad campaigns to advertisers.
Cost of revenues for advertising and transaction fees increased
approximately $1.1 million, to $2.2 million for the three months ended September
30, 2000 from $1.1 million for the three months ended September 30, 1999.This
increase was due primarily to the increase in advertising and transaction fee
revenue associated with the increase in Web-enabled subscribers due to the
expansion of our free basic service to include full Web access. Cost of revenues
related to advertising and transaction fees as a percentage of advertising and
transaction fees improved to 19.6% for the three months ended September 30, 2000
from 33.3% for the three months ended September 30, 1999. This improvement was
due primarily to decreased telecommunications rates, faster average connection
speeds, larger average deal sizes over which to spread relatively fixed
production costs, and improvements in our production and distribution methods.
We currently expect cost of revenues for advertising and transaction fees to
remain in the 20% to 30% range over the long term, but may see such costs
increase as a percentage of such revenues to the extent we offer discounted
rates in order to sell a greater percentage of our available ad inventory or see
advertising rates fall for any other reason.
DIRECT PRODUCT SALES. Cost of revenues for direct product sales consists
primarily of the costs of merchandise sold directly by us to our subscribers and
the associated shipping and handling costs.
The cost of revenues for direct product sales decreased $0.9 million, to
$0.1 million for the three months ended September 30, 2000 from $1.0 million for
the three months ended September 30, 1999, a decrease of 92.5%. This decrease
corresponds to the decrease in merchandise sold. The cost of revenues for direct
product sales as a percentage of direct product sales revenues increased to
94.9% for the three months ended September 30, 2000 from 91.2% for the three
months ended September 30, 1999. This increase was due primarily to a greater
decline in the average retail price of merchandise sold relative to the declines
in the costs of such merchandise as well as additional promotional pricing in
response to increasing competition in the computer hardware retail market, which
category represented the majority of our merchandise sold. We stopped conducting
direct product sales activities in August 2000.
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OPERATING EXPENSES
OPERATIONS, FREE SERVICE. Operations, free service consists of the costs
associated with providing our free basic service. Costs consist principally of
telecommunications costs, expenses associated with providing customer service,
depreciation of network equipment, and personnel and related overhead costs.
Expenses associated with Operations, free service increased $10.3 million,
to $11.8 million for the three months ended September 30, 2000 from $1.5 million
for the three months ended September 30, 1999, an increase of 704%. This
increase was due primarily to additional telecommunications costs incurred as a
result of the expansion of our free service to include full Internet access. On
average, our free service subscribers used approximately 6 hours of connection
time per month in the three months ended September 30, 2000, as compared to
approximately 4 hours per month in the three months ended June 30, 2000. We
currently expect that, in the absence of measures directed at addressing the
disproportionate resource consumption of the heaviest users of our free service,
average hours of connection time could rise significantly further over the
coming quarters. However, such growth in average hours of connection time may be
slowed or prevented to the extent that we successfully implement plans to
prioritize our billable service subscribers and light users of our free service
ahead of heavier users of our free service in terms of the resources we permit
such users to consume. Such measures might, for example, make it more difficult
for a heavy user to establish or maintain a Web connection, particularly during
peak usage hours for our free service. We may also show additional advertising
to our heavier users, including solicitations encouraging them to sign up for
one of our billable services or for another revenue-generating program. To the
extent that we implement these or similar changes, we are likely to experience
at least some, and possibly a significant amount of, subscriber attrition, which
may itself reduce overall Operations, free service expenses. Our Operations,
free service expenses may also be positively impacted on a per-subscriber basis
due to continued reductions in telecommunication rates. However, there can be no
assurance that telecommunication rates will continue to decline, or that we will
be successful in addressing disproportionate resource consumption by our
heaviest users.
SUBSCRIBER ACQUISITION. Subscriber acquisition costs include all costs
incurred to acquire subscribers to either our free basic service or to one of
our billable premium services. These costs include the cost of direct mail
campaigns, advertising through conventional and computer-based media,
telemarketing, the production of advertisements to be displayed over the Juno
services and transmission of such advertisements to our subscribers, disk
duplication and fulfillment, and bounties paid to acquire subscribers, including
fees paid under stock-based subscriber referral agreements where payment is made
primarily or entirely through the issuance of shares of our common stock, 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 $9.8 million, to
$24.9 million for the three months ended September 30, 2000 from $15.0 million
for the three months ended September 30, 1999, an increase of 65.5%. This
increase is due primarily to costs incurred in connection with two stock-based
subscriber referral agreements. The cash portion of subscriber acquisition costs
declined to approximately $12.3 million in the third quarter of 2000 as compared
to $15.0 million in the third quarter of 1999. The decrease in the cash portion
of subscriber acquisition costs resulted from a reduction in our use of
cash-intensive marketing channels, including direct mail and television and
radio advertising. Subscriber acquisition costs represented 82.5% of total
revenues in the three months ended September 30, 2000 as compared with 115% of
(lower) total revenues in the three months ended September 30, 1999. We
currently expect a significant further reduction in overall subscriber
acquisition expenses during the fourth quarter.
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 advertising sales effort, corporate branding activities unrelated to
subscriber acquisition, and public relations, as well as advertising production,
advertising transmission, customer service and fulfillment costs associated with
our direct product sales activities.
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Sales and marketing costs increased $1.8 million, to $5.0 million for the
three months ended September 30, 2000 from $3.2 million for the three months
ended September 30, 1999, an increase of 57.5%. This increase is due primarily
to an increase in personnel and related costs, including sales commissions. As a
percentage of total revenues, sales and marketing costs improved to 16.6% in the
three months ended September 30, 2000 from 24.3% in the three months ended
September 30, 1999. This improvement was due primarily to an increase in
revenues for the three months ended September 30, 2000 as compared to the
year-ago quarter.
PRODUCT DEVELOPMENT. Product development includes research and development
expenses and other product development costs. These costs consist primarily of
personnel and related overhead costs as well as, for periods prior to May 1999,
the costs associated with research and development and other product development
activities performed for us on a contract basis by a related party in Hyderabad,
India. In May 1999, we hired as employees substantially all of the individuals
involved in this India-based contract.
Product development costs increased $0.9 million, to $2.5 million for the
three months ended September 30, 2000 from $1.6 million for the three months
ended September 30, 1999, an increase of 55.2%. This increase is due primarily
to additional personnel and related costs in both our U.S. and India offices
related to the development of our Juno Express premium service and of a new
release of our client-side software, version 5.0. To date, we have not
capitalized any expenses related to any software development activities.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of personnel and related overhead costs associated with executive,
finance, legal, recruiting, human resources and facilities functions, as well as
various professional expenses.
General and administrative costs increased approximately $0.9 million, to
$2.1 million for the three months ended September 30, 2000 from $1.3 million for
the three months ended September 30, 1999, an increase of 66.6%. This increase
is due primarily to a rise in personnel and overhead costs and professional
service fees. As a percentage of revenues, general and administrative costs
improved to 7.1% for the three months ended September 30, 2000 as compared to
9.8% for the three months ended September 30, 1999.
INTEREST INCOME, NET. Interest income, net decreased approximately $0.3
million to $1.2 million for the three months ended September 30, 2000, from $1.4
million for the three months ended September 30, 1999, a decrease of 18.7%. This
decrease was due primarily to interest income earned on lower average cash
balances in the three months ended September 30, 2000 as compared to the three
months ended September 30, 1999. Interest income, net, includes interest expense
of $39 and $33 for the three months ended September 30, 2000 and 1999,
respectively.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1999
REVENUES
Total revenues increased $49.8 million, to $83.7 million for the nine
months ended September 30, 2000 from $33.9 million for the nine months ended
September 30, 1999, an increase of 147%. This increase was due to increases in
billable services and in advertising and transaction fees, partially offset by a
decrease in direct product sales.
BILLABLE SERVICES. Billable services revenues increased $32.6 million, to
$54.1 million for the nine months ended September 30, 2000 from $21.5 million
for the nine months ended September 30, 1999, an increase of 151%. This increase
was due primarily to a greater number of billable service subscribers in the
nine months ended September 30, 2000, as compared with the much smaller number
in the year ago period, partially offset by lower average monthly revenue per
subscriber.
ADVERTISING AND TRANSACTION FEES. Advertising and transaction fees
increased $19.9 million, to $28.2 million for the nine months ended September
30, 2000 from $8.3 million for the nine months ended September 30, 1999,
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an increase of 238%. This increase was due primarily to the increase in
Web-enabled subscribers associated with the expansion of our free basic service
to include full Web access. We believe this expansion made our subscriber base
and ad inventory more attractive to some categories of advertisers, particularly
those interested in attracting traffic to their own Web sites, and may account
in part for our year-over-year increase in sales both overall and especially to
Internet-related companies. Barter transactions accounted for approximately 2.5%
and 1.9% of total revenues and 7.5% and 7.6% of advertising and transaction fees
for the nine months ended September 30, 2000 and 1999, respectively.
DIRECT PRODUCT SALES. Direct product sales decreased $2.7 million, to $1.4
million for the nine months ended September 30, 2000 from $4.1 million for the
nine months ended September 30, 1999, a decrease of 65.2%. This decline reflects
our strategic decision to narrow the range of our direct product sales
activities and the types of products offered to our subscribers and to gradually
replace direct product sales with other forms of electronic commerce.
Specifically, 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. Substantially
all remaining direct product sales activities were eliminated in August 2000.
COST OF REVENUES
Total cost of revenues increased $21.2 million, to $44.3 million for the
nine months ended September 30, 2000 from $23.1 million for the nine months
ended September 30, 1999, an increase of 91.9%. This increase was due primarily
to increases in costs associated with billable services and in advertising and
transaction fees, partially offset by a decrease in costs associated with direct
product sales.
BILLABLE SERVICES. Cost of revenues related to billable services increased
$20.6 million, to $36.7 million for the nine months ended September 30, 2000
from $16.1 million for the nine months ended September 30, 1999, an increase of
128%. This increase was due primarily to the costs of providing our billable
subscription services to a substantially larger number of subscribers as
compared with the number of subscribers in the year-ago period. Costs related to
the provision of these billable subscription services, principally
telecommunications, customer service, and technical support expenses, accounted
for 93.6% of the total costs of revenues related to billable services during the
nine months ended September 30, 2000 and accounted for the majority of the
increase. These expenses accounted for 91.2% of the total costs of revenues
during the nine months ended September 30, 1999. Cost of billable services
revenues as a percentage of billable services revenues improved to 67.9% for the
nine months ended September 30, 2000 from 74.9% for the nine months ended
September 30, 1999. This improvement is primarily attributable to decreased
customer service costs per subscriber and declining average telecommunications
rates, partially offset by increased average hours of usage per subscriber.
ADVERTISING AND TRANSACTION FEES. Cost of revenues for advertising and
transaction fees increased $2.8 million, to $6.2 million for the nine months
ended September 30, 2000 from $3.4 million for the nine months ended September
30, 1999, an increase of 84.0%. This increase was due primarily to the increase
in advertising and transaction fee revenue associated with the increase in
Web-enabled subscribers due to the expansion of our free basic service to
include full Web access. Cost of revenues related to advertising and transaction
fees as a percentage of advertising and transaction fees improved to 21.9% for
the nine months ended September 30, 2000 from 40.3% for the nine months ended
September 30, 1999. This improvement is due primarily to decreased
telecommunications rates, faster average connection speeds, larger average deal
sizes over which to spread relatively fixed production costs, and improvements
in our production and distribution methods.
DIRECT PRODUCT SALES. The cost of revenues for direct product sales
decreased approximately $2.2 million, to $1.3 million for the nine months ended
September 30, 2000 from $3.6 million for the nine months ended September 30,
1999, a decrease of 62.4%. This decrease corresponds to the decrease in
merchandise sold. The cost of revenues for direct product sales as a percentage
of direct product sales revenues increased to 94.7% for the nine months ended
September 30, 2000 from 87.6% for the nine months ended September 30, 1999. This
increase was due primarily to a greater decline in the average retail price of
merchandise sold relative to the declines in the costs of such merchandise and
additional promotional pricing in response to increasing competition in the
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computer hardware retail market, which category represents the majority of our
merchandise sold. We stopped conducting direct product sales activities in
August 2000.
OPERATING EXPENSES
OPERATIONS, FREE SERVICE. Expenses associated with operations, free
service increased $22.3 million, to $27.4 million for the nine months ended
September 30, 2000 from $5.1 million for the nine months ended September 30,
1999, an increase of 440%. This increase was due primarily to additional
telecommunications costs incurred as a result of the expansion of our free
service to include full Internet access.
SUBSCRIBER ACQUISITION. Subscriber acquisition costs increased $76.1
million, to $107.7 million for the nine months ended September 30, 2000 from
$31.6 million for the nine months ended September 30, 1999, an increase of
240%. This increase is due primarily to costs related to extensive direct
mail campaigns as well as other marketing activities including television,
radio, outdoor and other advertising campaigns. To a lesser extent, the
increase reflects costs incurred in connection with two stock-based
subscriber referral agreements as well as inbound telemarketing costs
incurred in connection with subscriber acquisition and retention activities.
As a percentage of revenues, subscriber acquisition costs increased to 129%
in the nine months ended September 30, 2000 from 93.2% in the nine months
ended September 30, 1999.
SALES AND MARKETING. Sales and marketing costs increased $6.0 million, to
$14.2 million for the nine months ended September 30, 2000 from $8.2 million for
the nine months ended September 30, 1999, an increase of 73.4%. This increase is
due primarily to an increase in personnel and related costs, including sales
commissions, as well as in trade advertising. As a percentage of revenues, sales
and marketing costs improved to 17.0% in the nine months ended September 30,
2000 from 24.2% in the nine months ended September 30, 1999. This improvement
was due primarily to an increase in revenues for the nine months ended September
30, 2000 as compared to the year-ago period.
PRODUCT DEVELOPMENT. Product development costs increased approximately
$2.6 million, to $8.0 million for the nine months ended September 30, 2000 from
$5.4 million for the nine months ended September 30, 1999, an increase of 48.1%.
This increase is due primarily to additional personnel and related costs in both
our domestic and India offices related to the development of our Juno Express
premium service and of a new release of our client-side software, version 5.0.
These costs were partially offset by the lower costs associated with operating
our India-based research and development efforts as a majority-owned subsidiary
rather than obtaining these services on a contract basis. To date, we have not
capitalized any expenses related to any software development activities.
GENERAL AND ADMINISTRATIVE. General and administrative costs increased
$3.4 million, to $6.4 million for the nine months ended September 30, 2000 from
$3.0 million for the nine months ended September 30, 1999, an increase of 116%.
This increase is due primarily to a rise in 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 improved to approximately 7.6% for the nine months ended
September 30, 2000 from 8.7% for the nine months ended September 30, 1999.
INTEREST INCOME, NET. Interest income, net increased $2.2 million to $4.5
million for the nine months ended September 30, 2000, from $2.3 million for the
nine months ended September 30, 1999, an increase of 94.1%. This increase is due
primarily to interest income earned on higher average cash balances in the nine
months ended September 30, 2000 as compared to the nine months ended September
30, 1999. Interest income, net includes interest expense of $131 and $286 for
the nine months ended September 30, 2000 and 1999, respectively.
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SELECTED SUBSCRIBER DATA
The following table sets forth selected subscriber data for each of the
five quarters ended September 30, 2000:
<TABLE>
<CAPTION>
SEPT. 30, JUNE 30, MAR. 31, DEC. 31, SEPT. 30,
2000 2000 1999 1999 2000
------------------------------------------------------- ---------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Total registered subscriber accounts as of (1) ........ 12,771,000 11,048,000 9,430,000 8,137,000 7,613,000
Active subscriber accounts in month ended (2) ......... 3,700,000 3,379,000 3,053,000 2,394,000 2,326,000
Active Web-enabled subscribers in month ended (3) ..... 3,251,000 2,876,000 2,358,000 771,000 268,000
Billable service accounts as of (4) ................... 750,000 730,000 661,000 550,000 400,000
-------------------------------------------------------
</TABLE>
(1) Includes all subscriber accounts created since Juno's inception, computed
after deduction of any accounts that have since been cancelled, but
regardless of current activity, if any.
(2) Encompasses all registered subscriber accounts that connected at least
once during the month, together with all subscribers to a billable
service, in each case regardless of the type of activity or activities
engaged in by such subscribers.
(3) Refers to the subset of active subscriber accounts that have been
centrally provisioned for, and provided with the client-side software
necessary to access, not only e-mail, but also the World Wide Web,
regardless of the extent, if any, to which such subscribers have actually
used the Web.
(4) Represents the subset of active subscriber accounts that carry a charge
for premium functionality.
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LIQUIDITY AND CAPITAL RESOURCES
Since our formation, we have financed our operations primarily from funds
generated by the sale of equity securities. Sales of equity securities include
$81.1 million of net proceeds from our February 2000 follow-on offering of
common stock, $77.3 million of net proceeds from our May 1999 initial public
offering of common stock and $61.9 million of net proceeds from our March 1999
private placement of redeemable convertible preferred stock, which converted
into common stock upon the completion of our initial public offering. We have
incurred significant losses since inception, totaling $267.8 million through
September 30, 2000. As of September 30, 2000 we had $68.6 million in cash and
cash equivalents.
Net cash used in operating activities for the nine months ended September
30, 2000 increased $68.5 million to $97.2 million, up from $28.8 million for the
nine months ended September 30, 1999. This increase was primarily the result of
additional subscriber acquisition expenses, which represented approximately 95%
of the overall increase in the net loss.
Additionally, relatively more cash was used in operating activities in
connection with the rise in accounts receivable during the nine months ended
September 30, 2000 as compared to the year-ago period. During this time, we
expanded our free basic service to include Web access, and we experienced an
increase in advertising revenues as advertisers sought to market to our
increasingly Web-enabled subscriber base. This resulted in a shift in our
revenue mix towards advertising and transaction fee revenues relative to
billable service subscription fees. As the proportion of advertising revenues
increased the ratio of our accounts receivable balances also increased
relative to revenues. In addition to other factors, this rise in the ratio of
receivables to revenues occurred for the following two reasons:
(1) It is typical to experience longer collection periods on advertising
and transaction fees than on billable subscription fees. While
billable services revenues are generally collected in advance on a
credit card, advertising and transaction fees are not typically
collected until after an advertising customer has been invoiced,
often following the completion of all or a portion of the related
advertising campaign.
(2) We have obtained negotiated contractual rights from a number of
advertising customers which allow us to invoice such customers in
advance of our completing performance of all of our obligations
under a given advertising contract, and sometimes in advance of our
beginning to recognize revenue under a given contract, since all
revenue is only recognized as it is earned.
The increase in the ratio of receivables to revenues described above
generally increases our risk of collection, as does the fact that a majority of
our advertisers are concentrated in the increasingly capital-constrained and
highly volatile Internet sector.
Cash used in operating activities for the nine months ended September 30,
1999 reflects prepaid advertising of $10.0 million. At September 30, 2000, $3.8
million of this prepaid advertising remained unused. This remaining prepaid
advertising balance is available to be used at any time prior to March 2001.
Net cash used in investing activities was $7.2 million and $0.6 million
for the nine months ended September 30, 2000, and 1999, respectively. The
principal use of cash for the periods presented was for the purchase of fixed
assets.
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. Expenditures associated with
the purchase of telecommunications capacity, the provision of customer service,
and subscriber acquisition and retention activities are expected to continue to
represent a material use of our cash resources.
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Net cash provided by financing activities was $81.6 million and $129.6
million for the nine months ended September 30, 2000 and 1999, respectively.
Financing activities for the nine months ended September 30, 2000 primarily
included $81.1 million in net proceeds we received from our February 2000
follow-on offering of common stock. Financing activities for the nine months
ended September 30, 1999 included $61.9 million of net proceeds received from
our March 1999 private placement and $77.3 million of net proceeds from our May
1999 initial public offering of common stock.
In July 1999, we entered into a credit facility with a bank that provided
for borrowings up to $10.0 million. During August 2000, we extended this
facility through October 2000. No borrowings were ever made under this facility,
and we did not renew the facility subsequent to October 2000.
During October 2000, we secured an equity financing commitment from a
private investment fund in the form of an "equity line" facility. Under certain
circumstances, we would have the right (but not the obligation) under this
facility to obtain as much as $125 million through the issuance of common stock
to the fund in a series of drawdowns over a two-year period. However, the amount
actually available to us, if any, will be limited by, among other things,
various volume- and price-related limitations, and is currently expected to be
much lower than $125 million. Any stock issued to the fund under this facility
will be purchased at a price equal to 94 percent of the volume-weighted average
price of our common shares on each purchase day. However, the fund will
generally not be obligated to purchase shares from us on any day when the
purchase price would be less than $2.50 per share. We will control the timing
and frequency of any sales, subject to the facility's volume- and price-related
limitations, and will have no obligation to draw down any minimum amount or
number of times. However, the facility may be terminated if we do not sell any
shares to the fund for a period of four consecutive months. We have agreed that,
prior to any sale of shares to the fund under this facility, we will register
such securities for resale under the Securities Act of 1933. Juno expects to
file a registration statement with the Securities and Exchange Commission prior
to December 1, 2000. We will not be able to draw on the facility until such
time, if any, as this registration statement is declared effective by the
Securities and Exchange Commission. As of October 31, 2000, we had not issued
any of our common stock under this facility.
We believe that our existing cash and cash equivalents will be sufficient
to meet our anticipated cash needs for at least the next twelve months. As of
September 30, 2000, we held a total of $68.6 million in cash and cash
equivalents. We believe that changes in the market environment over the past
nine months have increased the value of corporate cash reserves as well as the
relative importance of bringing expenses more in line with revenues over time
and reducing our reliance on external sources of capital. We continue to place a
high value on flexibility, and may well respond on an opportunistic basis to
further changes within the industry, but for the time being we expect to
continue our recent shift of focus from the aggressive, cash intensive growth of
our subscriber base to the reduction of cash outflows and subscriber acquisition
investments overall and to the exploration and development of additional
potential revenue sources.
The cash portion of our net loss decreased to approximately $16 million
for the three months ended September 30, 2000, from approximately $41 million in
the three months ended June 30, 2000. Subscriber acquisition expenses
represented the vast majority of our overall net loss and of the cash portion of
our net loss. We reduced overall subscriber acquisition expenses to $24.9
million and the cash portion of subscriber acquisition expenses to $12.3 million
during the three months ended September 30, 2000, from $38.1 million and $37.9
million, respectively, during the three months ended June 30, 2000. Evaluating
our loss before subscriber acquisition expenses, while not a measurement of
financial performance under generally accepted accounting principles, can be a
useful way to understand the effect that adjustments to subscriber acquisition
costs can have on our cash flow. Loss before subscriber acquisition expenses
improved to $4.5 million in the three months ended September 30, 2000, from $4.7
million in the three months ended June 30, 2000. In addition to reducing overall
subscriber acquisition expenses, we expect to further reduce the cash portion of
our net loss over the coming quarters by pursuing measures intended to reduce
the expenses of operating our free basic service.
We may find opportunities to issue our equity securities as consideration
for subscriber acquisition, telecommunications, or other significant operating
costs in the future. We may also seek to sell additional equity
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or debt securities. If non-cash methods for payment of operating costs are used
or additional funds are raised by our issuing equity securities, stockholders
may experience significant dilution of their ownership interest and the newly
issued securities may have rights superior to those of our common stock. If
additional funds are raised by our issuing debt, we may be subject to
limitations on our operations. There can be no assurance that financing will be
available in amounts or on terms acceptable to us, or at all.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
OUR BILLABLE PREMIUM SERVICES AND OUR FREE BASIC WEB ACCESS SERVICE HAVE A
LIMITED OPERATING HISTORY AND FACE NUMEROUS RISKS AND UNCERTAINTIES.
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 free basic service to
include full Internet access in addition to e-mail in December 1999. As a
company in the rapidly evolving market for Internet services, we face numerous
risks and uncertainties. Some of these risks relate to our ability to:
o attract and retain subscribers to our free basic service and our
billable premium services;
o anticipate and adapt to the changing Internet market;
o generate revenues sufficient to cover our operating expenses through
the sale of our billable premium services, through the sale of
advertising or from other revenue sources;
o preserve or raise the capital necessary to fund our operations to the
extent that they are not profitable;
o maintain and develop strategic relationships with business partners to
advertise their products over our services;
o implement an effective marketing strategy to promote awareness of the
Juno services;
o respond to actions taken by our competitors and the entry of new
competitors into our markets;
o develop and deploy successive versions of the Juno software;
o operate computer systems and related infrastructure adequate to
effectively manage our growth and provide our basic service and our
billable premium services;
o operate broadband Internet access services, whether independently or in
collaboration with one or more third parties;
o manage the billing systems used to invoice subscribers to our billable
premium services; and
o attract, retain and motivate qualified personnel.
Our business and financial results will depend heavily on the commercial
acceptance and profitability of both our free basic and our billable premium
services. If we are unsuccessful in addressing these risks or in executing our
business strategy, our business and financial results may suffer.
WE HAVE A HISTORY OF LOSSES SINCE OUR INCEPTION IN 1995 AND EXPECT CONTINUED
LOSSES FOR THE FORESEEABLE FUTURE.
Since our inception in 1995, we have not been profitable. We have incurred
substantial costs to create and introduce our various services, to operate these
services, to promote awareness of these services and to grow our business. We
incurred net losses of approximately $3.8 million from inception through
December 31, 1995, $23.0 million for the year ended December 31, 1996, $33.7
million for the year ended December 31, 1997, $31.6 million for the year ended
December 31, 1998, $55.8 million for the year ended December 31, 1999 and $119.8
million for the nine months ended September 30, 2000. As of September 30, 2000,
our accumulated net losses totaled $267.8 million. We incurred negative cash
flows from operations of approximately $16.4 million for the year ended December
31, 1996, $33.6 million for the year ended December 31, 1997, $20.9 million for
the year ended December 31, 1998 and $45.1 million for the year ended December
31, 1999. For the nine months ended September 30, 2000, we
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used $97.2 million in cash for working capital purposes and to fund losses from
operations. At September 30, 2000, $3.8 million remained prepaid for advertising
that Juno has the right to display on a third party's media properties. This
prepaid amount may be used at any time prior to March 2001.
Since we operated as a limited partnership prior to the merger of Juno
Online Services, L.P. into Juno Online Services, Inc. in March 1999, taxable
losses incurred prior to the merger were allocated to the partners of Juno
Online Services, L.P. for reporting on their income tax returns. As a result, we
will not be able to offset future taxable income, if any, against losses
incurred prior to the merger.
We expect operating losses and negative cash flows to continue for the
foreseeable future as we continue to incur significant expenses. We may not 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 for any particular period, we cannot assure you that we would be
able to sustain or increase profitability on a quarterly or annual basis
thereafter.
WE CANNOT PREDICT OUR FUTURE CAPITAL NEEDS AND WE MAY NOT BE ABLE TO IMPLEMENT
OUR EXISTING FINANCING PLANS OR SECURE ADDITIONAL FINANCING.
Because we expect to continue to incur substantial losses for the
foreseeable future, we are likely to need to raise substantial additional funds
in the future to fund our operations, including our telecommunications and other
service provision costs, subscriber acquisition and brand promotion costs, costs
of enhancing or expanding the range of Internet services we offer and costs
associated with responding to competitive pressures or perceived opportunities.
Additional financing may not be available on terms favorable to us, or at all.
If adequate funds are not available or not available when required in sufficient
amounts or on acceptable terms, we may not be able to devote sufficient cash
resources to continue to provide our services in their current form, acquire
additional subscribers, effectively promote our brand, enhance or expand our
services, respond to competitive pressures or take advantage of perceived
opportunities, and our business and financial results may suffer, or we could be
forced to cease our operations entirely. In light of our historical and expected
losses, we are unlikely to be able to raise significant additional funds through
the incurrence of indebtedness. If additional funds are raised by our issuing
debt, we may be subject to limitations on our operations.
In October 2000, we entered into an equity line facility with a private
investment fund pursuant to which we may be able to issue up to $125 million of
our common stock to this investor over the course of a period of up to two
years. However, there are a number of conditions that must be satisfied before
this investor has an obligation to purchase shares from us under the equity line
facility. Among other limitations, the investor generally has no obligation to
purchase shares on a given day to the extent that the average trading price of
our shares during such day is less than $2.66 per share or to the extent that
such purchases would exceed specified volume limitations.
We have also entered into several transactions pursuant to which we have
the right to pay for goods or services using our common stock, and we may enter
into more such transactions in the future. If we raise additional funds or
obtain goods or services by issuing equity securities, stockholders may
experience significant dilution of their ownership interest and the newly issued
securities may have rights superior to those of our common stock. The dilutive
effect of these issuances will be increased to the extent our share price
continues to decline.
OUR STOCK PRICE HAS BEEN HIGHLY VOLATILE AND IS LIKELY TO EXPERIENCE EXTREME
PRICE AND VOLUME FLUCTUATIONS IN THE FUTURE THAT COULD REDUCE THE VALUE OF
YOUR INVESTMENT, SUBJECT US TO LITIGATION, AND MAKE OBTAINING FUTURE EQUITY
FINANCING MORE DIFFICULT FOR US.
The market price of our common stock has fluctuated in the past and is
likely to continue to be highly volatile, with extreme price and volume
fluctuations. The Nasdaq National Market, where most
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publicly held Internet companies are traded, has experienced substantial price
and volume fluctuations. These broad market and industry factors may harm the
market price of our common stock, regardless of our actual operating
performance, and for this or other reasons we could continue to suffer
significant declines in the market price of our common stock.
In the past, companies that have experienced volatility in the market
price of their stock have been the object of securities class action litigation.
If we were to become the object of securities class action litigation, it could
result in substantial costs and a diversion of our management's attention and
resources.
In addition, further declines in our stock price might harm our ability to
issue, or significantly increase the ownership dilution to stockholders caused
by our issuing, equity in financing or other transactions. The price at which we
issue shares in such transactions is generally based on the market price of our
common stock and a decline in our stock price would result in our needing to
issue a greater number of shares to raise a given amount of funding or acquire a
given dollar value of goods or services. A low stock price might impair our
ability to draw down funds under the equity line facility, because the purchaser
under the facility is generally not required to purchase shares of our common
stock under the facility on a given day if our average stock price during such
day is less than $2.66 per share.
WE EXPECT TO ISSUE OUR COMMON STOCK TO PAY FOR SERVICES IN TRANSACTIONS THAT
CAUSE DILUTION TO OUR STOCKHOLDERS, AND THE DILUTIVE EFFECT OF THESE
ISSUANCES WILL INCREASE TO THE EXTENT THAT OUR STOCK PRICE DECLINES.
In addition to the equity line facility, we have entered into a number of
relationships in which we expect to use our common stock to compensate third
parties for services performed for us, including subscriber referral and
telecommunications services, and we may enter into additional such relationships
in the future. In most of these transactions, the payments owed by Juno will be
calculated in dollar terms, with Juno having the right to issue an equivalent
amount of its common stock in lieu of making cash payments. We currently
anticipate that we will exercise those rights to make payments in our common
stock where available to us, although we may choose to pay for some or all of
such expenses in cash. If the price of Juno common stock should decrease
further, our electing to pay with common stock would entail issuing a relatively
larger number of shares, increasing the dilutive effect on our stockholders, and
potentially impairing our ability to draw down on the equity line facility or
execute other financing transactions. Additionally, the third parties to whom we
issue common stock will generally have registration rights that require us to
register these shares of common stock for resale in the public markets. The
market price of our common stock could decline as a result of sales of these
shares in the market, or the perception that such sales could occur.
FUTURE SALES OF OUR COMMON STOCK MAY NEGATIVELY AFFECT OUR STOCK PRICE.
In addition to potential future issuances of our common stock, we have a
large number of shares of common stock currently outstanding and available for
resale. The market price of our common stock could decline as a result of sales
of a large number of shares of our common stock in the market, or the perception
that such sales could occur. These sales also might make it more difficult for
us to sell equity securities in the future at a price that we think is
appropriate, or at all.
OUR 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. These
include factors within and outside of our control. Some of these factors
include:
o patterns of subscriber acquisition and retention, and seasonal trends
relating to subscriber usage of our services;
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o whether we maintain past levels of marketing activity to acquire
subscribers and promote the Juno brand, and the extent to which any
marketing activities we do undertake are timely and effective;
o the timing and effectiveness of any revenue sharing arrangements or
other strategic alliances into which we enter;
o the demand for Internet advertising and seasonal trends relating to
Internet advertising spending;
o capital expenses related to upgrading our computer systems and related
infrastructure;
o our ability to protect our systems from any telecommunications
failures, power loss, or software-related system failures;
o our ability to integrate operations and technologies from any
acquisitions or other business combinations or relationships into which
we enter;
o the extent to which we experience increased competition in the markets
for Internet services, Internet advertising and electronic commerce;
o changes in operating expenses including, in particular,
telecommunications expenses and the cost of providing various types of
technical and non-technical customer support to our subscribers; and
o economic conditions specific to the Internet as well as general
economic and market conditions.
Since we expect to be heavily dependent on revenues from our billable
premium services in the foreseeable future, our revenues are likely to be
particularly affected by our ability to recruit new subscribers directly to our
billable premium services, upgrade users of our free basic service to our
billable premium services, and retain subscribers to our billable premium
services. In addition, our operating expenses are based on our expectations of
our future revenues and are relatively fixed in the short term. We may be unable
to adjust spending quickly enough to offset any revenue shortfall, which may
cause our business and financial results to suffer.
Due to all of the above factors and the other risks discussed in this
section, you should not rely on quarter-to-quarter comparisons of our results of
operations as an indication of future performance. It is possible that in some
future periods our results of operations may be below the expectations of public
market analysts and investors. In this event, the price of our common stock is
likely to fall.
THE EXPANSION OF OUR FREE BASIC SERVICE TO INCLUDE FULL WEB ACCESS HAS CREATED
SUBSTANTIAL BUSINESS RISKS.
In December 1999, we expanded our free basic service to include full
Internet access, including access to the World Wide Web. We continue to face
numerous costs, risks, and uncertainties associated with our provision of free
Web access to consumers, including the following:
o RISK THAT OUR PAYING SUBSCRIBERS WILL CANCEL THEIR BILLABLE SERVICE
SUBSCRIPTIONS AND SWITCH TO THE EXPANDED FREE SERVICE. Since users of
our basic service can access the Web for free, some Juno Web
subscribers may 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. Net growth of our Juno Web subscriber
base has, in fact, slowed significantly since December 1999, possibly
in part due to such cancellations.
o RISK THAT USERS OF OUR EXPANDED FREE BASIC SERVICE WILL REACT
NEGATIVELY TO THE ADDITIONAL ADVERTISING DISPLAYED WHILE THEY USE THE
WEB. Users of our expanded free basic service are
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required to view a prominent advertising and navigation banner at all
times while they are connected to the Web, as well as various other
forms of advertising. Some users, particularly those using
low-resolution computer monitors to view the Web, may consider this
advertising to be intrusive to an extent that interferes with their use
of the service. Some competitors offer free Internet access services
that do not require the user to view advertising as intrusive as ours,
or in some cases any advertising at all. If these competitive services
become popular, or if additional competitors introduce free Internet
access services that do not require the user to view intrusive
advertising, then our ability to retain users of our free basic service
or our ability to derive revenue by displaying advertisements to such
users may be harmed.
o RISK THAT 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 addition of a persistent
advertising banner displayed to users of our expanded basic service
when they use the Web has created a significant amount of additional
advertising inventory. To date, this additional advertising inventory
has not generated significant additional revenues, even with the
efforts of a third party, 24/7 Media, engaged by us to bear primary
responsibility for the sale of this inventory in return for a
commission. In addition, this relationship is currently the subject of
an arbitration proceeding initiated by Juno pursuant to which we are
attempting to collect guaranteed minimum payments owed to us. In
connection with this dispute, we have notified 24/7 Media of our intent
to terminate the relationship effective December 26, 2000, in
accordance with the terms of our agreement with them. If we are unable
to reach a satisfactory resolution of our dispute with 24/7 Media prior
to December 26, 2000, then we expect that our relationship with them
will terminate and we will be required to utilize our internal sales
organization or a replacement sales agent to market the advertising
inventory currently marketed by 24/7 Media. There can be no assurance
that in the future we will be able to generate significant revenues
from the sale of this advertising inventory, either by ourselves or
through an agent. If we are unable to sell this inventory or to do so
at favorable rates, our business and financial results may suffer.
WE MAY EXPERIENCE CONTINUED INCREASES IN OUR TELECOMMUNICATIONS COSTS.
Our telecommunications costs represent one of the most significant
expenses of providing our services, and they may continue to increase as use of
the Web by our subscribers increases. 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. Since we purchase
telecommunications resources on a metered basis based on hours of connection
time, the longer connections associated with accessing the Web generate
significantly higher expenses than the shorter connections associated with
downloading or uploading email messages. In recent quarters, we have experienced
significant increases in the amount of time that users spend connected, and in
the absence of measures we might take to counteract this trend, we believe that
per-subscriber usage is likely to continue to increase. This trend could be
expected to increase our telecommunications costs both on an absolute and a
per-subscriber basis, unless we are able to achieve corresponding reductions in
our telecommunications rates. If we were to attract new subscribers to our free
basic service, our telecommunications costs would increase still further on an
absolute basis. We cannot assure you that we will be able to achieve adequate
reductions in our per-subscriber telecommunications costs, or any such
reductions, and if we are unable to achieve such reductions, our business and
financial results will suffer.
OUR ABILITY TO CAUSE OUR FREE BASIC SERVICE SUBSCRIBERS TO SUBSCRIBE TO OUR
BILLABLE PREMIUM SERVICE IS UNCERTAIN. IF THE NUMBER OF SUBSCRIBERS UPGRADING
TO OUR BILLABLE SERVICES FALLS SHORT OF OUR GOALS, OUR BUSINESS AND FINANCIAL
RESULTS WILL SUFFER.
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Our business strategy contemplates that some of the subscribers to our
free basic service will decide over time to upgrade to our premium services.
We are relying increasingly on such migration as a source of subscribers to
our billable premium services. 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 has caused, and may continue
to cause, their effectiveness to decline. As a result, such advertisements
may prove insufficient to generate growth in or maintain the size of our
billable subscriber base. We expect that it will become more difficult and
expensive over time to effectively market our premium services to users of
our free basic service. Accordingly, the rate at which users of the free
basic service upgrade to our billable premium services may decline. If our
marketing techniques fail to generate an adequate conversion rate from free
to billable premium services, if the acquisition cost for subscribers
acquired directly or indirectly into our billable premium services is greater
than expected, if diminished capital resources require us to curtail even
further our use of external marketing channels, or if technical limitations
make the conversion process more difficult or time-consuming than
anticipated, our business and financial results will suffer.
OUR MARKETING RESOURCES MAY BE INSUFFICIENT TO GENERATE NEW SUBSCRIBERS OR
AWARENESS OF OUR SERVICES.
In light of our objective of preserving cash resources, we currently
expect to significantly reduce the extent of our marketing activities, and there
is a risk that such activities as we do undertake, if any, may not be effective
in accomplishing our goals. Many of our competitors have greater financial
resources than we do and have undertaken significant advertising campaigns. We
cannot predict the timing, the type, or the extent of future advertising
activities by our competitors. It is possible that marketing campaigns
undertaken by our competitors will have an adverse effect on our ability to
retain or acquire subscribers. If we incur costs in implementing marketing
campaigns without generating sufficient new subscribers to our services, or if
capital limitations prevent us from implementing marketing campaigns, or if
marketing campaigns undertaken by competitors cause attrition in our subscriber
base, our business and financial results will suffer.
OUR SUBSCRIBER COUNT MAY DECLINE AND OUR BUSINESS MAY SUFFER AS A RESULT OF
EXPECTED REDUCTIONS IN OUR SUBSCRIBER ACQUISITION ACTIVITIES, AND IN
PARTICULAR, IN OUR USE OF CASH-INTENSIVE MARKETING CHANNELS FOR SUBSCRIBER
ACQUISITION.
We may not succeed in acquiring or retaining a sufficiently large
subscriber base for our free basic service and our billable premium services. To
acquire new subscribers, we have historically relied on a number of
cash-intensive distribution channels for our free proprietary software that
enables subscribers to use our services. The most significant channel has been
the use of direct mail to circulate diskettes or CDs containing our software to
large numbers of prospective subscribers. We have suspended substantially all
use of direct mail for subscriber acquisition, and although our plans could
change in response to any of a number of factors, we do not currently expect to
increase its use in the near future. We have also reduced our use of other
subscriber acquisition channels, particularly channels that require significant
cash expenditures, and currently plan to reduce subscriber acquisition
activities further in the future. We have undertaken some alternative subscriber
acquisition activities that entail the expenditure of lesser amounts of cash,
including stock-based subscriber referral agreements with two former Internet
access providers, WorldSpy and Freewwweb, and with a retailer of computer
software, Babbage's. However, there can be no assurance that we will choose to
pursue such opportunities in the future, that we will be successful in
identifying or exploiting additional such opportunities if we do choose to
pursue them, or that the number of subscribers generated by any such
opportunities we do identify and exploit will be sufficient to grow, or even to
maintain the size of, our subscriber base. Additionally, there is a risk that
recent declines in the trading price of our common stock may adversely affect
the willingness of potential counterparties to accept Juno common stock as an
alternative to cash consideration in connection with such opportunities. To the
extent that alternative subscriber acquisition methods we
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employ involve the issuance of Juno common stock as consideration, existing
stockholders may experience significant dilution of their ownership interest and
the newly issued securities may have rights superior to those of our common
stock.
DIFFICULTY RETAINING SUBSCRIBERS TO OUR SERVICES, AS WELL AS SUBSCRIBER
ATTRITION CAUSED BY MEASURES WE MAY IMPLEMENT TO DISCOURAGE DISPROPORTIONATE
USAGE OF OUR FREE SERVICE BY OUR HEAVIEST USERS, MAY CAUSE OUR BUSINESS TO
SUFFER.
Our business and financial results are dependent on, among other things,
the number of subscribers to our services. Among other things, the number of
active subscribers has a significant impact on the number of advertising
impressions we have available to sell, and on how many billable service
subscribers we can potentially acquire by soliciting users of our free service.
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. It is easy for Internet
users to switch to competing providers, and we believe that intense competition
has caused, and may continue to cause, many of our subscribers to switch to
other services. In addition, new subscribers may decide to use our services only
out of curiosity regarding the Internet, or to take advantage of free or
low-cost introductory offers for our billable premium services, and may later
discontinue using our services.
Furthermore, we are currently planning to implement certain measures
designed to encourage the heaviest users of our free service to alter their
usage patterns, upgrade to one of our billable services, or generate additional
revenues in some other way that might help us cover the higher costs they cause
us to incur. While the details of these measures have not yet been finalized,
examples may include, but may or may not be limited to, the display of
additional advertising to heavier users and the prioritization of access to our
free service according to usage levels, among other factors. Such prioritization
mechanisms are currently expected to make it more difficult for the heaviest
users of our free service to establish and maintain a Web connection through
Juno's free service, particularly during those hours when overall usage tends to
be highest and/or in certain geographic areas, than is expected to be the case
for free subscribers whose usage patterns are more typical. To the extent we
actually implement these or similar measures, we are likely to experience at
least some degree of subscriber attrition. We are unable to predict the amount
of such attrition, or the extent to which it might involve subscribers other
than those heavy users to whom we currently expect to target these measures. In
the event such measures were to result in a significant decrease in the size of
Juno's subscriber base, and particularly to the extent such attrition were to
involve subscribers other than the currently targeted group, such measures could
cause our business and financial results to suffer. Furthermore, we may at some
point in the future charge a fee for our basic service or limit the amount a
subscriber may use this service in a given period. If we were to implement such
changes, we might lose a significant number of subscribers and our business and
financial results could suffer.
In the past, we have experienced lengthy periods during which subscriber
attrition caused the total number of subscribers using our services in a given
month to remain relatively static despite our addition of a substantial number
of new users to our services. In recent quarters, we have significantly reduced
our levels of cash expenditure for subscriber acquisition and retention, and we
expect to further reduce our cash expenditures for such activities in the
future. Although the many factors affecting subscriber acquisition and retention
make it difficult to accurately predict the future size of our subscriber base,
such reductions may cause our active subscriber counts to decline. To the extent
that such spending reductions, other changes in our policies or operations,
competitive or other market conditions, or other factors were to result in a
significant decline in the net number of active subscribers to one or more of
our services, this could cause our business and financial results to suffer.
SOME USERS OF OUR FREE BASIC SERVICE MAY BE UNABLE TO ACCESS THE WEB.
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In order to obtain access to the Web, users of our free basic service must
be equipped with a version of our software at least as recent as version 4.0, as
well as a recent version of Microsoft Internet Explorer, the Web browsing
software that our free basic service requires. At September 30, 2000,
approximately 15% of active users of our free basic service used versions of our
software older than version 4.0. Although we hope to upgrade such users'
software to a more recent version 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, would need to be sent a copy of the software by
mail before they could complete this process. Approximately 3% of our free basic
service users currently use a version of the Microsoft Windows operating system
older than Windows 95, and cannot upgrade to a current version 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 a
current version of the Juno software and will be unable to access the Web
through our free basic service.
If a significant percentage of our basic service users do not use the Web,
our ability to display Web-related advertisements and generate associated
revenues will be harmed.
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 as well
as industry and general economic trends. The market for Internet services has
begun to consolidate, and we expect competition to increase as some of our
competitors grow larger through consolidation or begin 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, for competitive or other reasons, 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. Alternatively,
we may choose to increase the fees we charge for our billable premium services
in order to increase our billable services revenue or profitability, in spite of
the fact that such increases would be expected to result in subscriber
attrition, possibly to an extent sufficient to cause overall revenues from
billable services to decline. Any increase in the prices we charge for our
billable services could result in a reduction of demand for our billable
services and possibly in our overall billable services revenue. Moreover, any
decrease in such prices could result in a reduction in our billable services
revenue and would harm the profitability of our billable services. Thus, if we
make any change in our pricing, our business and financial results may suffer.
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In recruiting subscribers for our services, we currently compete, or
expect to compete, with the following types of companies, among others:
o Established online service providers such as America Online,
CompuServe, and The Microsoft Network;
o National Internet service providers such as EarthLink and Prodigy,
including a number of companies, such as 1stUp, NetZero and Spinway,
that offer Web access for free;
o Numerous independent regional and local Internet service providers that
may offer lower prices than a national Internet service provider;
o Various national and local telephone companies such as AT&T, MCI
WorldCom and Pacific Bell;
o Companies providing Internet access through "set-top boxes" connected
to a user's television, such as WebTV, or through a "cable modem"
connected to a user's personal computer, such as Excite@Home; and
o Companies providing Internet access services using other broadband
technologies, including digital subscriber line technology, commonly
known as DSL, such as the Regional Bell Operating Companies and various
partners of Covad, Rhythms, and NorthPoint.
In addition, Microsoft and Netscape, publishers of the Web browsers
utilized by most Internet users, including Juno subscribers, each own or are
owned by online or Internet service providers that compete with Juno.
In addition to competition from the types of companies listed above, we
also face the risk that subscribers to our premium billable services will
migrate to our free basic service, which would result in a decrease in our
subscription revenues.
We do not currently offer services internationally, other than to a small
base of users located in Canada. 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 and electronic commerce
revenue, we compete with many of the market participants listed above as well as
with various advertising-supported Web sites, including portal sites such as
Yahoo! and Excite, content sites such as CNET and CNN.com, and interactive
advertising networks and agencies such as DoubleClick and 24/7 Media. We also
compete with traditional media such as print and television for a share of
advertisers' total advertising budgets. If advertisers perceive the Internet to
be a limited or ineffective advertising medium or perceive us to be less
effective or less desirable than other Internet advertising vehicles,
advertisers may be reluctant to advertise on our services.
In addition to intense competition, the overall market for Internet
advertising has been characterized in recent quarters by increasing softness of
demand, the reduction or cancellation of advertising contracts, an increased
risk of uncollectible receivables from advertisers, and the apparent reduction
of Internet advertising budgets, especially by Internet-related companies. The
impact of this trend is exacerbated in Juno's case because of the large
percentage of Juno's advertisers that are Internet related companies. If demand
for Internet advertising in general or our advertising inventory in particular
does not increase or declines further, if our advertisers reduce or cancel their
contracts with us or if we are unable to collect amounts they owe us for
contracts we fulfill, our business and financial results may suffer.
OUR COMPETITION IS LIKELY TO INCREASE IN THE FUTURE.
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Our competition has increased and is likely to continue to increase. We
believe this will probably happen as Internet service providers and online
service providers consolidate and become larger, more competitive companies, and
as large diversified telecommunications and media companies acquire Internet
service providers. Many market participants offer services similar to one or
more of the services we provide. Other market participants may introduce free
Internet access services that compete with 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. In the past, we have formed
several such relationships, and did not find them effective as a means of
attracting new subscribers to our services. Our competitors may be able to
establish strategic alliances or form joint ventures that put us at a serious
competitive disadvantage. Increasing competition could result in increased
subscriber attrition. It could also put pressure on us to increase our spending
for sales and marketing and for subscriber acquisition and retention activities
at a time when we may not have adequate cash resources to devote to such
activities. 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 IS 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. The number of terminations by our partners
of various types of advertising contracts has increased over the course of 2000.
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. Additionally, many of our strategic
marketing partners are concentrated within the Internet industry. As a result,
any downturn that affects the Internet industry generally, and, in particular,
any downturn that affects the ability of our partners to pay revenues or
advances against revenue as they become due, could cause our business and
financial results to suffer.
OUR STRATEGIC MARKETING ALLIANCES AND OTHER SOURCES OF ADVERTISING REVENUE ARE
CONCENTRATED IN THE INTERNET INDUSTRY, MAKING US VULNERABLE TO DOWNTURNS
EXPERIENCED BY OTHER INTERNET COMPANIES OR THE INTERNET INDUSTRY IN GENERAL.
In the quarter ended September 30, 2000, we derived approximately 75% of
our advertising revenue from strategic marketing and advertising relationships
with other Internet companies. At the current time, we believe that some of
these companies may be having difficulty raising capital, or are anticipating
such difficulties, and are electing to scale back the resources they devote to
advertising, including on our system. Other companies in the Internet industry
have depleted their available capital, and may be expected to cease operations
or file for bankruptcy protection. Difficulties such as these may affect the
total amount of advertising inventory we can sell, and may also affect our
ability to collect revenues or
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advances against revenues from our existing partners or advertisers as such
amounts become due. If the current environment for Internet advertising does not
improve, our business and financial results may suffer.
OUR BUSINESS MAY BE ADVERSELY AFFECTED IF THE MARKET FOR INTERNET ADVERTISING
CONTRACTS OR DEVELOPS MORE SLOWLY THAN PREVIOUSLY EXPECTED.
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 contracts or
develops more slowly than previously expected. Our business also may suffer if
users install "filter" software programs that limit or prevent advertising from
being delivered to their computers. 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. Competition for Internet-based advertising revenues is intense,
and this competition, together with a continuing increase in the amount of
advertising space available overall on the Internet, has resulted in significant
price erosion over time, which may continue. 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, and it may become
necessary to lower the rates for advertising space on our services.
We currently rely primarily on our internal sales and marketing personnel
for generating sales leads and promoting our services to the advertising
community. We also rely on revenue arrangements under third party relationships
in which Juno receives revenue in return for the display of advertising sold by
a third party partner. These arrangements include relationships with LookSmart
Ltd. and 24/7 Media.
Under our agreement with LookSmart, LookSmart provides Internet search and
directory features to our subscribers through our Web portal site, and we are
entitled to receive payments based on the volume of Web pages viewed by users of
these features. We cannot be sure that our users will find the services provided
by LookSmart useful, or that they will utilize LookSmart's search and directory
features in a manner that generates significant revenue to Juno. If usage of the
LookSmart features is less than projected, then our business and financial
results may suffer.
Under our current agreement with 24/7 Media, we are entitled to a portion
of the revenues earned from their sale of advertising on the persistent
advertising and navigation banner that is displayed to users who access the Web
through our free basic service. We have commenced an arbitration proceeding
against 24/7 Media to collect certain guaranteed minimum payments owed to us,
and there can be no assurance that we will collect such amounts in full or at
all. In connection with this dispute, we have notified 24/7 Media of our intent
to terminate the relationship effective December 26, 2000, in accordance with
the terms of our agreement with them. If we are unable to reach a satisfactory
resolution of our dispute with 24/7 Media prior to December 26, 2000, then we
expect that our relationship with them will terminate and we will be required to
utilize our internal sales organization or a replacement sales agent to market
the advertising inventory currently marketed by 24/7 Media.
We cannot be sure that our internal sales organization, 24/7 Media, or any
other independent sales organization will achieve our advertising sales
objectives or do so in a cost-effective manner. If Internet-based advertising
does not continue to grow or if we are unable to capture a sufficient share of
Internet-based advertising, our business and financial results may suffer.
Additionally, we have experienced difficulties in achieving our projected level
of advertising sales, especially with respect to the persistent advertising and
navigation banner marketed by 24/7 Media. If our internal sales organization,
24/7 Media or other independent sales organizations are not able to accomplish
desired sales levels, or if our
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relationship with 24/7 Media terminates and we are not able to collect or
replace the revenue payments currently guaranteed to us by 24/7 Media, then our
business and financial results may suffer.
IF INTERNET USAGE DOES NOT CONTINUE TO GROW, OUR BUSINESS WILL SUFFER.
Our business and financial results depend on continued growth in the use
of the Internet. We cannot be certain that this growth will continue or that it
will continue in its present form. If Internet usage declines or evolves away
from our business, our ability to grow, if any, will be harmed.
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. We
may not be able to foresee or respond to these technical advances effectively or
at all. 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. In many regions, cable television companies, local and long
distance telephone companies, and wireless communications companies, have begun
to provide Internet access. These competitors, including cable television
operators, may include Internet access in their basic bundle of services or may
offer Internet access for a nominal additional charge. We have begun to enter
into arrangements with providers of broadband connections to allow the delivery
of our services over distribution channels they own or control. However, the
majority of our broadband relationships are at a developmental or initial
implementation stage and the associated services are used by a negligible number
of subscribers at the current time. Moreover, only a portion of our subscriber
base is currently served by broadband providers with which we have existing
agreements. In other segments of our market, there is a risk that we may be
unable to offer our subscribers high-speed Internet access. In the future, we
might also be prevented from delivering high-speed Internet access through
networks controlled by competitors of ours, or from doing so on a cost-effective
basis.
Even if we are not prevented from delivering our Internet services through
the broadband connections owned by other companies, the delivery of our Internet
services using broadband technology is subject to significant risks and
uncertainties, and we may be unable to adapt to the challenges posed by
broadband technologies.
We may also have to modify the means by which we deliver our Internet
services, in which case we would incur significant costs. If consumers adopt
alternative forms of Internet access that provide a continuous connection to the
Internet rather than relying on a series of separate dial-up connections, then
any competitive advantage that we currently realize because our technology
minimizes connect time may diminish. If other companies are able to prevent us
from delivering our Internet services through the wire, cable and wireless
connections that they own, if we are unable to adapt to the challenges posed by
broadband technologies or if we incur significant costs without generating
sufficient revenues, our business and financial results may suffer.
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AS THE MARKET FOR BROADBAND SERVICES EXPANDS, OUR BUSINESS MAY BE HARMED IF WE
CANNOT PROVIDE COMPETITIVE BROADBAND SERVICES THROUGH JUNO EXPRESS.
Juno Express, our billable broadband service, delivers Internet access at
broadband speeds currently through the use of DSL and mobile wireless
technologies. Juno Express currently accounts for an extremely small percentage
of our active subscriber base. As our DSL service is currently designed, before
we can provide service to a subscriber, the subscriber's local telephone company
frequently 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 used for the DSL connection is available. Accordingly,
consumers who wish to subscribe to the DSL version of 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 using DSL
technology. 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 expand beyond the markets in which the
service is currently available, or if these or other factors affect our ability
to introduce or deliver DSL-based services in a timely and cost-effective
fashion, then our business and financial results may suffer.
In addition to the DSL service described above, we have recently begun
offering a Juno Express mobile wireless service powered by Metricom's Ricochet
technology. This service is currently being offered in only nine markets, and
there can be no assurances that the performance or availability of this service
will be acceptable to us or to our subscribers, or that Metricom will
successfully expand this service offering beyond the current markets.
Additionally, use of this service requires subscribers to purchase and install
special hardware, in connection with which we are dependent on a third party
that must coordinate installation and activation with Metricom.
Although we have begun to make arrangements for the provision of the Juno
Express service over other broadband platforms, the relationships on which such
expansion depends are new and are subject to significant risks and
uncertainties. We have recently entered into agreements with AT&T Broadband and
Time Warner for the provision of Internet services over cable technology,
initially in small-scale tests. In the case of AT&T Broadband, there is a
significant risk that AT&T will not succeed in renegotiating an existing
agreement under which Excite@Home has the exclusive right to provide high-speed
broadband services over AT&T's cable system through June 2002. If AT&T is
unsuccessful, we will not be able to offer Juno Express over AT&T's cable
systems at speeds above 128kbps until July 2002 at the earliest. Similarly, Time
Warner has existing commitments to make RoadRunner the exclusive provider of
residential broadband services on Time Warner's cable system through December
2001. If Time Warner fails to renegotiate its commitment to RoadRunner, we will
not be able to offer residential broadband services over Time Warner's cable
system until January 2002. Additionally, we may find that offering Juno Express
over cable systems requires us to incur levels of operating expense that make
broad expansion of these two relationships unfeasible or unattractive to us.
There are also risks that either of these companies could exercise rights to
terminate their relationship with Juno.
We have entered into an arrangement to offer Juno Express through
broadband satellite services provided by Hughes. There are significant risks and
uncertainties associated with this arrangement. Considerable technical
development must occur before the service can be launched. Also, the technology
currently utilized provides "one-way" broadband functionality, requiring users
to utilize traditional dial-up phone line service for the "upstream" portion of
their Internet connection. This feature may prove unattractive to subscribers
because of slower connection speeds and possible connection costs, and could
have an adverse affect on the acceptance of this broadband platform, as well as
its economic
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attractiveness to us. There can be no assurance that "two-way" functionality
will be made available by this partner.
The market for broadband services is in the early stages of development,
and we cannot assure you that broadband services in general, or that any of DSL,
cable, mobile wireless or satellite technologies in particular, will become
popular with consumers. We cannot assure you that we will have adequate access
to any of these technologies at favorable rates, that we will be able to reach a
sufficient number of users through the broadband partners identified above, or
that we will have adequate capital to take advantage of existing or future
opportunities to provide broadband services. 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. 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 ADVERTISING SYSTEM REQUIRES LABOR AND IMPOSES COSTS ON US BEYOND THOSE
ASSOCIATED WITH STANDARD WEB ADVERTISING.
A significant fraction of the advertising inventory available on our
services is non-standard when compared to advertising on the Web and may put
Juno at a competitive disadvantage. Although our Web portal site and the
persistent advertising and navigation banner shown to users of our free basic
service when they access the Web utilize standard Web formatting, the
substantial amount of advertising inventory associated with the e-mail portion
of our services employs non-standard formatting. The advertisements displayed
while a subscriber reads and writes e-mail are created using proprietary tools
that are not fully compatible with standard Web advertising. Therefore, many
advertisements displayed on our services require customization that would not be
required by a Web site capable of displaying previously prepared standard
advertisements. This customization work increases the time necessary to prepare
an advertisement to be displayed on our services and the costs associated with
running these ads. We must also absorb the telecommunications cost associated
with downloading ads to our subscribers, which is an expense that
advertising-supported Web sites do not incur. As ads become more complex, our
telecommunications expenses may increase. Furthermore, the costs associated with
selling or attempting to sell advertising space on our services are significant.
These costs may be greater than the costs associated with selling advertising
space on Web sites that exclusively utilize standard Web advertising formats.
Additionally, our use of a proprietary advertising format could interfere with
our packaging a significant portion of our advertising space for sale by an
advertising network such as DoubleClick or 24/7 Media. 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, other things being equal.
Since our operating expenses are based on our expectations of future
revenues, including seasonal fluctuations, it is possible that operating results
will suffer if these seasonal trends do not continue in the future or if
different seasonal trends develop in the future.
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WE ARE DEPENDENT ON A SMALL NUMBER OF TELECOMMUNICATIONS CARRIERS AND MAY BE
UNABLE TO FIND ADEQUATE REPLACEMENTS IF THEIR RATES INCREASE, SERVICE QUALITY
DECLINES, OR IF THEY DISCONTINUE DOING BUSINESS WITH US.
Our business and financial results depend in significant part on the
capacity, affordability, reliability and security of our telephone company data
networks. To use our services, subscribers must initiate telephone connections
between their personal computers and computer hardware in local or regional
facilities known as "points of presence." We contract for the use of points of
presence around the country from various telecommunications carriers. These
carriers currently include UUNET Technologies, which is operated by WorldCom;
Level 3; Concentric; Splitrock Services; Sprint; PSINet; and Navipath. We also
rely on these telecommunications companies to carry data between their points of
presence and our central computers located in Cambridge, Massachusetts and
Jersey City, New Jersey.
As of September 30, 2000, we had contracted for the use of more than 3,400
local telephone numbers associated with points of presence throughout the United
States. Nevertheless, a minority of our subscriber base may be 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 subscriptions with
us. Because we depend on third-party telecommunications carriers for crucial
portions of our network infrastructure, we do not have direct control over
network reliability and some aspects of service quality. A natural disaster or
other unanticipated problem that affects the points of presence or the
telecommunications lines we use, or that affects the nation's telecommunications
network in general, could cause interruptions in our services.
Only a small number of telecommunications companies can provide the
network services we require. This number has been reduced through consolidation
in the telecommunications industry, and there is a significant risk that further
consolidation could make us reliant on an even smaller number of providers.
Currently, we are particularly dependent on WorldCom, which provides more than
1,100 of the more than 3,400 points of presence for which we contract, many of
which are in locations not served competitively by other telecommunications
carriers. Our business could be significantly harmed if we are unable to
maintain a favorable relationship with WorldCom and the companies they control.
We cannot assure you that we would be able to replace all of the services
provided to us through 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. In the past, we have benefited from
reductions in per-unit pricing for telecommunications services. We cannot assure
you that telecommunications prices will continue to decline, or that there will
not be telecommunications price increases due to factors within or beyond our
control, including but not limited to a decline in the total number of
telecommunications hours our subscribers consume, possibly due in part to
reductions in the size of our subscriber base. We cannot assure you that our
telecommunications carriers will continue to provide us access to their points
of presence on our current or better price terms, that the price terms that they
do offer us, if any, will be sufficiently low to meet our needs, or that
alternative services will be available in the event that their quality of
service declines or that our relationship with any of our current carriers is
terminated.
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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 our
telecommunications carriers could end their relationship with us. In addition,
each of our telecommunications carriers provides network access to some of our
competitors, and could choose to grant those competitors preferential network
access, potentially limiting our members' ability to access the Internet or
connect to our central computers. Furthermore, the majority of our
telecommunications providers compete, or have announced an intention to compete,
with us in the market to provide consumer Internet access. If our
telecommunications service providers were to decrease the levels of service or
access provided to us, or if they were to terminate their relationships with us
for competitive or other reasons, our business and financial results would
suffer.
WE ARE DEPENDENT ON A THIRD PARTY FOR TECHNICAL AND CUSTOMER SERVICE SUPPORT AND
OUR BUSINESS MAY SUFFER IF IT IS UNABLE TO PROVIDE THESE SERVICES, CANNOT
EXPAND TO MEET OUR NEEDS, OR TERMINATES ITS RELATIONSHIP WITH US.
Our business and financial results depend, in part, on the availability
and quality of live technical and customer service support services. Although
many Internet service providers have developed internal customer service
operations designed to meet these needs, we have elected to outsource these
functions. We currently purchase almost all of our technical and customer
service support from ClientLogic Corporation. 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 functions in the event that
ClientLogic becomes unable or unwilling to offer these services to us.
At September 30, 2000, ClientLogic provided approximately 700 full-time or
part-time employees at its facilities to service our account. We believe the
availability of call-in technical support and customer service is especially
important to acquire and retain subscribers to our billable premium services,
and we are dependent 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. We believe
that failure to provide consistent customer support and to maintain
consumer-acceptable hold times could have an adverse effect on our subscriber
acquisition and retention efforts in the future. However, maintaining desired
customer support levels may require significantly more support personnel than
are currently available to us through ClientLogic, or significantly greater
expense than we feel it is appropriate, or than we are able, to incur.
Additionally, if we elect to offer customer service features that we do not
currently support, or to enhance the overall quality of our customer support for
competitive reasons, we may require even greater resources. We are currently
soliciting proposals from additional vendors to supplement the services provided
to us by ClientLogic, or to provide such services in the event our relationship
with ClientLogic terminates. Our current agreement with ClientLogic converted to
a month-to-month contract on August 1, 2000, under which either party has the
right to terminate the relationship at any time upon one month's notice.
Although we are currently renegotiating the terms of our relationship with
ClientLogic, there is a significant risk that ClientLogic could exercise its
one-month termination rights under the current agreement if the parties are
unable to reach mutually acceptable terms. 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 unable to
obtain externally or develop internally the additional customer service and
technical support capacity we expect to need, 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
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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. Our insurance
coverage may not adequately compensate us for any losses that may occur due to
any failures in our systems or interruptions in our services.
IF OUR BUSINESS WERE TO EXPERIENCE ADDITIONAL GROWTH, IT COULD STRAIN OUR
MANAGERIAL, OPERATIONAL, FINANCIAL, AND INFORMATION SYSTEMS RESOURCES.
In the past, we have expanded our company and our operations rapidly to
facilitate the growth of our business, and this expansion placed a significant
strain on our managerial, operational, financial and information systems
resources. Additionally, we expect that we will need to continually improve our
financial and managerial controls, billing systems, reporting systems and
procedures, and that we will also need to continue to recruit, train and manage
members of our workforce. Additional growth, if any, could hamper our ability to
effectively manage our business.
We had 65 employees at December 31, 1996, 152 employees at December 31,
1997, 144 employees at December 31, 1998, 263 employees at December 31, 1999,
including 60 employees in India, and 329 employees at September 30, 2000,
including 74 employees in India. Prior to May 21, 1999, consultants used in
India were employed by an affiliate of Juno. We expect to continue to rely on
outsourcing arrangements for our customer service needs and for the performance
of some advertising sales functions. Even with our reliance on outsourcing, it
is possible that that the size of certain portions of our own workforce may need
to continue to increase.
The demand on our network infrastructure, technical staff and technical
resources has grown rapidly as our subscriber base has expanded. We cannot be
certain that our infrastructure, technical staff and technical resources would
adequately accommodate or facilitate any future growth of our subscriber base
that we might experience. In particular, if we were to experience repeated or
prolonged system-wide service outages, our business and financial results would
suffer.
WE FACE POTENTIAL LIABILITY FOR INFORMATION TRANSMITTED OR RETRIEVED THROUGH OUR
INTERNET SERVICES.
Our business and financial results may suffer if we incur liability as a
result of information transmitted or retrieved through our services. The
liability of Internet service providers and online services companies for
information transmitted or retrieved through their services is uncertain. It is
possible that claims may be filed against us based on a variety of theories,
including defamation, obscenity, negligence, copyright or trademark
infringement, or other theories based on the nature, publication or distribution
of this information. These types of claims have been brought, sometimes
successfully, against providers of Internet services in the past. Such claims,
with or without merit, would likely divert management time and attention and
result in significant costs to investigate and defend. In addition, if we become
subject to these types of claims and we are not successful in our defense, we
may be forced to pay substantial damages. We may also be forced to implement
expensive measures to alter the way our services are provided to avoid any
potential liability.
CHANGES IN GOVERNMENT REGULATION COULD DECREASE OUR REVENUES AND INCREASE OUR
COSTS.
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Changes in the regulatory environment could decrease our revenues and
increase our costs. As a provider of Internet access 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 some developments suggest that they may be successful in obtaining the
treatment they seek. In addition, we operate our services throughout the United
States, and regulatory authorities at the state level may seek to regulate
aspects of our activities as telecommunications services. As a result, we could
become subject to FCC and state regulation as Internet services and
telecommunications services converge.
We remain subject to numerous additional laws and regulations that could
affect our business. Because of the Internet's popularity and increasing use,
new laws and regulations with respect to the Internet are becoming more
prevalent. These laws and regulations have covered, or may cover in the future,
issues such as:
o user privacy;
o children's privacy;
o pricing;
o intellectual property;
o federal, state and local taxation;
o advertising;
o distribution; and
o characteristics and quality of products and services.
Legislation in these areas could slow the growth in use of the Internet
generally and decrease the acceptance of the Internet as a communications and
commercial medium.
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, we
have begun to service a small number of subscribers who are located in Canada.
Laws and regulations relating to the Internet, or to doing business in Canada,
or similar laws and regulations in other jurisdictions should we choose to
continue to expand elsewhere outside of the United States, could have an adverse
effect on our business.
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. Additionally, because we rely on the collection and use of personal
data from our subscribers for targeting advertising and other communications to
our subscribers, we may be harmed by any laws or regulations that restrict our
ability to collect or use this data. The Federal Trade Commission has conducted
investigations into the privacy practices of companies that collect information
about individuals on the Internet. The enactment of any additional laws or
regulations in this area, or renewed enforcement activity of existing laws and
regulations, may impede the growth of the Internet, which could decrease our
potential revenues or otherwise cause our business to suffer.
FEDERAL TRADE COMMISSION ACTION COULD IMPACT OUR FINANCIAL RESULTS AND MARKETING
PRACTICES.
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The FTC has been investigating the advertising, billing and
cancellation practices of various Internet-related companies, including Juno.
At the FTC's request, we have provided marketing-related and customer
service-related information concerning our services. On the basis of these
submissions, the FTC staff has claimed, among other things, that Juno's
disclosure practices about the possibility of users incurring telephone
charges were insufficient, and that Juno's cancellation policies for
subscribers to its billable services were unduly restrictive. On the basis of
our discussions with the FTC staff, we have begun implementing modifications
to the disclosure we make about telecommunications charges that users might
incur and to our billable services cancellation practices. Depending on the
final outcome of the FTC inquiry, we could be required, under a consent order
or otherwise, to make compensatory payments, to revise our advertising and
marketing materials, and to make further modifications to our business
practices. As a result, our business and financial results could 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 ARE DEPENDENT ON THIRD-PARTY SOFTWARE TO ACCURATELY BILL SUBSCRIBERS TO OUR
BILLABLE PREMIUM SERVICES.
The operation of our billable premium services requires the accurate
operation of billing system software as well as our development of policies
designed to reduce the incidence of credit card fraud and other forms of
uncollectable "chargebacks." If we encounter difficulty with the operation of
these systems, or if errors, defects or malfunctions occur in the operation of
these systems, this could result in erroneous overcharges to customers or in the
under-collection of revenue, either of which could hurt our business and
financial results.
RELATIONSHIPS WITH ENTITIES AFFILIATED WITH THE CHAIRMAN OF OUR BOARD OF
DIRECTORS MAY PRESENT POTENTIAL CONFLICTS OF INTEREST.
The Chairman of our board of directors and our largest stockholder, Dr.
David E. Shaw, is the Chairman and Chief Executive Officer of D. E. Shaw & Co.,
Inc., which is the general partner of D. E. Shaw & Co., L.P. ("DESCO, L.P."), a
securities firm whose activities focus on various aspects of the intersection
between technology and finance. Dr. Shaw and entities affiliated with him are
also involved in other technology-related businesses apart from our company. As
a result of these other interests, 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. In addition to his indirect ownership of a
controlling interest in DESCO, L.P., Dr. Shaw may have a controlling interest in
these other businesses. Transactions between us and other entities affiliated
with Dr. Shaw may occur in the future and could result in conflicts of interest
that prove harmful to us.
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.
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In May 1999, we terminated an agreement with DESCO, L.P. under which
individuals employed by its affiliates located in India provided consulting
services to us. Following the termination of this agreement, these individuals
became employees of a Juno subsidiary located in Hyderabad, India. We continue
to obtain some services in India from DESCO, L.P. or its affiliates.
OUR DIRECTORS AND OFFICERS EXERCISE SIGNIFICANT CONTROL OVER US.
As of October 31, 2000, the executive officers, directors, and persons and
entities affiliated with executive officers or directors beneficially owned in
the aggregate approximately 39.9% of our outstanding common stock. The Chairman
of our board of directors is Dr. David E. Shaw. Dr. Shaw continues to serve as
the Chairman and Chief Executive Officer of D. E. Shaw & Co., Inc., which is the
general partner of DESCO, L.P. As of October 31, 2000, Dr. Shaw and persons or
entities affiliated with him, including DESCO, L.P., beneficially owned, in the
aggregate, approximately 38.5% of our outstanding common stock as of that date.
As a result of this concentration of ownership, Dr. Shaw is able to exercise
significant influence over matters requiring approval by our stockholders,
including the election of directors and approval of significant corporate
transactions. This concentration of ownership could also have the effect of
delaying or preventing a change in control of Juno.
IF WE FAIL TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY OR FACE A CLAIM OF
INTELLECTUAL PROPERTY INFRINGEMENT BY A THIRD PARTY, WE COULD LOSE OUR
INTELLECTUAL PROPERTY RIGHTS OR BE LIABLE FOR SIGNIFICANT DAMAGES.
We have taken steps to protect our intellectual property rights, but we
cannot be certain that our efforts will be adequate to safeguard our rights to
technology we have developed. Disputes concerning the ownership or rights to use
intellectual property could be costly and time consuming to litigate, may
distract management from other tasks of operating the business, and may result
in our loss of significant rights and the loss of our ability to operate our
business.
We have been granted four U.S. patents covering aspects of our technology
for the offline display of advertisements and the authentication and dynamic
scheduling of advertisements and other messages to be delivered to computer
users. We have also filed a number of other U.S. patent applications relating to
additional aspects of our business. We cannot assure you, however, that these
applications will result in the issuance of patents, that any patents that have
been granted or that might be granted in the future will provide us with any
competitive advantages or will be exploited profitably by us, or that any of
these patents will withstand any challenges by third parties. We also cannot
assure you that others will not obtain and assert patents against us which are
essential for our business. If patents are asserted against us, we cannot assure
you that we will be able to obtain license rights to those patents on reasonable
terms or at all. If we are unable to obtain licenses, we may be prevented from
operating our business and our financial results may therefore be harmed.
Except as described above, we rely solely upon copyright and trademark
law, trade secret protection and confidentiality agreements with our employees
and with some third parties to protect our proprietary technology, processes,
and other intellectual property, to the extent that protection is sought or
secured at all. We cannot assure you that any steps we might take will be
adequate to protect against infringement and misappropriation of our
intellectual property by third parties. Similarly, we cannot assure you that
third parties will not be able to independently develop similar or superior
technology, processes, or other intellectual property. Furthermore, we cannot
assure you that third parties will not assert claims against us for infringement
and misappropriation of their intellectual property rights nor that others will
not infringe or misappropriate our intellectual property rights, for which we
may wish to assert claims.
WE ARE DEPENDENT ON KEY MANAGEMENT PERSONNEL FOR OUR FUTURE SUCCESS.
Our business and financial results depend in part on the continued service
of our key personnel. We do not carry key person life insurance on any of our
personnel. The loss of the services of any of our
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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. Concerns about developments in the Internet industry
in general, or about our company in particular, may make it more difficult than
in the past to retain our key employees or to attract, assimilate or retain
other highly qualified employees. We have from time to time in the past
experienced difficulty in hiring and retaining highly skilled employees with
appropriate qualifications, and we expect to continue to experience such
difficulties. We have experienced a higher rate of employee attrition in recent
quarters than in prior periods, including the departure of a number of our most
senior managers. We are likely to experience further such attrition, including
of senior managers, in the future.
WE MAY NOT BE ABLE TO SUCCESSFULLY MAKE ACQUISITIONS OF OR INVESTMENTS IN OTHER
COMPANIES.
Although we have recently entered into two transactions in which other
companies have agreed to refer their subscribers to us in return for
compensation either primarily or entirely in the form of Juno common stock, we
do not have experience in completing acquisitions of, or making investments in,
companies or their assets. From time to time we have had discussions with
companies regarding our acquiring, or investing in, their businesses, products
or services, or customers. If we buy a company, we could have difficulty in
assimilating that company's personnel and operations, and the key personnel of
the acquired company may decide not to work for us. We would expect that any
acquisition may present us with difficulties in assimilating the acquired
services, technology assets or customer bases into our operations. Similarly,
subscriber referral transactions may expose us to difficulties resulting from
the conversion of subscribers from a competitive service to our own services.
Any of these difficulties could disrupt our ongoing business, and distract our
management and employees. In addition, these transactions could increase our
cash expenditures, and require the amortization of goodwill, both of which could
have an adverse effect on our financial results. Furthermore, we expect to issue
equity securities, in order to pay for our subscriber referral transactions to
date, and we would expect to issue equity securities, and might additionally be
required to assume indebtedness, in connection with any other transactions we
might choose to undertake in the future. The issuance of equity securities could
be dilutive to our existing stockholders and might, to the extent such
securities were sold into the public market, impair our ability to draw down
funding under the equity line facility.
WE COULD FACE ADDITIONAL REGULATORY REQUIREMENTS, TAX LIABILITIES AND OTHER
RISKS IF WE DECIDE TO EXPAND INTERNATIONALLY.
We currently provide services to a small number of users who are located
in Canada. We may decide to increase the international availability of our
services, and we 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.
WE HAVE ANTI-TAKEOVER PROVISIONS WHICH MAY MAKE IT DIFFICULT FOR A THIRD PARTY
TO ACQUIRE US.
Provisions of our certificate of incorporation, our bylaws and Delaware
law could make it more difficult for a third party to acquire us, even if doing
so might be beneficial to our stockholders.
WE DO NOT PLAN TO PAY DIVIDENDS IN THE FORESEEABLE FUTURE AND, AS A RESULT,
STOCKHOLDERS WILL NEED TO SELL SHARES TO REALIZE A RETURN ON THEIR
INVESTMENT.
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We have not declared or paid any cash dividends on our capital stock since
inception. We intend to retain any future earnings to finance the operation and
expansion of our business and do not anticipate paying any cash dividends in the
foreseeable future. Consequently, stockholders will need to sell shares of
common stock in order to realize a return on their investment, if any.
PART II. OTHER INFORMATION
ITEM 1 -- LEGAL PROCEEDINGS
Because Freewwweb and its affiliates had sought the protection of Chapter
11 of the Bankruptcy Code, the subscriber referral agreement we entered into
with Freewwweb was subject to approval by the U.S. Bankruptcy Court for the
Southern District of New York. On July 19, 2000, the Bankruptcy Court granted
Freewwweb's motion to approve the agreement. Subsequently, Freewwweb and its
principals asserted that Juno misused a computer file containing e-mail
addresses and passwords provided to us by Freeeweb, and they filed a pleading
with the Bankruptcy Court on August 1, 2000 asserting that Juno is obligated to
pay compensation in an amount in excess of $80 million solely as a result of the
delivery to Juno of this file. We believe that Freewwweb's assertions are
entirely without merit, as our agreement with Freewwweb is expressly limited so
that Juno will owe compensation only with respect to the subset of Freewwweb
users who successfully create Juno accounts as a result of Freewwweb's referral
services and who also satisfy strict usage criteria. Additionally, the computer
file in question was intentionally provided to us by Freewwweb so that Juno
could perform the e-mail forwarding services contemplated under the agreement.
While the applicable measurement periods have not been completed, Juno does not
believe that the number of users that legitimately qualify will constitute a
significant percentage of Freewwweb's initial subscriber base. We believe that
Freewwweb is not entitled to the additional consideration it seeks, and we have
commenced a proceeding with the Bankruptcy Court requesting a ruling on this
issue, as well as seeking monetary damages against Freewwweb. We intend to
defend our interests vigorously in this matter.
We filed an action against Qualcomm Incorporated and NetZero, Inc. in the
United States District Court for the District of Delaware, alleging that the
defendants have infringed our U.S. Patent No. 5,809,242. The complaint was
served on the defendants on September 25, 2000. Our patent, issued in 1998,
relates to technology developed by Juno that enables advertisements and other
content to be displayed to an Internet user while that user is offline. The
complaint alleges that a new version of Qualcomm's Eudora e-mail software
includes a setting called "sponsor mode" that enables advertising to be
displayed while the user reads and writes e-mail. NetZero has begun distributing
this version of Eudora and has engaged in activities to encourage its
subscribers to use it. Our lawsuit seeks declaratory relief, permanent
injunctive relief and actual and punitive damages against both defendants. On
November 6, 2000, the defendants filed an answer and counterclaim in which they
seek to have the court declare our patent invalid. Our company policy is to
vigorously pursue the protection of our intellectual property rights. We have
not ruled out the possibility that a settlement of this dispute would be in our
best interests, if it can avoid the time, expense, management distraction and
uncertainty of litigation. There can be no assurance that a settlement, if any
can be reached, would achieve the results that might have been available to us
through litigation, or would otherwise be advantageous to us.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as part of this report:
27.1 Financial Data Schedule
(b) The following reports on Form 8-K were filed during the quarter ended
September 30, 2000:
The Company filed a report on Form 8-K on July 20, 2000.
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ITEM 7. SIGNATURES
Pursuant to the requirements of the Securities Exchange Act, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized:
JUNO ONLINE SERVICES, INC.
(Registrant)
Date: November 14, 2000 /s/ Charles E. Ardai
---------------------
Name: Charles E. Ardai
Title: President, Chief Executive
Officer and Director
(principal executive officer)
Date: November 14, 2000 /s/ Richard M. Eaton, Jr.
--------------------------
Name: Richard M. Eaton, Jr.
Title: Chief Financial Officer
and Treasurer
(principal accounting and
financial officer)
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