FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(MARK ONE)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: MARCH 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____ TO _____
COMMISSION FILE NUMBER:
000-26009
JUNO ONLINE SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3914547
---------------------------------- ----------------------------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
1540 BROADWAY, NEW YORK, NY 10036
-----------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 597-9000
(FORMER NAME, FORMER ADDRESS, AND FORMER YEAR, IF CHANGED SINCE LAST REPORT:)
NOT APPLICABLE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
As of April 30, 2001, there were 41,688,888 shares of the Registrant's common
stock outstanding.
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 - March 31, 2001 and
December 31, 2000..................................................................... 3
Condensed Consolidated Statements of Operations - Three months ended
March 31, 2001 and 2000............................................................... 4
Condensed Consolidated Statement of Stockholders' Equity - Three months ended
March 31, 2001........................................................................ 5
Condensed Consolidated Statements of Cash Flows - Three months ended
March 31, 2001 and 2000............................................................... 6
Notes to Condensed Consolidated Financial Statements...................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................................ 9
PART II. OTHER INFORMATION.............................................................................. 50
Item 1. Legal Proceedings......................................................................... 50
Item 2. Changes in Securities and Use of Proceeds................................................. 51
Item 6. Exhibits and Reports on Form 8-K.......................................................... 51
Item 7. Signatures................................................................................ 53
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
JUNO ONLINE SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
March 31, December 31,
2001 2000
--------- ------------
(unaudited)
Assets
Current assets:
Cash and cash equivalents .................................. $ 46,820 $ 55,729
Accounts receivable, net of allowance for
doubtful accounts of $2,828 and $2,688 in 2001
and 2000, respectively .................................. 7,749 9,420
Prepaid expenses and other current assets .................. 1,354 3,141
--------- ---------
Total current assets .................................... 55,923 68,290
Fixed assets, net ............................................. 8,354 9,164
Other assets .................................................. 831 917
--------- ---------
Total assets .................................................. $ 65,108 $ 78,371
========= =========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses ...................... $ 25,702 $ 29,287
Current portion of capital lease obligations ............... 692 1,209
Deferred revenue ........................................... 14,596 14,578
--------- ---------
Total current liabilities ............................... 40,990 45,074
Capital lease obligations ..................................... 415 402
Deferred rent ................................................. 122 150
Liabilities expected to be settled with common stock .......... 4,000 4,000
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,
41,650,581 and 41,134,350 shares issued and outstanding
in 2001, and 2000, respectively ......................... 417 411
Additional paid-in capital ................................. 211,935 211,550
Unearned compensation ...................................... (250) (333)
Cumulative translation adjustment .......................... (5) (1)
Accumulated deficit ........................................ (192,516) (182,882)
--------- ---------
Total stockholders' equity .............................. 19,581 28,745
--------- ---------
Total liabilities and stockholders' equity .............. $ 65,108 $ 78,371
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
JUNO ONLINE SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
----------------------------
2001 2000
-------- --------
Revenues:
Billable services ................................ $ 22,913 $ 16,736
Advertising and transaction fees ................. 5,790 6,409
Direct product sales ............................. -- 902
-------- --------
Total revenues ................................ 28,703 24,047
-------- --------
Cost of revenues:
Billable services ................................ 15,358 12,040
Advertising and transaction fees ................. 1,531 1,750
Direct product sales ............................. -- 856
-------- --------
Total cost of revenues ........................ 16,889 14,646
-------- --------
Operating expenses:
Operations, free service ......................... 6,296 6,144
Subscriber acquisition ........................... 6,299 44,751
Sales and marketing .............................. 3,728 3,615
Product development .............................. 2,390 2,463
General and administrative ....................... 3,381 1,776
-------- --------
Total operating expenses ...................... 22,094 58,749
-------- --------
Loss from operations .......................... (10,280) (49,348)
Interest income, net ................................ 646 1,722
-------- --------
Net loss ...................................... $ (9,634) $(47,626)
======== ========
Basic and diluted net loss per share ................ $ (0.23) $ (1.28)
======== ========
Weighted average shares outstanding used
in basic and dilued net loss per share
calculation ...................................... 41,362 37,086
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
JUNO ONLINE SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
(UNAUDITED)
Additional Cumulative
Common Stock Paid-in Unearned Translation Accumulated
Shares Amount Capital Compensation Adjustment Deficit Total
------- --------- ---------- ------------ ------------ ------------ ---------
Balance, December 31, 2000 .............. 41,134 $ 411 $ 211,550 $ (333) $ (1) $(182,882) $ 28,745
Issuance of common stock upon
exercise of stock options ........ 143 2 80 -- -- -- 82
Issuance of common stock in
connection with employee stock
purchase plan .................... 56 1 125 -- -- -- 126
Issuance of common stock in
connection with equity line
facility, net of offering costs .. 317 3 229 -- -- -- 232
Forfeitures of unearned compensation -- -- (49) 49 -- -- --
Amortization of unearned compensation -- -- -- 34 -- -- 34
Foreign translation adjustment ...... -- -- -- -- (4) -- (4)
Net loss ............................ -- -- -- -- -- (9,634) (9,634)
------- --------- --------- --------- --------- --------- ---------
Balance, March 31, 2001 ................ 41,650 $ 417 $ 211,935 $ (250) $ (5) $(192,516) $ 19,581
======= ========= ========= ========= ========= ========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements
5
JUNO ONLINE SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
----------------------------
2001 2000
--------- ---------
Cash flows from operating activities:
Net loss ........................................................ $ (9,634) $ (47,626)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization ................................ 1,028 729
Amortization of unearned compensation ........................ 34 61
Changes to operating assets and liabilities:
Accounts receivable, net ................................... 1,671 (1,939)
Prepaid expenses and other current assets .................. 1,686 2,149
Accounts payable and accrued expenses ...................... (3,504) 2,391
Deferred revenue ........................................... 18 2,359
--------- ---------
Net cash used in operating activities .................... (8,701) (41,876)
--------- ---------
Cash flows from investing activities:
Purchases of fixed assets ....................................... (140) (1,886)
Other assets .................................................... -- (329)
--------- ---------
Net cash used in investing activities .................... (140) (2,215)
--------- ---------
Cash flows from financing activities:
Payments on capital lease obligations ........................... (504) (829)
Net proceeds from issuance of common stock ...................... -- 81,080
Proceeds from issuance of common stock
in connection with employee stock purchase plan .............. 126 715
Proceeds from issuance of common stock
in connection with equity line, net of offering costs ........ 232 --
Proceeds from issuance of common stock
upon exercise of stock options ............................... 82 446
--------- ---------
Net cash (used in) provided by financing activities ........ (64) 81,412
--------- ---------
Effect of exchange rate changes on cash and cash equivalents (4) --
Net (decrease) increase in cash and cash equivalents ....... (8,909) 37,321
Cash and cash equivalents, beginning of period ..................... 55,729 91,497
--------- ---------
Cash and cash equivalents, end of period ............................ $ 46,820 $ 128,818
========= =========
Supplemental disclosure of cash flow information:
Cash paid for interest .......................................... $ 19 $ 20
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
JUNO ONLINE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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 months ended March 31, 2001 are not necessarily indicative
of the results that may be expected for the full year ending December 31, 2001.
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, 2000, and other filings with the Securities and
Exchange Commission.
Juno is a provider of Internet-related services 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. The Company's revenues are
derived primarily from the subscription fees charged for its billable 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 the announcement, the
Company's free basic service provided only basic dial-up e-mail functionality.
The Company has experienced operating losses since its inception. Such
losses are due in large 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. Although the Company
reduced its investments in subscriber acquisition and other marketing activities
by a substantial amount in the second half of 2000 and first quarter of 2001,
and has taken steps to reduce other operating expenses, there can be no
assurance that the Company will achieve or sustain profitability or positive
cash flow in its operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
COMPREHENSIVE INCOME
The Company adopted SFAS No. 130, "Reporting Comprehensive Income"
("SFAS") during the year ended December 31, 1999. SFAS 130 establishes
standards for the reporting and display of comprehensive income and its
components. Other than the cumulative translation adjustment identified in
stockholders' equity in the balance sheet, the Company has no items of other
comprehensive income in any period presented.
EARNINGS PER SHARE
In accordance with SFAS No. 128, "Earnings per Share", basic earnings
per share is calculated based on the weighted average number of shares of
common stock outstanding during the reporting period. Diluted earnings per
share is calculated giving effect to all potentially dilutive common shares,
assuming such shares were outstanding during the reporting period. Stock
options in the amount of 9,785,582 and 6,068,082 shares for the three months
ended March 31, 2001 and 2000, respectively, were not included in the
computation of diluted EPS as they are antidilutive as a result of net losses
during the periods presented.
7
JUNO ONLINE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
3. 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 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 results of operations for the year ended December 31,
2000 reflect a charge for exposure that management estimates could result
from the FTC inquiry.
8
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,
2000, AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 16, 2001.
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 provide multiple
levels of service, including free basic Internet access, billable premium
dial-up service, and high-speed broadband access, which is currently available
in selected markets. Our revenues are derived primarily from the subscription
fees we charge for the use of our premium Web access services, and to a lesser
extent 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 1999 and 2000, we announced a number of major expansions
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, and the reduction of some forms of on-screen advertising.
o JUNO EXPRESS is a broadband service designed to provide high-speed
access to the Internet through a variety of technologies. Currently
offered in selected markets around the country, Juno Express is
provided in DSL and wireless versions. Juno is currently testing a
cable version of the service.
In December 1999, in connection with the expansion of our free basic
service to include full Web access, we upgraded all subscribers using our
enhanced e-mail service, Juno Gold, to Juno Web at no additional cost.
In the month of March 2001, our base of active subscribers increased to
4.1 million, up from 4.0 million in December 2000. Our billable subscriber base
grew to 910,000 at March 31, 2001, up from 842,000 at December 31, 2000. Total
registered subscriber accounts grew to 15.9 million at March 31, 2001, up from
14.2 million as of December 31, 2000. See Selected Subscriber Data after the
Results of Operations section in this Item for a presentation of subscriber data
over the last five 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
9
activity or activities engaged in by such subscribers.
The net increase of 68,000 billable subscribers during the first quarter
of 2001 was largely attributable to migrations from our free basic service to
our billable premium services. Toward the end of 2000, we began implementing
measures designed to encourage heavier users of the free service to modify their
usage patterns or upgrade to a billable service. While these measures are
believed to have caused a certain amount of subscriber attrition from the free
service and are likely to contribute to a projected decline in our active
subscriber count over the coming quarters, we believe the measures are also
responsible in part for the increase in migrations to our billable services that
we experienced at the end of the fourth quarter of 2000 and the start of the
first quarter of 2001. We do not expect the growth we experienced in December
2000 and the beginning of the first quarter of 2001 to continue in the current
quarter or in subsequent quarters.
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 selected discounted 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 within the main Juno
software while a Juno subscriber reads or writes e-mail and on
Juno's Web portal site, and during 2000 and a portion of 2001 were
also displayed on the persistent advertising and navigation banner
shown to our free subscribers at all times while they use the Web.
(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. Currently, the most common pricing plan for
Juno Web is a flat fee of $9.95 per month following a free initial month. During
the first quarter of 2001, we began adjusting the discounted prices offered
through some marketing channels and to some of our existing subscribers. For
example, we changed the billable service price plan we offered on our main Web
page and through some other marketing channels from $9.95 per month to $14.95
per month. Although we expect the reduction of discounted pricing to cause some
attrition from our billable services, we currently project that revenue lost due
to a decline in billable subscriber count is likely to be largely
counterbalanced by the higher revenues collected from the subscribers that
remain and the cost savings associated with the elimination of the usage hours
of any billable subscribers that leave the service. Our broadband service, Juno
Express, is currently provided through a number of technologies, including
10
DSL and mobile wireless technologies, at price points starting at $49.95 per
month. We have not undertaken any substantial amount of marketing for Juno
Express to date, and as of March 31, 2001, only a negligible number of
subscribers--roughly 3,000, not all of whom had completed the installation and
set-up process by such date--had signed up for broadband service through Juno
Express. Subscription revenues for our billable premium services accounted for
approximately 97% of billable services revenues during the first quarter of
2001.
The expansion of our free basic service to include full Web access in
December 1999 caused the costs associated with operating our free basic service
to increase significantly on a quarter-over-quarter basis in each of the first
three quarters of 2000 due to significantly increased telecommunications
connection time per subscriber per month. These costs, which are reflected in
the "Operations, free service" line of our statement of operations, improved
somewhat in the fourth quarter of 2000 and improved substantially further in the
first quarter of 2001, following our adoption of measures designed to encourage
heavier users of the free service to modify their usage patterns or upgrade to a
billable service. These measures led to a quarter-over-quarter reduction of
44.5% in average monthly Web connection time for users of our free service in
the first quarter of 2001 as compared to the fourth quarter of 2000. We expect
our cost of Operations, free service to improve even further in the second
quarter of 2001.
When we expanded our free service to include full Web access, we also
introduced a persistent advertising and navigation banner that is displayed to
our free subscribers at all times while they use the Web. Our long-term strategy
contemplated our generating sufficient additional revenues from this persistent
advertising banner and from other advertising inventory we control to cover the
costs associated with our service expansion. However, we have not yet been able
to generate sufficient additional revenues to cover these increased costs.
Furthermore, in December 2000, one of our competitors, NetZero, commenced legal
action against us asserting that elements of the technology we use in connection
with our persistent advertising and navigation banner infringe on a United
States patent issued to them earlier that month. We intend to vigorously contest
the allegations. For most of the first quarter, we were prevented from
displaying advertisements for third parties in this persistent advertising
banner due to a temporary restraining order issued in connection with this
dispute. However, on April 12, 2001, the court lifted this temporary restraining
order. On April 17, 2001, we resumed displaying third-party advertisements in
the persistent advertising banner. Please see "Risk Factors that May Affect
Future Results - If we fail to adequately protect our intellectual property or
face a claim of intellectual property infringement by a third party, we could
lose our intellectual property rights or be liable for significant damages" and
Part II. Item 1. "Legal Proceedings" for more detailed information.
Revenues from advertising and transaction fees declined by 44.9% to $5.8
million in the first quarter of 2001, down from $10.5 million in the fourth
quarter of 2000. This decrease in advertising revenues can be attributed in
large part to the widely reported decline in the market for Internet
advertising, manifested in part through reduced signings, the reduction or
cancellation of certain existing advertising contracts, and an increase in
uncollectible receivables. On a per subscriber basis, revenues associated with
our free basic service declined approximately 46.3% in the first quarter of
2001, to an average of $0.51 per month, down from approximately $0.95 per month
in the fourth quarter of 2000. As noted above, we have taken steps to reduce
expenses associated with providing the free service, with a particular emphasis
on managing telecommunications costs through the reduction of average monthly
Web connection time. We currently expect revenues associated with the free basic
service to continue to be exceeded for some time 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. Our business may suffer if the
11
market for Internet-based advertising fails to recover or if the steps we are
taking to reduce expenses fail to have the desired impact. The impact on Juno of
the softness in demand for Internet advertising is reflected in our backlog of
advertising contracts, which continued to decrease, to approximately $7.0
million at the end of the first quarter of 2001 from about $12.0 million at the
end of the fourth quarter of 2000 and $28 million at the end of the third
quarter of 2000. New signings continued to slow in the first quarter of 2001 and
a number of advertisers either shortened or cancelled their advertising
contracts. Additionally, as certain advertisers have gone out of business or
found themselves in financial distress--particularly Internet-related companies,
which continue to account for the majority of our advertisers--we have also
experienced a significant increase in uncollectible receivables. In light of
these trends, we currently expect advertising and transaction fee revenue to
decline further over the coming quarters, although we do not expect the revenue
decline during the second quarter of 2001 to be as extensive as the roughly 40%
drop in backlog from December 31, 2000 to March 31, 2001. Please see "Risk
Factors that May Affect Future Results - 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." During the first quarter of 2001, approximately
80% of revenues came from billable services, while the remaining 20% came from
advertising and transaction fees. Our current expectation is that this mix of
revenues will remain roughly constant for the remainder of the year, as we
continue to emphasize our billable services.
Our competitors for billable services revenues and advertising and
transaction fees revenues 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, among other things, necessitating advertising
rate reductions or price reductions for our billable services, or placing us at
a competitive disadvantage if, as we currently believe is likely, we do not
maintain or increase our spending in areas such as marketing and product
development.
As of March 31, 2001, we held a total of $46.8 million in cash and cash
equivalents. We believe that changes in the market environment over the past
year 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 reliance on external sources of capital. We have significantly reduced
our operating expenses over each of the last three quarters. In particular, we
have reduced Operations, free service expenses and expenditures for subscriber
acquisition. Operations, free service expenses dropped to $6.3 million in the
first quarter of 2001, down 42.2% from $10.9 million in the fourth quarter of
2000. Subscriber acquisition expenses also decreased to $6.3 million in the
first quarter of 2001, down 27.7% as compared to the immediately preceding
quarter and down 85.9% as compared to the year-ago quarter. We currently expect
that net losses for the remaining nine months of 2001 will total $15 million or
less.
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 some 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 have suspended substantially all use of
direct mail and do not currently plan to use either this channel or other
cash-intensive marketing channels for subscriber acquisition in the near term.
The results of operations
12
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. We currently expect our
active and billable subscriber count to decline over the coming quarters, in
part as a result of the measures we have begun implementing to reduce
telecommunications costs associated with our free service, drive migrations to
our billable services, and reduce the use of discounted promotional pricing for
our billable services.
Our principal expenses consist of telecommunications, customer service,
personnel and related costs, and marketing. 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, and services related to the sale of certain advertising inventory and
the delivery of the associated advertisements. 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 $289 million from our inception on
June 30, 1995 through March 31, 2001. We have relied primarily on sales of
equity securities, totaling $300 million through March 31, 2001, 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, $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 and
$232,000 of net proceeds from sales of our common stock under our "equity
line" facility, which we secured in October 2000. See "Liquidity and Capital
Resources" of this Item for additional information about this facility.
13
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE MONTHS ENDED MARCH 31, 2000
REVENUES
Total revenues increased $4.7 million, to $28.7 million for the three
months ended March 31, 2001 from $24.0 million for the three months ended
March 31, 2000, an increase of 19.4%. This increase was due to increases in
billable services, partially offset by a decrease in advertising and
transaction fees and direct product sales.
BILLABLE SERVICES. Billable services revenues increased $6.2 million,
to $22.9 million for the three months ended March 31, 2001 from $16.7 million
for the three months ended March 31, 2000, an increase of 36.9%. This
increase was due primarily to a greater number of billable service
subscribers and higher average monthly revenue per subscriber in the three
months ended March 31, 2001, as compared with the year ago period.
ADVERTISING AND TRANSACTION FEES. Advertising and transaction fee
revenues decreased $0.6 million, to $5.8 million for the three months ended
March 31, 2001 from $6.4 million for the three months ended March 31, 2000, a
decrease of 9.7%. This decrease was due primarily to the decline in the
market for Internet advertising and an increase in uncollectible receivables.
Barter transactions accounted for approximately 1.8% and 1.5% of total
revenues and 8.9% and 5.5% of advertising and transaction fees for the three
months ended March 31, 2001 and 2000, respectively.
DIRECT PRODUCT SALES. We stopped conducting direct product sales
activities in August 2000 and have not sold any merchandise or recorded any
revenue since then. Direct product sales totaled $0.9 million for the three
months ended March 31, 2000.
COST OF REVENUES
Total cost of revenues increased approximately $2.2 million, to $16.9
million for the three months ended March 31, 2001 from $14.6 million for the
three months ended March 31, 2000, an increase of 15.3%. This increase was
due primarily to increases in costs associated with providing billable
services to a substantially larger number of billable subscribers, partially
offset by a decrease in costs associated with advertising and transaction
fees and direct product sales.
BILLABLE SERVICES. Cost of revenues related to billable services
consists primarily of the costs to provide billable premium services,
including telecommunications, customer service, operator-assisted technical
support, credit card fees, and personnel and related overhead costs. In
addition, during the three months ended March 31, 2001, 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, a practice we had discontinued for most
of 2000.
Cost of revenues related to billable services increased approximately
$3.3 million, to $15.4 million for the three months ended March 31, 2001 from
$12.0 million for the three months ended March 31, 2000, an increase of
27.6%. This increase was due primarily to the costs of providing our billable
subscription services to a substantially larger number of subscribers, offset
in part by a decrease in the average monthly cost to provide the service to
each billable subscriber as compared with the year-ago period. Costs related
to the provision of these billable premium services, principally
telecommunications, customer service, and technical support expenses,
accounted for 87.1% of the total costs of revenues related to billable
services during the three months ended March 31, 2001 and accounted for the
majority of the increase. These expenses accounted for 88.6% of the total
costs of
14
revenues during the three months ended March 31, 2000. Cost of billable services
revenues as a percentage of billable services revenues improved to 67.0% for the
three months ended March 31, 2001 from 71.9% for the three months ended March
31, 2000. This improvement is primarily attributable to decreased average
telecommunications rates, partially offset by increased average hours of usage
per subscriber and average customer service costs per subscriber. However, cost
of billable services revenues as a percentage of billable services revenues
increased for the three months ended March 31, 2001 when compared with 62.2% for
the three months ended December 31, 2000. This deterioration of billable service
margin resulted from an increase in average hours of Web usage per billable
subscriber, in particular, as heavier users of our free service migrated to our
billable services following our December 2000 adoption of measures designed to
address resource consumption by such users. The effect of this increase was
offset, in part, by an increase in average revenue per billable subscriber and a
decrease in our effective telecommunications rate. We currently expect hours of
usage per billable subscriber to continue to increase. There can be no assurance
that this growth will be offset by a further improvement in average revenue per
billable subscriber or in our effective telecommunications rate.
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 decreased
approximately $219,000, to $1.5 million for the three months ended March 31,
2001 from $1.8 million for the three months ended March 31, 2000, a decrease
of 12.5%. This decrease was due primarily to the decline in advertising and
transaction fee revenue associated with continued weakness in the market for
Internet advertising. Cost of revenues related to advertising and transaction
fees as a percentage of advertising and transaction fees improved to 26.4%
for the three months ended March 31, 2001 from 27.3% for the three months
ended March 31, 2000. This improvement is due primarily to a decrease in
telecommunications rates. However, cost of revenues related to advertising
and transaction fees as a percentage of advertising and transaction fees
increased for the three months ended March 31, 2001 when compared with 18.4%
for the three months ended December 31, 2000. This deterioration of
advertising and transaction fees margin resulted from smaller average deal
sizes and a reduced revenue base over which to allocate related overhead
costs. Cost of revenues for advertising and transaction fees as a percentage
of advertising and transaction fees is expected to remain at around 30% over
the remainder of 2001.
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.
We stopped conducting direct product sales activities in August 2000
and have not incurred any costs since then. The cost of revenues for direct
product sales was $856,000 for the three months ended March 31, 2000.
OPERATING EXPENSES
OPERATIONS, FREE SERVICE. Operations, free service expenses represent
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
approximately $152,000 to $6.3
15
million for the three months ended March 31, 2001 from $6.1 million for the
three months ended March 31, 2000, an increase of 2.5%. This increase was due
primarily to an increase in the average number of hours that each of our free
service subscribers used the Web, offset primarily by a reduction in our
effective telecommunications rate. However, expenses associated with Operations,
free service decreased $4.6 million for the three months ended March 31, 2001
when compared with expenses of $10.9 million for the three months ended December
31, 2000. This improvement resulted primarily from a 44.5% reduction in average
monthly Web connection time for users of our free service during the three
months ended March 31, 2001 as compared to the three months ended December 31,
2000. This reduction was driven primarily by measures we began implementing late
in the fourth quarter of 2000 to encourage heavier users of the free service to
modify their usage patterns or upgrade to a billable service.
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 have historically included 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 decreased $38.5 million, to $6.3 million
for the three months ended March 31, 2001 from $44.8 million for the three
months ended March 31, 2000, a decrease of 85.9%. This decrease was due to
our not repeating in the first quarter of 2001 the extensive direct mail
campaigns undertaken in the first quarter of 2000, as well as our suspending
other marketing activities such as most television, radio, outdoor and other
advertising campaigns. In June 2000, we decided to substantially curtail cash
intensive subscriber acquisition activities in order to help bring our
operating expenses more in line with our revenues. As a percentage of
revenues, subscriber acquisition costs decreased to 21.9% in the three months
ended March 31, 2001 from 186.1% in the three months ended March 31, 2000.
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.
Sales and marketing costs increased approximately $113,000, to $3.7
million for the three months ended March 31, 2001 from $3.6 million for the
three months ended March 31, 2000, an increase of 3.1%. This increase was due
primarily to an increase in personnel and related costs (excluding sales
commissions), as well as in trade advertising, partially offset by a
reduction in telecommunications and credit card costs associated with direct
product sales and sales commissions. As a percentage of revenues, sales and
marketing costs improved to 13.0% in the three months ended March 31, 2001
from 15.0% in the three months ended March 31, 2000. This improvement was due
primarily to an increase in revenues for the three months ended March 31,
2001 as compared to the year-ago period.
PRODUCT DEVELOPMENT. Product development includes research and
development expenses and other product development costs. These costs consist
primarily of personnel and related overhead costs.
16
Product development costs decreased approximately $73,000, to $2.4
million for the three months ended March 31, 2001 from $2.5 million for the
three months ended March 31, 2000, a decrease of 3.0%. This decrease was due
primarily to a decline in personnel costs in both our domestic and India
offices, offset in part by a slight increase in overhead costs. To date, we
have not capitalized any expenses related to any software development
activities.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of personnel and related overhead costs associated with executive,
finance, legal, recruiting, human resources and facilities functions, as well
as various professional expenses.
General and administrative costs increased $1.6 million, to $3.4 million
for the three months ended March 31, 2001 from $1.8 million for the three months
ended March 31, 2000, an increase of 90.4%. This increase was due primarily to a
rise in expenses associated with additional personnel and related overhead
costs, uncollectible receivables, and legal fees associated with our defense of
various claims brought against us by third parties. As a percentage of revenues,
general and administrative costs increased to approximately 11.8% for the three
months ended March 31, 2001 from 7.4% for the three months ended March 31, 2000.
INTEREST INCOME, NET. Interest income, net decreased $1.1 million to
$0.6 million for the three months ended March 31, 2001, from $1.7 million for
the three months ended March 31, 2000, a decrease of 62.5%. This decrease was
due primarily to interest income earned on lower average cash balances in the
three months ended March 31, 2001 as compared to the three months ended March
31, 2000. Interest income, net includes interest expense of $19,000 and
$44,000 for the three months ended March 31, 2001 and 2000, respectively.
SELECTED SUBSCRIBER DATA
The following table sets forth selected subscriber data for each of the
five quarters ended March 31, 2001. This data should be read in conjunction with
the information appearing elsewhere herein. The selected subscriber data for any
quarter are not necessarily indicative of future periods.
MAR. 31, 2001 DEC. 31, 2000 SEPT. 30, 2000 JUN. 30, 2000 MAR. 31. 2000
Total registered subscriber
accounts as of (1) .......... 15,890,000 14,153,000 12,771,000 11,048,000 9,430,000
Active subscriber accounts
in month ended (2) .......... 4,133,000 4,001,000 3,700,000 3,379,000 3,053,000
Active Web-enabled
subscribers m month ended (3) 3,736,000 3,587,000 3,251,000 2,876,000 2,358,000
Billable service accounts
as of (4) ................... 910,000 842,000 750,000 730,000 661,000
- ----------
(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
17
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.
18
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, $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, and $232,000 of net proceeds from sales of our common stock under
our "equity line" facility, which we secured in October 2000. We have
incurred significant losses since inception, totaling $289 million through
March 31, 2001. As of March 31, 2001 we had $46.8 million in cash and cash
equivalents.
Net cash used in operating activities for the three months ended
March 31, 2001 decreased $33.2 million to $8.7 million, down from $41.9
million for the three months ended March 31, 2000. This decrease was
primarily the result of a decline in subscriber acquisition expenses, which
represented approximately 101% of the overall decrease in the net loss, and a
decrease in the balance of accounts receivable, offset in part by a decrease
in the balance of accounts payable and accrued expenses associated with
subscriber acquisition liabilities and deferred revenue. The decline in
subscriber acquisition expenses was attributable to our decision to
substantially curtail subscriber acquisition activities in order to help
bring our operating expenses more in line with our revenues. The decrease in
accounts receivable resulted from a decline in advertising and transaction
fee revenues, as well as increased collection efforts during the three months
ended March 31, 2001 as compared to the three months ended March 31, 2000.
Accounts receivable includes the portion of advertising and transaction fees
and billable subscriber fees that have been billed in advance of the
performance of all or a portion of the related services and that have not
been collected. The portions of accounts receivable related to these fees as
of March 31, 2001 and 2000--and the corresponding equal amounts that remained
in our deferred revenue liability account balances at such dates--were $4,453
and $2,691, respectively.
Net cash used in investing activities was $140,000, and $2.2 million
for the three months ended March 31, 2001 and 2000, 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.
Net cash used by and provided by financing activities was $64,000 and
$81.4 million for the three months ended March 31, 2001, and 2000,
respectively. Financing activities for the three months ended March 31, 2000
primarily included $81.1 million in net proceeds we received from our
February 2000 follow-on offering of common stock.
In October 2000, we entered into a common stock investment agreement
with a private investment fund, The Kingston Limited Partnership, providing
for the future issuance and purchase of shares of our common stock. This
agreement and a related registration rights agreement constitute what is
commonly referred to as an "equity line" facility. The equity line facility
permits us to sell, subject to various restrictions, up to $7.5 million of
common stock in each of up to 20 drawdown periods of 22 trading days each
over the course of a period of up to two years, provided that we cannot sell
19
more than $125 million worth of shares in total under the facility and may in
practice only be able to sell a much lower amount. The total number of shares
that may be issued under the facility depends on a number of factors,
including the market price and trading volume of our common stock during each
drawdown period we choose to initiate. Any stock issued to Kingston under
this facility will generally be purchased at a price equal to 94 percent of
the volume-weighted average trading price of our common shares on a given
purchase day. Additionally, Kingston will generally not be obligated to
purchase shares from us on any day when the purchase price would be less than
$1.50 per share. Since Kingston's purchase price will generally be 94% of our
volume-weighted average trading price during a given purchase day, Kingston
generally will have no obligation to purchase shares on a given day to the
extent that the volume-weighted average trading price of our shares during
such day is less than $1.60 per share. Prior to the reduction of this minimum
price condition from $2.50 per share to $1.50 per share in March 2001,
Kingston agreed to waive the $2.50 minimum price condition with respect to
one drawdown period, and Kingston may agree from time to time to waive the
minimum purchase price in effect in the future to allow Juno to sell common
stock to Kingston at prices lower than $1.50 per share. Kingston does not
have an obligation to permit such sales, and may grant or deny such waivers
in its sole discretion. Even if Kingston does grant such a waiver in a
particular case and, at Juno's request, accepts a new minimum purchase price
lower than $1.50 per share for a given drawdown period, there can be no
assurance that Juno will meet such new minimum trading price condition to our
ability to draw down funds for all or any portion of such drawdown period. We
will control the timing and frequency of any sales, subject to the facility's
various restrictions, and will have no obligation to draw down any minimum
amount or number of times. However, the facility may be terminated if we sell
no shares to the fund for a period of four consecutive months.
The common stock investment agreement provides that the equity line will
not be available to Juno unless a registration statement is effective to permit
the fund to resell the shares purchased by it. Juno has filed a registration
statement on Form S-3 with the Securities and Exchange Commission on November
28, 2000 to register the resale by the fund of up to 10,000,000 shares of the
common stock that may be issued to it under the equity line facility. As of
April 30, 2001 we had sold 317,400 shares and raised net proceeds of $232,000
under this facility.
As of March 31, 2001, we held a total of $46.8 million in cash and cash
equivalents. 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.
Over the coming quarters, we expect further improvements in our operating
expenses. Savings are expected to be driven by further reductions in
telecommunications hours associated with the free service and, to a lesser
extent, in expenditures for subscriber acquisition, as well as by reductions in
staff-related expenses achieved by the recent scaling back of selected
departments in response to the evolving business environment and expanding the
use of our resources in India. In April 2001, we eliminated approximately forty
positions (net of ongoing replacement searches) that we concluded were no longer
necessary due to shifts in the business and the relocation of certain functions
to our India office. At April 30, 2001, worldwide headcount was 262.
In 2000, we entered into several transactions in which Juno's payment for
services rendered may be settled, in whole or in part, through the issuance of
our common stock.
On June 29, 2000, we entered into a subscriber referral agreement with
SmartWorld Communications, Inc. and its subsidiaries SmartWorld Technologies,
LLC and Freewwweb, LLC. Under the terms of the Freewwweb Agreement, Freewwweb
20
began to refer its subscribers to our Internet access services on July 19,
2000 and is entitled to receive consideration from us for each former
Freewwweb subscriber that became a new subscriber to our services and
subsequently met certain qualification criteria. Under the terms of the
Freewwweb Agreement, such consideration will include cash and may include, at
our option, shares of our common stock. The number of shares of our common
stock will be based on the closing sale price of our common stock on the
dates of issuance. In accordance with the Freewwweb Agreement, we have ceased
accepting additional Freewwweb subscribers. We have not yet issued any shares
of our common stock to Freewwweb or its affiliates under this agreement.
Please see Part II, Item 1 "Legal Proceedings" for additional information
concerning this transaction.
On September 18, 2000, we entered into a distribution agreement with
Babbage's Etc. LLC. Under the terms of this agreement, Babbage's agreed to
distribute our software and will receive periodic compensation from us for each
new subscriber generated by such distribution that subsequently meets certain
qualification criteria. The compensation received by Babbage's will include
shares of our common stock or, at our option, cash. The number of shares of our
common stock issuable to Babbage's will be based on the closing sale price of
our common stock on the dates of issuance. We have not yet issued any shares of
our common stock to Babbage's under this agreement.
We may find additional 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 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.
21
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 market for Internet services;
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 control the cost of providing our free basic service by implementing
measures designed to discourage excessive use of this service, and
to do so without causing undesirable levels of subscriber attrition;
o maintain and develop strategic relationships with business partners
to advertise their products over our services, particularly in light
of ongoing weakness in the market for Internet advertising;
o promote awareness of and attract subscribers to the Juno services,
particularly to the extent that we continue to refrain from
conducting any material external marketing activities;
o prevent increases and achieve reductions in the rates we pay for
telecommunications 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 provide our basic service and our billable premium
services;
o provide technical and customer support to our subscribers in a
cost-effective manner;
o operate broadband Internet access services in a cost-effective
manner, whether independently or in collaboration with one or more
third parties, to whatever extent we might choose to offer such
services;
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 service 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.
22
WE HAVE A HISTORY OF LOSSES SINCE OUR INCEPTION IN 1995 AND MAY NOT EVER BECOME
CASH-FLOW POSITIVE OR PROFITABLE
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 attract subscribers to and promote awareness of these services and
to build 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, $131.4 million for the year ended December 31, 2000 and $9.6 million for
the three months ended March 31, 2001. As of March 31, 2001, our accumulated net
losses totaled $289.0 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, $45.1 million for the year ended December 31, 1999, $109.5
million for the year ended December 31, 2000 and $8.7 million for the three
months ended March 31, 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 may not ever be successful in implementing our business strategies or
in addressing the risks and uncertainties facing our company. Even if we do
implement these strategies and address these risks successfully, our business
might not ever become cash-flow positive or profitable. 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.
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;
o the extent to which our reduction in marketing activity to acquire
subscribers and promote the Juno brand affects our ability to
acquire and retain subscribers;
o the availability and effectiveness of any revenue sharing
arrangements or other strategic alliances;
o the demand for Internet advertising and our ability to collect
outstanding receivables from our advertisers;
o seasonal trends relating to Internet advertising spending;
o capital expenditures 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;
23
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 to our billable
premium services, particularly by encouraging users of our free basic service to
upgrade to our billable premium services, and our ability to 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.
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 may need to raise substantial additional funds in the
future to fund our operations, including our telecommunications and other
service provision costs, subscriber acquisition 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, 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.
On October 6, 2000, we entered into an equity line facility with The
Kingston Limited Partnership, pursuant to which we may, subject to certain
conditions, be able to issue common stock to Kingston over the course of a
period of up to two years, in an aggregate amount not to exceed $125 million.
However, under our agreement with Kingston, they are not obligated to purchase
shares of our common stock unless a number of conditions have been satisfied. In
particular, they generally have no obligation to purchase shares to the extent
that their purchase price on a given purchase day would be less than $1.50 per
share. Since Kingston's purchase price will generally be 94% of our
volume-weighted average trading price during a given purchase day, Kingston
generally will have no obligation to purchase shares on a given day to the
extent that the volume-weighted average trading price of our shares during such
day is less than $1.60 per share. Prior to the reduction of this minimum price
condition from $2.50 per share to $1.50 per share in March 2001, Kingston agreed
to waive the $2.50 minimum price condition with
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respect to one drawdown period, and Kingston may agree from time to time to
waive the minimum purchase price in effect in the future to allow Juno to sell
common stock to Kingston at prices lower than $1.50 per share. Kingston does not
have an obligation to permit such sales, and may grant or deny such waivers in
its sole discretion. Even if Kingston does grant such a waiver in a particular
case and, at Juno's request, accepts a new minimum purchase price lower than
$1.50 per share for a given drawdown period, there can be no assurance that Juno
will meet such new minimum trading price condition to our ability to draw down
funds for all or any portion of such drawdown period.
In addition to price-related limitations, Kingston generally has no
obligation to purchase shares on a given day to the extent that such purchases
would exceed specified limitations based on our trading volume. Kingston cannot
purchase shares of our common stock unless a registration statement covering
such shares is effective, and Kingston has the right to terminate the facility
in its entirety if we have sold no shares to Kingston for a period of four
consecutive months. Additionally, the equity line facility provides that
Kingston may not purchase a number of shares that, when added to all other
shares purchased under the facility, would exceed 19.99% of the number of shares
of our common stock issued and outstanding on October 6, 2000 unless either we
obtain stockholder approval of issuances under the facility in excess of that
amount, or Kingston is advised by counsel that the rules of the principal market
or exchange on which our shares are quoted or listed would permit such an
issuance without stockholder approval. As of October 6, 2000, we had a total of
38,944,360 shares of common stock issued and outstanding, 19.99% of which would
be 7,784,978 shares. In connection with our annual shareholder meeting scheduled
for May 16, 2001, we have requested stockholder approval for sales under the
equity line facility in excess of 7,784,978 shares, up to a maximum of
12,000,000 shares. As of March 31, 2001, we had issued 317,400 shares of our
common stock under the equity line facility for aggregate net proceeds of
$232,000.
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, acquire
assets, or obtain goods or services through the issuance of 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 declines.
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, CAUSE US TO BE UNABLE TO MAINTAIN THE
LISTING OF OUR COMMON STOCK ON THE NASDAQ NATIONAL MARKET, 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 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 objects 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.
Our common stock is currently listed on the Nasdaq National Market. We
must satisfy a number of requirements to maintain our listing on the Nasdaq
National Market, including maintaining a minimum
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bid price for our common stock of $1.00 per share. A company fails to satisfy
this requirement if its closing bid price remains below $1.00 per share for 30
consecutive business days. From time to time our common stock has had a closing
bid price below $1.00 per share. There can be no assurance that our bid price
will comply with the requirements of the Nasdaq National Market to facilitate
continued listing of our common stock on the Nasdaq National Market. If our
common stock loses its Nasdaq National Market status, it would most likely trade
on the Nasdaq Over the Counter Bulletin Board, which is viewed by most investors
as a less desirable and less liquid marketplace. This outcome would be likely to
harm the trading price of our common stock. In addition, continued listing on
the Nasdaq National Market or listing on the Nasdaq SmallCap Market, American
Stock Exchange or New York Stock Exchange is a condition to drawing down funds
under the equity line facility.
In addition, 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 may impair our ability to
draw down funds under the equity line facility, because The Kingston Limited
Partnership, the purchaser under the equity line facility, is generally not
required, absent a waiver of the minimum purchase price requirements under the
facility by the parties, to purchase shares of our common stock under the
facility on a given day if our volume-weighted average stock price during such
day is less than $1.60 per share or to the extent that such purchases would
exceed specified limitations based on our trading volume.
OUR STOCK PRICE COULD DECLINE AND OUR STOCKHOLDERS COULD EXPERIENCE SIGNIFICANT
OWNERSHIP DILUTION DUE TO OUR ABILITY TO ISSUE SHARES UNDER THE EQUITY LINE
FACILITY
The equity line facility permits us to sell, subject to various
restrictions, up to $7.5 million of common stock in each of up to 20 drawdown
periods of 22 trading days each over the course of a period of up to two years,
although we cannot sell more than $125 million in total under the facility and
may in practice only be able to sell a much lower amount. The total number of
shares that may be issued under the facility depends on a number of factors,
including the market price and trading volume of our common stock during each
drawdown period we choose to initiate.
Because the purchase price of any shares we choose to sell under the
equity line facility is based on the volume-weighted average trading price of
the common stock on the date of purchase, both the number of shares we would
have to sell in order to draw down any given amount of funding and the
associated ownership dilution experienced by our stockholders will be greater
if the price of our common stock declines. The lowest price at which Kingston
is obligated to purchase shares from us under the equity line facility is
currently $1.50 per share. We and Kingston have previously agreed to waive
this condition with respect to one drawdown period when the lowest price
would have otherwise been $2.50 per share and we may agree to waive this
condition from time to time in the future in order to allow us to sell shares
to them at prices lower than $1.50.
In the event that we were able, in spite of the various restrictions
contained in the equity line facility, to draw down the maximum amount under the
facility, and if we indeed chose to draw down the full $125 million, and if all
sales under the facility occurred at $1.50 per share, then we would need to
issue 83,333,333 shares of common stock to Kingston, well in excess of the
41,650,581 shares of our common stock outstanding as of March 31, 2001. If
Kingston permitted us to sell shares to them at prices
26
lower than $1.50 per share and we chose to do so, then it is possible that an
even greater number of shares could be issued. In general, ownership dilution
will increase as the market price for our common stock declines.
As of January 23, 2001, we had registered 10,000,000 shares of our common
stock for sale with the Securities and Exchange Commission in connection with
the equity line facility. If issued, these shares would represent 19.4% of our
shares outstanding, when added to the number of shares outstanding as of March
31, 2001.
The perceived risk associated with the possible sale of a large number of
shares under the equity line facility at prices as low as $1.50 per share--or
even lower, in the event that we were to request and Kingston were to agree to a
waiver allowing us to sell shares to them at prices below $1.50 per share--could
cause some of our stockholders to sell their stock, thus causing the price of
our stock to decline. In addition, actual or anticipated downward pressure on
our stock price due to actual or anticipated sales of stock under the equity
line facility could cause some institutions or individuals to engage in short
sales of our common stock, which may itself cause the price of our stock to
decline.
WE MAY ISSUE COMMON STOCK TO PAY FOR SERVICES IN TRANSACTIONS THAT CAUSE
DILUTION TO OUR STOCKHOLDERS, AND THE DILUTIVE EFFECT OF THESE ISSUANCES WOULD
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 may use our common stock to compensate third parties
for services performed for us, including subscriber referral 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 generally 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 decline, 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.
THE PROVISION OF FULL WEB ACCESS AS A FEATURE OF OUR FREE BASIC SERVICE CREATES
SUBSTANTIAL RISKS
In December 1999, we expanded our free basic service to include full
Internet access, including access to the World Wide Web. We face numerous costs,
operational and legal risks, and other 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 OUR FREE SERVICE. Since users of our
basic service can access the Web for free, some Juno
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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.
o RISK THAT THE NUMBER OF HOURS OUR FREE BASIC SERVICE IS USED, AND
THE COST OF PROVIDING THE SERVICE, WILL NOT DECREASE, AND MAY
INCREASE. The cost of providing our free basic service is
proportional to the amount of time subscribers to the service spend
using it to connect to the Internet or to Juno's central computers.
As users of the service spend more time connected, the costs we
incur to provide the service go up. Starting toward the end of 2000,
we began implementing measures designed to address disproportionate
resource consumption by relatively heavy users of our free basic
service, but there can be no assurance that these or any future
measures we may implement will be successful in reducing either
average connection time per subscriber or aggregate connection time
for all users of the service on an ongoing basis. If aggregate hours
of connection time associated with our free basic service increase
or do not continue to decline, our business and financial results
may suffer.
o RISK THAT WE MAY BE UNABLE TO GENERATE SIGNIFICANT REVENUES FROM THE
SALE OF ADVERTISING ON THE PERSISTENT ADVERTISING AND NAVIGATION
BANNER CURRENTLY DISPLAYED WHILE FREE SUBSCRIBERS USE THE WEB, OR
THAT PENDING LITIGATION MIGHT REQUIRE US TO PERMANENTLY DISABLE THIS
BANNER OR DISCONTINUE ITS USE FOR THE DISPLAY OF THIRD-PARTY
ADVERTISING. The display of a persistent advertising and navigation
banner to users of our basic service when they use the Web creates a
significant amount of advertising inventory. To date, this
advertising inventory has not generated significant 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 late 2000, we settled an arbitration proceeding we
initiated against 24/7 Media, and the parties agreed to a
restructured, non-exclusive relationship without future guaranteed
minimum payments to Juno.
Additionally, in connection with a patent infringement action
brought against us by NetZero, Inc., we discontinued the display of
third-party advertisements in the persistent advertising and
navigation banner as of January 12, 2001, pursuant to a temporary
injunction entered by the court. We resumed displaying third-party
advertisements after the temporary injunction was lifted in April
2001, but if NetZero ultimately succeeds in its infringement action,
we may be permanently prohibited from utilizing our advertising and
navigation banner for the display of third-party advertising or
possibly for any purpose, including the promotion of Juno's own
premium billable services and the differentiation of our free basic
service from our premium billable services.
There can be no assurance that, in the future, we will be able to
continue the use of the advertising and navigation banner on our
free basic service, or, that if we are permitted to do so, we will
be able to generate significant revenues from the sale of
advertising inventory on this banner, either through 24/7 Media,
any other third-party sales agent, or our own internal sales
organization. If we are unable to sell this inventory or to do so
at favorable rates, our advertising revenues could 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 increase, especially if overall
use of the Web by our subscribers increases. When using e-mail, subscribers
generally need to be connected to our central computers only 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. However, when using the Web, or when using
e-mail while connected to the Web, a subscriber remains continuously connected
to the Internet for the entire duration of the session. Since we purchase
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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 generally
associated with downloading or uploading e-mail messages. Starting toward the
end of 2000, we began implementing measures designed to reduce the amount of
time heavier users of our free basic service spend connected, but there is a
substantial risk that these measures will not result in sustained reductions
in the overall telecommunications resources consumed by users of our free
basic service. Some of our users have circumvented these measures, thereby
avoiding the associated usage limitations, or have otherwise engaged in
prohibited usage practices that cause us to incur significant
telecommunications expenses. There is a risk that we will not be able to
prevent or reduce such practices in the future, and that our
telecommunications expenses might not decline, or might increase, as a
result. Additionally, even if we are successful in reducing aggregate hours
of telecommunications usage by our free subscribers, since some of our
telecommunications agreements include tiered pricing arrangements under the
terms of which our rates increase if usage declines below specified levels,
even a significant reduction in per-subscriber telecommunications consumption
might fail to result in proportional savings to Juno.
Furthermore, we have experienced significant increases in the amount of
time that users of our billable premium services spend connected to the Web. We
believe this trend is likely to continue and may accelerate, especially if we
continue to experience migrations from our free service to our billable premium
services by relatively heavy users of our free service who are seeking to avoid
the usage constraints we began imposing on the free service in late 2000. As a
result, we may experience increases in overall connection time by Juno
subscribers and/or in connection time per Juno subscriber, even if we are
successful at reducing connection time per subscriber to the free basic service.
Accordingly, 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 services, 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.
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 or possibly the loss of our ability to operate
our business entirely.
On December 26, 2000, NetZero, Inc. filed an action in the United States
District Court for the Central District of California, alleging that Juno has
infringed U.S. Patent No. 6,157,946. NetZero has alleged that the persistent
advertising and navigation banner used on Juno's free service, along with other
elements of Juno's service, infringes the patent. NetZero is seeking unspecified
monetary damages, attorneys fees, and injunctive relief, including a prohibition
on Juno's continuing to offer its free service in its current form. On January
5, 2001, the court granted an interim temporary restraining order prohibiting
Juno from displaying third-party advertisements in the persistent advertising
and navigation banner displayed to users of Juno's free service. Following a
court hearing on April 12, 2001, the temporary restraining order was lifted.
Although no injunctive restrictions are currently in force in the
29
period prior to trial, it remains possible that the ultimate outcome of this
dispute could have an adverse impact on how we are permitted to operate our
services. If, as a result of this dispute, we were required permanently to
discontinue our display of third-party advertising on the advertising and
navigation banner, our advertising revenues could be materially harmed. If we
were required permanently to discontinue our use of the persistent advertising
and navigation banner entirely, the presence of this device as a differentiating
feature between our free service and our premium services, as well as our
ability to use the banner to promote our billable premium services, would be
eliminated, and our ability to upgrade users to and retain users in our billable
premium services would be impaired. If we were required to cease providing our
free service in its current form, our financial results and our business
prospects could be materially adversely affected. A trial is currently expected
to commence later in 2001, and we intend to continue defending our interests
vigorously in this matter.
We have been granted six 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.
OUR ABILITY TO CAUSE OUR FREE BASIC SERVICE SUBSCRIBERS TO UPGRADE TO OUR
BILLABLE PREMIUM SERVICES IS UNCERTAIN. IF THE NUMBER OF SUBSCRIBERS UPGRADING
TO OUR BILLABLE SERVICES FALLS SHORT OF OUR GOALS, OUR BUSINESS AND FINANCIAL
RESULTS WILL SUFFER
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 this migration as a major 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. There is a risk
that repeated exposure to these advertisements may cause their effectiveness to
decline. Furthermore, to the extent that our number of active free subscribers
declines, due to usage restrictions imposed on the free service or for any other
reason, we will have a smaller pool of free subscribers to solicit, further
reducing the absolute number of potential migrations to our billable services.
As a result, advertisements promoting our billable services to our free
subscribers may prove insufficient to generate a material number of new
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subscriptions to our billable services. The rate at which users of the free
basic service upgrade to our billable premium services may decline, and for this
and other reasons, our overall billable subscribers count is likely to 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 have
significantly reduced our marketing activities in recent quarters, and we expect
that we will reduce such activities further in the future. Any marketing
activities we do engage in are unlikely to be sufficient to increase or maintain
the size of our subscriber base and may not be sufficient to develop or maintain
awareness of our services. 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 or other factors prevent us from implementing marketing
campaigns, or if marketing campaigns undertaken by competitors cause attrition
in our subscriber base, our business and financial results may suffer.
OUR ACTIVE AND BILLABLE SUBSCRIBER COUNTS ARE LIKELY TO DECLINE AND OUR BUSINESS
MAY SUFFER AS A RESULT OF CONTINUED REDUCTIONS IN OUR SUBSCRIBER ACQUISITION
ACTIVITIES
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
resume its use in the near future. Most of our other subscriber acquisition
activities have similarly been suspended or materially curtailed, and we expect
that our subscriber acquisition activities will continue to diminish in the
future. In the past, we have undertaken some subscriber acquisition activities
that entail the expenditure of lesser amounts of cash, including stock-based
subscriber referral agreements with smaller Internet access providers seeking to
exit the business, but there can be no assurance that we will pursue such
opportunities in the future, that such opportunities will be available to us if
we do choose to pursue them, that we would be successful in exploiting
additional such opportunities if they were to become available, or that the
number of subscribers generated by any such opportunities would be sufficient to
grow or even maintain the size of our subscriber base. Additionally, there is a
risk that recent declines in the trading price of our common stock will
adversely affect the willingness of potential counterparties to accept Juno
common stock as an alternative to cash consideration in connection with such
opportunities, to whatever extent we might choose to pursue them. To the extent
that alternative subscriber acquisition methods we 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. The reduction or our
subscriber acquisition activities is likely to contribute
31
to the projected decline in our active and our billable subscriber count, and
such decline may cause our business and financial results to suffer.
DIFFICULTY RETAINING SUBSCRIBERS TO OUR SERVICES, AS WELL AS SUBSCRIBER
ATTRITION CAUSED BY MEASURES WE HAVE IMPLEMENTED TO DISCOURAGE DISPROPORTIONATE
USAGE OF OUR FREE SERVICE BY OUR HEAVIER USERS AND TO REDUCE THE DISCOUNTED
PRICING ENJOYED BY SOME OF OUR BILLABLE SUBSCRIBERS, 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, our 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 have recently begun implementing certain measures designed
to encourage heavier 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 may change over time, these measures
currently 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 currently make it more difficult for heavier users of our free
service to establish and maintain a Web connection through this service,
particularly during those hours when overall usage tends to be highest, than is
expected to be the case for free subscribers whose usage patterns are more
typical. As a result of these measures, we expect to experience at least some
degree, and possibly a substantial amount, of incremental subscriber attrition.
We are unable to predict the amount of such attrition we might experience
overall, or the extent to which it might involve subscribers other than those
heavier users to whom we currently target these measures. In the event the
decrease in the size of Juno's subscriber base is significant, and particularly
to the extent such attrition were to involve subscribers other than the targeted
groups, such measures could cause our business and financial results to suffer.
Furthermore, we have begun to reduce the use of discounted pricing plans for our
billable premium services, by offering higher-priced plans both through selected
external marketing channels and to some of our existing billable subscribers. We
believe these pricing changes will cause attrition from our billable services in
excess of that which we would expect in the absence of such changes.
Additionally, we may at some point in the future charge a fee for our basic
service or cap the amount a subscriber may use this service in a given period.
If these or other changes result in the loss of a significant number of
subscribers, 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 expenditure for subscriber acquisition and retention, and we
expect to further reduce our 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, we
currently expect that our active and billable subscriber count will decline in
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coming quarters, due to the factors described above, among others. If the
decline in the size of our active or billable subscriber base were
significant, our business and financial results could suffer.
COMPETITION IN THE MARKETS FOR INTERNET SERVICES, INTERNET ADVERTISING AND
ELECTRONIC COMMERCE IS LIKELY TO INCREASE IN THE FUTURE AND MAY HARM OUR
BUSINESS
The market for Internet services is extremely competitive and includes a
number of substantial participants, including AOL Time Warner, 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
subscriber acquisition activities and to the development, promotion and
distribution and sale of products and services.
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
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. Any decrease in such prices could result in a
reduction in our billable services revenue and would harm the profitability of
our billable services.
In the near term, however, we have begun to increase the prices we charge
at least some subscribers to our billable premium services, in an effort to
increase our billable services revenue and improve the profitability of such
services. Such price increases can be expected to result in subscriber
attrition, possibly to an extent sufficient to cause overall revenues from
billable services to decline, and this outcome could cause our business and
financial results to suffer.
In recruiting subscribers for our services, we currently compete, or
expect to compete, with the following types of companies, among others:
o National providers of Internet access such as AOL Time Warner,
EarthLink and Microsoft, including some companies, such as
Bluelight.com and NetZero, that offer some level of Internet access
for free;
o Numerous independent regional and local Internet service providers
that may offer lower prices than most national Internet service
providers;
o Various national and local telephone companies such as AT&T, MCI
WorldCom Communications and Pacific Bell, a division of SBC Telecom;
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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 Communications.
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 AND THESE
REVENUES HAVE BEEN, AND MAY CONTINUE TO BE, ADVERSELY AFFECTED BY CONTINUED
WEAKNESS IN THE MARKET FOR INTERNET ADVERTISING
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 Lycos, 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 continuing and
significant reduction in demand, the reduction or cancellation of advertising
contracts, a significant increase in uncollectible receivables from advertisers,
and a significant reduction of Internet advertising budgets, especially by
Internet-related companies. In addition, an increasing number of
Internet-related companies have experienced deteriorating financial results and
liquidity positions, and/or have ceased operations or filed for bankruptcy
protection, or may be expected to do so. The impact of these trends 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
Our competition has increased and is likely to continue to increase. We
believe this will 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.
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Other market participants may introduce free or billable Internet 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.
Alternatively our decision to increase the prices we charge at least some
subscribers to our billable services could cause our marketplace position to
suffer. Any of these scenarios could harm our business and financial results,
and we may not have the resources to continue to compete successfully.
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 March 31, 2001, we derived approximately 60% of our
advertising and transaction fee 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 generating operating cash
flow or raising capital, or are anticipating such difficulties, and are electing
to scale back the resources they devote to advertising, including on our
services. Other companies in the Internet industry have depleted their available
capital, and have ceased operations or filed for bankruptcy protection or may be
expected to do so. Difficulties such as these have affected and may continue to
affect the total amount of advertising inventory we sell, as well as our ability
to collect revenues or advances against revenues from our existing partners or
advertisers as such amounts become due. An increasing number of our strategic
marketing partners and advertisers, including some with agreements providing for
minimum guaranteed payments, have either already defaulted on periodic payments
due to us, or informed us that they will not meet their obligations. If the
current environment for Internet advertising does not improve, our business and
financial results may suffer.
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 of various types
of advertising contracts by our partners increased over the course of 2000 and
during the first quarter of 2001. In light of the concentration of our
advertisers within the Internet industry, we expect that we will continue to
experience a significant number of terminations during the remainder of 2001,
which could cause our business and financial results to suffer, especially if
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such terminations are coupled with a refusal to pay amounts owed to Juno at
the time of termination. If any of our strategic marketing agreements are
terminated, we cannot assure you that we will be able to replace the
terminated agreements with equally beneficial arrangements. We also expect
that we will not be able to renew all of our current agreements when they
expire and that, to the extent we are able to renew some or all, that we may
not be able to do so on favorable 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.
OUR BUSINESS MAY BE ADVERSELY AFFECTED IF THE MARKET FOR INTERNET ADVERTISING
CONTINUES TO CONTRACT OR FAILS TO RECOVER
Or 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 continues to
contract or fails to recover. Our business also may suffer if users install
"filter" software programs that limit or prevent advertising from being
delivered to their computers or to the extent that they fraudulently use our
services without also using the Juno software that enables us to display ads to
them while they do so. Widespread adoption of such filter software could harm
the commercial viability of Internet-based advertising, while an increase in the
amount of fraudulent usage we experience could harm our ability to sell such
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 an 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 third-party relationships in which Juno receives
revenue in return for displaying advertising sold by a third party or in which
Juno is compensated for delivering viewers to Web pages on which ads sold by a
third party are displayed. These arrangements include a relationship with
LookSmart Ltd., under the terms of which 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, or that our
relationship with LookSmart will continue in its current form or at all. If use
of the LookSmart features is less than projected or if Juno's relationship with
LookSmart is either terminated or modified in ways that are unfavorable to us,
our business and financial results may suffer. In recent quarters, we have
experienced difficulties in achieving our projected level of advertising sales.
If our internal sales organization or any third-party sales agents we might rely
on are not able to accomplish our sales objectives, then our business and
financial results may suffer.
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Between January 12, 2001 and April 12, 2001, we were subject to a
temporary restraining order in connection with a patent infringement action
brought against us by NetZero, Inc. During its pendency, the temporary
restraining order required us to discontinue the display of third-party
advertisements in the persistent advertising and navigation banner displayed
to users of our free basic service when they use the Web. Although the
temporary restraining order was lifted following a court hearing on April 12,
2001, and no injunctive restrictions are currently in force, it is possible
that NetZero could ultimately succeed in its infringement action. If NetZero
were to prevail, we could be permanently prohibited from utilizing our
advertising and navigation banner as an additional source of advertising
inventory. There can be no assurance that, in the future, we will be able to
continue the use of the advertising and navigation banner in any fashion, or
that, if we are permitted to do so, we will be able to generate significant
revenues from the sale of advertising inventory on this banner, either
through a third-party sales agent or our own internal sales organization. If
we are unable to sell this inventory or to do so at favorable rates, our
advertising revenues could be materially adversely affected. Furthermore, if
Internet-based advertising continues to contract or fails to recover or if we
are unable to capture a sufficient share of Internet-based advertising, 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, BUT ANY ATTEMPT TO SO ADAPT MAY CONSUME SIGNIFICANT
FINANCIAL AND OTHER RESOURCES
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. At the same time, any attempt we
make to respond in a timely and effective manner could also harm our business
and financial results, particularly to the extent that such attempt entails our
undertaking significant expense or committing significant human or technological
resources to highly speculative projects.
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. However, an
increasing number of consumers now access the Internet through broadband
connections which allow significantly faster access than 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 may include Internet access in their basic bundle of services or may
offer Internet access for a nominal additional charge. Our competitors may enjoy
more favorable underlying economics in offering broadband services than we do,
or may be able and willing to devote more substantial
37
financial resources to developing, marketing, and providing such services than
we can. To the extent that we do attempt to develop, market, and provide
competitively priced broadband services, doing so could severely tax our
financial and other resources.
While we have entered into several arrangements with providers of
broadband connections to allow the delivery of our services over distribution
channels they own or control, the majority of our broadband relationships are at
a developmental, trial, or initial implementation stage, and we may choose to
decrease, rather than increase, the scope or number of these arrangements or the
availability of some forms of broadband service to our subscribers. Only a
portion of our subscriber base is currently served by broadband providers with
which we have existing agreements. The associated services are used by a
negligible number of our subscribers at the current time, and we do not
currently expect this number to increase materially over the coming quarters. In
the future, we might be prevented from delivering high-speed Internet access
through networks controlled by competitors of ours, or from doing so on a
cost-effective basis, and, as a result, we may not ever offer our subscribers
high-speed Internet access in some areas.
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. We may be unable to adapt to the challenges posed by broadband
technologies, and we may be unable to compete with other companies that may have
the financial, marketing and technical resources to make broadband services
widely available to their subscribers. There is a risk that our competitors
could cause the popularity and adoption of broadband services in the marketplace
to accelerate. We may not be able to provide broadband services at competitive
prices, and may not have the resources to effectively market any services we are
able to provide.
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 we may have to modify the means by which we
deliver our Internet services. In this event, we would incur significant costs.
Additionally, 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.
AS THE MARKET FOR BROADBAND SERVICES EXPANDS, OUR BUSINESS MAY BE HARMED IF WE
CANNOT PROVIDE COMPETITIVE BROADBAND SERVICES
Juno Express, our billable broadband service, is designed to deliver
Internet access at broadband speeds through a variety of technologies. Juno
Express currently accounts for an extremely small percentage of our active
subscriber base and may never account for a material percentage. If broadband
services continue to increase in popularity and we are not able to offer
broadband services to satisfy consumer demand, our business and financial
results may suffer. To date, we have found Juno Express to be a costly service
to market and to operate, due in part to factors such as unfamiliarity on the
part of consumers, unavailability to large portions of our subscriber base,
installation difficulties, relatively high retail price points, and high
operating costs, among others. There can be no assurance that we will be
successful in addressing any of these issues. At the current time, we have
relationships for the delivery of broadband services through DSL, mobile and
fixed wireless, and cable technologies, each of which is subject to risks and
uncertainties.
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DSL
We currently provide a DSL version of Juno Express through a partner,
Covad Communications. For DSL installation, consumers must go through a complex
installation process, for which we are generally dependent on the performance of
both the local telephone company and Covad. Following an operational and
financial review of our DSL offering, we stopped accepting new orders for this
service in March 2001, although we continue to provide the service to those
subscribers who had signed up prior to that date. Barring improvements in the
underlying economics, we do not currently plan to resume accepting subscribers
into this DSL service in the foreseeable future. Our current agreement with
Covad ends in July 2001, and the relationship may be terminated then or at an
earlier date, due to operational issues, uncertainties concerning Covad's
financial condition, or other reasons. If our relationship with Covad is
unsuccessful or is terminated, if we are unable to identify and reach acceptable
terms with one or more alternative providers of DSL services, if Juno and any
DSL providers with whom we work are unable to coordinate effectively with local
telephone companies, if difficulties associated with the installation process
cause subscribers to cancel their DSL orders, or if other factors delay or
otherwise hinder our ability to provide DSL services either within or beyond the
markets in which the service is currently provided, or if these or other factors
affect our ability to deliver DSL-based services in a timely and cost-effective
fashion, then our business and financial results may suffer.
MOBILE AND FIXED WIRELESS
We currently offer a mobile wireless version of Juno Express powered by
Metricom's Ricochet technology. 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.
The mobile wireless version of Juno Express is currently offered in only 13
markets, and there can be no assurances that the performance or availability of
this service will be acceptable to us or to our subscribers, that Metricom will
be able to continue providing this service in its current markets or expand the
service into additional markets, or that Metricom will have the capital
resources to continue operating the Ricochet service at all. Recent indications
suggest that Metricom may, in fact, cease operations entirely during 2001. If
Metricom discontinues offering the Ricochet service, it is unlikely that Juno
would offer a substitute mobile wireless service to its subscribers in the
foreseeable future.
To be able to provide broadband access through fixed wireless technology,
we have entered into an arrangement with Hughes that allows us to offer Juno
Express through their satellite system. However, there are significant
operational and financial risks and uncertainties associated with this
arrangement, including risks that additional technical development may be
required, that the service may prove unattractive to our customers, and that the
pricing of the service may not be competitive with other broadband services. We
do not currently plan to begin offering this service in the foreseeable future.
CABLE
We have entered into agreements with AT&T Broadband, Comcast, and Time
Warner Cable to test the provision of Internet services over their cable
systems, initially in small-scale trials. We may find that offering Juno Express
over cable systems requires us to incur levels of operating expense that make
broad expansion of these relationships unfeasible or unattractive to us.
Conversely, to the extent our agreements with these or other partners require us
to undertake such broad expansion, the cost of performing our obligations under
such agreements might prove prohibitive. We may find that we are unsuccessful in
attracting a significant number of subscribers through these relationships,
especially in light of competitive services that are expected to be offered
through the same platforms, possibly at lower prices than we can offer. We or
our cable partners may be unable or unwilling to expand the service
39
geographically to cover significant segments of our user base. Additionally, in
the case of AT&T Broadband and Comcast, there is a significant risk that these
partners will not succeed in renegotiating existing agreements under which
Excite@Home has the exclusive right to provide high-speed broadband services
over these partners' cable systems through June 2002. If they are unsuccessful,
we will not be able to offer Juno Express over their cable systems at speeds
above 128kbps until July 2002 at the earliest. Even if they are successful at
renegotiating these agreements, we may find it economically unattractive to
pursue any expansion of these relationships. In the case of Time Warner Cable,
our agreement is subject to approval by the Federal Trade Commission, and
contains certain future operational and performance obligations on our part
concerning the expansion of our services over our partner's cable systems. Our
arrangement with Time Warner Cable may be terminated if these regulatory,
operational or performance conditions are not satisfied.
The market for broadband services is in the early stages of development,
and we cannot assure you that consumer demand for broadband services in general,
or for DSL, mobile or fixed wireless, or cable technologies in particular, will
increase. 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, which 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 can 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 on the e-mail portion
of our services could interfere with our packaging this 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.
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SEASONAL TRENDS IN INTERNET USAGE AND ADVERTISING SALES MAY NEGATIVELY AFFECT
OUR BUSINESS
Seasonal trends are likely to affect our business. Subscribers typically
use our Internet services less during the summer months and year-end holiday
periods. Under most of our advertising and strategic marketing relationships,
our advertising revenue is dependent on the number of impressions displayed to
our users. To the extent that usage by our subscribers is lower seasonally, our
revenues may be lower during these periods. 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.
WE ARE DEPENDENT ON A SMALL NUMBER OF TELECOMMUNICATIONS CARRIERS AND MAY BE
UNABLE TO FIND ADEQUATE REPLACEMENTS IF THEIR RATES INCREASE, THEIR SERVICE
QUALITY DECLINES, OR 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 MCI WorldCom
Communications; Level 3 Communications; XO Communications (formerly Concentric);
Splitrock Services; Sprint Communications Company; PSINet; NaviPath; StarNet;
Qwest; and Telia. 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 March 31, 2001, we had contracted for the use of more than 4,000
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 our service to access 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.
The inability of some of our subscribers to access our service 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. We
are particularly dependent on WorldCom, which, as of March 31, 2001, provided
more than 1,000 of the more than 4,000 points of presence for which we contract,
41
many of which are in locations not served competitively by other
telecommunications carriers. Our current agreement with WorldCom is scheduled
to expire on May 30, 2001. We are currently negotiating with WorldCom to
renew our agreement, but we cannot predict whether we will be able to renew
this agreement on pricing or other terms that are favorable to Juno, or at
all. If we are unable to reach a new agreement with WorldCom, they will have
the right to discontinue providing services to us effective September 30,
2001. Were our relationship with WorldCom to be terminated, there can be no
assurance that we would be able to replace the services provided to us by
WorldCom on attractive terms or at all. A significant number of our
subscribers reside in areas where Juno does not currently provide access
other than through WorldCom. If our relationship with WorldCom terminates and
we are unable to replace the services they provide us with comparable
services provided by other telecommunications carriers at competitive prices,
then our business and financial results could suffer.
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. These factors may include, among others, ongoing consolidation in the
telecommunications industry, as well as 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 or in the amount of
telecommunications-related resources we allow various categories of subscribers
to use. Furthermore, some of our telecommunications carriers have begun to
experience financial difficulties, and it is impossible to predict whether all
of our current providers will be able to continue providing services to us at
acceptable levels of quality, or at all. There can be no assurance 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, our agreements are terminated, or they discontinue dial-up
service or cease operations entirely. If any of these companies becomes unable
to provide service in locations not served by numerous other providers, some of
our subscribers may become unable to access our services with a local phone
call, possibly leading to increased subscriber attrition. Furthermore, the rates
we pay for telecommunications services may increase as a result of reduced
competition.
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.
Additionally, under long-standing FCC regulations, local telephone
carriers have been required to make certain reciprocal payments to each other
for carrying telephone calls on each others' networks. These reciprocal payments
are required to be made by the carrier that originates a phone call to the
carrier that terminates the phone call. Since carriers that service Internet
access providers receive far more inbound calls than they have outbound calls to
complete, such carriers have historically been
42
entitled to receive a greater amount of reciprocal payments income from other
carriers than they have been obligated to remit to such carriers for the low
volume of outbound calls they carry. Under recent changes to the FCC
regulations, however, it is expected that this imbalance will be corrected over
the next two years. Since the telecommunications carriers we utilize
characteristically carry a high proportion of inbound ISP traffic, there is a
risk that they will raise their rates in order to replace some of the reciprocal
payments income likely to be eliminated under the new FCC regulations, that they
will cease providing services to some areas, or that they will be forced to
discontinue operations entirely.
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 most of
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 March 31, 2000, ClientLogic provided approximately 570 full-time or
part-time customer service and technical support representatives at its
facilities to handle 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.
43
DISRUPTION OF OUR INTERNET SERVICES DUE TO SECURITY BREACHES AND SYSTEM
FAILURES COULD RESULT IN SUBSCRIBER CANCELLATIONS
Both our infrastructure and the infrastructure of our network providers
are vulnerable to security breaches or similar disruptive problems and system
failures. Our systems are also subject to telecommunications failures, power
loss, software-related system failures and various other events. Any of these
events, whether intentional or accidental, could lead to interruptions, delays
or cessation of service to our subscribers. This could cause some of our
subscribers to stop using our Internet services. Third parties could also
potentially jeopardize the security of confidential information stored in our
computer systems or our subscribers' computer systems through their
inappropriate use of the Internet, which could cause losses to us or our
subscribers or deter some people from subscribing to our services. People may be
able to circumvent our security measures or the security measures of our third
party network providers.
We may have to interrupt, delay or cease service to our subscribers to
alleviate problems caused by computer viruses, security breaches or other
failures of network security. Any damage or failure that interrupts or delays
our operations could result in subscriber cancellations, could harm our
reputation, and could affect our business and financial results. 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.
STAFF ATTRITION COULD STRAIN OUR MANAGERIAL, OPERATIONAL, FINANCIAL AND OTHER
RESOURCES
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; 332 employees at December 31, 2000, including
72 employees in India; and 262 employees as of April 30, 2001, including 80 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.
Any staff attrition we experience, whether initiated by the departing
employees or by the company, could place a significant strain on our managerial,
operational, financial and other resources. To the extent that the company does
not initiate or seek any staff attrition that occurs, there can be no assurance
that we will be able to identify and hire adequate replacement staff promptly,
or at all. In January and April 2001, in addition to conducting some
performance-related terminations, we eliminated a number of positions at Juno in
response to changes in our business needs, such as the significant reduction in
our marketing activities. We expect to evaluate our needs and the performance of
our staff on a periodic basis, and may choose to make further adjustments in the
future. If the size of our staff is significantly reduced, either by the
company's choice or otherwise, we could face significant management,
operational, financial and other constraints. For example, it may become more
difficult for us to manage existing, or establish new, relationships with
advertisers, vendors and other counterparties, or to expand and improve our
service offerings. It may become more difficult for us to implement changes to
our business plan or to respond promptly to opportunities in the marketplace. It
may become more difficult for us to devote personnel resources necessary to
maintain or improve existing systems, including our financial and managerial
controls, billing systems, reporting systems and procedures. Thus, our business
and financial results could suffer as a result of the staff reductions
undertaken to date in 2001, as well as from any future staff attrition that
might occur.
OUR JUNO VIRTUAL SUPERCOMPUTING PROJECT IS UNPROVEN AND MAY FAIL TO GENERATE
REVENUES OR CONSUMER ACCEPTANCE
In February 2001, we announced the Juno Virtual Supercomputer Project,
designed to make unused processing power existing on the computers of Juno's
subscribers available to third parties as an
44
alternative to conventional supercomputing resources. As designed, the project
would involve dividing computationally intensive problems into a large number of
smaller computational tasks, and distributing those smaller tasks to the
computers of Juno subscribers for such computers to process while the computers
were not otherwise being used by the subscribers. Management believes that
commercial opportunities might exist to sell this unused processing power to
companies in fields such as pharmaceutical research for biomedical or other
applications.
However, we face a number of significant risks in connection with the
Virtual Supercomputer Project and can give no assurance that such project will
be successful. The project is brand new. As of April 30, 2001, we had not
secured any material customers for this project. There can be no assurance that
we will identify or secure customers, in the pharmaceutical field or any other
field, that are willing to compensate Juno for its subscribers' unused
processing power, in a sufficient number to make this project successful.
Prospective customers may raise concerns about the security of their data, and
there can be no assurance that any steps we take to ensure such security will be
effective or that demonstrations of their effectiveness will be persuasive to
such prospective customers. Additionally, while we may require some or all
subscribers to our free basic service to participate in the Virtual
Supercomputer Project as a condition of using the service for free, there can be
no assurance that a material number of Juno's subscribers will be willing to
participate in the Virtual Supercomputer Project, even if their only alternative
is to stop using our free basic service, or that any who are willing will comply
with the requirements for participation, such as leaving their computers turned
on when not in use. Some members of the media and some subscribers have raised
concerns regarding whether the operation of the Virtual Supercomputer Project
might harm them or their computers in some way, and there can be no assurance
that we will be successful in allaying such concerns. If we are not successful
in overcoming consumer concerns, we may be unable to derive significant revenues
from the Virtual Supercomputer Project and we may experience significant
subscriber attrition. Additionally, Juno has not conducted large-scale tests of
some of the technology associated with the Virtual Supercomputer Project, and
there can be no assurances that such technology will operate successfully on the
scale that might be required by paying clients or at all. Unfavorable outcomes
with regard to any of the above could cause our business and financial results
to suffer.
WE FACE POTENTIAL LIABILITY FOR INFORMATION TRANSMITTED OR RETRIEVED THROUGH OUR
INTERNET SERVICES
Our business and financial results may suffer if we incur liability as a
result of information transmitted or retrieved through our services. The
liability of Internet service providers and online services companies for
information transmitted or retrieved through their services is uncertain. It is
possible that claims may be filed against us based on a variety of theories,
including defamation, obscenity, negligence, copyright or trademark
infringement, or other theories based on the nature, publication or distribution
of this information. These types of claims have been brought, sometimes
successfully, against providers of Internet services in the past. Such claims,
with or without merit, would likely divert management time and attention and
result in significant costs to investigate and defend. In addition, if we become
subject to these types of claims and we are not successful in our defense, we
may be forced to pay substantial damages. We may also be forced to implement
expensive measures to alter the way our services are provided to avoid any
potential liability.
CHANGES IN GOVERNMENT REGULATION COULD DECREASE OUR REVENUES AND INCREASE OUR
COSTS
Changes in the regulatory environment could decrease our revenues and
increase our costs. As a provider of Internet access services, we are not
currently subject to direct regulation by the Federal Communications Commission.
However, some telecommunications carriers have sought to have
45
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 and disclosure of pricing terms;
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.
46
FEDERAL TRADE COMMISSION ACTION COULD IMPACT OUR FINANCIAL RESULTS AND MARKETING
PRACTICES
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
uncollectible "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
47
us and other entities affiliated with Dr. Shaw may occur and could result in
conflicts of interest that prove harmful to us.
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 sublease office space in New York City from DESCO, L.P. Additionally
our subsidiary in Hyderabad, India subleases office space from an affiliate of
DESCO, L.P. We cannot be sure that we would be able to lease other space on
favorable terms in the event these subleases were to be terminated.
OUR DIRECTORS AND OFFICERS EXERCISE SIGNIFICANT CONTROL OVER US
As of April 30, 2001, the executive officers, directors, and persons and
entities affiliated with executive officers or directors beneficially owned in
the aggregate approximately 33.5% of our outstanding common stock. The Chairman
of our board of directors is Dr. David E. Shaw. Dr. Shaw continues to serve as
the Chairman and Chief Executive Officer of D. E. Shaw & Co., Inc., which is the
general partner of DESCO, L.P. As of April 30, 2001, Dr. Shaw and persons or
entities affiliated with him, including DESCO, L.P., beneficially owned, in the
aggregate, approximately 31.8% 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.
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. Over the past year a number of senior financial, marketing
and technical executives have left the company. We do not carry key person life
insurance on any of our personnel. The loss of the services of any of our
executive officers or the loss of the services of other key employees could harm
our business and financial results.
WE MAY NOT BE ABLE TO HIRE AND RETAIN QUALIFIED EMPLOYEES
Our business and financial results depend in part on our ability to
attract, retain and motivate highly skilled employees.. 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. At certain
times in our history, competition for employees in our industry has been
intense, and we expect that we will continue to experience such difficulties
from time to time in the future. At times, we have also experienced high rates
of employee attrition, including the departures 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 in 2000 we entered into two transactions in which other companies
referred their subscribers to us in return for compensation either primarily or
entirely in the form of Juno common stock, we have limited 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
48
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. To date we have
issued equity securities in order to pay for our subscriber referral
transactions and we may issue additional equity securities in satisfaction of
our obligations under subscriber referral transactions. In connection with any
other transactions we might choose to undertake in the future, we may issue
additional equity securities and may additionally assume indebtedness. 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 expand our business internationally, and we believe
that any international operations or transactions 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 differences in legal and
regulatory requirements, tariffs and other trade barriers, fluctuations in
currency exchange rates, and adverse tax consequences. We might be required to
modify our current services or practices to conform to these differences, or to
satisfy local preferences in other markets in which we might be doing business.
We cannot assure you that one or more of these factors would not harm any future
international operations or transactions.
WE HAVE ANTI-TAKEOVER PROVISIONS WHICH MAY MAKE IT DIFFICULT FOR A THIRD PARTY
TO ACQUIRE US
Provisions of our certificate of incorporation, our bylaws and Delaware
law could make it more difficult for a third party to acquire us, even if doing
so might be beneficial to our stockholders.
WE DO NOT PLAN TO PAY DIVIDENDS IN THE FORESEEABLE FUTURE AND, AS A RESULT,
STOCKHOLDERS WILL NEED TO SELL SHARES TO REALIZE A RETURN ON THEIR INVESTMENT
We have not declared or paid any cash dividends on our capital stock since
inception. We intend to retain any future earnings to finance the operation and
expansion of our business and do not anticipate paying any cash dividends in the
foreseeable future. Consequently, stockholders will need to sell shares of
common stock in order to realize a return on their investment, if any.
49
PART II. OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
We are involved in disputes and litigation in the ordinary course of our
business, as well as the particular matters described below.
In June 2000, we entered into a subscriber referral agreement with
Freewwweb, a provider of free Web access that had elected to cease operations.
Because Freewwweb and its affiliates had sought the protection of Chapter 11 of
the Bankruptcy Code, this agreement 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.
Thereafter, we began the subscriber referral process, which included Freewwweb's
voluntary delivery to Juno of a computer file containing their subscribers'
e-mail addresses and passwords in order to enable us to provide e-mail
forwarding services to any former Freewwweb subscribers who chose to sign up for
Juno. On August 1, 2000, Freewwweb and its principals filed a pleading with the
Bankruptcy Court 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. Freewwweb's assertion is based on the premise that Juno should pay a
subscriber referral fee for every former Freewwweb subscriber whose e-mail
address and password was contained in the file, rather than, as stipulated in
the agreement approved by the Bankruptcy Court, the significantly smaller number
of former Freewwweb subscribers who actually created a new Juno account and used
such account to access the Web for at least a specified minimum amount of time
in a specified qualification period. We believe that Freewwweb's assertions are
entirely without merit, that Freewwweb is not entitled to the additional
consideration it seeks and that the likelihood that Freewwweb will be awarded
any material compensation is remote. 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 on June 1, 2000,
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 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 offline. NetZero had begun
distributing this version of Eudora and had 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.
On December 26, 2000, NetZero filed a separate action in the United States
District Court for the Central District of California, alleging that Juno has
infringed U.S. Patent No. 6,157,946. NetZero has alleged that the persistent
advertising and navigation banner displayed to users of Juno's free service,
while they use the Web, along with other elements of Juno's service, infringes
the patent. NetZero is
50
seeking unspecified monetary damages, attorneys fees, and injunctive relief,
including a prohibition on Juno's continuing to offer its free service in its
current form. On January 5, 2001, the court entered an interim temporary
restraining order prohibiting Juno from displaying third-party advertisements in
the persistent advertising and navigation banner. Following a court hearing on
April 12, 2001, the temporary restraining order was lifted. Accordingly, no
injunctive restrictions are currently in force in the period prior to trial. We
expect that a trial will commence later this year, and we intend to defend our
interests vigorously in this matter.
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
During the three month period ended March 31, 2001, we issued shares of
our common stock to The Kingston Limited Partnership, an entity organized and
existing under the laws of Bermuda, pursuant to the terms of our equity line
financing facility with Kingston. Under our equity line facility, these shares
are considered to have been issued to Kingston pursuant to the exemption from
registration provided by Section 4(2) of the Securities Act of 1933, as amended.
However, in order to permit Kingston to subsequently resell these shares into
the public market, we filed a Registration Statement on Form S-3 with the
Securities and Exchange Commission on November 28, 2000. Under this registration
statement, which was subsequently amended, Kingston is identified as an
"underwriter" under the Securities Act in light of the planned distribution
activities described therein.
The particulars of the share issuance referred to above are as follows: On
February 7, 2001, Juno delivered a drawdown notice to The Kingston Limited
Partnership and, as a result, a purchase period commenced on February 8, 2001
and terminated on March 12, 2001. During this purchase period, Kingston
purchased an aggregate of 317,400 shares of our common stock for a total
purchase price of $519,418 resulting in aggregate net proceeds to us of
$232,000. Ladenburg Thalmann & Co. Inc. received placement agent fees totaling
$20,777 in connection with our drawdown under the equity line facility. Juno
intends to use the net proceeds from this sale of its common stock for general
working capital purposes.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as part of this report:
10.1 Amendment, dated as of March 29, 2001, to the Common Stock
Investment Agreement and Registration Rights Agreement, each dated
as of October 6, 2000, each between the registrant and Westgate
International, L.P. (incorporated by reference to Exhibit 10.4 to
Post-Effective Amendment No. 1 to Registration Statement on Form
S-3, filed March 30, 2001, File No. 333-50760)
10.2 Employment Agreement, dated March 28, 2001, between the registrant
and Harshan Bhangdia
(b) The following reports on Form 8-K were filed during the quarter ended
March 31, 2001:
On January 24, 2001, Juno filed a report on Form 8-K reporting under
Item 5 certain subscriber data for the quarter ended December 31, 2000.
On January 25, 2001, Juno filed a report on Form 8-K reporting under
Item 5 financial and operating results for the year and the quarter ended
December 31, 2000.
On February 2, 2001, Juno filed a report on Form 8-K reporting under
Item 5 the establishment of a distributed computing effort called the Juno
Virtual Supercomputer Project.
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On February 15, 2001, Juno filed a report on Form 8-K reporting
under Item 5 that it and The Kingston Limited Partnership had agreed
to a mutual waiver reducing the designated minimum purchase price
for one drawdown period under Juno's "equity line" facility.
On March 21, 2001, Juno filed a report on Form 8-K reporting under
Item 5 the number of shares sold and net proceeds raised during a purchase
period under the "equity line" facility.
On March 30, 2001, Juno filed a report on Form 8-K reporting under
Item 5 that it and The Kingston Limited Partnership had amended the
agreements governing the "equity line" facility to, among other things,
reduce the lowest designated minimum purchase price per share that could
be specified by Juno.
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ITEM 7. SIGNATURES
Pursuant to the requirements of the Securities Exchange Act, the Registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized:
JUNO ONLINE SERVICES, INC.
(Registrant)
Date: May 11, 2001 /s/ CHARLES E. ARDAI
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Name: Charles E. Ardai
Title: President, Chief Executive Officer and Director
(principal executive officer)
Date: May 11, 2001 /s/ HARSHAN BHANGDIA
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Name: Harshan Bhangdia
Title: Senior Vice President and Chief Financial Officer
(principal accounting and financial officer)
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