How to Read a 10Q: Juno
Posted Tue Apr 24 21:18:53 2001 by sbaldwin |
By Steve Gilliard
Source Document: http://www.sec.gov/Archives/edgar/data/1018035/000091205701007697/0000912057-01-007697.txt
According to Dotcompoop and Fecked Company, Juno may be filing for
Chapter 11 protection after laying off 120 people. None of this was
discussed during today's conference call, where a total of one question
was asked. According to a statement sent to Dotcomscoop by Juno Online
Services, Inc., "Rumors reported earlier on dotcomscoop.com concerning
Juno's overall current financial status, are inaccurate. Juno has
absolutely no plans to file for bankrupcy at any time in the near
future. In our Q4 conference call last January, we provided the
following guidance, which remains in effect. As of December 31, 2000,
we had $56 million in cash & cash equivalents. We expect total net
loss for 2001 to be under $25 million, and expect our cash reserves to
be "more than adequate to fund Juno's operations until the business
becomes cash-flow positive.:
But Juno lost $131m last year. They would have to make $107m this
year to reduce their losses from $131m to $25m. This may be a difficult
task, as shown by data in Juno's 10Q Report, Without further adieu,
let's proceed to the document:
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BUSINESS:
Based on our total of 4.0 million active
subscribers during the month of December 2000, Juno is one of the
nation's largest Internet access providers. Approximately 842,000 of
these active subscribers were subscribed to Juno's billable premium
services, and as of December 2000, 90% of Juno's active subscribers had
full Web access. Juno had approximately 14.2 million total registered
subscriber accounts as of December 31, 2000.
| This
is a problem. Juno has nearly 3 million people who will not pay for
their services, compared to MSN, Earthlink or AOL. Free for you and me
means no profit for Juno, the other bastard spawn of DE Shaw.
|
Juno Express is a broadband service designed to provide high-speed
Internet access through a variety of technologies such as DSL, cable,
and wireless. Juno Express offers consumers all the features of Juno
Web plus the benefits of broadband, including the ability to run
high-bandwidth multimedia applications that include video and audio
content as well as the availability of a dedicated, continuous
connection to the Internet. DSL and wireless versions of Juno Express
are currently available in selected markets around the country, and we
plan to test a cable version of the service during 2001. We will decide
to what extent we will roll out our broadband services as the market
for such services evolves, as consumer demand for various competing
broadband offerings can be assessed, and as the economics of offering
broadband services improves, if it does.
| OK,
now the realities of this are simple: DSL is faltering because it
doesn't work. Not the service, but the last mile. It is when you get to
the consumer that companies have problems. In New York, Verizon added
customers and now they can't get their e-mail. DSL is not going to save
many companies.
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EMPLOYEES
As of December 31, 2000, we employed 332 people in the United
States and India, of whom 162 were in operations, sales and marketing,
and customer support; 102 were in engineering, product development and
network operations; and 68 were in finance, legal and administration.
Our employees are not covered by any collective-bargaining
arrangements, and we consider our relations with our employees to be
good. (Note: according to today's conference call, the company now has
259 employees in the US and India)
One can guess who works in India and who works in the US. Even
though you can pay Indian workers a fraction of what their US
counterparts get, is the work up to par? This can be iffy - more than a
few US programmers claim that some of the work isn't even close. There
may be illusory savings and expenses in other places. Outsourcing isn't
really a solution.
ITEM 3. LEGAL PROCEEDINGS
We are involved in disputes and litigation in the ordinary course
of our business, as well as the particular matters described below.
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Which means there are other, unmentioned, lawsuits they are involved in.
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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 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.
| $80m?
Are they on crack? If that file was worth that much, they could have
SOLD it for that price. Someone was hoping to cash in here. However,
Juno would probably join them if forced to pay that kind of money.
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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.
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.
| Oh
please. What a silly pair of suits. Both are playing for advantage in a
very tight marketplace. The patent claims in these suits are pretty
much a joke. What is missing here are the two sexual harassment suits
lodged by former female employees. They must have been settled.
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In the month of December 2000, our base of active subscribers
increased to 4.0 million, up from 2.4 million in December 1999 and 3.7
million in September 2000. Our billable subscriber base grew to 842,000
at December 31, 2000, up from 550,000 at December 31, 1999 and 750,000
as of September 30, 2000. Total registered subscriber accounts grew to
14.2 million at December 31, 2000, up from 8.1 million as of December
31, 1999 and 12.8 million at September 30, 2000. See Selected
Subscriber Data after the Results of Operations section in this Item
for a presentation of subscriber data over the last eight fiscal
quarters. Our base of active subscribers encompasses all registered
subscriber accounts that connected at least once during the month,
together with all subscribers to a billable service, in each case
regardless of the type of activity or activities engaged in by such
subscribers. As of December 2000, 90% of our active subscribers had
full Web access, up from 88% in September 2000.
| As
an occasional user of Juno, their migration to a paid service was
crude. Blocking free use for most subscribers for most of the day was
guaranteed to drive them to Netzero, which installed a 40 hour per
month plan. Which means you could at least get your basic work done in
an hour a day. Not with the mystery shutoff plan Juno had installed.
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We currently expect these measures to further reduce average
monthly connection time per free subscriber and average Operations,
free service cost per subscriber during the first 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.
| Maybe
they realized that all you can eat wasn't going to work. Not that their
connections times were bad. But it seems that the free subscribers have
been
basically shut out from the service. They suggest that
you get online at 4 AM, which is insane for most
users. An active program to force users to paid
services, even when less than a million chose that
option. The reality is that once the company entered
the paid ISP realm, they were facing massive
competition with no real reason to purchase the
service. A bankruptcy would probably leave most users
with a wide variety of paid choices to choose from,
from local ISP's to AOL. Juno's services, which began
with free e-mail, poses no compelling reason to
continue with or upgrade their services.
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The impact on Juno of the softness in demand for
Internet advertising is reflected in our backlog of
advertising contracts, which decreased to
approximately $12.0 million at the end of the fourth
quarter from about $28.0 million at the end of the
third quarter as new signings slowed substantially and
a number of advertisers either shortened or cancelled
their advertising contracts.
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They lost $16m in contracts in three months. That is
a brutal loss of revenues for a single quarter.
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During the fourth quarter of 2000, we resolved a
dispute we had with 24/7 Media regarding guaranteed
minimum payments owed to Juno. 24/7 Media is a
third-party sales force that we granted the exclusive
right to sell substantially all of our persistent
advertising banner inventory. The results of the
dispute did not have a material effect on our results
of operations during the fourth quarter of 2000. Under
the terms of the settlement, we may continue to work
with 24/7 Media, but both our exclusivity obligations
to 24/7 Media and 24/7 Media's future guaranteed
minimum payments to Juno were eliminated.
|
Ad brokers have had a historic issue with agreeing
upon and relinquishing payments to customers. While
not all brokers are the same, obviously, and 24/7's
issues with Juno may be unique, it is not unusual to
have these disputes arise.
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We have incurred net losses of $279.4 million from our
inception on June 30, 1995 through December 31, 2000.
We have relied primarily on sales of equity
securities, totaling $299.8 million through December
31, 2000, to fund our operations. Included in this
amount are $81.1 million of net proceeds from our
February 2000 follow-on offering of common stock,
$77.3 million of net proceeds from our May 1999
initial public offering of common stock and $61.9
million of net proceeds from our March 1999 private
placement of Series B redeemable convertible preferred
stock, which automatically converted into shares of
common stock upon the closing of the initial public
offering.
|
It seems to be clear that without some kind of
intelligently planned way to pay for free services,
this market is doomed to fail. They have lost $279.4 m
and never come close to profitability, despite all of
the stories about the company. Are journalists
allergic to asking companies if they can be profitable
within a five year period, the commonly understood
period of time for profitability?
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Prior to March 1, 1999, we operated our business
primarily through a limited partnership, Juno Online
Services, L.P. On that date, we completed a statutory
merger of Juno Online Services, L.P. into Juno Online
Services, Inc., which had been a wholly owned
subsidiary of Juno Online Services, L.P. Juno Online
Services, Inc. is the surviving entity after
completion of the statutory merger. The consolidated
financial statements for 1999 included herein consist
of the accounts of both Juno Online Services, L.P. and
Juno Online Services, Inc. All significant
intercompany accounts and transactions have been
eliminated in consolidation. Since we operated as a
limited partnership prior to March 1, 1999, taxable
losses incurred through that date have been allocated
to the partners for reporting on their respective
income tax returns. Accordingly, as of that date, we
had no available net operating loss carryforwards
available for federal and state income tax purposes to
offset future taxable income, if any.
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Hmmm, a limited partnership turned into a
corporation. The real question is why was it set up as
an LP in the first place?
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RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
REVENUES
Total revenues increased $62.0 million, to $114.0 million for the
year ended December 31, 2000 from $52.0 million for the year ended
December 31, 1999, an increase of 119%. This increase was due to
increases in billable services and in advertising and transaction fees,
partially offset by a decrease in direct product sales.
|
OK, the company made $114 m and still cannot turn a profit. How can a company not live within a $114 m budget?
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DIRECT PRODUCT SALES. Direct product sales decreased $3.4 million,
to $1.4 million for the year ended December 31, 2000 from $4.8 million
for the year ended December 31, 1999, a decrease of 70.4%. This decline
reflects our strategic decision to cease our direct product sales
activities and focus instead on other forms of electronic commerce.
Specifically, we decided to concentrate on forming strategic marketing
alliances and developing other uses for our advertising inventory that
we believe should generate revenues with higher margins than direct
product
sales. We stopped conducting direct product sales activities in August 2000
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Why were they in the direct product sales business to being with anyway? Juno was hardly a sterling retail name.
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Expenses associated with operations, free service increased $31.6
million, to $38.3 million for the year ended December 31, 2000 from
$6.7 million for the year ended December 31, 1999, an increase of 472%.
This increase was due primarily to additional telecommunications costs
incurred as a result of the expansion of our free service to include
full Internet access.
|
Why do this, then? Why bother? A desperate act to capture market share?
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PRODUCT DEVELOPMENT. Product development includes research and
development expenses and other product development costs. These costs
consist primarily of personnel and related overhead costs as well as,
for periods prior to May 1999, the costs associated with research and
development and other product development activities performed for us
on a contract basis by a related party in Hyderabad, India. In May
1999, we hired as employees substantially all of the individuals who
provided services to us under this related-party arrangement.
Product development costs increased approximately $3.1 million, to
$10.3 million for the year ended December 31, 2000 from $7.2 million
for the year ended December 31, 1999, an increase of 42.2%. This
increase is due primarily to additional personnel and related costs in
both our domestic and India offices related to the development of our
Juno Express premium service and of a new release of our client-side
software, version 5.0. These costs were partially offset by the lower
costs associated with operating our India-based research and
development efforts as a majority-owned subsidiary rather than
obtaining these services on a contract basis. To date, we have not
capitalized any expenses related to any software development
activities.
|
But costs still climbed. Where were the savings? Lower costs do not mean increased savings.
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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, and $131.4 million for the year ended
December 31, 2000.
| And
at no point did anyone suggest a way to reign in these costs? The magic
yar was 2000. It seems the Juno more than doubled their losses in a
strategy which makes no financial sense. Even when it was executed, it
was hamfisted. To continue to offer free services in a graceless way,
by "focusing" on the "5%" using their services "excessively". Could
they really have afforded to carry the other 95%?
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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, delivers Internet
access at broadband speeds, currently through the use of DSL and mobile
wireless technologies. Juno Express currently accounts for an extremely
small percentage of our active subscriber base and may never account
for a material percentage. If broadband services increase in popularity
and we are not successful at rolling out or expanding our
broadband services, our business and financial results may suffer.
| They
are making an assumption about the future which is contradicted by
their own statements. and Ardai's statements during the conference
call. They have had miserable success in providing broadband, yet now
it is critical to their growth? A better assumption would have been
that the rate of DSL rollout would have been slow, and since they had a
captive base of 4m subscribers, they could have easily marketed DSL to
them if the market had expanded
quickly, which it didn't come close to doing.
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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; and 332 employees at
December 31, 2000, including 72 employees in India. Prior to May 21,
1999, consultants used in India were employed by an affiliate of Juno.
We expect to
continue to rely on outsourcing arrangements for our customer service
needs and for the performance of some advertising sales functions
|
Did they really need 72 programmers in India? Or 332 people overall? Obviously not.
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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
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. The project is brand new. As of
February 28, 2001, we had not secured any customers for this project,
and there can be no assurance that we will be successful in
identifying, locating or securing customers, in the pharmaceutical
field or any other field, that are willing to compensate Juno for its
subscribers' unused processing power.
...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.
| Now
of all the wacky ideas of wacky ideas, this takes the cake. Forcing
users to participate in this kind of scheme, only used by the SETI
project, and on a voluntary basis, is risky on so many levels that it's
proposal alone comes from the kind of people who think technology has
no limits. It was amazing when I first heard it proposed and the idea
of it as a profit center is amazing on it's own.
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RELATIONSHIPS WITH ENTITIES AFFILIATED WITH THE CHAIRMAN OF OUR BOARD OF DIRECTORS MAY PRESENT POTENTIAL CONFLICTS OF INTEREST
The Chairman of our board of directors and our largest stockholder,
Dr. David E. Shaw, is the Chairman and Chief Executive Officer of D. E.
Shaw & Co., Inc., which is the general partner of D. E. Shaw &
Co., L.P. ("DESCO, L.P."), a securities firm whose activities focus on
various aspects of the intersection between technology and finance. Dr.
Shaw and entities affiliated with him are also involved in other
technology-related businesses apart from our company. As a result of
these other interests Dr. Shaw devotes only a portion of his time to
our company, and spends most of his time and energy engaged in business
activities unrelated to us. In addition to his indirect ownership of a
controlling interest in DESCO, L.P., Dr. Shaw may have a controlling
interest in these other businesses. Transactions between us and other
entities affiliated with Dr. Shaw may occur in the future and could
result in conflicts of interest that prove harmful to us.
We sublease office space in New York City from DESCO, L.P.
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
sublease arrangements were to be terminated.
In May 1999, we terminated an agreement with DESCO, L.P. under
which individuals employed by its affiliates located in India provided
consulting services to us. Following the termination of this agreement,
these individuals became employees of a Juno subsidiary located in
Hyderabad, India.
| Very
interesting. While the DE Shaw link was usually mentioned, the level of
Shaw's involvement was never revealed as an issue, nor was the fact
that Juno was subleasing space from them. So in addition to having an
active role in Juno, Juno was paying Shaw for office space.
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OUR DIRECTORS AND OFFICERS EXERCISE SIGNIFICANT CONTROL OVER US
As of February 28, 2001, the executive officers, directors, and
persons and entities affiliated with executive officers or directors
beneficially owned in the aggregate approximately 36.2% of our
outstanding common stock. The Chairman of our board of directors is Dr.
David E. Shaw. Dr. Shaw continues to serve as the Chairman and Chief
Executive Officer of D. E. Shaw & Co., Inc., which is the general
partner of DESCO, L.P. As of February 28, 2001, Dr. Shaw and persons or
entities affiliated with him, including DESCO, L.P., beneficially
owned, in the aggregate, approximately 34.4% 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.
| Even
more interesting. Shaw and his associates control 34.4 percent of Juno.
Very interesting. Shaw, his company and his family trust have been selling shares
of the company for months, reaping millions of dollars from the sale of
stocks as the value of the shares went down. Ardai has exercised
options at .45 held in trust in lots of 5,443 since July 25, 2000,
excluding three sales during November and December of 2000. He now
holds 5,204 shares in Juno. David Shaw holds 14m shares. Ardai has sold
$556,911 worth of shares since last April.
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STOCK PURCHASE PLAN
In April 1999, the Company adopted the 1999 Employee Stock Purchase
Plan (the "1999 ESPP"). A total of 555,556 shares are available to be
issued under the 1999 ESPP. The 1999 ESPP allows eligible employees to
purchase shares of common stock at semi-annual intervals
|
Yeah. A fraction of the stock sold by that controlled by DE Shaw, his trust and his company.
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AGREEMENT dated as of the 9th day of March, 2001, by and between
Juno Online Services, Inc., a Delaware corporation ("Company"), and
Charles Ardai (the "Employee").
2. Compensation
(a) BASE SALARY DURING THE COMPENSATION PERIOD. As compensation for
the Employee's services during the period beginning January 1, 2001 and
ending on December 31, 2001 (the "Compensation Period"), the Company
shall pay the Employee a base salary computed at an annual rate of
$275,000 per year, prorated to correspond to that portion of the
Compensation Period during which the Employee is actually employed with
the Company, such base salary to be paid semi-monthly.
(b) BASE SALARY AFTER THE COMPENSATION PERIOD. As of the end of the
Compensation Period, the Employee's base salary may be increased or
decreased, or the manner in which the Employee is compensated may be
changed, in the sole discretion of the Company. Any such change in
compensation shall be deemed to modify only this Section 2 of this
Agreement, and all other provisions of this Agreement shall remain in
effect following such change in compensation. In the absence of any
such change, the Employee's base salary shall remain the same as it was
during the Compensation Period.
(c) YEAR-END BONUS DURING THE COMPENSATION PERIOD. The Company
shall pay the Employee a minimum guaranteed year-end bonus for the
Compensation Period in the amount of $200,000. Such bonus shall be paid
to the Employee on a date to be determined by the Company, which date
shall ordinarily be no later than March 15th of the following calendar
year, or as soon thereafter as is practicable. If the Employee is
involuntarily terminated (other than for cause) by the Company during
the Compensation Period, then any unpaid portion of the minimum
guaranteed bonus amount set forth in this Section 2(c) shall become
payable immediately upon such termination.
(d) NON-REFUNDABLE ADVANCE AGAINST BONUS. In addition to the base
salary specified in Section 2(a) the Employee shall, during the
Compensation Period, receive non-refundable advances against the bonus
specified in Section 2(c) totaling $50,000, payable in two installments
of $25,000 each on or about June 30, 2001 and on or about December 31,
2001. The Employee shall under no circumstances be required to repay
any correctly computed sum that has already been paid to the Employee
as a non-refundable advance against bonus pursuant to the terms of this
Section 2(d).
(e) YEAR-END BONUS AFTER THE COMPENSATION PERIOD. As of the end of
the Compensation Period, or as of the end of any subsequent calendar
year, the Employee's year-end bonus, if any, and/or the non refundable
advance against such year-end bonus, if any, may be increased,
decreased, or eliminated, or the manner in which the Employee is
compensated may be changed, in the sole discretion of the Company. Any
such change in compensation shall be deemed to modify only this Section
2 of this Agreement, and all other provisions of this Agreement shall
remain in effect following such change in compensation. Subsequent to
the Compensation Period, the Company shall not have any obligation to
continue to pay a year-end bonus to the Employee unless such an
arrangement is explicitly agreed to in writing by the Company.
(f) DISCRETIONARY BONUS. In addition to the bonus payment set forth
in Section 2(c), the Company may (or may not) in its sole discretion
pay the Employee an additional discretionary bonus at any time. The
award and amount of any such bonus shall be determined by the Company
in its sole discretion.
Ardai could take home a minimum of 475K during this contract. In
1999, he took home 388K in pay and bonuses. What is amazing is the way
the bonuses are built into the contract. Despite the company's failure,
the CEO could take home close to half a million dollars if the company
survives the year. Despite the fact that the company lost 92 percent of
it's value over the last year.
(iii) employ, or retain as a consultant or contractor, or cause to
be so employed or retained, or enter into a partnership or business
venture with, any person (a "Related Person") who at the time of such
action (A) is an employee of the Company or the D. E. Shaw Group; (B)
has been employed by the Company or the D. E. Shaw Group at any time
within the previous 18 months; (C) is a consultant, sales agent,
contract programmer, or other independent gent who is retained on a
full-time or substantially full-time basis by the Company or the D. E.
Shaw Group; or (D) has been retained on a full-time or substantially
full-time basis by the Company or the D. E. Shaw Group as a consultant,
sales agent, contract programmer, or other independent agent at any
time within the previous 18 months; or
(iv) solicit, persuade, encourage, or induce any employee of the
Company or the D. E. Shaw Group (or any consultant, sales agent,
contract programmer, or other independent agent who is retained on a
full-time or substantially full-time basis by the Company or the D. E.
Shaw Group) to cease his employment with or retention by the Company or
the D. . Shaw Group.;
Here's a question: is Juno Online Services a subsidiary of DE Shaw?
While Ardai has been the company's front man, they even admit
within their 10K that Shaw has substantial control over the company's
management. He controls 14 million shares, Ardai around 5000. Ardai was
a former employee of DE Shaw, as was Jeff Bezos. The company sublets
space from DE Shaw. It seems clear from the company's own admissions in
their SEC filings that they owe much of their existence to DE Shaw. It
seems obvious that the company would not exist without the continued
active help and assistance of DE Shaw.
Look at it this way, DE Shaw is even referred to in their own
documents. Yet, at no point was the link between Shaw and Juno made
clear. Shaw has a material and ongoing interest in the company's
survival and DE Shaw is the chairman of the Board of Directors. While
obviously not his sole personal investment, Shaw backed Juno with the
weight and resources of his company.
Why is this of interest? Because this would mean that a securities
firm had gone into an unrelated field in a major and ongoing way.
People would have seen Juno in an entirely different light. It would be
as if a well-liked protege of Sanford Weill opened up a chain of bars
and then you see that Citigroup and Weill were heavy investors. It
would make you pause rather seriously. Because you have to wonder about
how they dealt with not only Juno, but other companies in that same
space.
|
From D.E Shaw's website: "The D. E. Shaw group was also responsible
for the conceptualization, organization, and initial financing of Juno
Online Services, Inc., which later grew to become one of the nation's
largest provider Internet access providers. Juno's revenues are derived
from the subscription fees it charges for its billable premium
services, from the sale of advertising, and from various forms of
electronic commerce. According to Media Metrix, as of December 2000
Juno ranked fourth (after AOL, Yahoo! and Microsoft, but ahead of such
Internet industry leaders as Excite, Lycos, eBay, and Amazon.com) in
hours of Internet use per month. The D. E. Shaw group and its
principals provided the sole financing for Juno's operations through
the completion of its external mezzanine financing round in early 1999.
Juno became a public company on May 25, 1999, and is now traded on
Nasdaq under the symbol JWEB.
The firm maintains a constant watch for true superstars who might
significantly add to its capabilities. Hiring is extremely selective,
with less than one candidate in 250 ultimately invited to join the
firm."
So is that how Bezos was hired?
While Shaw discusses their ties to Juno, the reverse seems to be
less true. What is interesting is the question of how Shaw handled
their positions in the space Juno was operating in. There are clear
questions about a firm which actively trades securities and is now
unloading them as the market sinks, how the two companies worked
together. There are real questions, at least for outside shareholders,
on how Juno's relationship with DE Shaw affected both companies. |
Why Juno is Failing
While in the latest conference call Ardai stressed the move to
billable services, while not admitting that their change of emphasis
entails moving into a whole different category. He claims that Juno is
a "large" ISP, but Juno really isn't, because fewer than one million of
their four million active subscribers actually pay for any
Juno-provided service. There is no clear reason to spend 19.95 per
month with Juno Web when one can spend 21.95 a month for AOL or 19.95 a
month for Earthlink or as low as $7 a month for AT&T when using
their long distance service. Juno would shift market position from near
the top of the e-mail/web access business to the increasingly shrinking
ISP market.
As a long term strategy, this is a clear failure or will be as
large communications companies move to entrench their role in this
marketplace. Another question is why did Juno have to continue to build
their own software. None of their other competitors engaged in such a
risky, expensive strategy. They kept their users in their software
which is far less functional than any of the commonly available mail
programs.
One thing which people need to examine is the number of users who
have moved away from Juno or keep their accounts inactive. They have
15m registered names; four million of these have used the service. That
means 11m people walked away or no longer bother with Juno, despite
registering at least one name. Less than 1m will pay for their
services. Compare those numbers. For every 15 people who have had any
contact with Juno four use at least one of its services, and only one
will pay for them. Is that the kind of retention rate one would see as
useful?
Even while Ardai acknowledged the risk of losing non-paying
customers by shifting to billable services, the question is whether
Juno is actually any good at delivering services. There is reason to
question that.
It is obvious that the 11 million users have some internet access,
yet they choose to go elsewhere for services. What Ardai didn't say is
that all of the other free services remaining are far more flexible in
how one can access the internet and use it. Their time limits and use
of standard software makes far more sense in the end for the average
user than Juno's proprietary solutions.
Juno, despite increased earnings, faces a very difficult road to
profitability because they are dealing with the transformation of a
free service into a pay service in a crude and loutish way, by randomly
restricting users access to the internet without warning. If they have
an hours limit, announcing one would have been useful before
instituting their plan.
Also, their invasive plan for distributed computing was going to be
shoved down the consumer's throat without their permission as a
condition for using the service.
One gets the feeling that they are nibbling at the edges of
solutions and they may never be able to capture the audience they need
to survive.
Editor's Note: This is Part 4 of Steve Gilliard's ongoing series. You can read Part 1 (IVillage), Part 2 (Salon), Part 3 (Razorfish), Part 4 (Juno), and Part 5 (Ask Jeeves) on this site).
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