<PAGE>
As filed with the Securities and Exchange Commission on December 20, 1996
Registration No. 333-11135
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------------
JONES EDUCATION COMPANY
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Colorado 8299 84-1150623
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
9697 East Mineral Avenue
Englewood, Colorado 80112
(303) 792-3111
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive office)
Elizabeth M. Steele, Vice President and Secretary
9697 East Mineral Avenue
Englewood, Colorado 80112
(303) 792-3111
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------------------
Copies to:
Paul Hilton, Esq. Dan Busbee, Esq.
J. Justyn Sirkin, Esq. Henry Exall IV, Esq.
N. Anthony Jeffries, Esq. Locke Purnell Rain Harrell
Davis, Graham & Stubbs LLP (A Professional Corporation)
370 Seventeenth Street, Suite 4700 2200 Ross Avenue, Suite 2200
Denver, Colorado 80202 Dallas, Texas 75201-6776
(303) 892-9400 (214) 740-8000
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Approximate date of commencement of proposed sale to public:
As soon as practicable after the effective date of this Registration Statement.
---------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box.[_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration for the same offering.[_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.[_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box.[_]
---------------------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any State.
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED DECEMBER 20, 1996
6,900,000 Shares
JONES EDUCATION COMPANY
Class A Common Stock
Of the 6,900,000 shares of Class A Common Stock offered hereby (the
"Offering"), 5,800,000 shares are being sold by Jones Education Company (the
"Company"), and 1,100,000 shares are being sold by certain shareholders of the
Company (the "Selling Shareholders"). See "Principal and Selling Shareholders."
The Company will not receive any of the proceeds from the sale of shares by the
Selling Shareholders.
Holders of Class A Common Stock are entitled to 1/10th of a vote per
share and holders of Class B Common Stock are entitled to one vote per share on
all matters submitted to a vote of shareholders. Both classes vote together as a
single class on all matters except that as long as the Class A Common Stock
constitutes more than 10% of the outstanding shares of Common Stock, the holders
of Class A Common Stock, voting separately as a class, are entitled to elect
approximately 25% of the Company's directors, with the remainder of the
directors being elected by the holders of Class B Common Stock, voting
separately as a class. See "Description of Capital Stock." Immediately following
the Offering and on a fully-diluted basis (assuming no exercise of the
Underwriters' over-allotment option), Glenn R. Jones, the beneficial owner of
all of the Class B Common Stock, will have approximately 69% of the combined
voting power of the Company's total outstanding common stock. See "Principal and
Selling Shareholders" and "Risk Factors - Voting Rights; Control by Principal
Shareholder."
Prior to this Offering, there has been no public market for the Class A
Common Stock of the Company. It is anticipated that the initial public offering
price of the Class A Common Stock will be between $14.00 and $16.00 per share.
See "Underwriting" for a discussion of the factors considered in determining the
initial public offering price. The Class A Common Stock has been approved for
quotation on the Nasdaq National Market under the symbol "JECO."
See "Risk Factors" commencing on Page 9 for a discussion of certain
factors that should be considered by prospective purchasers of the Class A
Common Stock offered hereby.
---------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Proceeds
Price to Underwriting Proceeds to to Selling
Public Discount (1) Company (2) Shareholders
- ---------------- ---------------------------------------------------------------
Per Share....... $ $ $ $
Total (3)....... $ $ $ $
================ ===============================================================
(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters, including the Company's agreement to grant
a warrant to purchase shares of the Class A Common Stock to M. Kane &
Company, Inc. in consideration of certain financial advisory services
provided to the Company.
(2) Before deducting expenses payable by the Company estimated at $2,650,000,
which expenses include amounts payable to M. Kane & Company, Inc. in
consideration of certain financial advisory services provided to the
Company. See "Underwriting."
(3) The Company and the Selling Shareholders have granted to the Underwriters
a 30-day option to purchase up to 1,035,000 additional shares of Class A
Common Stock solely to cover over-allotments, if any. If the Underwriters
exercise this option in full, the Price to Public will total $ , the
Underwriting Discount will total $ , the Proceeds to Company will total $
and the Proceeds to Selling Shareholders will total $ . See "Principal and
Selling Shareholders" and "Underwriting." The shares of Class A Common
Stock are offered by the several Underwriters named herein, subject to
receipt and acceptance by them and subject to their right to reject any
order in whole or in part. It is expected that delivery of the
certificates representing such shares will be made against payment
therefor at the office of Montgomery Securities on or about , 1996.
---------------------------
MONTGOMERY SECURITIES
PIPER JAFFRAY INC.
M. KANE & COMPANY, INC.
<PAGE>
[The graphics presented on this page contain the statement "To make
self-empowering knowledge and education available to adults anytime, and
anywhere by integrating a network of communication technologies." This statement
is placed in the middle of the page over pictures of a television set, a
computer screen displaying an Internet browser, a satellite dish and a personal
computer. The statement is surrounded by the Company's trademarks and pictures
relating to the Company's business, products, services and markets.]
[ART]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CLASS A
COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL
IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL
MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY
TIME.
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<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by and should be
read in conjunction with the more detailed information and Consolidated
Financial Statements and Notes thereto appearing elsewhere in this Prospectus.
Unless the context requires otherwise, references to the Company herein include
Jones Education Company and its subsidiaries and references to Common Stock
herein refer collectively to the Class A Common Stock and Class B Common Stock.
Unless otherwise indicated, all information in this Prospectus assumes that the
Underwriters' overallotment option has not been exercised and reflects a
285-for-one stock split of the Class A Common Stock and Class B Common Stock to
be effected immediately prior to the consummation of the Offering. Investors
should consider carefully the information set forth under the heading "Risk
Factors."
The Company
The Company offers a variety of integrated educational programming,
products and services through multiple distribution channels designed to serve a
continuum of adult learning needs. Targeting adults who want everything from
practical information to formal education, the Company offers a myriad of
products and services. For adults who seek information that is of practical use
in their day-to-day lives, the Company licenses, develops and produces
knowledge-enhancing programs and distributes these programs primarily on its
television networks, JEC Knowledge TV and Jones Computer Network. For those who
desire more in-depth information or formal education, i.e., certification or
post-secondary degrees, the Company works in conjunction with select
universities and colleges to offer degree and certificate courses through
multiple media including videotapes, television and print, in addition to the
Internet and other interactive media. As a complement to the programs and
degrees offered, the Company also offers a broad selection of educational video
and software products.
The Company's programming, products and services concentrate primarily
on four high-demand subject areas: (i) computers and technology, (ii) business,
careers and finance, (iii) health and wellness and (iv) global culture and
languages. By integrating and cross-promoting its networks, degree and
certificate programs and educational products, the Company encourages its
customers to experience a continuum of learning and, while so doing, utilize any
combination of the Company's products and services.
The Company's television networks generate revenue through license fees
paid by program distributors and through the sale of advertising time. The
networks' programming is intended to reach an audience that has demographics
attractive to advertisers and that is receptive to the Company's education
products and services. The Company's distance learning operations generate
revenue from tuition fees, student fees and the sale of education-oriented
products, particularly training videos and programs. In 1995 and the first nine
months of 1996, network revenue and education products and services revenue
accounted for 77% and 79%, and 23% and 21%, respectively, of the Company's total
revenue. Historically, advertising revenue has accounted for a significant
portion of the Company's network revenue. For the first nine months of 1996,
advertising revenue accounted for approximately 54% of the Company's network
revenue, or 43% of its total revenue. The Company believes that its distance
education business is differentiated from others because it is highly integrated
and it derives revenue from multiple sources.
The Company's network programs are designed to provide adults with
practical information that can be applied immediately in their personal and
professional lives and are distributed on the
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<PAGE>
Company's two 24- hours a day, satellite-delivered networks, JEC Knowledge TV
and Jones Computer Network. JEC Knowledge TV, launched in 1987, features
programs in each of the Company's four high-demand subject areas and is
currently available to approximately 24.5 million households in the United
States. Jones Computer Network, launched in 1994, offers programming focused
primarily on computers and technology and is currently available to
approximately 1.2 million households in the United States.
The Company's degree and certificate courses target adults who desire
in-depth, post-secondary education, but who are constrained by the time and
location inconveniences associated with enrollment in programs using the
traditional educational model. Working in conjunction with universities and
colleges, the Company offers distance education degree and certificate courses
that are delivered directly to adults through multiple forms of media, including
videotape, television, print materials, the Internet and other interactive
multimedia. The Company currently offers 170 course selections and 17 degree and
certificate programs through 11 accredited universities and colleges, including
The George Washington University, Regis University, California State University
at Dominguez Hills and the University of Colorado-Colorado Springs, as well as
through International University, an affiliate of the Company currently in the
accreditation process. The Company seeks to distinguish its distance education
programs from those of others by offering students: (i) a variety of accredited
universities and colleges from which they can choose to earn a degree or
certificate, (ii) a greater selection of degree and certificate programs, (iii)
greater flexibility in the scheduling and delivery methods for its courses and
(iv) increased frequency in the delivery of its courses. The Company also
provides a range of support services for its distance education degree and
certificate courses through its education services center, JEC College
Connection, and offers a broad selection of educational videotapes, audiotapes,
books, compact disks and other learning tools through its JEC Knowledge
Store.
The Company believes that rapidly evolving changes in society, the
workplace and technology may lead adults to seek new educational opportunities
offered in a more convenient fashion than traditional site- based education
programs. The Company believes that the market for educational and informational
programming, of which the Company's programming comprises a segment, is growing.
The Company further believes that advertisers and programming distributors have
responded positively to the popularity of such programming. Based on recent
industry data, advertisers spent approximately $780 million, net of agency
commissions, in 1995 on 10 networks airing information-based programming,
representing an increase of approximately 144% from such advertising
expenditures in 1990. In addition, industry data indicates that license fees
paid by cable operators to these networks were approximately $600 million in
1995. The Company believes that its programming is more education-oriented than
these information-based networks and therefore appeals to a smaller audience
than, and may not be as attractive to advertisers and programming distributors
as, information-based networks. See "Business - The Market for Adult Education
Programming and Credit Courses." In addition, the Company believes a substantial
number of adults are seeking more in-depth education through formal credit and
degree courses. In 1993, the most recent year for which information is
available, the U.S Department of Education estimated that adults over 24 years
of age comprised approximately 6.3 million, or 44%, of the 14.3 million students
enrolled in higher education programs. The Company believes that it is
positioned to compete effectively in these markets due to its unique combination
of experience, resources, depth of course offerings, breadth of delivery modes
and integrated sales and marketing capabilities. There can be no assurance,
however, that the Company's advertising or license fee revenue or educational
products and services revenue will grow in the future.
-4-
<PAGE>
The Company seeks to strengthen and expand its position as a provider
of knowledge-enhancing programming and distance education products and services
to adults. The Company's strategy is: (i) to expand the distribution of its
networks, (ii) to license, develop and produce high quality programming for both
its networks and degree and certificate courses, (iii) to increase its marketing
and promotion activities, (iv) to increase its student enrollments, (v) to
develop corporate relationships (vi) to expand further into international
markets and (vii) to pursue strategic investments, acquisitions and joint
ventures. By pursuing these strategies, the Company hopes to expand its
subscriber base, make its networks more attractive to both viewers and
advertisers, increase the brand awareness and usage of both its networks and its
distance education programs and expand further into international markets.
The Company was incorporated as a Colorado corporation in 1990 and is
the successor to certain affiliated entities that previously conducted certain
of its businesses. The Company's corporate offices are located at 9697 East
Mineral Avenue, Englewood, Colorado 80112, and its telephone number is (303)
792-3111.
-5-
<PAGE>
<TABLE>
<CAPTION>
The Offering
<S> <C>
Class A Common Stock offered by:
The Company........................................... 5,800,000 shares
The Selling Shareholders.............................. 1,100,000 shares
Total......................................... 6,900,000 shares
=========
Common Stock to be outstanding after the Offering:
Class A Common Stock.................................. 9,492,175 shares
Class B Common Stock.................................. 2,089,620 shares
---------
Total............................................. 11,581,795 shares(1)
==========
Use of proceeds........................................... The Company currently intends to use the net
proceeds from the Offering as follows:
(i) approximately $32.0 million to increase
marketing activities relating to the Company's
networks and its education products and services
through 1998; (ii) approximately $41.0 million to
license, develop and produce additional
programming for its networks and its degree and
certificate course offerings through 1998; and
(iii) approximately $1.4 million to repay a long-
term advance from Jones International, Ltd. ("Jones
International"). The Company intends to use the
remaining $3.9 million for working capital and
general corporate purposes, including potential
strategic investments, acquisitions or joint ventures.
The Company believes that the proceeds of this
Offering, together with its revenues from
operations, will be sufficient to pursue these plans.
The Company may reallocate the amount of
proceeds used for marketing, programming and
strategic investments, acquisitions or joint ventures
in response to changes within the markets in which
it competes. The Company will not receive any of
the proceeds from the sale of shares by the Selling
Shareholders. See "Use of Proceeds."
Voting rights............................................. Holders of Class A Common Stock are entitled to
1/10th of a vote per share and holders of Class B
Common Stock are entitled to one vote per share on
all matters submitted to a vote of shareholders.
Both classes vote together as a single class on all
matters not requiring a class vote. As long as the
Class A Common Stock constitutes more than 10%
of the outstanding shares of Common Stock, the
holders of Class A Common Stock, voting
separately as a
</TABLE>
-6-
<PAGE>
<TABLE>
<S> <C>
class, are entitled to elect approximately 25% of the
Company's directors, with the remainder of the directors
being elected by the holders of Class B Common Stock,
voting separately as a class. The shares of Class B Common
Stock are not convertible into shares of Class A Common Stock.
See "Description of Capital Stock." Immediately following the
Offering and on a fully-diluted basis, Glenn R. Jones, the
beneficial owner of all of the outstanding shares of the
Class B Common Stock, will have approximately 69% of the
combined voting power of the Company's outstanding Common
Stock. See "Principal and Selling Shareholders" and
"Risk Factors - Voting Rights; Control by Principal Shareholder."
Nasdaq National Market symbol............................. JECO
</TABLE>
- --------------------------
(1) Excludes: (i) 1,100,000 shares of Class A Common Stock reserved for
issuance pursuant to the Company's Stock Option Plan, 381,500 of which
were subject to outstanding options as of December 19, 1996, and (ii)
28,750 shares (33,063 shares if the Underwriters' over-allotment option is
exercised in full) of Class A Common Stock issuable under a warrant the
Company has agreed to grant to M. Kane & Company, Inc. with an exercise
price equal to 120% of the initial public offering price. See
"Management - Stock Option Plan" and "Underwriting."
-7-
<PAGE>
Summary Consolidated Financial Data
(In thousands, except per share and student and enrollment data)
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
-------------------------------------- -------------------
1993 1994 1995 1995 1996
-------- -------- -------- -------- ------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues...................................... $ 6,073 $ 9,973 $ 15,911 $ 11,311 $ 15,594
Operating loss................................ (10,060) (10,232) (12,308) (10,501) (4,150)
Loss before income tax benefit and minority
interests................................... (10,136) (12,830) (13,365) (11,378) (4,315)
Net loss...................................... (9,728) (11,029) (13,365) (11,378) (3,889)
Net loss per common share .................... (2.50) (2.82) (2.55) (2.09) (0.68)
Weighted average number of common shares
outstanding................................. 3,891 3,909 5,239 5,443 5,702
Other Data:
Number of network households(1)............... 25,552 25,558 25,720 25,800 25,607
Number of paying network households(2)........ 6,800 8,200 11,500 11,400 11,900
Number of enrollments(3)...................... 1,974 2,544 4,662 4,456 4,918
Number of students(4)......................... 1,131 1,654 1,901 1,635 1,838
</TABLE>
<TABLE>
<CAPTION>
September 30, 1996
-----------------------------------
Actual As Adjusted(5)
------------- -----------------
<S> <C> <C>
Balance Sheet Data:
Working capital.......................................................... $ 3,631 $80,550
Total assets............................................................. 11,010 87,929
Long term debt........................................................... 1,400 -
Total shareholders' equity .............................................. 4,422 82,741
</TABLE>
- -----------------------
(1) Represents the number of television households that receive the Company's
networks via cable or through C-band satellite receivers.
(2) Represents the number of television households that receive the Company's
networks for which a monthly subscriber fee is paid to the Company by
cable television system operators or other video distributors.
(3) Represents the cumulative number of students in all credit bearing
courses offered through the Company during the period (for example, a
single student enrolled in three courses during the period would be
counted as three enrollments).
(4) Represents the number of individual students enrolled in one or more
credit bearing courses offered through the Company during the period.
(5) Adjusted to give effect to the sale of 5,800,000 shares of Class A
Common Stock offered by the Company hereby, at an assumed offering
price of $15.00 per share and after deducting underwriting discounts
and commissions and estimated offering expenses payable by the
Company, and the application of the net proceeds therefrom. See "Use
of Proceeds."
-8-
<PAGE>
RISK FACTORS
An investment in the shares of Class A Common Stock offered hereby
involves a high degree of risk. Prospective purchasers of the Class A Common
Stock should consider carefully the information set forth below, as well as the
other information in this Prospectus, in determining whether to purchase shares
of the Class A Common Stock offered hereby. In addition, certain information
included in this Prospectus is forward-looking. Such forward-looking information
involves significant risks and uncertainties that could cause actual future
results to differ significantly from those expressed in any forward-looking
statements made by, or on behalf of, the Company. These risks and uncertainties
include but are not limited to those discussed below.
History of Operating and Net Losses; Expected Future Losses
The Company has sustained operating and net losses throughout its
history, including operating losses of $10.0 million, $10.2 million, $12.3
million and $4.1 million and net losses of $9.7 million, $11.0 million, $13.4
million and $3.9 million for the years ended December 31, 1993, 1994 and 1995,
and for the nine months ended September 30, 1996, respectively. These losses
have resulted in accumulated deficits of $20.1 million, $31.1 million, $44.5
million and $36.7 million for the years ended December 31, 1993, 1994 and 1995,
and for the nine months ended September 30, 1996, respectively. The Company also
anticipates incurring increased costs and substantially higher operating losses
and net losses through at least 1998. The Company expects to continue to
recognize substantial operating and net losses for the foreseeable future and
there can be no assurance that the Company will ever generate operating or net
income. In addition, the Company has not generated sufficient cash from
operations and has relied on advances and investments from current shareholders
to fund its operations. These shareholders are under no obligation to provide,
nor does the Company expect such shareholders to provide, additional financial
assistance to the Company subsequent to the consummation of this Offering. The
Company intends to fund its future operating losses resulting from its increased
marketing and programming expenditures with a portion of the proceeds of this
Offering. Although the Company believes that the proceeds of this Offering will
be sufficient to satisfy the Company's working capital and cash flow needs
through 1998, there can be no assurance that the Company will be able to meet
its longer term capital requirements. See "- Risk of Inability to Obtain
Additional Financing," "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources."
Inability to Sustain or Manage Growth
The Company's revenue has grown substantially in recent years primarily
as a result of increased advertising and licensing revenue generated by its two
networks, JEC Knowledge TV and Jones Computer Network. The Company intends to
pursue an aggressive expansion strategy for the foreseeable future, but there
can be no assurance that the Company will successfully achieve its growth
objectives. The Company's ability to maintain its growth will depend on a number
of factors, many of which are beyond the Company's control, including
maintaining and expanding distribution of JEC Knowledge TV and Jones Computer
Network, both through multiple system operators of cable television systems
("MSOs"), as well as through alternative distribution systems such as direct
broadcast satellite services ("DBS"), wireless video services ("MMDS") and video
distribution systems being established by various telecommunications companies;
developing and licensing additional programming for the Company's networks that
is consistent with viewer preferences; attracting additional advertisers that
are willing to pay competitive rates; developing additional course offerings
for, and increasing student enrollment in, its degree and certificate programs;
and
-9-
<PAGE>
penetrating and developing existing and new markets for its television
programming and degree and certificate courses. In addition, the Company is
subject to a variety of business risks generally associated with growing
companies. Future growth and expansion could place significant strain on the
Company's management personnel, some of whom also serve as officers of
affiliates of the Company, and likely will require the Company to recruit
additional management personnel. As part of its business strategy, the Company
will consider making strategic investments or acquisitions or entering into
joint ventures. The success of this strategy depends not only upon the Company's
ability to identify and acquire suitable businesses or joint venture partners,
but also upon its ability to integrate acquired businesses or joint venture
operations into its organization effectively and to retain and motivate key
personnel of acquired businesses or joint venture operations. In addition, the
Company may face competition from other companies for acquisition candidates or
joint venture partners. There can be no assurance that the Company will be able
to manage its expanding operations effectively, that it will be able to maintain
or accelerate its growth or that such growth, if achieved, will result in
profitable operations, that it will be able to attract and retain sufficient
management personnel necessary for continued growth, or that it will be able to
successfully make strategic investments or acquisitions or enter into joint
ventures. The failure to accomplish any of the foregoing could have a material
adverse effect on the Company. See "Business - Growth Strategy" and "-Dependence
upon Key Personnel."
Risks Associated with Distribution of Programming; Termination of Affiliation
Agreements
The Company's business is dependent upon the distribution of its
programming through MSOs, other video programmers and other media distributors.
In terms of cable distribution, the Company's programming competes for a limited
number of available cable channels with a large number of well-established
programmers supplying a variety of alternative programming, including education,
news, public affairs, entertainment and sports programming. In addition, channel
space is controlled by MSOs, some of which are affiliated with competing program
providers. See "- Competition." While the Company has entered into affiliation
agreements with five of the ten largest MSOs in the United States, as well as a
number of smaller MSOs, these agreements generally do not guarantee the
distribution of the Company's networks if local cable operators are unable or
unwilling to carry the Company's programming. In addition, affiliation
agreements accounting for approximately 35% of the Company's licensing revenue
for 1995 are terminable upon 30 days notice and affiliation agreements
accounting for approximately 2% and 19% of the Company's licensing revenue for
1995 are scheduled to expire in fiscal 1997 and 1998, respectively. The
termination or non-renewal of certain of the Company's affiliation agreements or
the termination of carriage of the Company's networks by a significant number of
cable systems would have a material adverse effect on the Company's business,
results of operations and liquidity. In addition, the Company's expansion plans
are dependent, in part, on the ability of the Company to enter into affiliation
agreements with additional MSOs and other video programming distributors, to
renew existing affiliation agreements with current MSOs when such agreements
expire and to persuade additional local cable operators to carry the Company's
programming. There can be no assurance that the Company will be able to
successfully negotiate affiliation agreements with any current or new MSO or
other video programming distributor or secure additional distribution from or
maintain current distribution with local cable operators. See "- Competition"
and "Business - Growth Strategy," and "- Distribution."
-10-
<PAGE>
Dependence on Advertising Revenue
The Company historically has derived substantial revenue from the sale
of airtime on its networks for long-form advertisements (infomercials) and, to a
lesser extent, short-form advertisements (spot ads). For the first nine months
of 1996, advertising revenue comprised 54% of the Company's network revenue, or
43% of its total revenue. The Company's ability to increase its advertising
revenue is dependent, in part, on its ability to attract additional advertisers
that are willing to pay competitive rates for airtime. The Company's ability to
attract such additional advertisers is dependent upon its ability to demonstrate
that its networks are able to deliver the type and quantity of television
viewers that such advertisers seek which in turn is dependent upon a number of
factors, including, among others, the Company's ability: (i) to expand the
distribution of its networks, (ii) to maintain or increase the number of hours
of network programming on the cable systems on which the Company's networks are
carried only part-time, (iii) to license, develop and produce additional high
quality, distinctive programming that will attract additional viewers and (iv)
to increase awareness of its networks and measure the type and quantity of
television viewers tuned to its networks. The sale of additional advertising on
the Company's networks is also dependent on certain factors that are beyond the
Company's control, including, among others, the amount of funds that advertisers
dedicate to television advertising and, in particular, to networks such as JEC
Knowledge TV and Jones Computer Network, the number of advertisers who seek
audiences within the demographic group to which the Company's networks deliver
programming and fluctuations affecting the advertising industry resulting from
general economic trends. There can be no assurance that the Company will be able
to maintain its existing advertisers or attract additional advertisers in the
future. See "Business - Advertising."
Competition for Viewers and Students; Market Acceptance
The Company's networks compete for viewers with various cable and
broadcast television programmers supplying a variety of enrichment programming,
including, among others, the Discovery Channel, Arts & Entertainment, the
History Channel, The Learning Channel, CNBC, CNN, MSNBC, Fox News Channel, Home
and Garden TV and the Public Broadcasting Service. Many of these programmers
have substantially greater financial and other resources than the Company.
Moreover, the Company expects to encounter additional competition for viewers as
technological advances, such as the deployment of digital compression
technology, the deployment of fiber optic cable and the "multiplexing" of cable
services, allow cable systems to greatly expand their channel capacity and, as a
result, their ability to add new networks. Historically, demand for educational
programming has not had wide appeal with television audiences and high quality
programming with a substantial educational content has not been widely
available. The Company's ability to compete effectively for viewers is dependent
upon, among other factors, its ability to assess consumer preferences accurately
and to develop and license programming that is attractive to television viewers.
With respect to distance education, the Company competes with
universities and colleges, including those that deliver education and training
products to distant locations, and independent education and training companies
that package and distribute programs through various media, including, among
others, the University of Phoenix and Westcott Communications, Inc. In addition,
the Company believes that a number of other virtual universities are being
planned or developed that will compete with the Company in the near future.
While the Company believes that its integrated approach of offering a variety of
products and services through a combination of technologies is distinctive and
that the convenience of home and desktop delivery will be preferred, there can
be no
-11-
<PAGE>
assurance that adults will find the Company's approach preferable to the
approach of its competitors or that the Company will be able to compete
successfully in the future.
In addition, the Company's success in developing additional quality
educational programming and expanding its audience will depend on its ability to
provide programming that anticipates and responds to the needs and preferences
of adults. There can be no assurance that the Company will be able to license or
develop additional educational programming that will be accepted by its targeted
markets. See "Business Competition."
Risks Associated with the Distance Education Market
The market for adult education traditionally has been served through
site-based, live instruction. Although distance education programs have been
available for many years, such programs have low awareness among consumers and
currently account for only a small portion of the overall adult education
market. The Company derived approximately 23% of its revenues in 1995 from the
sale of education products and services. There can be no assurance, however,
that the demand for adult distance education will continue at its current level
or increase or that the Company will be able to maintain or increase its current
market share. In addition, the Company relies on its relationships with select
colleges and universities to offer many of its education products and services.
There can be no assurance that the Company will be able to maintain these
relationships or enter into new relationships. See "Business - Education
Products and Services."
Voting Rights; Control by Principal Shareholder
Holders of Class A Common Stock have limited voting rights. Holders of
Class A Common Stock are entitled to 1/10th of a vote per share, and holders of
Class B Common Stock are entitled to one vote per share, on all matters
submitted to a vote of shareholders. As long as the Class A Common Stock
constitutes more than 10% of the issued and outstanding shares of Common Stock,
the holders of Class A Common Stock, voting separately as a class, are entitled
to elect approximately 25% of the Company's directors, with the remainder of the
directors being elected by the holders of Class B Common Stock, voting
separately as a class. The shares of Class B Common Stock are not convertible
into shares of Class A Common Stock. See "Description of Capital Stock." Thus,
the holders of the Class B Common Stock will have the power to control all
matters requiring shareholder approval. Following the completion of this
Offering, Glenn R. Jones will directly and indirectly possess 100% of the voting
power of the outstanding Class B Common Stock and 75.5% of the total voting
power of the Company's outstanding Class A Common Stock and Class B Common Stock
combined. See "Certain Relationships and Related Transactions," "Principal and
Selling Shareholders" and "Description of Capital Stock."
Anti-Takeover Effects; Potential Unfavorable Treatment in Takeover
The voting control by the holders of the Class B Common Stock and
certain provisions of the Company's articles of incorporation may be deemed to
have certain anti-takeover effects. This voting control may have the effect of
delaying, deferring or preventing a change of control of the Company, including
any business combination with an unaffiliated party, impeding the ability of the
shareholders to replace management even if factors warrant such a change and
affecting the price that investors might be willing to pay in the future for
shares of the Company's Class A Common Stock. Under the Company's articles of
incorporation, a majority of the directors then in office, though less than a
quorum, or the sole remaining director, will be empowered to fill any vacancy on
the Board of
-12-
<PAGE>
Directors. A two-thirds vote of the Common Stock will be required to alter,
amend or repeal the foregoing provisions. This provision for filling vacancies
on the Board of Directors may discourage a third party from attempting to gain
control of the Company and may maintain the incumbency of the Board of
Directors. In addition, the holders of the Class B Common Stock may also arrange
or approve an acquisition of voting control of the Company that is more
favorable to them than to the holders of the Class A Common Stock or that does
not involve the holders of Class A Common Stock at all. See "Principal and
Selling Shareholders" and "Description of Capital Stock."
Conflicts of Interest; Transactions with and Reliance on Affiliates
The Company has engaged in and expects to continue to engage in
numerous transactions with affiliates. These transactions relate to loans to the
Company, guarantees on behalf of the Company, affiliation agreements related to
the sale of the Company's programming, lease agreements and service agreements
related to certain technical, computer and administrative services provided to
the Company. In 1995, $2.7 million, or 17%, of the Company's total revenues and
$5.6 million, or 20%, of its total expenses involved related party transactions.
Because certain officers and directors of the Company are also officers and
directors of such affiliates, the terms of any distribution, programming,
production, lease or other agreement between the Company and such affiliates
will not be the result of arm's-length negotiations. The Board of Directors has
not established any policies regarding related transactions or potential
conflicts of interest that may arise in the future between the Company and its
affiliates, and there can be no assurance that the terms of any such
transactions will be as favorable as the Company could obtain from unaffiliated
parties. See "- Dependence upon Key Personnel" and "Certain Relationships and
Related Transactions."
Fluctuations in Operating Results; Seasonality
The Company has experienced fluctuations in its quarterly operating
results, and it expects such fluctuations to continue in the future. Certain of
the Company's operating expenses, including expenses for: (i) program licensing,
development and production, (ii) program distribution and delivery and (iii)
education products and services, are incurred based on the Company's
expectations regarding future demand and market conditions. There can be no
assurance that future expenditures will generate advertising, licensing or
education products and services revenue. The Company may also be unable to
adjust its expenditures in a timely manner to compensate for any unexpected
revenue shortfall. In addition, a significant change in the level of
distribution of the Company's programming or changes in license fees or
advertising revenue may also affect the Company's earnings comparisons. Any
significant revenue shortfall would have a material adverse effect on the
Company's results of operations. In addition, the Company's operating results
may fluctuate based on other factors, including, among other factors,
competitive forces within the current and anticipated future markets served by
the Company and general economic conditions. The Company's revenue has also
varied significantly from quarter to quarter due to seasonal factors. The
Company generally has greater advertising and student enrollment revenue in the
first and fourth quarters. Fluctuations in operating results could result in
volatility in the price of the Class A Common Stock and could have a material
adverse effect on the Company's liquidity. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Seasonality and
Quarterly Fluctuations."
Risks of Inability to Obtain Additional Financing
Expansion of the Company's business through the licensing, development,
production, marketing and distribution of its programming and education products
and services, as well as
-13-
<PAGE>
through increasing brand recognition of the Company's networks, will require
significant expenditures. The Company expects that the net proceeds from this
Offering will be adequate to meet the Company's requirements for working capital
and liquidity needs through 1998. Thereafter, the Company may be required to
seek additional equity or debt financing to pursue future growth opportunities
or to address its liquidity or other needs. The Company does not currently have
an external credit facility and there can be no assurance that it will be able
to secure such a facility or any additional financings on acceptable terms, if
at all. In addition, further equity financing could have a dilutive effect on
the Company's then existing shareholders. If the Company is unable to obtain
additional financing on acceptable terms in the future, its operations and
financial condition would be adversely affected. Although most of the Company's
historical capital needs have been met by advances from and investments made by
current shareholders, such shareholders are under no obligation to provide, nor
does the Company expect such shareholders to provide, additional financial
assistance to the Company subsequent to the consummation of this Offering. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources" and "Certain Relationships and
Related Transactions."
Risks Associated with International Expansion
The Company is seeking to develop international operations through
various arrangements with international cable, broadcast and other media
distributors. The purpose of this expansion effort is to increase revenue from
the licensing of programming to the international syndication market and from
student enrollments outside the United States. The Company's international
operations are subject to certain inherent risks, including varying political
and economic conditions, currency fluctuations, regulation and uncertainties in
such regulation, trade barriers, staffing problems and adverse tax consequences.
Additionally, foreign regulatory requirements may prevent or limit the Company's
ability to distribute programming in certain international markets. There can be
no assurance that such factors will not have a material adverse effect on the
Company's plans for international expansion or growth in the future or that the
Company will be successful in expanding its international operations. See
"Business - Growth Strategy."
Dependence upon Key Personnel
The Company's success is dependent upon the efforts of its key
personnel, particularly the Company's Chairman of the Board and Chief Executive
Officer, Glenn R. Jones, and its President, Wallace W. Griffin. Subsequent to
this Offering, Mr. Griffin will devote substantially all of his time to the
Company's business. Mr. Jones will devote, on an average annual basis,
approximately 33% of his time to the Company's business and will continue to
devote a substantial amount of his time to the business activities of the
Company's affiliates. Loss of the services of one or more of the Company's key
personnel may adversely affect its business. The Company does not have
employment agreements with, and does not carry key man life insurance on, any of
its employees. See "Management."
Litigation
On June 4, 1996, an action entitled Space Vision, Inc., Meridian Gate
Holdings, Ltd. and Higher Education Group, Inc. v. Jones International, Ltd.,
Jones Education Company and Mind Extension University, Inc., Civil Action No.
96-CV-2644, was filed against the Company in the District Court for the City and
County of Denver, Colorado. The plaintiffs allege that the defendants failed to
perform their obligations under agreements to provide a certain number of hours
of JEC
-14-
<PAGE>
Knowledge TV programming for distribution in Taiwan, and to comply with other
provisions of the agreements relating to content of programming supplied and
subtitling of programming. The plaintiffs have alleged misrepresentation and
concealment, breach of contract and bad faith by all defendants. No dollar
amount of damages has been alleged, but plaintiffs seek to recover both
compensatory and punitive damages, including lost profits. The Company has
motions pending to dismiss the fraud and bad-faith claims and intends to defend
this action vigorously. See "Business - Litigation."
Intellectual Property
The Company regards its original network programming as proprietary and
relies primarily on a combination of statutory and common law copyright,
trademark and trade secret laws, customer licensing agreements, employee and
third-party nondisclosure agreements and other methods to protect its
proprietary rights. If substantial unauthorized use of the Company's products
were to occur, the Company's business and results of operations could be
negatively affected. There can be no assurance that the Company's means of
protecting its proprietary rights will be adequate or that the Company's
competitors will not independently develop similar courses, program content and
distribution methods. Additionally, there can be no assurance that third parties
will not claim that the Company's current or future programming or courseware
infringes on the proprietary rights of others. A rights infringement
determination claim against the Company could have a material adverse effect on
the Company. See "Business - Intellectual Property."
Government Regulation
Certain states assert authority to regulate non-degree granting
education providers if such provider's educational programs are available to
such state's residents. Based upon its review of applicable laws, the Company
believes that it is exempt from such regulation because the Company's courses
are offered through independent universities and colleges that pay the Company a
fee for its services and the Company does not participate in any federal or
state student aid or loan programs. However, in the future, state laws and
regulations could limit the ability of the Company to distribute educational
services in certain states. If, in the future, the Company were required to
comply with, or were found to be in violation of, a state's current or future
licensing or regulatory requirements, it could be subject to civil or criminal
sanctions, including monetary penalties, and could be barred from providing
educational services in that state. In addition, there may be foreign regulatory
requirements that must be met in order to provide programming in the
international markets and there can be no assurance that such requirements can
be met. See "Business - Regulation."
Transponder Arrangements
There are a limited number of domestic communications satellites
available for the transmission of cable television programming to cable system
operators. The availability of satellite transponders in the future is dependent
on a number of factors over which the Company has no control. These factors
include, primarily, the limited availability of desirable orbital slots for
commercial communications satellites, the successful launches of additional
commercial communications satellites by third parties, and competition and
demand for transponder leases on existing and new satellites. If satellite
transmission were interrupted or terminated due to the failure or unavailability
of a transponder or for any other reason, such interruption or termination could
have a material adverse effect on the Company.
-15-
<PAGE>
Absence of Prior Public Market; Determination of Offering Price; Possible
Volatility of Stock Price
Prior to the Offering, there has been no public market for the Class A
Common Stock and there can be no assurance that an active public market will
develop or continue after the Offering. The initial public offering price of the
Class A Common Stock was determined through negotiations between the Company and
representatives of the Underwriters and there can be no assurance that the Class
A Common Stock will not trade at a price less than the offering price. See
"Underwriting." The market price of the Class A Common Stock could be subject to
significant fluctuations in response to variations in quarterly operating
results and other factors. See "- Fluctuations in Operating Results;
Seasonality" and "- Shares Eligible for Future Sale." In addition, the
securities markets have experienced significant price and volume fluctuations
from time to time in recent years that have often been unrelated or
disproportionate to the operating performance of particular companies. These
broad fluctuations may adversely affect the market price of the Class A Common
Stock.
Shares Eligible for Future Sale
The market price for the Class A Common Stock could be adversely
affected by the availability of shares of Class A Common Stock for sale or
actual sales of substantial amounts of Class A Common Stock by existing or
future shareholders. Upon completion of the Offering, the 6,900,000 shares of
Class A Common Stock sold in the Offering will be freely tradeable without
restriction or further registration under the Securities Act of 1933, as amended
(the "Securities Act"), by persons other than "affiliates" of the Company. The
remaining 2,592,175 shares of Class A Common Stock will be "restricted
securities" within the meaning of Rule 144 under the Securities Act ("Rule 144")
and may not be sold in the absence of registration under the Securities Act
unless an exemption from registration is available, including the exemption
contained in Rule 144. The holders of 1,676,470 shares of Class A Common Stock
possess registration rights with respect to such shares. The Company and its
current shareholders, directors and executive officers have agreed that for a
period of 180 days from the date of this prospectus, that they will not publicly
offer, sell, contract to sell or otherwise publicly dispose of any shares of
Class A Common Stock without the prior written consent of Montgomery Securities.
Following the expiration of such lock-up agreements, 2,592,175 shares of Class A
Common Stock will become available for resale in the public market, subject to
the volume limitations, holding period and other restrictions of Rule 144.
Additionally, as of December 19, 1996, 1,100,000 shares of Class A Common Stock
have been reserved for issuance under the Company's Stock Option Plan, 381,500
of which were subject to outstanding options as of that date. See "Management."
The Company has also, in connection with this Offering, agreed to grant a
warrant to M. Kane & Company, Inc. to purchase 28,750 shares (33,063 shares if
the Underwriters' overallotment option is exercised in full) of the Class A
Common Stock at an exercise price equal to 120% of the initial public offering
price, together with certain registration rights relating to such shares. Future
sales of shares of Class A Common Stock, or the perception that such sales could
occur, could have an adverse effect on the market price of the Company's Class A
Common Stock and the Company's ability to obtain additional equity financing.
See "- Absence of Prior Public Market; Determination of Offering Price; Possible
Volatility of Stock Price," "Shares Eligible for Future Sale," "Underwriting"
and "Description of Capital Stock."
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<PAGE>
Immediate and Substantial Dilution; Absence of Payments of Cash Dividends
Purchasers of the Class A Common Stock will experience immediate and
substantial dilution of $7.81 (at an assumed offering price of $15.00 per share)
in net tangible book value per share. Also, the Company has not paid any cash
dividends since its inception and does not anticipate paying cash dividends in
the future. See "Dilution" and "Dividend Policy."
-17-
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 5,800,000 shares
of Class A Common Stock being offered by the Company, assuming an initial
offering price of $15.00 per share, are estimated to be approximately $78.3
million ($90.2 million if the Underwriters' overallotment option is exercised in
full) after deducting underwriting discounts and commissions and estimated
offering expenses payable by the Company.
The Company currently intends to use the net proceeds from the Offering
as follows: (i) approximately $32.0 million to increase marketing activities
relating to the Company's networks and its education products and services
through 1998; (ii) approximately $41.0 million to license, develop and produce
additional programming for its networks and its degree and certificate course
offerings through 1998; and (iii) approximately $1.4 million to repay a
long-term advance from Jones International, which has no maturity date and bears
interest at the published prime rate plus 2% (which equaled approximately 10.25%
as of September 30, 1996). See Note 4 of Notes to the Consolidated Financial
Statements. Jones International is a principal shareholder of the Company. See
"Principal and Selling Shareholders" and "Certain Relationships and Related
Party Transactions." The Company intends to use the remaining $3.9 million for
working capital and general corporate purposes, including potential strategic
investments in, acquisitions of, or joint ventures with, businesses
complementary to the Company's business, such as production companies, media
development companies, and education and training product and service companies.
The Company is not currently engaged in any negotiations concerning such
investments, acquisitions or joint ventures. In the event that, in the future,
the Company identifies an investment, acquisition or joint venture opportunity
that is available on favorable terms, the Company may reallocate a portion of
the proceeds to such investment or acquisition. In addition, the Company may
reallocate the amount of proceeds used for marketing and programming efforts in
response to the degree of success of the efforts or changes within the markets
in which it competes. Pending such uses, the Company intends to invest the net
proceeds from the Offering in investment-grade, short-term, interest-bearing
securities. The Company will not receive any proceeds from the sale of the
1,100,000 shares of Class A Common Stock to be offered by the Selling
Shareholders. See "Principal and Selling Shareholders."
DIVIDEND POLICY
The Company has never declared or paid a cash dividend on its Common
Stock. The Company intends to retain any earnings for use in the operation and
expansion of its business and therefore does not anticipate paying any cash
dividends in the foreseeable future. The declaration and payment of dividends in
the future will be at the discretion of the Board of Directors and will be
dependent upon the Company's financial condition, results of operations and
capital requirements, terms of future credit or other agreements and such other
factors as the Board of Directors deems relevant. Holders of Class A Common
Stock and Class B Common Stock are entitled to share ratably in dividends
(whether paid in cash, property or shares of the Company), if declared by the
Board of Directors.
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<PAGE>
CAPITALIZATION
The following table sets forth the actual capitalization of the Company
at September 30, 1996 and as adjusted to reflect the sale of 5,800,000 shares of
Class A Common Stock offered by the Company at the assumed initial offering
price of $15.00 per share and the application of the net proceeds therefrom. See
"Use of Proceeds." This table should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and Notes thereto included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
September 30, 1996
---------------------------------------
Actual As Adjusted
----------------- -----------------
(In thousands)
<S> <C> <C>
Long-term debt......................................................... $ 1,400(1) $ -
Shareholders' equity:
Class A Common Stock, $.01 par value; 100,000,000 37 95
shares authorized; 3,692,175 shares issued and
outstanding actual; 9,492,175 shares issued and
outstanding as adjusted(2).......................................
Class B Common Stock, $.01 par value; 2,089,620 shares 21 21
authorized; 2,089,620 shares issued and outstanding
actual and as adjusted...........................................
Additional paid-in capital............................................. 41,111 119,372
Accumulated deficit.................................................... (36,747) (36,747)
-------- ---------
Total shareholders' equity......................................... 4,422 82,741
-------- ---------
Total capitalization........................................... $ 5,822 $ 82,741
======== =========
</TABLE>
- ----------------------
(1) Long-term debt consists of advances from Jones International, which
advances have no maturity date and bear interest at the published prime
rate plus 2%. See Note 4 of Notes to the Consolidated Financial Statements
and "Use of Proceeds."
(2) Excludes: (i) 1,100,000 shares of Class A Common Stock reserved for
issuance under the Company's Stock Option Plan, 381,500 of which were
subject to outstanding options as of December 19, 1996 and (ii) 28,750
shares (33,063 shares if the Underwriters' over-allotment option is
exercised) of Class A Common Stock issuable under a warrant the Company has
agreed to grant to M. Kane & Company, Inc. with an exercise price equal to
120% of the initial public offering price. See "Management - Stock Option
Plan" and "Underwriting."
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<PAGE>
DILUTION
The net tangible book value of the Company as of September 30, 1996 was
approximately $4.9 million, or $.85 per share of Common Stock. Net tangible book
value per share represents the amount of tangible assets of the Company, less
total liabilities, divided by the number of shares of Common Stock outstanding.
Without taking into account any other changes in net tangible book value after
September 30, 1996, other than the sale by the Company of the 5,800,000 shares
of Class A Common Stock offered hereby (at an assumed initial offering price of
$15.00 per share and after deduction of underwriting discounts and commissions
and estimated Offering expenses), the net tangible book value of the Company at
September 30, 1996 would have been $83.2 million, or $7.19 per share of Common
Stock. This represents an immediate increase in net tangible book value of $6.34
per share of Common Stock to existing shareholders and an immediate dilution of
$7.81 per share to purchasers of Class A Common Stock. The following table
illustrates the per share dilution to new investors.
<TABLE>
<S> <C> <C>
Assumed initial public offering price ........................................ $15.00
Net tangible book value as of September 30,1996........................... $.85
Increase in net tangible book value attributable to the Offering.......... 6.34
----
Net tangible book value after the Offering.................................... 7.19
-----
Dilution to purchasers of Class A Common Stock................................ $ 7.81
=====
</TABLE>
The following table summarizes, on a pro forma basis as of September
30, 1996 (assuming the sale of 5,800,000 shares of Class A Common Stock by the
Company at $15.00 per share), the number of shares of Common Stock purchased
from the Company, the total consideration paid to the Company and the average
price per share paid by the existing shareholders and by the new investors
purchasing shares of Class A Common Stock from the Company in this Offering
(before deducting underwriting discounts and commissions and estimated Offering
expenses):
<TABLE>
<CAPTION>
Shares Purchased(1) Total Consideration Average
-------------------------- ------------------------ Price
Number Percent Amount Percent Per Share
----------- ----------- ------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders................ 5,781,795 49.9% $ 44,301,000 33.7% $7.66
New investors........................ 5,800,000 50.1% 87,000,000 66.3% $15.00
--------- ----- ---------- -----
Total............................. 11,581,795 100.0% $131,301,000 100.0%
========== ====== ============ ======
</TABLE>
- ---------------------
(1) Assuming the sale by the Selling Shareholders of 1,100,000 shares of
Class A Common Stock in this Offering, the number of shares of Common
Stock held by the existing shareholders will be reduced to 4,681,795
shares, or 40.4% of the total number of shares of Common Stock
outstanding after this Offering and new investors will hold 59.6% of
the total number of shares of Common Stock outstanding after the
Offering. See "Principal and Selling Shareholders."
This preceding table does not include: (i) 1,100,000 shares of Class A
Common Stock reserved for issuance under the Company's Stock Option Plan,
381,500 of which were subject to outstanding options as of December 19, 1996 and
(ii) 28,750 shares (33,063 shares if the Underwriters' over-allotment option is
exercised) of Class A Common Stock issuable under a warrant the Company has
agreed to grant to M. Kane & Company, Inc. with an exercise price equal to 120%
of the initial public offering price. See "Management - Stock Option Plan" and
"Underwriting."
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<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data of the Company are
qualified by reference to and should be read in conjunction with the
Consolidated Financial Statements and Notes thereto and other financial data
included elsewhere in this Prospectus. The statement of operations data set
forth below for each of the three years in the period ended December 31, 1995
and the balance sheet data at December 31, 1994 and 1995, are derived from the
Company's consolidated financial statements for those years which have been
audited by Arthur Andersen LLP, independent accountants, whose report thereon is
included elsewhere in this Prospectus. The statement of operations data for each
of the two years in the period ended December 31, 1992 and the balance sheet
data at December 31, 1991, 1992 and 1993 are derived from unaudited financial
statements of the Company not included in this Prospectus. The statement of
operations data for the nine months ended September 30, 1995 and 1996 and the
balance sheet data at September 30, 1996 are derived from unaudited financial
statements which, in the opinion of management, have been prepared on the same
basis as the audited financial statements and contain all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the financial condition and results of operations for such
periods. These historical results are not necessarily indicative of the results
to be expected in the future. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
Nine Months
Ended
Year Ended December 31, September 30,
------------------------------------------------------ -----------------------
1991 1992 1993 1994 1995 1995 1996
---------- ---------- --------- ---------- ---------- ----------- -----------
(In thousands, except per share and student and enrollment data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Advertising revenue............... $ - $ 24 $ 543 $ 3,423 $ 5,397 $ 3,396 $ 6,711
Licensing revenue................. 1,926 2,362 3,051 3,948 6,790 5,142 5,671
Education products and services... 2,367 1,624 2,479 2,602 3,724 2,773 3,212
-------- -------- -------- -------- -------- -------- --------
Total revenues.................. 4,293 4,010 6,073 9,973 15,911 11,311 15,594
Operating expenses:
Network expenses.................. 2,088 3,429 4,888 6,537 11,043 8,593 9,398
Education products and services expenses 1,639 1,515 1,860 2,299 5,231 4,211 4,030
Selling and marketing expenses.... 2,047 2,790 4,379 5,322 5,618 4,289 2,832
General and administrative expenses 2,379 3,477 5,006 6,047 6,327 4,719 3,483
-------- -------- -------- -------- -------- -------- --------
Total operating expenses........ 8,153 11,211 16,133 20,205 28,219 21,812 19,743
-------- -------- -------- -------- -------- -------- --------
Operating loss...................... (3,860) (7,201) (10,060) (10,232) (12,308) (10,501) (4,149)
Other income (expense), net......... 3,060 (788) (76) (2,598) (1,057) (877) (165)
------ ------- -------- -------- -------- -------- --------
Loss before income tax benefit and
minority interests................ (800) (7,989) (10,136) (12,830) (13,365) (11,378) (4,314)
Income tax benefit.................. 76 1,330 408 1,801 - - -
Minority interests.................. - - - - - - 425
------ ------- -------- -------- -------- -------- --------
Net loss............................ $ (724) $ (6,659) $ (9,728) $(11,029) $(13,365) $(11,378) $ (3,889)
====== ======== ======== ======== ======== ======== ========
Net loss per common share........... $(0.19) $(1.71) $(2.50) $(2.82) $(2.55) $(2.09) $(0.68)
Weighted average number of common
shares outstanding................ 3,891 3,891 3,891 3,909 5,239 5,443 5,702
Other Data:
Number of network households/(1)/... 22,015 22,015 25,552 25,558 25,720 25,800 25,607
Number of paying network
households/(2)/..................... N/A 1,900 6,800 8,200 11,500 11,400 11,900
Number of enrollments(3)............ 588 1,362 1,974 2,544 4,662 4,456 4,918
Number of students(4)............... 368 950 1,131 1,654 1,901 1,635 1,838
<CAPTION>
December 31, September 30,
--------------------------------------------------- ---------------
1991 1992 1993 1994 1995 1996
------ ------ ------ ------ ------ ---------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital.............................. $ 682 $ 3,338 $ 1,270 $21,164 $ 7,788 $ 3,631
Total assets................................. 1,482 4,351 2,886 24,766 12,065 11,010
Long-term debt............................... 5,843 5,140 13,063 26,693 6,769 1,400
Total shareholders' equity (deficit)......... (4,640) (1,224) (10,877) (3,831) 2,879 4,422
</TABLE>
(1) Represents the number of television households that receive the Company's
networks via cable or through C-band satellite receivers.
(2) Represents the number of television households that receive the Company's
networks for which a monthly subscriber fee is paid to the Company by
cable television system operators or other video distributors.
-21-
<PAGE>
(3) Represents the cumulative number of students in all credit bearing
courses offered through the Company during the period (for example, a
single student enrolled in three courses during the period would be
counted as three enrollments).
(4) Represents the number of individual students enrolled in one or more
credit bearing courses offered through the Company during the period.
-22-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion of the results of operations and financial
condition should be read in conjunction with the Company's Consolidated
Financial Statements and Notes thereto appearing elsewhere in this Prospectus.
This Prospectus contains forward-looking statements. These forward-looking
statements involve risks and uncertainties. The Company's actual results may
differ materially from the results discussed in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed in "Risk Factors."
Overview
The Company offers a variety of integrated educational programming,
products and services through multiple distribution channels designed to serve a
continuum of adult learning needs. Targeting adults who want everything from
practical information to formal education, the Company offers a myriad of
products and services. For adults who seek information that is of practical use
in their day-to-day lives, the Company licenses, develops and produces
knowledge-enhancing programs and distributes these programs primarily on its
television networks, JEC Knowledge TV and Jones Computer Network. For those
who desire more in-depth information or formal education, i.e., certification
or post-secondary degrees, the Company works in conjunction with select
universities and colleges to offer degree and certificate courses through
multiple media including videotapes, television and print, in addition to the
Internet and other interactive media. As a complement to the programs and
degrees offered, the Company also offers a broad selection of educational
video and software products.
The Company's programming, products and services concentrate primarily
on four high-demand subject areas: (i) computers and technology, (ii) business,
careers and finance, (iii) health and wellness and (iv) global culture and
languages. By integrating and cross-promoting its networks, degree and
certificate programs and educational products, the Company encourages its
customers to experience a continuum of learning and, while so doing, utilize any
combination of the Company's products and services.
The Company's current shareholders are Glenn R. Jones, Jones
International, Jones Intercable, Inc. ("Jones Intercable") and Bell Canada
International BVI III Limited, a wholly-owned subsidiary of Bell Canada
International Inc. ("BCI"). Following the completion of this Offering, Glenn R.
Jones, Jones International, Jones Intercable and BCI will own approximately 3%,
25%, 8% and 5%, respectively, or 41% in the aggregate, of the total shares of
outstanding Common Stock. Following the completion of the Offering, Mr. Jones
will directly, and indirectly through Jones International and Jones Intercable,
possess 75.5% of the total voting power of the Company's outstanding Common
Stock. See "Risk Factors - Voting Rights; Control by Principal Shareholder" and
"Principal and Selling Shareholders." The Company's principal subsidiaries
include Mind Extension University, Inc., approximately 66% of which is owned by
the Company, approximately 26% of which is owned by Jones Intercable and
approximately 8% of which is owned by Mr. Jones directly. The Company owns 81%
of its other subsidiaries including, among others, Jones Computer Network, with
Mr. Jones owning the remaining 19% of such subsidiaries directly. The Company
allocates income or loss to the minority shareholders in relation to their
ownership interests in the subsidiaries. Any minority share of loss in excess of
the minority interest in those subsidiaries is charged to the Company which
occurs primarily when the capital contributions by the minority shareholders
prove insufficient to fund operations and the Company is required to advance
amounts to
-23-
<PAGE>
the subsidiaries. The Company, to the extent available, will recover
these excess losses against any future income and/or equity contributions.
The Company's revenue is derived primarily from: (i) its television
networks, JEC Knowledge TV and Jones Computer Network and (ii) its education
products and services. The Company's television networks generate revenue: (i)
from the sale of advertising time on its networks, including both long-form
advertising (infomercials) and short-form (spot) advertising and (ii) through
licensing fees, which include subscriber and syndication fees, paid by cable
operators and other programming distributors, respectively. Historically, long-
form advertisements have accounted for the majority of the Company's advertising
revenue. In 1995 and for the nine months ended September 30, 1996, network
revenue accounted for approximately 77% and 79% of total revenue, respectively.
The Company's education products and services revenue is comprised of: (i) gross
tuition fees, (ii) student servicing fees and (iii) the sale of education-
oriented products, primarily computer training videos and cable television
training programs. The Company recognizes as revenue 100% of the gross tuition
fees paid by students to the Company for the degree and certificate courses it
provides and expenses that portion of the tuition that is remitted to the
applicable university or college, which is typically 65% of tuition. Upon
enrollment, the Company records an accounts receivable from the student and
deferred revenue is recognized beginning with the start of the term, pro rata
over the length of the term. The length of the term is typically three months.
If a student withdraws, tuition paid related to the unearned portion of the
course is refunded in accordance with the applicable refund policy and accounts
receivable and deferred revenue are adjusted accordingly. The Company rebates
the appropriate portion of tuition to the applicable university or college at
the end of the course term. In 1995 and for the nine months ended September 30,
1996, the Company's education products and services revenue accounted for
approximately 23% and 21% of total revenue, respectively.
Operating expenses consist of: (i) network expenses, (ii) education
products and services expenses, (iii) selling and marketing expenses and (iv)
general and administrative expenses. Network expenses consist of program
licensing, development and production costs, as well as distribution and
delivery costs. Program licensing, development and production costs include the
costs of licensing, researching, designing and producing programs for the
Company's networks, and other associated operating costs. The majority of the
Company's program licensing, development and production costs are expensed as
they are incurred. Program distribution and delivery costs include transponder
leasing fees, uplinking charges and other associated operating costs. The costs
associated with program distribution and delivery are relatively fixed with
respect to each of the Company's two networks. Education products and services
expenses include tuition rebates to universities and colleges that offer the
degree and certificate courses delivered by the Company, production, development
and licensing costs related to products and services offered, and other
associated operating expenses. Selling and marketing expenses include salaries,
travel and other associated operating expenses related to the Company's
marketing activities, as well as the costs of designing, producing and
distributing marketing, advertising and promotional materials. General and
administrative expenses include personnel and associated operating costs for the
Company's executive and management staff and operational support.
Under the terms of an affiliation agreement with a certain unaffiliated
MSO, the Company pays a rebate to the MSO equal to such MSO's pro rata share
(based on the number of subscribers in its cable systems receiving JEC Knowledge
TV as a percentage of the total number of subscribers receiving such network) of
20% of net advertising revenue (defined as gross advertising revenue less
outside agency commissions) generated by JEC Knowledge TV. In addition, the
Company pays such
-24-
<PAGE>
MSO a rebate equal to 5% of net sales receipts from sales of merchandise made to
customers in zip codes served by MSO's systems carrying JEC Knowledge TV as a
consequence of direct on-air marketing and sales of products on JEC Knowledge
TV. For 1994 and 1995, these rebates amounted to approximately $35,000 and
$61,000, respectively, and totaled approximately $139,000 as of September 30,
1996.
The Company's revenue has grown in recent years primarily as a result
of increased advertising and licensing revenue generated by its two networks,
JEC Knowledge TV and Jones Computer Network. The Company intends to pursue an
aggressive expansion strategy for the foreseeable future, but there can be no
assurance that the Company will successfully achieve its growth objectives. The
Company's strategy is: (i) to expand the distribution of its networks, (ii) to
license, develop and produce high quality programming for both its networks and
degree and certificate courses, (iii) to increase its marketing and promotion
activities, (iv) to increase its student enrollments, (v) to develop corporate
relationships (vi) to expand further into international markets and (vii) to
pursue strategic investments, acquisitions or joint ventures. By pursuing these
strategies, the Company hopes to expand its subscriber base, make its networks
more attractive to both viewers and advertisers, increase the brand awareness
and usage of both its networks and its distance education programs and expand
further into international markets.
The Company's ability to successfully implement its strategy and
maintain its growth will depend on a number of factors, many of which are beyond
the Company's control, including maintaining and expanding distribution of JEC
Knowledge TV and Jones Computer Network through MSOs, as well as through
alternative distribution systems such as DBS, MMDS and video distribution
systems being established by various telecommunications companies; developing
and licensing additional programming for the Company's networks that is
consistent with viewer preferences; attracting additional advertisers that are
willing to pay competitive rates; developing additional course offerings for,
and increasing student enrollment in, its degree and certificate programs; and
penetrating and developing existing and new markets for its television
programming and degree and certificate courses. The Company expects to continue
to recognize substantial operating and net losses through at least 1998,
although there can be no assurance that the Company will ever generate operating
or net income.
The Company has sustained operating and net losses throughout its
history, including operating losses of $10.0 million, $10.2 million, $12.3
million and $4.1 million and net losses of $9.7 million, $11.0 million, $13.4
million and $3.9 million for the years ended December 31, 1993, 1994 and 1995,
and for the nine months ended September 30, 1996, respectively. These losses
have resulted in accumulated deficits of $20.1 million, $31.1 million, $44.5
million and $36.7 million for the years ended December 31, 1993, 1994 and 1995,
and for the nine months ended September 30, 1996, respectively. The Company
expects certain costs to increase and, as a result, to incur substantially
higher operating losses and net losses through at least 1998. These operating
losses and net losses are primarily the result of increased expenditures for
program licensing, development and production, and expanded sales and marketing
expenses to increase distribution, brand awareness and student enrollments, as
well as advertising and program licensing agreements. The Company expects to
fund these expenditures and operating losses with the proceeds of this Offering.
-25-
<PAGE>
Results of Operations
The following table sets forth, for the periods indicated, certain data
from the Company's consolidated statements of operations as a percentage of
total revenue:
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended December 31, September 30,
---------------------------------- -------------------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total Revenues:
Advertising revenue........................ 9% 34% 34% 30% 43%
Licensing revenue.......................... 50 40 43 45 36
--- --- --- --- ---
Network revenue.......................... 59 74 76 75 79
Education products and services revenue.... 41 26 23 25 21
--- --- --- --- ---
Total revenue............................ 100 100 100 100 100
--- --- --- --- ---
Operating Expenses:
Network expenses........................... 80 66 69 76 60
Education products and service expenses.... 31 23 33 37 26
Selling and marketing expenses............. 72 53 35 38 18
General and administrative expenses........ 82 61 40 42 22
--- --- --- --- ---
Total operating expenses................. 265 203 177 193 126
--- --- --- --- ---
Operating loss............................. (165) (103) (77) (93) (26)
Net loss................................... (160)% (111)% (84)% (101)% (25)%
====== ====== ===== ====== =====
</TABLE>
Nine Months Ended September 30, 1996 Compared to Nine Months Ended September 30,
1995
Total Revenue. Total revenue increased $4.3 million, or 38%, from $11.3
million for the nine months ended September 30, 1995 to $15.6 million for the
nine months ended September 30, 1996. This increase was due primarily to an
increase in network revenue and secondarily to an increase in sales of education
products and services.
Network Revenue. Network revenue increased $3.9 million, or 46%, from
$8.5 million for the nine months ended September 30, 1995 to $12.4 million for
the nine months ended September 30, 1996. Advertising revenue increased $3.3
million, or 97%, from $3.4 million for the nine months ended September 30, 1995
to $6.7 million for the nine months ended September 30, 1996, primarily as a
result of increased rates charged for long-form advertising. Licensing revenue
increased $0.6 million, or 12%, from $5.1 million for the nine months ended
September 30, 1995 to $5.7 million for the nine months ended September 30, 1996,
due primarily to an increase in the number of paying subscribers receiving JEC
Knowledge TV and Jones Computer Network.
Education Products and Services Revenue. Education products and
services revenue increased $0.4 million, or 14%, from $2.8 million for the nine
months ended September 30, 1995 to $3.2 million for the nine months ended
September 30, 1996. This increase was due primarily to an approximately 70%
increase in unit sales of JEC Knowledge Store products and an approximately 10%
increase in student enrollments in degree and certificate courses.
Network Expenses. Network expenses increased $0.8 million, or 9%, from
$8.6 million for the nine months ended September 30, 1995 to $9.4 million for
the nine months ended September 30,
-26-
<PAGE>
1996. This increase was due primarily to an increase in program distribution and
delivery costs and was partially offset by a decrease in program licensing,
development and production costs. Program licensing, development and production
costs decreased $0.4 million, or 11%, from $3.8 million for the nine months
ended September 30, 1995 to $3.4 million for the nine months ended September 30,
1996. This decrease was due primarily to reductions in international
distribution costs and viewer research activities, which offset increased
operating costs. Program distribution and delivery costs increased $1.2 million,
or 25%, from $4.8 million for the nine months ended September 30, 1995 to $6.0
million for the nine months ended September 30, 1996. This increase was due
primarily to an increase in personnel and associated operating costs due to an
increase in the size of the affiliate sales staff and a $0.3 million write-off
of an account receivable. As a percentage of network revenue, network expenses
decreased from 101% for the nine months ended September 30, 1995 to 76% for the
nine months ended September 30, 1996.
Education Products and Services Expenses. Education products and
services expenses decreased $0.2 million, or 5%, from $4.2 million for the nine
months ended September 30, 1995 to $4.0 million for the nine months ended
September 30, 1996. This decrease was due primarily to a reduction in
expenditures for original and licensed products and a reduction in personnel and
contract service costs and was partially offset by an increase in tuition
rebates. As a percentage of education products and services revenue, education
and product service expenses decreased from 150% for the nine months ended
September 30, 1995 to 125% for the nine months ended September 30, 1996.
Selling and Marketing Expenses. Selling and marketing expenses
decreased $1.5 million, or 35%, from $4.3 million for the nine months ended
September 30, 1995 to $2.8 million for the nine months ended September 30, 1996.
This decrease was due primarily to decreases in advertising, promotion and
public relations expenses as a result of the redevelopment of the Company's
marketing strategy during the first half of 1996. Significantly greater
marketing expenditures primarily related to the development of new marketing
initiatives in the last quarter of 1996 and secondarily related to staff
increases should result in year-end expenses approximating those of 1995. As a
percentage of total revenue, selling and marketing expenses decreased from 38%
for the nine months ended September 30, 1995 to 18% for the nine months ended
September 30, 1996.
General and Administrative Expenses. General and administrative
expenses decreased $1.2 million, or 26%, from $4.7 million for the nine months
ended September 30, 1995 to $3.5 million for the nine months ended September 30,
1996. This decrease was due primarily to the reduction of certain executive and
management staff and support personnel and was partially offset by an increase
in salary allocations to the Company by its affiliates. As a percentage of total
revenue, general and administrative expenses decreased from 42% for the nine
months ended September 30, 1995 to 22% of total revenue for the nine months
ended September 30, 1996.
Other Expense (Income). Other expense (income) includes primarily
interest income and interest expense. Other expense (income) decreased $0.7
million, or 78%, from $0.9 million for the nine months ended September 30, 1995
to $0.2 million for the nine months ended September 30, 1996. This decrease was
primarily the result of a decrease in interest expense resulting from the
conversion in April 1995 of a $20 million note payable to Jones Intercable into
shares of the Company's Class A Common Stock.
-27-
<PAGE>
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Total Revenue. Total revenue increased $5.9 million, or 59%, from $10.0
million for the year ended December 31, 1994 to $15.9 million for the year ended
December 31, 1995. This increase was due primarily to an increase in network
revenue and secondarily to an increase in the sale of education products and
services.
Network Revenue. Network revenue increased $4.8 million, or 65%, from
$7.4 million for the year ended December 31, 1994 to $12.2 million for the year
ended December 31, 1995. Advertising revenue increased $2.0 million, or 59%,
from $3.4 million for the year ended December 31, 1994 to $5.4 million for the
year ended December 31, 1995. Revenue from the sale of airtime for long-form
advertising accounted for $1.7 million of the increase in advertising revenue.
This increase was due primarily to a 154% increase in available airtime for
long-form advertising on JEC Knowledge TV and a 300% increase in available
airtime on Jones Computer Network. Licensing revenue increased $2.8 million, or
70%, from $4.0 million for the year ended December 31, 1994 to $6.8 million for
the year ended December 31, 1995. This increase was due primarily to an increase
in the number of paying subscribers receiving JEC Knowledge TV for which cable
operators are required to pay a per subscriber license fee, and the fact that
the Company received 12 months of Jones Computer Network licensing revenue in
1995 as compared to 4 months of such licensing revenue in 1994.
Education Products and Services Revenue. Education products and
services revenue increased $1.1 million, or 42%, from $2.6 million for the year
ended December 31, 1994 to $3.7 million for the year ended December 31, 1995.
This increase was primarily due to an approximately 83% increase in student
enrollments in degree and certificate courses offered by the Company and an
approximately 73% increase in product sales through the JEC Knowledge
Store.
Network Expenses. Network expenses increased $4.5 million, or 69%, from
$6.5 million for the year ended December 31, 1994 to $11.0 million for the year
ended December 31, 1995. This increase was due primarily to a significant
increase in program distribution and delivery costs, and a smaller increase in
program licensing, development and production costs. Program licensing,
development and production costs increased $1.4 million, or 44%, from $3.2
million for the year ended December 31, 1994 to $4.6 million for the year ended
December 31, 1995. This increase was due primarily to increased expenditures for
the development and production of enhanced programming for Jones Computer
Network, which was launched in September 1994, and JEC Knowledge TV. Program
distribution and delivery costs increased $3.1 million, or 94%, from $3.3
million for the year ended December 31, 1994 to $6.4 million for the year ended
December 31, 1995. This increase was due primarily to increased transponder
fees, uplink charges and other associated operating costs for Jones Computer
Network, which operated for 12 months in 1995 as compared to four months in
1994. In 1995, the Company also incurred initial program distribution and
delivery costs associated with licensing programming internationally. As a
percentage of network revenue, network expenses increased from 88% to 90% for
the periods ended December 31, 1994 and 1995, respectively.
Education Products and Services Expenses. Education products and
services expenses increased $2.9 million, or 126%, from $2.3 million for the
year ended December 31, 1994 to $5.2 million for the year ended December 31,
1995. This increase was due primarily to significant costs associated with the
development and production of JEC Knowledge Store products in 1995 as compared
to 1994 and, to a lesser extent, increased tuition rebates and other costs
related to the approximately 83% increase in student enrollments and an
approximately 73% increase in unit sales
-28-
<PAGE>
through the JEC Knowledge Store. As a percentage of education products and
services revenue, education products and services expenses increased from 88%
for the year ended December 31, 1994 to 140% for the year ended December 31,
1995.
Selling and Marketing Expenses. Selling and marketing expenses
increased $0.3 million, or 6%, from $5.3 million for the year ended December 31,
1994 to $5.6 million for the year ended December 31, 1995. This increase was
primarily due to continued promotional efforts directed toward cable operators
to facilitate the launch of the Jones Computer Network in September 1994. As a
percentage of total revenue, selling and marketing expenses decreased from 53%
for the year ended December 31, 1994 to 35% for the year ended December 31,
1995.
General and Administrative Expenses. General and administrative
expenses increased $0.3 million, or 5%, from $6.0 million for the year ended
December 31, 1994 to $6.3 million for the year ended December 31, 1995. This
increase was due primarily to the implementation of a computerized traffic and
billing system to support advertising sales. As a percentage of total revenue,
general and administrative expenses decreased from 61% for the year ended
December 31, 1994 to 40% for the year ended December 31, 1995.
Other Expense (Income). Other expense (income) decreased $1.5 million,
or 58%, from $2.6 million for the year ended December 31, 1994 to $1.1 million
for the year ended December 31, 1995. This decrease was primarily a result of a
decrease in interest expense resulting from the conversion in April 1995 of a
$20 million note payable to Jones Intercable into shares of the Company's Class
A Common Stock.
Year Ended December 31, 1994 Compared to Year Ended December 31, 1993
Total Revenue. Total revenue increased $3.9 million, or 64%, from $6.1
million for the year ended December 31, 1993 to $10.0 million for the year ended
December 31, 1994. This increase was due primarily to an increase in network
revenue.
Network Revenue. Network revenue increased $3.8 million, or 106%, from
$3.6 million for the year ended December 31, 1993 to $7.4 million for the year
ended December 31, 1994. Advertising revenue increased $2.9 million to $3.4
million for the year ended December 31, 1994. Revenue from the sale of airtime
for long-form advertising accounted for substantially all of the increase in
advertising revenue. This increase was due primarily to the increased airtime
available for long-form advertising. Licensing revenue increased $0.9 million,
or 29%, from $3.1 million for the year ended December 31, 1993 to $4.0 million
for the year ended December 31, 1994. This increase was due to an increase in
the number of subscribers receiving JEC Knowledge TV and Jones Computer Network
for which the cable operators were required to pay a per subscriber license
fee.
Education Products and Services Revenue. Education products and
services revenue increased $0.1 million, or 4%, from $2.5 million for the year
ended December 31, 1993 to $2.6 million for the year ended December 31, 1994.
This increase was due to an approximately 29% increase in student enrollments in
degree and certificate courses offered by the Company and was partially offset
by a decline in product sales.
Network Expenses. Network expenses increased $1.6 million, or 33%, from
$4.9 million for the year ended December 31, 1993 to $6.5 million for the year
ended December 31, 1994. This increase was due primarily to an increase in
program licensing, development and production costs.
-29-
<PAGE>
Program licensing, development and production costs increased $1.3 million, or
68%, from $1.9 million for the year ended December 31, 1993 to $3.2 million for
the year ended December 31, 1994. This increase was due primarily to increased
program expenditures relating to the launch of Jones Computer Network and
secondarily to increased program expenditures for JEC Knowledge TV. Program
distribution and delivery costs increased $0.3 million, or 10%, from $3.0
million, for the year ended December 31, 1993 to $3.3 million for the year ended
December 31, 1994. This increase was due primarily to an increase in transponder
fees and uplinking charges as a result of the launch of Jones Computer Network.
As a percentage of network revenue, network expenses decreased from 136% for the
year ended December 31, 1993 to 88% for the year ended December 31, 1994.
Education Products and Services Expenses. Education products and
services expenses increased $0.4 million, or 21%, from $1.9 million for the year
ended December 31, 1993 to $2.3 million for the year ended December 31, 1994.
This increase was due primarily to the tuition rebates as a result of the 29%
increase in student enrollments in degree and certificate courses offered by the
Company, partially offset by a decline in product sales. As a percentage of
education products and services revenue, education products and services
expenses increased from 76% for the year ended December 31, 1993 to 88% for the
year ended December 31, 1994.
Selling and Marketing Expenses. Selling and marketing expenses
increased $0.9 million, or 20%, from $4.4 million for the year ended December
31, 1993 to $5.3 million for the year ended December 31, 1994. This increase was
primarily due to increased promotional activity related to the launch of Jones
Computer Network. As a percentage of total revenue, selling and marketing
expenses decreased from 72% for the year ended December 31, 1993 to 53% for the
year ended December 31, 1994.
General and Administrative Expenses. General and administrative
expenses increased $1.0 million, or 20%, from $5.0 million for the year ended
December 31, 1993 to $6.0 million for the year ended December 31, 1994. This
increase was primarily due to the increase in the executive staff and associated
general administrative expenses related to the anticipated growth of the
Company. As a percentage of total revenue, general and administrative expenses
decreased from 82% for the year ended December 31, 1993 to 61% for the year
ended December 31, 1994.
Other Expense (Income). Other expense (income) increased $2.5 million
to $2.6 million for the year ended December 31, 1994. This increase was due
primarily to an increase in interest expense resulting from increased levels of
borrowings from affiliates.
Seasonality and Quarterly Fluctuations
The Company experiences seasonality in its results of operations from
quarter to quarter, primarily as a result of changes in the level of advertising
on its networks and on the level of student enrollments. The Company has
generally higher advertising revenue in the first and fourth quarters due to
viewership and corresponding rates received for advertising during these
quarters. While the Company enrolls students throughout the year, educational
products and services revenue is the greatest during the Company's fourth and
first quarters which correspond to the Fall and Spring academic enrollment
periods. The Company's results of operations from quarter to quarter may be
adversely impacted in the future as the Company increases its program licensing,
development and production expenses and selling and marketing expenses.
-30-
<PAGE>
The Company's unaudited quarterly operating results for each quarter of
fiscal 1994 and 1995 and the first, second and third quarters of fiscal 1996 are
shown below. These historical quarterly results are not necessarily indicative
of the results to be expected in the future.
<TABLE>
<CAPTION>
For the Year Ended For the Year Ended For the Nine Months
December 31, 1994 December 31, 1995 Ended September 30, 1996
1st 2nd 3rd 4th 1st 2nd 3rd 4th 1st 2nd
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total
revenue....... $2,132 $ 2,340 $ 2,428 $ 3,073 $ 3,786 $ 3,931 $4,068 $ 4,126 $ 5,501 $ 5,027
Total operating
expenses....... 4,693 5,069 5,369 5,074 7,740 7,700 6,251 6,528 6,198 6,538
------- -------- -------- -------- ------- --------- ------- ------- -------- -------
Operating
loss.......... (2,561) (2,729) (2,941) (2,001) (3,954) (3,769) (2,183) (2,402) (697) (1,511)
------- -------- -------- -------- ------- --------- ------- ------- -------- -------
Net loss....... $(2,989) $ (2,887) $ (3,678) $ (1,475) $(4,803) $ (3,694) $(2,285) $(2,583) $ (793) $(1,350)
======= ======== ======== ======== ======= ========= ======= ======= ======== =======
<CAPTION>
3rd
Quarter
------
<S> <C>
Total
revenue....... $ 5,066
Total operating
expenses....... 7,007
-------
Operating
loss.......... (1,941)
---------
Net loss....... $ (1,746)
=========
</TABLE>
Liquidity and Capital Resources
Since inception, the Company has financed its operations from a combination
of advances to and investments in the Company made by current shareholders.
These shareholders are under no obligation to provide, nor does the Company-
expect them to provide, financial assistance to the Company subsequent to the
consummation of this Offering. The Company currently has no external credit
facilities. Historically, the Company has been able to maintain positive working
capital as a result of the advances and investments from shareholders. In
December 1994, the Company received $18.0 million from BCI in exchange for a
then 15% interest in the Company. In April 1995, Jones Intercable converted
$20.0 million of advances made to Mind Extension University, Inc. into a then
17% interest in the Company. Also, in March 1996, Jones International invested
$6.3 million in the Company in exchange for shares of Class A Common Stock and
Class B Common Stock. The Company's working capital was $7.8 million and $3.6
million at December 31, 1995 and September 30, 1996, respectively. In addition,
Jones International has historically funded the Company's ordinary course
working capital needs. The maximum outstanding advances from Jones International
for working capital needs in 1995 was $4.8 million. As of September 30, 1996,
the Company's advances from Jones International for working capital needs
totaled $2.0 million. The Company has repaid these advances on a monthly basis
as revenues were received or from other cash resources. Following the
consummation of this Offering, any advances from Jones International to fund the
Company's operating activities, which advances are not expected to exceed
$500,000 at any time, will bear interest at or below market rates. Jones
International has no obligation to continue such funding. See "Certain
Relationships and Related Transactions."
Since its inception, the Company has incurred net losses as a result of
expenses associated with developing and launching its networks and developing
its distance education degree and certificate courses. Net cash used in
operating activities for the years ended December 31, 1993, 1994 and 1995, and
the nine months ended September 30, 1996 was $9.4 million, $13.1 million, $11.1
million and $2.5 million, respectively. Of the net cash used in operating
activities for the years ended December 31, 1993, 1994 and 1995, and the nine
months ended September 30, 1996, approximately $9.7 million, $11.0 million,
$13.4 million and $3.9 million, respectively, were
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<PAGE>
attributable to the net losses incurred by the Company for the respective
periods. Additional components and significant adjustments needed to reconcile
the Company's net losses to net cash used in operating activities for each
respective period include net changes in accounts receivable, accounts payable
and accrued liabilities, deferred revenue, accrued tuition, and depreciation and
amortization expense for the respective periods. Accounts receivable consist of
amounts due from advertisement airtime sales, cable operator and syndication
licensing fees and education products and services. Accounts receivable related
to airtime sales and education products and services are typically collected
between 30 and 90 days while accounts receivable related to cable operator
licensing fees are usually paid within 90 days.
The Company's investing activities have consisted primarily of licensing of
programming content in support of expanded television programming and, to a
lesser extent, capital expenditures, except for a purchase of marketable debt
securities in 1994 and their corresponding sale in 1995. For the years ended
December 31, 1993, 1994 and 1995, and the nine months ended September 30, 1996,
net cash provided by (used in) investing activity was $(0.4) million, $(10.8)
million, $9.2 million and $(1.6) million, respectively. Of the net cash provided
by (used in) investing activities, approximately $(0.4) million, $(0.8) million,
$(0.8) million, and $(0.5) million related to property and equipment
expenditures and investment in telecourse production made for the years ended
December 31, 1993, 1994 and 1995, and the nine months ended September 30, 1996,
respectively. The remaining cash provided by (used in) investing activities for
the years ended December 31, 1994 and 1995, and the nine months ended September
30, 1996, represent sales (purchases) of investments of $(10.0) million, $10.0
million, and $(1.1) million, respectively, which were purchased from proceeds
received from sale of the Company's common stock to BCI as discussed above.
Net cash provided by financing activities in 1993, 1994, 1995 and the nine
months ended September 30, 1996 were $7.5 million, $32.1 million, $0.0 million
and $0.8 million. Of the net cash provided by financing activities for the years
ended December 31, 1993 and 1994, $9.2 million and $10.8 million, respectively,
represent the $20 million advanced to Mind Extension University, Inc. during
1993 and 1994 as mentioned above. In addition, $18.0 million and $6.3 million
were received in calendar year 1994 and during the nine month period ended
September 30, 1996 from sale of the Company's common stock to BCI and Jones
International, respectively. Additional net cash provided by (used in) financing
activities for the years ended December 31, 1993, 1994 and 1995, and the nine
months ended September 30, 1996, include proceeds received and repayments of
advances from Jones International of $(1.7) million, $3.4 million, $0.1 million
and $(5.4) million, respectively.
The Company presently has no material commitments for future capital
expenditures.
The Company intends to use the proceeds of this Offering to meet its short-
and medium-term liquidity needs. Generally the Company's liquidity needs are to
fund business operations and operating losses and not for capital expenditures.
The Company has not historically had, and does not in the future anticipate
having, significant capital expenditures. The Company believes that the net
proceeds from this Offering, together with its revenues from operations, will
provide sufficient cash to fund its liquidity requirements through 1998.
Thereafter, the Company plans to seek to meet its liquidity needs from its cash
flow from operations. There can be no assurance, however, that the Company's
revenues will grow as expected or that it will have cash flow from operations.
As a result, the Company may be required, either prior to or after the end of
1998, to seek additional equity or debt financing to address its liquidity or
other needs or to pursue future growth opportunities. The Company does not
currently have an external credit facility and there can be no assurance that it
will be able to secure such a facility or any additional financing on acceptable
terms,
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<PAGE>
if at all. Although the Company has received advances and investments from its
current shareholders to fund its operations in the past, these shareholders are
under no obligation to provide, nor does the Company expect such shareholders to
provide, financial assistance to the Company subsequent to the consummation of
this Offering.
Effect of Inflation
The Company does not believe its operations have been materially affected
by inflation.
New Accounting Pronouncements
The Company adopted Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" ("SFAS 121"), effective January 1, 1996. SFAS 121 establishes
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles and goodwill. Implementation of SFAS 121 had no
material effect on the Company's financial position or results of
operations.
The Company adopted Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123") effective January 1,
1996. SFAS 123 recommends a fair value based method of accounting for employee
stock compensation, including stock options. However, companies may choose to
account for stock compensation using the intrinsic value based method as
prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" and provide pro forma disclosures of net income and
earnings per share as if the fair value based method had been applied. The
Company elected to account for stock compensation using the intrinsic value
based method, and thus SFAS 123 will not have any impact on reported operating
results.
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<PAGE>
BUSINESS
Overview
The Company offers a variety of integrated educational programming,
products and services through multiple distribution channels designed to serve a
continuum of adult learning needs. Targeting adults who want everything from
practical information to formal education, the Company offers a myriad of
products and services. For adults who seek information that is of practical use
in their day-to-day lives, the Company licenses, develops and produces
knowledge-enhancing programs and distributes these programs primarily on its
television networks, JEC Knowledge TV and Jones Computer Network. For those who
desire more in-depth information or formal education, i.e., certification or
post-secondary degrees, the Company works in conjunction with select
universities and colleges to offer degree and certificate courses through
multiple media including videotapes, television and print, in addition to the
Internet and other interactive media. As a complement to the programs and
degrees offered, the Company also offers a broad selection of educational video
and software products.
The Company's programming, products and services concentrate primarily on
four high-demand subject areas: (i) computers and technology, (ii) business,
careers and finance, (iii) health and wellness and (iv) global culture and
languages. By integrating and cross-promoting its networks, degree and
certificate programs and educational products, the Company encourages its
customers to experience a continuum of learning and, while so doing, utilize any
combination of the Company's products and services.
The Company's television networks generate revenue through license fees
paid by program distributors and through the sale of advertising time. The
networks' programming is intended to reach an audience that has demographics
attractive to advertisers and that is receptive to the Company's education
products and services. The Company's distance learning operations generate
revenue from tuition fees, student fees and the sale of education-oriented
products, particularly training videos and programs. The Company believes that
its distance education business is differentiated from others because it is
highly integrated, derives revenue from multiple sources and serves the
continuum of adult learning needs.
The Market for Adult Education Programming and Credit Courses
The Company believes that rapidly evolving changes in society, the
workplace and technology may lead adults to seek new educational opportunities
offered in a more convenient fashion than traditional site- based education
programs. The Company believes that many adults seek practical education through
television programming with substantial knowledge and training content and that
an increasing number of adults are seeking more in-depth education through
formal credit and degree courses. According to a study commissioned by the
Company in 1994, approximately 85% of adult cable viewers desire television
programming that provides helpful information and opportunities for
self-improvement, particularly on topics with a high degree of applicability and
relevance to their daily lives. The study also indicated that approximately 72%
of such adults desire more education or training courses to be made available
via television, satellite or video and that approximately 30% of such adults
planning to take a course would prefer that such course be delivered via
television or video.
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Television networks that focus on delivery of both information and
entertainment programming, including CNN and Headline News, the Discovery
Channel, The Learning Channel, Arts & Entertainment and CNBC, have become
popular in recent years and advertisers have responded positively to the success
of programs aired on these networks and the viewers they attract. Based on
industry data, advertisers spent approximately $780 million, net of agency
commissions, in 1995 on 10 networks airing such information-based programming,
representing an increase of approximately 144% from such advertising
expenditures on these networks in 1990. In addition, industry data indicates
that license fees paid by cable operators to networks airing information-based
programming were approximately $600 million in 1995. The Company believes that
its programming is more education-related and less oriented toward a general
television audience than the programming on the information-based networks
referred to above. The Company therefore anticipates that it may not be as
attractive to advertisers or MSOs. The Company currently has limited
distribution by cable operators and a very small portion of this advertising
market and there can be no assurance that the Company's share of this
advertising market or license fees can be increased.
The Company, working in conjunction with select universities and colleges,
offers distance education degree and certificate courses for adults. In 1993,
the most recent year for which information is available, the U.S. Department of
Education estimated that adults over 24 years of age comprised approximately 6.3
million, or 44%, of the 14.3 million students enrolled in higher education
programs. The Company believes that traditional educational institutions, which
typically are designed to serve the needs of the 18 to 24 year-old student, have
significant inherent shortcomings in meeting the needs of older students. Most
universities and colleges provide the bulk of their educational programming
based on a traditional academic calendar with courses starting and finishing on
a semester schedule and with extensive breaks between semesters. In addition,
most universities and colleges offer programs that are site-based, requiring
students to attend classes on a regular basis at a specific time and location.
This structure limits the educational opportunities of adults who, due to
personal and career responsibilities, desire courses that are more flexibly
provided and scheduled. The Company believes its distance education programs
increase the accessibility of educational opportunities desired by many adults.
The Jones Education Company Approach
The Company utilizes multiple forms of communications technologies and media
to market and deliver knowledge-enhancing television programming, degree and
certificate courses and other knowledge-based products, such as educational
videos and software. The Company's programming, products and services are
designed to be integrated and are intended to encourage viewers of the Company's
networks to enroll in its degree and certificate courses and to purchase its
other education products and services. Key elements of the Company's approach
include:
Programming. The Company licenses, develops and produces knowledge-enhancing
programs focusing primarily on its four high-demand subject areas. The
Company's network programs are designed to provide adults with practical
information that can be applied immediately in their personal and professional
lives in a cost-effective and convenient manner. These programs are distributed
on the Company's two 24-hours a day, satellite-delivered networks, JEC Knowledge
TV and Jones Computer Network, and to a lesser extent through syndication on
other networks. JEC Knowledge TV, launched in 1987, offers a variety of
programming relating to each of the Company's four high-demand subject areas and
Jones Computer Network, launched in 1994, offers programming focused on
computers and technology. The Company also uses its networks as a platform to
market its distance education degree and certificate courses and other education
products and services.
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<PAGE>
Distance Education Degree and Certificate Courses. Working in conjunction
with select universities and colleges, the Company offers distance education
degree and certificate courses that are delivered directly to adults through
multiple forms of media, including videotapes, television, print materials, the
Internet and other interactive multimedia. The Company's distance education
degree and certificate courses target adults who desire in-depth, post-secondary
education but are limited by location and time constraints. The Company seeks
affiliations with universities and colleges that have strong reputations,
expertise in the subject matter in which the degree or certificate is offered,
and the willingness and ability to design courses that enable affordable and
effective education to occur beyond the confines of the classroom. The Company
seeks to distinguish its distance education programs by offering students: (i)
a variety of accredited universities and colleges from which they can choose to
earn a degree or certificate, (ii) a greater selection of degree and certificate
programs, (iii) greater flexibility in the scheduling and delivery methods for
its courses and (iv) increased frequency in the delivery of its courses.
JEC College Connection. The Company's education services center, JEC College
Connection, provides a range of support services for the Company's distance
education degree and certificate course programs, including facilitating
telephone and Internet communications among students and faculty members in
order to provide an interactive component that is essential to the Company's
distance education model. In addition, JEC College Connection performs student
recruitment functions and provides enrollment processing and academic advising
services to students. JEC College Connection also provides administrative
support services, such as tuition billing and collection, to participating
universities and colleges. JEC College Connection also handles inquiries
concerning the Company's education products and services that are promoted on
its networks. The Company believes that JEC College Connection is unique in its
practice of providing complete services and support to distance education
students throughout their learning experience.
JEC Knowledge Store. The Company's JEC Knowledge Store offers a broad
selection of educational videotapes, CDs and other learning tools. The JEC
Knowledge Store products are designed to present information that may be
immediately employed by adults in their personal and professional lives and that
may be viewed at a time and place of their choosing. The products are marketed
through promotion on the Company's networks and through a catalog published and
distributed by the Company.
Growth Strategy
The Company's strategy is to strengthen and expand its position as one of the
leading providers of knowledge-enhancing programming and distance education
products and services to adults. Key elements of this strategy include:
Expand Distribution of Its Networks. The Company's networks, JEC Knowledge
TV and Jones Computer Network, are currently available to approximately 24% and
1%, respectively, of households with televisions in the United States. The
Company seeks to expand the distribution of its networks to a larger percentage
of the estimated 97 million U.S. households with televisions by: (i) increasing
distribution with cable operators currently carrying one or both of its
networks, (ii) establishing distribution of its networks with cable operators
that currently do not carry its networks and (iii) establishing distribution of
its networks with providers of direct broadcast satellite and wireless video
services. As the Company expands the distribution of its networks, it
anticipates generating increased advertising revenue, increased licensing
revenue from cable operators and other programming distributors and increased
revenue from the sale of education products and services.
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<PAGE>
License, Develop and Produce High Quality Programming. The Company intends
to continue to improve the quality and quantity of its network programming,
including programming related to degree and certificate courses in each of its
four high-demand subject areas. The Company intends to license, develop and
produce high-quality programs to increase the appeal of its networks to cable
operators and other distributors, viewers and advertisers and to meet the
knowledge needs of adults.
Increase Marketing and Promotion. The Company anticipates increasing its
marketing and promotion expenses from approximately $5.0 million in 1996 to
approximately $20.0 million in 1997 in support of the Company's efforts to
expand distribution of its networks, increase the number of advertisers and
advertisements, increase viewership, increase student enrollments and increase
sales of education products. The Company's efforts will be focused on: (i)
promoting the benefits of JEC Knowledge TV and Jones Computer Network to cable
operators and other media distributors and their viewers and users, (ii)
promoting its distance education degree and certificate courses and education-
oriented products to adults and (iii) building brand recognition of its networks
and education products and services.
Increase Student Enrollments. The Company intends to increase student
enrollments by aggressively marketing its distance education degree and
certificate courses on its networks as well as on other networks, expanding the
number of universities and colleges that offer courses through the Company,
introducing new degree and certificate courses that respond to the changing
educational needs of adults, offering distance education programs and services
through new and more convenient media and providing a more flexible enrollment
schedule to better accommodate the needs of adults. The Company intends to
enhance the delivery of its network programming and distance education degree
and certificate courses as new communications technologies are developed and
become cost effective. In 1995, the Company began offering courses using the
Internet, thereby making certain of the Company's degree and certificate
programs more readily available and easily accessible worldwide.
Develop Corporate Relationships. The Company believes that an opportunity
exists to sell its current credit-based and non-credit based programming to
domestic and multinational corporations, as well as to foreign-based
corporations, many of whom may need or choose to offer continuing education to
their employees. In addition, the Company believes that an opportunity also
exists to develop custom distance education programs for corporations and their
employees.
Expand in International Markets. The Company believes that there are
significant opportunities to deliver its programming, products and services
internationally, especially in the fields of computers and technology and
business. The Company licenses and distributes programming in Australia,
Brazil, Canada, Hong Kong, Israel, Philippines and South Korea and has recently
entered into licensing agreements providing for distribution of the Company's
programming in China and Thailand. The Company will continue to assess
opportunities for further international expansion. For the eight months ended
August 31, 1996, approximately 2.2% of the Company's total revenue was derived
from international licensing agreements.
Pursue Strategic Acquisitions. The Company intends to pursue strategic
investments in, acquisitions of, or joint ventures with, companies that are
complementary to its business, such as production companies, media development
companies and education and training product and service companies. Although the
Company currently has no agreement or understanding with respect to any such
strategic investment, acquisition or joint venture, the Company plans to
evaluate opportunities to expand its business through strategic investments,
acquisitions or joint ventures.
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Programming
The Company licenses, develops and produces educational programming designed
to meet the personal and professional enrichment needs of adults. The Company's
programming content currently consists of both programming licensed from third
parties and programming developed and produced by the Company. The Company
currently dedicates approximately 30% of its combined daily programming
schedules to knowledge-enhancing general programming, approximately 30% to its
degree and certification courses and the balance to advertising and promotions.
The Company's programming is typically shown in half hour and hour segments and
is focused on four high-demand subject areas that the Company's research
indicates are of high educational interest, including: (i) computers and
technology, (ii) business, careers and finance, (iii) health and wellness, and
(iv) global culture and languages.
Licensed Programming. The majority of the Company's network programming is
licensed from various sources, including program syndicators and the
universities and colleges whose courses are offered through the Company. The
Company has chosen to license most of its programming because it is less capital
intensive than development and production and increases the networks'
programming flexibility. As a result, the Company expects to continue to
license the majority of its programming in the future. The Company exhibits the
licensed programming pursuant to agreements with suppliers and generally pays a
negotiated annual fixed fee under these licenses. In general, licenses extend
for one year and entitle the Company to show each program an unlimited number of
times on its networks.
Original Programming. To complement licensed programming, the Company also
develops and produces original programming. The Company has historically
developed and produced programming within the four high-demand subject areas in
which there is a lack of relevant high quality programming available for
licensing. The majority of the programming produced by the Company has consisted
of computers and technology programming aired on both of its networks. The
Company plans to increase its production of original programming in the future
as it believes the development and production of original programming creates
distinctive "brand-name" shows that are expressly identified with its networks.
The Company believes that additional value can also be realized through
licensing its original programming domestically and internationally. The
Company's development activities include surveying adults to determine what
types of programming they would be interested in viewing, conducting marketing
studies, convening focus groups, hiring consultants to assist in the development
of program content and producing pilot episodes to further test viewer interest.
Most of the Company's original programming has been and is anticipated to be
produced by production companies under the supervision of the Company.
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The following table provides selected examples of programs that have been
recently licensed or developed and produced by the Company within its four high-
demand subject areas:
<TABLE>
<CAPTION>
Number
Programs of Episodes Description
- -------- ----------- -----------
<S> <C> <C>
Computers and Technology
Home Computing/(1)(2)/ 13 A program employing a light-hearted
approach to explaining the basics of
using computer hardware and
software.
New Media News/(1)(2)/ 117 A news format program, co-produced
with KRON-TV of San Francisco,
reporting on current developments in
computers and technology.
Using the Internet in 6 A program offered by International
Business/(1)(2)(3)/ University that examines issues
related to doing business on the
Internet.
Business, Careers and
Finance
AARP Works/(1)/ 16 A program designed to provide
information on effective job
searching techniques for mature job
seekers.
Leading and Managing the 10 A program offered by University of
Organization of the Colorado-Colorado Springs that
Future/(1)(3)/ explores leadership and management
skills important to success in
business organizations.
International 20 A program offered by Regis
Management/(1)(3)/ University that focuses on
strategies and structures of
international business, including
discussion of the future role of
small and mid-sized firms in these
markets.
Health and Wellness
Professional Issues in 24 A program offered by California State
Nursing/(1)(3)/ University at Dominguez Hills that
examines the diverse roles and
settings for nursing practice in the
health care delivery system.
The Cutting Edge Medical 26 A magazine format program focusing
Report/(1)/ on breakthrough developments in
technology which enables people to
live longer, healthier lives.
Psychological Foundations 26 A program offered by Oklahoma State
of Childhood/(1)(3)/ University that focuses on
children's development of cognitive,
affective and psychomotor skills.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Number
Programs of Episodes Description
- -------- ----------- -----------
<S> <C> <C>
Global Culture and
Languages
French Deux News/(1)/ 260 A daily local news program from
France designed to provide an
international news update from a
French perspective.
More Simply Spanish/(1)(3)/ 20 A Spanish course that uses a
conversational approach to
illustrate how to communicate about
travel, shopping, eating and other
activities in Spanish.
Europa Seminal/(1)/ 26 A weekly Spanish language news
format program providing a wide
ranging international news report.
</TABLE>
- ---------------------
(1)Shown on JEC Knowledge TV.
(2)Shown on Jones Computer Network.
(3)Also included as part of a credit bearing course.
Distribution
The Company's programming is distributed on its networks, JEC Knowledge TV
and Jones Computer Network and, to a lesser extent, through syndication to third
parties for distribution domestically and internationally.
JEC Knowledge TV. Launched in 1987, JEC Knowledge TV is a 24-hour a day,
satellite-delivered programming network that features programs in each of the
Company's four high-demand subject areas. A portion of the programming on JEC
Knowledge TV is also carried on Jones Computer Network. JEC Knowledge TV is
currently available to approximately 24.5 million households in the United
States, approximately 19.4 million of which are in cable television systems that
distribute the network on a full or part time basis, and the remainder of which
receive the network through C-Band satellite dishes or untraceable cable
connections. JEC Knowledge TV is currently distributed in systems owned by each
of the ten largest MSOs in the United States and the Company has affiliation
agreements with five of such MSOs, including Tele-Communications, Inc., Time
Warner, Inc., Marcus Cable, Cox Communications, Inc. and Jones Intercable. In
addition, the Company also has affiliation agreements providing for the
distribution of JEC Knowledge TV with approximately 25 smaller MSOs, including
two cable cooperatives, Telesynergy and the National Cable Television
Cooperative, which together represent MSOs that own cable television systems
that reach over 9 million cable subscribers. The Company's affiliation
agreements generally provide that the MSO may distribute the network in as many
or as few of its cable television systems as it desires. Once the Company has
reached an agreement with an MSO, the Company works with local cable operators
within the MSO system to secure distribution of JEC Knowledge TV on their
systems. In order to secure such distribution, the Company often provides
launch incentives to the operators, such as providing periods of free
programming and/or paying a marketing subsidy to the cable operator. The fees
payable by MSOs with respect to distribution vary depending upon the level of
distribution of the networks in the
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particular MSO's system and the size of the MSO. The terms of affiliation
agreements with larger MSOs generally provide that the MSO can add or delete the
Company's programming in its discretion. The terms of the affiliation agreements
with smaller MSOs generally provide for distribution for a period of three to
five years and, in most cases, do not allow for the discretionary deletion of
the network once it is launched. In June 1996, the Company entered into an
affiliation agreement with Corporate Media Partners, d/b/a Americast, a general
partnership consisting of Ameritech New Media, Inc., Bell South Media Ventures,
Inc., GTE Media Ventures, Incorporated and SBC Interactive, Inc., that provides
for the distribution of JEC Knowledge TV on video distribution networks being
established by these telecommunication companies. This affiliation agreement
contains terms similar to those of the affiliation agreements with the larger
MSOs.
Jones Computer Network. Launched in 1994, Jones Computer Network is a 24-
hour a day, satellite-delivered network that delivers programming focusing on
computers, communications, multimedia, software and related technologies. The
programming includes news programs and reports on the latest in computers and
technology, "how-to" shows offering information and instruction on operating
software programs, interviews with leaders in technological innovation, and
general interest shows relating to the current and future impact of computers
and other emerging technologies. The Jones Computer Network programming is also
distributed on JEC Knowledge TV as part of its prime time programming block.
Jones Computer Network is currently available to approximately 1.2 million
households in the United States, approximately 85% of which households are in
cable television systems operated by Jones Intercable. The only cable systems
that are currently paying fees to the Company for distribution rights of Jones
Computer Network programming are those systems owned by Jones Intercable. The
remainder of these systems do not currently pay fees due to launch incentives
granted by the Company. The operators of these systems are scheduled to begin
paying fees at various dates commencing in 1997.
Program Syndication. The Company distributes educational programming
developed and produced by the Company or for which it has secured distribution
rights through domestic and international syndication agreements with satellite
and broadcast distribution systems. The licensing agreements generally provide
either for distribution of a specific program series or distribution of a block
of programming and may be either exclusive or non-exclusive. The Company
currently has licensing agreements relating to distribution of specific programs
in Australia, Brazil, Canada, Hong Kong, Israel, Philippines and South Korea.
In addition, the Company has agreements allowing it to provide programming
blocks on distribution systems in Thailand and China. Currently, approximately
20% and 50% of the programming aired on JEC Knowledge TV and Jones Computer
Network, respectively, is available for licensing by the Company. The Company
views its licensing arrangements as a means of increasing awareness of its
education programming and products and services and promoting its distance
education degree and certificate programs.
Advertising
The Company has sold advertising on JEC Knowledge TV since 1993 and on Jones
Computer Network since its launch in September 1994. The Company's advertising
revenues have been derived primarily from sales of long-form advertising
(infomercials) and, to a lesser extent, from sales of spot advertising. Major
advertisers on the Company's networks are generally nationally known companies
whose products are complementary to the content on the Company's networks. The
Company believes that the focused nature of its programming enables a potential
advertiser to effectively target a specific demographic segment of viewers. In
keeping with its role as a provider of quality
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knowledge and academic programming, the Company does not carry advertisements
that it believes are inconsistent with the networks' programming strategy.
Long-form advertising generally is 30 minutes in length. This form of
advertising is generally aired in the overnight hours. During 1995,
approximately 22% of JEC Knowledge TV's average weekly programming was devoted
to long-form advertising and approximately 25% of Jones Computer Network's
average weekly programming was devoted to long-form advertising. An affiliate
of the Company earns a three percent commission on the sale of airtime for
infomercials on the Company's networks. See "Certain Relationships and Related
Transactions - Sales Commissions."
Spot advertising consists primarily of 30-second commercials for products and
services. The Company sells spot advertising time to advertising agencies
representing national advertisers or directly to the advertisers themselves. In
1995, spot advertising accounted for 16% of total advertising revenues, with the
balance being comprised of long-form advertising.
Education Products and Services
The Company's education products and services consist of distance education
degree and certificate courses, the services of its education services center,
JEC College Connection, and educational video and software products.
Distance Education Degree and Certificate Courses. In conjunction with
select universities and colleges, the Company produces and markets distance
education degree and certificate courses to adults. The Company currently
offers 17 degree and certificate programs, including four graduate degree
programs, six bachelor's degree completion programs, two associate of arts
programs and five certificate programs. The Company currently offers
approximately 170 courses through 11 accredited universities and colleges and
through the International University, an affiliate of the Company currently in
the accreditation process. The following table summarizes the Company's current
distance education degree and certificate programs:
<TABLE>
<CAPTION>
ENROLLMENTS
JANUARY 1- CREDIT PRICE PER
SEPTEMBER 30, HOURS CREDIT
PROGRAM INSTITUTION 1996 REQUIRED HOUR/(1)/
- ------- ----------- ------------- -------- ----------
Graduate Degree Programs
<S> <C> <C> <C> <C>
Master's Degree in
Educational Technology The George Washington
Leadership University 755 36 $238
Master of Arts in
Business Communication International University 159 35 $163
Master of Business University of Colorado - 86/(2)/ 36 $235
Administration Colorado Springs
Master of Public University of Colorado - -/(2)/ 36 $235
Administration Colorado Springs --------
Total Graduate Degree Program Enrollment 1,000
========
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
ENROLLMENTS
JANUARY 1- CREDIT PRICE PER
SEPTEMBER 30, HOURS CREDIT
PROGRAM INSTITUTION 1996 REQUIRED HOUR/(1)/
- ------- ----------- ------------- -------- ----------
<S> <C> <C> <C> <C>
Bachelor's Degree Completion Programs
Bachelor of Science in
Business Administration Regis University 1,171 128/(3)/ $185/(4)/
Bachelor of Science in California State
Nursing University at Dominguez
Hills 1,386 126/(3)/ $210
Bachelor of Arts in Washington State
Social Sciences University 465 120/(3)/ $182
Bachelor of Science in
Animal Sciences and
Industry Kansas State University 62 127/(3)/ $180
Bachelor of Science in
Human Resources with a
Major in Hotel,
Restaurant and
Institutional Management University of Delaware 50 120/(3)/ $195
Bachelor of Arts in
Business Communication International University 31 120/(3)/ $163
-------
Total Bachelor's Degree Completion Program
Enrollment 3,165
=======
<CAPTION>
Associate of Arts Degree Programs
Associate of Arts Colorado Electronic
Community College/
Arapahoe Community
College 359 60 $147
Associate of Arts Seattle Central
Community College 215 90 $ 94
-------
Total Associate of Arts Degree Program
Enrollment 574
=======
<CAPTION>
Certificate Programs
Early Reading Instruction University of Colorado
Colorado Springs 75 8 $125
Advanced Oral and
Written Communication
Skills International University 1 6 $163
Business Technologies International University --/(5)/ 6 $163
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
ENROLLMENTS
JANUARY 1- CREDIT PRICE PER
SEPTEMBER 30, HOURS CREDIT
PROGRAM INSTITUTION 1996 REQUIRED HOUR/(1)/
- ------- ----------- ------------- -------- ----------
<S> <C> <C> <C> <C>
Oral and Written
Communication Skills International University - 6 $163
Organizational
Communication International University 1/(5)/ 6 $163
-------
Total Certificate Program Enrollment 77
=======
</TABLE>
- -----------------------
(1) Includes tuition and registration fees.
(2) These programs are first being offered in September 1996.
(3) The total number of required credit hours listed for bachelor degree
completion programs includes credit hours earned by the student prior to
enrollment in the program. The prior credit hours required before
enrollment in these programs range from 27 to 60.
(4) Colorado residents pay $197 per credit hour.
(5) International University has not yet actively marketed this certificate
program.
The Company attempts to identify and offer distance education degree and
certificate courses that will attract students and address their educational
needs. The Company conducts surveys among adults to attempt to identify which
courses or programs are of interest to them. The Company then attempts to
identify and establish relationships with educational institutions that offer
degree or certificate programs in the area of interest.
The Company seeks affiliations with accredited universities and colleges that
have strong reputations, expertise in the subject matter in which the degree or
certificate is offered, and the willingness and ability to design courses that
enable effective education to occur beyond the confines of the classroom. The
courses and degree programs offered through the Company are designed and taught
by the faculty of the university or college offering the course and are produced
with assistance from the Company in a manner designed to be appealing and
engaging. Individuals who successfully complete any course taken for credit or
any degree program receive credit from the participating university or college.
The courses and the degree and certificate programs offered by the Company
are specifically designed for the distance education market and are accessible
through videotapes, television, print material, the Internet and other
interactive multimedia methods. Currently, a typical course package includes
videotapes, print materials (study guides, textbooks and reference materials),
and telecommunication connections such as voice-mail and the Internet. Students
interact with course instructors and/or other class members on a regular basis
through the telephone and the Internet. All course assignments are submitted to
the institution by the students either through the mail or electronically, and
grades and comments on such assignments are similarly returned by the faculty to
the students. Proctored testing occurs at locations arranged by the university
or college that are convenient to the student's location, such as a local
college. Testing also occurs through "take home" exams that are submitted in the
same manner as class assignments.
The Company first enrolled students in its courses in January 1988 and since
that time, approximately 6,400 students have completed approximately 15,000
courses. Approximately 135 students have graduated from degree programs,
including approximately 95 who have received
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<PAGE>
masters degrees and approximately 40 who have received bachelors degrees. As of
September 30, 1996, approximately 90% of students enrolled in a course offered
through the Company are pursuing one of the 12 available degree programs. During
1996, approximately 74% of the students who have enrolled in a course or degree
program through the Company have been between the ages of 26 and 45, and
approximately 65% of these students were women. The largest concentration of the
Company's students has come from the states of Colorado and California, although
the Company has had students from each of the 50 states and from 16 foreign
countries.
JEC College Connection. JEC College Connection recruits, enrolls, and
provides course and other materials and customer service to the Company's
students. Service representatives at JEC College Connection respond to
inquiries and distribute enrollment forms. Once a student is accepted into a
course or degree program, JEC College Connection supplies the student with
appropriate course materials and establishes any Internet or other electronic
connection required for participation in such course. Each student is billed
according to the products and services ordered. JEC College Connection performs
collections and remittance functions on behalf of the applicable program or
service provider. In addition, customers are subsequently contacted in an
effort to determine satisfaction with the products and services offered. During
1995, JEC College Connection processed approximately 4,600 course enrollments
and sold approximately 33,000 educational products.
Educational Video and Software Products. The Company, through the JEC
Knowledge Store, offers a wide variety of software and other learning tools.
The Company currently offers approximately 250 products with the majority of the
products sold ranging in price between $50 and $75. Each product is designed to
educate the consumer in a specific topic or skill within the applicable subject
matter area. Examples of such education products include Video Software School,
a videotape series designed to improve computing skills and to serve as a
reference source for computer users; More Simply Spanish, a videotape series
designed to teach Spanish in a conversational setting through vocabulary and
activities; and Adults in Transition, a series for adults who want to
investigate new career opportunities. These products are marketed principally
through JEC Knowledge TV and a catalog published and distributed by the Company.
Sales and Marketing
The Company markets its combination of programming, products and services as
an integrated package designed to provide a broad selection of high-quality
education and training tools. The Company's sales and marketing efforts
endeavor to take advantage of cross-promotional opportunities made available by
the Company's multiple and complementary distribution channels. In addition to
the sales associates disclosed below, the Company has 11 general marketing
associates who support network distribution, advertising sales and the marketing
of education products and services.
The Company employs a 21 person sales force that targets cable television
operators and other video program distributors in order to increase distribution
of JEC Knowledge TV and Jones Computer Network. The Company's marketing
activities with respect to programming distribution typically consist of making
presentations, placing print ads in trade publications and undertaking
promotional activities at trade shows. Additionally, the Company promotes its
networks to cable operators through launch incentives, including payments to
cable operators for direct mailings, advertising and community-oriented events.
The Company also employs a three person sales force that targets advertisers
whose products are complementary to the knowledge-enhancing content of the
programming on its networks. The Company is also in the process of developing a
"corporate" sales
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<PAGE>
force whose focus will be on marketing and selling the Company's existing and
planned programming to business, institutional, and governmental entities.
In order to attract students, the Company uses its networks to coordinate
sales and marketing campaigns designed to encourage viewers to enroll in the
Company's distance education degree and certificate courses. The Company's
research indicates that approximately 70% of the students who have enrolled in
courses offered through the Company first became aware of the course offerings
through viewing JEC Knowledge TV and approximately 20% of such students first
became aware of the Company's course offerings through referrals. The Company
currently dedicates approximately 20% of its total spot advertising time to the
promotion and advertising of its distance education courses. Although the
Company has previously advertised its distance education programs exclusively on
its networks, it now advertises its distance education degree and certificate
courses on other networks. In addition to network advertising, the Company uses
catalogs and direct mail targeted to specific groups such as associations,
educators, professionals and human resource executives, as well as print
advertisements and telemarketing campaigns, to promote the Company's education
products and services.
The Company offers programs and courses from select universities direct to
the student and eliminates the need to travel to a classroom. As a consequence,
a business or corporation is able to provide training and educational programs
to its workers without incurring losses due to the opportunity costs of missed
work as well as the actual costs of travel, room and board. The Company
believes that it can continue to attract select universities and content experts
to broaden its present program offering and, as a result, increase the appeal
and acceptance of its current distance learning business.
The Company has developed a Web site, JEC Knowledge Online, on the Internet
that allows electronic access to information concerning the Company and its
products. The web site also provides avenues for users to explore education
opportunities, enroll in courses, review JEC Knowledge TV and Jones Computer
Network programming schedules, purchase education products and communicate with
the Company.
Competition
The Company faces competition from a variety of sources, including cable and
broadcast television programmers, universities and colleges that deliver
education and training to distant locations and independent education and
training companies that package and distribute programs through various media.
Many of the Company's competitors have greater financial and other resources
than the Company. While the Company believes that its approach of offering a
variety of products and services through an integrated combination of
technologies, combined with its ability to use its networks to encourage adults
to pursue further education through the Company, is distinctive, there can be no
assurance that the Company will be able to compete effectively in the future.
Cable and Broadcast Television Programmers. The Company faces intense
competition from other networks for channel space on cable television
distribution systems and other broadcast and satellite distribution networks.
The Company also competes with these networks for both viewers and advertisers.
The Company believes that there are currently over 100 programming services
competing for limited space on the existing distribution systems, as well as for
viewers and advertising dollars. Several of these programmers target an
audience similar to that targeted by the Company, including The Discovery
Channel, Arts & Entertainment, The History Channel, The
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<PAGE>
Learning Channel, CNBC, CNN, MSNBC, Fox News Channel, Home and Garden TV and the
Public Broadcasting System, among others.
Universities and Colleges. Various institutions offer education and
training, both on-site and at a distance, including the University of Phoenix
and many other universities and colleges. These institutions typically offer
courses or programs either at satellite campuses or at distant locations to
which students must travel. In addition, these institutions typically offer
only their own courses rather than courses from multiple institutions. The
Company believes, however, that there are low barriers to entry in the distance
education market for most universities and colleges. In addition, the Company
believes that a number of other virtual universities are being planned or
developed that will compete with the Company in the near future. As a result,
the Company may face increased competition in this market in the future.
Independent Education and Training Companies. There are a large number of
independent education and training companies. Similar to universities and
colleges, these companies generally provide programs in a site-based manner.
However, there can be no assurance that these companies will not develop
capabilities similar to the Company's in the future or that the Company's
products and course offerings will be preferred by consumers.
Intellectual Property
The Company owns all rights to the original programming that it develops and
produces and it generally owns distribution rights in most domestic and
international markets to the educational programming and products developed in
conjunction with participating universities and colleges. With respect to
programming licensed by the Company for distribution on its networks, the
Company generally acquires the right to air such programming on its networks
multiple times during a specified license period.
The Company has also developed proprietary information systems to support the
operation of its business. It relies primarily on a combination of statutory
and common law copyright, trademark and trade secret laws and other methods to
protect these proprietary rights. The Company uses a variety of federal and
state registered trademarks and trade names in its business. Certain of these
trademarks and trade names are owned by Jones International, the majority
shareholder of the Company, and are licensed to the Company at no charge for use
by the Company in connection with its business. The Company believes that the
trademarks and trade names that it currently uses are not material to its
business. See "Risk Factors -Intellectual Property."
Associates
The Company refers to its employees as associates. As of September 30, 1996,
the Company had 75 full-time associates. Of these associates, 33 work in
network sales and programming, 16 in JEC College Connection, 15 in marketing and
11 in operations, executive and administrative positions with the Company. None
of the Company's associates are covered by a collective bargaining agreement,
and the Company believes its employee relations to be good. See "Risk Factors -
Dependence upon Key Personnel."
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<PAGE>
Facilities and Leases
The Company's offices and JEC College Connection are located in
Englewood, Colorado in facilities leased by the Company from certain of its
affiliates. The Company believes that its offices and JEC College Connection are
adequate to meet its current needs. The Company also leases transponder space on
the domestic communications satellites on which JEC Knowledge TV and Jones
Computer Network are distributed from an affiliate. See "Certain Relationships
and Related Transactions - Office Lease and - Transponder Agreements."
Regulation
To date, the Company has not been subject to any material regulation
regarding its programming or its method of operations. Certain states assert
authority to regulate non-degree granting education providers if their
educational programs are available to that state's residents. Based upon its
review of applicable laws, the Company believes that it is exempt from such
regulation because the Company contracts with the universities and colleges
offering the courses and does not participate in any federal or state student
aid/loan programs. However, in the future, state laws and regulations could
affect the Company's operations and might limit the ability of the Company to
distribute educational services in certain states. If, in the future, the
Company were required to comply with, or were found to be in violation of, a
state's current or future licensing or regulatory requirements, it could be
subject to civil or criminal sanctions, including monetary penalties, and could
be barred from providing educational services in that state. In addition, there
may be foreign regulatory requirements that must be met in order to provide
programming in the international markets and there can be no assurance that such
requirements can be met. See "Risk Factors -Government Regulation."
Litigation
On June 4, 1996, an action entitled Space Vision, Inc., Meridian Gate
Holdings, Ltd. and Higher Education Group, Inc. v. Jones International, Ltd.,
Jones Education Company and Mind Extension University, Inc., Civil Action No.
96-CV-2644, was filed against the Company in the District Court for the City and
County of Denver, Colorado. The plaintiffs allege that the defendants failed to
perform their obligations under an agreement to provide a certain number of
hours of JEC Knowledge TV programming for distribution in Taiwan, and to comply
with other provisions of the agreements relating to content of programming
supplied and subtitling of programming. The plaintiffs have alleged
misrepresentation and concealment, breach of contract and bad faith by all
defendants. No dollar amount of damages has been alleged, but plaintiffs seek to
recover both compensatory and punitive damages, including lost profits. The
Company has motions pending to dismiss the fraud and bad-faith claims and
intends to defend this action vigorously.
The Company is involved in routine legal proceedings incident to the
ordinary course of its business. The Company believes that the outcome of all
such routine legal proceedings in the aggregate will not have a material adverse
effect on the Company.
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<PAGE>
MANAGEMENT
Directors and Executive Officers
Set forth below is certain information concerning the directors,
officers and certain key employees of the Company. All directors hold office for
a period of one year or until their respective successors are elected and
qualified, or until their earlier resignation or removal.
Name Age Position
- ---- --- --------
Glenn R. Jones 66 Chairman of the Board and
Chief Executive Officer
Wallace W. Griffin 57 President and Director
Scott A. Wheeler 37 Group Vice President/
Paul R. Amos 43 Operations and Director
Vice President/International
Business Development and Director
Ilene B. Block 45 Group Vice President/Marketing
Stephanie L. Garcia 34 Vice President/Chief Financial
Officer
James P. Honiotes 38 Vice President/Distribution
Scott M. Kline 33 Group Vice President/Corporate
Business Development
Elizabeth M. Steele 44 Vice President and Secretary
Keith D. Thompson 29 Chief Accounting Officer
Barbara B. Lawton 41 Director
Siim A. Vanaselja 40 Director
Robert J. Malone 52 Director
The Company's bylaws provide that the Company shall have no fewer than
one director and no more than ten directors. Subject to such limitation, the
number of directors may be fixed from time to time by the Board. Executive
officers of the Company hold office until their successors are chosen and
qualified, subject to earlier removal by the Board.
The principal occupations for at least the past five years of each of
the directors, executive officers and certain key employees of the Company are
as follows:
Glenn R. Jones has served as Chairman of the Board of Directors and
Chief Executive Officer of the Company since it was founded in 1990. Mr. Jones
has been involved in the cable television business in various capacities since
1961 and currently serves as a director and/or executive officer of many of the
Company's affiliates, including as Chief Executive Officer and a director of
Jones Intercable, one of the ten largest MSOs in the United States, and as a
director and vice chairman of BCI. Mr. Jones will continue to devote a
substantial amount of his time to the Company's affiliates. Mr. Jones serves on
the Board of Directors and the Executive Committee of the National Cable
Television Association, the Board of Education Council of the National Alliance
of Business and on the James Madison Council of the Library of Congress, and has
served on the Executive Committee of Cable in the Classroom, an organization
dedicated to education via cable television. Mr. Jones has been the recipient of
numerous awards during his career, including the 1993 Most Outstanding Corporate
Individual Achievement award from the International Distance Learning Conference
and the 1994 Golden Plate Award for his advances in distance education from the
American Academy of
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<PAGE>
Achievement. In 1994, Mr. Jones was inducted into Broadcasting and Cable's Hall
of Fame. Mr. Jones received a B.S. in Economics from Allegheny College and a
J.D. from the University of Colorado School of Law.
Wallace W. Griffin has served as President and as a director of the
Company since April 1995. From April 1995 to August 1996, Mr. Griffin also
served as an executive officer of Jones Digital Century, Inc., an electronic
publishing company, Jones Interactive, Inc., a computer support services
company, Jones Lightwave, Ltd., an alternate access provider, and Jones Digital
Empire, Inc., an Internet distribution and content provider, each of which is an
affiliate of the Company. From July 1994 to April 1995, Mr. Griffin served as
President of Jones Futurex, Inc., an affiliate of the Company engaged in
contract manufacturing. From April 1992 to the present, he has served as a
director of Ddx, Inc., a Colorado-based company that conducts various food
diagnostic tests. From June 1992 to June 1994, he served as Chief Operating
Officer of that company. Mr. Griffin was employed for thirty years in various
management positions at US West, Inc., including serving as President and Chief
Executive Officer of its Marketing Resources Group from 1987 to June 1992. Mr.
Griffin holds a B.S. Degree in Electrical Engineering from The University of
North Dakota and has participated in executive management training programs at
Harvard University, The Brookings Institute and The Menninger Foundation.
Scott A. Wheeler has served as Group Vice President/Operations of the
Company since April 1995 and as a director of the Company since August 1996. Mr.
Wheeler has been associated with the Jones International group of companies
since 1984, including serving as the Company's Vice President/Business Services
from March 1994 to March 1995 and as the Assistant to the President of Jones
Intercable from March 1990 to February 1994. Mr. Wheeler received a B.S. in
Accounting from the University of Wyoming and a Masters in Telecommunications
from the University of Denver and is a Certified Public Accountant in the State
of Colorado.
Paul R. Amos has served as a Vice President of the Company since
February 1996 and as Vice President/International Business Development and as a
director of the Company since August 1996. From September 1995 to February 1996,
Mr. Amos served as Vice President, Studio Operations, of King World Productions
and from March 1995 to September 1995, as Vice President, Sales & Marketing,
TransWorld Communications, Inc., an international satellite operator. Mr. Amos
founded HCTV, Inc. (d/b/a The Health Channel) in March 1993 and served as its
President from March 1993 to April 1995. From July 1992 to March 1993, Mr. Amos
served as Executive Vice President of Fox News. From March 1980 to May 1991, Mr.
Amos was employed in various capacities by CNN, including as an Executive Vice
President from 1988 to May 1991. Mr. Amos received his B.A. in Mass
Communications from Loyola University, New Orleans. In June 1995, Mr. Amos
declared personal bankruptcy under Chapter 7 of the Federal Bankruptcy Code. Mr.
Amos' bankruptcy resulted from his efforts to form his own company, HCTC, Inc.
(d/b/a The Health Channel). Mr. Amos' bankruptcy was discharged in October 1995.
Ilene B. Block has served as Group Vice President/Marketing of the
Company since January 1996. From October 1993 to March 1995, Ms. Block served as
Senior Vice President Marketing, Executive Committee, with VICORP Restaurants,
Inc., a restaurant holding company based in Denver, Colorado. From August 1992
to September 1993, Ms. Block was Vice President, Director of Client Services of
Henry Gill Silverman, a Denver, Colorado based advertising agency. From 1982
until joining Henry Gill Silverman, Ms. Block was a Senior Partner, Executive
Management Committee, with the advertising agency of Tatham Euro RSCG in
Chicago, Illinois. Ms. Block received an MBA from the University of Chicago and
an MFA and BFA from the California Institute
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<PAGE>
of the Arts. In 1973, Ms. Block received a Fulbright Scholarship to study as a
master's apprentice in a glass factory in Riihimaki, Finland.
Stephanie L. Garcia has served as Vice President/Chief Financial
Officer of the Company since July 1996. Ms. Garcia has been associated with the
Jones International group of companies since September 1992, serving as Group
Vice President, Finance and Operations for Jones Digital Century, Inc. from
March 1995 to July 1996, Vice President of Financial Analysis and Business
Development for the Company from April 1994 to February 1995, Director of
Operations for the Product Information Network from October 1993 to March 1994
and as an Operations Manager for Jones Intercable from September 1992 to
September 1993. From June 1992 to August 1992, Ms. Garcia was an Operations
Manager at US West, Inc. specializing in international cable property
investments and management. Ms. Garcia received an MBA from the Amos Tuck
Business School at Dartmouth College and a B.S. in Business Administration from
the University of Colorado.
James P. Honiotes has served as Vice President/Domestic Distribution
of the Company since March 1995. From 1981 to March 1995, Mr. Honiotes served in
a variety of management, marketing and sales positions for Jones Intercable,
including as general manager of its Colorado operations from 1990 to March 1995.
Mr. Honiotes is a past President of the Colorado Cable Television Association.
Mr. Honiotes received a B.S. in Business Administration from Regis University.
Scott M. Kline has served as Group Vice President for Corporate
Business Development of the Company since October 1996. From 1994 to 1996 he
served as Vice President of Westcott Communications, Inc. ("Westcott") and as
General Manager of Westcott's The Executive Education Network. From 1989 to
1994, Kline was an associate of the Boston law firm of Carrington, Coleman,
Sloman & Blumenthal. Mr. Kline received his J.D. from Harvard Law School in
1988, and B.A. in Political Science from Yale University in 1985.
Elizabeth M. Steele has served as Vice President and Secretary of the
Company since it was founded in July 1990. Ms. Steele has also served as Vice
President/General Counsel and Secretary of Jones Intercable, as well as general
counsel to certain of Jones Intercable's and the Company's affiliates since
1987. Ms. Steele will continue to devote a significant amount of her time to
these affiliates. From 1980 through 1987, Ms. Steele practiced law with the
Denver law firm of Davis, Graham & Stubbs LLP, where she was elected a partner
in 1985. Ms. Steele received a B.A. in History from Hamilton College and J.D.
from the University of New Mexico.
Keith D. Thompson has served as Chief Accounting Officer of the Company
since August 1996. Mr. Thompson has also been associated with Jones
International since October 1994, serving as a Senior Accountant from October
1994 to April 1995, as an Accounting Manager from April 1995 to January 1996 and
as Director of Accounting from January 1996 to the present. Mr. Thompson will
continue to devote a substantial amount of his time to Jones International. From
July 1989 to October 1994, Mr. Thompson was an auditor for Deloitte & Touche
LLP. Mr. Thompson received a B.S. in Accounting from Oral Roberts University and
is a Certified Public Accountant in the State of Colorado.
Barbara B. Lawton has served as a director of the Company since August
1996. Since 1993 she has been a W. Edward Deming Professor of Management at the
University of Colorado. From 1992 to 1993, Dr. Lawton was president of The
Deming Foundation, a non-profit educational institution. From 1989 to 1992, Dr.
Lawton served as Corporate Director of Total Quality of Albany
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<PAGE>
International Corporation, a manufacturing company, and from 1985 to 1989 was a
senior statistician for Rockwell International. Dr. Lawton received a Ph.D. in
Statistics from the University of Wyoming, an M.A. in Statistics from The
Pennsylvania State University and a B.S. in Biology from The American
University. Dr. Lawton has also completed the Executive Program in Business
Administration at Columbia University.
Siim A. Vanaselja has served as a director of the Company since August
1996. Since August 1996, Mr. Vanaselja has served as Executive Vice President
and Chief Financial Officer of BCI. From February 1994 to August 1996, Mr.
Vanaselja served as an officer of BCE, Inc., Canada's largest telecommunications
company and the corporate parent of BCI, including as Vice-President, Taxation
from February 1995 to August 1996, as Assistant Vice-President and Director of
Taxation from June 1994 to February 1995, and as Assistant Vice-President of
International Taxation from February 1994 to June 1994. From August 1989 to
February 1994, Mr. Vanaselja was a partner in the Toronto office of KPMG Peat
Marwick Thorne.
Robert J. Malone has served as a director of the Company since August
1996. Mr. Malone is also a director of Commercial Assets, Inc., a real estate
investment trust. Since January 1993, Mr. Malone has served as Chairman of the
Board of Colorado National Bank, Denver and of Colorado National Bankshares,
Inc., a national bank holding company, and from January 1993 to July 1996 he
served as its Chief Executive Officer of these companies. From March 1990 to
December 1992, Mr. Malone was Chairman of the Board, President and Chief
Executive Officer of Western Capital Investment Corporation and its principal
subsidiary, Bank Western. From 1984 to 1990, he was President and Chief
Executive Officer of First Interstate Bank of Denver. Mr. Malone received an
M.B.A. from the University of Southern California and an A.B. from Loyola
University, Los Angeles.
Committees
The Board of Directors established an Executive Committee, a
Compensation Committee, an Executive Officer Stock Option Committee and an Audit
Committee in August 1996. The Executive Committee consists of Messrs. Jones,
Griffin and Vanaselja and is responsible for acting in the Board's stead, except
where action by the full Board of Directors is required by law or the Company's
articles of incorporation or bylaws. The Compensation Committee consists of
Messrs. Jones, Malone and Vanaselja and is responsible for recommending which
employees (other than the executive officers) will receive awards under the
Stock Option Plan and the salaries for senior management to the Company's Board
of Directors. The Executive Officer Stock Option Committee consists of Messrs.
Malone and Vanaselja and Ms. Lawton and selects which executive officers will
receive awards under the Stock Option Plan. The Audit Committee consists of
Messrs. Malone, Wheeler and Vanaselja and is responsible for meeting
periodically with representatives of the Company's independent auditors to
review the general scope of audit coverage, including consideration of the
Company's accounting practices and procedures and system of internal accounting
controls, and to report to the Board with respect thereto. The Audit Committee
also recommends to the Board of Directors the appointment of the Company's
independent auditors.
Compensation of Directors
The Company intends to pay its directors who are not officers of the
Company for their services as directors. Directors who are not officers of the
Company will receive $2,500 per quarter for services rendered as a director and
$500 for attending each meeting of the Board or one of its
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committees. Directors who are also officers of the Company will not be paid any
director fees. All directors will be reimbursed for their expenses in attending
Board and committee meetings.
Executive Compensation
The following table sets forth certain information regarding the
compensation for services in all capacities to the Company for the year ended
December 31, 1995 for the Chief Executive Officer of the Company and the one
other executive officer of the Company whose annual salary and bonus exceeded
$100,000 during such period (collectively, the "Named Executive Officers").
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation
-------------------------------- All Other
Name and Principal Position Salary ($) Bonus ($) Compensation ($)
--------------------------- ---------- ----------- ----------------
<S> <C> <C> <C>
Glenn R. Jones/(1)/ ................................ 0 0 0
Chairman of the Board and Chief Executive
Officer
Wallace W. Griffin/(2)/ ............................ $93,925 $60,000 $14,125/(3)/
President and Director
</TABLE>
- --------------------
(1) Mr. Jones has not received any compensation for services rendered to
the Company in the past. Mr. Jones served as an executive officer of
certain of the Company's affiliates during 1995 and 1996. The Company
expects that it will pay Mr. Jones an annual salary of $75,000 in
1997.
(2) Mr. Griffin's total compensation for services rendered to the Company
during the year ended December 31, 1995 represents an allocation of the
total compensation paid to Mr. Griffin by Jones International for this
period based upon the time he dedicated to the Company's business. Mr.
Griffin served as an executive officer of certain of the Company's
affiliates during 1995 and 1996. Subsequent to the close of this
Offering, Mr. Griffin will devote substantially all of his time to the
business of the Company. The Company expects that it will pay Mr.
Griffin an annual salary of $250,000 in 1997.
(3) Represents an allocation of amounts paid to Mr. Griffin under the Jones
Intercable Deferred Compensation Plan.
The Company expects that it will pay each of Messrs. Griffin, Wheeler,
Amos and Honiotes and Msses. Block and Garcia an annual salary and bonus in
excess of $100,000 for services rendered to the Company in 1997.
Stock Option Plan
The Company has adopted an employee stock option plan (the "Plan") that
provides for the grant of stock options and stock appreciation rights ("SARs")
to employees or individuals providing services to the Company. The Plan is
construed, interpreted and administered by the Compensation Committee (the
"Committee") of the Board of Directors. The Committee (or the Executive Stock
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Option Committee, in the case of grants of stock options or SARs to executive
officers) determines the individuals to whom options are granted, the number of
shares subject to the options, the exercise price of the options (which may be
below fair market value of the stock on the date of grant), the period over
which the options become exercisable and the term of the options. The Committee
and/or Executive Stock Option Committee has the discretion to set other terms
and provisions of stock options as it may determine from time to time, subject
only to the provisions of the Plan.
Under the Plan, the Committee and/or Executive Stock Option Committee
may grant options to purchase an aggregate of up to 1,100,000 shares of the
Company's Class A Common Stock. The number of shares available for grant of
options under the Plan and the number of shares included in each outstanding
option are subject to adjustment upon recapitalizations, stock splits or other
similar events that cause changes in the Company's Class A Common Stock. Shares
of Class A Common Stock underlying options that expire unexercised are available
for future option grants under the Plan.
The Plan provides for the grant of incentive stock options ("Incentive
Options") within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended (the "Code"), and non-statutory stock options that do not
qualify as incentive stock options under Section 422 of the Code ("Non-Qualified
Options"). Options granted may be either Incentive Options or Non-Qualified
Options or a combination of the two. The exercise price of each Incentive Option
granted must be at least equal to the fair market value of the Class A Common
Stock on the date the Incentive Option is granted. The exercise price of
Non-Qualified Options may be less than the fair market value of the Class A
Common Stock on the date the Non-Qualified Option is granted. If an Incentive
Option is granted to an employee who then owns stock possessing 10% of the total
combined voting power of all classes of stock of the Company, the exercise price
of the Incentive Option must be at least equal to 110% of the fair market value
of the Class A Common Stock on the date the Incentive Option is granted.
The maximum term of options granted under the Plan is generally ten
years, but with respect to an Incentive Option granted to an employee who then
owns stock possessing 10% of the total combined voting power of all classes of
stock of the Company, the maximum term of the option is five years. Subject to
the foregoing limitation, the Committee determines the term of the options and
the period over which they vest and become exercisable.
The Committee and/or Executive Stock Option Committee may also grant
SARs in tandem with options granted under the Plan. Each SAR entitles the
participant, upon the exercise of the SAR, to receive the excess of the fair
market value of a share of Class A Common Stock on the exercise date over the
fair market value of the share on the date the SAR was granted. An SAR is
exercisable only to the extent the associated stock option is exercisable. To
the extent the option is exercised, the accompanying SAR will cease to be
exercisable, and vice versa. An SAR may be exercised only when the market price
of Class A Common Stock subject to the option exceeds the exercise price of such
option.
Options and associated SARs are not transferable, except by will or
pursuant to the laws of descent and distribution, and are exercisable only by
the option holder during his lifetime or, in the event of disability or
incapacity, by the option holder's guardian or legal representative.
The vesting of options and associated SARs is accelerated upon a
"Change in Control" of the Company. A Change in Control is deemed to have
occurred if (a) a person (as such term is used in Section 13(d) of the Exchange
Act) becomes the beneficial owner (as defined in Rule 13d-3 under the
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Exchange Act), directly or indirectly, in one or more transactions, of shares of
Class A Common Stock and/or Class B Common Stock of the Company representing 35%
or more of the total number of votes that may be cast by all shareholders of the
Company voting as a single class, without the approval or consent of the
Company's Board of Directors, or (b) there is a consolidation or merger of the
Company in which the Company is not the surviving corporation or (c) a plan or
proposal for the liquidation or dissolution of the Company is adopted.
The Board may amend the Plan at any time or may terminate it without
the approval of the shareholders; provided, however, that shareholder approval
is required for any amendment to the Plan that increases the number of shares
for which options may be granted, materially increases the benefits accruing to
participants in the plan or materially modifies the eligibility requirements for
participation in the Plan. However, no action by the Board or shareholders may
alter or impair any option previously granted without the consent of the
optionee.
As of October 4, 1996, the Company had granted options to purchase
381,500 shares of its Class A Common Stock under the Plan. As of that date, the
Company had not granted any SARs under the Plan.
Certain Federal Income Tax Consequences. The following discussion,
which is based on the law as in effect on September 30, 1996, summarizes certain
federal income tax consequences of participation in the Plan. The summary does
not purport to cover federal employment tax or other federal tax consequences
that may be associated with the Plan, nor does it cover state, local or non-U.S.
taxes.
In general, an optionee realizes no taxable income upon the grant or
exercise of an Incentive Option. However, the exercise of an Incentive Option
may result in an alternative minimum tax liability to the optionee. With certain
exceptions, a disposition of shares purchased under an Incentive Option within
two years from the date of grant or within one year after exercise produces
ordinary income to the optionee (and a corresponding deduction is available to
the Company) equal to the value of the shares at the time of exercise less the
exercise price. Any additional gain recognized in the disposition is treated as
a capital gain for which the Company is not entitled to a deduction. If the
optionee does not dispose of the shares until after the expiration of these one-
and two-year holding periods, any gain or loss recognized upon a subsequent sale
is treated as a long-term capital gain or loss for which the Company is not
entitled to a deduction.
In general, in the case of a Non-Qualified Option, the optionee has no
taxable income at the time of grant if the option price is equal to the fair
market value of the Shares at date of grant, but realizes ordinary income in
connection with exercise of the option in an amount equal to the excess (at the
time of exercise) of the fair market value of the shares acquired upon exercise
over the option price, a corresponding deduction is available to the Company,
and upon a subsequent sale or exchange of the shares, appreciation or
depreciation after the date of exercise is treated as capital gain or loss for
which the Company is not entitled to a deduction. In general, an Incentive
Option that is exercised more than three months after termination of employment
(other than termination by reason of death) is treated as a Non-Qualified
Option. Incentive Options are also treated as Non-Qualified Options to the
extent they first become exercisable by an individual in any calendar year for
shares having a fair market value (determined as of the date of grant) in excess
of $100,000.
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The grant of SARs has no federal income tax consequences at the time of
grant. Upon the exercise of SARs, the amount received is generally taxable as
ordinary income, and the Company is entitled to a corresponding deduction.
Under the so-called "golden parachute" provisions of the Code, the
vesting or accelerated exercisability of awards in connection with a Change in
Control of the Company may be required to be valued and taken into account in
determining whether participants have received compensatory payments, contingent
on the Change in Control, in excess of certain limits. If these limits are
exceeded, a substantial portion of amounts payable to the participant, including
income recognized by reason of the grant, vesting or exercise of awards under
the Plan, may be subject to an additional 20% federal tax and may be
nondeductible to the Company.
The foregoing constitutes a brief summary of the principal federal
income tax consequences related to the grant and exercise of stock options and
SARs based on current federal income tax laws. This summary is not intended to
be exhaustive and does not describe state, local or foreign tax consequences.
Recipients of stock options or SARs under the Plan are urged to consult their
own tax advisors with respect to the consequences of their participation in the
Plan.
Employee Investment 401(k) Plan
The Company's employees are eligible to participate in an Employee
Profit Sharing/Retirement Savings Plan (the "401(k) Plan"). Under the 401(k)
Plan, eligible employees are permitted to defer receipt of up to 20% of their
monthly compensation, subject to a limit prescribed by statute. The Company
currently matches 50% of the employees' deferrals up to a maximum of 6% of their
monthly base pay. The Company's contribution vests immediately. Subject to
certain restrictions, contributions to the 401(k) Plan are invested by the
trustees of the 401(k) Plan in accordance with the directions of each
participant. All employees of the Company who earn 1,000 hours of credited
service over one year are eligible to participate in the 401(k) Plan on the
first day of the January or July next following the date that the eligibility
requirement has been met.
Participants or their beneficiaries are entitled to payment of
benefits: (i) upon retirement either at or after age 65, (ii) upon death or
disability or (iii) upon termination of employment, if the participant elects to
receive a distribution of his account balance. In addition, hardship
distributions and loans to participants from the 401(k) Plan are available under
certain circumstances. The amount of benefits ultimately payable to a
participant under the 401(k) Plan will depend on the performance of the
investments to which contributions are made on the participant's behalf. During
1995, the Company contributed approximately $55,000 to the 401(k) Plan on behalf
of its employees.
Deferred Compensation Plan
Certain of the Company's key employees are eligible to participate in a
Deferred Compensation Plan (the "Deferred Compensation Plan"). Key employees
eligible to participate in the Deferred Compensation Plan constitute a select
group of highly compensated or management personnel and are selected by the
Compensation Committee of the Company. Under the Deferred Compensation Plan, key
employees are permitted to defer receipt of 100% of their annual compensation.
The Company currently matches the key employees' deferrals up to a maximum of 6%
of their contributions. The funds are deposited with Norwest Bank Colorado, NA,
as Trustee of the Deferred Compensation Plan's Public Trust, and they are
invested in a number of pre-selected
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investment funds. Both the key employees' contributions and the Company's
contributions are at all times subject to the claims of the Company's general
creditors.
Key employees who participate in the Deferred Compensation Plan receive
a distribution of their contributions, the Company's contributions, and earnings
attributable to those contributions on their separation from employment with the
Company or their death. The Deferred Compensation Plan also permits hardship
distributions in certain circumstances. The amount of benefits ultimately
payable to a key employee participant depends upon the performance of the
investment funds held by the trust. During 1995, the Company contributed
approximately $30,000 to the Deferred Compensation Plan on behalf of its key
employees.
Compensation Committee Interlocks and Insider Participation
The Company established a Compensation Committee and an Executive
Stock Option Plan Committee in August 1996. The Compensation Committee consists
of Messrs. Jones, Malone and Vanaselja. The Executive Stock Option Committee
consists of Messrs. Malone and Vanaselja and Ms. Lawton. During 1995, the
Company's Board of Directors set the compensation of the Company's executive
officers and was comprised of, at various times, Mr. Jones, Mr. Griffin, Gregory
Liptak, Bernard J. Luskin, Reynie U. Ortiz, Donald A. Sutton and Daniel E.
Somers.
Messrs. Jones, Griffin, Liptak, Luskin, Ortiz and Sutton served as
executive officers of the Company and certain of its subsidiaries, and also
served as directors and officers of a number of the Company's affiliates during
1995. As individuals, the Company's executive officers and directors had no
reportable transactions with the Company. See "Certain Relationships and Related
Transactions" for a discussion of certain transactions between the Company and
its affiliates.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Investments and Advances by Affiliates
From the Company's inception, it has relied primarily on advances from
Jones International and Jones Intercable to fund the Company's operating and
investment activities. These advances accrue interest at the published prime
rate plus 2% (approximately 11% in 1995). The Company paid interest of
approximately $695,000, $541,000 and $1.1 million to Jones International in
1993, 1994 and 1995, respectively, in connection with these advances. The
largest total amount of outstanding advances from Jones International in 1995
was approximately $11.6 million in April 1995. At September 30, 1996, working
capital advances from Jones International totaled approximately $2.0 million.
The Company intends to repay the $1.4 million long-term portion of these
advances upon the closing of this Offering. See "Use of Proceeds." Following the
completion of this Offering, any advances from Jones International to fund the
Company's operating activities, which advances are not expected to exceed
$500,000 at any time, will bear interest at or below market rates.
In March 1996, the Company issued 144,210 shares of Class A Common
Stock and 144,210 shares of Class B Common Stock to Jones International to repay
$6.3 million owed to Jones International.
Prior to 1995, Jones Intercable advanced $20 million to the Company's
subsidiary, Mind Extension University, Inc. Prior to the conversion of the
advance into Class A Common Stock (as described below), the advance accrued
interest at Jones Intercable's weighted average cost of borrowing plus 2%
(approximately 11% in 1995). The total interest paid by the Company to Jones
Intercable on this advance totalled approximately $300,000, $2,094,000 and
$704,000 for 1993, 1994 and 1995, respectively. The largest total amount of
outstanding advances from Jones Intercable in 1995 was $20 million in April
1995. On April 10, 1995, the Company issued shares of Class A Common Stock to
Jones Intercable representing a then 16.7% interest in the Company to repay the
entire $20 million advance.
On December 20, 1994, BCI purchased an approximately 30% economic
interest in Jones Intercable. In connection with this investment, BCI also
purchased an approximately 15% economic interest in the Company for $18 million.
At that time, BCI entered into a shareholders agreement with the Company, Jones
International and Glenn R. Jones that, among other things, grants to BCI and its
affiliates certain registration rights with respect to the Company's capital
stock. See "Shares Eligible for Future Sale."
Guarantee by Affiliate
On September 30, 1996, Jones International agreed to guarantee the
Company's obligations to a media buying company with which the Company has
contracted to purchase broadcast media time. Pursuant to this agreement, Jones
International guaranteed to the media buying company the payment of any sum of
money that the Company shall owe to the media buying company as a result of its
purchase of broadcast time for the Company's advertisements and promotions
during the fourth calendar quarter of 1996 in an amount not to exceed $1.2
million. This guarantee is terminable upon notice to the media buying company by
Jones International, with such termination effective only as to obligations
incurred by the Company subsequent to such notice. Jones International is under
no obligation to make additional guarantees on behalf of the Company in the
future.
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Tax Sharing Agreement
The Company joined in filing a consolidated tax return for 1993 and
1994 as provided for under the terms of a tax allocation agreement with Jones
International and certain of Jones International's subsidiaries. Pursuant to the
terms of the tax allocation agreement, tax provisions (benefits) were allocated
to the members of the tax sharing group based on their pro rata contribution of
taxable income (loss) to Jones International's consolidated taxable income
(loss).
In 1993 and 1994, the Company recognized income tax benefits as a
result of the tax sharing arrangement of approximately $408,000 and $1,801,000,
respectively. No current income tax benefit was recognized by the Company in
1995 or as of September 30, 1996, as the Company fell out of the Jones
International tax sharing agreement in December 1994 when the Company no longer
met the 80% ownership requirement for inclusion in the tax sharing group.
Loans to Affiliates
In April 1996, the Company and its subsidiary, Mind Extension
University, Inc., each agreed to loan $166,667 (for a total of $333,334) to The
International Community College ("ICC"), a non-profit entity of which the
Company and Mind Extension University, Inc. are members. Interest accrues on
these loans at the rate of 10% per annum. The loans provide that ICC will make
quarterly principal and interest payments of $41,667 to each of the Company and
Mind Extension University, Inc. beginning on July 1, 2000 and ending on April 1,
2002. In July 1995, the Company advanced $50,000 of the $166,667. In December
1995, Mind Extension University, Inc. advanced $50,000 of the $166,667. In
February 1996, the Company and Mind Extension University, Inc. each funded ICC
with an additional $75,000 on the same terms and conditions as described above.
At September 30, 1996, a total of $250,000 was outstanding under these loans.
Sales Commissions
Jones International Networks, Ltd. ("JIN"), a subsidiary of Jones
International, earns a three percent commission on the sale of airtime for
informational programming to third parties. JEC Knowledge TV and Jones Computer
Network paid commissions to JIN totaling approximately $52,000 for 1995.
Affiliate Fees
The Company sells its programming to certain cable television systems
owned and managed by Jones Intercable. In 1993, 1994 and 1995, these systems
paid total subscriber license fees to JEC Knowledge TV of approximately
$417,000, $640,000, $861,000, respectively. In 1994 and 1995, these systems paid
total subscriber license fees to Jones Computer Network of approximately
$237,000 and $1.1 million, respectively.
Transponder Agreements
Jones Satellite Holdings, Inc. ("Satellite Holdings"), a wholly-owned
subsidiary of Mind Extension University, Inc., began subleasing to Jones
Galactic Radio, Inc. ("Galactic Radio"), an affiliate of the Company, an audio
channel on a non-preemptible satellite transponder on the Galaxy V
communications satellite for approximately $58,000 per month in January 1995.
Satellite Holdings has the right to
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terminate the sublease prior to its May 2004 expiration date upon 30-days
written notice. Satellite Holdings leases the transponder from a third party
pursuant to a lease that terminates in 2004. Satellite Holdings received lease
payments from Galactic Radio of approximately $696,000 for the year ended
December 31, 1995.
In fiscal 1994, Jones Computer Network entered into a lease agreement
with Jones Space Segment, Inc. ("Space Segment"), a subsidiary of Jones
International, to sublease from Space Segment a non- preemptible transponder on
a domestic communications satellite that is currently leased by Space Segment
from a third party. Under the terms of the agreement, Space Segment has the
right to terminate the license at any time upon 30 days written notice to Jones
Computer Network. The monthly lease payments may be adjusted periodically
through the December 2004 agreement expiration date based on the number of
customers using the transponder. Jones Computer Network made lease payments to
Space Segment of approximately $267,000 and $1.2 million in 1994 and 1995,
respectively.
Uplinking and Other Services
Jones Earth Segment, Inc. ("Earth Segment"), a subsidiary of Jones
International, provides playback, editing, duplicating and uplinking services to
the Company pursuant to an agreement that terminates on December 31, 2004. Earth
Segment has the right to terminate this agreement upon 30-days written notice.
The Company paid Earth Segment approximately $1.0 million, $1.4 million and $1.9
million for these services in 1993, 1994 and 1995, respectively.
Programming
Jones Digital Century, Inc. ("JDC"), a subsidiary of Jones Interactive,
Inc., provides program production services to the Company. The Company paid
approximately $1.1 million to JDC for programming in 1995.
The Mind Extension Institute, Inc. ("MEI"), a subsidiary of the
Company, provides cable-related instructional videos and other training
materials to MSOs, including Jones Intercable and its affiliates. In 1993, 1994
and 1995, MEI charged Jones Intercable and its affiliates approximately $13,000,
$252,000 and $39,000, respectively, for these materials.
Computer Services
Jones Interactive, Inc. ("JII"), a wholly-owned subsidiary of Jones
International, provides computer hardware and software services and
miscellaneous related support services to the Company. The Company paid JII
approximately $236,000, $449,000 and $895,000 for these services in 1993, 1994
and 1995, respectively.
Office Lease
The Company subleases office space in Englewood, Colorado from
affiliates of Jones International. This sublease, as amended, has a 15-year
term, expiring July 2000, with three five-year renewal options. The Company paid
rent and associated expenses of approximately $211,000, $196,000 and $373,000 to
these affiliates in 1993, 1994 and 1995, respectively.
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Administrative Services
The Company also reimburses Jones International and Jones Intercable
for certain administrative services provided by these companies, such as legal,
accounting, purchasing and human resources services. Jones International and
Jones Intercable charge the Company for these services based upon an allocation
of its personnel expenses associated with providing these services. These
allocated expenses totaled approximately $70,000, $92,000 and $119,000 in 1993,
1994 and 1995, respectively.
Loan to Mr. Amos
In February 1996, the Company made a $77,000 interest-free bridge loan
to Paul R. Amos, the Vice President/International Business Development and a
Director of the Company, in connection with Mr. Amos' employment and to
facilitate his relocation to the Company's Englewood, Colorado headquarters. The
loan is repayable out of the proceeds from the sale of Mr. Amos' former
residence.
In the foregoing transactions no third party bids or appraisals were
obtained. In addition, certain of these transactions are by their nature unique
to the companies involved. Accordingly, no assurance can be given that these
transactions were generally as favorable to the Company as could have been
obtained from unaffiliated third parties. All of the transactions described
above, other than the advances from Jones Intercable and from Jones
International and the investment by BCI, are expected to continue during the
current fiscal year and additional agreements and transactions with affiliated
parties may be arranged in the future.
In addition, Messrs. Jones and Griffin and Msses. Steele and Garcia,
officers and/or directors of the Company, are also officers or directors of
these affiliated entities and, from time to time, the Company may enter into
transactions with these entities. Consequently, such officers and directors may
have conflicts of interest with respect to matters potentially or actually
involving or affecting the Company and such affiliates. In addition, such
directors and/or officers may have such conflicts of interest with respect to
corporate opportunities suitable for both the Company and such affiliates.
Neither the Company nor its Board of Directors has established any corporate
policy to resolve such potential conflicts of interest between the Company and
its affiliates.
Under the Colorado Business Corporation Act, as amended (the "Colorado
Act"), no conflicting interests transaction shall be void or voidable or give
rise to an award of damages in a proceeding by a shareholder or by or in the
right of the corporation, solely because the conflicting interest transaction
involves a director of the corporation or an entity in which a director of a
corporation is a director or officer or has a financial interest or solely
because the director is present at or participates in the meeting of the
corporation's Board of Directors or of a committee of the Board of Directors
which authorizes, approves, or ratifies the conflicting interest transaction or
solely because the directors' vote is counted for such purpose, if: (i) the
material facts as to the directors relationship or interest and as to the
conflicting interest transaction are disclosed or known to the Board of
Directors or the committee and said Board of Directors or committee authorizes,
approves, or ratifies in good faith the conflicting interest transaction, (ii)
the material facts as to the director's relationship or interest and as to the
conflicting interest transaction are disclosed or known to the shareholder
entitled to vote thereon and said shareholders specifically authorize, approve,
or ratify in good faith the conflicting interest transaction or (iii) the
conflicting interest transaction is fair as to the corporation.
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Conflicts of interest also may arise in managing the operations of more
than one entity with respect to allocating time, personnel and other resources
between entities. To the extent deemed appropriate by the Company, such
conflicts would be resolved by employing additional personnel as necessary. See
"Risk Factors - Conflicts of Interest; Transactions with and Reliance on
Affiliates."
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PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Class A Common Stock and Class B Common Stock as of
December 19, 1996 and as adjusted to reflect the sale of shares offered hereby,
by: (i) each Selling Shareholder, (ii) each person known by the Company to be
the beneficial owner of more than 5% of the Class A Common Stock or Class B
Common Stock, (iii) certain of the Company's directors, (iv) certain of the
Named Executive Officers and (v) all directors and executive officers of the
Company as a group. Ms. Lawton and Messrs. Malone, Vanaselja, Griffin, Wheeler
and Amos, directors and/or officers of the Company, do not beneficially own any
shares of Class A Common Stock or Class B Common Stock and have therefore been
omitted from the following table. Except as otherwise indicated, each person
named in the table below has informed the Company that such person has sole
voting and investment power with respect to all shares beneficially owned by it.
<TABLE>
<CAPTION>
Class A Common Stock Class B Common Stock
--------------------------------------------------------- Owned Before and
Owned Before Offering Owned After Offering After Offering Percent of
--------------------- -------------------- ------------------- Vote of All Classes
Number Shares Sold Number Number of Common Stock
Beneficial Owner of Shares Percent In Offering of Shares Percent of Shares Percent After Offering
- ---------------- --------- ------- ----------- --------- ------- --------- ------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Glenn R. Jones/(1)/ 3,005,325 81.4% 944,735 2,060,590 21.7% 2,089,620 100.0% 75.5%
Bell Canada International 686,850 18.6 155,265 531,585 5.6 -- -- 1.8%
BVI III Limited/(2)/
All executive officers 3,005,325 81.4% 944,735 2,060,590 21.7% 2,089,620 100.0% 75.5%
and directors as a group
(12 person(s))/(3)/
</TABLE>
- --------------------
(1) Glenn R. Jones is the Chairman of the Board of Directors and Chief
Executive Officer of Jones International and owns all of the outstanding
shares of Jones International and is therefore deemed to be the beneficial
owner of all 2,759,655 shares of Class A Common Stock and all 1,843,950
shares of Class B Common Stock currently owned by Jones International. Mr.
Jones is also the Chairman of the Board of Directors and Chief Executive
Officer of Jones Intercable and beneficially owns shares of the common
stock of Jones Intercable entitling him to cast 41% of the votes to be cast
on all matters put to a vote of Jones Intercable's shareholders voting as a
single class. He therefore may be deemed to be the beneficial owner of all
915,705 shares of Class A Common Stock currently held by Jones Intercable.
Share amounts shown do not include shares beneficially owned by BCI, of
which Mr. Jones is a director. Mr. Jones disclaims beneficial ownership of
such shares. Glenn R. Jones', Jones International's and Jones Intercable's
address is 9697 East Mineral Avenue, Englewood, Colorado 80112.
(2) Bell Canada International BVI III Limited ("Limited") is a wholly-owned
subsidiary of BCI. As a result, BCI may be deemed to beneficially own all
686,850 shares of Class A Common Stock owned by Limited. Mr. Vanaselja, a
director of the Company and an executive officer of BCI, disclaims
beneficial ownership of such shares. BCI's address is 1000 rue de La
Gauchetiere Ouest, Bureau 1100, Montreal, Quebec, Canada H3B 4Y8.
(3) Consists solely of shares beneficially owned by Glenn R. Jones.
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DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 100,000,000 shares of
Class A Common Stock, $.01 par value per share, of which 3,692,175 shares were
outstanding on September 30, 1996, and 2,089,620 shares of Class B Common Stock,
$.01 par value per share, of which 2,089,620 shares were outstanding on such
date.
Common Stock
Under the Company's articles of incorporation, the holders of the Class A
Common Stock and Class B Common Stock are entitled to vote as separate classes
with respect to those matters requiring a class vote under Colorado law, such as
certain amendments to the Company's articles of incorporation which affect a
class and certain mergers or share exchanges. On all matters requiring a class
vote under the Colorado Act, passage will require the affirmative vote of the
holders of two-thirds of the shares of each class, voting separately, and of the
total shares entitled to vote thereon.
Holders of Class A Common Stock and Class B Common Stock are entitled to
share ratably in all dividends (whether paid in cash, property or shares of the
Company), if declared by the Company's Board of Directors out of any funds
legally available therefor and in assets available for distribution upon any
liquidation of the Company, subject to the prior rights of creditors. The
Company does not currently anticipate paying any dividends. See "Dividend
Policy."
The shares of Common Stock are not subject to redemption or to any
liability for further calls or assessments, and the holders of such shares do
not have preemptive or other rights to subscribe for additional shares of the
Company or any rights to convert such shares into any other securities of the
Company.
Class A Common Stock
Each share of Class A Common Stock casts one-tenth of a vote on all matters
put to a vote of the shareholders. On all matters except for the election of
directors or as otherwise required by law, the holders of Class A Common Stock
and Class B Common Stock vote together as a single class. As long as the Class A
Common Stock constitutes more than 10% of the issued and outstanding shares of
Common Stock, the holders of Class A Common Stock, voting as a separate class,
are entitled to elect that number of directors that constitute 25% percent of
the total membership of the Board of Directors (if such number of directors is
not a whole number, the holders of the Class A Common Stock are entitled to
elect the nearest higher whole number of directors that constitute at least 25%
of the Board of Directors). Holders of the Class A Common Stock are not entitled
to cumulate their votes in the election of directors. Directors elected by the
Class A Common Stock may be removed from office, with or without cause, only by
the holders of the Class A Common Stock. Any vacancies on the Board of Directors
may be filled by the remaining directors, regardless of which class of Common
Stock elected the director whose directorship has been vacated.
Upon the completion of this Offering, the outstanding shares of Class A
Common Stock will constitute approximately 82% of the total outstanding shares
of capital stock of the Company and will be entitled to cast approximately 31%
of the votes to be cast in matters to be acted upon by shareholders of the
Company not requiring a class vote.
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Class B Common Stock
Each share of Class B Common Stock casts one vote on all matters put to a
vote of the shareholders. On all matters except for the election of directors or
as otherwise required by law, the holders of Class A Common Stock and Class B
Common Stock vote together as a single class. In the election of directors, the
holders of Class B Common Stock, voting as a separate class, are entitled to
elect all of the directors not specially entitled to be elected by the holders
of the Class A Common Stock. Holders of the Class B Common Stock are not
entitled to cumulate their votes in the election of directors. Directors elected
by the Class B Common Stock may be removed from office, with or without cause,
only by the holders of the Class B Common Stock. Any vacancies on the Board of
Directors may be filled by the remaining directors, regardless of which class of
Common Stock elected the director whose directorship has been vacated.
Upon the completion of this Offering, the outstanding shares of Class B
Common Stock will constitute approximately 18% of the total outstanding shares
of capital stock of the Company and will be entitled to cast approximately 69%
of the votes to be cast in matters to be acted upon by shareholders of the
Company not requiring a class vote.
Certain Provisions of the Articles of Incorporation
In accordance with the Colorado Act, the Company's articles of
incorporation eliminate in certain circumstances the liability of directors of
the Company for monetary damages for breach of their fiduciary duty as
directors. This provision does not eliminate the liability of a director (i) for
a breach of the director's duty of loyalty to the Company or its shareholders,
(ii) for acts or omissions by the director not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) for a willful or
negligent declaration of an unlawful distribution or (iv) for transactions from
which the director derived an improper personal benefit.
The Company's articles of incorporation also provide that the Company shall
indemnify any person and his or her estate and personal representatives against
all liability and expense incurred by reason of the person being or having been
a director or officer of the Company or, while serving as a director or officer
of the Company, is or was serving at the request of the Company or any of its
subsidiaries as a director, an officer, an agent, an associate, an employee, a
fiduciary, a manager, a member, a partner, a promoter, or a trustee of, or to
hold any similar position with, another domestic or foreign corporation or other
individual or entity or of an employee benefit plan, to the full extent
permitted under the Colorado Act. The Colorado Act requires a corporation to
indemnify its officers and directors against reasonable expenses incurred in any
proceeding to which the officer or director is a party and was wholly
successful, on the merits or otherwise, in defense of the proceeding. In
addition to this mandatory indemnification, the Colorado Act provides that a
corporation may indemnify its officers and directors against liability and
reasonable expenses if the officer or director acted in good faith and in a
manner reasonably relieved to be in the best interests of the corporation in the
case of conduct in an official capacity, in a manner he or she reasonably
believed was at least not opposed to the corporation's best interests in all
other cases, or in a manner he or she had no reasonable cause to believe was
unlawful in the case of criminal proceedings. In actions by or in the name of
the corporation, the Colorado Act provides the same standard but limits
indemnification to reasonable expenses incurred by the director and prohibits
any indemnification if the director was adjudged liable to the corporation. The
Colorado Act also prohibits indemnification of a director in connection with
actions charging improper personal benefit to the director if the director is
adjudged liable on that basis.
-65-
<PAGE>
Certain provisions of the Company's articles of incorporation and bylaws
may have the effect of preventing, discouraging or delaying any change in the
control of the Company and may maintain the incumbency of the Board of Directors
and management. Under the Company's articles of incorporation, a majority of the
directors then in office, though less than a quorum, or the sole remaining
director, will be empowered to fill any vacancy on the Board of Directors. A
two-thirds vote of the Common Stock will be required to alter, amend or repeal
the foregoing provisions. This provision for filling vacancies on the Board of
Directors may discourage a third party from attempting to gain control of the
Company and may maintain the incumbency of the Board of Directors. The Company
is not aware of any plans by a third party to seek control of the Company. See
"Risk Factors - Anti-Takeover Effects; Potential Unfavorable Treatment in
Takeover."
Transfer Agent and Registrar
The transfer agent and registrar for the Class A Common Stock will be
American Securities Transfer & Trust, Incorporated, Denver, Colorado.
-66-
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have outstanding
9,492,175 shares (10,527,175 shares if the Underwriters' over-allotment option
is exercised in full) of Class A Common Stock. Of these shares, all 6,900,000
shares (7,935,000 shares if the Underwriters' over-allotment option is exercised
in full) sold by the Company in this Offering will be freely transferable by
persons other than "affiliates" of the Company without restriction under the
Securities Act.
The remaining 2,592,175 shares of Class A Common Stock outstanding will be
held by affiliates of the Company and will be "restricted securities" within the
meaning of Rule 144 under the Securities Act and may not be sold in the absence
of registration under the Securities Act unless an exemption from registration
is available, including the exemption contained in Rule 144. The Company and its
shareholders, officers and directors have agreed not to publicly offer to sell,
sell, contract to sell or otherwise publicly dispose of such shares for at least
180 days after the date of this Prospectus without the prior written consent of
Montgomery Securities. The Company understands that Montgomery Securities may,
in its discretion, waive these agreements at any time. Following the expiration
of such lock-up agreements, 2,592,175 shares will become available for resale in
the public market, all of which are subject to the volume limitations, holding
period and other restrictions of Rule 144.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned his or her shares of
Class A Common Stock for at least two years, including an "affiliate" of the
Company (as that term is defined under the Securities Act), is entitled to sell,
within any three-month period, a number of shares that does not exceed the
greater of (i) 1% of the then outstanding shares of Class A Common Stock of the
Company or (ii) the average weekly trading volume of the then outstanding shares
of Class A Common Stock during the four calendar weeks preceding each such sale.
A person (or persons whose shares are aggregated) who is not deemed an
"affiliate" of the Company and who has beneficially owned shares for at least
three years is entitled to sell such shares under Rule 144 without regard to the
volume limitations described above. Affiliates, including members of the
Company's Board of Directors and executive officers, continue to be subject to
such limitations.
In connection with BCI's acquisition of a then 15% equity interest in the
Company in December 1994, BCI entered into a Shareholders Agreement, dated as of
December 20, 1994, with Glenn R. Jones, Jones International and the Company (the
"Shareholders Agreement") that, among other things, grants to BCI and certain of
its affiliates (the "BCI Holders") certain registration rights with respect to
the Company's capital stock. On August 7, 1996, Mr. Jones and Jones
International (collectively, the "Jones Holders") and the Company entered into a
Registration Rights Agreement on substantially the same terms and conditions as
the registration rights granted to the BCI Holders under the Shareholders
Agreement. Pursuant to such registration rights, each of the BCI Holders and the
Jones Holders have the right to demand, up to three times, that the Company file
a registration statement with the Commission to register the sale of their
shares of the Company's capital stock and to piggy-back, an unlimited number of
times, on certain other registration statements filed by the Company. The Jones
Holders and the BCI Holders may demand that the Company register shares of its
capital stock owned by them no more than once every nine months. The Jones
Holders' and BCI Holders' registration rights terminate five years after the
effective date of the registration statement for this Offering. The Jones
Holders and the BCI Holders have exercised their piggyback registration rights
in connection with this Offering.
-67-
<PAGE>
As compensation for services rendered in connection with this Offering, the
Company has agreed to grant a warrant to M. Kane & Company, Inc. ("MKC") to
purchase 28,750 shares (33,063 shares if the Underwriters' over-allotment option
is exercised in full) of the Class A Common Stock at an exercise price equal to
120% of the initial public offering price. In connection with the warrant, MKC
also received certain registration rights relating to the shares of Class A
Common Stock underlying the warrant. See "Underwriting."
Additionally, as of December 19, 1996, 1,100,000 shares of Class A Common
Stock were reserved for issuance under the Company's Stock Option Plan. As of
that date, the Company had granted options to purchase 381,500 shares of its
Class A Common Stock under the Stock Option Plan.
Prior to this Offering, there has been no market for the Class A Common
Stock of the Company, and the amount, timing and nature of any future sale of
Class A Common Stock will depend upon market conditions, the personal
circumstances of the sellers and other factors. No predictions can be made as to
the effect, if any, that public sales of shares or the availability of shares
for sale will have on the market price prevailing from time to time.
Nevertheless, sales of substantial amounts of the Class A Common Stock in the
public market, pursuant to Rule 144 or otherwise, or the perception that such
sales could occur, could have an adverse impact on the market price of the Class
A Common Stock and the Company's ability to obtain additional equity financing.
See "Risk Factors - Shares Eligible for Future Sale."
-68-
<PAGE>
UNDERWRITING
The underwriters named below (the "Underwriters"), represented by
Montgomery Securities, Piper Jaffray Inc. and MKC (the "Representatives"), have
severally agreed, subject to the terms and conditions set forth in the
Underwriting Agreement, to purchase from the Company and the Selling
Shareholders the number of shares of Class A Common Stock indicated below
opposite their respective names at the initial public offering price less the
underwriting discount set forth on the cover page of this Prospectus. The
Underwriting Agreement provides that the obligations of the Underwriters are
subject to certain conditions precedent and that the Underwriters are committed
to purchase all of such shares if they purchase any.
Underwriters Number of Shares
------------ ----------------
Montgomery Securities ...................................
Piper Jaffray Inc........................................
M. Kane & Company, Inc...................................
---------
Total.............................................. 6,900,000
=========
The Representatives have advised the Company and the Selling Shareholders
that the Underwriters initially propose to offer Class A Common Stock to the
public on the terms set forth on the cover page of this Prospectus. The
Underwriters may allow to selected dealers a concession of not more than $ per
share; and the Underwriters may allow, and such dealers may reallow, a
concession of not more than $ per share to certain other dealers. After the
initial public offering, the offering price and other selling terms may be
changed by the Representatives. The Class A Common Stock is offered subject to
receipt and acceptance by the Underwriters, and to certain other conditions,
including the right to reject orders in whole or in part. Montgomery Securities
and Piper Jaffray Inc. have advised the Company that they intend to make a
market in the Class A Common Stock after the consummation of this Offering.
The Company and the Selling Shareholders have granted an option to the
Underwriters, exercisable during the 30-day period after the date of this
Prospectus, to purchase up to a maximum of 870,000 and 165,000 additional shares
of Class A Common Stock, respectively, to cover over-allotments, if any, at the
same price per share as the initial 6,900,000 shares to be purchased by the
Underwriters. To the extent that the Underwriters exercise this option, each of
the Underwriters will be committed, subject to certain conditions, to purchase
such additional shares in approximately the same proportion as set forth in the
above table. The Underwriters may purchase such shares only to cover over-
allotments made in connection with this Offering.
Each director and executive officer of the Company, the Selling
Shareholders and certain other holders of Class A Common Stock have agreed,
subject to certain limited exceptions, not to publicly sell or offer to sell or
otherwise publicly dispose of any shares of Class A Common Stock currently held
by them, any right to acquire any shares of Class A Common Stock or any
securities exercisable for or convertible into any shares of Class A Common
Stock for a period of 180 days after the date of this Prospectus without the
prior written consent of Montgomery Securities. Montgomery Securities may, in
its sole discretion and at any time without notice, release all or any portion
of the securities subject to these lock-up agreements.
-69-
<PAGE>
The Underwriting Agreement provides that the Company and the Selling
Shareholders will severally indemnify the Underwriters and their controlling
persons against certain liabilities, including civil liabilities under the
Securities Act, or will contribute to payments the Underwriters may be required
to make in respect thereof.
The Representatives have advised the Company that the Underwriters do not
intend to confirm sales to any accounts over which they exercise discretionary
authority in excess of 5% of the number of shares of Class A Common Stock
offered hereby.
On May 29, 1996, the Company and MKC entered into an agreement pursuant to
which MKC agreed to provide financial advice and assistance to the Company about
strategic alternatives, including financial structuring and valuation-related
analyses, and in the event that the Company elected to execute an initial public
offering, to assist the Company with its structure and conduct. In consideration
for such services, MKC has received a $250,000 fee and, beginning as of June
1996, a retainer of $20,000 per month. MKC is also entitled to advisory fees
equal to 1.875% of the gross proceeds of this Offering, which fees are estimated
to be $2.0 million and will be offset by any fees previously paid by the Company
to MKC. MKC will also receive the MKC Warrant. In addition, the Company is
required to reimburse MKC for its reasonable out-of-pocket fees and expenses.
The agreement will terminate upon the closing of this Offering.
The Company has also agreed to issue to MKC the MKC Warrant which grants
the right for five years to purchase 28,750 shares (33,063 shares if the
Underwriters' over-allotment option is exercised) of the Class A Common Stock at
an exercise price equal to 120% of the initial public offering price set forth
on the cover page of this Prospectus. The MKC Warrant will be exercisable one
year after the effective date of the Registration Statement relating to this
Offering and carries one demand and unlimited "piggyback" registration rights.
The MKC Warrant is not transferable (except to certain employees and affiliates
of MKC). The exercise price and the number of shares may, under certain
circumstances, be subject to adjustment pursuant to anti-dilution provisions.
MKC was first registered as a broker-dealer in July 1994. Its president, Michael
W. Kane, previously worked as an investment banker on underwritten public
offerings.
Prior to this offering, there has been no public market for the Class A
Common Stock. Consequently, the initial public offering price will be determined
through negotiations among the Company, the Selling Shareholders and the
Representatives. Among the factors considered in such negotiations will be the
history of, and prospects for, the Company and the industry in which it
competes, an assessment of the Company's management, the Company's past and
present operations and financial performance, its past and present earnings and
the trend of such earnings, the prospects for future earnings of the Company,
the present state of the Company's development, the general condition of the
securities markets at the time of this Offering and the market prices of
publicly traded common stocks of comparable companies in recent periods.
-70-
<PAGE>
LEGAL MATTERS
The validity of the Common Stock being offered hereby will be passed upon
for the Company by Davis, Graham & Stubbs LLP, Denver, Colorado. Certain legal
matters will be passed upon for the Underwriters by Locke Purnell Rain Harrell
(A Professional Corporation), Dallas, Texas.
EXPERTS
The financial statements of the Company at December 31, 1995 and 1994, and
for each of the three years in the period ended December 31, 1995, appearing in
this Prospectus and the Registration Statement to the extent and for the periods
indicated in their report have been audited by Arthur Andersen LLP, independent
public accountants, as set forth in their report thereon appearing elsewhere
herein and in the Registration Statement, and are included herein in reliance
upon the authority of said firm as experts in accounting and auditing in giving
said report.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (including all amendments
thereto, the "Registration Statement") under the Securities Act with respect to
the shares of Class A Common Stock offered hereby. As permitted by the rules and
regulations of the Commission, this Prospectus, which constitutes a part of the
Registration Statement, does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto. Statements
contained in this Prospectus as to the contents of any agreement or other
document referred to are not necessarily complete. With respect to each such
agreement or other document filed as an exhibit to the Registration Statement,
reference is made to the exhibit for a more complete description of the matter
involved, and each such statement shall be deemed qualified in all respects by
such reference.
The Registration Statement, including the exhibits and schedules thereto,
may be inspected at the public reference facilities maintained by the Commission
at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549
and at the following regional offices of the Commission: Seven World Trade
Center, New York, New York 10048, and 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such materials may be obtained from the
public reference section of the Commission at its Washington, D.C. address upon
payment of the prescribed fees. The Commission also maintains a World Wide Web
site that contains reports, proxy statements and information statements of
registrants (including the Company) that file electronically with the Commission
at http://www.sec.gov.
Upon completion of this Offering, the Company will be subject to the
informational reporting requirements of the Securities Exchange Act of 1934, as
amended, and in accordance therewith will file reports, proxy statements and
other information with the Commission.
The Company intends to furnish its shareholders with annual reports
containing audited financial statements and a report of independent certified
public accountants. The Company will make available quarterly reports for each
of the first three quarters of each fiscal year containing unaudited summary
financial information.
-71-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
Jones Education Company and Subsidiaries Consolidated Financial Statements
- --------------------------------------------------------------------------
<S> <C>
Report of Independent Public Accountants............................................... F-2
Consolidated Balance Sheets as of December 31, 1994 and 1995 and September 30, 1996.... F-3
Consolidated Statements of Operations for the Three Years Ended
December 31, 1995, and the Nine Month Periods Ended September 30, 1995 and 1996........ F-5
Consolidated Statements of Shareholders' Investment for the Three Years
Ended December 31, 1995, and the Nine Month Period Ended September 30, 1996........... F-6
Consolidated Statements of Cash Flows for the Three Years Ended December 31,
1995, and the Nine Month Periods Ended September 30, 1995 and 1996.................... F-7
Notes to Consolidated Financial Statements............................................. F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Jones Education Company:
We have audited the accompanying consolidated balance sheets of Jones
Education Company (a Colorado corporation) and subsidiaries (collectively, "the
Company") as of December 31, 1994 and 1995, and the related consolidated
statements of operations, shareholders' investment and cash flows for each of
the three years in the period ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 1994 and 1995, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1995 in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado
August 21, 1996
F-2
<PAGE>
JONES EDUCATION COMPANY AND SUBSIDIARIES
----------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
<TABLE>
<CAPTION>
ASSETS
------
December 31, December 31, September 30,
1994 1995 1996
-------------- -------------- --------------
(unaudited)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 8,258,040 $ 6,362,420 $ 3,069,974
Short term investments 10,000,000 - 1,051,875
Accounts receivable, net of allowance
for doubtful accounts of $397,685,
$199,160, and $157,194, respectively 3,749,917 2,957,619 3,198,334
Inventory 442,676 585,985 615,493
Other current assets 617,516 298,954 384,588
----------- ----------- -----------
Total Current Assets 23,068,149 10,204,978 8,320,264
----------- ----------- -----------
PROPERTY AND EQUIPMENT:
Furniture, fixtures and equipment 1,368,812 1,821,453 2,039,622
Leasehold improvements 65,432 122,921 310,539
----------- ----------- -----------
1,434,244 1,944,374 2,350,161
Less - accumulated depreciation
and amortization (543,227) (751,840) (1,002,901)
----------- ----------- -----------
Net Property and Equipment 891,017 1,192,534 1,347,260
----------- ----------- -----------
INVESTMENT IN PRODUCTIONS (Note 2):
Investment in productions 1,004,763 1,254,635 1,371,775
Less - accumulated amortization (385,971) (757,434) (976,205)
----------- ----------- -----------
Net Investment in Productions 618,792 497,201 395,570
----------- ----------- -----------
OTHER ASSETS:
Notes receivable from affiliate (Note 6) - 100,000 250,000
Other 188,408 70,192 697,054
----------- ----------- -----------
Total Other Assets 188,408 170,192 947,054
----------- ----------- -----------
Total Assets $24,766,366 $12,064,905 $11,010,148
=========== =========== ===========
</TABLE>
The accompanying notes to financial statements are
an integral part of these consolidated balance sheets.
F-3
<PAGE>
JONES EDUCATION COMPANY AND SUBSIDIARIES
----------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
LIABILITIES AND SHAREHOLDERS' INVESTMENT
----------------------------------------
<TABLE>
<CAPTION>
December 31, December 31, September 30,
1994 1995 1996
-------------- -------------- --------------
(unaudited)
<S> <C> <C> <C>
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 340,934 $ 1,461,774 $ 1,348,044
Accounts payable--Jones International,
Ltd. (Note 4) - - 2,012,182
Accrued tuition (Note 2) 410,152 383,179 402,910
Deferred revenue (Note 2) 1,153,230 457,551 725,606
Other - 114,227 200,580
------------ ------------ ------------
Total Current Liabilities 1,904,316 2,416,731 4,689,322
------------ ------------ ------------
ADVANCES FROM JONES
INTERNATIONAL, LTD. (Note 4) 6,680,032 6,768,894 1,400,000
------------ ------------ ------------
LONG-TERM DEBT AND
CAPITAL LEASES (Note 1) 20,012,621 - -
------------ ------------ ------------
MINORITY INTERESTS - - 499,288
------------ ------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 8)
SHAREHOLDERS' INVESTMENT (Note 5):
Class A Common Stock; $.01 par value;
100,000,000 shares authorized; 2,632,260, 3,547,965
and 3,692,175 shares issued and outstanding,
respectively 26,323 35,480 36,922
Class B Common Stock; $.01 par value;
2,089,620 shares authorized; 1,945,410, 1,945,410
and 2,089,620 shares issued and outstanding,
respectively 19,454 19,454 20,896
Additional paid-in capital 27,228,480 47,294,323 41,110,782
Accumulated deficit (Note 2) (31,104,860) (44,469,977) (36,747,062)
----------- ------------ ------------
Total Shareholders' Investment (3,830,603) 2,879,280 4,421,538
------------ ------------ ------------
Total Liabilities and
Shareholders' Investment $ 24,766,366 $ 12,064,905 $ 11,010,148
============ ============ ============
</TABLE>
The accompanying notes to financial statements are an
integral part of these consolidated balance sheets.
F-4
<PAGE>
JONES EDUCATION COMPANY AND SUBSIDIARIES
----------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
<TABLE>
<CAPTION>
For the Years Ended For the Nine Months
December 31, Ended September 30,
---------------------------------------- ---------------------------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
REVENUES:
Network revenue--
Advertising revenue $ 542,716 $ 3,423,587 $ 5,397,013 $ 3,396,525 $ 6,710,708
------------ ------------ ------------ ------------ -----------
Licensing revenue--
Non-affiliated entities 2,635,004 3,070,734 4,103,593 3,164,886 3,468,630
Affiliated entities 416,740 877,271 2,686,090 1,976,775 2,201,949
------------ ------------ ------------ ------------ -----------
Total licensing revenue 3,051,744 3,948,005 6,789,683 5,141,661 5,670,579
------------ ------------ ------------ ------------ -----------
Total network revenue 3,594,460 7,371,592 12,186,696 8,538,186 12,381,287
Education products and services revenue 2,478,879 2,601,785 3,724,757 2,773,135 3,212,570
------------ ------------ ------------ ------------ -----------
Total revenues 6,073,339 9,973,377 15,911,453 11,311,321 15,593,857
------------ ------------ ------------ ------------ -----------
OPERATING EXPENSES:
Network expense--
Non-affiliated entities 3,846,013 4,860,812 6,868,786 5,340,294 5,554,999
Affiliated entities 1,041,894 1,675,804 4,174,761 3,252,981 3,843,574
------------ ------------ ------------ ------------ -----------
Total network expense 4,887,907 6,536,616 11,043,547 8,593,275 9,398,573
Education products and services expense 1,860,216 2,299,461 5,231,220 4,210,354 4,029,642
Selling and marketing expense 4,379,072 5,321,710 5,617,969 4,289,068 2,832,246
General and administrative expense 5,005,943 6,047,707 6,326,717 4,719,484 3,482,900
------------ ------------ ------------ ------------ -----------
Total operating expenses 16,133,138 20,205,494 28,219,453 21,812,181 19,743,361
------------ ------------ ------------ ------------ -----------
OPERATING LOSS (10,059,799) (10,232,117) (12,308,000) (10,500,860) (4,149,504)
------------ ------------ ------------ ------------ -----------
OTHER INCOME (EXPENSE):
Interest income 26,852 130,486 869,512 756,189 279,790
Interest expense - affiliated entities (994,507) (2,634,670) (1,851,541) (1,631,049) (326,025)
Equity in loss of affiliated entity - - (72,845) - (114,301)
Other, net 891,956 (93,925) (2,243) (2,764) (4,664)
------------ ------------ ------------ ------------ -----------
Total other expense, net (75,699) (2,598,109) (1,057,117) (877,624) (165,200)
------------ ------------ ------------ ------------ -----------
Loss before income tax benefit and
minority interests (10,135,498) (12,830,226) (13,365,117) (11,378,484) (4,314,704)
Income tax benefit (Note 7) 407,868 1,801,448 - - -
------------ ------------ ------------ ------------ -----------
Minority interests in net loss
of consolidated subsidiaries - - - - 425,499
------------ ------------ ------------ ------------ -----------
NET LOSS $ (9,727,630) $(11,028,778) $(13,365,117) $(11,378,484) $(3,889,205)
============ ============ ============ ============ ===========
NET LOSS PER COMMON SHARE (Note 2) $(2.50) $(2.82) $(2.55) $(2.09) $(.68)
============ ============ ============ ============ ===========
PRO FORMA INCOME TAX BENEFIT (unaudited)
(Note 7) - - - - -
------------ ------------ ------------ ------------ -----------
PRO FORMA NET LOSS (unaudited) $(10,135,498) $(12,830,226) $(13,365,117) $(11,378,484) $(3,889,205)
============ ============ ============ ============ ===========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING (Note 5) 3,890,820 3,909,284 5,239,013 5,442,503 5,702,195
============ ============ ============ ============ ===========
</TABLE>
The accompanying notes to financial statements are
an integral part of these financial statements.
F-5
<PAGE>
JONES EDUCATION COMPANY AND SUBSIDIARIES
----------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT
---------------------------------------------------
<TABLE>
<CAPTION>
Common Stock Additional Total
------------
Class A Class B Paid-in Accumulated Shareholders'
------- -------
Shares Amount Shares Amount Capital Deficit Investment
------ ------ ------ ------ ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1993 1,945,410 $19,454 1,945,410 $19,454 $ 9,085,671 $(10,348,452) $ (1,223,873)
Executive Compensation Contribution - - - - 75,000 - 75,000
Net Loss - - - - - (9,727,630) (9,727,630)
--------- ------- --------- ------- ------------ ------------ ------------
Balance, December 31, 1993 1,945,410 19,454 1,945,410 19,454 9,160,671 (20,076,082) (10,876,503)
Issuance of Common Stock 686,850 6,869 - - 17,992,809 - 17,999,678
Executive Compensation Contribution - - - - 75,000 - 75,000
Net Loss - - - - - (11,028,778) (11,028,778)
--------- ------- --------- ------- ------------ ------------ ------------
Balance, December 31, 1994 2,632,260 26,323 1,945,410 19,454 27,228,480 (31,104,860) (3,830,603)
Issuance of Common Stock 915,705 9,157 - - 19,990,843 - 20,000,000
Executive Compensation Contribution - - - - 75,000 - 75,000
Net Loss - - - - - (13,365,117) (13,365,117)
--------- ------- --------- ------- ------------ ------------ ------------
Balance, December 31, 1995 3,547,965 35,480 1,945,410 19,454 47,294,323 (44,469,977) 2,879,280
Issuance of Common Stock 144,210 1,442 144,210 1,442 6,297,116 - 6,300,000
Issuance of Stock by Subsidiary - - - - (12,536,907) 11,612,120 (924,787)
Executive Compensation Contribution - - - - 56,250 - 56,250
Net Loss - - - - - (3,889,205) (3,889,205)
--------- ------- --------- ------- ------------ ------------ ------------
Balance, September 30, 1996 (unaudited) 3,692,175 $36,922 2,089,620 $20,896 $ 41,110,782 $(36,747,062) $ 4,421,538
========= ======= ========= ======= ============ ============ ============
</TABLE>
The accompanying notes to financial statements are
an integral part of these financial statements.
F-6
<PAGE>
JONES EDUCATION COMPANY AND SUBSIDIARIES
----------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
For the Years Ended For the Nine Months
December 31, Ended September 30,
---------------------------------- --------------------------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(9,727,630) $(11,028,778) $(13,365,117) $(11,378,484) $(3,889,205)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Depreciation and amortization 169,144 72,685 627,580 429,289 469,832
Equity in loss of subsidiary - - 72,845 - 114,301
Minority interest in net loss - - - - (425,499)
Executive non-cash compensation contribution 75,000 75,000 75,000 56,250 56,250
Net change in assets and liabilities:
Decrease (increase) in receivables (430,414) (2,650,354) 792,298 565,897 (240,715)
Decrease (increase) in inventory and
other current assets (134,955) (219,804) 175,253 191,593 (115,142)
Decrease (increase) in other assets (74,669) (97,003) 118,216 128,258 (626,862)
Increase in accounts payable to
Jones International, Ltd. - - - 993,091 2,012,182
Increase (decrease) in accounts
payable and accrued liabilities 229,623 (42,132) 1,120,840 590,804 (113,730)
Increase (decrease) in accrued tuition
and other 491,587 (361,958) 14,409 47,424 (8,217)
Increase (decrease) in deferred revenue 3,000 1,150,230 (695,679) (539,716) 268,055
----------- ------------ ------------ ------------ -----------
Net cash used in operating activities (9,399,314) (13,102,114) (11,064,355) (8,915,594) (2,498,750)
----------- ------------ ------------ ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (218,046) (374,083) (510,130) (104,945) (405,787)
Purchases of investments - (10,000,000) - - (1,051,875)
Proceeds from sale or maturity of investments - - 10,000,000 4,540,534 -
Investment in productions (214,700) (383,309) (297,376) (240,225) (117,140)
----------- ------------ ------------ ------------ -----------
Net cash provided by (used in) investing activities (432,746) (10,757,392) 9,192,494 4,195,364 (1,574,802)
----------- ------------ ------------ ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from advances received from
Jones International, Ltd. - 3,356,853 88,862 88,862 31,106
Repayment of advances from
Jones International, Ltd. (1,678,620) - - - (5,400,000)
Proceeds from sale of common stock of
Jones Education Company - 17,999,678 - - 6,300,000
Proceeds from borrowings 9,201,000 10,799,000 - - -
Repayment of borrowings (58,025) (67,940) - - -
Increase in advances to International
Community College - - (100,000) (50,000) (150,000)
Repayment of capital leases - - (12,621) (12,621) -
----------- ------------ ------------ ------------ -----------
Net cash provided by (used in)
financing activities 7,464,355 32,087,591 (23,759) 26,241 781,106
----------- ------------ ------------ ------------ -----------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (2,367,705) 8,228,085 (1,895,620) (4,693,989) (3,292,446)
----------- ------------ ------------ ------------ -----------
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 2,397,660 29,955 8,258,040 8,258,040 6,362,420
----------- ------------ ------------ ------------ -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 29,955 $ 8,258,040 $ 6,362,420 $ 3,564,051 $ 3,069,974
=========== ============ ============ ============ ===========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Issuance of common stock in repayment of
debt (Note 1) $ - $ - $ 20,000,000 $ 20,000,000 $ -
=========== ============ ============ ============ ===========
Interest paid $ 994,507 $ 2,634,670 $ 1,851,541 $ 1,631,049 $ 326,025
=========== ============ ============ ============ ===========
Allocated income tax benefits $ 407,868 $ 1,801,448 $ - $ - $ -
=========== ============ ============ ============ ===========
</TABLE>
The accompanying notes to financial statements are
an integral part of these financial statements.
F-7
<PAGE>
JONES EDUCATION COMPANY
-----------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
----------------------------------------------------
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 (unaudited)
---------------------------------------------------------------------
(1) ORGANIZATION AND BUSINESS
-------------------------
Jones Education Company (the "Company"), was incorporated on June 18, 1990.
The Company develops, acquires, markets and distributes knowledge-based
television programs, distance education credit courses and other
educational products and services that target the adult learning market.
Through its television networks, JEC Knowledge TV and Jones Computer
Network ("JCN"), the Company distributes knowledge-enhancing programs via
multiple distribution channels. Mind Extension University, Inc. ("ME/U"),
the operator of JEC Knowledge TV, is a 66-percent-owned subsidiary of the
Company and JCN is an 81-percent-owned subsidiary of the Company. To date,
the Company has invested heavily in building its cable distribution base
and in developing its programming networks. Also, the Company has expanded
into the international marketplace, through distribution of educational
programming in the Asian and Latin American markets. To date, these
international operations have not had a significant impact on the Company's
results of operations.
The funding of the Company's development has come primarily from equity
funding and advances from its primary shareholders. The Company was formed
by Jones International, Ltd. ("International"), a holding company with
ownership interests in several companies involved in various aspects of the
telecommunications industry, and Glenn R. Jones. International is wholly
owned by Glenn R. Jones, Chairman and Chief Executive Officer of
International. International also owns a controlling interest in Jones
Intercable, Inc. ("Intercable"), a company which owns, operates and manages
cable television systems serving approximately 1.4 million subscribers in
the United States. In 1993, 1994 and 1995, Intercable advanced a total of
$20 million to ME/U. In June 1995, Intercable converted these advances to
ME/U into shares of Class A Common Stock of the Company for a then 17%
equity interest in the Company. In December 1994, Bell Canada International
Inc. ("BCI") purchased a then 15% equity position in the Company for $18
million (See Note 3 for additional information regarding BCI's investment).
Further, in March 1996, the Company sold 144,210 shares of both its Class A
and Class B Common Stock to International for $6.3 million, resulting in
the following ownership of the Company as of September 30, 1996 (excluding
the pro forma effect of the proposed offering described below):
Glenn R. Jones 8%
International 64%
Intercable 16%
BCI 12%
-----
100%
=====
Expansion of the Company's business through the development, production,
acquisition, marketing and distribution of its programming, as well as
through increasing brand recognition of the Company's networks, will
require significant expenditures. If the Company is unable to obtain
additional financing on acceptable terms in the future, its operations and
financial condition could be adversely affected. Although most of the
Company's historical capital needs have been met by advances from and
investments made by current shareholders, such entities are under no
obligation to provide future advances to the Company.
The Company is planning to register and sell additional shares of its Class
A Common Stock to the public. The Company believes its growing revenue
streams and available cash balances will allow it to meet its obligations
through December 31, 1996.
F-8
<PAGE>
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of all
subsidiaries which are majority-owned and controlled. Investments in
entities which are not majority-owned and controlled by the Company are
accounted for under the equity method. All significant intercompany
balances and transactions have been eliminated in consolidation.
Minority Interest
-----------------
The minority interest in the net income or loss of the Company's
consolidated subsidiaries is reflected in the statement of operations. To
the extent the minority interest in the net losses of the Company's
consolidated subsidiaries exceeds the minority investment, such excess
losses are charged to the Company. These excess losses are recovered
against any future earnings in accordance with the provisions of Accounting
Research Bulletin ("ARB") No. 51 or equity contributions by existing or new
shareholders. The Company recorded losses of approximately $4,700,000,
$4,400,000, and $4,600,000 in excess of the Company's ownership interest in
its consolidated subsidiaries during the years ended December 31, 1993,
1994 and 1995, respectively, and losses of approximately $4,000,000 and
$1,100,000 during the nine months ended September 30, 1995 and 1996,
respectively.
In March 1996, the Company exchanged $26 million of advances made to its
subsidiary ME/U for newly-issued ME/U stock. The resulting net change in
the Company's proportionate share of ME/U's equity from this contribution
was approximately $925,000. As a result of the related-party nature of
this exchange, the adjustments to the Company's equity reflect both the
dilution of approximately $12,500,000 to the Company and the corresponding
change in minority interest as well as the recovery of approximately
$11,900,000 in excess losses previously allocated to the Company. As of
December 31, 1994 and 1995, and September 30, 1996, the Company had
accumulated losses in excess of the Company's ownership interest in its
consolidated subsidiaries totaling approximately $9,400,000, $14,000,000
and $3,300,000, respectively.
Cash and Cash Equivalents
-------------------------
The Company considers all highly-liquid investments with a maturity when
purchased of three months or less to be cash equivalents.
Short-term investments
----------------------
Short-term investments mature within one year and are comprised of
investments in debt securities. Due to the short-term nature of these
securities, the estimated fair market value approximates cost. Therefore,
no unrealized holding gains or losses are reflected in the accompanying
financial statements.
Inventories
-----------
Inventories consist of course and training materials and are valued on a
first-in, first-out basis at the lower of cost or market value.
Investment in Productions
-------------------------
As of December 31, 1994 and 1995, and September 30, 1996, the Company had a
gross investment of $1,004,763, $1,254,635 and $1,371,775, respectively, in
the production of telecourses and cable-related instructional videos. The
investment consists primarily of costs incurred in the acquisition of
programming and externally contracted development and production costs
incurred in connection with the original productions of credit and non-
credit telecourses and instructional videos. These production costs are
amortized based upon the estimated life of each telecourse, which is
typically two years. The Company also evaluates production costs
periodically and charges them to expense when the telecourses or cable-
related instructional videos are no longer distributed. Cable television
programming and other educational product costs, which include all costs of
producing cable television programs or other educational products,
generally have estimated useful lives of less than one year and are thus
expensed as incurred.
Property and Equipment
----------------------
Property and equipment is depreciated using the straight-line method over
the estimated useful lives of five years. Leasehold improvements are
depreciated over the lesser of five years or the term of the lease.
Income Taxes
------------
The Company accounts for deferred tax liabilities or assets based on the
temporary differences between the financial reporting and tax bases of
assets and liabilities as measured by the enacted tax rates which are
expected to be in effect when these differences reverse. Deferred tax
assets are reduced, if deemed necessary, by a valuation allowance for the
amount of any tax benefits which, more likely than not based upon current
circumstances, are not expected to be realized.
F-9
<PAGE>
The Company's ownership of ME/U is below the 80 percent ownership
requirement for inclusion in the Company's consolidated income tax return
and, therefore, ME/U files separate federal and state income tax returns.
As a result, ME/U's tax net operating loss carryforwards are not available
to the Company.
Revenue Recognition
-------------------
The Company generates revenue primarily through advertisements, cable
operator and syndication licensing fees and education products and
services. The Company generates advertising revenue by selling airtime to
advertising agencies and other organizations who advertise their products
or services on the networks. The Company recognizes revenue upon airing of
the advertisements. Any amount paid by a customer for an advertisement that
has not aired during the period is recorded as deferred revenue until such
time as the advertisement is aired.
The Company delivers its programming to affiliated and unaffiliated cable
television systems for distribution to their viewers. Cable operator
licensing fees are earned monthly based on a per subscriber licensing fee
set under the terms of the respective cable operator's contractual
agreement and the number of subscribers of the cable operator that are
receiving the Company's programming during the respective month. Cable
operator licensing fees are usually paid within 90 days.
The Company, through its subsidiary ME/U, offers a number of degree
programs and other for-credit courses from a number of accredited colleges
and universities. The Company negotiates agreements with these universities
for the sharing of gross tuition fees and other student services. All
student registration, tuition payment collection and related support
functions are coordinated by the Company. The Company accrues the
universities' share of gross tuition fees when students are registered.
Tuition fees are generally payable to these universities at the end of the
course term. Tuition fee income is recognized by the Company over the
related instruction period, which is generally 3 months.
The Company also sells course support materials to students and video
learning tools to consumers. Revenue is recognized from the sale of these
and other student-related merchandise when the goods are shipped.
Net Loss per Share
------------------
Net loss per share of Class A and Class B Common Stock is based on the
weighted average number of shares outstanding during the respective
periods.
Unaudited September 30 Results
------------------------------
The accompanying September 30, 1996 and 1995 unaudited financial
information reflects all necessary adjustments which are, in the opinion of
management, necessary for a fair statement of the results for the interim
periods presented. All such adjustments were of a normal recurring nature.
Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
New Accounting Pronouncements
-----------------------------
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-lived
Assets and for Long-lived Assets to be Disposed Of" (SFAS 121), which
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles and goodwill. The Company adopted SFAS 121
effective January 1, 1996. Implementation of SFAS 121 had no material
effect on the Company's financial position or results of operations.
The Company adopted Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123) effective January 1,
1996. SFAS 123 recommends a fair value based method of accounting for
employee stock compensation, including stock options. However, companies
may choose to account for stock compensation using the intrinsic value
based method as prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and provide pro forma
disclosures of net income and earnings per share as if the fair value based
method had been applied. The Company elected to account for stock
compensation using the intrinsic value based method, and thus SFAS 123 will
not have any impact on reported operating results.
F-10
<PAGE>
(3) INVESTMENT IN THE COMPANY BY BCI
--------------------------------
On December 20, 1994, BCI invested $18,000,000 in the Company through the
acquisition of 686,850 shares of the Company's Class A Common Stock, which
represented a then 15% equity interest in the Company. Due to issuances of
additional shares of the Company's Class A Common Stock since that date,
BCI's equity interest in the Company as of September 30, 1996 had been
reduced to approximately 12%.
Pursuant to the terms of a Shareholders Agreement dated as of December 20,
1994 among the Company, Glenn R. Jones, International and BCI (the
"Shareholders Agreement"), BCI was granted certain rights including, among
others, the right to designate one member of the Board of Directors of the
Company, the same "shareholder rights" granted to any new unaffiliated
shareholder that purchases 15% or less of the Company's equity, and both
demand and piggy-back registration rights. The Shareholders Agreement also
provides BCI with certain preemptive rights with respect to future
issuances of stock by the Company and tag-along rights if International and
Mr. Jones propose to sell the controlling interest in the Company. BCI's
preemptive rights and tag-along rights will terminate at the time of the
Company's initial public offering. In addition, the Shareholders Agreement
granted International certain rights, including the right of first refusal
should BCI desire to sell any of its shares in the Company. International's
right of first refusal will terminate at the time of the Company's initial
public offering. All of the foregoing provisions of the Shareholders
Agreement, except for BCI's demand and piggy-back registration rights,
automatically will terminate at such time as BCI's equity ownership in the
Company drops below 10%.
(4) TRANSACTIONS WITH AFFILIATED ENTITIES
-------------------------------------
International owns a controlling interest in a number of subsidiaries,
including Intercable. As of September 30, 1996, Intercable owns 16 percent
of the Company and 26 percent of ME/U. Certain members of management of the
Company are also officers or directors of other affiliated entities and,
from time to time, the Company may have transactions with these entities.
Certain expenses are paid by affiliated entities on behalf of the Company
and are allocated at cost based on specific identification or other methods
which management believes are reasonable. Principal recurring transactions
are described in the following discussion:
Network Revenue
---------------
Jones International Networks, Inc. ("JIN"), a subsidiary of International,
earns a commission equal to 3 percent on the sale of airtime for
informational programming to third parties. Prior to October 1, 1995, the
Company did not have any commissions payable to JIN from this service. For
the year ended December 31, 1995 and the nine month period ended September
30, 1996, JIN charged ME/U and JCN commissions totaling $51,574 and
$182,648, respectively.
The Company delivers its television programming to cable television
systems, including cable television systems owned and managed by
Intercable. Total cable operator license fees paid by Intercable to ME/U
were $416,740, $639,892, $861,488, $619,397 and $670,491, for the years
ended December 31, 1993, 1994 and 1995, and the nine months ended September
30, 1995 and 1996, respectively. Total cable operator fees paid by
Intercable to JCN were $-0-, $237,379, $1,128,302, $835,153 and $1,009,233
for the years ended December 31, 1993, 1994 and 1995, and the nine months
ended September 30, 1995 and 1996, respectively.
Jones Satellite Holdings ("Satellite Holdings"), a wholly-owned subsidiary
of ME/U, has entered into a transponder lease agreement with a third party.
This agreement entitles Satellite Holdings to use a transponder (the
"Transponder") on a domestic communications satellite on a full-time basis.
In 1995, Satellite Holdings entered into a license agreement with Jones
Galactic Radio ("JGR"), an affiliate of International. This agreement
allows JGR to use a portion of the Transponder to distribute its audio
programming. JGR agreed to pay Satellite Holdings $58,025 per month
beginning in January 1995. Satellite Holdings has the right to terminate
the license agreement at any time upon 30 days written notice to JGR. The
amounts paid by JGR to Satellite Holdings for this service were $-0-, $-0-,
$696,300, $522,225 and $522,225 for the years ended December 31, 1993, 1994
and 1995, and the nine months ended September 30, 1995 and 1996,
respectively.
Education Products and Services Revenue
---------------------------------------
Mind Extension Institute, Inc. ("MEI"), a subsidiary of the Company,
provides cable-related instructional videos and other training materials to
multi-system cable operators, including Intercable and its subsidiaries and
managed partnerships. For the years ended December 31, 1993, 1994 and 1995
and the nine month periods
F-11
<PAGE>
ended September 30, 1995 and 1996, MEI charged Intercable and its affiliates
$12,956, $252,054, $38,610, $29,776 and $64,444, respectively for these
instructional materials.
Network Expense
- ---------------
Jones Digital Century ("JDC"), a wholly-owned subsidiary of Jones Interactive,
Inc. ("JII", a wholly-owned subsidiary of International), provides linear video
production services for the Company and its subsidiaries. Production services
charges of $-0-, $-0-, $1,077,605, $977,130 and $1,717,259 were incurred by the
Company for the years ended December 31, 1993, 1994 and 1995 and the nine month
periods ended September 30, 1995 and 1996, respectively.
Jones Earth Segment, Inc. ("Earth Segment"), a subsidiary of International,
provides playback, editing, duplication and uplinking services primarily to its
cable programming network affiliates. Earth Segment charges affiliates for its
services using rates which are calculated to achieve a specified rate of return
on investment to Earth Segment. For the years ended December 31, 1993, 1994 and
1995, and the nine months ended September 30, 1995 and 1996, Earth Segment
charged the Company and its subsidiaries $1,041,894, $1,409,136, $1,884,481,
$1,366,347 and $1,487,198, respectively, for these services.
In 1994, JCN entered into a license agreement with Jones Space Segment, Inc.
("Space Segment"), a subsidiary of International, to use a non-preemptible
transponder on a domestic communications satellite which Space Segment currently
leases. JCN agreed to pay Space Segment $66,667 per month from September
through December 1994 and $101,056 per month beginning January 1995. Beginning
in January 1996, the monthly transponder fee charged to JCN decreased to $71,013
per month. Space Segment has the right to terminate the license at any time
upon 30 days written notice to JCN. Monthly transponder expense may be adjusted
periodically through the December 2004 agreement expiration date, depending on
the number of networks being carried by the transponder. Transponder expenses
of $0, $266,668 and $1,212,675 were charged to JCN for the years ended December
31, 1993, 1994 and 1995, and $909,504 and $639,117 were charged to JCN for the
nine month periods ended September 30, 1995 and 1996, respectively.
General and Administrative Expense
- ----------------------------------
The Company leases office space in Englewood, Colorado from affiliates of
International. Rent and associated expenses are allocated to the Company based
on the amount of square footage it occupies. Office rent and related expenses of
$211,020, $195,900, $373,333, $311,265 and $233,346 were charged to the Company
for the years ended December 31, 1993, 1994 and 1995, and the nine months ended
September 30, 1995 and 1996, respectively.
JII provides computer hardware and software support services to the Company.
Computer expenses of $235,982, $449,273, $894,909, $726,241 and $572,959 were
charged to the Company for the years ended December 31, 1993, 1994 and 1995 and
the nine months ended September 30, 1995 and 1996, respectively.
The Company and its consolidated subsidiaries reimburse International for
certain allocated administrative personnel expenses. These expenses generally
consist of salaries and related benefits. Allocations of personnel costs are
generally based on actual time spent by affiliated associates with respect to
the Company. Such allocated expenses totaled $69,713, $91,637, $118,593,
$77,923 and $454,062 for the years ended December 31, 1993, 1994 and 1995 and
the nine months ended September 30, 1995 and 1996, respectively.
Interest Expense
- ----------------
To assist in funding its operating and investing activities, the Company has
borrowed funds from International and Intercable. International and Intercable
charged interest on their advances to the Company at rates of approximately 8,
9, and 11 percent per annum in 1993, 1994 and 1995, respectively, and
approximately 11 percent and 10 percent per annum during the nine months ended
September 30, 1995 and 1996, respectively. International's interest rate is
calculated using the published prime rate plus 2 percent. Intercable's interest
rate is calculated using Intercable's weighted average cost of borrowings plus 2
percent. Total interest charged by International for the years ended December
31, 1993, 1994 and 1995 and the nine month periods ended September 30, 1995 and
1996, was $694,757, $540,930, $1,147,667, $927,175 and $326,025, respectively.
Total interest charged by Intercable for the years ended December 31, 1993, 1994
and 1995 and the nine month periods ended September 30, 1995 and 1996 was
$299,750, $2,093,740, $703,874, $703,874 and $-0-, respectively.
While International has not established formal repayment terms and has agreed
not to demand repayment of these advances until at least July 1997, the Company
intends to repay the outstanding advances upon closing of the offering. As the
Company intends to repay the remaining outstanding advances upon successful
completion of the offering, the carrying
F-12
<PAGE>
value of the advances approximates the fair market value of such advances.
Because International has agreed not to demand repayment until at least
July 1997, the advances are considered long-term.
Periodically, International remits funds on behalf of the Company and its
subsidiaries to third parties and affiliates in payment of products and
services purchased by the Company and its subsidiaries in their normal
course of business. These amounts are then subsequently reimbursed to
International on a timely basis as revenue proceeds are received by the
Company. Due to their short-term nature, such amounts payable to
International are classified as a current liability in the accompanying
financial statements.
(5) COMMON STOCK
------------
Voting Rights
-------------
The Class A Common Stock has voting rights that are generally one-tenth of
those held by the Class B Common Stock. In the election of directors, the
holders of Class A Common Stock, voting as a separate class, are entitled
to elect that number of directors that constitute approximately 25 percent
of the total membership of the Board of Directors of the Company. Holders
of the Class B Common Stock, also voting as a separate class, are entitled
to elect the remaining directors. Glenn R. Jones directly or beneficially
owns all of the Class B Common Stock.
Stock Splits
------------
Assuming the proposed offering is successful, the Board of Directors will
approve a stock split whereby each share of the Company's Class A Common
Stock will be exchanged into 285 shares of Class A Common Stock and each
share of the Company's Class B Common Stock will be exchanged into 285
shares of Class B Common Stock. These stock splits have been reflected
retroactively in the accompanying financial statements.
Stock Option Plan
-----------------
An employee stock option plan has been adopted to provide for the granting
of either incentive options or non-qualified options or a combination of
such. The Company has reserved 1,100,000 shares of Class A Common Stock
pursuant to this plan. Subsequent to September 30, 1996, options to
purchase 381,500 shares of the Company's Class A Common Stock have been
granted under this plan contingent upon closing of the offering. Such
options shall be exercisable in equal installments over a four year period
commencing on the first anniversary of the date of grant and shall expire,
to the extent not exercised, on the tenth anniversary of the date of grant.
Additional options to purchase shares of Class A Common Stock at the
initial public offering price are expected to be granted to employees
concurrent with the offering.
(6) NOTES RECEIVABLE
----------------
The Company and ME/U each agreed to loan The International Community
College (the "College"), a non-profit entity of which the Company and ME/U
are members, $166,667, for a total of $333,334. As of September 30, 1996,
the Company and ME/U had each loaned $125,000 to the College pursuant to
this agreement. This note will accrue interest at 10 percent per annum. The
College will make quarterly principal and interest payments of $41,667 to
be split equally between the Company and ME/U. The principal and interest
payments commence on July 1, 2000 with final payment on April 1, 2002. This
note receivable is not publicly traded, but management believes the note is
reflected on the balance sheets at values approximating estimated fair
market value.
(7) INCOME TAXES
------------
Prior to December 20, 1994, the Company and certain of its subsidiaries
joined in filing a consolidated tax return as provided for under the terms
of a tax sharing agreement with International and International's other
subsidiaries. Pursuant to the terms of the agreement, tax (provisions)
benefits are allocated to members of the tax sharing group based on their
respective pro rata contribution of taxable (income) loss to
International's consolidated taxable (income) loss. Income tax benefits
recognized as a result of the tax sharing arrangement were $407,868 and
$1,801,448 for the years ended December 31, 1993 and 1994, respectively.
Absent the tax sharing agreement and as disclosed on a pro forma basis in
the accompanying statements of operations, the Company would not have
recognized any tax benefits because it has not yet demonstrated the ability
to generate taxable income. On a pro forma, stand-alone basis, the net
losses for the years ended December 31, 1993 and 1994 would have been
$10,135,498 and $12,830,226, respectively, with other periods presented
remaining the same.
F-13
<PAGE>
The difference between the statutory federal income tax rate and effective
rate is summarized as follows (in thousands):
<TABLE>
<CAPTION>
December 31, September 30,
1993 1994 1995 1995 1996
-------------------------------------- -----------------------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Computed "expected tax benefit" $ 3,521 $ 4,464 $ 4,652 $ 3,982 $ 1,361
State taxes, net of federal benefit 327 415 432 370 126
Other 1 15 24 18 27
---------- ----------- ----------- ------------- -------------
3,849 4,894 5,108 4,370 1,514
Valuation allowance (3,441) (3,093) (5,108) (4,370) (1,514)
---------- ----------- ----------- ------------- -------------
Total income tax benefit $ 408 $ 1,801 $ - $ - $ -
========== =========== =========== ============= =============
</TABLE>
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are as follows (in
thousands):
<TABLE>
<CAPTION>
December 31, September 30,
1994 1995 1996
---------------------- ----------------------
(unaudited)
<S> <C> <C> <C>
DEFERRED TAX ASSETS:
Net operating loss carryforwards $ 9,369 $ 14,366 $ 14,623
Future deductible amounts associated
with other assets and liabilities 374 304 356
---------- ---------- -----------
9,743 14,670 14,979
DEFERRED TAX LIABILITIES:
Investments in productions, property
and equipment (94) (102) (99)
VALUATION ALLOWANCE (9,649) (14,568) (14,880)
---------- ---------- -----------
Net deferred tax asset $ - $ - $ -
========== ========== ===========
</TABLE>
At December 31, 1995, the Company had net tax operating loss carryforwards
of approximately $7,300,000, which expire in 2010. ME/U's net tax operating
loss carryforwards, which are not available to offset taxable income of the
Company, are approximately $30,300,000 at December 31, 1995. The
carryforwards expire between 2004 and 2010. Although management expects
future results of operations to improve, it emphasizes the Company's and
ME/U's past performance rather than growth projections when determining the
valuation allowance. Any subsequent adjustment to the valuation allowance,
if deemed appropriate due to changed circumstances, will be recognized as a
separate component of the provision for income taxes.
If the Company successfully completes its proposed offering of Class A
shares, an ownership change as defined under tax statutes may occur,
limiting the Company's yearly utilization of NOLs to offset future income.
Management believes that the application of the limitation will not likely
cause taxable income to occur in the near term due to unavailability of
limited NOLs.
(8) COMMITMENTS
-----------
Lease
-----
In June 1992, Satellite Holdings entered into a transponder lease agreement
with an unaffiliated third party. Under the terms of the lease agreement,
Satellite Holdings is required to pay $211,000 per month until 2004.
Other Commitments
-----------------
Under the terms of one of its affiliation agreements with a cable operator,
the Company pays a rebate to the cable operator equal to the operator's pro
rata share of 20% of net advertising revenue generated by JEC Knowledge
TV. The operator's pro rata share is based on the number of subscribers in
its cable systems receiving JEC Knowledge TV as a percentage of the total
number
F-14
<PAGE>
of subscribers receiving the network. In addition, the Company pays the
cable operator a rebate equal to 5% of net sales receipts from sale of
merchandise made to customers in zip codes served by the cable operator's
systems carrying JEC Knowledge TV. As of December 31,1995, these rebates
totaled approximately $35,000 and $61,000, respectively.
On May 29, 1996, the Company and M. Kane & Company, Inc. ("MKC") entered
into an agreement pursuant to which MKC agreed to provide financial advice
and assistance, including valuation-related analyses of the Company, advice
to the Company about strategic financial alternatives and assistance to the
Company in structuring and conducting an initial public offering. In
consideration for such services, MKC is being paid $20,000 per month from
June 1996 until the closing of the initial public offering. MKC is also
entitled to 1.875% of the gross proceeds of the initial public offering,
less the monthly retainer payments received by it, as well as a warrant
(the "MKC Warrant") to purchase shares of Class A Common Stock, as
described below. In addition, the Company is required to reimburse MKC for
its reasonable out-of-pocket fees and expenses. This agreement will
terminate on the settlement date of the initial public offering.
The Company has also agreed to issue to MKC the MKC Warrant, which grants
the right for five years to purchase 28,750 shares (33,063 shares if the
Underwriters' over-allotment option is exercised) of the Class A Common
Stock at an exercise price equal to 120% of the initial public offering
price. The MKC Warrant will be exercisable one year after the effective
date of the registration statement relating to the Company's initial public
offering.
Litigation
----------
In June 1996, the Company, ME/U and International were named as defendants
in a lawsuit brought by three parties to an agreement entered into that
provided for the distribution of JEC Knowledge TV programming in Taiwan.
The plaintiffs allege that the Company, ME/U and International failed to
perform their obligations under the agreement, including failing to provide
the agreed upon programming hours for distribution in Taiwan. In addition,
the plaintiffs have alleged fraud by misrepresentation and concealment,
breach of contract and bad faith.
The amount of damages being sought by the plaintiffs has not yet been
specified. However, the Company believes that it has not breached the
related agreements and further believes that its defenses are meritorious
and intends to vigorously defend the litigation.
In addition to the above matter, the Company is involved in certain other
litigation. Management believes that the ultimate resolution of all of
these matters will not have a material adverse effect on the Company's
financial position or results of operations.
(9) EMPLOYEE INVESTMENT AND DEFERRED COMPENSATION PLANS
The Company's employees are eligible to participate in an Employee Profit
Sharing/Retirement Savings Plan (the "401(k) Plan"). Under the 401(k) Plan,
eligible employees are permitted to defer up to 16% of their annual
compensation. In addition, the Company currently matches 50% of the
employees' deferrals up to a maximum of 6% of their annual compensation,
with the Company's contribution vesting immediately. Contributions to the
401(k) Plan are invested by the trustees of the 401(k) Plan in accordance
with the directions of each participant. Participants or their
beneficiaries are entitled to payment of benefits (i) upon retirement
either at or after age 65, (ii) upon death or disability or (iii) upon
termination of employment, unless the participant elects to receive payment
prior to one of the events previously listed. For the years ended December
31, 1993, 1994 and 1995 and for the nine months ended September 30, 1995
and 1996, the Company contributed approximately $21,000, $54,000, $55,000,
$43,000 and $56,000, respectively, to the 401(k) Plan on behalf of its
employees.
Certain of the Company's key management personnel are eligible to
participate in a Deferred Compensation Plan (the "Deferred Compensation
Plan"). Under the Deferred Compensation Plan, key employees are permitted
to defer receipt of 100% of their annual compensation. The Company
currently matches the key employees' deferrals up to a maximum of 6% of
their contributions. The contributed funds are deposited with an
independent trustee and are invested in a number of pre-selected investment
funds. Both the key employees' and the Company's contributions are subject
to the claims of the Company's creditors. Participants in the Deferred
Compensation Plan receive a distribution of their contributions, the
Company's contributions, and earnings attributable to those contributions
on their separation from employment with the
F-15
<PAGE>
Company or their death. Contributions made by the Company to the Deferred
Compensation Plan on behalf of key employees totaled approximately $10,000,
$26,000, $30,000, $18,000 and $31,000 for the years ended December 31,
1993, 1994, and 1995 and for the nine month periods ended September 30,
1995 and 1996, respectively.
F-16
<PAGE>
The graphics presented on this page show JEC Knowledge TV's Fall 1996
Programming Schedule. The schedule is color coded with a legend to indicate the
subject areas to which each program relates.
<PAGE>
================================================================================
No dealer, sales representative or any other person has been authorized to
give any information or to make any representations in connection with this
offering other than those contained in this Prospectus, and, if given or made,
such information or representations must not be relied upon as having been
authorized by the Company or any of the Underwriters. This Prospectus does not
constitute an offer to sell or a solicitation of an offer to buy any securities
other than the shares of Class A Common Stock to which it relates or an offer
to, or a solicitation of, any person in any jurisdiction where such an offer or
solicitation would be unlawful. Neither the delivery of this Prospectus nor any
sale made hereunder shall, under any circumstances, create any implication that
there has been no change in the affairs of the Company since the date hereof or
that the information contained herein is correct as of any time subsequent to
the date hereof.
------------------------------
TABLE OF CONTENTS
------------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary............................................................ 3
Risk Factors.................................................................. 9
Use of Proceeds.............................................................. 18
Dividend Policy.............................................................. 18
Capitalization............................................................... 19
Dilution..................................................................... 20
Selected Consolidated Financial Data......................................... 21
Management's Discussion and Analysis of
Financial Condition and Results of Operations.............................. 23
Business..................................................................... 34
Management................................................................... 49
Certain Relationships and Related Transactions............................... 58
Principal and Selling Shareholders........................................... 63
Description of Capital Stock................................................. 64
Shares Eligible for Future Sale.............................................. 67
Underwriting................................................................. 69
Legal Matters................................................................ 71
Experts...................................................................... 71
Additional Information....................................................... 71
Index to Consolidated Financial Statements.................................. F-1
</TABLE>
Until , 1997 (25 days after the date of this Prospectus) all dealers
effecting transactions in the Class A Common Stock, whether or not participating
in this distribution, may be required to deliver a Prospectus. This is in
addition to the obligation of dealers to deliver a Prospectus when acting as
Underwriters and with respect to their unsold allotments or subscriptions.
================================================================================
================================================================================
6,900,000 Shares
[LOGO]
JONES EDUCATION COMPANY
Class A Common Stock
--------------------
PROSPECTUS
--------------------
MONTGOMERY SECURITIES
PIPER JAFFRAY INC.
M. KANE & COMPANY, INC.
, 1996
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions and the $2 million payable to M. Kane &
Company, Inc. for financial advisory services, payable by the Company in
connection with the sale of Class A Common Stock being registered (all amounts
are estimated except the SEC Registration Fee and the NASD Filing Fee).
SEC Registration Fee............................................. $ 43,780
National Association of Securities Dealers, Inc. Filing Fee...... 13,200
Nasdaq Listing Application Fee................................... 33,500
Blue Sky Qualification Fees and Expenses (including legal fees).. 25,000
Printing Expenses................................................ 115,000
Legal Fees and Expenses.......................................... 175,000
Accountants' Fees and Expenses................................... 100,000
Transfer Agent and Registrar Fees................................ 20,000
Miscellaneous Expenses........................................... 124,520
-------
Total.................................................... $650,000
=======
Item 14. Indemnification of Directors and Officers.
In accordance with the Colorado Act, the Company's articles of
incorporation eliminate in certain circumstances the liability of directors of
the Company for monetary damages for breach of their fiduciary duty as
directors. This provision does not eliminate the liability of a director: (i)
for a breach of the director's duty of loyalty to the Company or its
shareholders, (ii) for acts or omissions by the director not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) for a
willful or negligent declaration of an unlawful distribution or (iv) for
transactions from which the director derived an improper personal benefit.
The Company's articles of incorporation also provide that the Company shall
indemnify any person and his or her estate and personal representatives against
all liability and expense incurred by reason of the person being or having been
a director or officer of the Company or, while serving as a director or officer
of the Company, is or was serving at the request of the Company or any of its
subsidiaries as a director, an officer, an agent, an associate, an employee, a
fiduciary, a manager, a member, a partner, a promoter, or a trustee of, or to
hold any similar position with, another domestic or foreign corporation or other
individual or entity or of an employee benefit plan, to the full extent
permitted under the Colorado Act. The Colorado Act requires a corporation to
indemnify its officers and directors against reasonable expenses incurred in any
proceeding to which the officer or director is a party and was wholly
successful, on the merits or otherwise, in defense of the proceeding. In
addition to this mandatory indemnification, the Colorado Act provides that a
corporation may indemnify its officers and directors against liability and
reasonable expenses if the officer or director acted in good faith and in a
manner reasonably relieved to be in the best interests of the corporation in the
case of conduct in an official capacity, in a manner he or she reasonably
believed was at least not opposed to the corporation's best interests in all
other cases, or in a manner he or she had no reasonable cause to believe was
unlawful in the case of criminal proceedings. In actions by or in the
II-1
<PAGE>
name of the corporation, the Colorado Act provides the same standard but limits
indemnification to reasonable expenses incurred by the director and prohibits
any indemnification if the director was adjudged liable to the corporation. The
Colorado Act also prohibits indemnification of a director in connection with
actions charging improper personal benefit to the director if the director is
adjudged liable on that basis.
Section 11 of the Underwriting Agreement (filed as Exhibit 1.1 hereto)
provides that the Underwriters will indemnify and hold harmless the Company, and
each of the Selling Shareholders and their respective directors, officers and
controlling persons from and against certain liabilities, including any
liability caused by any statement or omission in the Registration Statement or
Prospectus based on certain information furnished to the Company by the
Underwriters for use in the preparation thereof.
Item 15. Recent Sales of Unregistered Securities.
In the three years preceding the filing of this registration statement, the
Company has issued the following securities that were not registered under the
Securities Act of 1933, as amended (the "Securities Act") (all share amounts
reflect the proposed 285-for-1 stock-split):
In May 1996, the Company agreed to grant a warrant to M. Kane & Company,
Inc. ("MKC") to purchase 28,750 shares (33,063 shares if the Underwriters' over-
allotment option is exercised in full) of the Class A Common Stock at an
exercise price equal to 120% of the initial public offering price. In connection
with the warrant, MKC also received certain registration rights that provide,
among other things, that MKC will have one demand registration right and an
unlimited number of piggy-back registration rights relating to the shares of
Class A Common Stock underlying the warrant. The MKC Warrant is not transferable
(except to certain employees and affiliates of MKC).
On March 18, 1996, the Company issued 144,210 shares of Class A Common
stock and 144,210 shares of Class B Common Stock to Jones International in
return for the cancellation of approximately $6.3 million of debt owed by the
Company to Jones International.
On April 10, 1995, the Company issued 915,705 shares of Class A Common
Stock to Jones Intercable in return for the cancellation of approximately $20
million of debt owed by one of the Company's subsidiaries to Intercable.
On December 20, 1994, BCI purchased 686,850 shares of Class A Common Stock
for $18 million.
The Company issued all of the foregoing securities in reliance on the
exemption from registration provided by Section 4(2) of the Securities Act.
II-2
<PAGE>
Item 16. Exhibits and Financial Statement Schedules.
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------ ----------------------
<S> <C>
1.1* Form of Underwriting Agreement
3.1* Articles of Incorporation of the Company
3.2* Bylaws of the Company
4.1* Form of Class A Common Stock Certificate
4.2* Shareholder Agreement dated as of December 20, 1994 among Glenn
R. Jones, Jones International, Ltd., Bell Canada International
Inc. and Jones Education Company
4.3* Registration Rights Agreement, dated August 7, 1996, among Jones
Education Company, Glenn R. Jones and Jones International, Ltd.
4.4** Warrant Purchase Agreement, dated _____________, 1996, between
Jones Education Company and M. Kane & Company, Inc.
5.1** Form of Opinion of Davis, Graham & Stubbs LLP as to the legality
of issuance of the Company's Class A Common Stock
10.1** Agreement dated as of July 1, 1994 between Jones Education
Company and The Board of Trustees of the California State
University by and on behalf of California State University
Dominguez Hills
10.2** Agreement dated as of October 29, 1993 between Jones Education
Company and Regis University
10.3** Agreement dated November 14, 1995 between Jones Education
Company and the Regents of the University of Colorado, on
behalf of the University of Colorado at Colorado Springs
10.4** Agreement dated as of March 1, 1996 between Jones Education
Company and Seattle Central Community College
10.5** Agreement dated September 29, 1994 and Addendum dated May 3, 1996
between Jones Education Company and the University of Delaware
10.6* Production Agreement dated September 1, 1995 between Jones
Education Company and The Chronicle Publishing Company
10.7* Programming Distribution Agreement dated December 1, 1994 between
Jones Education Company and Telecom Holding Company
10.8* Program License Contract dated as of June 28, 1996 between Jones
Education Network/China, Inc. and China Education TV Productions
10.9** Affiliate Agreement dated as of January 10, 1994 between Mind
Extension University, Inc. and Cox Cable Communications
10.10** Affiliate Agreement dated as of April 6, 1994 between Mind
Extension University, Inc. and Marcus Cable Company, L.P.
10.11** Master Agreement dated December 12, 1995 between Mind Extension
University, Inc. and the National Cable Television Cooperative,
Inc.
10.12** Affiliation Agreement dated as of January 1, 1991 between Mind
Extension University, Inc. and Satellite Services, Inc.; letter
amendment dated January 1, 1991; and letter amendment dated
April 27, 1995
10.13** Affiliate Agreement dated as of October 25, 1993 between Mind
Extension University, Inc. and Telesynergy, Inc.
</TABLE>
II-3
<PAGE>
<TABLE>
<S> <C>
10.14** Cable Affiliate Agreement dated as of August 1, 1994 between Mind
Extension University, Inc. and Time Warner Cable
10.15** Agreement dated as of October 1, 1991 between Mind Extension
University, Inc. and The George Washington University
10.16* Representation Agreement dated as of July 15, 1994 between Higher
Education Group, Inc. and Jones Education Company
10.17* Programming Distribution Agreement dated as of September 28, 1994
between Jones Education Company and Space Vision, Inc.
10.18* Amendment Agreement dated as of September 28, 1994 between Higher
Education Group, Inc. and Jones Education Company
10.19* Letter Agreement dated February 24, 1995 between Jones Education
Company and Higher Education Group, Inc.
10.20* Agreement dated as of November 18, 1994 between Jones Education
Company and Space Vision, Inc.
10.21* Services Agreement dated as of December 16, 1994 between Jones
Education Company and Jones Interactive, Inc.
10.22* Transponder Licenses Agreement dated as of January 1, 1995
between Jones Space Segment, Inc., Jones Infomercial Networks,
Inc. and Jones Computer Network, Ltd.
10.23** Affiliate Agreement dated as of December 28, 1993 between Mind
Extension University, Inc. and Jones Intercable, Inc.
10.24** Affiliate Agreement, dated as of June 27, 1996, between Mind
Extension University, Inc. and Corporate Media Partners.
10.25* Transponder Licenses Agreement, dated as of January 1, 1995,
among Jones Satellite Holdings, Inc., Jones Galactic Radio, Inc.
and Mind Extension University, Inc.
10.26* Letter Agreement, dated May 29, 1996, between Jones Education
Company and M. Kane & Company, Inc.
10.27* Guarantee, dated September 30, 1996, by Jones International, Ltd.
to Western International Media Corporation for the benefit of
Jones Education Company
10.28* Promissory Note, dated August 30, 1996, between Jones Education
Company and Paul R. Amos.
21* Subsidiaries
23.1 Consent of Arthur Andersen LLP
23.2** Consent of Davis, Graham & Stubbs LLP (See Exhibit 5.1)
24* Power of Attorney
27 Financial Data Schedule
</TABLE>
- --------------------
* Filed previously.
** To be filed by amendment.
Schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions, are inapplicable and therefore have been omitted or the
information required by the applicable schedule is included in the notes to the
financial statements.
II-4
<PAGE>
Item 17. Undertakings.
The undersigned registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Purchase Agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the Company's Bylaws, Certificate of Incorporation or the
Purchase Agreement, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Amendment No. 2 to the Company's Registration
Statement on Form S-1 (File No. 333-11135) to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Englewood, State of
Colorado, on December 20, 1996.
JONES EDUCATION COMPANY
By: /s/ Wallace W. Griffin
------------------------------------
Wallace W. Griffin
President
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Amendment No. 2 to the Company's Registration Statement on Form S-
1 (File No. 333-11135) has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ Glenn R. Jones* Chairman of the Board of Directors and December 20, 1996
- --------------------------- Chief Executive Officer
Glenn R. Jones (Principal Executive Officer)
/s/ Wallace W. Griffin President and Director December 20, 1996
- ---------------------------
Wallace W. Griffin
/s/ Scott A. Wheeler* Group Vice President/Operations and December 20, 1996
- --------------------------- Director
Scott A. Wheeler
/s/ Paul R. Amos* Vice President/International Business December 20, 1996
- --------------------------- Development and Director
Paul R. Amos
/s/ Stephanie L. Garcia* Vice President/Chief Financial Officer December 20, 1996
- --------------------------- (Principal Financial Officer)
Stephanie L. Garcia
/s/ Keith D. Thompson* Chief Accounting Officer December 20, 1996
- --------------------------- (Principal Accounting Officer)
Keith D. Thompson
Director
- ---------------------------
Barbara B. Lawton, Ph.D.
Director
- ---------------------------
Robert J. Malone
/s/ Siim A. Vanaselja* Director December 20, 1996
- ---------------------------
Siim A. Vanaselja
*By: /s/ Wallace W. Griffin
-----------------------
Wallace W. Griffin
Attorney-in fact
</TABLE>
II-6
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report and to all references to our Firm included in or made a part of this
Amendment No. 2 to the Form S-1 Registration Statement for Jones Education
Company.
ARTHUR ANDERSEN LLP
Denver, Colorado
December 20, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-START> JAN-01-1995 JAN-01-1996
<PERIOD-END> DEC-31-1995 SEP-30-1996
<CASH> 6,362,420 3,069,974
<SECURITIES> 0 1,051,875
<RECEIVABLES> 3,156,779 3,355,528
<ALLOWANCES> 199,160 157,194
<INVENTORY> 585,985 615,493
<CURRENT-ASSETS> 10,204,978 8,320,264
<PP&E> 1,944,374 2,350,161
<DEPRECIATION> 751,840 1,002,901
<TOTAL-ASSETS> 12,064,905 11,010,148
<CURRENT-LIABILITIES> 2,416,731 4,689,322
<BONDS> 0 0
0 0
0 0
<COMMON> 54,934 57,818
<OTHER-SE> 2,824,346 4,363,720
<TOTAL-LIABILITY-AND-EQUITY> 12,064,905 11,010,148
<SALES> 15,911,453 15,593,857
<TOTAL-REVENUES> 15,911,453 15,593,857
<CGS> 16,274,767 13,428,215
<TOTAL-COSTS> 28,219,453 19,743,361
<OTHER-EXPENSES> (794,424) (160,825)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,851,541 326,025
<INCOME-PRETAX> (13,365,117) (4,314,704)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (13,365,117) (4,314,704)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (13,365,117) (3,889,205)
<EPS-PRIMARY> (2.55) (.68)
<EPS-DILUTED> (2.55) (.68)
</TABLE>
