<PAGE>
As filed with the Securities and Exchange Commission on October 4, 1996
Registration No. 333-11135
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------
AMENDMENT NO.1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------------
JONES EDUCATION COMPANY
(Exact name of registrant as specified in its charter)
Colorado 8299 84-1150623
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification Number)
incorporation or Classification Code
organization) Number)
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
----------------------------
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 OCTOBER 4, 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 (i) 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, and (ii) the approval of two-thirds of each class, voting
separately, is required for certain extraordinary corporate actions. See
"Description of Capital Stock." Immediately following the Offering and on a
fully-diluted basis (assuming no exercise of the Underwriters' over-allotment
option), the holders of 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 Shareholders."
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 8 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 $650,000 and
approximately $2.0 million 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.
, 1996
<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.
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.
2
<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
the learning needs of adults. Targeting 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 two television networks, ME/U Knowledge TV and Jones Computer Network.
For adults who desire more in-depth information or post-secondary degrees or
certificates, the Company works in conjunction with select universities and
colleges to offer degree and certificate courses through multiple forms of
media, including videotapes, television, print materials, the Internet and other
interactive multimedia. The Company also offers a broad selection of
educational video and software products that complement its programming and
course offerings. 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 other learning products, the Company encourages its viewers,
students and other customers to utilize these products and services. The
Company's 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 also generates revenue from tuition fees, student fees
and the sale of education-oriented products, particularly training videos and
programs. In 1995 and the first six months of 1996, network revenue and
education products and services revenue accounted for 77% and 23%, 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 six
months of 1996, advertising revenue accounted for approximately 56% 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 Company's two 24-hours a day,
satellite-delivered networks, ME/U Knowledge TV and Jones Computer Network.
ME/U 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
3
<PAGE>
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 College, an affiliate of the Company
currently seeking accreditation. 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 and offers a broad
selection of educational videotapes, audiotapes, books, compact disks and other
learning tools through its ME/U 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.
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
4
<PAGE>
relationships (vi) to expand further into international markets and (vii) to
pursue strategic acquisitions. 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 in 1990 in Colorado. 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>
The Offering
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 or
acquisitions. 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 or acquisitions 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
6
<PAGE>
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 approval of two-thirds of each
class of Common Stock, voting separately, is
required for certain extraordinary corporate
actions. See "Description of Capital Stock."
Immediately following the Offering and on a
fully-diluted basis, the holders of the Class
B Common Stock (Glenn R. Jones and Jones
International) 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
Shareholders."
Nasdaq National Market symbol ... JECO
- --------------------------
(1) Excludes (i) 1,100,000 shares of Class A Common Stock reserved for issuance
pursuant to the Company's Stock Option Plan, 346,500 of which were subject
to outstanding options as of October 4, 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 $18.00 per
share (assuming an offering price of $15.00 per share). The Company
anticipates granting stock options to certain of its officers and employees
prior to the completion of this Offering. 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>
Six Months Ended
Year Ended December 31, June 30,
------------------------------------ ----------------------
1993 1994 1995 1995 1996
--------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues...................................... $ 6,073 $ 9,973 $ 15,911 $ 7,717 $10,528
Operating loss................................ (9,985) (10,157) (12,233) (7,685) (2,170)
Loss before income tax benefit and minority
interests................................... (10,061) (12,755) (13,290) (8,459) (2,287)
Net loss...................................... (9,653) (10,954) (13,290) (8,459) (2,105)
Net loss per common share..................... (2.48) (2.80) (2.54) (1.70) (0.36)
Weighted average number of common shares
outstanding................................. 3,891 3,909 5,239 4,985 5,782
Other Data:
Number of network households/(1)/............. 25,552 25,558 25,720 27,240 25,676
Number of paying network households/(2)/...... 6,800 8,200 11,500 10,900 11,600
Number of enrollments/(3)/.................... 1,974 2,544 4,674 2,155 2,586
Number of students/(4)/....................... 1,141 1,185 1,801 1,717 1,970
<CAPTION>
June 30, 1996
-------------------------------------
Actual As Adjusted/(5)/
-------------- -------------------
Balance Sheet Data:
Working capital.................................................... $ 5,938 $82,857
Total assets....................................................... 11,088 88,007
Long term debt..................................................... 1,400 -
Total shareholders' equity......................................... 6,150 84,469
- -----------------------
</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, $12.2 million and
$2.2 million and net losses of $9.7 million, $11.0 million, $13.3 million and
$2.1 million for the years ended December 31, 1993, 1994 and 1995, and for the
six months ended June 30, 1996, respectively. These losses have resulted in
accumulated deficits of $19.8 million, $30.8 million, $44.1 million and $34.6
million for the years ended December 31, 1993, 1994 and 1995, and for the six
months ended June 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 advances to or make
future investments in the Company. 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, ME/U 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 ME/U 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. 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 or that it will be able to attract and retain
sufficient management personnel necessary for continued growth. The failure to
manage such expansion effectively could have a material adverse effect on the
Company's business, financial condition or results of operations. 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."
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 six months
of 1996, advertising revenue comprised 56% 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,
10
<PAGE>
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 ME/U
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. 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
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."
11
<PAGE>
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. However, there can be no assurance
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.
Voting Rights; Control by Principal Shareholders
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. 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 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. In addition, the approval of two-thirds of each class of
Common Stock is required for certain extraordinary corporate actions. See
"Description of Capital Stock." Immediately following the Offering and on a
fully-diluted basis (assuming no exercise of the Underwriters' over-allotment
option), (i) the holders of the Class B Common Stock will have approximately 69%
of the combined voting power of the Company's outstanding Common Stock and (ii)
all of the current shareholders of the Company will have approximately 27% of
the voting power of the Class A Common Stock and approximately 77% of the
combined voting power of the Company's outstanding Common Stock. Thus, the
holders of the Class B Common Stock will have the power to control all matters
requiring shareholder approval not involving a class vote and the current
shareholders of the Company will have the power to substantially influence all
matters involving a class vote. 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 and Class B Common Stock combined. See "Certain
Relationships and Related Transactions," "Principal and Selling Shareholders"
and "Description of Capital Stock."
Anti-Takeover Effects
The voting control of the Company's existing shareholders 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 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
-12-
<PAGE>
Board of Directors. The Company is not aware of any plans by a third party to
seek control of the Company. See "Principal and Selling Shareholders" and
"Description of Capital Stock."
Conflicts of Interest; Transactions with 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 12%, 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 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
-13-
<PAGE>
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, if at
all. In addition, further equity financings 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, future advances or make
future investments in the Company. 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 only devote a portion of his time to the Company's
business because he is also an executive officer of certain affiliates of the
Company and he will continue to devote a substantial amount of his time to the
business activities of such 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 ME/U 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
-14-
<PAGE>
dismiss the fraud and bad-faith claims. The Company believes that it has not
breached the agreements and, therefore, that it has meritorious defenses to the
allegations. The Company intends to defend this action vigorously. Because the
litigation was only recently filed and no discovery has occurred, the Company
has not yet made an assessment as to any potential impact that an adverse ruling
in this case may have on the Company. 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 adverse to the Company could have a material adverse effect on the
Company's business. 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 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, 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 August 30, 1996, 1,100,000 shares of Class A Common Stock have been
reserved for issuance under the Company's Stock Option Plan, none of which were
subject to outstanding options as of that date. The Company anticipates
granting stock options to certain of its officers and employees prior to the
completion of this Offering. 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 $18.00 per share (assuming an initial public offering price of $15.00
per share), 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."
-16-
<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 $7.64 (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 or acquisitions of 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 or
acquisitions. In the event that, in the future, the Company identifies an
investment or acquisition 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.
-18-
<PAGE>
CAPITALIZATION
The following table sets forth the actual capitalization of the
Company at June 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>
June 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; 37 95
100,000,000 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 21 21
shares authorized; 2,089,620 shares issued and
outstanding actual and as adjusted.............
Additional paid-in capital........................ 40,680 118,941
Accumulated deficit............................... (34,588) (34,588)
-------- --------
Total shareholders' equity....................... 6,150 84,469
-------- --------
Total capitalization........................... $ 7,550 $ 84,469
======== ========
</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, 346,500 of which were subject to
outstanding options as of October 4, 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 $18.00 per share
(assuming an initial public offering price of $15.00 per share). The
Company anticipates granting stock options to certain of its officers and
employees prior to the completion of this Offering. See "Management - Stock
Option Plan" and "Underwriting."
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<PAGE>
DILUTION
The net tangible book value of the Company as of June 30, 1996 was
approximately $6.9 million, or $1.19 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 June 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 June 30, 1996 would have been $85.2 million, or $7.36 per share of
Common Stock. This represents an immediate increase in net tangible book value
of $6.17 per share of Common Stock to existing shareholders and an immediate
dilution of $7.64 per share to purchasers of Class A Common Stock. The
following table illustrates the per share dilution to new investors.
<TABLE>
<CAPTION>
<S> <C> <C>
Assumed initial public offering price.............................. $15.00
Net tangible book value as of June 30, 1996...................... $ 1.19
Increase in net tangible book value attributable to the Offering. 6.17
------
Net tangible book value after the Offering......................... 7.36
------
Dilution to purchasers of Class A Common Stock..................... $ 7.64
======
</TABLE>
The following table summarizes, on a pro forma basis as of June 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,
346,500 of which were subject to outstanding options as of October 4, 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
$18.00 per share (assuming an initial public offering price of $15.00 per
share). The Company anticipates granting stock options to certain of its
officers and employees prior to the completion of this Offering. 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 six months ended June 30, 1995 and 1996 and
the balance sheet data at June 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>
Six Months
Ended
Year Ended December 31, June 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> <C>
Statement of Operations Data:
Revenues:
Advertising revenue....................... $ - $ 24 $ 543 $ 3,423 $ 5,397 $ 2,336 $ 4,529
Licensing revenue......................... 1,926 2,362 3,051 3,948 6,790 3,397 3,609
Education products and services........... 2,366 1,624 2,479 2,602 3,724 1,984 2,390
----- ------- ------- ------- ------- ------- -------
Total revenues.......................... 4,292 4,010 6,073 9,973 15,911 7,717 10,528
Operating expenses:
Network expenses.......................... 2,088 3,429 4,888 6,537 11,043 5,853 6,372
Education products and services expenses.. 1,639 1,515 1,860 2,299 5,231 3,114 2,572
Selling and marketing expenses............ 2,047 2,790 4,379 5,322 5,618 3,171 1,556
General and administrative expenses....... 2,304 3,402 4,931 5,972 6,252 3,264 2,198
----- ------- ------- ------- ------- ------- -------
Total operating expenses................ 8,078 11,136 16,058 20,130 28,144 15,402 12,698
----- ------- ------- ------- ------- ------- -------
Operating loss............................. (3,786) (7,126) (9,985) (10,157) (12,233) (7,685) (2,170)
Other income (expense), net................ 3,060 (788) (76) (2,598) (1,057) (774) (117)
----- ------- ------- ------- ------- ------- -------
Loss before income tax benefit and
minority interests........................ (726) (7,914) (10,061) (12,755) (13,290) (8,459) (2,287)
Income tax benefit......................... 76 1,330 408 1,801 - - -
Minority interests......................... - - - - - - 182
----- ------- ------- ------- ------- ------- -------
Net loss................................... $ (649) $ (6,584) $ (9,653) $(10,954) $(13,290) $ (8,459) $ (2,105)
===== ======= ======= ======= ======= ======= =======
Net loss per common share.................. $(0.17) $(1.69) $(2.48) $(2.80) $(2.54) $(1.70) $(0.36)
Weighted average number of common
shares outstanding........................ 3,891 3,891 3,891 3,909 5,239 4,985 5,782
Other Data:
Number of network households/(1)/.......... 22,015 22,015 25,552 25,558 25,720 27,240 25,676
Number of paying network households/(2)/... N/A 3,802 6,800 8,200 11,500 10,900 11,600
Number of enrollments/(3)/................. 588 1,362 1,974 2,544 4,674 2,155 2,586
Number of students/(4)/.................... 378 950 1,141 1,185 1,801 1,717 1,970
<CAPTION>
December 31,
-------------------------------------------------- June 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 $ 5,938
Total assets.............................. 1,482 4,351 2,886 24,766 12,065 11,088
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 6,150
</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 the
learning needs of adults. Targeting 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 two television networks, ME/U Knowledge TV and Jones Computer Network.
For adults who desire more in-depth information or post-secondary degrees or
certificates, the Company works in conjunction with select universities and
colleges to offer degree and certificate courses through multiple forms of
media, including videotapes, television, print materials, the Internet and other
interactive multimedia. The Company also offers a broad selection of
educational video and software products that complement its programming and
course offerings. 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.
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 Shareholders"
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 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,
ME/U 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
-23-
<PAGE>
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 both 1995 and for the six months ended June 30, 1996, network
revenue accounted for approximately 77% of total revenue. 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 both 1995 and for the six months ended June 30, 1996, the Company's education
products and services revenue accounted for approximately 23% of total revenue.
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 ME/U 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 ME/U Knowledge TV. In addition, the Company
pays such 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 ME/U
Knowledge TV as a consequence of direct on-air marketing and sales of products
on ME/U Knowledge TV. For 1994 and 1995, these rebates amounted to
approximately $35,000 and $61,000, respectively, and are expected to be
approximately $100,000 in 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, ME/U
Knowledge TV and Jones
-24-
<PAGE>
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
acquisitions. 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 ME/U
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, $12.2 million and
$2.2 million and net losses of $9.7 million, $11.0 million, $13.3 million and
$2.1 million for the years ended December 31, 1993, 1994 and 1995, and for the
six months ended June 30, 1996, respectively. These losses have resulted in
accumulated deficits of $19.8 million, $30.8 million, $44.1 million and $34.6
million for the years ended December 31, 1993, 1994 and 1995, and for the six
months ended June 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>
Years Ended December 31, Six Months Ended June 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 44 34
--- --- --- --- ---
Network revenue................................ 59 74 77 74 77
Education products and services revenue......... 41 26 23 26 23
--- --- --- --- ---
Total revenue.................................. 100 100 100 100 100
--- --- --- --- ---
Operating Expenses:
Network expenses................................ 80 66 69 76 61
Education products and service expenses......... 31 23 33 40 24
Selling and marketing expenses.................. 72 53 35 41 15
General and administrative expenses............. 81 60 39 42 21
--- --- --- --- ---
Total operating expenses........................ 264 202 176 199 121
--- --- --- --- ---
Operating loss.................................. (164) (102) (76) (99) (21)
Net loss........................................ (159)% (110)% (84) % (110)% (20)%
=== === === === ===
</TABLE>
Six Months Ended June 30, 1996 Compared to Six Months Ended June 30, 1995
Total Revenue. Total revenue increased $2.8 million, or 36%, from $7.7
million for the six months ended June 30, 1995 to $10.5 million for the six
months ended June 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 $2.4 million, or 42%, from $5.7
million for the six months ended June 30, 1995 to $8.1 million for the six
months ended June 30, 1996. Advertising revenue increased $2.2 million, or 96%,
from $2.3 million for the six months ended June 30, 1995 to $4.5 million for the
six months ended June 30, 1996, primarily as a result of increased rates charged
for long-form advertising. Licensing revenue increased $0.2 million, or 6%,
from $3.4 million for the six months ended June 30, 1995 to $3.6 million for the
six months ended June 30, 1996, due primarily to an increase in the number of
paying subscribers receiving ME/U Knowledge TV and Jones Computer Network.
Education Products and Services Revenue. Education products and services
revenue increased $0.4 million, or 20%, from $2.0 million for the six months
ended June 30, 1995 to $2.4 million for the six months ended June 30, 1996.
This increase was due primarily to an approximately 81% increase in unit sales
of ME/U Knowledge Store products and an approximately 20% increase in student
enrollments in degree and certificate courses.
Network Expenses. Network expenses increased $0.5 million, or 8%, from $5.9
million for the six months ended June 30, 1995 to $6.4 million for the six
months ended June 30, 1996. This increase was due primarily to an increase in
program distribution and delivery costs and was partially
-26-
<PAGE>
offset by a decrease in program licensing, development and production costs.
Program licensing, development and production costs decreased $0.3 million, or
11%, from $2.7 million for the six months ended June 30, 1995 to $2.4 million
for the six months ended June 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 $0.8 million, or 25%, from $3.2 million for the six months ended June
30, 1995 to $4.0 million for the six months ended June 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 104% for the six months ended June 30, 1995 to 79% for
the six months ended June 30, 1996.
Education Products and Services Expenses. Education products and services
expenses decreased $0.5 million, or 16%, from $3.1 million for the six months
ended June 30, 1995 to $2.6 million for the six months ended June 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 155% for the six months ended June 30, 1995 to 108% for the six
months ended June 30, 1996.
Selling and Marketing Expenses. Selling and marketing expenses decreased $1.6
million, or 50%, from $3.2 million for the six months ended June 30, 1995 to
$1.6 million for the six months ended June 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 second half 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 41% for the six months ended June 30, 1995
to 15% for the six months ended June 30, 1996.
General and Administrative Expenses. General and administrative expenses
decreased $1.1 million, or 33%, from $3.3 million for the six months ended June
30, 1995 to $2.2 million for the six months ended June 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 six months ended June 30,
1995 to 21% of total revenue for the six months ended June 30, 1996.
Other Expense (Income). Other expense (income) includes primarily interest
income and interest expense. Other expense (income) decreased $0.7 million, or
88%, from $0.8 million for the six months ended June 30, 1995 to $0.1 million
for the six months ended June 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.
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
-27-
<PAGE>
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 ME/U 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 ME/U 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 ME/U 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 ME/U 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 ME/U 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 through the ME/U 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.
-28-
<PAGE>
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 60% for the year ended December 31, 1994
to 39% 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 ME/U 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. 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 ME/U Knowledge
-29-
<PAGE>
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 $1.1 million, or 22%, from $4.9 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
81% for the year ended December 31, 1993 to 60% 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.
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
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<PAGE>
the intrinsic value based method, and thus SFAS 123 will not have any impact on
reported operating results.
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.
The Company's unaudited quarterly operating results for each quarter of fiscal
1995 and the first and second 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 Six Month
December 31, 1995 Ended June 30, 1996
----------------------------------------------------- --------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter 1st Quarter 2nd Quarter
------------ ------------ ------------ ------------ ----------- -----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Total revenue......................... $ 3,786 $ 3,931 $ 4,068 $ 4,126 $ 5,501 $ 5,027
Total operating expenses.............. 7,721 7,681 6,233 6,509 6,179 6,519
--------- --------- --------- --------- --------- ---------
Operating loss........................ (3,935) (3,750) (2,165) (2,383) (678) (1,492)
--------- --------- --------- --------- --------- ---------
Net loss.............................. $ (4,784) $ (3,675) $ (2,267) $ (2,564) $ (774) $ (1,331)
--------- --------- --------- --------- --------- ---------
</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, future advances or make future investments in the Company. 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 $5.9 million at December 31, 1995 and June
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 August 31, 1996, the Company's advances from Jones
International for working capital needs were $2.7 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
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<PAGE>
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 six months ended June 30, 1996 was $9.4 million, $13.1 million, $11.1
million and $1.6 million, respectively. Of the net cash used in operating
activities for the years ended December 31, 1993, 1994 and 1995, and the six
months ended June 30, 1996, approximately $9.7 million, $11.0 million, $13.3
million and $2.1 million, respectively, were 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 six months ended June 30, 1996, net
cash provided by (used in) investing activity was $(0.4) million, $(10.8)
million, $9.2 million and $(1.4) million, respectively. Of the net cash
provided by (used in) investing activities, approximately $(0.4) million, $(0.8)
million, $(0.8) million, and $(0.3) 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 six months ended June 30, 1996,
respectively. The remaining cash provided by (used in) investing activities for
the years ended December 31, 1994 and 1995, and the six months ended June 30,
1996, represent sales (purchases) of investments of $(10.0) million, $10.0
million, and $(1.0) 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 six
months ended June 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 six month period ended June
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 six months ended
June 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.
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<PAGE>
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, and does not in the future anticipate, 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, 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,
additional advances to or future investments in the Company.
Effect of Inflation
The Company does not believe its operations have been materially affected by
inflation.
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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 the
learning needs of adults. Targeting 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 two television networks, ME/U Knowledge TV and Jones Computer Network.
For adults who desire more in-depth information or post-secondary degrees or
certificates, the Company works in conjunction with select universities and
colleges to offer degree and certificate courses through multiple forms of
media, including videotapes, television, print materials, the Internet and other
interactive multimedia. The Company also offers a broad selection of educational
video and software products that complement its programming and course
offerings. 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 other learning products, the Company encourages its viewers,
students and other customers to utilize these products and services. The
Company's 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 also generates 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 and derives revenue
from multiple sources.
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 to their daily lives.
The study also indicated that approximately 72% of such adults desire more
educational 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.
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 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
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<PAGE>
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 Networks 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, ME/U Knowledge TV and Jones
Computer Network, and to a lesser extent through syndication on other networks.
ME/U 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.
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
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<PAGE>
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.
Education Services Center. The Company's Education Services Center 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, the Education Services Center performs student recruitment
functions and provides enrollment processing and academic advising services to
students. The Education Services Center also provides administrative support
services, such as tuition billing and collection, to participating universities
and colleges. The Education Services Center also handles inquiries concerning
the Company's education products and services that are promoted on its networks.
The Company believes its Education Services Center is unique in its practice of
providing complete services and support to distance education students
throughout their learning experience.
ME/U Knowledge Store. The Company's ME/U Knowledge Store offers a broad
selection of educational videotapes, CDs and other learning tools. The ME/U
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, ME/U 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.
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.
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<PAGE>
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 ME/U 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 plans to continue to establish
educational relationships with major corporations, governmental agencies and the
military in order to provide degree and certificate courses and other training
programs to their employees. The Company believes that the establishment of
such corporate relationships provides an effective means of marketing its
education products and services to adults who are likely to receive tuition
assistance or reimbursement.
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 Brazil, Hong Kong,
Israel, Canada 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 or acquisitions 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 or acquisition,
the Company plans to evaluate opportunities to expand its business through
strategic investments or acquisitions.
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
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<PAGE>
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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<PAGE>
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 College 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
Nursing/(1)(3)/ State 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 ME/U 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, ME/U Knowledge TV
and Jones Computer Network and, to a lesser extent, through syndication to third
parties for distribution domestically and internationally.
ME/U Knowledge TV. Launched in 1987, ME/U 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 ME/U
Knowledge TV is also carried on Jones Computer Network. ME/U 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. ME/U 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, Marcus Cable Partners, Cox Cable and Jones Intercable. In addition, the
Company also has affiliation agreements providing for the distribution of ME/U
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 ME/U 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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<PAGE>
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 1995, 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 ME/U 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 ME/U 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 Canada, Brazil, Korea, Israel and Hong Kong. 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 ME/U 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 ME/U 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
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<PAGE>
of quality 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 ME/U 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
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 College, an affiliate of the Company
currently seeking accreditation. The following table summarizes the Company's
current distance education degree and certificate programs:
<TABLE>
<CAPTION>
ENROLLMENTS CREDIT PRICE PER
JANUARY 1- HOURS CREDIT
PROGRAM INSTITUTION JUNE 30, 1996 REQUIRED HOUR/(1)/
- -------- ----------- ------------- --------- ---------
<S> <C> <C> <C> <C>
Graduate Degree Programs
Master's Degree in
Educational Technology The George Washington
Leadership University 505 36 $238
Master of Arts in International University
Business Communication College 114 35 $163
Master of Business University of Colorado -
Administration Colorado Springs --/(2)/ 36 $235
Master of Public University of Colorado -
Administration Colorado Springs --/(2)/ 36 $235
---
Total Graduate Degree Program Enrollment 619
===
</TABLE>
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<PAGE>
<TABLE>
ENROLLMENTS CREDIT PRICE PER
JANUARY 1- HOURS CREDIT
PROGRAM INSTITUTION JUNE 30, 1996 REQUIRED HOUR/(1)/
- -------- ----------- ------------- --------- ---------
<S> <C> <C> <C> <C>
Bachelor's Degree Completion Programs
Bachelor of Science in
Business Administration Regis University 799 128/(3)/ $185/(4)/
Bachelor of Science in California State
Nursing University at
Dominguez Hills 719 126/(3)/ $210
Bachelor of Arts in Washington State
Social Sciences University 269 120/(3)/ $182
Bachelor of Science in
Animal Sciences and
Industry Kansas State University 41 127/(3)/ $180
Bachelor of Science in
Human Resources with a
Major in Hotel,
Restaurant and
Institutional Management University of Delaware 16 120/(3)/ $195
Bachelor of Arts in International University 12 120/(3)/ $163
Business Communication College -----
Total Bachelor's Degree Completion Program
Enrollment 1,856
=====
Associate of Arts Degree Programs
Associate of Arts Colorado Electronic
Community
College/Arapahoe
Community College 186 60 $147
Associate of Arts Seattle Central
Community College 152 90 $ 94
-----
Total Associate of Arts Degree Program
Enrollment 338
=====
Certificate Programs
Early Reading University of Colorado
Instruction -Colorado Springs 41 8 $125
Advanced Oral and
Written Communication International University
Skills College 1 6 $163
Business Technologies International University
College --/(5)/ 6 $163
</TABLE>
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<PAGE>
<TABLE>
ENROLLMENTS CREDIT PRICE PER
JANUARY 1- HOURS CREDIT
PROGRAM INSTITUTION JUNE 30, 1996 REQUIRED HOUR/(1)/
- -------- ----------- ------------- --------- ---------
<S> <C> <C> <C> <C>
Oral and Written International University
Communication Skills College 4 6 $163
Organizational International University
Communication College --/(5)/ 6 $163
-----
Total Certificate Program Enrollment 46
=====
</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 College has not yet 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
June 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.
Education Services Center. The Company's Education Services Center recruits,
enrolls, and provides course and other materials and customer service to the
Company's students. Service representatives at the Education Services Center
respond to inquiries and distribute enrollment forms. Once a student is
accepted into a course or degree program, the Educational Services Center
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.
The Education Services Center 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, the Company's Education Services
Center processed approximately 4,600 course enrollments and sold approximately
33,000 educational products.
Educational Video and Software Products. The Company, through the ME/U
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 ME/U 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 ME/U 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
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<PAGE>
that targets advertisers whose products are complementary to the knowledge-
enhancing content of the programming on its networks.
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 ME/U 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. In addition, the
Company promotes its education products and services through its half-hour
program, ME/U User Guide, which airs daily Monday through Saturday. Although
the Company has previously advertised its distance education programs
exclusively on its networks, it plans to advertise its distance education degree
and certificate courses on other networks in the future. 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 has developed a Web site, ME/U Knowledge Online,
http://www.meu.edu, 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 ME/U
Knowledge TV and Jones Computer Network programming schedules and purchase
education products.
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 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
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<PAGE>
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. 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 June 30, 1996, the
Company had 74 full-time associates. Of these associates, 29 work in network
sales and programming, 21 in the Education Services Center, 11 in marketing and
13 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."
Facilities and Leases
The Company's offices and its Education Services Center are located in
Englewood, Colorado in facilities leased by the Company from certain of its
affiliates. The Company believes that its offices and Education Services Center
facilities are adequate to meet its current needs. The Company also leases
transponder space on the domestic communications satellites on which ME/U
Knowledge TV and Jones Computer Network are distributed from an affiliate. See
"Certain Relationships and Related Transactions - Office Lease and - Transponder
Agreements."
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<PAGE>
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 no 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 ME/U 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. The
Company believes that it has not breached the agreements and, therefore, that it
has meritorious defenses to the allegations. The Company intends to defend this
action vigorously. Because the litigation was only recently filed and no
discovery has occurred, the Company has not yet made an assessment as to any
potential impact that an adverse ruling in this case may have on the Company.
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
The Company's directors and executive officers are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
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/Operations and Director
Paul R. Amos 43 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
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
</TABLE>
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 and a director of Bell Cablemedia plc, an
affiliate 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
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
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<PAGE>
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 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
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<PAGE>
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.
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 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
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<PAGE>
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.
All directors serve for a term of one year and until their successors are
duly elected. Executive officers of the Company serve at the discretion of the
Board of Directors.
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.
Directors' Compensation
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 of Directors or one of its Committees. Directors who are also
officers of the Company will not be paid any director fees. All directors are
reimbursed for their expenses in attending Board and Committee meetings.
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<PAGE>
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
$100,000 during such period (collectively, the "Named Executive Officers").
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation
--------------------- All Other
Name and Principal Position Salary ($) 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 he has served these affiliates in
1996 as well. 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 he has served these affiliates in 1996 as well. 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
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
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<PAGE>
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 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
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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
346,500 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 June 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.
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.
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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 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
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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 August 31, 1996, advances from
Jones International totaled approximately $2.7 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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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. ME/U Knowledge TV and Jones
Computer Network paid commissions to JIN of approximately $50,000 and $118,000,
respectively, in 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 ME/U 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., leases a non-preemptible
transponder on a domestic communication satellite from a third party. The lease
terminates in 2004. In January 1995, Satellite Holdings entered into a license
agreement with Jones Galactic Radio, Inc. ("JGR"), an affiliate of the Company,
to sublease the sub-carrier space on the transponder to JGR for approximately
$58,000 per month. Satellite Holdings has the right to terminate the license
agreement at any time upon 30 days written notice to JGR. Satellite Holdings
received approximately $696,000 in lease payments from JGR in 1995.
In fiscal 1994, Jones Computer Network entered into a license agreement
with Jones Space Segment, Inc. ("Space Segment"), a subsidiary of Jones
International, to sublease 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. Such 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.
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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. 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.
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 $60,000 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.
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In most of 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.
However, 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 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, 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 the conflicting interest transaction is
fair as to the corporation. In addition, the Board of Directors or a committee
thereof may not authorize a loan to, or issue a guaranty on behalf of, a
director of the Company or an entity in which a director of the Company is a
director or officer or has a financial interest, until at least ten days after
written notice of the proposed authorization of the loan or guaranty has been
given to the shareholders who would be entitled to vote thereon if the issue of
the loan or guaranty were submitted to a vote of the shareholders.
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. The
Company and its officers and directors will devote only such time to the Company
as they deem necessary and will be involved on a continuing basis with
activities on behalf of affiliates of the Company. See "Risk Factors --
Conflicts of Interest."
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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
August 30, 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) each of the Named
Executive Officers, and (v) all directors and executive officers of the Company
as a group. Ms. Lawton and Messrs. Malone and Vanaselja, directors of the
Company, do not beneficially own any shares of Class A Common Stock and Class B
Common Stock and have therefore been omitted from the following table. Except
as otherwise indicated, each person named in the table has informed the Company
that such person has sole voting and investment power with respect to all shares
beneficially owned by it, subject to community property laws where applicable.
<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)(2)/ 3,005,325 81.4% 944,735 2,060,590 21.7% 2,089,620 100.0% 75.5%
Jones International, 2,759,655 74.7 833,665 1,925,990 20.3 1,843,950 88.2 67.0%
Ltd./(2)(3)/
Jones Intercable, Inc./(2)/ 915,705 24.8 - 915,705 9.6 - - 3.0%
Bell Canada International 686,850 18.6 155,265 531,585 5.6 - - 1.8%
BVI III Limited/(4)/
Wallace W. Griffin - - - - - - - -
Scott A. Wheeler - - - - - - - -
Paul R. Amos - - - - - - - -
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))/(5)/
- --------------------
</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 shares of the Company 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 shares of the
Company 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.
(2) Glenn R. Jones', Jones International's and Jones Intercable's address is
9697 East Mineral Avenue, Englewood, Colorado 80112.
(3) Jones International beneficially owns shares of common stock of Jones
Intercable entitling it to cast 35% of the votes to be cast on all matters
put to a vote of Jones Intercable's shareholders voting as a single class.
Jones International may be deemed to be the beneficial owner of all shares
of the Company held by Jones Intercable.
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(4) 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.
(5) 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 June 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 Colorado Business Corporation Act, as amended (the "Colorado
Act"), the holders of the Class A Common Stock and Class B Common Stock are
entitled to vote as separate classes with respect to certain amendments to the
Company's articles of incorporation, certain mergers or share exchanges, a sale
or other disposition of all or substantially all of the Company's assets not in
the ordinary course of business, and the dissolution of the Company. 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 outstanding 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."
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 and the Selling Shareholders 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
$18.00 (assuming an initial offering price of $15.00 per share). 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 during the five-year period
after the closing of this Offering. MKC has agreed not to publicly offer to
sell, sell, contract to sell or otherwise publicly dispose of the shares of
Class A Common Stock underlying the warrant for at least 180 days after the date
of this Prospectus. See "Underwriting."
Additionally, as of October 4, 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 346,500 shares of its
Class A Common Stock under the Stock Option Plan. The Company anticipates
granting stock options to certain of its officers and employees prior to the
completion of this Offering.
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.
-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, including
valuation-related analyses of the Company, to the Company about strategic
financial alternatives and to assist the Company in structuring and conducting
this Offering. In consideration for such services, MKC is entitled to advisory
fees equal to 1.875% of the gross proceeds of this Offering, which fees are
estimated to be $2 million, as well as a non-transferable warrant (the "MKC
Warrant") to purchase shares of Class A Common Stock (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 closing date of
this Offering.
Under the MKC Warrant, MKC will have the right to purchase shares of the
Class A Common Stock at a per share exercise price equal to 120% of the initial
offering price of the Class A Common Stock, in an aggregate amount equal to 0.5%
of the gross proceeds of this Offering. Assuming an offering price of $15 per
share, MKC will have the right 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 $18.00 per share. The MKC Warrant is immediately
exercisable and expires five years from the closing of the Offering. In
connection with the MKC Warrant, MKC will also receive certain non-transferable
registration rights. These registration rights provide that MKC will have the
right, during the five year period commencing on the date of the closing of the
Offering, on one occasion to require the Company to register the Class A Common
Stock underlying the MKC Warrant (the "Registrable Securities") by means of a
registration statement pursuant to the Securities Act, or post-effective
amendment thereto, as appropriate, so as to enable MKC to publicly offer the
Registrable Securities. Moreover, if during the five year period commencing the
date of the closing of the Offering the Company registers any of its Class A
Common Stock for sale pursuant to a post-effective amendment or new registration
statement (with the exception of Form S-8, Form S-4 or any other inappropriate
form), upon request by MKC, the Company shall be required to include the
Registrable Securities as part of the registration statement. MKC will have no
voting, dividend or other rights as stockholders of the Company unless and until
the exercise of the MKC Warrant. The number of shares of Class A Common Stock
deliverable upon any exercise of the MKC Warrant and the exercise price of the
MKC Warrant are protected by customary anti-dilution provisions. MKC has agreed
not to publicly offer to sell, sell, contract to sell or otherwise publicly
dispose of the shares of Class A Common Stock underlying the warrant for at
least 180 days after the date of this Prospectus. 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
-70-
<PAGE>
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.
-71-
<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.
-72-
<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 June 30,1996.................................................. F-3
Consolidated Statements of Operations for
the Three Years Ended December 31, 1995, and the
Six Month Periods Ended June 30, 1995 and 1996.................... F-5
Consolidated Statements of Shareholders' Investment for the
Three Years Ended December 31, 1995, and
the Six Month Period Ended June 30, 1996.......................... F-6
Consolidated Statements of Cash Flows for the
Three Years Ended December 31, 1995, and the
Six Month Periods Ended June 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
---------------------------
ASSETS
------
<TABLE>
<CAPTION>
December 31, December 31, June 30,
1994 1995 1996
-------------- -------------- --------------
(unaudited)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 8,258,040 $ 6,362,420 $ 4,197,154
Short term investments 10,000,000 - 1,032,188
Accounts receivable, net of allowance
for doubtful accounts of $397,685,
$199,160, and $133,977, respectively 3,749,917 2,957,619 2,805,420
Inventory 442,676 585,985 646,822
Other current assets 617,516 298,954 52,526
----------- ----------- -----------
Total Current Assets 23,068,149 10,204,978 8,734,110
----------- ----------- -----------
PROPERTY AND EQUIPMENT:
Furniture, fixtures and equipment 1,368,812 1,821,453 1,922,664
Leasehold improvements 65,432 122,921 303,073
----------- ----------- -----------
1,434,244 1,944,374 2,225,737
Less - accumulated depreciation
and amortization (543,227) (751,840) (925,739)
----------- ----------- -----------
Net Property and Equipment 891,017 1,192,534 1,299,998
----------- ----------- -----------
INVESTMENT IN PRODUCTIONS (Note 2):
Investment in productions 1,004,763 1,254,635 1,305,575
Less - accumulated amortization (385,971) (757,434) (891,456)
----------- ----------- -----------
Net Investment in Productions 618,792 497,201 414,119
----------- ----------- -----------
OTHER ASSETS:
Notes receivable from affiliate (Note 6) - 100,000 250,000
Other 188,408 70,192 389,909
----------- ----------- -----------
Total Other Assets 188,408 170,192 639,909
----------- ----------- -----------
Total Assets $24,766,366 $12,064,905 $11,088,136
=========== =========== ===========
</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, June 30,
1994 1995 1996
-------------- -------------- --------------
(unaudited)
<S> <C> <C> <C>
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 340,934 $ 1,461,774 $ 921,711
Accounts payable--Jones International,
Ltd. (Note 4) - - 896,081
Accrued tuition (Note 2) 410,152 383,179 586,585
Deferred revenue (Note 2) 1,153,230 457,551 259,320
Other - 114,227 132,322
------------ ------------ ------------
Total Current Liabilities 1,904,316 2,416,731 2,796,019
------------ ------------ ------------
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 - - 742,494
------------ ------------ ------------
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 26,928,480 46,919,323 40,679,532
Accumulated deficit (Note 2) (30,804,860) (44,094,977) (34,587,727)
------------ ------------ ------------
Total Shareholders' Investment (3,830,603) 2,879,280 6,149,623
------------ ------------ ------------
Total Liabilities and
Shareholders' Investment $ 24,766,366 $ 12,064,905 $ 11,088,136
============ ============ ============
</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 Six Months
December 31, Ended June 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 $ 2,336,019 $ 4,528,832
------------ ------------ ------------ ----------- -----------
Licensing revenue--
Non-affiliated entities 2,635,004 3,070,734 4,103,593 2,105,187 2,177,269
Affiliated entities 416,740 877,271 2,686,090 1,291,758 1,431,748
------------ ------------ ------------ ----------- -----------
Total licensing revenue 3,051,744 3,948,005 6,789,683 3,396,945 3,609,017
------------ ------------ ------------ ----------- -----------
Total network revenue 3,594,460 7,371,592 12,186,696 5,732,964 8,137,849
Education products and services revenue 2,478,879 2,601,785 3,724,757 1,984,576 2,390,113
------------ ------------ ------------ ----------- -----------
Total revenues 6,073,339 9,973,377 15,911,453 7,717,540 10,527,962
------------ ------------ ------------ ----------- -----------
OPERATING EXPENSES:
Network expense--
Non-affiliated entities 3,846,471 4,860,812 6,868,786 4,050,439 4,059,210
Affiliated entities 1,041,436 1,675,804 4,174,761 1,802,831 2,312,934
------------ ------------ ------------ ----------- -----------
Total network expense 4,887,907 6,536,616 11,043,547 5,853,270 6,372,144
Education products and services expense 1,860,216 2,299,461 5,231,220 3,113,670 2,572,116
Selling and marketing expense 4,379,072 5,321,710 5,617,969 3,171,333 1,555,658
General and administrative expense 4,930,943 5,972,707 6,251,717 3,264,019 2,197,547
------------ ------------ ------------ ----------- -----------
Total operating expenses 16,058,138 20,130,494 28,144,453 15,402,292 12,697,465
------------ ------------ ------------ ----------- -----------
OPERATING LOSS (9,984,799) (10,157,117) (12,233,000) (7,684,752) (2,169,503)
------------ ------------ ------------ ----------- -----------
OTHER INCOME (EXPENSE):
Interest income 26,852 130,486 869,512 607,341 195,001
Interest expense - affiliated entities (994,507) (2,634,670) (1,851,541) (1,379,816) (260,196)
Equity in loss of affiliated entity - - (72,845) - (48,075)
Other, net 891,956 (93,925) (2,243) (1,754) (4,390)
------------ ------------ ------------ ----------- -----------
Total other expense, net (75,699) (2,598,109) (1,057,117) (774,229) (117,660)
------------ ------------ ------------ ----------- -----------
Loss before income tax benefit and
minority interests (10,060,498) (12,755,226) (13,290,117) (8,458,981) (2,287,163)
Income tax benefit (Note 7) 407,868 1,801,448 - - -
------------ ------------ ------------ ----------- -----------
Minority interests in net loss
of consolidated subsidiaries - - - - 182,293
------------ ------------ ------------ ----------- -----------
NET LOSS $ (9,652,630) $(10,953,778) $(13,290,117) $(8,458,981) $(2,104,870)
============ ============ ============ =========== ===========
NET LOSS PER COMMON SHARE (Note 2) $ (2.48) $ (2.80) $ (2.54) $ (1.70) $ (.36)
============ ============ ============ =========== ===========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING (Note 5) 3,890,820 3,909,284 5,239,013 4,984,650 5,781,795
============ ============ ============ =========== ===========
</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 $ 8,935,671 $(10,198,452) $ (1,223,873)
Net Loss - - - - - (9,652,630) (9,652,630)
--------- ------- --------- ------- ------------ ------------ ------------
Balance, December 31, 1993 1,945,410 19,454 1,945,410 19,454 8,935,671 (19,851,082) (10,876,503)
Issuance of Common Stock 686,850 6,869 - - 17,992,809 - 17,999,678
Net Loss - - - - - (10,953,778) (10,953,778)
--------- ------- --------- ------- ------------ ------------ ------------
Balance, December 31, 1994 2,632,260 26,323 1,945,410 19,454 26,928,480 (30,804,860) (3,830,603)
Issuance of Common Stock 915,705 9,157 - - 19,990,843 - 20,000,000
Net Loss - - - - - (13,290,117) (13,290,117)
--------- ------- --------- ------- ------------ ------------ ------------
Balance, December 31, 1995 3,547,965 35,480 1,945,410 19,454 46,919,323 (44,094,977) 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)
Net Loss - - - - - (2,104,870) (2,104,870)
--------- ------- --------- ------- ------------ ------------ ------------
Balance, June 30, 1996 (unaudited) 3,692,175 $36,922 2,089,620 $20,896 $ 40,679,532 $(34,587,727) $ 6,149,623
========= ======= ========= ======= ============ ============ ============
</TABLE>
The accompanying notes to financial statements are
an integral part of this financial statement.
F-6
<PAGE>
JONES EDUCATION COMPANY AND SUBSIDIARIES
----------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
For the Years Ended For the Six Months
December 31, Ended June 30,
------------------------------------------ ----------------------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(9,652,630) $(10,953,778) $(13,290,117) $(8,458,981) $(2,104,870)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 169,144 72,685 627,580 282,847 307,921
Equity in loss of subsidiary - - 72,845 - 48,075
Minority interest in net loss - - - - (182,293)
Net change in assets and liabilities:
Decrease (increase) in receivables (430,414) (2,650,354) 792,298 1,143,983 152,199
Decrease (increase) in inventory and
other current assets (134,955) (219,804) 175,253 609,676 185,591
Decrease (increase) in other assets (74,669) (97,003) 118,216 957,202 (319,717)
Increase in accounts payable to Jones
International, Ltd. - - - 1,160,809 896,081
Increase (decrease) in accounts payable and
accrued liabilities 229,623 (42,132) 1,120,840 523,987 (540,063)
Increase (decrease) in accrued tuition
and other 491,587 (361,958) 14,409 51,125 (170,527)
Increase (decrease) in deferred revenue 3,000 1,150,230 (695,679) (963,356) 145,722
----------- ------------ ------------ ----------- -----------
Net cash used in operating activities (9,399,314) (13,102,114) (11,064,355) (4,692,708) (1,581,881)
----------- ------------ ------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (218,046) (374,083) (510,130) (100,353) (281,363)
Purchases of investments - (10,000,000) - - (1,032,188)
Proceeds from sale or maturity of investments - - 10,000,000 1,163,768 -
Investment in productions (214,700) (383,309) (297,376) (147,875) (50,940)
----------- ------------ ------------ ----------- -----------
Net cash provided by (used in) investing
activities (432,746) (10,757,392) 9,192,494 915,540 (1,364,491)
----------- ------------ ------------ ----------- -----------
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) - (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) 76,241 781,106
----------- ------------ ------------ ----------- -----------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (2,367,705) 8,228,085 (1,895,620) (3,700,927) (2,165,266)
----------- ------------ ------------ ----------- -----------
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 $ 4,557,113 $ 4,197,154
========== =========== =========== ========== ==========
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 $ 1,379,816 $ 260,196
========== =========== =========== ========== ==========
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 SIX MONTHS ENDED JUNE 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, ME/U 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 ME/U 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 June 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 in those
subsidiaries, such excess losses are charged to the Company. These excess
losses are recovered against any future earnings 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
$2,800,000 and $900,000 during the six months ended June 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. The adjustments to the Company's equity reflect
both the dilution to the Company and the corresponding change in minority
interest as well as the recovery of excess losses previously allocated to
the Company. As of December 31, 1994 and 1995, and June 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 $3,000,000, 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 June 30, 1996, the Company had a
gross investment of $1,004,763, $1,254,635 and $1,305,575, 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.
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.
F-9
<PAGE>
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 June 30 Results
-------------------------
The accompanying June 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.
(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 June 30, 1996 had been reduced
to approximately 12%.
F-10
<PAGE>
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 June 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 July 1, 1995, the
Company did not have any commissions payable to JIN from this service. For
the year ended December 31, 1995 and the six month period ended June 30,
1996, JIN charged ME/U and JCN commissions totaling $49,917, and $118,220,
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, $411,838 and $440,643, for the years
ended December 31, 1993, 1994 and 1995, and the six months ended June 30,
1995 and 1996, respectively. Total cable operator fees paid by Intercable
to JCN were $-0-, $237,379, $1,128,302, $531,770 and $642,955 for the years
ended December 31, 1993, 1994 and 1995, and the six months ended June 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, $348,150 and $348,150 for the years ended December 31, 1993, 1994
and 1995, and the six months ended June 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 six month periods ended June 30, 1995 and 1996, MEI charged
Intercable and its affiliates $12,956, $252,054, $38,610, $21,910 and
$52,582, 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,
$296,820, and $1,116,596, were incurred by the Company for the years ended
December 31, 1993, 1994 and 1995 and the six month periods ended June 30,
1995 and 1996, respectively.
F-11
<PAGE>
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 six month periods ended June 30, 1995 and
1996, Earth Segment charged the Company and its subsidiaries $1,041,436,
$1,409,136, $1,884,481, $899,675, and $770,260, 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 $606,336 and $426,078 were charged to JCN for
the six-month periods ended June 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
associated expenses of $211,020, $195,900, $373,333, $248,125, and
$156,008, were charged to the Company for the years ended December 31,
1993, 1994 and 1995, and the six months ended June 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, $458,692, and
$382,557, were charged to the Company for the years ended December 31,
1993, 1994 and 1995 and the six months ended June 30, 1995 and 1996,
respectively.
The Company and its consolidated subsidiaries reimburse International for
certain allocated administrative 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, $60,088,
$56,570, and $88,328, for the years ended December 31, 1993, 1994 and 1995
and the six months ended June 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 per annum during the six months
ended June 30, 1995 and 1996. 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 six month periods ended June 30,
1995 and 1996, was $694,757, $540,930, $1,147,667, $675,942 and $260,196,
respectively. Total interest charged by Intercable for the years ended
December 31, 1993, 1994 and 1995 and the six month periods ended June 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 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.
F-12
<PAGE>
(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
the two. The Company has reserved 1,100,000 shares of Class A Common Stock
pursuant to this plan. Subsequent to June 30, 1996, options to purchase
346,500 shares of the Company's Class A Common Stock have been granted
under this plan contingent upon the 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 also 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 June 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, 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 $10,060,498 and
$12,755,226, respectively, with other periods presented remaining the
same.
The difference between the statutory federal income tax rate and effective
rate is summarized as follows (in thousands):
<TABLE>
<CAPTION>
December 31, June 30,
1993 1994 1995 1995 1996
------------------------------------ --------------------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Computed "expected tax benefit" $ 3,521 $ 4,464 $ 4,652 $ 2,961 $ 801
State taxes, net of federal benefit 327 415 432 275 74
Other 1 15 24 13 18
------- -------- ------- -------- --------
3,849 4,894 5,108 3,249 893
Valuation allowance (3,441) (3,093) (5,108) (3,249) (893)
------- -------- ------- -------- --------
Total income tax benefit $ 408 $ 1,801 $ - $ - $ -
======= ======== ======= ======== ========
</TABLE>
F-13
<PAGE>
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, June 30,
1994 1995 1996
--------------------- ----------
(unaudited)
<S> <C> <C> <C>
DEFERRED TAX ASSETS:
Net operating loss carryforwards $ 9,369 $ 14,366 $15,354
Future deductible amounts associated
with other assets and liabilities 374 304 442
-------- -------- ----------
9,743 14,670 15,796
DEFERRED TAX LIABILITIES:
Investments in productions, property
and equipment (94) (102) (109)
VALUATION ALLOWANCE (9,649) (14,568) (15,687)
-------- -------- ----------
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 operation 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 an unaffiliated
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 ME/U Knowledge TV. The operator's pro rata share is based on the number
of subscribers in its cable systems receiving ME/U as a percentage of the
total number 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 ME/U 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 reimbursement
for its reasonable out-of-pocket fees and expenses. This agreement will
terminate on the settlement date of the initial public offering.
F-14
<PAGE>
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 ME/U 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 receipt of up to 20% of their
monthly compensation. The Company currently matches 50% of the employees'
deferrals up to a maximum of 6% of their monthly base pay, 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,
if 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 six months ended June 30, 1995 and 1996, the Company contributed
approximately $21,000, $54,000, $55,000, $30,000 and $38,000, 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 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,
$12,000 and $17,000 for the years ended December 31, 1993, 1994, and 1995
and for the six month periods ended June 30, 1995 and 1996, respectively.
F-15
<PAGE>
The graphics presented on this page show ME/U 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...................... 62
Description of Capital Stock............................ 64
Shares Eligible for Future Sale......................... 67
Underwriting............................................ 69
Legal Matters........................................... 72
Experts................................................. 72
Additional Information.................................. 72
Index to Consolidated Financial Statements.............. F-1
</TABLE>
Until , 1996 (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).
<TABLE>
<S> <C>
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
========
</TABLE>
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 non-transferable 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 $18.00 (assuming an initial offering price
of $15.00 per share). In connection with the warrant, MKC also received certain
non-transferable registration rights that provide, among other things, that MKC
will have one demand registration right and an unlimited number of piggy-back
registration rights during the five-year period after the closing of this
Offering.
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
- ------ ----------------------
<C> <S>
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 Network, Inc. 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.
10.14** Cable Affiliate Agreement dated as of August 1, 1994 between Mind
Extension University, Inc. and Time Warner Cable
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S>
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. 1 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 October 4, 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. 1 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 October 4, 1996
- --------------------------- Directors and Chief Executive
Glenn R. Jones Officer (Principal Executive
Officer)
/s/ Wallace W. Griffin
- --------------------------- President and Director October 4, 1996
Wallace W. Griffin
/s/ Scott A. Wheeler* Group Vice President/Operations October 4, 1996
- --------------------------- and Director
Scott A. Wheeler
/s/ Paul R. Amos* Vice President/International October 4, 1996
- --------------------------- Business Development and
Paul R. Amos Director
/s/ Stephanie L. Garcia* Vice President/Chief Financial October 4, 1996
- --------------------------- Officer (Principal Financial
Stephanie L. Garcia Officer)
/s/ Keith D. Thompson* Chief Accounting Officer October 4, 1996
- --------------------------- (Principal Accounting Officer)
Keith D. Thompson
Director
- ---------------------------
Barbara B. Lawton, Ph.D.
Director
- ---------------------------
Robert J. Malone
/s/ Siim A. Vanaselja* Director October 4, 1996
- ---------------------------
Siim A. Vanaselja
</TABLE>
II-6
<PAGE>
*By:/s/ WALLACE W. GRIFFIN
----------------------
Wallace W. Griffin
Attorney-in fact
II-7
<PAGE>
Exhibit 1.1
Draft - 10/01/96
6,900,000 Shares
JONES EDUCATION COMPANY
Class A Common Stock
UNDERWRITING AGREEMENT
----------------------
_______________, 1996
MONTGOMERY SECURITIES
PIPER JAFFRAY INC.
M. KANE & COMPANY, INC.
c/o Montgomery Securities
600 Montgomery Street
San Francisco, California 94111
Dear Sirs:
SECTION 1. Introductory. James Education Company, a Colorado
------------
corporation (the "Company"), proposes to issue and sell 5,800,000 shares of its
authorized but unissued Class A Common Stock, $.01 par value per share (the
"Common Stock"), and certain shareholders of the Company named in Schedule B
annexed hereto (the "Selling Shareholders") propose to sell an aggregate of
1,100,000 shares of the Company's issued and outstanding Common Stock to the
underwriters named in Schedule A annexed hereto (the "Underwriters"). Said
shares, aggregating a total of 6,900,000 shares, are herein referred to as the
"Firm Common Shares." In addition, the Company proposes to grant to the
Underwriters an option to purchase up to _________ additional shares of Common
Stock, and the Selling Shareholders propose to grant to the Underwriters an
option to purchase up to ________ additional shares of Common Stock (such
________ shares and ________ shares, aggregating a total of 1,035,000 shares,
being referred to as the "Optional Common Shares"), as provided in Section 5
hereof. The Firm Common Shares and, to the extent such option is exercised, the
Optional Common Shares, are hereinafter collectively referred to as the "Common
Shares."
You have advised the Company and the Selling Shareholders that the
Underwriters propose to make a public offering of the Common Shares on the
effective date of the registration statement hereinafter referred to, or as soon
thereafter as in their judgment is advisable.
The Company and the Selling Shareholders hereby confirm their
respective agreements with respect to the purchase of the Common Shares by the
Underwriters as follows:
SECTION 2. Representations and Warranties of the Company. The
---------------------------------------------
Company hereby represents and warrants to the Underwriters that:
(a) A registration statement on Form S-1 (File No. 333-11135) with
respect to the Common Shares has been prepared by the Company in conformity
with the requirements of the Securities Act of 1933, as amended (the
"Act"), and the rules and regulations (the "Rules and Regulations") of the
Securities and Exchange Commission (the "Commission") thereunder, and has
been filed with the Commission. The Company has met all of the eligibility
requirements for the use of a registration statement on Form S-1. There
have been delivered to the Underwriters two signed copies of such
registration statement and amendments, together with two copies of each
exhibit filed therewith. Conformed copies of such registration statement
and amendments (but without exhibits) and of the related preliminary
prospectus have been delivered to each of the Underwriters in such
reasonable
<PAGE>
quantities as each of them has requested. The Company will next file with
the Commission one of the following: (i) prior to effectiveness of such
registration statement, a further amendment thereto, including the form of
final prospectus, or (ii) a final prospectus in accordance with Rules 430A
and 424(b) of the Rules and Regulations. As filed, such amendment and form
of final prospectus, or such final prospectus, shall include all Rule 430A
Information and, except to the extent that the Underwriters shall agree in
writing to a modification, shall be in all substantive respects in the form
furnished to the Underwriters prior to the date and time that this
Agreement was executed and delivered by the parties hereto, or, to the
extent not completed at such date and time, shall contain only such
specific additional information and other changes (beyond that contained in
the latest Preliminary Prospectus) as the Company shall have previously
advised the Underwriters would be included or made therein.
The term "Registration Statement" as used in this Agreement shall mean
such registration statement at the time such registration statement becomes
effective and, in the event any post-effective amendment thereto becomes
effective prior to the First Closing Date (as hereinafter defined), shall
also mean such registration statement as so amended; provided, however,
that such term shall also include all Rule 430A Information deemed to be
included in such registration statement at the time such registration
statement becomes effective as provided by Rule 430A of the Rules and
Regulations. The term "Preliminary Prospectus" shall mean any preliminary
prospectus referred to in the preceding paragraph and any preliminary
prospectus included in the Registration Statement at the time it becomes
effective that omits Rule 430A Information. The term "Prospectus" as used
in this Agreement shall mean the prospectus relating to the Common Shares
in the form in which it is first filed with the Commission pursuant to Rule
424(b) of the Rules and Regulations or, if no filing pursuant to Rule
424(b) of the Rules and Regulations is required, shall mean the form of
final prospectus included in the Registration Statement at the time such
registration statement becomes effective. The term "Rule 430A Information"
means information with respect to the Common Shares and the offering
thereof permitted to be omitted from the Registration Statement when it
becomes effective pursuant to Rule 430A of the Rules and Regulations.
(b) The Commission has not issued any order preventing or suspending
the use of any Preliminary Prospectus, and each Preliminary Prospectus has
conformed in all material respects to the requirements of the Act and the
Rules and Regulations and, as of its date, has not included any untrue
statement of a material fact or omitted to state a material fact necessary
to make the statements therein, in the light of the circumstances under
which they were made, not misleading; and at the time the Registration
Statement becomes effective, and at all times subsequent thereto up to and
including each Closing Date hereinafter mentioned, the Registration
Statement and the Prospectus, and any amendments or supplements thereto,
will contain all material statements and information required to be
included therein by the Act and the Rules and Regulations and will in all
material respects conform to the requirements of the Act and the Rules and
Regulations, and neither the Registration Statement nor the Prospectus, nor
any amendment or supplement thereto, will include any untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading in light
of circumstances under which they were made; provided, however, no
representation or warranty contained in this subsection 2(b) shall be
applicable to information contained in or omitted from any Preliminary
Prospectus, the Registration Statement, the Prospectus or any such
amendment or supplement in reliance upon and in conformity with written
information furnished to the Company by or on behalf of the Underwriters
specifically for use in the preparation thereof.
-2-
<PAGE>
(c) The Company does not own or control, directly or indirectly, any
corporation, association or other entity other than the subsidiaries listed
in Exhibit 21 to the Registration Statement, and any reference herein to
the Company's "subsidiaries" shall mean the subsidiaries listed in such
Exhibit 21. The Company and each of the subsidiaries have been duly
incorporated and are validly existing as corporations in good standing
under the laws of their respective jurisdictions of incorporation, with
full corporate power and authority (corporate and other) to own and lease
their properties and conduct their respective businesses as described in
the Prospectus; on the First Closing Date, the Company will own all of the
outstanding capital stock of its subsidiaries; the Company and its
subsidiaries are in possession of and are operating in compliance with all
authorizations, licenses, permits, consents, certificates and orders
material to the conduct of their respective businesses, except where
noncompliance would not have a material adverse effect on the business or
financial condition of the Company and its subsidiaries, taken as a whole;
the Company and each of its subsidiaries are duly qualified to do business
and are in good standing as foreign corporations in each jurisdiction in
which the ownership or leasing of properties or the conduct of their
respective businesses requires such qualification, except for jurisdictions
in which the failure to so qualify would not have a material adverse effect
upon the Company and its subsidiaries taken as a whole; and no proceeding
has been instituted in any such jurisdiction revoking, limiting or
curtailing, or seeking to revoke, limit or curtail, such power and
authority or qualification.
(d) The Company has an authorized and outstanding capital stock as
set forth under the heading "Capitalization" in the Prospectus; the issued
and outstanding shares of Common Stock and the issued and outstanding
shares of Class B Common Stock have been duly authorized and validly
issued, are fully paid and nonassessable, have been issued in compliance
with all federal and state securities laws, were not issued in violation of
or subject to any preemptive rights or other rights to subscribe for or
purchase securities and conform to the descriptions thereof contained under
the heading "Description of Capital Stock" in the Prospectus. All issued
and outstanding shares of capital stock of the Company's subsidiaries have
been duly authorized and validly issued and are fully paid and
nonassessable and are owned by the Company free and clear of any lien,
claim, equity or other encumbrance of any kind or character. Except as
disclosed in or contemplated by the Prospectus and the consolidated
financial statements of the Company and its subsidiaries and the related
notes thereto, included in the Prospectus, neither the Company nor any of
its subsidiaries has outstanding any options to purchase, or any preemptive
rights or other rights to subscribe for or to purchase, any securities or
obligations convertible into, or any contracts or commitments to issue or
sell, shares of its capital stock or any such options, rights, convertible
securities or obligations. The description of the Company's outstanding
stock options, and other stock plans or arrangements, and the options or
other rights granted and exercised thereunder, set forth in the Prospectus,
accurately and fairly presents in all material respects the information
required to be shown with respect to such options, plans, arrangements, and
rights.
(e) The Common Shares to be sold by the Company have been duly
authorized and, when issued, delivered and paid for in the manner set forth
in this Agreement, will be duly authorized, validly issued, fully paid and
nonassessable, and will conform to the description thereof contained in the
Prospectus; and when duly countersigned by the Company's transfer agent and
registrar, and delivered to the Underwriters in accordance with the
provisions of this Agreement, good and valid title thereto will pass to the
Underwriters free and clear of any liens, claims, equities or other
encumbrances of any kind or character. No preemptive rights or other rights
to subscribe for or purchase exist with respect to the issuance and sale of
the Common Shares by the Company pursuant to this Agreement. No shareholder
of the Company has any right to require the Company to register
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the sale of any shares owned by such shareholder under the Act in the
public offering contemplated by this Agreement.
(f) The Company has full legal right, power and authority to enter
into this Agreement and perform the transactions contemplated hereby. This
Agreement has been duly authorized, executed and delivered by the Company
and constitutes a valid and binding obligation of the Company, enforceable
against the Company in accordance with its terms, except to the extent that
(i) the validity and binding effect and enforcement of this Agreement may
be limited by any applicable bankruptcy, reorganization, moratorium, or
similar laws of general application, (ii) the availability of equitable
remedies may be limited by principles of equity, whether considered in a
proceeding at law or in equity, and (iii) the terms thereof may be limited
by applicable securities laws and the policies embodied therein. The making
and performance of this Agreement by the Company and the consummation of
the transactions herein contemplated by the Company or the performance by
the Company of the transactions contemplated hereby (i) requires any
consent, approval, authorization or order of or registration or filing with
any court, regulatory body, administrative agency or other governmental
body, agency or official (except such as may be required for the
registration of the Common Shares under the Act and compliance with the
securities or Blue Sky laws and Canadian securities laws, and the clearance
of the public offering of the Common Shares by the National Association of
Securities Dealers, Inc. (the "NASD")), or conflicts or will conflict with,
constitutes or will constitute a breach of, or a default under, the
Articles of Incorporation as amended, or Bylaws or other organizational
documents of the Company or any of its subsidiaries, (ii) conflicts or will
conflict or constitutes or will constitute a breach of or a default under
any agreement, indenture, lease or other instrument to which the Company or
any of its subsidiaries is a party or by which any of them or any of their
respective properties may be bound (except for such conflicts, breaches or
defaults for which waivers or consents have been obtained), or violates or
will violate any statute, law, regulation or filing or judgment,
injunction, order or decree applicable to the Company or any of its
subsidiaries or any of the their respective properties, or will result in
the creation or imposition of any lien, charge or encumbrance upon any
property or assets of the Company or any of its subsidiaries pursuant to
the terms of any agreement or instrument to which any of them is a party or
by which any of the them may be bound or to which any of the property or
assets of any of them is subject, in each case, except for such conflicts,
breaches, defaults, violations, or encumbrances that would not singly or in
the aggregate have a material adverse effect the ability of the Company.
(g) Arthur Andersen LLP, who have expressed their opinion with
respect to the financial statements filed with the Commission as a part of
the Registration Statement and included in the Prospectus and in the
Registration Statement, are independent accountants as required by the Act
and the Rules and Regulations.
(h) The consolidated financial statements of the Company and the
related notes thereto, and the interim financial data included in the
Registration Statement and the Prospectus, present fairly the financial
position of the Company and its subsidiaries as of the respective dates of
such financial statements and interim data and the results of operations
and changes in financial position of the Company for the respective periods
covered thereby. Such consolidated financial statements and related notes
and such interim financial data have been prepared in accordance with
accounting principles generally accepted in the United States applied on a
consistent basis, except that all interim financial data shall be subject
to normal year-end adjustments consistent with past practice. Such
consolidated financial statements and related notes, except for the interim
financial data, have been certified by the Company's independent
accountants. The financial and statistical data set forth in the Prospectus
under the captions "Prospectus Summary," "Risk Factors," "Use of Proceeds,"
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"Capitalization," "Dilution," "Selected Financial and Operating Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business," "Management," "Certain Relationships and Related
Transactions" and "Principal and Selling Shareholders" fairly present the
information set forth therein on the basis stated in the Registration
Statement.
(i) The Company is not in violation or default of any provision of
its Articles of Incorporation, as amended; none of the Company's
subsidiaries is in violation or default of its Articles of Incorporation;
neither the Company nor any of its subsidiaries is in violation or default
of any provision of its Bylaws or is in breach of or default with respect
to any provision of any judgment, decree or order, or is in breach of or
default with respect to any provision of any material agreement, mortgage,
deed of trust, lease, loan agreement, security agreement, license,
indenture, permit or other instrument to which it is a party or by which it
or any of its properties are bound; and there does not exist any state of
facts which constitutes an event of default on the part of the Company or
any of its subsidiaries as defined in such documents or which, with notice
or lapse of time or both, would constitute such an event of default.
(j) There are no contracts or other documents required to be
described in the Registration Statement or to be filed as exhibits to the
Registration Statement by the Act or by the Rules and Regulations which
have not been described or filed as required. The contracts so described in
the Prospectus are in full force and effect on the date hereof; and neither
the Company nor any of its subsidiaries, nor to the best of the Company's
or any subsidiaries's knowledge any other party, is in breach of or default
under any material provision of any such contract which would have a
material adverse effect on the Company and its subsidiaries, taken as a
whole.
(k) There are no legal or governmental actions, suits or proceedings
pending or, to the best of the Company's knowledge, threatened to which the
Company or any of its subsidiaries is or may be a party or with respect to
which property owned or leased by the Company or any of its subsidiaries is
or may be the subject, or related to environmental, employment of aliens or
discrimination matters, which actions, suits or proceedings might,
individually or in the aggregate, prevent or adversely affect the
transactions contemplated by this Agreement or result in a material adverse
change in the condition (financial or otherwise), properties, business,
results of operations or prospects of the Company and its subsidiaries,
taken as a whole, and no labor disturbance by the employees of the Company
or its subsidiaries exists or, to the knowledge of the Company or any of
its subsidiaries, is imminent and which might be expected to result in a
material adverse change in the condition (financial or otherwise),
properties, business, results of operations or prospects of the Company or
any of its subsidiaries, taken as a whole. Neither the Company nor any of
its subsidiaries is a party to, or subject to the provisions of, any
material injunction, judgment, decree or order of any court, regulatory
body, administrative agency or other governmental body.
(l) The Company and each of its subsidiaries have good and marketable
title to all the properties and assets reflected as owned by them,
respectively, in the consolidated financial statements hereinabove
described (or as reflected or described elsewhere in the Prospectus),
subject to no lien, mortgage, pledge, charge or encumbrance of any kind
except (i) those, if any, reflected in such consolidated financial
statements (or elsewhere in the Prospectus), or (ii) those which do not
materially adversely affect the use made and proposed to be made of such
property by the Company or any of its subsidiaries. The Company and each of
its subsidiaries hold their respective leased properties under valid and
binding leases, with such exceptions as are not materially significant in
relation to the business of the Company or its subsidiaries. Except as
disclosed in the Prospectus,
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<PAGE>
the Company and each of its subsidiaries own or lease all such properties
as are necessary to their respective operations as now conducted.
(m) Since the respective dates as of which information is given in
the Registration Statement and Prospectus, and except as described in or
specifically contemplated by the Prospectus (i) neither the Company nor any
of its subsidiaries has incurred any liabilities or obligations, direct,
indirect or contingent, or entered into any verbal or written agreement or
other transaction which is not in the ordinary course of business and which
reasonably could be expected to result in a material reduction in the
future earnings of the Company or its subsidiaries, taken as a whole; (ii)
the Company and its subsidiaries, taken as a whole, have not sustained any
material loss or interference with their respective businesses or
properties from fire, flood, windstorm, accident or other calamity, whether
or not covered by insurance; (iii) the Company has not paid or declared any
dividends or other distributions with respect to its capital stock, and the
Company and its subsidiaries are not in default in the payment of principal
or interest on any outstanding debt obligations; (iv) there has not been
any change in the capital stock (other than upon the sale of the Common
Shares hereunder) or indebtedness material to the Company; and (v) there
has not been any material adverse change in the condition (financial or
otherwise), business, properties, results of operations or prospects of the
Company or its subsidiaries, taken as a whole.
(n) The Company and its subsidiaries have sufficient trademarks,
trade names, patent rights, mask works, copyrights, licenses, approvals and
governmental authorizations to conduct their respective businesses as now
conducted; and the Company has no knowledge of any infringement by it or
its subsidiaries of trademarks, trade name rights, trade dress, patent
rights, mask works, copyrights, licenses, trade secret or other similar
rights of others; and the Company has no knowledge of any infringement by
others of the Company's or its subsidiaries' trademarks, trade name rights,
trade dress, patent rights, mask works, copyrights, licenses, trade secrets
or other similar rights that would be material to the business or financial
condition of the Company and its subsidiaries, taken as a whole; and there
is no claim being made against the Company or any of its subsidiaries
regarding trademark, trade name, trade dress, patent right, mask work,
copyright, license, trade secret or other infringement which could have a
material adverse effect on the condition (financial or otherwise),
business, results of operations or prospects of the Company and its
subsidiaries, taken as a whole.
(o) The Company has not been advised, and has no reason to believe,
that either it or any of its subsidiaries is not conducting business in
compliance with all applicable laws, rules and regulations of the
jurisdictions in which it is conducting business, including, without
limitation, all applicable local, state and federal employment, truth-in-
advertising, franchising, immigration and environmental laws and
regulations, except where failure to be so in compliance would not
materially adversely affect the condition (financial or otherwise),
business, results of operations or prospects of the Company and its
subsidiaries, taken as a whole.
(p) The Company and each of its subsidiaries and have filed all
federal, state and foreign income and franchise tax returns or extensions
therefor required to be filed and have paid all taxes shown as due thereon;
and the Company has no knowledge of any tax deficiency which has been or
might be asserted or threatened against the Company or any of its
subsidiaries which could materially and adversely affect the business,
operations or properties of the Company and its subsidiaries, taken as a
whole.
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<PAGE>
(q) The Company and each of its subsidiaries maintain a system of
internal accounting controls sufficient to provide reasonable assurances
that (i) transactions are executed in accordance with management's general
or specific authorizations; (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain accountability for assets;
and (iii) the recorded accountability for assets is compared with existing
assets at reasonable intervals and appropriate action is taken with respect
to any differences.
(r) The Company is not required to make, and following receipt of the
proceeds from the sale of the Common Shares will not be required to make,
any filing or to register under the Investment Company Act of 1940, as
amended.
(s) There is no proceeding pending or threatened (or, to the
knowledge of the Company or any of its subsidiaries or any officer of the
Company or its subsidiaries, any basis therefor) which may lead to the
revocation, suspension, termination or nonrenewal or any certificate,
order, license, permit, easement, consent, waiver, approval, franchise,
grant, authorization or concession required to conduct the business of the
Company or its subsidiaries as now conducted and as proposed to be
conducted and which are material to the Company and its subsidiaries, taken
as a whole.
(t) Neither the Company nor any subsidiary of the Company conducts
business with the Government of Cuba, or in Cuba or with any Cuban business
entity or enterprise.
SECTION 3. Additional Representations, Warranties and Covenants of the
-----------------------------------------------------------
Selling Shareholders.
--------------------
(a) Each of the Selling Shareholders severally represents and
warrants to, and agrees with, the several Underwriters that:
(i) Such Selling Shareholder has good and valid title to the
Common Shares proposed to be sold by such Selling Shareholder
hereunder and the full right, power and authority to enter into this
Agreement and to sell, assign, transfer and deliver such Common Shares
hereunder, free and clear of all liens, claims, equities or other
encumbrances of any kind or character; and upon delivery of and
payment for such Common Shares hereunder, the Underwriters will
acquire good and valid title thereto, free and clear of all liens,
claims, equities or other encumbrances of any kind or character.
(ii) Such Selling Shareholder has executed and delivered a
Power of Attorney and a Custody Agreement (hereinafter collectively
referred to as the "Shareholders' Agreement") and in connection
herewith such Selling Shareholder further represents, warrants and
agrees that such Selling Shareholder has deposited in custody, under
the Shareholders' Agreement, with the agent named therein (the
"Agent") as custodian, certificates in negotiable form for the Common
Shares to be sold hereunder by such Selling Shareholder for the
purpose of further delivery pursuant to this Agreement. Such Selling
Shareholder agrees that the Common Shares to be sold by such Selling
Shareholder on deposit with the Agent are subject to the interests of
the Company and the Underwriters, that the arrangements made for such
custody are in that extent irrevocable, and that the obligations of
such Selling Shareholder hereunder shall not be terminated, except as
provided in this Agreement or in the Shareholders' Agreement, by any
act of such Selling Shareholder, by operation of law, by the death or
incapacity of such Selling Shareholder or by the occurrence of any
other event. If the Selling Shareholder should die, become
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<PAGE>
incapacitated, or if any other event should occur before the delivery
of the Common Shares hereunder, the certificates and documents
evidencing Common Shares then on deposit with the Agent shall be
delivered by the Agent in accordance with the terms and conditions of
this Agreement as if such death, incapacity or other event had not
occurred, regardless of whether the Agent shall have received notice
thereof. This Agreement and the Shareholders' Agreement have been duly
executed and delivered by or on behalf of such Selling Shareholder and
the form of such Shareholders' Agreement has been delivered to you.
(iii) The performance of this Agreement and the
Shareholders' Agreement and the consummation of the transactions
contemplated hereby and by the Shareholders' Agreement will not result
in a breach or violation by such Selling Shareholder of any of the
terms or provisions of, or constitute a default by, such Selling
Shareholder under any indenture, mortgage, deed of trust, trust
(constructive or other), loan agreement, lease, franchise, license or
other agreement or instrument to which such Selling Shareholder is a
party or by which such Selling Shareholder or any of his properties is
bound, or any statute, judgment, decree, order, rule or regulation of
any court or governmental agency or body applicable to such Selling
Shareholder or any of his properties.
(iv) Such Selling Shareholder has not taken and will not
take, directly or indirectly, any action designed to, or which has
constituted or which might reasonably be expected to cause or result
in, stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Common Shares.
(v) Each Preliminary Prospectus and the Prospectus,
respectively, has conformed or conform, as the case may be, in all
material respects to the requirements of the Act and the Rules and
Regulations and has not included any untrue statement of a material
fact or omitted to state a material fact necessary to make the
statements therein not misleading in light of the circumstances under
which they were made; and neither the Registration Statement nor the
Prospectus, nor any amendment or supplement thereto will include any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements
therein not misleading.
(vi) The representations and warranties of the Company set
forth in Section 2 above are true and correct in all material
respects.
(b) Each of the Selling Shareholders agrees with the Company and
the Underwriters not to offer to sell, sell or contract to sell or
otherwise dispose of any shares of Common Stock or securities convertible
into or exchangeable for any shares of Common Stock for a period of 180
days from the date of the Prospectus without the prior written consent of
either Montgomery Securities or the Underwriters acting jointly (the giving
or withholding of such consent being in the sole discretion of Montgomery
Securities, or the Underwriters acting jointly, as the case may be).
SECTION 4. Representations and Warranties of the Underwriters. The
--------------------------------------------------
Underwriters represent and warrant to the Company and the Selling Shareholders
that the information set forth (i) on the cover page of the Prospectus with
respect to price, underwriting discounts and commissions and terms of the
offering and (ii) under "Underwriting" in the Prospectus furnished to the
Company by the Underwriters for use in connection with the preparation of the
Registration Statement and the Prospectus is correct in all material respects.
The Company and the Selling Shareholders acknowledge that this information is
the sole
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<PAGE>
information furnished to the Company by the Underwriters for inclusion in the
Registration Statement, any Preliminary Prospectus, any Prospectus, or any
amendment or supplement thereto.
SECTION 5. Purchase, Sale and Delivery of Common Shares. On the basis of
--------------------------------------------
the representations, warranties and agreements herein contained, but subject to
the terms and conditions herein set forth, the Company agrees to issue and sell
to the Underwriters 5,800,000 Firm Common Shares, and the Selling Shareholders
agree to sell to the Underwriters the number of Firm Common Shares set forth
beside such Selling Shareholders' name on Schedule B hereto, aggregating
1,100,000 Firm Common Shares, and the Underwriters agree, severally and not
jointly, to purchase from the Company and the Selling Shareholders the number of
Firm Common Shares set forth opposite their respective names in Schedule A
hereto. The purchase price per share to be paid by the several Underwriters to
the Company and the Selling Shareholders shall be $_______ per share.
Delivery of certificate(s) for the Firm Common Shares to be purchased by
the Underwriters shall be made by or on behalf of the Company and the Selling
Shareholders to the Underwriters or to the account of Montgomery Securities at
the Depositary Trust Corporation, New York, New York ("DTC"), as the
Representatives may direct, for the respective accounts of Underwriters. In the
event certificates are delivered to the Underwriters other than through DTC,
such delivery shall be made at the offices of Davis, Graham & Stubbs LLP, 370
Seventeenth Street, Suite 4700, Denver, Colorado 80202 (or such other place as
may be agreed upon by the Company, the Selling Shareholders and the
Representatives). Delivery of certificates, whether through DTC or otherwise,
shall be made at such time and date, not later than the third (or, if the Firm
Common Shares are priced, as contemplated by Rule 15cb-1(c) promulgated under
the Securities Exchange Act of 1934, as amended, after 4:30 p.m., Washington,
D.C. time, the fourth) full business day following the first day that any
of Common Shares are released by the Underwriters for sale to the public, as the
Representatives shall designate (the "First Closing Date"); provided, however,
that if the Prospectus is at any time prior to the First Closing Date
recirculated to the public, the First Closing Date shall occur upon the later of
the third or fourth, as the case may be, full business day following the first
date that any of the Common Shares are released by the Underwriters for sale to
public or the date that is 48 hours after the date that the Prospectus has been
so recirculated. The certificates for the Firm Common Shares shall be
registered in such names and denominations as the Representatives shall have
requested at least two full business days prior to the First Closing Date and
shall be made available for checking and packaging on the business day preceding
the First Closing Date at a location in New York, New York, as may be designated
by the Representatives. Time shall be of the essence, and delivery at the time
and place specified in this Agreement is a further condition to the obligations
of the Underwriters. Payment by the Underwriters for the purchase price for the
Firm Common Shares shall be made by wire transfer in federal funds to
____________________ Bank, account number _________________, in the case of the
Company, and to ____________________ Bank, account number ___________________,
in the case of the Selling Shareholders.
In addition, on the basis of the representations, warranties and agreements
herein contained, but subject to the terms and conditions herein set forth, the
Company hereby grants an option to the Underwriters to purchase up to _________
Optional Common Shares, and the __________ Selling Shareholders hereby grant an
option to the Underwriters to purchase up to _________ Optional Shares,
aggregating 1,035,000 shares, at the purchase price per share to be paid for the
Firm Common Shares, for use solely in covering any over-allotments made by the
Underwriters in the sale and distribution of the Firm Common Shares. The
options granted hereunder may be exercised at any time (but not more than once)
within 30 days after the first date that any of the Firm Common Shares are
released by the Underwriters for sale to the public upon notice by the
Underwriters to the Company and the Selling Shareholders setting forth the
aggregate number of Optional Common Shares as to which the Underwriters are
exercising the options, the names and denominations in which the certificates
for such shares are to be registered and the time and
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place at which such certificates will be delivered. Such time of delivery (which
may not be earlier than the First Closing Date), being herein referred to as the
"Second Closing Date," shall be determined by the Underwriters, but if at any
time other than the First Closing Date shall not be earlier than three nor later
than five full business days after delivery of such notice of exercise. The
number of Optional Common Shares to be purchased by each Underwriter shall be
determined by multiplying the aggregate number of Optional Common Shares to be
sold by the Company and the Selling Shareholders, respectively, pursuant to such
notice of exercise by a fraction, the numerator of which is the number of Firm
Common Shares to be purchased by such Underwriter as set forth opposite its name
in Schedule A and the denominator of which is 6,900,000 (subject to such
adjustments to eliminate any fractional share purchases as the Underwriters in
their discretion may make). In the event that the option is exercised by the
Underwriters for less than all of the Optional Common Shares, the number of
Optional Common Shares with respect to which the option is exercised shall be
purchased from the Company and the Selling Shareholders on a pro rata basis.
Certificates for the Optional Common Shares will be made available for checking
and packaging on the business day preceding the Second Closing Date at a
location in New York, New York, designated by you. The manner of payment for
and delivery of the Optional Common Shares shall be the same as for the Firm
Common Shares purchased, as specified in this Section 5. At any time before
lapse of the option, the Underwriters may cancel such option by giving written
notice of such cancellation to the Company and the Option Selling Shareholder.
If the option is canceled or expires unexercised in whole or in part, the
Company will deregister under the Act the number of Optional Common Shares as to
which the option has not been exercised.
Subject to the terms and conditions hereof, the Underwriters propose to
make a public offering of their respective portions of the Firm Common Shares,
and of the Optional Common Shares if and to the extent that the Underwriters
exercise their option to purchase Optional Common Shares, as soon after the
effective date of the Registration Statement as in the judgment of the
Underwriters is advisable and at the public offering price set forth on the
cover page of and on the terms set forth in the Prospectus.
SECTION 6. Covenants of the Company. The Company covenants and agrees that:
------------------------
(a) The Company will use its best efforts to cause the Registration
Statement and any amendment thereof, if not effective at the time and date
that this Agreement is executed and delivered by the parties hereto, to
become effective. If the Registration Statement has become or becomes
effective pursuant to Rule 430A of the Rules and Regulations, or the filing
of the Prospectus is otherwise required under Rule 424(b) of the Rules and
Regulations, the Company will file the Prospectus, properly completed,
pursuant to the applicable paragraph of Rule 424(b) of the Rules and
Regulations within the time period prescribed and will provide evidence
satisfactory to the Underwriters of such timely filing. The Company will
promptly advise the Underwriters in writing (i) of the receipt of any
comments of the Commission, (ii) of any request of the Commission for
amendment of or supplement to the Registration Statement (either before or
after it becomes effective), any Preliminary Prospectus or the Prospectus
or for additional information, (iii) when the Registration Statement shall
have become effective and (iv) of the issuance by the Commission of any
stop order suspending the effectiveness of the Registration Statement or of
the institution of any proceedings for that purpose. If the Commission
shall enter any such stop order at any time, the Company will use its best
efforts to obtain the lifting of such order at the earliest possible
moment. The Company will not file any amendment or supplement to the
Registration Statement (either before or after it becomes effective), any
Preliminary Prospectus or the Prospectus of which the Underwriters have not
been furnished with a copy a reasonable time prior to such filing or to
which the Underwriters reasonably object in writing or which is not in
compliance with the Act and the Rules and Regulations.
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(b) The Company will prepare and file with the Commission, promptly
upon the Underwriters' request, any amendments or supplements to the
Registration Statement or the Prospectus which in the Underwriters'
judgment may be necessary or advisable to enable the several Underwriters
to continue the distribution of the Common Shares and will use its best
efforts to cause the same to become effective as promptly as possible. The
Company will fully and completely comply with the provisions of Rule 430A
of the Rules and Regulations with respect to information omitted from the
Registration Statement in reliance upon such Rule.
(c) If at any time within the nine-month period referred to in
Section 10(a)(3) of the Act during which a prospectus relating to the
Common Shares is required to be delivered under the Act any event occurs,
as a result of which the Prospectus, including any amendments or
supplements, would include an untrue statement of a material fact, or omit
to state any material fact required to be stated therein or necessary to
make the statements therein not misleading, or if it is necessary at any
time to amend the Prospectus, including any amendments or supplements, to
comply with the Act or the Rules and Regulations, the Company will promptly
advise the Underwriters thereof and will promptly prepare and file with the
Commission, at its own expense, an amendment or supplement which will
correct such statement or omission or an amendment or supplement which will
effect such compliance and will use its best efforts to cause the same to
become effective as soon as possible; and, in case any Underwriter is
required to deliver a prospectus after such nine-month period, the Company,
upon request, but at the expense of such Underwriter, will promptly prepare
such amendment or amendments to the Registration Statement and such
Prospectus or Prospectuses as may be necessary to permit compliance with
the requirements of Section 10(a)(3) of the Act.
(d) As soon as practicable, but not later than 45 days after the end
of the first quarter ending after one year following the "effective date of
the Registration Statement" (as defined in Rule 158(c) of the Rules and
Regulations), the Company will make generally available to its security
holders an earnings statement (which need not be audited) covering a period
of 12 consecutive months beginning after the effective date of the
Registration Statement which will satisfy the provisions of the last
paragraph of Section 11(a) of the Act.
(e) During such period as a prospectus is required by law to be
delivered in connection with sales by an Underwriter or dealer, the
Company, at its expense, but only for the nine-month period referred to in
Section 10(a)(3) of the Act, will furnish to the Underwriters or mail
copies of the Registration Statement, the Prospectus, the Preliminary
Prospectus and all amendments and supplements to any such documents in each
case as soon as available and in such quantities as the Underwriters may
request, for the purposes contemplated by the Act.
(f) The Company shall cooperate with the Underwriters and their
counsel in order to qualify or register the Common Shares for sale under
(or obtain exemptions from the application of) the Blue Sky laws of such
jurisdictions as the Underwriters designate and under Canadian securities
laws, will comply with such laws and will continue such qualifications,
registrations and exemptions in effect so long as reasonably required for
the distribution of the Common Shares. The Company shall not be required to
qualify as a foreign corporation or to file a general consent to service of
process in any such jurisdiction where it is not presently qualified or
where it would be subject to taxation as a foreign corporation. The Company
will advise the Underwriters promptly of the suspension of the
qualification or registration of (or any such exemption relating to) the
Common Shares for offering, sale or trading in any jurisdiction or any
initiation or overt threat of any proceeding for any such purpose, and in
the event of the issuance of any order suspending such
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<PAGE>
qualification, registration or exemption, the Company, with the
Underwriters' cooperation, will use its best efforts to obtain the
withdrawal thereof.
(g) During the period of five years hereafter, the Company will
furnish to the Underwriters: (i) as soon as practicable after the end of
each fiscal year, copies of the Annual Report to Shareholders of the
Company containing the balance sheet of the Company as of the close of such
fiscal year and statements of income, stockholders' equity and cash flows
for the year then ended and the opinion thereon of the Company's
independent public accountants; (ii) as soon as practicable after the
filing thereof, copies of each proxy statement, Annual Report on Form 10-K,
Quarterly Report on Form 10-Q, Report on Form 8-K or other report filed by
the Company with the Commission, the NASD or any securities exchange; and
(iii) as soon as available, copies of any report or communication of the
Company mailed generally to holders of its Common Stock.
(h) During the period of 180 days from the date of the Prospectus,
without the prior written consent of either Montgomery Securities or the
Underwriters acting jointly (the giving or withholding of such written
consent being in the sole discretion of Montgomery Securities, or the
Underwriters acting jointly, as the case may be), the Company will not
issue, offer, sell, grant options to purchase or otherwise dispose of any
of the Company's equity securities or any other securities convertible into
or exchangeable with its Common Stock or other equity security, except for
(i) the grant of options in the ordinary course of business pursuant to
existing stock option plans described in the Prospectus, or (ii) the
issuance of shares of Common Stock pursuant to the exercise of director,
officer or employee stock options that are disclosed in the Registration
Statement or Prospectus and are outstanding on the date of the Prospectus.
(i) The Company will apply the net proceeds of the sale of the Common
Shares sold by it substantially in accordance with its statements under the
caption "Use of Proceeds" in the Prospectus and will file with the
Commission, and deliver copies thereof to the Representatives upon any such
filing, such reports on Form SR as may be required pursuant to Rule 463
under the Act.
(j) The Company will use its best efforts to qualify or register its
Common Stock for sale in non-issuer transactions under (or obtain
exemptions from the application of) the Blue Sky laws of the State of
California (and thereby permit market making transactions and secondary
trading in the Company's Common Stock in California), will comply with such
Blue Sky laws and will use its best efforts to maintain such
qualifications, registrations and exemptions in effect for a period of five
years after the date hereof.
(k) The Company will use its best efforts to designate the Common
Stock for quotation as a National Market System security on the NASD
Automated Quotation System.
The Representatives may, in their sole discretion and on behalf of the
Underwriters, waive in writing the performance by the Company of any one or more
of the foregoing covenants or extend the time for their performance.
SECTION 7. Payment of Expenses. Whether or not the transactions
-------------------
contemplated hereunder are consummated or this Agreement becomes effective or is
terminated, the Company agrees to pay all costs, fees and expenses incurred in
connection with the performance of its obligations hereunder, including without
limiting the generality of the foregoing, (i) all expenses incident to the
issuance and delivery of the Common Shares (including all printing and engraving
costs), (ii) all fees and expenses of the registrar and transfer agent of the
Common Stock, (iii) all necessary issue, transfer and other stamp taxes in
connection with the
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<PAGE>
issuance and sale of the Common Shares to the Underwriters, (iv) all fees and
expenses of the Company's counsel, Selling Shareholders' counsel and the
Company's independent accountants, (v) all costs and expenses incurred in
connection with the preparation, printing, filing, shipping and distribution to
the Underwriters and dealers of the Registration Statement, each Preliminary
Prospectus and the Prospectus (including all exhibits and financial statements)
and all amendments and supplements provided for herein, this Agreement, the
Agreement Among Underwriters, the Selected Dealers Agreement, the Underwriters'
Questionnaire, the Underwriters' Power of Attorney and the preliminary Blue Sky
memorandum and final Blue Sky memorandum, (vi) all filing fees, attorneys' fees
and expenses incurred by the Company or the Underwriters in connection with
qualifying or registering (or obtaining exemptions from the qualification or
registration of) all or any part of the Common Shares for offer and sale under
the Blue Sky laws and applicable Canadian securities laws, (vii) the filing fee
of the NASD and attorneys fees and expenses incurred by the Company or the
Underwriters in obtaining a letter of no objection from the NASD, and (viii) all
other fees, costs and expenses referred to in Item 13 of the Registration
Statement. Except as provided in this Section 7, Section 9 and Section 11
hereof, the Underwriters shall pay all of their own expenses, including the fees
and disbursements of their counsel (excluding those relating to qualification,
registration or exemption under the Blue Sky laws, Canadian securities laws, the
Blue Sky memoranda and relating to obtaining a letter of no objection from the
NASD, referred to above).
SECTION 8. Conditions of the Obligations of the Underwriters. The
-------------------------------------------------
obligations of the Underwriters to purchase and pay for the Firm Common Shares
on the First Closing Date and the Optional Common Shares on the Second Closing
Date shall be subject to the accuracy of the representations and warranties on
the part of the Company and the Selling Shareholders herein set forth as of the
date hereof and as of the First Closing Date or the Second Closing Date, as the
case may be, to the accuracy of the statements of Company officers and the
Selling Shareholders made pursuant to the provisions of this Agreement, to the
performance by the Company and the Selling Shareholders of their respective
obligations hereunder, and to the following additional conditions:
(a) The Registration Statement shall have become effective; if the
filing of the Prospectus, or any supplement thereto, is required pursuant
to Rule 424(b) of the Rules and Regulations, the Prospectus shall have been
filed in the manner and within the time period required by Rule 424(b) of
the Rules and Regulations; and prior to such Closing Date, no stop order
suspending the effectiveness of the Registration Statement shall have been
issued and no proceedings for that purpose shall have been instituted or
shall be pending or, to the knowledge of the Company, t he Selling
Shareholders or the Underwriters, shall be contemplated by the Commission;
and any request of the Commission for inclusion of additional information
in the Registration Statement, or otherwise, shall have been complied with
to the Underwriters' satisfaction.
(b) The Underwriters shall be satisfied that since the respective
dates as of which information is given in the Registration Statement and
Prospectus, (i) there shall not have been any change in the capital stock
(other than pursuant to the exercise of director, officer or employee stock
options disclosed in the Registration Statement or Prospectus and
outstanding as of the date of the Prospectus) of the Company or its
subsidiaries or any material change in the indebtedness of the Company or
its subsidiaries, (ii) except as set forth in or contemplated by the
Registration Statement or the Prospectus, no material verbal or written
agreement or other transaction shall have been entered into by the Company
or its subsidiaries which is not in the ordinary course of business and
which reasonably could be expected to result in a material reduction in the
future earnings of the Company or its subsidiaries, taken as a whole, (iii)
no loss or damage (whether or not insured) to the property of the Company
or its subsidiaries shall have been sustained which materially and
adversely affects the condition (financial or otherwise), business, results
of operations or prospects
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<PAGE>
of the Company or its subsidiaries, taken as a whole, (iv) no legal or
governmental action, suit or proceeding affecting the Company or its
subsidiaries which could have a material adverse effect upon the Company
and its subsidiaries, taken as a whole, or which affects or may affect the
transactions contemplated by this Agreement shall have been instituted or
threatened and (v) there shall not have been any material change in the
condition (financial or otherwise), business, management, results of
operations or prospects of the Company and its subsidiaries taken as a
whole which makes it impractical or inadvisable in the judgment of the
Underwriters to proceed with the public offering or purchase of the Common
Shares as contemplated hereby.
(c) There shall have been furnished to the Underwriters on each
Closing Date, in form and substance satisfactory to the Underwriters, such
documents and certificates as the Underwriters shall reasonably request,
including the following:
(i) An opinion of Davis, Graham & Stubbs LLP, counsel for the
Company and the Selling Shareholders, addressed to the Underwriters
and dated the First Closing Date, or the Second Closing Date, as the
case may be, to the effect that:
(1) Each of the Company and its subsidiaries, respectively,
has been duly incorporated and is validly existing as a
corporation in good standing under the laws of its jurisdiction
of incorporation, is duly qualified to do business as a foreign
corporation and is in good standing in all other jurisdictions
where the ownership or leasing of properties or the conduct of
its business requires such qualification, except for
jurisdictions in which the failure to so qualify would not have a
material adverse effect on the Company or its subsidiaries, as
the case may be, and each has full corporate power and authority
to own its properties and conduct its business as described in
the Registration Statement;
(2) The authorized capital stock of the Company is as set
forth under the caption "Capitalization" in the Prospectus, and
the number of shares of Common Stock that will be issued and
outstanding after consummation of the transactions contemplated
hereby is as set forth under the caption "Prospectus Summary -
The Offering" (assuming the Underwriters do not elect to purchase
any of the Optional Common Shares); all necessary and proper
corporate proceedings have been taken in order to validly
authorize such authorized Common Stock and to validly issue such
issued and outstanding Common Stock; all outstanding shares of
Common Stock (including the Firm Common Shares and Optional
Common Shares, if any) have been duly and validly authorized and
issued, are fully paid and nonassessable, were not issued in
violation of any preemptive rights or other rights to subscribe
for or purchase any securities and conform to the description
thereof contained in the Prospectus; without limiting the
foregoing, there are no preemptive or other rights to subscribe
for or purchase any of the Common Shares to be sold by the
Company hereunder; neither the Articles of Incorporation, as
amended, nor Bylaws of the Company, nor does any contract,
contain any restriction upon the voting or transfer of any of the
shares of capital stock of the Company (including the Firm Common
Shares and the Option Common Shares), except such restrictions as
may be imposed by federal and state securities laws or as may be
expressly described in the Prospectus;
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<PAGE>
(3) All of the issued and outstanding shares of capital
stock of the Company's subsidiaries have been duly and validly
authorized and issued, are fully paid and nonassessable, and good
and valid title thereto is held by the Company free and clear of
all liens, claims, equities or other encumbrances of any kind or
character;
(4) The certificate(s) evidencing the Common Shares to be
delivered hereunder are in due and proper form under Colorado
law, and when duly countersigned by the Company's transfer agent
and registrar, and delivered to the Underwriters or to the order
of the Underwriters against payment of the agreed consideration
therefor in accordance with the provisions of this Agreement,
good and valid title to the Common Shares (including the Firm
Common Shares to be sold by the Company and the Optional Common
Shares to be sold by the Company to the extent that the over-
allotment option is exercised) will pass to the Underwriters free
and clear of any liens, claims, equities or other encumbrances of
any kind or character, and the Common Shares represented by such
certificate(s) will be duly authorized and validly issued, fully
paid and nonassessable, will not have been issued in violation of
or subject to any preemptive rights or other rights to subscribe
for or purchase securities, and will conform to the description
thereof contained in the Prospectus;
(5) Except as disclosed in the Prospectus, there are no
outstanding options, warrants or other rights calling for the
issuance of, and no commitments or obligations to issue, any
shares of capital stock of the Company or any security
convertible into or exchangeable for capital stock of the
Company;
(6) (a) The Registration Statement has become effective
under the Act, and, to such counsel's knowledge, no stop order
suspending the effectiveness of the Registration Statement or
preventing the use of the Prospectus has been issued and no
proceedings for that purpose have been instituted or are pending
or overtly threatened by the Commission; any required filing of
the Prospectus and any supplement thereto pursuant to Rule 424(b)
of the Rules and Regulations has been made in the manner and
within the time period required by such Rule 424(b);
(b) The Registration Statement, the Prospectus and
each amendment or supplement thereto (except for the financial
statements and schedules and other statistical financial data and
schedules included therein, as to which such counsel need express
no opinion) comply as to form in all material respects with the
requirements of the Act and the Rules and Regulations; and
(c) To such counsel's knowledge, there are no
franchises, leases, contracts, agreements or documents of a
character required to be disclosed in the Registration Statement
or Prospectus or to be filed as exhibits to the Registration
Statement which are not disclosed or filed, as required;
(7) The Company has full right, corporate power and
authority to enter into this Agreement and to sell and deliver
the Common Shares to be sold by it to the Underwriters; this
Agreement has been duly and validly authorized by all necessary
corporate action by the Company, has been duly and validly
executed and
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<PAGE>
delivered by and on behalf of the Company, and is a valid and
binding agreement of the Company enforceable against the Company
in accordance with its terms, except to the extent that (i) the
validity and binding effect and enforcement of this Agreement may
be limited by any applicable bankruptcy, reorganization,
moratorium, or similar laws of general application, (ii) the
availability of equitable remedies may be limited by principles
of equity, whether considered in a proceeding at law or in
equity, and (iii) the terms hereof may be limited by applicable
securities laws and the policies embodied therein; and no
approval, authorization, order, consent, registration, filing,
qualification, license or permit of or with any court,
regulatory, administrative or other governmental body is required
for the execution and delivery of this Agreement by the Company
or the consummation of the transactions contemplated by this
Agreement, except such as have been obtained and are in full
force and effect under the Act and such as may be required under
applicable Blue Sky laws and applicable Canadian securities laws
in connection with the purchase and distribution of the Common
Shares by the Underwriters and the obtaining of a letter of no
objection from the NASD with respect to such offering;
(8) The execution and performance of this Agreement, the
sale of the Common Shares and the consummation of the
transactions herein contemplated will not violate any of the
provisions of the Articles of Incorporation, as amended, or
Bylaws of the Company or the Articles of Incorporation or Bylaws
of any of its subsidiaries or, to such counsel's knowledge,
conflict with, result in the breach of, or constitute, either by
itself or upon notice or the passage of time or both, a default
under any agreement, mortgage, deed of trust, lease, franchise,
license, indenture, permit or other instrument to which the
Company or its subsidiaries is a party or by which the Company or
its subsidiaries or any of its or their property may be bound or
affected, or violate any statute, judgment, decree, order, rule
or regulation of any court or government body having jurisdiction
over the Company or its subsidiaries or any of its or their
property (other than state securities or Blue Sky laws and
regulations and Canadian securities laws as to which counsel need
not express any opinion);
(9) The Company is not in violation of its Articles of
Incorporation, as amended, or Bylaws and the Company's
subsidiaries are not in violation of their of Incorporation or
Bylaws, and, to such counsel's knowledge neither the Company nor
its subsidiaries is in breach of or default with respect to any
provision of any agreement, mortgage, deed of trust, lease, loan
agreement, security agreement, license, indenture, permit or
other instrument to which the Company or its subsidiaries is a
party or by which the Company or any of its properties or the
Company's subsidiaries or any of their properties may be bound
or affected, except where such default would not materially
adversely affect the Company or its subsidiaries, taken as a
whole; and, to such counsel's knowledge, the Company and its
subsidiaries are in compliance with all laws, rules, regulations,
judgments, decrees, orders and statutes of any court or
jurisdiction to which they are subject, except where
noncompliance would not materially adversely affect the Company
or its subsidiaries, taken as a whole;
(10) To such counsel's knowledge, there are no legal
actions, suits or governmental proceedings pending or threatened
before any court or governmental
-16-
<PAGE>
agency, authority or body which, if determined adversely to the
Company or its subsidiaries, would individually or in the
aggregate have a material adverse effect on the financial
position, shareholders' equity or results of operations of the
Company or its subsidiaries, taken as a whole;
(11) To such counsel's knowledge, no holders of securities
of the Company have rights to the registration of shares of
Common Stock, Class B Common Stock or other securities which
would be required to be included in the Registration Statement
filed by the Company or included in the offering contemplated
thereby;
(12) No transfer taxes are required to be paid under the
laws of the State of Colorado in connection with the sale and
delivery of the Common Shares to the Underwriters hereunder;
(13) To such counsel's knowledge, this Agreement and the
Shareholders' Agreement have been duly authorized, executed and
delivered by each of the Selling Shareholders; and to the best of
such counsel's knowledge, the performance of this Agreement and
the Shareholders' Agreement and the consummation of the
transactions herein contemplated by the respective Selling
Shareholders will not result in a breach of, or constitute a
default under, any indenture, mortgage, deeds of trust, trust
(constructive or other), loan agreement, lease, franchise,
license or other agreement or instrument to which the respective
Selling Shareholder is a party or by which the respective Selling
Shareholder or any of his properties may be bound, or violate any
statute, judgment, decree, order, rule or regulation known to
such counsel of any court or governmental body having
jurisdiction over the Selling Shareholders, respectively, or any
of the properties of the respective Selling Shareholders; and to
such counsel's knowledge, no approval, authorization, order or
consent of any court, regulatory body, administrative agency or
other governmental body is required for the execution and
delivery of this Agreement or the Shareholders' Agreement or the
consummation by the respective Selling Shareholders of the
transactions contemplated by this Agreement and the Shareholders'
Agreement, except such as have been obtained and are in full
force and effect under the Act and such as may be required under
the rules of NASD, applicable Blue Sky laws and Canadian
securities laws;
(14) To the best knowledge of such counsel, each of the
Selling Shareholders has the full right, power and authority to
enter into this Agreement and the Shareholders' Agreement and to
sell, transfer and deliver the Common Shares to be sold by each
Selling Shareholder on the Closing Date, and good and valid title
to such Common Shares so sold, free and clear of all liens,
claims, equities or other encumbrances of any kind or character,
will be transferred to the Underwriters who have purchased such
Common Shares hereunder; and
(15) To the best knowledge of such counsel, this Agreement
and the Shareholders' Agreement are valid and binding agreements
of the respective Selling Shareholders in accordance with their
respective terms except to the extent that (i) the validity and
binding effect and enforcement of this Agreement and the
Shareholders' Agreement may be limited by any applicable
bankruptcy, reorganization, moratorium, or similar laws of
general application, (ii) the
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<PAGE>
availability of equitable remedies may be limited by principles
of equity, whether considered in a proceeding at law or in
equity, and (iii) the indemnification provisions contained in
this Agreement may be limited by applicable securities laws and
the policies embodied therein.
(16) To the best knowledge of such counsel, neither
issuance, sale or delivery of the Common Shares, nor the
execution, delivery or performance of this Agreement, or
compliance by the Company with the transactions contemplated
hereby or thereby conflicts or will conflict or constitutes or
will constitute a breach of, or a default under, the Articles or
Articles of Incorporation, as amended, or Bylaws or other
organizational documents of the Company or any agreement,
indenture, lease, or other instrument to which the Company is a
party, or will result in the creation or imposition of any lien,
charge or encumbrance upon any property or assets of the Company
or any of its subsidiaries under any such agreement, indenture,
lease or other instrument, nor will any such action result in any
violation of any existing law, regulation, ruling, (assuming
compliance with all applicable state securities and Blue Sky laws
and Canadian securities laws), judgment, injunction, order or
decree known to such counsel, and applicable to the Company, any
of its subsidiaries or any of their respective properties, in
each case except for such conflicts, breaches, defaults,
violation, or encumbrances that would not singly or in the
aggregate have a material adverse effect on the ability of the
Company to fulfill its obligations under this Agreement.
In rendering such opinion, such counsel may rely, as to matters
of fact, on certificates of the Selling Shareholders and of officers of the
Company and of governmental officials, in which case their opinion shall state
that they are so doing and that the Underwriters are justified in relying on
such certificates and copies of such certificates are to be attached to the
opinion.
In addition, such counsel shall state that they have participated
in conferences with officers, employees and other representatives of the
Company, counsel for the Underwriters, representatives of the independent public
accountants for the Company and representatives of the Underwriters at which the
contents of the Registration Statement and Prospectus and related matters were
discussed and, although such counsel is not passing upon and does not assume any
responsibility for, the accuracy, completeness or fairness of the statements
contained in the Registration Statement and Prospectus and has not made any
independent check or verification thereof, on the basis of the foregoing
(relying as to materiality to a large extent upon the statements of officers,
employees and other representatives of the Company), no facts have come to such
counsel's attention that lead them to believe that either the Registration
Statement at the time such Registration Statement became effective contained an
untrue statement of a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements therein in light of the
circumstances in which they were made, not misleading, or the Prospectus as of
its date contained an untrue statement of a material fact or omitted to state a
material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, except that such
counsel need express no opinion with respect to the financial statements,
schedules and other statistical financial data included in the Registration
Statement or Prospectus.
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<PAGE>
(ii) Such opinion or opinions of Locke Purnell Rain Harrell (A
Professional Corporation), counsel for the Underwriters, dated the First Closing
Date or the Second Closing Date, as the case may be, with respect to the
incorporation of the Company and its subsidiaries, the sufficiency of all
corporate proceedings and other legal matters relating to this Agreement, the
validity of the Common Shares, the Registration Statement and the Prospectus and
other related matters as the Underwriters may reasonably require, and the
Company and the Selling Shareholders shall have furnished to such counsel such
documents and shall have exhibited to them such papers and records as they
reasonably may request for the purpose of enabling them to pass upon such
matters. In connection with such opinions, such counsel may rely on
representations or certificates of the Selling Shareholders and of officers of
the Company and governmental officials.
(iii) A certificate of the Company executed by the Chairman of
the Board and Chief Executive Officer and the Chief Financial or Accounting
Officer of the Company, dated the First Closing Date or the Second Closing Date,
as the case may be, to the effect that:
(1) The representations and warranties of the Company set
forth in Section 2 of this Agreement are true and correct as of
the date of this Agreement and as of the First Closing Date or
the Second Closing Date, as the case may be, and the Company has
complied with all the agreements and satisfied all the conditions
on its part to be performed or satisfied on or prior to such
Dates, respectively;
(2) The Commission has not issued any order preventing or
suspending the use of the Prospectus or any Preliminary
Prospectus filed as a part of the Registration Statement or any
amendment thereto; no stop order suspending the effectiveness of
the Registration Statement has been issued; and to the best of
the knowledge of the respective signers, no proceedings for that
purpose have been instituted or are pending or overtly threatened
under the Act;
(3) Each of the respective signers of the certificate has
carefully examined the Registration Statement and the Prospectus;
in his opinion and to the best of his knowledge, the Registration
Statement and the Prospectus and any amendments or supplements
thereto contain all statements required to be stated therein
regarding the Company and its subsidiaries, and neither the
Registration Statement nor the Prospectus nor any amendment or
supplement thereto includes any untrue statement of a material
fact or omits to state any material fact required to be stated
therein or necessary to make the statements therein not
misleading;
(4) Since the initial date on which the Registration
Statement was filed, no agreement, written or oral, transaction
or event has occurred which should have been set forth in an
amendment to the Registration Statement or in a supplement to or
amendment of any Prospectus which has not been disclosed in such
a supplement or amendment;
(5) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, and
except as disclosed in or contemplated by the Prospectus, there
has not been any material adverse change or a development
involving a material adverse change in the condition (financial
or
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<PAGE>
otherwise), business, properties, results of operations,
management or prospects of the Company and its subsidiaries,
taken as a whole; and no legal or governmental action, suit or
proceeding is pending or threatened against the Company or its
subsidiaries which is material to the Company or its
subsidiaries, whether or not arising from transactions in the
ordinary course of business, or which may adversely affect the
transactions contemplated by this Agreement; neither the Company
nor its subsidiaries has entered into any verbal or written
agreement or other transaction which is not in the ordinary
course of business or which reasonably could be expected to
result in a material reduction in the future earnings of the
Company or its subsidiaries, or incurred any material liability
or obligation, direct, contingent or indirect, made any change in
its capital stock, made any material change in its short-term
debt or long-term debt or repurchased or otherwise acquired any
of the Company's capital stock; and the Company has not declared
or paid any dividend, or declared or made any other distribution,
with respect to its outstanding capital stock payable to
shareholders of record, except as disclosed in the Prospectus, on
a date prior to the First Closing Date or Second Closing Date, as
the case may be; and
(6) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus and except
as disclosed in or contemplated by the Prospectus, neither the
Company nor its subsidiaries has sustained a material loss or
damage by strike, fire, flood, windstorm, accident or other
calamity (whether or not insured).
(iv) On the First Closing Date, a certificate, dated such Closing
Date and addressed to the Underwriters, signed by or on behalf of the Selling
Shareholders, and on the Second Closing Date a certificate, dated the Second
Closing Date and addressed to the Underwriters, signed by the Selling
Shareholders, to the effect that the representatives and warranties of such
Selling Shareholders are true and correct as if made at and as of such Closing
Date, and such Selling Shareholder have complied with all the agreements and
satisfied all the conditions to be performed or satisfied prior to the First
Closing Date or the Second Closing Date, as the case may be.
(v) On the date before this Agreement is executed and also on the
First Closing Date and the Second Closing Date, a letter addressed to the
Underwriters from Arthur Andersen, LLP, independent accountants, the first one
to be dated the day before the date of this Agreement, the second one to be
dated the First Closing Date and the third one (in the event of a Second
Closing) to be dated the Second Closing Date, in form and substance satisfactory
to you.
(vi) On or before the First Closing Date, letters from each
director and officer of the Company and from each person or entity named under
the caption "Principal and Selling Shareholders" in the Prospectus, in form and
substance satisfactory to you, confirming that for a period of 180 days from the
date of the Prospectus such person or entity will not directly or indirectly
sell or offer to sell or otherwise dispose of any shares of Common Stock or any
right to acquire such shares without the prior written consent of either
Montgomery Securities or the Underwriters acting jointly, which consent may be
withheld at the sole discretion of Montgomery Securities, or the Underwriters
acting jointly, as the case may be.
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<PAGE>
All such opinions, certificates, letters and documents shall be in
compliance with the provisions hereof only if they are reasonably
satisfactory to the Underwriters and to Locke Purnell Rain Harrell (A
Professional Corporation), counsel for the Underwriters. The Company and
the Selling Shareholders shall furnish the Underwriters with such manually
signed or conformed copies of such opinions, certificates, letters and
documents as the Underwriters request. Any certificate signed by any
officer of the Company and delivered to the Underwriters shall be deemed to
be a representation and warranty by the Company to the Underwriters as to
the statements made therein.
If any condition to the Underwriters' obligations hereunder to be
satisfied prior to or at the First Closing Date is not so satisfied, this
Agreement at the election of the Underwriters will terminate upon
notification by the Underwriters to the Company without liability on the
part of any Underwriter or the Company, except for the expenses to be paid
or reimbursed by the Company pursuant to Sections 7 and 9 hereof and except
to the extent provided in Section 12 hereof.
SECTION 9. Reimbursement of Underwriters' Expenses. If this Agreement shall
---------------------------------------
be terminated by the Underwriters pursuant to Section 8, or if the sale to the
Underwriters of the Common Shares at the First Closing Date is not consummated
because of any refusal, inability or failure on the part of the Company to
perform any agreement herein or to comply with any provision hereof, the Company
agrees to reimburse the Underwriters upon demand for all out-of-pocket expenses
that shall have been reasonably incurred by the Underwriters in connection with
the proposed purchase and the sale of the Common Shares, including but not
limited to fees and disbursements of Underwriters' counsel, printing expenses,
travel expenses, postage, telecopy charges and telephone charges relating
directly to the offering contemplated by the Prospectus. Any such termination
shall be without liability of any party to any other party, except that the
provisions of this Section, Section 7 and Section 11 shall at all times be
effective and shall apply.
SECTION 10. Effectiveness of Registration Statement. The Underwriters and
---------------------------------------
the Company will use their respective best efforts to cause the Registration
Statement to become effective, to prevent the issuance of any stop order
suspending the effectiveness of the Registration Statement and, if such stop
order be issued, to obtain as soon as possible the lifting thereof.
SECTION 11. Indemnification.
---------------
(a) The Company and the Selling Shareholders, severally and not
jointly, agree to indemnify and hold harmless each Underwriter and each
person, if any, who controls any Underwriter within the meaning of the Act
against any losses, claims, damages, liabilities or expenses, joint or
several, to which such Underwriter or such controlling person may become
subject, under the Act, the Exchange Act, or other federal or state
statutory law or regulation, or at common law or otherwise (including in
settlement of any litigation, if such settlement is effected with the
written consent of the Company and the Selling Shareholders), insofar as
such losses, claims, damages, liabilities or expenses (or actions in
respect thereof as contemplated below) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained
in the Registration Statement, any Preliminary Prospectus, the Prospectus,
or any amendment or supplement thereto, or arise out of or are based upon
the omission or alleged omission to state in any of them a material fact
required to be stated therein or necessary to make the statements in any of
them not misleading, or arise out of or are based in whole or in part on
any inaccuracy in the representations and warranties of the Company or the
Selling Shareholders contained herein or any failure of the Company or the
Selling Shareholders to perform their respective obligations hereunder or
under law; and will reimburse each Underwriter and each such controlling
person for any legal and other expenses as such expenses are reasonably
incurred by such Underwriter or such controlling person
-21-
<PAGE>
in connection with investigating, defending, settling, compromising or
paying any such loss, claim, damage, liability, expense or action;
provided, that the Company and the Selling Shareholders will not be liable
in any such case to the extent that any such loss, claim, damage, liability
or expense arises out of or is based upon an untrue statement or alleged
untrue statement or omission or alleged omission made in the Registration
Statement, any Preliminary Prospectus, the Prospectus or any amendment or
supplement thereto in reliance upon and in conformity with the information
furnished to the Company by the Underwriters pursuant to Section 4 hereof;
and provided further, that with respect to any untrue statement or omission
or alleged untrue statement or omission made in any Preliminary Prospectus,
the indemnity agreement contained in this paragraph shall not inure to the
benefit of any Underwriter from whom the person asserting any such losses,
claims, damages, liabilities or expenses purchased the Common Shares
concerned (or to the benefit of any person controlling such Underwriter) to
the extent that any such loss, claim, damage, liability or expense of such
Underwriter or controlling person results from the fact that a copy of the
Prospectus was not sent or given to such person at or prior to the written
confirmation of sale of such Common Shares to such person as required by
the Act, and if the untrue statement or omission has been corrected in the
Prospectus, unless such failure to deliver the Prospectus was a result of
noncompliance by the Company with its obligations under Section 6(e)
hereof; and, provided further, that the aforesaid liability of each Selling
Shareholder under this Section 11(a) shall not exceed the sum of the net
proceeds received by such Selling Shareholder from the Common Shares sold
by such Selling Shareholder pursuant hereto. The Company and the Selling
Shareholders may agree, as among themselves and without limiting the rights
of the Underwriters under this Agreement, as to their respective amounts of
such liability for which they each shall be responsible, and this Agreement
shall not modify or supersede any agreements now in effect between the
Company and the Selling Shareholders with respect thereto.
(b) In addition to their other obligations under this Section 11 the
Company and the Selling Shareholders severally agree that, as an interim
measure during the pendency of any claim, action, investigation, inquiry or
other proceeding arising out of or based upon any statement or omission, or
any alleged statement or omission, or any inaccuracy in the representations
and warranties of the Company or the Selling Shareholders herein or failure
to perform the respective obligations of the Company and the Selling
Shareholders hereunder, all as described in Section 11(a), the Company and
the Selling Shareholders will reimburse each Underwriter on a quarterly
basis for all reasonable legal or other expenses incurred in connection
with investigating or defending any such claim, action, investigation,
inquiry or other proceeding, notwithstanding the absence of a judicial
determination as to the propriety and enforceability of the Company's or
the Selling Shareholders' obligations to reimburse each Underwriter for
such expenses and the possibility that such payments might later be held to
have been improper by a court of competent jurisdiction. To the extent that
any such interim reimbursement payment is so held to have been improper,
each Underwriter shall promptly return such payment to the Company and the
Selling Shareholders, pro rata, together with interest, compounded daily,
determined on the basis of the prime rate (or other commercial lending rate
for borrowers of the highest credit standing) announced from time to time
by Bank of America NT&SA, San Francisco, California (the "Prime Rate"). Any
such interim reimbursement payments which are not made to an Underwriter
within 30 days of a request for reimbursement shall bear interest at the
Prime Rate from the date of such request. This indemnity agreement will be
in addition to any liability which the Company and the Selling Shareholders
may otherwise have.
-22-
<PAGE>
(c) Each Underwriter will severally indemnify and hold harmless the
Company, each of its directors, each of its officers who signed the
Registration Statement, Selling Shareholders and each person, if any, who
controls the Company within the meaning of the Act, against any losses,
claims, damages, liabilities or expenses to which the Company, or any such
director, officer, or controlling person may become subject under the Act,
the Exchange Act, or other federal or state statutory law or regulation, or
at common law or otherwise (including in settlement of any litigation, if
such settlement is effected with the written consent of such Underwriter),
insofar as such losses, claims, damages, liabilities or expenses (or
actions in respect thereof as contemplated below) arise out of or are based
upon any untrue or alleged untrue statement of any material fact contained
in the Registration Statement, any Preliminary Prospectus, the Prospectus,
or any amendment or supplement thereto, or arise out of or are based upon
the omission or alleged omission to state therein a material fact required
to be stated therein the extent, but only to the extent, that such untrue
statement or alleged untrue statement or omission or alleged omission was
made in the Registration Statement, any Preliminary Prospectus, the
Prospectus, or any amendment or supplement thereto, in reliance upon and in
conformity with the information furnished to the Company pursuant to
Section 4 hereof (which information is the sole information furnished to
the Company by the Underwriters for inclusion in the Registration
Statement, any Preliminary Prospectus, any Prospectus, or any amendment or
supplement thereto); and will reimburse the Company, or any such director,
officer, Selling Shareholder, or controlling person for any legal and other
expense reasonably incurred by the Company, or any such director, officer,
Selling Shareholder or controlling person in connection with investigating,
defending, settling, compromising or paying any such loss, claim, damage,
liability, expense or action. In addition to its other obligations under
this Section 11(c), each Underwriter severally agrees that, as an interim
measure during the pendency of any claim, action, investigation, inquiry or
other proceeding arising out of or based upon any statement or omission, or
any alleged statement or omission, described in this Section 11(c) which
relates to information furnished to the Company pursuant to Section 4
hereof, it will reimburse the Company (and, to the extent applicable, each
officer, director, Selling Shareholder or controlling person) on a
quarterly basis for all reasonable legal or other expenses incurred in
connection with investigating or defending any such claim, action,
investigation, inquiry or other proceeding, notwithstanding the absence of
a judicial determination as to the propriety and enforceability of the
Underwriters' obligation to reimburse the Company (and, to the extent
applicable, each officer, director, Selling Shareholder or controlling
person) for such expenses and the possibility that such payments might
later be held to have been improper by a court of competent jurisdiction.
To the extent that any such interim reimbursement payment is so held to
have been improper, the Company (and, to the extent applicable, each
officer, director, Selling Shareholder or controlling person) shall
promptly return such payment to the Underwriters, together with interest,
compounded daily, determined on the basis of the Prime Rate. Any such
interim reimbursement payments which are not made within 30 days of a
request for reimbursement, shall bear interest at the Prime Rate from the
date of such request. This indemnity agreement will be in addition to any
liability which such Underwriter may otherwise have.
(d) Promptly after receipt by an indemnified party under this Section
of notice of the commencement of any action, such indemnified party will,
if a claim in respect thereof is to be made against an indemnifying party
under this Section, notify the indemnifying party in writing of the
commencement thereof; but the omission so to notify the indemnifying party
will not relieve it from any liability which it may have to any indemnified
party for contribution or otherwise hereunder to the extent it is not
materially prejudiced as a proximate result of such failure. In case any
such action is brought against any indemnified party and such indemnified
party seeks or intends to seek indemnity from an indemnifying party, the
indemnifying party will be entitled to participate in, and,
-23-
<PAGE>
to the extent that it may wish, jointly with all other indemnifying parties
similarly notified, to assume the defense thereof with counsel reasonably
satisfactory to such indemnified party; provided, however, if the
defendants in any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably
concluded that there may be a conflict between the positions of the
indemnifying party and the indemnified party in conducting the defense of
any such action or that there may be legal defenses available to it and/or
other indemnified parties which are different from or additional to those
available to the indemnifying party, the indemnified party or parties shall
have the right to select separate counsel to assume such legal defenses and
to otherwise participate in the defense of such action on behalf of such
indemnified party or parties. Upon receipt of notice from the indemnifying
party to such indemnified party of its election so to assume the defense of
such action and approval by the indemnified party of counsel, the
indemnifying party will not be liable to such indemnified party under this
Section for any legal expenses subsequently incurred by such indemnified
party in connection with the defense thereof unless (i) the indemnified
party shall have employed such counsel in connection with the assumption of
legal defenses in accordance with the proviso to the next preceding
sentence (it being understood, however, that the indemnifying party shall
not be liable for the expenses of more than one separate counsel, approved
by the Underwriters in the case of Section 11(a), representing the
indemnified parties who are parties to such action) or (ii) the
indemnifying party shall not have employed counsel reasonably satisfactory
to the indemnified party to represent the indemnified party within a
reasonable time after notice of commencement of the action, in each of
which cases the fees and expenses of counsel shall be at the expense of the
indemnifying party.
(e) If the indemnification provided for in this Section 11 is
required by its terms, but for any reason is held to be unavailable to or
otherwise insufficient to hold harmless any indemnified party under
paragraphs (a), (b), (c) or (d) in respect of any losses, claims, damages,
liabilities or expenses as referred to herein, then each applicable
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of any losses, claims, damages, liabilities
or expenses referred to herein (i) in such proportion as is appropriate to
reflect the relative benefits received by the Company, the Selling
Shareholders and the Underwriters from the offering of the Common Shares or
(ii) if the allocation provided by clause (i) above is not permitted by
applicable law, then such proportion as is appropriate to reflect not only
the relative benefits referred to in clause (i) above but also the relative
fault of the Company, the Selling Shareholders and the Underwriters in
connection with the statements or omissions or inaccuracies in their
representations and warranties herein which resulted in such losses,
claims, damages, liabilities or expenses, as well as any other relevant
equitable considerations. The respective relative benefits received by the
Company, the Selling Shareholders and the Underwriters shall be deemed to
be in the same proportion, in the case of the Company and the Selling
Shareholders as the total price paid to the Company and the Selling
Shareholders, respectively for the Common Shares sold by them to the
Underwriters (before deducting expenses), and in the case of Underwriters
as the underwriting commissions received by them, bears to the total of
such amounts paid to the Company and the Selling Shareholders and the
amounts received by the Underwriters as underwriting commissions. The
relative fault of the Company, the Selling Shareholders and the
Underwriters shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to stating material fact or the inaccurate or
the alleged inaccurate representations and/or warranty relates to the
information supplied by the Company, the Selling Shareholders or the
Underwriters and the parties relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or
omission. The amount paid or payable by a party as a result of the losses,
claims, damages, liabilities and expenses referred to above shall be deemed
to include, subject to the limitations set forth in subsection (d) of this
Section 11, any legal or other fees or
-24-
<PAGE>
expenses reasonably incurred by such party in connection with investigating
or defending any action or claim. The provisions set forth in subsection
(d) of this Section 11 with respect to notice of commencement of any action
shall apply if a claim for contribution is to be made under this subsection
(e); provided, however, that no additional notice shall be required with
respect to any action for which notice has been given under subsection (d)
for the purposes of indemnification. The Company, the Selling Shareholders,
and the Underwriters agree that it would not be just inequitable if
contribution pursuant to this Section 11 were determined solely by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take into
account the equitable considerations referred to in this subsection (e).
Notwithstanding the provisions of this Section 11, no Underwriter shall be
required to contribute any amount in excess of the amount of the total
underwriting commissions received by such Underwriter in connection with
the Common Shares underwritten by it and distributed to the public. No
person guilty of fraudulent misrepresentation (within a meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation. The Underwriters'
obligations to contribute pursuant to this Section 11 are several in
proportion to their respective underwriting commitments and not joint.
(f) It is agreed that any controversy arising out of the operation
of the interim reimbursement arrangements set forth in this Section 11,
including the amounts of any requested reimbursement payments and the
method of determining such amounts, shall be settled by arbitration
conducted under the provisions of the Constitution and Rules of the Board
of Governors of the New York Stock Exchange, Inc. or pursuant to the Code
of Arbitration Procedure of the NASD. Any such arbitration must be
commenced by service of a written demand for arbitration or written notice
of intention to arbitrate, therein electing the arbitration tribunal. In
the event the party demanding arbitration does not make such designation of
an arbitration tribunal in such demand or notice, then the party responding
to said demand or notice is authorized to do so. Such an arbitration would
be limited to the operation of the interim reimbursement provisions
contained in this Section 11 and would not resolve the ultimate propriety
or enforceability of the obligation to reimburse expenses which is created
by the provisions of this Section 11.
SECTION 12 Default of Underwriters. It shall be a condition to this
-----------------------
Agreement and the obligation of the Company and the Selling Shareholders to sell
and deliver the Common Shares hereunder, and of each Underwriter to purchase the
Common Shares in the manner described herein, that, except as hereinafter in
this paragraph provided, each of the Underwriters shall purchase and pay for all
the Common Shares agreed to be purchased by such Underwriter hereunder upon
tender to the Underwriters of all such shares in accordance with the terms
hereof. If EITHER UNDERWRITER defaults in its obligation to purchase Common
Shares hereunder on either the First or Second Closing Date and the aggregate
number of Common Shares that such defaulting Underwriter agreed but failed to
purchase on such Closing Date does not exceed 10% of the total number of Common
Shares which the Underwriters are obligated severally, in proportion to their
respective commitments hereunder, to purchase on such Closing Date, the non-
defaulting Underwriters shall be obligated to purchase the Common Shares that
such defaulting Underwriter agreed but failed to purchase on such Closing Date.
If any Underwriter so defaults and the aggregate number of Common Shares with
respect to which such default occurs is more than the above percentage and
arrangements satisfactory to the Underwriters and the sellers of such Common
Shares for the purchase of such Common Shares by other persons are not made
within 48 hours after such default, this Agreement will terminate without
liability on the part of the non-defaulting Underwriters or the Company (except
for the expenses to be paid by the Company pursuant to Section 7 hereof and
except to the extent provided in Section 11 hereof).
-25-
<PAGE>
In the event that Common Shares to which a default relates are to be
purchased by the non-defaulting Underwriters or by another party or parties, the
Underwriters or the sellers of such Common Shares shall have the right to
postpone the First or Second Closing Date, as the case may be, for not more than
five business days in order that the necessary changes in the Registration
Statement, Prospectus and any other documents, as well as any other
arrangements, may be effected. As used in this Agreement, the term "Underwriter"
includes any person substituted for an Underwriter under this Section. Nothing
herein will relieve a defaulting Underwriter from liability for its default.
SECTION 13. Effective Date. This Agreement shall become effective at such
--------------
time as the Registration Statement has become effective and you shall have
released the Firm Common Shares for sale to the public; provided, however, that
the provisions of Sections 7, 9, 11, 14 and 15 hereof shall at all times be
effective. For the purposes of this Section 13, the Firm Common Shares shall be
deemed to have been so released upon the release by the Underwriters for
publication, at any time after the Registration Statement has become effective,
of any newspaper advertisement relating to any of the Common Shares, or upon the
release by the Underwriters of any of the Common Shares for sale to the public,
whichever may occur first.
SECTION 14. Termination. Without limiting the right to terminate this
-----------
Agreement pursuant to any other provision hereof:
(a) This Agreement may be terminated by the Company and the Selling
Shareholders by notice to the Underwriters or by the Underwriters by notice
to the Company and the Selling Shareholders at any time prior to the time
this Agreement shall become effective as to all its provisions, and any
such termination shall be without liability on the part of the Company or
the Selling Shareholders to the Underwriters (except for the expenses to be
paid or reimbursed by the Company pursuant to Sections 7 and 9 hereof and
except to the extent provided in Sections 11 and 15 hereof) or of any
Underwriter to the Company (except to the extent provided in Sections 11
and 15 hereof).
(b) This Agreement may also be terminated by the Underwriters prior
to the First Closing Date or prior to the Second Closing Date, as the case
may be, by notice to the Company and the Selling Shareholders (i) if
additional material governmental restrictions not in force and effect on
the date hereof shall have been imposed upon trading in securities
generally or minimum or maximum prices shall have been generally
established on the New York Stock Exchange or on the American Stock
Exchange or in the NASDAQ National Market System or in the over the counter
market by the NASD, or trading in securities generally shall have been
suspended on either such Exchange or in the NASDAQ National Market System
or in the over the counter market by the NASD or the Commission, or a
general banking moratorium shall have been established by federal, New
York, Colorado or California authorities, (ii) if an outbreak of
hostilities or other national or international calamity or any material
change in political, financial or economic conditions shall have occurred
or shall have accelerated to such an extent that the effect on the
financial markets shall, in the judgment of the Underwriters, affect
adversely the marketability of the Common Shares, (iii) if any adverse
event shall have occurred or shall exist which makes untrue or incorrect in
any material respect any statement or information contained in the
Registration Statement or Prospectus or which is not reflected in the
Registration Statement or Prospectus but should be reflected therein in
order to make the statements or information contained therein not
misleading in any material respect, or (iv) if there shall be any action,
suit or proceeding pending or threatened, or there shall have been any
development involving particularly the business or properties or securities
of the Company or its subsidiaries or the transactions contemplated by this
Agreement, which, in the judgment of the Underwriters, may materially and
adversely affect the business or earnings of the
-26-
<PAGE>
Company and its subsidiaries taken as a whole or makes it impracticable to
offer or sell the Common Shares. Any termination pursuant to this
subsection (b) shall be without liability on the part of the Underwriters
to the Company or the Selling Shareholders or on the part of the Company or
the Selling Shareholders to the Underwriters (except for expenses to be
paid or reimbursed by the Company or the Selling Shareholders pursuant to
Sections 7 or 11 hereof and except to the extent provided in Sections 11
and 15).
SECTION 15. Failure of the Selling Shareholders to Sell and Deliver. If any
-------------------------------------------------------
Selling Shareholder fails to sell and deliver to the Underwriters the Common
Shares to be sold and delivered by such Selling Shareholder at the First Closing
Date or the Second Closing Date under the terms of this Agreement, then the
Underwriters may at their option, by written notice to the Company and the
Selling Shareholders, either (i) terminate this Agreement without any liability
on the part of any Underwriter or, except as provided in Sections 7, 9, 11 and
16 hereof, the Company or the Selling Shareholders, or (ii) purchase the shares
which the Company and the Selling Shareholders who have sold and delivered the
Common Shares to be sold and delivered by them to the Underwriters in accordance
with the terms hereof. In the event of a failure by a Selling Shareholder to
sell and deliver as referred to in this Section, either the Underwriters or the
Company and the Selling Shareholders who have sold and delivered their shares to
the Underwriters shall have the right to postpone the Closing Date for a period
not exceeding seven (7) business days in order that the necessary changes in the
Registration Statement, Prospectus and any other documents, as well as any other
arrangements, may be effective.
SECTION 16. Representations and Indemnities to Survive Delivery. The
---------------------------------------------------
respective indemnities, agreements, representations, warranties and other
statements of the Company and its officers, the Selling Shareholders and of the
Underwriters set forth in or made pursuant to this Agreement will remain in full
force and effect, regardless of any investigation made by or on behalf of the
Underwriters or the Company, or the Selling Shareholders, or any of their
partners, officers or directors or any controlling person, as the case may be,
and will survive delivery of and payment for the Common Shares sold hereunder
and any termination of this Agreement.
SECTION 17. Notices. All communications hereunder shall be in writing and,
-------
if sent to the Underwriters, shall be mailed, delivered or telecopied or
telegraphed and confirmed to the Underwriters at Montgomery Securities, 600
Montgomery Street, San Francisco, California 94111, Attention: General Counsel;
Piper Jaffray Inc., Piper Jaffray Tower, 222 South Ninth Street, Minneapolis,
Minnesota 55402, Attention: ________________; and M. Kane & Company, Inc., 10877
Wilshire Boulevard, Suite 1102, Los Angeles, California 90024, Attention:
Michael W. Kane, with a copy to Locke Purnell Rain Harrell (A Professional
Corporation), 2200 Ross Avenue, Suite 2200, Dallas, Texas 75201, Attention: Dan
Busbee; and if sent to the Company or the Selling Shareholders shall be mailed,
delivered or telecopied or telegraphed and confirmed to the Company at 9697 East
Mineral Avenue, Englewood, Colorado 80112, Attention: Elizabeth M. Steele, Vice
President and Secretary, with a copy to Davis, Graham & Stubbs LLP, 370 Seventh
Street, Suite 4700, Denver, Colorado 80202, Attention: Paul Hilton. The Company,
the Selling Shareholders or the Underwriters may change the address for receipt
of communications hereunder by giving notice to the others.
SECTION 18. Successors. This Agreement will inure to the benefit of and be
----------
binding upon the parties hereto, including any substitute Underwriters pursuant
to Section 12 hereof, and to the benefit of the officers and directors and
controlling persons referred to in Section 11, and in each case their respective
successors, personal Underwriters and assigns, and no other person will have any
right or obligation hereunder. No such assignment shall relieve any party of its
obligations hereunder. The term "successors" shall not include any purchaser of
the Common Shares as such from any of the Underwriters merely by reason of such
purchase.
-27-
<PAGE>
SECTION 19. Partial Unenforceability. The invalidity or unenforceability
------------------------
of any Section, subsection, paragraph or provision of this Agreement shall not
affect the validity or enforceability of any other Section, paragraph or
provision hereof. If any Section, subsection, paragraph or provision of this
Agreement is for any reason determined to be invalid or unenforceable, there
shall be deemed to be made such minor changes (and only such minor changes) as
are necessary to make it valid and enforceable.
SECTION 20. Applicable Law. This Agreement shall be governed by and
--------------
construed in accordance with the internal laws (and not the laws pertaining to
conflicts of laws) of the State of Colorado.
SECTION 21. General. This Agreement constitutes the entire agreement of
-------
the parties to this Agreement and supersedes all prior written or oral and all
contemporaneous oral agreements, understandings and negotiations with respect to
the subject matter hereof. This Agreement may be executed in several
counterparts, each one of which shall be an original, and all of which shall
constitute one and the same document.
In this Agreement, the masculine, feminine and neuter genders and the
singular and the plural include one another. The section headings in this
Agreement are for the convenience of the parties only and will not affect the
construction or interpretation of this Agreement. This Agreement may be amended
or modified, and the observance of any term of this Agreement may be waived,
only by a writing signed by the Company, the Selling Shareholders and the
Underwriters.
If the foregoing is in accordance with the Underwriters' understanding of
our agreement, kindly sign and return to us the enclosed copies hereof,
whereupon it will become a binding agreement among the Company, the Selling
Shareholders and the Underwriters, all in accordance with its terms.
Very truly yours,
JONES EDUCATION COMPANY
By:
_______________________________
Glenn R. Jones, Chairman
of the Board and Chief
Executive Officer
SELLING SHAREHOLDERS
*
---------------------------------
*
---------------------------------
*
---------------------------------
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<PAGE>
*
---------------------------
*
---------------------------
*
---------------------------
*By: ______________________________________
___________________ (Attorney-In-Fact)
The foregoing Underwriting Agreement
is hereby confirmed and accepted
as of the date first above written
by the undersigned Underwriters.
MONTGOMERY SECURITIES
PIPER JAFFRAY INC.
M. KANE & COMPANY, INC.
By: MONTGOMERY SECURITIES
By: ___________________________
Its: Managing Director
-29-
<PAGE>
SCHEDULE A
Number of Firm Common
Name of Underwriter Shares to be Purchased
- -------------------- ----------------------
Montgomery Securities
Piper Jaffray Inc.
M. Kane & Company, Inc.
--------------------------
TOTAL
==========================
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<PAGE>
SCHEDULE B
Number of Firm Common Shares
Name of Selling Shareholder to be Sold by Selling Shareholder
- --------------------------- ---------------------------------
-31-
<PAGE>
================================================================================
Exhibit 4.1
CLASS A COMMON STOCK CLASS A COMMON STOCK
[NUMBER OF STOCK [SHARES OF STOCK
CERTIFICATE APPEARS CERTIFICATE APPEARS
HERE] HERE]
JONES EDUCATION COMPANY
Incorporated Under the Laws of the State of Colorado
CUSIP 480198 10 0
SEE REVERSE FOR CERTAIN DEFINITIONS
THIS CERTIFIES THAT
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
is the owner of
______________________________________________________________________
fully paid and non-assessable shares of Class A Common Stock, $.01 par value, of
JONES EDUCATION COMPANY
transferable on the books of the Corporation by the holder hereof in person, or
by duly authorized attorney, upon surrender of this certificate properly
endorsed.
This certificate shall not be valid until countersigned by the Transfer Agent
and registered by the Registrar.
Witness the facsimile seal of the Corporation and the facsimile signatures of
its duly authorized officers.
DATED
[JONES EDUCATIONAL COMPANY CORPORATE
COLORADO SEAL APPEARS HERE]
/s/ [SIGNATURE APPEARES HERE] /s/ [SIGNATURE APPEARS HERE]
SECRETARY CHAIRMAN OF THE BOARD
Countersigned and Registered:
AMERICAN SECURITIES TRANSFER & TRUST, INC.
P.O. Box 1598
Denver, Colorado 80216 Transfer Agent
and Registrar
By
Authorized Officer
================================================================================
<PAGE>
JONES EDUCATION COMPANY
The Corporation will furnish to any shareholder upon request and
without charge a full statement of the designations, preferences, limitations,
and relative rights of the shares of the Corporation's Class A Common Stock and
Class B Common Stock.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT - Custodian
----------- ------------
TEN ENT - as tenants by the entireties (Cust) (Minor)
under Uniform Gifts to Minors
JT TEN - as joint tenants with right of
survivorship and not as tenants Act
in common ----------------------
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
For value received,_________________ hereby sell, assign and transfer
unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- ---------------------------------------
- ---------------------------------------
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
shares
- --------------------------------------------------------------------------
of the Class A Common Stock represented by the within Certificate, and do
hereby irrevocably constitute and appoint
Attorney
- ------------------------------------------------------------------------
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated
--------------------------
- --------------------------------------------------------------------------------
Signature
- --------------------------------------------------------------------------------
Signature
- --------------------------------------------------------------------------------
Signature Guaranteed By
NOTICE:THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH
THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN
EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR
ANY CHANGE WHATEVER.
THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN
AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE
17Ad-15.
<PAGE>
Exhibit 10.27
September 30, 1996
Western International Media Corporation
8544 Sunset Boulevard
Los Angeles, CA 90069
Western International Media Corporation ("Western") has been asked by Jones
Education Company ("Advertiser") to purchase broadcast media time on
Advertiser's behalf. Western has agreed to purchase broadcast media time at
Advertiser's direction provided that Jones International, Ltd. ("JI"), a
corporation having an interest in Advertiser, agrees to guarantee Advertiser's
obligations to Western resulting from the purchase of such broadcast media time
(the "Guarantee"). Accordingly, as an inducement to Western and in consideration
of Western's providing media time purchasing services for the benefit of
Advertiser, JI hereby guarantees to Western the payment of any sum or sums of
money which Advertiser shall owe Western as a result of purchasing media
broadcast time for the benefit of Advertiser. In no event shall the sum or sums
guaranteed herein exceed one million two hundred thousand dollars ($1,200,000)
and in no event shall the Guarantee cover any media purchase made after December
31, 1996. Western shall give prompt notice to JI of any failure of Advertiser to
pay Western when owed.
The Guarantee shall terminate and expire upon notice to Western at the above
address (Attn: President), with such termination effective only as to
obligations of Advertiser incurred subsequent to such notice.
JI hereby represents and warrants to Western that:
It has been duly incorporated and is validly existing as a corporation in
good standing under the laws of the State of Colorado and is duly qualified to
do business as a foreign corporation in good standing in all jurisdictions in
which the nature of its business or the character or location of its properties
or assets requires such qualifications, except for failures to so qualify which
in the aggregate do not and will not materially and adversely affect the
business, operations or financial condition of such party or the performance of
this Guarantee.
<PAGE>
This Guarantee has been duly and validly authorized, executed and
delivered by such party and constitutes a valid, binding and enforceable
guarantee of such party.
The execution, delivery and performance of this Guarantee by such party
will not (i) violate any of its corporate charter or bylaws, or (ii) conflict
with or result in a breach of any or the terms, condition or provisions of or
constitute a default under, or result in the imposition of any lien, charge or
encumbrance upon any of the material properties or assets of such party pursuant
to, any bond, debenture, note or other evidence of indebtedness or any material
contract, indenture, mortgage, loan agreement, lease, joint venture, partnership
or other agreement or instrument to which such party is a party or by which it
or any of its material properties is bound, or (iii) result in the violation of
any law, order, rule, regulations, writ, injunction or decree of any
governmental instrumentality or court. No consent, approval, authorization or
order of any governmental agency or court or of any other person is required for
the execution, delivery or performance of this Guarantee by such party, except
for those which have been heretofore obtained.
Such party has the full and complete authority to enter into this
Guarantee and to perform in all respects the obligations required to be
performed by it pursuant to this Guarantee.
IN WITNESS WHEREOF the parties hereto have executed this Guarantee as of this
30th day of September, 1996.
JONES INTERNATIONAL, LTD.,
a Colorado corporation
By: /s/ Jay B. Lewis
_________________________
Name: Jay B. Lewis
Its: Vice President/Finance and Treasurer
Date: September 30, 1996
_________________________
By: _________________________
Name:
Its:
Date: _________________________
26192
<PAGE>
Exhibit 10.28
PROMISSORY NOTE
Englewood, Colorado $77,000.00
August 30, 1996
FOR VALUE RECEIVED, the undersigned, Paul Amos ("Maker"), hereby promises
to pay to the order of Jones Education Networks, Inc., a Colorado corporation,
at 9697 E. Mineral Avenue, Englewood, Colorado, or at such other address as the
holder hereof shall designate in writing, the principal sum of Seventy-seven
Thousand Dollars ($77,000), in accordance with the terms set forth herein.
This Note shall not bear interest, and shall be payable in full within five
(5) business days after the consummation of the sale by Maker of his former
principal residence located at 10035 Scenic View Terrace, Vienna, Virginia.
This Note may be prepaid in whole or, from time to time, in part at the
option of Maker. If Maker shall fail to make payment when due hereunder, the
entire amount of this Note shall, at the option of the holder hereof, become
immediately due and payable. If this Note is placed in the hands of an attorney
for collection, by suit or otherwise, then all costs of collection and
litigation, including court costs and reasonable attorneys' fees, shall be added
hereto and collectible as a part of the principal hereof.
Maker hereby waives demand, protect, presentment, dishonor and notice of
dishonor of this Note. This Note is issued under and shall be governed by and
construed in accordance with the laws of the State of Colorado.
IN WITNESS WHEREOF, the undersigned has executed this Note as of the date
set forth above.
/s/ PAUL AMOS
------------------------
Paul Amos
<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. 1 to Form S-1 Registration Statement for Jones Education Company.
ARTHUR ANDERSEN LLP
Denver, Colorado
October 4, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-START> JAN-01-1995 JAN-01-1996
<PERIOD-END> DEC-31-1995 JUN-30-1996
<CASH> 6,362,420 4,197,154
<SECURITIES> 0 1,032,188
<RECEIVABLES> 3,156,779 2,939,397
<ALLOWANCES> 199,160 133,977
<INVENTORY> 585,985 646,822
<CURRENT-ASSETS> 10,204,978 8,734,110
<PP&E> 1,944,374 2,225,737
<DEPRECIATION> 751,840 925,739
<TOTAL-ASSETS> 12,064,905 11,088,136
<CURRENT-LIABILITIES> 2,416,731 2,796,019
<BONDS> 0 0
0 0
0 0
<COMMON> 54,934 57,818
<OTHER-SE> 2,824,346 6,091,805
<TOTAL-LIABILITY-AND-EQUITY> 12,064,905 11,088,136
<SALES> 15,911,453 10,527,962
<TOTAL-REVENUES> 15,911,453 10,527,962
<CGS> 16,274,767 8,944,260
<TOTAL-COSTS> 28,144,453 12,697,465
<OTHER-EXPENSES> (794,424) (142,536)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,851,541 260,196
<INCOME-PRETAX> (13,290,117) (2,287,163)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (13,290,117) (2,287,163)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (13,290,117) (2,104,870)
<EPS-PRIMARY> (2.54) (.36)
<EPS-DILUTED> (2.54) (.36)
</TABLE>
