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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
(Mark One)
[X] Annual report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 (Fee required) For the fiscal year ended October 31, 1996
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 (No fee required)
For the transition period from ________ to ________
Commission file number 0-20303
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TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
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(Name of small business issuer in its charter)
Delaware 13-2846796
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. Box 382, Fields Lane, Brewster, NY 10509
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(Address of principal executive offices) (Zip Code)
(914) 277-8100
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(Issuer's telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act: None.
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Securities registered under Section 12(g) of the Exchange Act:
Name of Each Exchange
Title of Each Class on Which Registered
------------------- ----------------------
Common Stock, $.0001 par value NASDAQ
- ------------------------------------------ --------------------------------
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for past 90 days.
Yes X No
--------- --------
Check if there is no disclosure of delinquent filers in response
to Item 405 of Regulation S-B is not contained in this form, and no disclosure
will be contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. []
State issuer's revenues for its most recent fiscal year:
$2,519,908 for the fiscal year ended October 31, 1996.
State the aggregate market value of the voting stock held by
non-affiliates computed by reference to the price at which the stock was sold,
or the average bid and asked prices of such stock, as of a specified date
within the past 60 days: $3,545,668 as of November 30, 1996. The aggregate
market value was based upon the closing price for the Common Stock, par value
$.0001 per share, as quoted by the NASDAQ for such date.
(ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PAST FIVE YEARS)
Check whether the issuer has filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by a court. Yes No
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(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
State the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date: As of November
30, 1996, 7,789,322 shares of Common Stock, par value $.0001 per share.
DOCUMENTS INCORPORATED BY REFERENCE
If the following documents are incorporated by reference, briefly
describe them and identify the part of the Form 10-KSB (e.g., Part I, Part II,
etc.) into which the document is incorporated: (1) any annual report to
security holders; (2) any proxy or information statement; and (3) any
prospectus filed pursuant to Rule 424(b) or (c) of the Securities Act of 1933
("Securities Act"). None.
-----
Transitional Small Business Disclosure Format (check one):
Yes No X
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
Touchstone Applied Science Associates, Inc. (the "Company")
designs, develops, publishes and distributes educational tests,
instructional materials and computer software to elementary and secondary
schools, colleges and universities. The Company was originally
incorporated in the State of New York in 1976. In August 1991, the Company
changed its corporate domicile to Delaware by merger into a Delaware
corporation created exclusively for that purpose.
The Company's original corporate purpose when it was founded
was to perform research for others under contract. Therefore, some
Company-developed products were marketed by the College Board. In July
1988, all rights to the Company-developed Degrees of Reading Power ("DRP")
tests were assigned by the College Board to the Company. With the
acquisition of rights to DRP tests, the Company changed corporate purposes
becoming an educational publisher instead of a contract research firm.
In addition to Primary, Standard and Advanced DRP tests, the
Company also publishes Degrees of Word Meaning ("DWM") tests. The
Company's tests assess student progress in the following interrelated
components of literacy:
. the ability to comprehend the surface meaning of increasingly
more difficult textual material;
. the ability to reason with--that is, analyze, evaluate and
extend the ideas that are presented in--increasingly more
difficult textual material; and
. the size of students' reading vocabularies by measuring their
understanding of the meaning of words appearing in naturally
occurring contexts.
Management believes that Degrees of Reading Power and Degrees
of Word Meaning tests are widely recognized as having advanced the
state-of-the-art in educational assessment. From descriptions contained in
Tests in Print published by Buros Institute of Mental Measurements (which
endeavors to cover all tests published in the United States), it is
management's belief that DRP tests were the first, and remain the only,
commercial standardized tests whose results can be directly interpreted
with respect to the textual materials that students can read. Management
further believes that DRP tests are the only existing instruments that can
measure progress toward one or more standards or requirements that are
established by examining how well prose in books or other sources must be
comprehended for particular purposes. As a result, DRP tests are
especially useful in accountability assessments and in measuring literacy.
Management further believes, based upon descriptions in Tests in Print, DWM
tests are the first measures of the size of a student's reading vocabulary.
Certain specially prepared secure forms of the Company's DRP
tests are licensed for one-time or limited use by states and other "shelf"
forms listed in the Company's catalog are licensed for an indefinite period
of time to school districts throughout the United States, Canada and
Australia. In accordance with the United States Copyright Office's
definition, secure test forms are composed of text and test items that have
never before been administered and are typically used in only one test
administration before they are destroyed. The Company provides secure
tests annually for administration in certain grades by the states of
Connecticut, New York, and Virginia. Because the Company's secure tests
are mandatory in certain grades and because the tests it sells through its
catalog are generally administered by school entities that require students
to take them, management believes approximately 4 million DRP tests, for
which the Company is the sole source proprietor, are administered each year
in states and school districts, and in college and university testing
programs.
DEGREES OF READING POWER TESTS
When traditional, norm-referenced or criterion-referenced tests
are required or legislated, they tend to prescribe the nature of
instruction in the classroom. Because such tests typically contain
specific items that measure discrete skills, teachers often drill students
on the skills that are tested. While such drill and practice may raise the
test scores on traditional tests, there is little or no evidence that such
drill and practice leads to improvement in the desired educational outcome.
Because traditional reading tests are timed, they are unable to
distinguish between slow, competent readers and fast, careless readers.
Both types of students can earn identical scores even though their
development and instructional needs are markedly different. More
important, these tests often penalize those students who tend to become
overly anxious when asked to work under tight deadlines. Another
limitation is that traditional tests may require students to supply content
knowledge about the passages being read and/or they may contain questions
that can be answered without reading the passage. These conditions make
test bias very difficult to control and the interpretation of test results
ambiguous.
The primary purpose of traditional, standardized tests is to
discriminate among students. Items for such tests are selected more on the
basis of their difficulty than on what the items actually assess. Student
performance on traditional, standardized tests is generally reported on one
or more norm-referenced scales--grade equivalents, percentiles and/or
standings. While norm-referenced scales may be used to assess the relative
performance of a student, norms are not adequate for reporting what
students can read or how much growth in reading has occurred over time.
In developing DRP tests for assessing reading comprehension,
the Company's ultimate objective was to design reading comprehension tests
that would have a beneficial impact on curriculum and instruction. Since
teachers would continue to have incentives to teach to such required tests,
the test format had to be designed so that teaching to the test would be
synonymous with the teaching of reading comprehension.
DRP tests also had to meet a number of other desirable
objectives. For example, the item format and the cognitive task asked of
students had to be consistent across all grades to ensure continuity of
measurement. Without such continuity, in terms of what is measured and how
it is measured, it is practically impossible to assess student growth in
reading comprehension. In addition, the scale upon which the results would
be reported had to remain invariant over time. While the benefits of
meeting these objectives may appear to be obvious, it is management's
belief that no other standardized test currently administered in schools
has been able to completely meet them (based upon the previously referenced
descriptions in Tests in Print published by Buros Institute of Mental
Measurements). The final objective for DRP tests was to develop a score
scale that had functional meaning. A score scale in reading that has
functional meaning would be one that would describe what students are able
to read and how well they are able to do so. The references for this type
of score scale could be instructional materials used in the classroom,
materials used in the military or in various occupations and professions,
or "real world" reading tasks such as driver's license manuals, newspapers,
magazines and the like.
While there would be many advantages to a score scale that
permitted a functional interpretation of student performance in reading, a
key advantage would be in the setting of expectations or standards in
reading--standards set in terms of the actual capability of students to
function on "real world" reading tasks with a functionally referenced score
scale.
Currently, three distinct but related kinds of DRP tests are
available off the shelf for qualified customers: Primary, Standard and
Advanced. The most distinguishable feature of all DRP test forms is the
item format used to assess comprehension.
Primary and Standard DRP Tests. Primary and Standard DRP tests
are a holistic measure of how well students understand the meaning of text.
As much as is possible in a testing situation, these tests determine how
well a student reads under real-life conditions in and out of school.
Primary and Standard DRP tests are single-objective tests measuring how
well students understand the surface meaning of what they read. As such,
they measure the process of reading rather than products of reading such as
main idea and author purpose.
Primary and Standard DRP tests consist of nonfiction paragraphs
and/or passages on a variety of topics. Each passage has been written,
edited and calibrated by the Company. The individual test passages are
stored in the Company's "Test Passage Bank", and each test is created by
selecting the appropriate test passages from the Test Passage Bank to
satisfy the criteria set for a particular test. Within these paragraphs
and passages, words have been deleted and the student is asked to select
the correct word for each deletion in text from a set of multiple-choice
options.
Important features of the Primary and Standard DRP tests are:
(1) they are untimed; (2) the paragraphs and passages form a linearly
ordered scale (i.e., all paragraphs and passages, from the easiest to the
hardest, measure the same construct of reading); (3) the results can be
interpreted in terms of what students can read; and (4) the tests are
particularly sensitive to the assessment of growth in reading across the
grades.
Advanced DRP Tests. Advanced DRP tests have been developed
that extend the definition of comprehension employed in the Primary and
Standard DRP tests.
Advanced DRP test items engage those cognitive processes
required to remember, think about, analyze, derive, combine, or evaluate
propositions in text. Correct answers to these items are never simple
rewordings or restatements of the text. Finally, like the Primary and
Standard DRP tests, the passages on the Advanced DRP tests do not require
the student to supply topic/content knowledge in order to choose the
unambiguously correct answer.
The items on Advanced DRP tests assess the ability to choose
that integration of propositions which is valid within a paragraph, between
adjacent paragraphs, and between two or more non-adjacent paragraphs.
Stated more simply, Advanced DRP tests assess how well students are able to
reason with textual materials. The questions can be considered "higher
order" because the correct answer depends upon the student being able to
recognize which response option is properly derived from the text.
As is true of the Primary DRP paragraphs and the Standard DRP
passages, there is no evidence that teachers can successfully circumvent
the instructional process by teaching to the format of the Advanced DRP
passages. While students need to be familiar with the format of any test
prior to its administration, there is no evidence that extensive practice
on "cloze-type" exercises will improve student scores on DRP tests.
DEGREES OF WORD MEANING TESTS
Degrees of Word Meaning tests are the first measures of the
size of a student's reading vocabulary. Unlike conventional standardized
vocabulary tests, which only rank order students by such normative
statistics as percentile ranks, DWM tests measure growth toward adult
proficiency levels. It is expected that schools will administer both
Standard DRP tests and DWM tests using the Company's combined Test Answer
Sheet.
SOFTWARE PRODUCTS
The Company has designed and produced computer software
products that are sold as instructional aids for reading development.
Among the products are MicRA--->DRP, which allows the user to determine the
difficulty of written text. Additionally, in 1996, the Company introduced
DRP--->BOOKLINK and Browzer--->BOOKLINK, which allow teachers to find
appropriate books for each student based upon interest categories and
reading ability.
TEST SCORING AND RELATED REPORTING SERVICES
The Company provides scanning, scoring, and reporting services
to schools and districts. Company-copyrighted test answer sheets or
licensed answer sheets are required for the administration of all of the
Company's tests. Answer marks on these sheets are interpreted by
scanner-computer systems that use Company-proprietary software. For example,
Company-copyrighted conversion tables are used to convert the total number
of right answers on a given DRP test form into a DRP score that indicates
how well a student can comprehend text of given difficulty (readability).
These DRP scores are also interpreted normatively (e.g., in terms of
national percentiles) using the Company's proprietary data. Primary,
Standard and Advanced DRP and DWM norms indicate a student's percentile
rank in relation to students nationally in his or her grade.
All District, School and Class Level Reports of the Company's
test results are copyrighted by the Company, as are various Parent and
Individual Reports that may be ordered by school systems. Schools may also
order score reports on Company-copyrighted pressure-sensitive labels for
inclusion in permanent records.
State education departments and other educational institutions
may purchase a license to score the Company's tests. Third-party firms
that provide scanning and scoring services to schools may also be licensed
to score the Company's tests. Similarly, the Company licenses MicRA--->DRP
and other computer software.
APPLICATIONS OF THE DRP TECHNOLOGY
DRP tests have been adopted by a wide variety of educational
institutions and agencies including state departments of education,
colleges and universities, schools and school districts. While the desire
to improve the quality of instruction in reading may be the ultimate reason
DRP tests are administered in educational settings, other reasons are also
important. DRP tests are used in education to determine eligibility for
graduation, allocate resources to districts, document school
accountability, set and maintain promotion standards, place students into
adult basic education and GED (Graduate Equivalency Degree) programs of
study and evaluate student progress in adult literacy programs.
Because the Company's secure tests are mandatory in certain
grades and because the tests it sells through its catalog are generally
administered by school entities that require students to take them,
management believes approximately 4 million DRP tests, for which the
Company is the sole source proprietor, are administered each year in states
and school districts and in college and university testing programs.
DRP tests have been adopted as one component of the Connecticut
Mastery Testing Program in grades 4, 6 and 8. In New York State, DRP tests
are the reading component in the Regents Competency Testing program (RCT).
A student must attain a certain score on the RCT to be awarded a high
school diploma. In Virginia, DRP tests have been adopted as part of the
Literacy Testing Program in grade 6. In each of these instances, DRP tests
serve as an indicator of whether valued educational outcomes have been
achieved.
DRP test scores are utilized for placement of students in both
four- and two-year institutions. DRP tests are used to screen, identify,
place and evaluate the progress made by such students at, for example, such
four-year institutions as the University of Cincinnati, Bowling Green
University and the University of Northeastern Missouri. Among two-year
institutions, the Oregon System of Community Colleges uses DRP test results
to place students in ABE (Adult Basic Education) and GED programs of study,
while the College of Lake County (Illinois), Tarrant Community College
(Texas) and Triton College (Illinois) use DRP tests to monitor student
progress and maintain exit standards in reading.
The use of DRP tests as measures of accountability has been
increasing over the last few years--especially as the limitations of
norm-referenced score scales become more widely understood. One such
limitation of traditional tests is the lack of security associated with
repeated administrations of the same two "shelf" forms of the tests. To
counter this limitation, new fully secure DRP tests are constructed annually.
These fully secure DRP tests are only available on a contract basis and
cannot be purchased "off-the-shelf".
DRP test results are reported on a text difficulty scale.
Therefore, student test results can be used to select instructional
materials that best meet the needs of the students. In other words,
teachers can avoid the student frustration that arises when materials are
too difficult and the boredom that comes when materials are too easy.
In addition to the other features of DRP and DWM tests, the
availability of normative data for the tests means they can be used for
Federal program evaluations. Finally, DRP and DWM tests are in accord with
the professional standards for testing promulgated by the American
Psychological Association, the American Educational Research Association
and the National Council for Measurement in Education.
COMPETITION
Success in the industry will be based on scientific and
technological superiority, service, product support, the availability of
patent protection, access to adequate capital, the ability to successfully
develop and market products and processes and the ability to obtain
government approvals. Although there is intense competition in the
industry and there are both domestic and foreign companies which may be
deemed dominant competitors, the Company believes that the features of its
products coupled with its ability to provide quality services will permit
the Company to compete successfully in its designated marketplace.
The Company is subject to competition from various sources. It
is anticipated that the Company's principal competition comes from
established for-profit and non-profit companies in the testing business and
testing departments within certain states and school districts, all of
which are considerably larger and have greater financial and human
resources and marketing capabilities.
Although there are a number of for-profit firms that develop,
publish, market, and distribute educational tests, the market is dominated
by three: CTB/McGraw-Hill, Lake Forest, Illinois, and Monterey,
California; the Psychological Corporation, San Antonio, Texas; and The
Riverside Publishing Company, Chicago, Illinois. As large, well-established
publishers of educational tests and related products and
services, these firms are considered strong competitors of the Company.
There are a number of non-profit organizations that develop,
publish and distribute educational tests. For example, the American
College Testing Program (ACT), Iowa City, Iowa; American Council on
Education (ACE), Washington, DC; and Educational Testing Service (ETS),
Princeton, New Jersey. In addition, there are various organizations that
sponsor educational tests even though they do not have the technical
capability to produce tests. For example, the College Board, New York, New
York, sponsors the Scholastic Assessment Test (SAT) which is developed for
the College Board by ETS. All of these non-profit organizations have, or
have access to, the capability to develop, publish and distribute tests to
schools. Currently, ACT, College Board, and ETS publish one or more
educational tests for the school market.
A number of states, and some school districts, have their own
test development and publishing capabilities. It is management's belief
that the largest developer of educational tests for its own use is the New
York State Education Department, which produces a variety of tests,
including the New York State Regents examinations. Although the Company's
DRP tests are licensed for specific use over fixed periods of time by three
states that develop other tests for their own use--Connecticut, New York
and Virginia--this does not necessarily mean that the Company's tests will
be licensed to other states that develop their own statewide tests. In
contracts between the Company and states, as in purchase orders executed
with the Company by any educational institution, the Company--which is the
sole-source proprietor of DRP tests--retains copyright ownership of all
tests, items and other materials. This ownership is acknowledged on the
inside cover of the test booklets or in some other prominent place in cases
where DRP tests are part of a testing program that carries a state name.
There are a number of for-profit and non-profit firms that
provide test design, production and consulting services to states under
contract. For example, Advanced Systems in Measurement and Evaluation,
Inc., Dover, New Hampshire; IOX Assessment Associates, Los Angeles,
California; National Evaluation Systems (NES), Amherst, Massachusetts; and
National Computer Systems (NCS), Iowa City, Iowa; are among the for-profit
firms that supply test development, printing, distribution, and scoring
services to individual states under contract. Among the non-profit
organizations, ACT and ETS have conducted such contract work for states and
ETS is the current contractor for the National Assessment of Educational
Progress. By enabling states to have tests developed and administered to
their own specifications, these for-profit and non-profit firms compete
indirectly with the Company. In terms of size alone, these firms have
greater marketing capability and resources than does the Company.
MARKETING
The Company markets its products and services as follows:
(a) Sales of secure tests to large scale users such as state
education departments are conducted directly by the Company's staff. This
includes making presentations and negotiating contracts and license
agreements.
(b) Sales of the Company's products and services as
described in the Company's catalog are made primarily through direct mail
campaigns to elementary school, secondary school and college markets. The
Company also advertises its products in trade journals.
(c) In addition, the Company's staff and its independent
consultants provide presentations and in-service workshops supporting the
Company's products.
PRICING AND OTHER CUSTOMER TERMS
The Company sells its products on a contract or purchase order
basis in accordance with a published price list. Depending upon the
contract or the purchase order, the Company sells its product on a net 30-day
or C.O.D. basis. The Company does not offer extended credit terms to
its customers. Historically, bad debts have not been material.
EMPLOYEES
As of October 31, 1996, the Company employed twenty-two full-time
employees and six part-time employees or consultants, of whom nine are
engaged in research and/or test development, eight are in operations, three
are in executive capacities and eight are in marketing.
GOVERNMENT REGULATIONS
The degree of government regulations to be imposed upon the
Company and the field in which the Company engages is uncertain at this time.
Under Chapter 1 of the Elementary and Secondary Education Act
(ESEA), schools that serve large numbers of children from low income
families receive financial assistance from the Federal government to expand
and improve their educational programs to meet the special educational
needs of educationally deprived students. Chapter 1 regulations
promulgated by the Office of Education include a requirement that schools
receiving Chapter 1 funds must evaluate student growth or progress in
reading and mathematics annually. It is management's belief that State
Education Authorities (SEAs) find DRP test results to be in accord with the
regulations for Chapter 1 published on May 19, 1989 in the Federal
Register, as DRP tests are used by schools to evaluate Federally-supported
Chapter 1 programs.
If post-secondary institutions enroll students who have not
graduated from high school, or obtained their GED certificate, the United
States Department of Education requires the students to pass an approved
"ability-to-benefit" test before the institution can grant Federal
financial assistance to the students. All forms of DRP tests were approved
in June 1991 for "ability-to-benefit" determinations. According to new
regulations issued by the Department of Education, only test batteries that
generate both verbal and quantitative scores will be approved. The Company
does not currently have any tests that measure quantitative abilities.
Therefore, as of October 25, 1996, DRP tests may not be used by post-secondary
institutions for "ability-to-benefit" determinations.
Management knows of no other applicable government regulations
or of any other instance in which DRP tests failed to meet government
regulations. The Company's management believes it may be necessary to
obtain other government approvals for its products including the DWM tests.
If necessary, a portion of the revenues of the Company may be directed
toward obtaining such approvals, and any such expenditures will occur
without the assurance that approvals will be achieved. Additionally, the
extent of potentially adverse government regulations which might arise from
future legislative or administrative action cannot be predicted.
PATENTS, COPYRIGHTS, TRADEMARKS AND TRADE SECRETS
The United States Patent Office issued a patent (No. 4,943,239)
to Bertram L. Koslin, the Company's former President, on July 24, 1990, for
the Test Answer and Score Sheet Device. Pursuant to an agreement between
the Company and Mr. Koslin, all rights, title and interest to the Test
Answer and Score Sheet were assigned to the Company. There is no assurance
that the patent assigned to the Company is enforceable and there is no
assurance that the Company will derive any competitive advantage therefrom.
While the patent is deemed important to the Company, it is not considered
essential to the success of the Company's business. The issuance of the
patent for the Test Answer and Score Sheet Device may be insufficient to
prevent competitors from essentially duplicating the product by designing
around the patented aspects. In addition, there is no assurance the
Company's product will not infringe on patents owned by others, licenses
which may not be available to the Company or that competitors will not
develop functionally similar products outside the protection of the
patent. Moreover, there is no assurance that the validity of the patent
issued for the Test Answer and Score Sheet Device or any other Company
product in the future will be sustained if judicially tested.
As of October 31, 1996, the United States Copyright Office has
issued 66 copyrights to the Company for shelf-secure test booklets,
annually secure test booklets, reports and manuals. The Company regularly
asserts copyrights to all of its test and instructional materials.
The following are registered trademarks of the Company:
TASA, the TASA logo, Degrees of Literacy Power, DLP, Degrees of
Reading Power, DRP, Degrees of Word Meaning, DWM, Traveling Classroom
Library, TCL, MicRA--->DRP, Browzer, the Browzer dog logo, Booklore, and
DRP--->BOOKLINK (pending) and Browzer--->BOOKLINK (pending).
Trade secrets are maintained by licenses for software and
certain proprietary data. In addition, all employees execute nondisclosure
agreements as a condition of employment.
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ITEM 2. DESCRIPTION OF PROPERTY
The Company presently owns a 3-acre parcel of office-park zoned
land, on which the Company occupies a two-story steel and concrete office
building which totals approximately 30,000 square feet and which houses the
Company's administrative and executive offices, warehouse, computer
facility, research and development department and marketing division. The
property is subject to industrial development bond financing, with an
outstanding balance of $571,250 at October 31, 1996, which matures in 2001.
The property is also subject to a mortgage with The Bank of New York, N.A.
(formerly, Barclays Bank of New York, N.A.) as mortgagee, which also
matures in 2001. Such mortgage had an outstanding balance of $252,500 at
October 31, 1996. See "Management's Discussion and Analysis or Plan of
Operation".
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded in the NASDAQ
small-capitalization over-the-counter market under the symbol TASA. As quoted
in the Monthly Statistical Reports of the National Association of Securities
Dealers, Inc., the approximate high and low closing prices for each fiscal
quarter in the two fiscal years ended October 31, 1995 and October 31, 1996
were as follows:
Common Stock Closing Prices
Fiscal Quarter: High Low
---------------------------------------
1st Qtr 95 3.00 1.50
2nd Qtr 95 3.25 1.38
3rd Qtr 95 3.00 1.75
4th Qtr 95 2.56 1.38
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1st Qtr 96 3.125 2.00
2nd Qtr 96 2.56 1.67
3rd Qtr 96 1.97 0.94
4th Qtr 96 1.44 0.50
------------------------------------
These quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual transactions.
As of November 30, 1996, there were 45 holders of record of the
Company's Common Stock. This number of holders of record does not include
beneficial owners of the Company's Common Stock, which shares are held in
the names of various security holders, dealers and clearing agencies. The
Company believes that the number of beneficial owners of its Common Stock
held by others or in nominee names exceeds 600 in number. The Company has
not paid any cash dividends, and does not anticipate doing so in the
immediate future as it intends to invest any earnings in the development of
the Company's business.
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATIONS
In the 1996 fiscal year, all Company revenues were derived from
the sale of test products and services. Total revenues increased 8.9%
versus fiscal 1995 and 24.3% versus fiscal 1994 ($2,519,908 in 1996,
$2,314,594 in 1995 and $2,027,521 in 1994). The overall increase in
revenues for this three-year period represents the net of a significant
increase in catalog sales over a decrease in contract sales.
For the same period, contract income decreased 8.5% versus
fiscal 1995 and 6.7% versus fiscal 1994 ($875,608 in 1996, $956,803 in 1995
and $938,449 in 1994). Contract income now represents 34.7% of sales
versus 41.3% in fiscal 1995 and 46.3% in fiscal 1994. Management believes
that this decline in contract income as a percentage of total revenues is a
positive development as it makes the Company much less dependent on any
single customer.
Catalog sales for shelf tests and associated products increased
dramatically during fiscal 1996. In fiscal 1996, catalog sales increased
21.1% versus fiscal 1995 and 51.0% versus fiscal 1994 ($1,644,300 in 1996,
$1,357,791 in 1995 and $1,089,072 in 1994). Since 1995, the Company has
invested heavily in marketing and sales initiatives. Management believes
that the Company should continue to grow in this category since the
Company's rate of spending to support future growth should be undiminished
over the intermediate term.
COSTS AND EXPENSES. Cost of goods for fiscal 1996 decreased
25.5% versus fiscal 1995 and increased 32.0% versus fiscal 1994 ($711,564
in 1996, $954,907 in 1995 and $538,982 in 1994). The costs decreased in
fiscal 1996, both as a total dollar value and as a percentage of sales
because, in fiscal 1995, the Company wrote off significant obsolete
inventory. Cost of goods in fiscal 1996 approached the same percentage of
total revenues as in fiscal 1994, however total costs are 32% higher due to
the 51% increase in the volume of catalog sales.
General and administrative expenses increased 26.4% versus
fiscal 1995 and 24.6% versus fiscal 1994 ($936,462 in 1996, $740,861 in
1995 and $751,363 in 1994). These increases are due to management's
decision to re-focus the Company in late 1994 as well as the need to add
additional manpower to support increased revenue and product development
activities.
Selling expenses increased by 18.4% over fiscal 1995 and 77.9%
over fiscal 1994 ($703,214 in 1996, $593,959 in 1995 and $395,382 in 1994).
These increases represent management's decision to support the Company's
activities with significant advertising and direct mail efforts. Further,
over the past eighteen months, the Company added four independent
consultants to its sales organization as well as a representative firm.
Based upon these activities, the Company has essentially doubled its
acquisition of new customers each year. In 1994, prior to commencement of
the marketing initiatives, the Company added 149 new customers; in 1995,
with the start of marketing initiatives, the Company acquired 273 new
customers; and as the Company increased such initiatives in 1996, the
Company acquired an additional 319 new customers.
In fiscal 1996, the Company spent $60,238 on product
development activities. There were no comparable expenditures in fiscal
years 1995 or 1994. The Company has expended funds designing and
researching new products because it believes it is necessary to create new
products to add to the Company's existing line of products and services.
INVESTMENT INCOME AND INTEREST EXPENSE. Investment income from
money market accounts and intermediate bonds was essentially the same in
fiscal years 1996, 1995 and 1994 ($166,981 in 1996, $163,714 in 1995 and
$158,644 in 1994). This income was a direct result of the completion of
the Company's public offering in 1992 and the investment of the proceeds
that have not been required for the Company's working capital. Interest
expenses increased 8.9% versus fiscal 1995 and 4.1% versus fiscal 1994
($64,154 in 1996, $58,939 in 1995 and $61,642 in 1994).
NET INCOME AND EARNINGS PER SHARE. Net after-tax income
increased 23.8% in 1996 versus fiscal 1995 ($192,048 in 1996 versus
$155,146 in 1995). From 1994 to 1996, net income increased from a loss of
$(658,696) to income of $192,048 or a change of $850,744. The increase
over the past two years is due to increased revenues as well as a
stabilization of the Company's expense base.
Earnings per share were $.03 in fiscal 1996 and $.02 in fiscal
1995 and a loss per share of $(.10) in fiscal 1994.
LIQUIDITY AND CAPITAL RESOURCES
Working capital, which consists principally of cash, cash
equivalents, marketable securities and accounts receivable, was $4,116,202
on October 31, 1996 versus $2,923,276 on October 31, 1995. The increase in
working capital was primarily due to an increase in paid-in capital from
the exercise of options and warrants by unaffiliated third parties as well
as profits from operations and the refinancing of existing indebtedness.
Net cash flow from operations for the fiscal year ended October
31, 1996 totaled $428,388. This compares with the net cash flow from
operations of $483,206 and $749,547 for the fiscal years ended October 31,
1995 and 1994, respectively. The change from fiscal 1994 was due to the
Company's abandonment of certain hardware and software projects in that
year and the increased expenditures in the Company's marketing initiatives
in fiscal years 1995 and 1996.
For the fiscal years 1996, 1995 and 1994, the Company
experienced a net cash outflow in investment activities ($518,193 in 1996,
$575,721 in 1995 and $1,400,360 in 1994). This outflow was due primarily
to the development of the Test Passage Bank, software development and the
purchase of marketable securities.
For fiscal 1996, the Company had a net cash inflow from
financing activities of $522,319. This inflow was created by the receipt
of $736,162 from the exercise of options and warrants, less deferred
offering costs of $151,343 and the retirement of principal payments from
mortgage obligations. In fiscal years 1995 and 1994, the Company had a net
cash outflow from financing activities of $274,615 and $29,960
respectively. The primary reason for the utilization of funds in fiscal
1995 was for principal payments on mortgage obligations and the outlay of
deferred offering costs. In fiscal 1994, the cash was used primarily for
bond payments.
In May 1996, the Company had a balloon payment of $252,500 due
for the addition of its facility, which was completed in 1991. The Company
refinanced this balloon payment and has a new mortgage in place, which
terminates in 2001. The Company has no other material commitments for
capital or other expenditures and is not party to any arrangement that
would adversely impact the Company's liquidity. The Company is not
currently aware of any trends that would affect its liquidity.
SELECTED FINANCIAL DATA
The following tables summarize certain financial data for the
Company for the fiscal years ended October 31, 1996, 1995, and 1994,
respectively.
Year Ended October 31,
------------------------------------------
1996 1995 1994
INCOME STATEMENT DATA:
Operating revenues $2,519,908 $2,314,594 $2,027,521
Net sales 2,519,908 2,314,594 2,027,521
Gross profit 1,808,344 1,359,687 1,488,539
Income (loss) from operations 108,430 24,867 (1,328,455)
Income (loss) before income taxes 211,257 129,642 (1,311,533)
Net income (loss) 192,048 155,146 (658,696)
Earnings (loss) per share .03 .02 (.10)
BALANCE SHEETS:
Current assets $4,458,538 $3,449,356 $3,681,972
Total assets 8,975,542 8,416,732 8,300,187
Long-term obligations 728,250 571,250 886,250
Total liabilities 1,591,807 1,699,492 1,908,255
Working capital 4,116,202 2,923,276 3,439,128
Stockholders' equity 7,383,735 6,717,240 6,391,932
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
Financial information required by this item appears in the
pages marked F-1 through F-25 at the end of this Report and are
incorporated herein by reference as if fully set forth herein.
INDEX TO FINANCIAL STATEMENTS
Page
Independent Auditors' Report F-2
Independent Auditors' Report--Predecessor Auditor F-3
Financial Statements:
Balance Sheets F-4
Statements of Operations F-6
Statement of Changes in Stockholders' Equity F-7
Statements of Cash Flows F-8
Notes to Financial Statements F-10
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
As of October 31, 1996, the directors and executive officers of
the Company, were as follows:
Name Age Position
---- --- --------
Andrew L. Simon 54 Chairman of the Board of Directors;
President; Chief Executive Officer;
and Treasurer
Linda G. Straley 40 Director; Vice President,
Operations; and Secretary
Stephen H. Ivens 55 Director; Vice President, Research
& Development
Steven R. Berger 41 Director
Michael Milone 51 Director
Each director shall hold office until the next annual meeting
of the Company's stockholders and until a successor is selected and
qualified.
ANDREW L. SIMON was elected as Director and as President and
Treasurer of the Company on March 31, 1995. He served as Interim President
from June 1994 through March 31, 1995. He was a founder of the Company and
previously served as a Director from 1976 to 1991 and has acted as a
financial consultant to the Company since its inception in 1976. From 1983
to 1986, he was a Vice President/Marketing Division Head in the Private
Clients Group at Bankers Trust Company. He was a Vice President at
Citibank, NA, where he held a number of senior marketing and sales
positions, from 1980 to 1983. Prior to 1980, Mr. Simon served as Marketing
Director for several consumer package goods companies including
Norcliff-Thayer and Lederle Laboratories. He holds an M.B.A. from Columbia
University and a B.A. from Washington University. Mr. Simon is a trustee
of the Harvey School and previously served as a director of the City of
Poughkeepsie Partnership.
LINDA G. STRALEY is a Director of the Company and has been Vice
President of Operations since June 1994. From June 1994 through March 31,
1995, she was Chairman of the Board of Directors. She has been Secretary
since August 1992 and, since 1984, she has served as director of DRP
Services for the Company. Ms. Straley received a B.A. in Education from
Bethany College and an M.S. in Psychology and Statistics from the State
University of New York.
STEPHEN H. IVENS was elected as a Director of the Company on
March 31, 1995, and has been Vice President, Research and Development since
June 1994, and was Executive Director of DRP Services of the Company since
August 1989. Mr. Ivens received a B.S. in Mathematics and M.S. in Guidance
from Illinois State University and a Ph.D. in Educational Research from
Florida State University. From 1970 to 1989 he was an Executive Director
at the College Entrance Examination Board.
STEVEN R. BERGER was elected as a Director of the Company on
March 29, 1996 and he also serves on the Company's Compensation Committee.
Mr. Berger has been a partner in the law firm of Christy & Viener in New
York City since January 1989. Mr. Berger received an A.B. and a J.D. from
Harvard University. Christy & Viener has acted as special securities
counsel to the Company since January 1995.
MICHAEL MILONE was elected as a Director of the Company on
March 29, 1996 and he also serves on the Company's Compensation Committee.
Dr. Milone has been an educational writer and independent consultant to
publishers and school districts since 1984. Dr. Milone received an M.A.
from Gallaudet University and a Ph.D. from The Ohio State University, where
he has served as an adjunct assistant professor in the Department of
Educational Services and Research.
ITEM 10. EXECUTIVE COMPENSATION
The following table shows compensation for services rendered to
the Company during fiscal years 1996, 1995 and 1994 by the Chief Executive
Officer, the Vice President, Research & Development and the Vice President,
Operations. Each executive officer serves under the authority of the Board
of Directors. No other executive officer of the Company received cash
compensation that exceeded $100,000 during fiscal years 1996, 1995 and
1994. Therefore, pursuant to Item 402 of Regulation S-B, only compensation
for each of the Chief Executive Officer, the Vice President, Research &
Development, and Vice President, Operations is shown in the Summary
Compensation Table below.
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
Annual Compensation Long-Term Compensation
------------------------- -----------------------------------
Awards Payouts
----------------------- ---------
Securities All
Other Under- Other
Annual Restricted lying Com-
Compen- Stock Options/ LTIP pensa-
Name and Bonus sation Award(s) SARs(a) Payouts tion
Principal Position Year Salary($) ($) ($) ($) (#) ($) ($)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Andrew L. Simon, 1996 $109,568 0 $25,457 0 82,500 0 __b
President, Chief 1995 99,112 $2,500 24,021 0 0 0 __b
Executive Officer* 1994 64,680(c) 0 12,439 0 59,000 0 __b
and Treasurer
Stephen H. Ivens, 1996 $107,068 0 $26,913 0 52,500 0 __b
Vice President, 1995 102,498 $2,500 25,561 0 0 0 __b
Research & 1994 95,760 0 24,175 0 59,000 0 __b
Development
Linda G. Straley, 1996 $88,125 0 $18,701 0 52,500 0 __b
Vice President, 1995 72,500 $2,500 16,732 0 0 0 __b
Operations, and 1994 64,705 0 15,187 0 59,000 0 __b
Secretary
<FN>
(a) To date, the Company has issued no SARs
(b) Has an assigned Company car with an approximate value of $8,250 for
Mr. Simon, $7,250 for Mr. Ivens and $7,250 for Ms. Straley
(c) Includes consulting fees from November 1, 1993 through June 30, 1994 and
salary as Interim President from July 1, 1994 through October 31, 1994
* Commencing June 1994
</FN>
</TABLE>
EMPLOYMENT CONTRACTS
On March 1, 1996, the Company entered into an employment
agreement with each of Andrew L. Simon, Linda G. Straley and Stephen H.
Ivens, pursuant to which the Company agreed to employ Mr. Simon, Ms.
Straley and Mr. Ivens, and each of Mr. Simon, Ms. Straley and Mr. Ivens
agreed to remain, as the Company's President and Chief Executive Officer,
Vice President, Research and Development, and Vice President, Operations,
respectively, for a term of three years, subject to automatic yearly
extensions and certain rights of termination as provided in each such
agreement.
In the employment agreements with each of the executive
officers of the Company, the Company has agreed to provide for certain
benefits and protections for such executive officers in connection with a
change of control of the Company. Such agreements provide that upon the
occurrence of a change of control, such executive's employment agreement
would continue until the earlier of three years from the date of such
change of control or the date all of the Company's obligations under the
employment agreement are satisfied. In addition, in the event of a change
of control, each executive officer would be awarded for each fiscal year
during the employment term, an annual bonus in cash at least equal to the
average annual bonus payable to such executive in respect of two of the
last three fiscal years immediately preceding the date of the change of
control in which bonuses paid were higher. For purposes of these
employment agreements, a "change of control" will be deemed to have
occurred if: (a) any person, entity or "group", within the meaning of
Section 13(d)(3) or 14(d)(2) of the Exchange Act acquires beneficial
ownership (within the meaning of Rule 13d-3 promulgated under the Exchange
Act) of 20% or more of either the then outstanding shares of the Company's
common stock or the combined voting power of the Company's then outstanding
voting securities entitled to vote generally in the election of directors;
(b) individuals who, as of the date of the employment agreement,
constituted the Board (the "Incumbent Board") cease for any reason to
constitute at least a majority of the Board, provided that any person who
first becomes a director subsequent to the date of such employment
agreement whose recommendation, election or nomination for election by the
Corporation's stockholders was approved by a vote of at least a majority of
the directors then comprising the Incumbent Board (other than an election
by an individual whose initial assumption of office is in connection with
an actual or threatened election contest relating to the election of the
directors of the Company as described in Rule 14a-11 of Regulation 14
promulgated under the Exchange Act) shall be, for purposes of this
Agreement, considered as though such person were a member of the Incumbent
Board; (c) the stockholders of the Company approve a reorganization, share
exchange, merger or consolidation with respect to which, in any such case
the persons who were the stockholders of the Company immediately prior to
such reorganization, share exchange, merger or consolidation do not,
immediately thereafter, own more than 50% of the combined voting power
entitled to vote in the election of directors of the reorganized, merged or
consolidated company; or (d) a liquidation or dissolution of the Company
occurs or a sale of all or substantially all of the assets of the Company
is made. Each employment agreement also contains a non-competition clause
for two years following termination of the executive's employment.
Generally, each employee of the Company has agreed to the
assignment to the Company of the employee's rights to any inventions
relating to the Company's business or interest which were conceived both
prior to and during the period of employment and, except under certain
specified conditions, the Company's employees are prohibited from competing
for one year with the Company in areas in which he or she was employed.
STOCK OPTION PLAN
The Board of Directors of the Company adopted the 1991
Incentive Stock Option Plan (the "Option Plan") on August 25, 1991 in order
to attract and retain qualified personnel, which Option Plan was approved
by the stockholders on August 25, 1991. The Board of Directors adopted the
Amended and Restated 1991 Stock Option Incentive Plan (the "Amended Option
Plan") in February 1996, which Amended Option Plan amended and restated the
Option Plan and was approved by the stockholders of the Company on March
29, 1996. Under the Amended Option Plan, options to purchase up to
2,500,000 shares of Common Stock may be granted to employees, officers,
directors and consultants of the Company. The Amended Option Plan is
administered by the Compensation Committee of the Board of Directors (the
"Committee").
Subject to the terms of the Amended Option Plan, the Committee
is authorized to select optionees and determine the number of shares
covered by each option and certain of its other terms. The exercise price
of stock options granted under the Amended Option Plan may not be less than
the fair market value of the Company's Common Stock on the date of the
grant. In general, options become exercisable after the first anniversary
of the date of grant. The period within which any stock option may be
exercised cannot exceed ten years from the date of grant. Options held by
a terminated employee expire three months after termination except in the
event of death, disability or termination for cause. No one participant
may receive, in any one fiscal year, awards under the Amended Option Plan
which would entitle the Participant to receive more than 200,000 shares.
On October 31, 1994, the Company granted 460,000 options under the Option
Plan; on October 1, 1995, the Company granted 72,500 options under the
Option Plan; on July 10, 1996, the Company granted 170,000 options under
the Amended Option Plan; on September 30, 1996, the Company granted 40,500
options under the Amended Option Plan; and on October 31, 1996, the Company
granted 22,500 options under the Amended Option Plan. In 1994, 470,250
options were forfeited; in 1995, 18,900 options were forfeited; and, in
1996, 637,678 options were canceled or forfeited. As of November 1, 1996,
there were 1,052,750 options in the aggregate outstanding under the Option
Plan.
<TABLE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
<CAPTION>
Number of Percent of Total
Securities Options/SARs
Underlying Granted to Exercise or
Options/SARs(a) Employees in Fiscal Base Price Expiration
Name Granted (#) Year(c) ($/sh) Date
<S> <C> <C> <C> <C>
Andrew L. 75,000 (b) 32.19% $1.0938 July 9, 2006
Simon, 7,500 (d) 3.22% $0.75 October 30, 2006
President,
Chief Executive
Officer and
Treasurer
Stephen H. 45,000 (b) 19.31% $1.0938 July 9, 2006
Ivens, Vice 7,500 (d) 3.22% $0.75 October 30, 2006
President,
Research &
Development
Linda G. Straley, 45,000 (b) 19.31% $1.0938 July 9, 2006
Vice President, 7,500 (d) 3.22% $0.75 October 30, 2006
Operations, and
Secretary
<FN>
(a) To date, the Company has issued no SARs.
(b) These options become exercisable on July 10, 1997.
(c) Includes all options granted under the Amended Option Plan.
(d) These options become exercisable on October 31, 1997.
</FN>
</TABLE>
None of the named officers received any option grants in the
fiscal year ended October 31, 1995.
<PAGE>
<TABLE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
<CAPTION>
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs(a) Options/SARs(a)
at FY-End (#) at FY-End ($)
--------------------------------
Shares Value
Acquired on Realized Exercisable/ Exercisable/
Name Exercise (#) ($) Unexercisable Unexercisable
- ------------------ ------------ --------- --------------- -------------------
<S> <C> <C> <C> <C>
Andrew L. Simon, 0 0 239,000/82,500 $390,585/$25,785(b)
President, Chief
Executive Officer
and Treasurer
Stephen H. Ivens, 0 0 102,500/52,500 $167,610/$15,471(b)
Vice President,
Research &
Development
Linda G. Straley, 0 0 102,700/52,500 $181,417/$15,471(b)
Vice President,
Operations, and
Secretary
<FN>
(a) To date, the Company has issued no SARs.
(b) Calculated based on the closing bid price of the Company's
Common Stock on NASDAQ on October 31, 1996, or $.75.
</FN>
</TABLE>
DIRECTORS STOCK OPTION PLAN
The Board of Directors of the Company adopted the Directors
Stock Option Plan (the "Directors Plan") in February 1996 in order to aid
the Company in attracting, retaining and motivating independent directors,
which Directors Plan was approved by the stockholders of the Company on
March 29, 1996. Under the Directors Plan, non-qualified stock options to
purchase up to 100,000 shares of Common Stock may be granted to non-employee
directors of the Company, which options are granted automatically at the
times and in the manner stated in the Directors Plan.
Subject to the terms of the Directors Plan, each non-employee
director receives 5,000 options on the day he (she) first is elected to the
Board of Directors, and 2,500 options on the date of each annual meeting of
the stockholders of the Company, provided he (she) is re-elected to the
Board of Directors. The exercise price of stock options granted under the
Directors Plan is the fair market value of the Company's Common Stock on the
date of grant. The options become exercisable after the first anniversary
of the date of grant and the term of the option cannot exceed ten years. On
March 29, 1996, the Company granted 10,000 options.
Directors receive no compensation for services in such capacity.
OTHER PLANS
PROFIT SHARING PLAN. The Company has a qualified 401(k) Profit
Sharing Plan. The Plan allows employees to contribute up to 15 percent of
income through Company contributions and a salary reduction mechanism.
Company contributions to the Plan are optional and accrue at the discretion
of the Board of Directors. For the fiscal years ended October 31, 1996,
1995 and 1994, the Company made a contribution to profit sharing equal to
five percent (5%) of each eligible employee's compensation, thereby limiting
each eligible employee to contribute up to ten percent (10%) of
compensation.
Net assets for the Profit Sharing Plan, as estimated by the
Massachusetts Mutual Life Insurance Company which maintains the plan's
records, are $1,144,585 at October 31, 1996.
MONEY PURCHASE PENSION PLAN. In October 1991, the Company
adopted a Money Purchase Pension Plan, which has been qualified by the
Internal Revenue Service. Under this Plan, the Company makes an annual
contribution to the Plan equal to ten percent (10%) of each eligible
employee's compensation.
Net assets for the Money Purchase Pension Plan, as estimated by
the Massachusetts Mutual Life Insurance Company which maintains the plan's
records, are $424,231 at October 31, 1996.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires
the Company's directors, executive officers and persons who own beneficially
more than ten percent of the Company's outstanding common stock to file with
the SEC initial reports of beneficial ownership and reports of changes in
beneficial ownership of common stock and other securities of the Company on
Forms 3, 4 and 5, and to furnish the Company with copies of all such forms
they file. Based on a review of copies of such reports, all of the
Company's directors and officers timely filed all reports required with
respect to fiscal 1996, except that Andrew L. Simon, President, filed a Form
4 reporting his December 1995 sale of 10,000 shares of Common Stock on the
open market one month late.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of the Company's Common Stock and Series A Preferred
Stock, as of November 30, 1996, by (i) each person who is known by the
Company to own beneficially more than 5% of the Company's outstanding Common
Stock; (ii) each of the Company's officers and directors; and (iii) all
officers and directors as a group.
As of November 30, 1996, there were 7,789,322 shares of Common
Stock outstanding, and 1,500 shares of Series A Preferred Stock outstanding.
Each share of Common Stock is entitled to one vote per share and each share
of Series A Preferred Stock is entitled to 3,000 votes per share.
Consequently, there are an aggregate of 12,289,322 eligible votes for the
Company's outstanding capital stock.
All of the shares of Common Stock and Preferred Stock owned by
the officers and directors of the Company, other than shares deemed to be
owned beneficially by such officers and directors because they may be
acquired through the exercise of currently exercisable stock options, are
held in a voting trust (the "Voting Trust"), pursuant to a Voting Trust
Agreement, dated as of August 19, 1992, as amended. Until his death,
Bertram L. Koslin had been sole Voting Trustee. Julius Ostreicher, the
attorney for the Estate of Bertram L. Koslin, Andrew L. Simon, the Chairman
of the Board of Directors and the President of the Company, and Eileen West,
a former director of the Company, have been appointed as successor Voting
Trustees. For purposes of the table set forth below, each of the officers
and directors are listed as beneficially owning the shares of Common Stock
and Preferred Stock listed opposite his or her name, even though the Voting
Trust has the sole rights to vote such shares. Because the Voting Trust has
the sole and exclusive power to exercise all voting rights with respect to
the shares of Common Stock and Preferred Stock deposited in the Voting
Trust, the Voting Trust has sole voting and dispositive power with respect
to 1,485,912 shares of Common Stock (and, therefore, 1,485,912 votes) and
with respect to 1,500 shares of Preferred Stock (and, therefore, 4,500,000
votes). Accordingly, the Voting Trust has the power to exercise 5,985,912
votes, or 48.7% of all eligible votes.
<PAGE>
<TABLE>
<CAPTION>
Shares of Percent of Shares of Percent of
Common Common Preferred Preferred Percent of
Name and Address of Stock Stock Stock Stock all Out-
Beneficial Owners and Beneficially Beneficially Beneficially Beneficially standing
Directors and Officers Owned Owned Owned Owned Votes
- ---------------------- ------------ ------------ ------------ ------------ --------
<S> <C> <C> <C> <C> <C>
5% Beneficial Owners:
- ---------------------
Voting Trust, u/a 1,485,912 19.1% 1,500 100.0% 48.7%
dated August 19, 1992,
as amended, Julius
Ostreicher, Andrew L.
Simon and Eileen West,
Voting Trustees c/o
Touchstone Applied
Science Associates,
Inc. Fields Lane,
Brewster, NY 10509
Estate of Bertram L. 464,170 6.0% 948.68 63.2% 26.9%
Koslin
1640 Hunterbrook Road
Yorktown Heights, NY
10598
Eileen West 44,357(a) 0.6% 10.74 0.72% 0.6%
56 Harrison Street
New Rochelle, NY 10801
Officers and Directors:
- -----------------------
Andrew L. Simon 567,452(b) 7.1% 179.0 11.9% 8.8%
1905 Hunterbrook Road
Yorktown Heights, NY
10598
Stephen H. Ivens 264,476(c) 3.4% 89.5 6.0% 4.3%
272 River Drive
River Vale, NJ 07675
Linda G. Straley 285,477(d) 3.6% 89.5 6.0% 4.5%
2 Circle Drive East
Ridgefield, CT 06877
Steven R. Berger 0(e) 0.0% 0 0.0% 0.0%
3 Castle View Court
Rye Brook, NY 10573
Michael Milone 14,000(f) 0.2% 0 0.0% 0.1%
64 Calle del Norte
Placitas, NM 87043
Officers and Directors 1,930,112(g) 24.8% 1,500 100.0% 50.5%
as a Group (5 persons)
<FN>
(a) Includes 21,500 shares which Ms. West has the right to acquire upon
the exercise of currently exercisable stock options; excludes the
shares of Common Stock and Preferred Stock held in the Voting Trust
for the benefit of all members thereof, which Voting Trust is
listed separately as a 5% stockholder in this Table. Ms. West is
one of three Voting Trustees of the Voting Trust.
(b) Includes 239,000 shares which Mr. Simon has the right to acquire
upon the exercise of currently exercisable stock options, which
options are not included in the Voting Trust; excludes (i)
82,500 shares which are the subject of options granted to
Mr. Simon which are not currently exercisable and (ii) the shares
of Common Stock and Preferred Stock held in the Voting Trust for
the benefit of all of the members thereof, which Voting Trust is
listed separately as a 5% stockholder in this table. Mr. Simon is
one of three Voting Trustees of the Voting Trust.
(c) Includes 102,500 shares which Mr. Ivens has the right to acquire
upon the exercise of currently exercisable stock options. Excludes
52,500 shares which are the subject of options granged to Mr. Ivens
which are not currently exercisable.
(d) Includes 102,700 shares which Ms. Straley has the right to acquire
upon the exercise of currently exercisable stock options. Excludes
52,500 shares which are the subject of options granted to
Ms. Straley which are not currently exercisable.
(e) Excludes 5,000 shares which are the subject of options granted to
Mr. Berger which are not currently exercisable.
(f) Includes 14,000 shares which are held in a Custodial SEP, of which
Dr. Milone is the beneficiary. Excludes 5,000 shares which are the
subject of options granted to Dr. Milone which are not currently
exercisable.
(g) Includes shares held in the Voting Trust for the benefit of the
Estate of Bertram L. Koslin. Andrew L. Simon, Chairman of the
Board of Directors and President of the Company, is one of three
Voting Trustees of the Voting Trust. Includes an aggregate of
444,200 currently exercisable options which are held by officers
and directors of the Company, but are not included in the Voting
Trust. Excludes an aggregate of 197,500 options held by officers
and directors of the Company which are not currently exercisable
and are not included in the Voting Trust.
</FN>
</TABLE>
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company is authorized to issue 5,000,000 shares, par value
$.0001 per share, of preferred stock. The stock may be issued by the Board
of Directors of the Company in one or more series and with such preferences,
conversion or other rights, voting powers and other provisions as may be
fixed by the Board of Directors in the resolution authorizing its issuance
without any further action of the shareholders.
On November 16, 1992, the Company issued 1,500 shares of $.0001
par value convertible preferred shares to the Voting Trust. The
beneficiaries of the Voting Trust consist of the officers and directors of
the Company and the Estate of Bertram L. Koslin. The shares are entitled to
3,000 votes per share. The holders of the shares are entitled to a
non-cumulative dividend of $.01 per share. In September 1994, with the consent
of the Voting Trust and the beneficiaries thereof, the Company exchanged the
1,500 outstanding $.0001 par value convertible preferred shares for 1,500
par value $.0001 preferred shares. Such preferred shares possess all the
rights of the original issue but for the conversion privilege.
Accordingly, the Voting Trust has sole voting and dispositive
power with respect to the preferred shares, as well as the shares of Common
Stock held in the Voting Trust. See "Security Ownership of Certain
Beneficial Owners and Management".
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following Exhibits are filed as part of this Report:
3.1 Certificate of Incorporation, dated August 22, 1991
filed with the Secretary of State of the State of
Delaware*
3.2 Certificate of Merger dated August 26, 1992, filed
with the Secretary of State of the State of Delaware*
3.3 Certificate of Designations for Series A Preferred
Stock of the Company*
3.4 By-Laws*
4.1 Specimen Certificate evidencing shares of Common Stock*
4.2 Form of Redeemable Class B Common Stock Purchase Warrant*
4.3 Form of Warrant Agreement between the Company and
American Stock Transfer and Trust Company*
4.4 Form of Underwriter's Unit Purchase Warrant Agreement
between the Company and Redstone Securities, Inc.*
9.1 Voting Trust Agreement, dated August 19, 1992**
9.2 Amendment of Voting Trust Agreement and Appointment of
Successor Trustee, dated March 30, 1995**
10.1 Lease Agreement between the Town of Southeast
Industrial Development Agency/Industrial Development
Reserve Bonds and the Company; Mortgage and Security
Agreement between the Company and the Town of
Southeast Industrial Development Agency to Barclays
Bank of New York, N.A., now The Bank of New York, as
mortgagee; Note between the Company and Barclays Bank
of New York, N.A., now The Bank of New York; Lease
Guarantee Agreement from the Company as guarantor and
Barclays Bank of New York, N.A., now The Bank of New
York, as Trustee; Amendment to Lease between the Town
of Southeast Industrial Development Agency and the Company*
10.2 Extension and Modification Agreement, dated as of
October 31, 1996, between the Company and the Town of
Southeast Industrial Development Agency, and the Bank
of New York ****
10.3 Agreements between the Company and the Commissioner of
Education of the State of New York and Chief Executive
Officer of the Board of Regents of the University of
the State of New York*
10.4 Agreement between the Company and the State of
Connecticut and a Purchase Order between the Company
and the Commonwealth of Virginia*
10.5 401(k) Plan*
10.6 Notice of Grant Award*
10.7 Patent Assignment by Bertram Koslin to the Company*
10.8 Financial Advisory Agreement between the Company and
the Harriman Group (Option Certificate issued by the
Company to the Harriman Group and Acknowledgment
Letter between the Company and the Harriman Group)**
10.9 Amended and Restated 1991 Stock Option Incentive Plan***
10.10 Directors Stock Option Plan***
10.11 Employment Agreement with Andrew L. Simon***
10.12 Employment Agreement with Linda G. Straley***
10.13 Employment Agreement with Stephen H. Ivens***
11 Computation of Earnings Per Share****
27 Financial Data Schedule****
(b) Reports on Form 8-K
None.
- -----------------------
* Incorporated herein by reference to the exhibit contained in the
Company's Registration Statement on Form SB-2 under the Securities
Act of 1933, as amended, filed with the Securities and Exchange
Commission on July 7, 1993
** Incorporated herein by reference to the exhibit contained in
Amendment No. 1 to the Company's Registration Statement on Form SB-2
under the Securities Act of 1933, as amended, filed with the
Securities and Exchange Commission on March 16, 1994
*** Incorporated herein by reference to the exhibit contained in the
Company's Quarterly Report on Form 10-QSB for the fiscal quarter
ended April 30, 1996, filed with the Securities and Exchange
Commission on June 12, 1996
**** Filed herewith
<PAGE> F - 1
INDEX TO FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT F - 2
INDEPENDENT AUDITORS' REPORT - PREDECESSOR AUDITOR F - 3
BALANCE SHEETS F - 4
STATEMENTS OF OPERATIONS F - 6
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY F - 7
STATEMENTS OF CASH FLOWS F - 8
NOTES TO FINANCIAL STATEMENTS F - 10
<PAGE> F - 2
INDEPENDENT AUDITORS' REPORT
----------------------------
TO THE BOARD OF DIRECTORS
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
We have audited the accompanying balance sheets of Touchstone Applied Science
Associates, Inc. as of October 31, 1996 and 1995, and the related statements
of operations, changes in stockholders' equity and cash flows for the two
years ended October 31, 1996. 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 audits 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 Touchstone Applied Science
Associates, Inc. as of October 31, 1996 and 1995 and the results of its
operations and its cash flows for the two years ended October 31, 1996 in
conformity with generally accepted accounting principles.
Lazar, Levine & Company LLP
Certified Public Accountants
New York, New York
December 5, 1996
<PAGE> F - 3
INDEPENDENT AUDITORS' REPORT - PREDECESSOR AUDITOR
--------------------------------------------------
TO THE BOARD OF DIRECTORS
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
I have audited the accompanying statements of operations, changes in
stockholders' equity and cash flows of Touchstone Applied Science Associates,
Inc. for the year ended October 31, 1994. These financial statements are the
responsibility of the Company's management. My responsibility is to express
an opinion on these financial statements based on my audit.
I conducted my audit in accordance with generally accepted auditing standards.
Those standards require that I 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. I believe that my audit provides a reasonable basis
for my opinion.
In my opinion, the statements of operations and cash flows referred to above
present fairly, in all material respects, the results of the operations and
the cash flows of Touchstone Applied Science Associates, Inc. for the year
ended October 31, 1994 in conformity with generally accepted accounting
principles.
Thomas J. Marion
Certified Public Accountant
New York, New York
February 10, 1995
<PAGE> F - 4
<TABLE>
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
Page 1 of 2
BALANCE SHEETS
<CAPTION>
October 31,
1 9 9 6 1 9 9 5
----------- -----------
<S> <C> <C>
ASSETS
------
Current assets:
Cash and temporary investments (Note A) $1,049,819 $ 617,305
Marketable securities (Note A) 2,076,158 2,114,243
Accounts receivable (Note A) 567,374 351,491
Inventories (Note A) 242,081 152,296
Loan receivable (Note D) 400,000 --
Prepaid expenses and other current assets 123,106 214,021
----------- -----------
Total current assets 4,458,538 3,449,356
Property, plant and equipment - net of
accumulated depreciation of $909,607
and $1,593,208, respectively
(Notes A, B, E and F) 1,795,195 1,869,141
Other assets:
Deferred offering costs (Note A) -- 236,624
Loan receivable (Note D) -- 400,000
Test passage bank, net of accumulated
amortization of $907,053 and $673,626,
respectively (Notes A & C) 2,563,286 2,435,488
Software development costs, net of
accumulated amortization of $5,427 (Note A) 136,928 --
Other assets 21,595 26,123
----------- -----------
Total assets $8,975,542 $8,416,732
=========== ===========
<FN>
See notes to financial statements.
</FN>
</TABLE>
<PAGE> F - 5
<TABLE>
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
Page 2 of 2
BALANCE SHEETS
<CAPTION>
October 31,
1 9 9 6 1 9 9 5
----------- -----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of long-term debt (Notes E and F) $ 95,500 $ 315,000
Accounts payable and accrued expenses 246,270 210,649
Corporation taxes payable 566 431
----------- -----------
Total current liabilities 342,336 526,080
Long-term debt:
Long-term debt less current portion (Notes E and F) 728,250 571,250
Deferred income taxes (Notes A and I) 521,221 602,162
----------- -----------
Total liabilities 1,591,807 1,699,492
----------- -----------
Commitments and contingencies (Notes E, F, G, I,
J, L and M)
Stockholders' equity (Note H):
Preferred stock, $.0001 par value, 5,000,000
authorized, 1,500 issued and outstanding -- --
Common stock, $.0001 par value, 20,000,000
authorized, 7,789,322 and 6,899,400 shares
issued and outstanding 779 690
Additional paid-in capital 4,077,935 3,609,978
Stock subscription receivable (14,350) --
Unrealized holding loss (Note A) (20,073) (40,824)
Retained earnings 3,339,444 3,147,396
----------- -----------
Total stockholders' equity 7,383,735 6,717,240
----------- -----------
Total liabilities & stockholders' equity $8,975,542 $8,416,732
=========== ===========
<FN>
See notes to financial statements.
</FN>
</TABLE>
<PAGE> F - 6
<TABLE>
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
STATEMENTS OF OPERATIONS
<CAPTION>
Years Ended October 31,
1 9 9 6 1 9 9 5 1 9 9 4
----------- ----------- -----------
<S> <C> <C> <C>
Contract income (Note A) $ 875,608 $ 956,803 $ 938,449
Catalog sales (Note A) 1,644,300 1,357,791 1,089,072
----------- ----------- -----------
Total net revenue (Note L) 2,519,908 2,314,594 2,027,521
Cost of goods sold (Note M) 711,564 954,907 538,982
----------- ----------- -----------
Gross profit 1,808,344 1,359,687 1,488,539
----------- ----------- -----------
Operating expenses:
Selling expenses 703,214 593,959 395,382
General and administrative expenses 936,462 740,861 751,363
Abandonment of hardware and software
projects (Note K) -- -- 1,670,249
Product development (Note A) 60,238 -- --
----------- ----------- -----------
Total operating expenses 1,699,914 1,334,820 2,816,994
----------- ----------- -----------
Income (loss) from operations 108,430 24,867 (1,328,455)
Other income (expense):
Abandonment of offering -- -- (80,080)
Interest expense (64,154) (58,939) (61,642)
Investment income 166,981 163,714 158,644
----------- ----------- -----------
Income (loss) before income taxes 211,257 129,642 (1,311,533)
Income taxes (credit) (Note A & I) 19,209 (25,504) (652,837)
----------- ----------- -----------
Net income (loss) $ 192,048 $ 155,146 $ (658,696)
=========== =========== ===========
Weighted average shares outstanding
(Note A)
Primary 7,640,867 7,665,511 6,899,400
Fully diluted 7,640,867 7,738,324 6,899,400
Earnings (loss) per share (Note A)
Primary $ .03 $ .02 $ (.10)
Fully diluted $ .03 $ .02 $ (.10)
<FN>
See notes to financial statements.
</FN>
</TABLE>
<PAGE> F - 7
<TABLE>
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<CAPTION>
Preferred Stock Common Stock Additional Stock Unrealized Total
--------------- ---------------- Paid-in Subscriptions Holding Retained Stockholders
Shares Amount Shares Amount Capital Receivable Loss Earnings Equity
------- ------ ------- ------ ------- ---------- ---- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at November 1, 1993 1,500 $ -- 6,899,400 $ 690 $3,398,978 $ (1,969) $ -- $3,650,946 $7,048,645
Receipt of stock subscription -- -- -- -- -- 1,969 -- -- 1,969
Financial advisory services
(Note H) -- -- -- -- 105,500 -- -- -- 105,500
Net unrealized loss in
marketable securities -- -- -- -- -- -- (105,486) -- (105,486)
Net loss -- -- -- -- -- -- -- (658,696) (658,696)
------ ---- --------- ----- ---------- ------- --------- ---------- ----------
Balance at October 31, 1994 1,500 -- 6,899,400 690 3,504,478 -- (105,486) 2,992,250 6,391,932
Financial advisory services
(Note H) -- -- -- -- 105,500 -- -- -- 105,500
Net unrealized gain in
marketable securities -- -- -- -- -- -- 64,662 -- 64,662
Net income -- -- -- -- -- -- -- 155,146 155,146
------ ---- --------- ----- ---------- ------- --------- ---------- ----------
Balance at October 31, 1995 1,500 -- 6,899,400 690 3,609,978 -- (40,824) 3,147,396 6,717,240
Proceeds from exercise
of options -- -- 865,922 87 310,459 (14,350) -- -- 296,196
Proceeds from exercise
of warrants -- -- 24,000 2 51,998 -- -- -- 52,000
Financial advisory services
(Note H) -- -- -- -- 105,500 -- -- -- 105,500
Net unrealized gain in
marketable securities -- -- -- -- -- -- 20,751 -- 20,751
Net income -- -- -- -- -- -- -- 192,048 192,048
------ ---- --------- ----- ---------- ------- --------- ---------- ----------
Balance at October 31, 1996 1,500 $ -- 7,789,322 $ 779 $4,077,935 $(14,350) $(20,073) $3,339,444 $7,383,735
====== ==== ========= ===== ========== ======= ========= ========== ==========
<FN>
See notes to financial statements.
</FN>
</TABLE>
<PAGE> F - 8
<TABLE>
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
STATEMENTS OF CASH FLOWS
<CAPTION>
Year Ended October 31,
1 9 9 6 1 9 9 5 1 9 9 4
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 192,048 $ 155,146 $ (658,696)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization 389,767 343,740 308,005
Loss (gain) on sale of auto 1,009 -- (5,663)
Deferred income taxes (80,941) (176,999) (650,239)
Abandonment of hardware and
software projects -- -- 1,670,249
Financial advisory services 105,500 105,500 105,500
Changes in operating assets and
liabilities:
Accounts receivable (215,883) (65,629) 164,929
Inventories (89,785) (4,518) (2,570)
Prepaid expenses and other current
assets 90,915 82,730 (170,260)
Accounts payable 35,758 43,236 (11,708)
----------- ----------- -----------
NET CASH FLOWS PROVIDED BY OPERATING
ACTIVITIES 428,388 483,206 749,547
----------- ----------- -----------
INVESTING ACTIVITIES
Purchase of marketable securities (111,164) (82,435) (630,186)
Proceeds from sale of marketable
securities 170,000 -- --
Acquisition of property, plant and
equipment (73,448) (175,053) (82,947)
Proceeds from sale of auto -- -- 11,025
Test passage bank (361,225) (318,233) (471,502)
Software development costs (142,356) -- (226,750)
----------- ----------- -----------
NET CASH FLOWS USED BY INVESTING
ACTIVITIES (518,193) (575,721) (1,400,360)
----------- ----------- -----------
<FN>
See notes to financial statements.
</FN>
</TABLE>
<PAGE> F - 9
<TABLE>
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
STATEMENTS OF CASH FLOWS (Continued)
<CAPTION>
Year Ended October 31,
1 9 9 6 1 9 9 5 1 9 9 4
----------- ----------- -----------
<S> <C> <C> <C>
FINANCING ACTIVITIES
Principal payments on long-term debt $ (62,500) $ (75,000) $ (75,000)
Subscriptions received -- -- 1,969
Deferred offering costs (151,343) (199,615) 43,071
Proceeds from exercise of options 684,162 -- --
Proceeds from exercise of warrants 52,000 -- --
----------- ----------- -----------
NET CASH FLOWS PROVIDED
(USED) BY FINANCING ACTIVITIES 522,319 (274,615) (29,960)
----------- ----------- -----------
NET CHANGE IN CASH AND TEMPORARY
INVESTMENTS 432,514 (367,130) (680,773)
CASH AND TEMPORARY INVESTMENTS
AT BEGINNING OF PERIOD 617,305 984,435 1,665,208
----------- ----------- -----------
CASH AND TEMPORARY INVESTMENTS
AT END OF PERIOD $1,049,819 $ 617,305 $ 984,435
=========== =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 67,858 $ 67,392 $ 61,543
=========== =========== ===========
Income taxes paid $ 30,690 $ 47,522 $ 160,502
=========== =========== ===========
<FN>
See notes to financial statements.
</FN>
</TABLE>
<PAGE> F - 10
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE A - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------------
Organization
- ------------
Touchstone Applied Science Associates, Inc. (the "Company"), was originally
incorporated in the State of New York in 1976. In August 1991, the Company
changed its corporate domicile to Delaware by merger into a Delaware
Corporation created exclusively for that purpose. The Company designs,
develops, publishes and distributes primarily reading comprehension tests
and related services as well as instructional materials and software to
elementary and secondary schools, colleges and universities throughout the
United States. In July 1995, RTA-USA Inc., the Company's subsidiary, which
was substantially inactive, was merged into the Company.
Temporary Investments
- ---------------------
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be temporary investments. These
investments consist primarily of money market mutual funds which make monthly
tax-free dividend payments.
Inventories
- -----------
Inventories, which based on the nature of the Company's operations consist
solely of finished goods, are stated at the lower of cost (first-in, first-out
method) or market.
<PAGE> F - 11
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE A - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
- ---------------------------------------------------------
Marketable Securities
- ---------------------
Effective November 1, 1993, the Company adopted Financial Accounting Standards
Board (FASB) Statement of Financial Accounting Standards (SFAS) Number 115
"Accounting for Certain Investments in Debt, and Equity Securities". Under
this standard, certain investments in debt and equity securities will be
reported at fair value. The Company's marketable securities, which consist
primarily of investment grade bonds, are being reported as securities held for
sale. The market value of these securities at October 31, 1996 and 1995 is as
follows:
<TABLE>
<CAPTION>
October 31,
1 9 9 6 1 9 9 5
----------- -----------
<S> <C> <C>
Aggregate cost $2,096,231 $2,155,067
Gross unrealized gain 1,850 1,191
Gross unrealized loss (21,923) (42,015)
----------- -----------
$2,076,158 $2,114,243
=========== ===========
</TABLE>
All of these securities mature within one through five years. Cost of the
securities used in the computation of realized gains and losses is determined
using the specific identification method. During 1996, a bond with a face
value of $170,000 matured. There was no realized gain or loss on this
security.
Property, Plant and Equipment
- -----------------------------
Property, plant and equipment are stated at cost. The Company provides for
depreciation generally on an accelerated method (double-declining balance)
for personal property purchased after 1988 and on the straight-line method
for real property and personal property purchased prior to 1989, by charges
to income at rates based upon estimated recovery periods as follows:
Building 31-1/2 years
Building improvements 15 - 31-1/2 years
Furniture and computer equipment 5 to 7 years
Automobiles 5 years
<PAGE> F - 12
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE A - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
- ---------------------------------------------------------
Deferred Offering Costs
- -----------------------
Costs and fees incurred in conjunction with the registration of certain stock
options and the conversion of stock warrants have been deferred and charged
against the gross proceeds of the securities.
Income Taxes
- ------------
The Company's deferred income taxes arise principally from the differences in
the recording of expenses relating to the test passage bank (See Note C).
Income taxes are reported based upon the Company's adoption of Statement of
Financial Accounting Standards (SFAS) Number 109, "Accounting for Income
Taxes".
Software Development
- --------------------
The Company accounts for costs associated with the development of software
products pursuant to SFAS Number 86, "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed". Pursuant to these rules
for product development, the work performed prior to the determination of
technological feasibility, is treated as research and development costs and
is expensed as incurred. From the point a project obtains technological
feasibility until it is ready for sale, the payroll and payroll related
charges and any direct material costs are capitalized.
Amortization
- ------------
IDA bond origination fees and mortgage costs (See Note F) are amortized using
the straight-line method over the term of the indebtedness. Other capitalized
costs are amortized using the straight-line method over a period of five (5)
years for software development and eleven (11) years for the test passage bank.
In 1994, new management made the decision to shorten the estimated life, for
amortization purposes, of the test passage bank from twenty (20) to eleven
(11) years. This change is applied prospectively as a change in accounting
estimate to the remaining asset value as of the end of fiscal 1993.
<PAGE> F - 13
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE A - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
- ---------------------------------------------------------
Reserve for Bad Debts
- ---------------------
The Company, due to its customer base, has experienced virtually no bad debts.
As a result, no reserve has been provided for.
Concentration of Credit Risk
- ----------------------------
Substantially all of the Company's revenues are derived from unsecured credit
sales to its customers, which are mainly in the field of education.
The Company maintains substantially all its cash balances in one financial
institution. The balances are insured by the Federal Deposit Insurance
Corporation up to $100,000. At October 31, 1996 and 1995, the Company's
uninsured cash balances totaled $386,737 and $24,599 respectively.
Revenue Recognition
- -------------------
Catalog and contract sales are recognized when product is shipped from the
Company's warehouse. Grant revenues are recognized as billed based upon an
agreed upon work plan.
There is a right of return on test booklets, answer sheets and certain
software products. Upon return within a specified period, a credit is issued,
with certain chargeoffs, or the item is replaced, if a software product. In
the past, the Company's returns have been insignificant. As a result, no
reserve has been provided for.
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.
<PAGE> F - 14
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE A - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
- ---------------------------------------------------------
Fair Value
- ----------
The Company has a number of financial instruments, none of which are held for
trading purposes. The Company estimates that the fair value of all financial
instruments at October 31, 1996 and 1995, does not differ materially from the
aggregate carrying values of its financial instruments recorded in the
accompanying balance sheets. The estimated fair value amounts have been
determined by the Company using available market information and appropriate
valuation methodologies. Considerable judgment is necessarily required in
interpreting market data to develop the estimates of fair value, and
accordingly, the estimates are not necessarily indicative of the amounts that
the Company could realize in a current market exchange.
Earnings (loss) per Share
- -------------------------
Earnings (loss) per share for the years ended October 31, 1996, 1995 and 1994
were computed by dividing net income by the weighted average number of common
and common equivalent shares outstanding and is adjusted for the assumed
conversion of shares issuable upon exercise of options and warrants. The
Company had a net loss for the year ended October 31, 1994 and accordingly
common stock equivalents are excluded since the effect would be anti-dilutive.
NOTE B - PROPERTY, PLANT AND EQUIPMENT
- --------------------------------------
Property, plant and equipment are summarized as follows:
<TABLE>
<CAPTION>
October 31,
1 9 9 6 1 9 9 5
----------- -----------
<S> <C> <C>
Land $ 161,367 $ 161,367
Building 1,807,591 1,798,091
Building improvements 252,492 251,546
Furniture and computer equipment 347,651 1,097,536
Automobiles 135,701 153,809
----------- -----------
2,704,802 3,462,349
Less: accumulated depreciation 909,607 1,593,208
----------- -----------
$1,795,195 $1,869,141
=========== ===========
</TABLE>
<PAGE> F - 15
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE B - PROPERTY, PLANT AND EQUIPMENT (Continued)
- --------------------------------------
The Company's property under capital leases which is included in property,
plant, and equipment at October 31, 1996 consists of real property (including
costs allocated to land of $161,367) at a cost of $1,401,206 less accumulated
depreciation of $440,479.
Depreciation expense for the years ended October 31, 1996 and 1995 was
$143,860 and $136,682, respectively.
NOTE C - TEST PASSAGE BANK
- --------------------------
The creation and production of reading test passages to become part of the
Test Passage Bank is the production of an asset which is used in the
manufacture of all forms of the Company's Degrees of Reading Power tests.
This asset is principally comprised of payroll and payroll related costs
incurred in the writing and calibration of test passages. The process of
writing and calibrating a test passage takes approximately two years and all
costs associated with this process are capitalized. Beginning with year
three, these costs are amortized over the test passage's useful life, which
is estimated to be eleven years.
NOTE D - LOAN RECEIVABLE
- ------------------------
On September 25, 1992, the Company, through a subordinated unsecured demand
loan agreement, loaned $300,000 to the Harriman Group, a market maker in the
Company's stock. The note bears interest at a rate of eight percent (8%) per
annum, payable annually, and is due on November 1, 2002.
On November 30, 1992, the Company made an additional subordinated unsecured
demand loan of $100,000 to the Harriman Group. This note also bears interest
at a rate of eight percent (8%) per annum, payable annually, and is due on
December 1, 2002.
On February 1, 1994, the Company consolidated the two outstanding subordinated
unsecured demand loans with the Harriman Group. The new note bears interest
at a rate of ten percent (10%) per annum, payable annually, and is due on
February 1, 2002.
On November 5, 1996, the Company notified the Harriman Group of its intention
to accelerate the outstanding obligations per the above agreements. Pursuant
to this notification, the entire principal balance plus accrued interest to
date of payment is due by May 5, 1997.
<PAGE> F - 16
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE E - PLANT FACILITIES
- -------------------------
In October 1987, the Company moved its operations to its new facility of
approximately 13,000 square feet of finished space, and infrastructure for
additional space. Of the total costs of $1,394,620 through October 31, 1990,
the Company financed $1,000,000 with an Industrial Development Authority Bond
(Note F).
In July 1990, the Company improved its current facility by adding approximately
17,000 square feet at a cost of $653,319. The Company financed $400,000 of
the total cost with an additional mortgage (Note F). In June 1994, the
Company began improvements to finish this space. In May 1995, the Company
completed the improvements at a cost of $107,019.
NOTE F - LONG-TERM DEBT
- -----------------------
On August 1, 1986, the Town of Southeast Industrial Development Agency issued
revenue bonds to finance construction of a facility, which the Company leases
from the Agency. Minimum lease payments sufficient to cover the Agency's debt
service and other expenses must be made by the Company over the fifteen year
term, which includes a final payment in 2001 of $350,000. The Bank of New
York purchased all the bonds from the Barclays Bank of New York, NA. The bond
indenture incurs interest at ninety-two percent (92%) of the Bank's prime rate
(7.45% and 6.46% at October 31, 1996 and 1995 respectively) and contains
covenants requiring the Company to maintain specified levels of working
capital and tangible net worth. The lease agreement contains a one dollar
($1) purchase option at the end of the lease term. The bond is secured by the
lease and is guaranteed by the Company and its principal stockholders. The
Company owed $571,250 and $616,250 on the bond as of October 31, 1996 and 1995
respectively.
On May 15, 1991, the Company secured an additional mortgage for $400,000 from
the Bank of New York, to finance the 17,000 square foot addition to its
facilities (Note E). The mortgage incurs interest at the rate of
three-fourths of one percent (.75%) over the Bank's prime rate (9.00% and
9.50% at October 31, 1996 and 1995, respectively). A $250,000 balloon payment
was due in 1996. On June 1, 1996, the Company refinanced the mortgage for an
additional five years, maturing on June 1, 2001 at the same rate of interest.
The Company owed $252,500 and $270,000 on the additional mortgage as of October
31, 1996 and 1995, respectively.
<PAGE> F - 17
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE F - LONG-TERM DEBT (Continued)
- -----------------------
The following is a schedule of future minimum payments, excluding maintenance
and other operating costs, required under the long- term debt, as of
October 31, 1996.
<TABLE>
<CAPTION>
Year Ending October 31:
<S> <C>
1997 $ 206,125
1998 199,550
1999 191,650
2000 183,750
2001 523,900
----------
Total minimum payments 1,304,975
Less amount representing interest
and obligations under the debt 481,225
----------
Principal payments remaining 823,750
Less current portion 95,500
----------
Long-term portion $ 728,250
==========
</TABLE>
<PAGE> F - 18
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE G - RETIREMENT PLANS
- -------------------------
The Company has a qualified 401(k) Profit Sharing Plan for all employees who
are eighteen years of age and have completed six months or one thousand hours
of employment. The Plan allows total contributions of up to fifteen percent
(15%) of the eligible employee's salary through Company contributions and a
salary reduction mechanism. Company contributions to the Plan are optional
and accrue at the discretion of the Board of Directors. For the years ended
October 31, 1996, 1995 and 1994, the Company made a contribution to the profit
sharing plan equal to five percent (5%) of each eligible employee's
compensation thereby limiting each eligible employee to contribute up to ten
percent (10%) of compensation.
Net assets for the Profit Sharing Plan, as estimated by the Massachusetts
Mutual Life Insurance Company which maintains the plan's records, are
$1,144,585 at October 31, 1996.
In October 1991, the Company adopted a Money Purchase Pension Plan for all
employees who are eighteen years of age and have completed six months or one
thousand hours employment, which has been qualified by the Internal Revenue
Service. Under this Plan, which was first effective for the year ended
October 31, 1991, the Company makes an annual contribution to the Plan equal
to ten percent (10%) of each eligible employee's compensation.
Net assets for the Money Purchase Pension Plan, as estimated by the
Massachusetts Mutual Life Insurance Company which maintains the plan's
records, are $424,231 at October 31, 1996.
Pension and profit sharing costs were $149,290, $143,565 and $110,976 for the
years ended October 31, 1996, 1995 and 1994, respectively.
<PAGE> F - 19
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE H - STOCKHOLDERS' EQUITY
- -----------------------------
Preferred Stock
- ---------------
The Company is authorized to issue 5,000,000 shares of $.0001 par value
preferred stock. The stock may be issued by the Board of Directors of the
Company in one or more series and with such preferences, conversion or other
rights, voting powers and other provisions as may be fixed by the Board of
Directors in the resolution authorizing their issuance without any further
action of the stockholders.
On November 16, 1992, the Company issued 1,500 shares of $.0001 par value
convertible preferred shares to a voting trust, controlled by management,
dated August 1992. The shares are entitled to 1,000 votes per share (3,000
votes per share after giving effect to the 3 for 1 stock split on September
22, 1993). The holders of the shares are also entitled to a non-cumulative
dividend of $.01 per share. The shares could be converted to common stock,
at a rate of 1,000 common shares (3,000 common shares after giving effect to
the 3 for 1 stock split on September 22, 1993) for each preferred share, on a
pro rata basis over ten years, upon the attainment of certain performance
goals. In September 1994, the Company exchanged the 1,500 outstanding
$.0001 par value convertible preferred shares for 1,500 shares of $.0001 par
value preferred shares. The new preferred shares possess all the rights of
the original issue but for the conversion privilege.
The Company has designated 1,500 of its 5,000,000 authorized preferred shares
as $.0001 par value Series A preferred stock. The remaining 4,998,500
authorized preferred shares have not been designated.
<PAGE> F - 20
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE H - STOCKHOLDERS' EQUITY (Continued)
- -----------------------------
Incentive Stock Option Plan
- ---------------------------
The Company has adopted an Amended and Restated 1991 Stock Option Incentive
Plan (the Plan) whereby options to purchase up to an aggregate of 2,500,000
shares of common stock, may be granted to officers, key employees, directors,
and consultants of the Company. Subject to the terms of the Plan, the Board
of Directors is authorized to select optionees and determine the number of
shares covered by each option, its exercise price and certain of its other
terms. No one participant may receive an award in excess of 200,000 shares
in any one fiscal year. The exercise price granted, however, may not be less
than the fair market value of the Company's common stock on the date of the
grant.
Incentive stock option plan activity is summarized as follows:
<TABLE>
<CAPTION>
Option Price
Shares Per Share
------------ --------------
<S> <C> <C>
Options outstanding November 1, 1994 1,519,750 $1.42 - $2.75
Granted 72,500 $1.53125
Canceled (18,900) $1.42 - $2.625
------------
Options outstanding October 31, 1995 1,573,350 $1.42 - $2.75
Granted 233,000 $ .75 - $1.09
Canceled (673,028) $1.42 - $2.625
Exercised (80,572) $1.42
------------
Options outstanding October 31, 1996 1,052,750 $ .75 - $2.75
============
Options exercisable October 31, 1996 819,750
============
</TABLE>
<PAGE> F - 21
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE H - STOCKHOLDERS' EQUITY (Continued)
- -----------------------------
Incentive Stock Option Plan ( Continued)
- ---------------------------
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation". The Company currently accounts for its stock-based
compensation plans using the accounting prescribed by Accounting Principles
Board Opinion No. 25 "Accounting for Stock Issued to Employees". Since the
Company is not required to adopt the fair value based recognition provisions
prescribed under SFAS No. 123, it has elected only to comply with the
disclosure requirements set forth in the statement which includes disclosing
pro forma net income and earnings per share as if the fair value based method
of accounting had been applied. The pro forma net income and earnings per
share for the year ended October 31, 1996 would have been $54,413 and $.01 had
the new method been applied.
Directors Stock Option Plan
- ---------------------------
In 1996, the Company adopted a Directors Stock Option Plan whereby options may
be granted to purchase up to an aggregate of 100,000 shares of the Company's
common stock to directors of the Company who are not officers or employees of
the Company or otherwise eligible to receive awards under the Amended and
Restated 1991 Stock Option Incentive Plan. Pursuant to the plan, eligible
directors would receive an option to purchase 5,000 shares of the Company's
common stock on the date the director first becomes eligible. The eligible
director would subsequently receive an option to purchase 2,500 shares of the
Company's common stock on the date of each succeeding annual meeting of the
stockholders, unless the director's term ends on that date. Each option
granted is exercisable at the fair market value of the stock on the date
granted, and may be exercised for a 9 year period commencing one year from the
date of the grant.
On March 29, 1996, the Company granted an aggregate of 10,000 options to two
non-employee directors. The options are exercisable at $2.1875.
<PAGE> F - 22
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE H - STOCKHOLDERS' EQUITY (Continued)
- -----------------------------
Option Agreement
- ----------------
On September 25, 1992, the Company issued an Option Certificate for 250,000
options to the Harriman Group, a market maker in the Company's stock, for
$2,500, that allows them to purchase 250,000 shares of the Company's
restricted common stock (750,000 shares after giving effect to the 3 for 1
stock split on September 22, 1993) at $2.14 per share ($.71 per share after
giving effect to the 3 for 1 stock split on September 22, 1993), the fair
market value of restricted shares on the date of the certificate. The
options expire if they are not exercised by September 26, 1997.
The Option Certificate also identifies certain financial advisory tasks to
be performed by the Harriman Group, a market maker in the Company's stock,
for a five-year (5) period beginning September 25, 1992. These tasks are to
be performed at the Company's request and are in exchange for the Company's
registering the options or shares. The Company has reflected the cost of
these services, the difference between fair market value of restricted shares
and fair market value of freely trading shares, as a charge to operations on
a prorata basis over the term of the agreement.
In November 1995, the Harriman Group exercised 600,000 options. In October
1996, the Harriman Group exercised the remaining options.
Public Offering
- ---------------
On June 12, 1992, the Company grossed $1,560,000 and netted $1,340,625 from
the completion of an initial public stock offering under the Securities Act
of 1933 as amended. The offering consisted of 300,000 units, at a selling
price of $5.20 per unit. Each unit consisted of one (1) share of Common Stock,
$.0001 par value ("common stock"), one (1) Class A Redeemable Common Stock
Purchase Warrant ("A Warrant") and one (1) detachable Class B Redeemable
Common Stock Purchase Warrant ("B Warrant"). Each Class A Warrant entitled
the holder to purchase one (1) share of Common Stock for a period of eighteen
months from the effective date of the offering at a price of $6.50. Each
Class B Warrant entitled the holder to purchase one (1) share of Common Stock
(3 shares after giving effect to the 3 for 1 stock split September 22, 1993)
for a period of thirty-six months from the effective date of the offering at
a price of $8.00. On September 13, 1993, the A warrants expired with
299,800 shares (899,400 shares after giving effect to the 3 for 1 stock split
on September 22, 1993) having been exercised. In March 1996, 8,000 B
warrants were exercised into 24,000 shares of common stock for $6.50 per
warrant. The remaining 292,000 warrants expired in March 1996.
<PAGE> F - 23
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE I - INCOME TAXES
- ---------------------
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes using the enacted tax
rates in effect in the years in which the differences are expected to reverse.
Deferred income tax liabilities and assets are comprised as follows:
<TABLE>
<CAPTION>
October 31,
1 9 9 6 1 9 9 5
--------- ---------
<S> <C> <C>
Deferred tax liability:
Test passage bank $521,221 $602,162
</TABLE>
The Company's income tax expense consists of the following:
<TABLE>
<CAPTION>
October 31,
1 9 9 6 1 9 9 5 1 9 9 4
----------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal $ 74,345 $ 108,736 $ (29,745)
State 25,805 42,759 27,147
----------- ----------- -----------
$100,150 $ 151,495 $ (2,598)
----------- ----------- -----------
Deferred:
Federal $ (57,059) $(146,407) $(468,466)
State (23,882) (30,592) (181,773)
----------- ----------- -----------
$ (80,941) $(176,999) $(650,239)
----------- ----------- -----------
Provision (credit) for income taxes $ 19,209 $ (25,504) $(652,837)
=========== =========== ===========
</TABLE>
The Company's former subsidiary (See Note A) had net operating losses totaling
approximately $80,000 at October 31, 1994. The net operating loss
carryforwards were used to offset taxable income for the year ended October,
31, 1995.
<PAGE> F - 24
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE I - INCOME TAXES (Continued)
- ---------------------
A reconciliation of the difference between the expected income tax rate using
the statutory federal tax rate and the Company's effective rate is as follows:
<TABLE>
<CAPTION>
Year Ended October 31,
1 9 9 6 1 9 9 5 1 9 9 4
------- ------- -------
<S> <C> <C> <C>
U.S. Federal income tax statutory rate 34% 34% (34)%
State income tax, net of Federal income tax benefit 7 7 (7)
Other - including tax free income and
net operating losses (32) (61) (9)
------- ------- -------
Effective tax rate 9% (20)% (50)%
======= ======= =======
</TABLE>
NOTE J - EMPLOYMENT AGREEMENTS
- ------------------------------
In March 1996, the Company entered into employment agreements with three of
its key employees. The agreements are for a three year term and are
automatically extended each year unless the Company notifies the employee,
in writing at least 60 days prior to the anniversary date that the agreement
will not be extended.
Each agreement calls for a base salary plus eligibility in the Company's
benefit plans and key man insurance. Additionally, the employee may be
entitled to bonuses at the discretion of the Company's Board of Directors.
In the event there is a change in control of the Company, the employees
employment agreements are in effect for a three year term commencing on the
date of change of control. In addition, they would be entitled to a bonus
at least equal to the average annual bonus payable with respect to two of
the last three fiscal years immediately preceding the date of change of
control. Among other provisions, the agreements include a non compete clause
for a two year period following termination of employment.
<PAGE> F - 25
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE K - HARDWARE & SOFTWARE PRODUCTS
- -------------------------------------
In June 1994, Bertram Koslin, the Company's President, Chief Executive Officer
and Chairman of the Board of Directors passed away. A management team was
formed to review the Company's operations and products. As a result, the
management team decided to abandon development of certain of the Company's
hardware and software products and redirect the Company's focus toward other
of the Company's products. Accordingly, the net cost of these abandoned
projects, $1,670,249, has been reflected as a charge to the statement of
operations for the year ended October 31, 1994.
NOTE L - MAJOR CUSTOMERS
- ------------------------
Revenues to single customers that exceed 10% of total revenues were as follows:
<TABLE>
<CAPTION>
Year Ended October 31,
1 9 9 6 1 9 9 5 1 9 9 4
----------- ----------- -----------
<S> <C> <C> <C>
Customer A $479,530 $390,958 $383,350
Customer B -- -- 297,933
Customer C -- 258,063 211,241
</TABLE>
NOTE M - MAJOR SUPPLIERS
- ------------------------
Substantially all of the Company's printing costs, totaling $33,715, $57,170
and $58,667 for the years ended October 31, 1996, 1995 and 1994, respectively,
were attributable to a single vendor.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act,
the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
January 21, 1997 By:/s/ ANDREW L. SIMON
-------------------------------------
Andrew L. Simon
President and Treasurer
(principal executive officer and
principal financial officer)
In accordance with the Exchange Act, this report has been
signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
Signature Title Date
/s/ ANDREW L. SIMON
- -------------------------------------
Andrew L. Simon Director and Chairman
of the Board January 21, 1997
/s/ LINDA G. STRALEY
- -------------------------------------
Linda G. Straley Director January 21, 1997
/s/ STEPHEN H. IVENS
- -------------------------------------
Stephen H. Ivens Director January 21, 1997
/s/ STEVEN R. BERGER
- -------------------------------------
Steven R. Berger Director January 21, 1997
/s/ MICHAEL MILONE
- -------------------------------------
Michael Milone Director January 21, 1997
<PAGE>
EXTENSION AND MODIFICATION AGREEMENT
by and between
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC., as Borrower
and
TOWN OF SOUTHEAST INDUSTRIAL DEVELOPMENT AGENCY, as Agency
and
THE BANK OF NEW YORK, as Mortgagee
- -------------------------------------------------------------------------------
OCTOBER 31, 1996
- -------------------------------------------------------------------------------
PREMISES
- --------
ADDRESS: Hardscrabble Heights Business Park
Fields Lane
Town of Southeast, New York
TAX MAP: 78
BLOCK: 2
LOT: 83
COUNTY: Putnam
RECORD AND RETURN TO:
BLEAKLEY PLATT & SCHMIDT
One North Lexington Avenue
White Plains, New York 10601
Attn: James J. Sullivan, Esq.
<PAGE>
EXTENSION AND MODIFICATION AGREEMENT
------------------------------------
THIS AGREEMENT dated October 31, 1996 by and between TOUCHSTONE APPLIED
SCIENCE ASSOCIATES, INC., a corporation organized and existing under the
laws of the State of New York having its principal office at Fields Lane,
Brewster, New York 10509 (the "Borrower") and the TOWN OF SOUTHEAST
INDUSTRIAL DEVELOPMENT AGENCY, Brewster, New York, a corporate governmental
agency constituting a body corporate and politic and a public benefit
corporation under the Laws of the State of New York having its principal
office at One Main Street, Brewster, New York 10509 (the "Agency"), the
Borrower and the Agency are hereinafter collectively referred to as the
"Mortgagor", and THE BANK OF NEW YORK, a banking association organized and
existing under the laws of the State of New York with offices located at
123 Main Street, White Plains, New York 10601, hereinafter the "Mortgagee".
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, on May 15, 1991 the Mortgagor made, executed and delivered to
Barclays Bank of New York, N.A. a Note in the principal sum of $400,000.00;
and
WHEREAS said Note was secured by a Mortgage and Security Agreement (the
"Mortgage") of even date made, executed and delivered by the Mortgagor to
Barclays Bank of New York, N.A. and said Mortgage was recorded in the
Putnam County Clerk's Office on May 16, 1991 in Vol. 1391 Page 57 and
encumbers the premises located at Hardscrabble Heights Business Park,
Fields Lane, Town of Southeast, New York, said premises being also known as
Tax Map 28, Block 2, Lot 83; and
WHEREAS on March 31, 1993 said Note, Mortgage and related loan documents
were assigned and delivered to THE BANK OF NEW YORK pursuant to an
assignment agreement dated March 31, 1993 by BARCLAYS BANK OF NEW YORK,
N.A. to THE BANK OF NEW YORK which assignment was filed in the Putnam
County Clerk's Office on March 31, 1994, in Liber 1886, Page 113; and
WHEREAS, pursuant to the terms of the Note, the indebtedness evidenced
thereby was to mature and be paid in full on June 1, 1996; and
WHEREAS, the Mortgagor acknowledges the unpaid principal balance of said
Note now totals $252,500.00; and
WHEREAS, the Mortgagor has requested that the Mortgagee extend the maturity
date of said Note.
NOW THEREFORE, in consideration of the premises and TEN and NO/100 ($10.00)
DOLLARS, each to the other in hand paid, and other good and valuable
consideration, receipt whereof is hereby acknowledged, the parties hereto
mutually agree as follows:
1. Effective immediately the maturity date on the Note is extended from
June 1, 1996 to June 1, 2001.
2. Effective immediately the interest rate on the unpaid principal
balance shall be the Prime Rate plus three quarters of one (>%)
percent. As used herein the "Prime Rate" shall mean the prime
commercial lending rate of The Bank of New York as publicly announced
at the Head Office of The Bank of New York in New York City, New
York, to be in effect from time to time, such rate to be adjusted
automatically, without notice on the effective date of any change in
such rate.
3. Commencing November 1, 1996 and continuing thereafter on the 1st day
of each consecutive month until June 1, 2001, the Borrower shall make
monthly payments of interest at the per annum interest rate set forth
herein together with monthly payments of principal sufficient to
fully amortize the unpaid principal balance.
4. The existing real estate tax escrow requirement shall be released,
but the Mortgagee reserves the right to require the Borrower to again
make monthly real estate tax escrow payments if the real estate tax
payments shall become delinquent at any time during the extended Note
term.
5. Effective immediately the existing personal Guaranty of Payment from
each of ANDREW L. SIMON, BERTRAM L. KOSLIN, SANDRA KOSLIN and SUSAN
M. ZENO is released from any liability or obligation for the
indebtedness evidenced by the Note and/or the term loan evidencing a
debt in the original principal amount of $1,000,000.00.
6. As an inducement for the Mortgagee to approve and enter into this
agreement the Borrower agrees to pay the Mortgagee an extension fee
equal to $2,525.00.
7. All other terms and provisions of the Note, Mortgage and related loan
documents shall remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have duly executed this agreement as
of the day and year first written above.
TOUCHSTONE APPLIED SCIENCE
ASSOCIATES, INC.
By: /s/ ANDREW L. SIMON
---------------------------------------
ANDREW L. SIMON, President
TOWN OF SOUTHEAST INDUSTRIAL
DEVELOPMENT AGENCY
By: /s/ MICHELLE ROWAN
---------------------------------------
, Chairman
THE BANK OF NEW YORK
By: /s/ JOHN M. TOLOMER
---------------------------------------
JOHN M. TOLOMER, V.P.
<PAGE>
SCHEDULE A
ALL that certain plot, piece or parcel of land, situate, lying and being in
the Town of Southeast, County of Putnam and State of New York, known and
designated as Lot No. 4 as shown on a certain map entitled, 'SUBDIVISION
PLAT OF HARDSCRABBLE HEIGHTS SITUATE IN THE TOWN OF SOUTHEAST, COUNTY OF
PUTNAM, STATE OF NEW YORK' dated July 9, 1985, revised August 6, 1985 and
revised October 3, 1985, filed October 22, 1985 in the Putnam County
Clerk's Office, as Map No. 2088, being bounded and described as follows:
BEGINNING at a point in the southerly line of Field's Lane being the north-
westerly corner of Lot No. 4 herein described and the northeasterly corner
of Lot No. 5 as shown on the above referenced map;
Thence following the southerly line of Field's Lane, North 84 degrees 48'
00" East a distance of 44.76 feet to a point of curvature, said point being
the intersection of the line of Lot No. 4 and the southwesterly line of
Hardscrabble Heights Drive;
Thence following the southwesterly line of Hardscrabble Heights Drive on a
curve to the right having a radius of 52.58 feet, a distance of 74.20 feet
to a point of reverse curvature;
Thence along a curve to the left having a radius of 225.00 feet a distance
of 186.50 feet to a point of tangency;
Thence South 61 degrees 50' 00" East a distance of 157.20 feet to a point
being the northeasterly corner of Lot No. 4 and the northwesterly corner of
Lot No. 6;
Thence along the line of Lot No. 6 and leaving the southwesterly line of
Lot No. 6 and leaving the southwesterly line of Hardscrabble Heights Drive,
South 04 degrees 40' 00" West a distance of 241.88 feet to a point in the
line of Lot No. 9;
Thence along Lot No. 9, North 85 degrees 20' 00" West a distance of 370.00
feet to a point in the line of Lot No. 5;
Thence along Lot No. 5 North 04 degrees 40' 00" East a distance of 464.63
feet to the point and place of beginning.
<PAGE>
STATE OF NEW YORK )
) ss:
COUNTY OF ORANGE )
On the 31st day of October, 1996, before me personally came
ANDREW L. SIMON, to me known, who, being by me duly sworn, did depose and
say that he resides at 1905 Hunterbrook Rd., Yorktown Heights, NY, that he
is the President of TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC., the
corporation described in and which executed the foregoing instrument and
that he signed his name thereto by order of the board of directors of said
corporation.
/s/ MAUREEN CRUSH
-------------------------------------
Maureen Crush
Notary Public, State of New York
No. 4882935
Qualified in Orange County
Commission Expires 4/13/97
STATE OF NEW YORK )
) ss:
COUNTY OF PUTNAM )
On the 31st day of October, 1996, before me personally came
MICHELLE ROWEN, to me known, who, being by me duly sworn, did depose and
say that she resides at 4 Hillside Park, Brewster, NY; that she is the
Chairman of TOWN OF SOUTHEAST INDUSTRIAL DEVELOPMENT AGENCY, the agency
described in and which executed the foregoing instrument and that she
signed his name thereto by order of the Members of said agency.
/s/ CHARLES JOSEPH ACKER
-------------------------------------
Charles Joseph Acker
Notary Pub., State of NY
#60-5012265 Putnam Co.
Term Expires 2/28/97
STATE OF NEW YORK )
) ss:
COUNTY OF WESTCHESTER )
On the 31st day of October, 1996, before me personally came
JOHN M. TOLOMER, to me known, who, being by me duly sworn, did depose and
say that he resides at 15 Pin Oak Lane, Chappaqua, NY; that he is the Vice
President of THE BANK OF NEW YORK, the corporation described in and which
executed the foregoing instrument and that he signed his name thereto by
order of the board of directors of said corporation.
/s/ RAYMOND E. SACHER
-------------------------------------
Raymond E. Sacher
Notary Public, State of New York
No. 60-4640310
Qualified in Putnam County
Commission Expires November 30, 1997
<TABLE>
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
EXHIBIT II
COMPUTATION OF EARNINGS PER COMMON SHARE
----------------------------------------
<CAPTION>
1 9 9 6 1 9 9 5 1 9 9 4
----------- ----------- -----------
<S> <C> <C> <C>
Primary earnings:
Net income (loss) $ 192,048 $ 155,146 $ (658,696)
----------- ----------- -----------
Shares:
Weighted common shares outstanding 7,524,539 6,899,400 6,899,400
Employees stock options 116,328 255,842 --
Options to The Harriman Group -- 506,035 --
B warrants -- -- --
Underwriter options -- 4,234 --
----------- ----------- -----------
Total weighted shares outstanding 7,640,867 7,665,511 6,899,400
----------- ----------- -----------
Primary earnings per share $ .03 $ .02 $ (.10)
=========== =========== ===========
Fully diluted earnings:
Net income (loss) $ 192,048 $ 155,146 $ (658,696)
----------- ----------- -----------
Shares:
Weighted common shares outstanding 7,524,539 6,899,400 6,899,400
Employee stock options 116,328 301,956 --
Options to The Harriman Group -- 525,789 --
B warrants -- -- --
Underwriter options -- 11,179 --
----------- ----------- -----------
Total weighted shares outstanding 7,640,867 7,738,324 6,899,400
----------- ----------- -----------
Fully diluted earnings per common share $ .03 $ .02 $ (.10)
=========== =========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted
from the Balance Sheet and Statements of Income filed as part of
the report on Form 10KSB for the fiscal year ended October 31, 1996
and is qualified in its entirety by reference to such report on
Form 10KSB for the fiscal year ended October 31, 1996.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-END> OCT-31-1996
<CASH> 1,049,819
<SECURITIES> 2,076,158
<RECEIVABLES> 567,374
<ALLOWANCES> 0
<INVENTORY> 242,081
<CURRENT-ASSETS> 4,458,538
<PP&E> 2,704,802
<DEPRECIATION> 909,607
<TOTAL-ASSETS> 8,975,542
<CURRENT-LIABILITIES> 342,336
<BONDS> 0
0
0
<COMMON> 779
<OTHER-SE> 7,382,956
<TOTAL-LIABILITY-AND-EQUITY> 8,975,542
<SALES> 2,519,908
<TOTAL-REVENUES> 2,686,889
<CGS> 711,564
<TOTAL-COSTS> 1,699,914
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 64,154
<INCOME-PRETAX> 211,257
<INCOME-TAX> 19,209
<INCOME-CONTINUING> 192,048
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 192,048
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
</TABLE>
