424(b)(3) PROSPECTUS
REGISTRATION NO. 333-27659
PROSPECTUS
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
850,000 SHARES OF COMMON STOCK
This Prospectus relates to up to 850,000 shares (the
"Shares") of the Common Stock, par value $.0001 per share (the
"Common Stock"), of Touchstone Applied Science Associates, Inc.
(the "Company" or "TASA") to be sold from time to time by the
holders thereof (the "Selling Stockholders") on the NASDAQ
SmallCap Market ("NASDAQ") or otherwise at prices then
attainable, less ordinary brokers' commissions and dealers'
discounts, as applicable. The Shares were issued to the Selling
Stockholders or are issuable upon the exercise of certain
warrants (the "Warrants") issued by the Company to some of the
Selling Stockholders. See "The Selling Stockholders" and "Plan
of Distribution".
The Shares have been approved for listing on NASDAQ,
subject to notice of issuance. TASA's Common Stock trades on
NASDAQ under the trading symbol TASA. The last reported sale
price of the Company's Common Stock on NASDAQ on May 21, 1997
was $0.63.
The Shares are being offered solely for the account of
the Selling Stockholders and the Company will receive no part of
the proceeds of this Offering, other than proceeds from the
payment of the exercise price of the Warrants. See "Use of
Proceeds" and "The Selling Stockholders".
THE COMPANY'S SECURITIES ARE SPECULATIVE IN THAT THEY
INVOLVE A HIGH DEGREE OF RISK AND SHOULD BE PURCHASED ONLY BY
PERSONS WHO CAN AFFORD TO LOSE THEIR ENTIRE INVESTMENT. SEE
"RISK FACTORS" FOR A DISCUSSION OF MATTERS WHICH SHOULD BE
CONSIDERED BY PROSPECTIVE PURCHASERS OF THESE SECURITIES.
Underwriting discounts Proceeds to issuer or
Price to Public and commissions other persons(3)
Per Share $0.63(1) -0- $0.63(1,2)
Total $535,500(1) -0- $535,500(1,2)
(1) Estimated, based upon the last reported sale price of the
Company's Common Stock on May 21, 1997.
(2) The Company will receive no part of the proceeds of this
Offering, other than proceeds from the payment of the
exercise price of the Warrants. 250,000 Warrants are
exercisable at a price of $0.469 per share, equaling
$117,250.00 of proceeds to the Company; 250,000 Warrants are
exercisable at a price of $0.50 per share, equaling
$125,000.00 of proceeds to the Company.
(3) The following are the expenses totaling $24,163 payable by the
Company in connection with the issuance and distribution of
the Shares: Securities and Exchange Commission registration
fee - $163; NASDAQ listing fees - $8,500; fees and expenses of
accountants - $1,000; fees and expenses of counsel - $12,500;
blue sky fees and expenses - $0; printing expenses - $1,000;
miscellaneous - $1,000. All the amounts shown are estimates,
except for the Securities and Exchange Commission registration
fee and the NASDAQ listing fee.
--------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
--------------------
The date of this Prospectus is June 11, 1997
<PAGE> 2
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED
TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS ON BEHALF OF
THE COMPANY NOT CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH IT
RELATES OR AN OFFER TO SELL, OR THE SOLICITATION OF AN OFFER TO
BUY, ANY SECURITIES IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO
WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN
NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
AVAILABLE INFORMATION
The Company is subject to the informational requirements
of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and, in accordance therewith, files reports and other
information with the Securities and Exchange Commission (the
"Commission"). Reports, proxy statements and other information
filed by the Company can be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024,
450 Fifth Street, N.W., Washington, D.C. 20549. Copies of such
material can also be obtained from the Public Reference Section of
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549,
at prescribed rates. The Commission maintains a Web site (located
at http://www.sec.gov) that contains reports, proxy and information
statements and other information regarding issuers that file
electronically with the Commission. The Company's Common Stock is
listed on NASDAQ and reports and other information concerning the
Company can be inspected at NASDAQ.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents heretofore filed with the
Commission by the Company (File Number 0-20303) pursuant to the
Exchange Act are incorporated by reference in this Prospectus: the
Company's Annual Report on Form 10-KSB for the fiscal year ended
October 31, 1996, its Quarterly Reports on Form 10-QSB for the
fiscal quarters ended January 31, 1997 and April 30, 1997, its
Current Reports on Form 8-K filed on December 20, 1996, January 30,
1997 and April 15, 1997. The description of the Company's Common
Stock set forth in the Company's Registration Statement on
Form 8-A, dated May 28, 1992, filed under the Exchange Act,
including any subsequent amendment or report filed for the purpose
of updating such description, is also incorporated herein by
reference.
All documents filed by the Company pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of
this Prospectus and prior to the termination of the offering of the
Shares covered by this Prospectus shall be deemed to be
incorporated by reference into this Prospectus and to be a part of
this Prospectus from the respective dates of the filing of such
documents. Any statement contained in a document incorporated
herein by reference shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement
contained in this Prospectus or in any other subsequently filed
document which also is or is deemed to be incorporated herein by
reference modifies or supersedes such statement. Any statement so
modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
This Prospectus incorporates certain documents by
reference which are not presented herein or delivered herewith.
Copies of such documents (other than exhibits not specifically
incorporated by reference into the text of such documents) are
available, without charge, to each person to whom this Prospectus
is delivered, on the written or oral request of such person, to
Touchstone Applied Science Associates, Inc., Fields Lane, P.O. Box
382, Brewster, New York 10509, Attention: Secretary (telephone
(914) 277-8100).
<PAGE> 3
IN CONNECTION WITH THIS OFFERING, CERTAIN SELLING
STOCKHOLDERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN
THE COMMON STOCK OF THE COMPANY ON NASDAQ IN ACCORDANCE WITH RULE
103 OF REGULATION M. SEE "PLAN OF DISTRIBUTION".
UNTIL JULY 21, 1997, ALL DEALERS EFFECTING TRANSACTIONS
IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS
OR SUBSCRIPTIONS.
TABLE OF CONTENTS
AVAILABLE INFORMATION. . . . . . . . . . . . . . . . . . . . . .2
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE. . . . . . . . .2
SUMMARY INFORMATION . . . . . . . . . . . . . . . . . . . . . .4
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . .5
BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
USE OF PROCEEDS. . . . . . . . . . . . . . . . . . . . . . . . 15
THE SELLING STOCKHOLDERS . . . . . . . . . . . . . . . . . . . 15
PLAN OF DISTRIBUTION . . . . . . . . . . . . . . . . . . . . . 16
SELECTED HISTORICAL FINANCIAL INFORMATION. . . . . . . . . . . 17
LEGAL OPINIONS . . . . . . . . . . . . . . . . . . . . . . . . 18
EXPERTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
<PAGE> 4
SUMMARY INFORMATION
The following summary is qualified in its entirety by the
detailed information and financial statements (including the notes
thereto) appearing elsewhere in this Prospectus.
THE COMPANY
Touchstone Applied Science Associates, Inc. (the
"Company" or "TASA") designs, develops, publishes and distributes
educational tests, instructional materials, and computer software
to elementary and secondary schools, colleges and universities.
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
believes that 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 forms listed in the Company's catalog are licensed for an
indefinite period of time to school districts throughout the United
States and Canada. In accord 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. The Company also sells its tests through
catalogs to school districts. The Company believes that
approximately four million DRP tests, for which the Company is the
sole source proprietor, are administered each year in states,
school districts, college and university testing programs. See
"Business".
The Company presently maintains its corporate offices at
Fields Lane, P.O. Box 382, Brewster, New York 10509; and its
telephone number is 914-277-8100.
THE SELLING STOCKHOLDERS
This Prospectus relates to the registration of the resale
of an aggregate of 850,000 shares of the Company's Common Stock as
follows: (a) 150,000 shares which were issued to Michael D. Beck
and his immediate family in January 1997 pursuant to the completion
of the Company's acquisition of Beck Evaluation & Testing
Associates, Inc. Michael D. Beck is currently a director and Vice
President of the Company; (b) 100,000 shares issued by the Company
to Paris Group, Ltd. ("Paris Group"), a financial consultant
retained by the Company; (c) 100,000 shares issued by the Company
to Meyers Pollock Robbins, Inc. ("Meyers Pollock"), a financial
consultant retained by the Company, and 250,000 shares issuable
upon the exercise of Warrants issued by the Company to Meyers
Pollock; and (d) 250,000 shares issuable upon the exercise of
Warrants issued by the Company to Jericho State Capital Corp. of
Florida ("Jericho"), a financial consultant retained by the
Company. Meyers Pollock may act as a market maker in the Company's
securities, and Paris Group, Meyers Pollock and Jericho provide
financial consulting and advisory services to the Company pursuant
to separate consulting agreements. Paris Group's consulting
agreement expires in 2001, subject to earlier termination by the
Company. Meyers Pollock's consulting agreement expires in 1999.
Jericho's consulting agreement has an initial term of one year,
subject to automatic renewal. Paris Group is located at 14 Fourth
Street, Farmingville, New York 11738, telephone: (516) 736-2130.
Meyers Pollock is located at One World Trade Center, Suite 9151,
New York, New York 10048, telephone (212) 323-3000. Jericho is
located at 2500 Military Trail, Suite 240, Boca Raton, Florida
33431, telephone: (561) 989-0091. Michael Beck and his immediate
family, Paris Group, Meyers Pollock and Jericho are collectively
referred to herein as the "Selling Stockholders". See "The Selling
Stockholders".
<PAGE> 5
RISK FACTORS
The Shares offered hereby are speculative and involve a
high degree of risk. An investment in the Shares is suitable only
for persons who can afford to sustain the loss of their entire
investment. Prospective investors should carefully consider the
following factors in addition to those described elsewhere in this
Prospectus before making an investment decision.
NO DIVIDENDS. The payment by the Company of dividends,
if any, in the future, rests within the discretion of its Board of
Directors and will depend, among other things, upon the Company's
earnings, its capital requirements and its financial condition as
well as other relevant factors. The Company has no present
intention of paying any cash dividends on its Common Stock in the
foreseeable future, as it intends to use its earnings, if any, to
generate growth.
PRODUCT RECALLS. The Company uses a sophisticated
technology to produce its tests. Within the state-of-the-art, the
Company warrants to replace, at no additional charge, any test form
which is not in accord with the specifications described in its
manuals. To date, the Company has not had to provide any such
replacement tests. Substantial product recalls could have a
material adverse effect on the Company's operations. In addition,
a claimed defect in the test or the failure of the Company's test
to perform for the use which the Company specifies may subject the
Company to claims of liability for damages.
NO FORMAL FEASIBILITY STUDIES. The Company intends to
rely on the judgment and conclusions of its management and their
expertise. No formal marketing studies have been done by the
Company and no reports from outside agencies have been obtained,
nor does the Company intend to do or obtain such studies.
RAPID POLICY AND TECHNOLOGICAL CHANGES. The field of
which the Company's products are a part has been characterized in
recent years by significant and rapid policy and technological
changes. The ability of the Company to operate profitably in the
future will depend in part upon its ability to develop and maintain
a technically competent research staff and its ability to adapt to
changes in the field. It is anticipated that, in the future,
changes and modifications will be required in order to keep pace
with changes in the field. There can be no assurance that
competitors will not develop technology which will render the
Company's products unmarketable or obsolete.
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 then 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. The United States Copyright Office has issued copyrights
to the Company. There is no assurance that the patent and
copyrights issued to the Company are enforceable and there is no
assurance that the Company will derive any competitive advantage
therefrom. While the patent and copyrights are deemed important to
the Company, they are not considered essential to the success of
the Company's business. The issuance of the patent and copyrights
may be insufficient to prevent competitors from designing around
the patented or copyrighted aspects. In addition, there is no
assurance the Company's product will not infringe on patents or
copyrights owned by others, licenses to 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 and
copyrights in the future will be sustained if judicially tested.
See "Business--Patents, Copyrights, Trademarks and Trade Secrets".
GOVERNMENT REGULATIONS. The degree of government
regulations to be imposed upon the Company and the field in which
the Company operates is uncertain at this time.
Under Title 1 of the 1994 Improving America's Schools Act
(IASA), 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 needs of educationally deprived students. Title 1 regulations
<PAGE> 6
include a requirement that schools receiving Title 1 funds must
evaluate student growth or progress in reading. It is management's
belief that State Education Authorities (SEAs) find DRP test
results to be in accord with the regulations for Title 1, as DRP
tests are used by schools to evaluate Federally-supported Title 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
Company's revenues 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.
While the Company knows of no government regulations other than
those referenced above, it would represent a serious problem should
the Company's tests fail to meet any government regulation. Such
failure would mean that the Company's tests could not be used in
any program governed by any such regulation. See
"Business--Government Regulation".
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. There is
intense competition in the industry and there are both domestic and
foreign companies which may be deemed dominant competitors. There
can be no assurance that the features of the Company's products
and/or 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 profit and non-profit companies
in the testing business and testing departments within certain
states and school districts, all of which have considerably larger
and greater financial and human resources and marketing
capabilities. See "Business--Competition".
ADDITIONAL FINANCING. The Company has traditionally
generated sufficient funds from operations to meet growth
objectives. The accelerated rate of fulfilling these objectives
(which are subject to annual revision) depends upon the net
proceeds from the sale of securities. Additional financing may be
required for further expansion for operational expenditures. If
additional financing is required, there can be no assurance that
such financing will be available, or that it can be obtained on
terms satisfactory to the Company.
DEPENDENCE ON KEY PERSONNEL. The business of the Company
will be largely dependent upon the active participation of its
executive officers and directors, Andrew L. Simon, Linda G.
Straley, Stephen H. Ivens, Michael D. Beck and Michael Milone.
The loss or unavailability to the Company of any of such
individuals could have a material adverse effect on the Company's
business prospects and potential earning capacity. If necessary,
the Company has several stock option plans designed to attract
additional qualified individuals to employment or association with
the Company.
EFFECTIVE CONTROL BY MANAGEMENT. As of April 30, 1997,
there were 8,139,322 shares of Common Stock outstanding and 1,500
shares of Series A Preferred Stock, par value $.0001 per share (the
"Preferred Stock"), outstanding. Each share of Common Stock is
<PAGE> 7
entitled to one vote per share and each share of Preferred Stock is
entitled to 3,000 votes per share. Consequently, there are an
aggregate of 12,639,322 eligible votes for the Company's
outstanding capital stock.
All of the shares of Common Stock and Preferred Stock
owned by Andrew L. Simon, Linda G. Straley and Stephen H. Ivens, as
well as certain other persons affiliated with the Company or the
Voting Trust (as defined below), 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, were appointed as successor Voting
Trustees on March 30, 1995, pursuant to an amendment to the Voting
Trust Agreement. Unless the Voting Trustees exercise their right
to terminate the Voting Trust earlier, the Voting Trust shall
terminate on August 18, 2002. 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 1,463,055 shares of Common Stock (and,
therefore, 1,463,055 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 5,963,055 votes, or
47.2% of all eligible votes.
SHARES AVAILABLE FOR RESALE. 5,100,000 shares of the
total of the Company's issued and outstanding stock were originally
issued as "restricted securities" as that term is defined under
Rule 144 promulgated under the Securities Act of 1933, as amended
(the "Act"), and in the future only may be sold in compliance with
Rule 144 of the Act, or pursuant to a Registration Statement filed
under the Act. Rule 144 provides, in essence, that a person
holding restricted securities for a period of one (1) year may sell
those securities in unsolicited brokerage transactions or in
transactions with a market-maker, in an amount up to one (1%)
percent of the Company's outstanding Common Stock every three (3)
months. Additionally, Rule 144 requires that an issuer of
securities make available adequate current public information with
respect to the issuer. Rule 144 also permits, under certain
circumstances, the sale of shares by a person who is not an
affiliate of the Company and who has satisfied a two-year holding
period without any quantity limitation and whether or not there is
adequate current public information available. Investors should be
aware that sales under Rule 144, or pursuant to a Registration
Statement filed under the Act, may have a depressive effect on the
market price of the Company's securities in any market that may
develop for such shares. As of March 31, 1997, 1,463,055 shares
have been outstanding for more than one year and could be publicly
sold in accordance with Rule 144.
POSSIBLE ISSUANCE OF ADDITIONAL SHARES. The Company's
Board of Directors has the power to issue any or all of the
Company's additional Common Stock and Preferred Stock without
stockholder approval. Management presently anticipates that it may
choose to issue such shares to acquire business interests or other
types of property in the future, although the Company presently has
no commitments, contracts or intentions to issue any additional
shares. Potential investors should be aware that any such stock
issuances may result in a reduction of the book value or market
price, if any, of the outstanding shares of Common Stock. If the
Company issues additional shares, such issuance will reduce the
proportionate ownership and voting power of each other stockholder.
Further, any new issuance of shares may result in a change in
control of the Company.
The ability of the Board of Directors to issue additional
shares without further stockholder action might serve as an anti-
takeover device, notwithstanding the desire of stockholders to
change management or accept a takeover offer. The ability of the
Board of Directors to issue new shares may make the cost of a
takeover prohibitively expensive to anyone attempting to acquire
the Company.
BROKER-DEALER SALES OF THE COMPANY'S COMMON STOCK. The
Company's securities may be covered by a Commission rule that
imposes additional sales practice requirements on broker-dealers
who sell such securities to persons other than established
customers and accredited investors (generally institutions with
assets in excess of $5,000,000 or individuals with a net worth in
excess of $1,000,000 or annual income exceeding $200,000
individually or $300,000 jointly with their spouse). For
transactions covered by the rule, broker-dealers must make a
special suitability determination for any purchaser and receive
<PAGE> 8
each purchaser's written agreement to the transaction prior to the
sale. Consequently, the rule may affect the ability of broker-dealers
to sell the Company's securities and also may affect the
ability of any purchasers in this offering to sell their shares in
the secondary market.
LIMITATION ON LIABILITY OF DIRECTORS. As permitted by
the General Corporation Law of the State of Delaware, the Company's
Certificate of Incorporation provides that a director of the
Company will not be personally liable to the Company or its
stockholders for monetary damages resulting from breaches of his or
her fiduciary duty as a director, including breaches which
constitute gross negligence. As a result, the right of the Company
and its stockholders to obtain monetary damages for acts or
omissions of directors will be more limited than they would be in
the absence of such provision. The provision would not apply to a
violation of a director's responsibility under federal securities
laws.
REQUIREMENT OF CONTINUING REGISTRATION. The Company must
have a current and effective registration statement on file with
the Commission in order for a Selling Stockholder to sell his or
its Shares or for a warrant holder to be able to exercise its
Warrants. Various state securities laws relating to qualification
of securities for sale in such states may also be applicable.
Necessarily, there can be no assurance that the Company will, at
all times during the life of the Warrants, be able to secure or
maintain such registration or qualification; and in the event it is
unable to do so, the Warrants will not be exercisable and will be
valueless.
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
<PAGE> 9
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 and Canada. 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
<PAGE> 10
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.
<PAGE> 11
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
<PAGE> 12
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.
BETA
As of January 2, 1997, the Company acquired all of the
outstanding capital stock of Beck Evaluation & Testing Associates,
Inc. ("BETA"). BETA provides consulting services to schools and
publishers.
MODERN LEARNING PRESS, INC.
As of May 30, 1997, the Company's wholly-owned
subsidiary, Modern Learning Press, Inc., acquired substantially all
of the assets of Programs for Education, Inc. Modern Learning
Press, Inc. will publish books and other materials used in the
enhancement of the reading skills of elementary school students, as
well as books in other subject areas.
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,
<PAGE> 13
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
<PAGE> 14
offer extended credit terms to its customers. Historically, bad
debts have not been material.
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 Title 1 of the 1994 Improving America's Schools Act
(IASA), 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 needs of educationally deprived students. Title 1 regulations
include a requirement that schools receiving Title 1 funds must
evaluate student growth or progress in reading. It is management's
belief that State Education Authorities (SEAs) find DRP test
results to be in accord with the regulations for Title 1, as DRP
tests are used by schools to evaluate Federally-supported Title 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.
<PAGE> 15
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.
USE OF PROCEEDS
The Company will not realize any proceeds from the sale
of the Shares by the Selling Stockholders. The Company will
realize proceeds only from the exercise of Warrants held by some of
the Selling Stockholders, which proceeds, if all such Warrants are
exercised, would aggregate $242,250. The Company will use the net
proceeds from the exercise of such Warrants for working capital
purposes.
THE SELLING STOCKHOLDERS
An aggregate of 850,000 shares of Common Stock are being
offered pursuant to this Prospectus. The following is a
description of the Selling Stockholders.
MICHAEL D. BECK, CONNIE BECK AND MICHAEL D. BECK, AS
CUSTODIAN FOR AMANDA P. BECK. The Shares being offered pursuant
hereto include 75,000 shares owned by Michael D. Beck, 37,500
shares owned by Connie Beck, Mr. Beck's wife, and 37,500 shares
owned by Mr. Beck, as custodian for his minor daughter, Amanda P.
Beck. These shares were issued by the Company pursuant to a
transaction concluded as of January 2, 1997, in which the Company
purchased all of the outstanding capital stock of Beck Evaluation
& Testing Associates, Inc. ("BETA") from the holders of such shares
for a purchase price equal to (i) $130,000 in cash, (ii) $150,000
payable in promissory notes, bearing interest at the rate of 8 1/4%
and maturing on January 2, 1999, and (iii) 150,000 shares of the
Company's Common Stock. Mr. Beck and members of Mr. Beck's
immediate family owned 100% of the outstanding stock of BETA. As
of January 2, 1997, BETA became a wholly-owned subsidiary of the
Company and Mr. Beck continues to serve as the President of BETA.
Mr. Beck was elected as Vice President of the Company on January 2,
1997, and as a director of the Company on March 28, 1997. As of
January 2, 1997, the Company entered into an employment agreement
with Michael D. Beck, pursuant to which the Company agreed to
employ Mr. Beck, and Mr. Beck agreed to remain, as the Company's
Vice President and as President and Chief Executive Officer of
BETA, a wholly-owned subsidiary of the Company, for a term of three
years, subject to automatic yearly extensions and certain rights of
termination as provided in such agreement. As of the date of this
Prospectus, Mr. Beck beneficially owns an aggregate of 119,500
shares of the Company's Common Stock, which includes 7,000 shares
owned jointly with his wife, Connie Beck, and the 37,500 shares
held by Mr. Beck as custodian for his minor daughter. Mr. Beck
also holds options to acquire 125,000 shares of the Company's
Common Stock, which options were issued pursuant to the Company's
Amended and Restated 1991 Stock Option Incentive Plan and which are
not currently exercisable.
PARIS GROUP, LTD. The Shares being offered pursuant
hereto include 100,000 shares owned by Paris Group, a financial
consultant retained by the Company pursuant to a consulting
agreement dated as of December 13, 1996. The consulting agreement
is for a five-year term, although the Company may terminate it
earlier upon 20 days' prior written notice to Paris Group.
Pursuant to the consulting agreement, Paris Group has agreed to
provide financial management and consulting services in order to
assist the Company in meeting its short-term and long-term
financial and strategic goals, and includes the following services:
analysis of proposed business opportunities; strategic planning;
and identifying and evaluating merger, acquisition, joint venture
and strategic alliance opportunities. Paris Group has no authority
to bind the Company to any contracts or commitments.
<PAGE> 16
As of the date of this Prospectus, Paris Group owns an
aggregate of 100,000 shares of the Company's Common Stock. Mr.
William Hayde is the sole stockholder of Paris Group. Mr. Hayde
beneficially owns an additional 155,000 shares of the Company's
Common Stock, which shares were purchased in the open market.
Paris Group is located at 14 Fourth Street, Farmingville, New York
11738.
MEYERS POLLOCK ROBBINS, INC. The Shares being offered
pursuant hereto also include 100,000 shares owned by Meyers
Pollock, a financial consultant retained by the Company in February
1997, and 250,000 shares issuable upon the exercise of warrants
issued to Meyers Pollock in connection with such consulting
arrangement. The Company's consulting agreement with Meyers
Pollock is initially for a two-year term, although it may be
terminated by either party at any time after one year upon thirty
days' prior written notice to the other party. Meyers Pollock also
acts as a market maker in the Company's securities. Pursuant to
the consulting agreement, Meyers Pollock has agreed to provide the
following services: assisting in the Company's relations with
investors, securities analysts and brokers, financial public
relations and strategic planning. Meyers Pollock has no authority
to bind the Company to any contracts or commitments.
In connection with the consulting agreement, the Company
issued to Meyers Pollock warrants (the "Meyers Pollock Warrants")
to purchase up to 250,000 shares of the Company's Common Stock.
The Meyers Pollock Warrants are exercisable at any time and from
time to time through February 24, 2002, at an exercise price of
$0.469 per share (which was the closing price of the Company's
Common Stock on the date of the consulting agreement). The number
of shares issuable pursuant to the Meyers Pollock Warrants is
subject to adjustment in the event of a stock dividend, stock
split, combination, reclassification or similar event.
As of the date of this Prospectus, Meyers Pollock
beneficially owns an aggregate of 353,000 shares of the Company's
Common Stock, which includes the 100,000 shares described above and
the 250,000 shares issuable upon the exercise of the Meyers Pollock
Warrants. Meyers Pollock is located at One World Trade Center,
Suite 9151, New York, New York 10048.
JERICHO STATE CAPITAL CORP. OF FLORIDA. The Shares being
offered pursuant hereto also include 250,000 shares issuable upon
the exercise of warrants issued by the Company to Jericho, a
financial consultant retained by the Company in March 1997. The
Company's consulting agreement with Jericho is initially for a one-year
term, although it is subject to automatic yearly renewals and
it may be terminated by either party at any time upon thirty days'
prior written notice to the other party. Pursuant to the
consulting agreement, Jericho has agreed to provide the following
services: assisting in the Company's relations with investors,
securities analysts and brokers, financial public relations,
strategic planning and assisting the Company in identifying and
consummating acquisitions. Jericho has no authority to bind the
Company to any contracts or commitments
In connection with the consulting agreement, the Company
issued to Jericho warrants (the "Jericho Warrants") to purchase up
to 250,000 shares of the Company's Common Stock. The Jericho
Warrants are exercisable at any time and from time to time through
March 6, 2002, at an exercise price of $0.50 per share (which was
the closing price of the Company's Common Stock on the date of the
consulting agreement). The number of shares issuable pursuant to
the Jericho Warrants is subject to adjustment in the event of a
stock dividend, stock split, combination, reclassification or
similar event.
As of the date of this Prospectus, Jericho beneficially
owns only the 250,000 shares issuable upon the exercise of the
Jericho Warrants. Jericho is located at 2500 North Military Trail,
Suite 240, Boca Raton, Florida 33431.
PLAN OF DISTRIBUTION
The Selling Stockholders expect to sell the Shares
primarily through brokers' transactions over NASDAQ at prices then
attainable, less ordinary brokers' commissions and dealers'
discounts, as applicable.
<PAGE> 17
The Selling Stockholders and any broker or dealer to or
through whom any of the Shares are sold ("Brokers") may be deemed
to be underwriters within the meaning of the Act with respect to
the Shares offered hereby, and any profits realized by the Selling
Stockholder or the Brokers may be deemed to be underwriting
commissions. To the best of the Company's knowledge, brokers'
commissions and dealers' discounts, taxes and other selling
expenses to be borne by the Selling Stockholders are not expected
to exceed normal selling expenses for sales over NASDAQ or
otherwise, as the case may be.
The registration of the Shares under the Act shall not be
deemed an admission by the Selling Stockholders or the Company that
any Selling Stockholder is an underwriter for purposes of the Act
of any of the Shares offered pursuant to this Prospectus.
SELECTED HISTORICAL FINANCIAL INFORMATION
The selected historical financial information presented
below for and as of the end of each of the two fiscal years in the
period ended October 31, 1996, is derived from the Financial
Statements of the Company, which financial statements have been
audited by Lazar Levine & Co. LLP, independent certified public
accountants. The selected historical financial information
presented below for and as of the end of the fiscal year ended
October 31, 1994 is derived from the Financial Statemetns of the
Company, which financial statements have been audited by Thomas J.
Marion, CPA, independent certified public accountant, as set forth
in his report thereon. The Consolidated Financial Statements as of
October 31, 1996 and October 31, 1995 and for each of the two years
in the period ended October 31, 1996 and the report of Lazar Levine
& Co. LLP thereon, and the Consolidated Financial Statements as of
October 31, 1994 and for the fiscal year ended October 31, 1994 and
the report of Thomas J. Marion thereon, are included in the
Company's Annual Report on Form 10-KSB for the fiscal year ended
October 31, 1996, incorporated herein by reference. The selected
historical financial information presented below as at January 31,
1997 and 1996 and for the three months ended January 31, 1997 and
1996, is derived from the unaudited condensed consolidated
financial statements of the Company, included in the Company's
Quarterly Report on Form 10-QSB for the fiscal quarter ended
January 31, 1997, incorporated herein by reference, which in the
opinion of the Company's management includes all adjustments,
consisting only of normal recurring adjustments, necessary to
present fairly the information set forth therein. This selected
historical financial information should be read in conjunction with
the consolidated financial statements, related notes, management's
discussion and analysis of financial condition and results of
operations and other financial information incorporated herein by
reference. The results of operations for the three months ended
January 31, 1997 are not necessarily indicative of results that can
be expected for the full year.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31, QUARTER ENDED JANUARY 31,
---------------------- -------------------------
1996 1995 1994 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Operating revenues $2,519,908 $2,314,594 $2,027,521 $937,511 $775,616
Net sales 2,519,908 2,314,594 2,027,521 937,511 775,616
Gross profit 1,808,344 1,359,687 1,488,539 677,399 572,270
Income (loss) from
operations 108,430 24,867 (1,328,455) 213,315 239,772
Income (loss) before
income taxes 211,257 129,642 (1,311,533) 224,423 257,768
Net income (loss) 192,048 155,146 (658,696) 151,442 166,549
Earnings (loss) per
share .03 .02 (.10) .02 .02
<PAGE> 18
BALANCE SHEETS:
Current assets $4,458,538 $3,449,356 $3,681,972 $4,418,366 $3,881,718
Total assets 8,975,542 8,416,732 8,300,187 9,411,362 8,661,801
Long-term obligations 728,250 571,250 886,250 785,864 552,500
Total liabilities 1,591,807 1,699,492 1,908,255 1,679,508 1,621,171
Working capital 4,116,202 2,923,276 3,439,128 4,024,816 3,394,974
Stockholders' equity 7,383,735 6,717,240 6,391,932 7,731,854 7,040,630
</TABLE>
LEGAL OPINIONS
The validity of the shares of the Common Stock offered
hereby will be passed upon for the Company by Christy & Viener,
New York, New York. Steven R. Berger, Esq., a partner in the firm of
Christy & Viener participating in the work on this matter, is a
director of the Company. Mr. Berger holds options, pursuant to the
Company's Directors Stock Option Plan, covering an aggregate of
7,500 shares of the Company's Common Stock.
EXPERTS
The consolidated financial statements of the Company
appearing in its Annual Report (Form 10-KSB) for the fiscal year
ended October 31, 1994, have been audited by Thomas J. Marion, CPA,
independent certified public accountant, as set forth in his report
thereon included therein and referred to herein. Such financial
statements are incorporated herein in reliance upon the reports of
Thomas J. Marion, CPA, pertaining to such financial statements (to
the extent covered by consents filed with the Commission) given
upon the authority of Mr. Marion as an expert in accounting and
auditing.
The consolidated financial statements and schedules of
the Company appearing in the Company's Annual Report (Form 10-KSB)
for the year ended October 31, 1996, have been audited by Lazar
Levine & Co. LLP, independent certified public accountants, as set
forth in their report thereon included therein and incorporated
herein by reference. Such consolidated financial statements are
incorporated herein by reference in reliance upon such report given
upon the authority of such firm as experts in accounting and
auditing.
