424(b)(3) Prospectus
Registration No. 333-75377
PROSPECTUS
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
87,500 SHARES OF COMMON STOCK
This Prospectus is being used by several
stockholders (the "Selling Stockholders") of Touchstone
Applied Science Associates, Inc. ("Touchstone") to sell 87,500
shares of Touchstone's Common Stock. The Selling Stockholders
will sell the Common Stock at prices then attainable, less
ordinary brokers' commissions and dealers' discounts, as
applicable. The shares of Common Stock being offered were
either previously issued to the Selling Stockholders or are
issuable upon the exercise of certain warrants issued by
Touchstone to the Selling Stockholders. All share amounts and
per share prices in this Prospectus and the related
Registration Statement have been adjusted to reflect the one-for-
four reverse stock split on March 4, 1999.
INVESTING IN THE COMMON STOCK INVOLVES RISKS WHICH
ARE DESCRIBED IN THE "RISK FACTORS" SECTION BEGINNING ON PAGE
7 OF THIS PROSPECTUS.
Touchstone's Common Stock trades on The Nasdaq Small
Capitalization Market under the trading symbol TASA. On March
25, 1999, the last sale price of the Common Stock on The
Nasdaq Small Capitalization Market was $2.125 per share.
Accordingly, the aggregate proceeds to the Selling
Stockholders may be calculated as follows:
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Per Share Total
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Public Offering Price. . . . . . . . . . .. . . . . . . $2.125 $185,958
Underwriting discount. . . . . . . . . . . . . . . . . .$0.00 $0.00
Proceeds, before expenses, to Selling Stockholders . . .$2.125 $185,958
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Neither the Securities and Exchange Commission nor
any state securities commission has approved or disapproved of
these securities or determined if this Prospectus is truthful
or complete. Any representation to the contrary is a criminal
offense.
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The date of this Prospectus is April 13, 1999.
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TABLE OF CONTENTS
Forward-Looking Statements . . . . . . . . . . . . . . . . . . .2
Where You Can Find More Information About the Company. . . . . .4
Incorporation of Information We File with the SEC. . . . . . . .4
Summary Information. . . . . . . . . . . . . . . . . . . . . . .6
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . .7
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . . . 15
The Selling Stockholders . . . . . . . . . . . . . . . . . . . 15
Plan of Distribution . . . . . . . . . . . . . . . . . . . . . 17
Selected Historical Financial Information. . . . . . . . . . . 18
Legal Opinions . . . . . . . . . . . . . . . . . . . . . . . . 19
Experts. . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
FORWARD-LOOKING STATEMENTS
This Report contains (or incorporates by reference)
certain "forward-looking statements". We have based these
forward-looking statements on our current expectations and
projections about future events. These forward-looking
statements are subject to risks, uncertainties and assumptions
about Touchstone, including, among other things:
. Rapid changes in (i) the technology used to administer
standardized tests generally or market educational
materials or (ii) in the policy considerations which
determine which test will be administered;
. Non-renewal of certain annual contracts with various
states;
. The loss of any significant customer;
. Our ability to compete successfully with the other
providers of standardized tests;
. Our ability to accommodate any changes in government
regulation which may impact the marketability of our
tests;
. The inability of the Mildred Elley schools to requalify
for the Federal student loan program, or the loss of
its eligibility under Federal or state grant programs
for tuition assistance, or the discontinuance of
Federal or state grant programs for tuition assistance;
. The loss of accreditation of the Mildred Elley schools;
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. Our ability to secure additional financing as and when
necessary;
. Our ability to retain the services of our key
management, and to attract new members of the
management team;
. Our ability to effect and retain appropriate patent,
copyright and trademark protection of its products;
. Our ability to meet the continued listing requirements
of the Nasdaq Small Capitalization Market;
. The failure of third parties to resolve the potential
impact of the year 2000 on relevant computerized
information systems by January 1, 2000;
. Any decrease in the market for educational consulting
services; and
. Increased competition in the field of publishing.
We undertake no obligation to update publicly or revise
any forward-looking statements, whether as a result of new
information, future events or otherwise. In light of these
risks, uncertainties and assumptions, the forward-looking events
contained or incorporated by reference in this Prospectus might
not occur.
____________________
You should rely only on the information contained in or
incorporated by reference into this Prospectus. We have not
authorized any other person to provide you with different
information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not
making an offer to sell these securities in any jurisdiction
where the offer or sale is not permitted. You should assume that
the information appearing in this Prospectus, as well as
information we previously filed with the SEC and incorporated by
reference, is accurate as of the date on the front cover of this
Prospectus only. Our business, financial condition, results of
operations and prospects may have changed since that date.
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WHERE YOU CAN FIND MORE INFORMATION ABOUT THE COMPANY
We file reports, proxy statements, and other
information with the Securities and Exchange Commission (SEC File
Number 0-20303). Our SEC filings are also available over the
Internet at the SEC's web site at http://www.sec.gov. You may
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also read and copy any document we file at the SEC's public
reference rooms in Washington, D.C., New York, New York and
Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for
more information on the public reference rooms and their copy
charges. You may also inspect our SEC reports and other
information at The Nasdaq Stock Market, Inc., 1735 K Street,
N.W., Washington D.C. 20006-1500. Additionally, we maintain
web sites at http://www.tasa.com and http://www.tasaliteracy.com.
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At the same time as we are filing this Prospectus with
the SEC, we are also filing a registration statement on Form S-3
covering the Common Stock being sold by the Selling Stockholders.
For further information on Touchstone and our Common Stock, you
should refer to our registration statement and its exhibits.
This Prospectus summarizes material provisions of contracts and
other documents to which we refer you. As the Prospectus may not
contain all the information that you may find important, you
should review the full text of those documents.
INCORPORATION OF INFORMATION WE FILE WITH THE SEC
The SEC allows us to "incorporate by reference" the
information we file with it, which means:
. Incorporated documents are considered part of the
Prospectus;
. We can disclose important information to you by
referring you to those documents; and
. Information that we file with the SEC will
automatically update and supersede this Prospectus.
We incorporate by reference the documents listed below
which were filed with the SEC under the Securities Exchange Act
of 1934, as amended (the "Exchange Act"):
. Annual Report on Form 10-KSB for the fiscal year ended
October 31, 1998;
. Quarterly Report on Form 10-QSB for the fiscal quarter
ended January 31, 1999;
. Current Report on Form 8-K filed with the SEC on
November 23, 1998 (and the Amendment to that Current
Report filed with the SEC on January 21, 1999);
. Current Report on Form 8-K filed with the SEC on
December 22, 1998; and
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. Description of our Common Stock set forth in
Touchstone's Registration Statement on Form 8-A, dated
May 28, 1992, including any subsequent amendment or
report filed for the purpose of updating such
description.
We also incorporate by reference each of the following
documents that we will file with the SEC after the date of this
Prospectus but before all the Common Stock offered by this
Prospectus has been sold:
. Reports filed under Sections 13(a) and (c) of the
Exchange Act; and
. Definitive proxy or information statements filed under
Section 14 of the Exchange Act in connection with any
subsequent stockholders' meeting.
. Any reports filed under Section 15(d) of the Exchange
Act.
You may request a copy of any filings referred to above
(excluding exhibits), at no cost, by contacting us at the
following address:
Touchstone Applied Science Associates, Inc.
4 Hardscrabble Heights
P.O. Box 382
Brewster, New York 10509
Attention: Secretary
(914) 277-8100
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SUMMARY INFORMATION
INFORMATION ABOUT TOUCHSTONE
Touchstone serves the education market with assessment
and instructional products and, as of November 1998, in the post-
secondary proprietary school market. Prior to new executive
management in 1994, Touchstone's primary business was reading
assessment through the publishing and sale of its proprietary
tests and related assessment tools. Since 1994, Touchstone's
current management has implemented a strategy to broaden
Touchstone's services in the education market. In Touchstone's
1997 and 1998 fiscal years and through the beginning of fiscal
1999, Touchstone completed four acquisitions in three core
segments of the education market: assessment, instruction and
delivery. Touchstone revenues increased from $2.5 million in
1996 to $6.3 million in 1998 and, on a pro forma basis, to over
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$11.0 million with the acquisition of the Mildred Elley post-
secondary proprietary schools in November 1998.
Touchstone is located at 4 Hardscrabble Heights,
Brewster, New York 10509, telephone: 914-277-8100. Touchstone
maintains websites at http://www.tasa.com and
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http://tasaliteracy.com. Touchstone is a Delaware corporation.
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INFORMATION ABOUT THE SELLING STOCKHOLDERS AND THIS PROSPECTUS
In August 1997, Touchstone retained Theodore P.
Allocca, Theodore P. Allocca, Jr., Steven Kevorkian and Barry M.
Goldstein (together, the "Selling Stockholders") as financial
consultants. Pursuant to their consulting agreements, the
Selling Stockholders received a total 25,000 shares of
Touchstone's common stock, par value $0.0001 per share (the
"Common Stock"), and warrants to acquire an additional 62,500
shares (together, the "Shares").
The Selling Stockholders are using this Prospectus to
sell, from time to time, the Shares. Once this Prospectus is
effective, the Selling Stockholders may:
. sell the 25,000 Shares currently held by them on the
open market; and
. upon exercise of their warrants (including payment of
the warrant exercise price), sell the additional 62,500
Shares underlying the warrants on the open market;
Touchstone does not know if or when any of the Selling
Stockholders will exercise any of the warrants or sell any of the
Shares referred to above.
You should rely only on the information contained in
this Prospectus or in documents that this Prospectus incorporates
by reference. Touchstone has not authorized anyone to provide
you with information that is different. This Prospectus is not
an offer to sell the Shares and is not soliciting an offer to buy
the Shares in any state where the offer or sale is not permitted.
You should not assume that the information in this Prospectus or
any of its supplements is accurate as of any date other than the
date of this Prospectus.
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RISK FACTORS
This section describes some, but not all, of the risks
of purchasing our Common Stock. The order in which these risks
are listed does not necessarily indicate their relative
importance. You should carefully consider these risks and the
other information in this Prospectus before investing in our
Common Stock.
This Prospectus contains forward-looking statements.
These statements are based on our current beliefs, expectations
and assumptions and are subject to a number of risks and
uncertainties. Actual results and events may vary materially from
those discussed in the forward-looking statements. We discuss
risks and uncertainties that might cause such a difference above
and in other places in this Prospectus.
NO DIVIDENDS. The payment by us of dividends, if any,
in the future, rests within the discretion of our Board of
Directors and will depend, among other things, upon:
. our earnings;
. our capital requirements; and
. our financial condition, as well as other relevant
factors.
We have no present intention of paying any cash dividends on our
Common Stock in the foreseeable future. We intend to use our
earnings, if any, to generate growth.
GOVERNMENT REGULATIONS. ASSESSMENT. The degree of
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government regulations to be imposed on us in the assessment
field is uncertain at this time. Under Title I 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 I regulations include a requirement
that schools receiving Title I funds must evaluate student growth
or progress in reading. We believe that State Education
Authorities (SEAs) find DRP test results to be in accord with the
regulations for Title I, as DRP tests are used by schools to
evaluate Federally-supported Title I programs; however, we cannot
assure you that this is or will continue to be the case.
We believe it may be necessary to obtain other
governmental approvals for our products. If necessary, a portion
of our revenues may be directed toward obtaining such approvals,
and we cannot assure you that any such expenditures will lead to
the necessary approvals. Additionally, the extent of potentially
adverse government regulations which might arise from future
legislative or administrative action cannot be predicted.
EDUCATIONAL DELIVERY. The post-secondary proprietary
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school industry is highly regulated with respect to accreditation
and government funding issues. To participate in federal student
financial aid programs, an institution must receive and maintain
authorization by the appropriate state education authority or
authorities, accreditation by an accrediting commission
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recognized by the U.S. Department of Education, and certification
by the U.S. Department of Education. As a result, we are subject
to extensive regulation by the U.S. Department of Education,
state education authorities and accrediting commissions.
The purpose of these regulations is to protect
students, the public and the government; it is not to protect
stockholders. Among other things, these regulations require us
to satisfy criteria related to:
. our programs of study and educational resources,
including faculty, equipment and facilities;
. our administrative capability; and
. the management and control of our financial
operations, including our ability to meet specified
financial ratios and other standards.
Regulatory requirements affect our capital structure, investment
practices and cash management. They also affect our ability to
make acquisitions, sell our Common Stock or change our corporate
structure. These requirements may limit our operations or
expansion plans. Our regulatory agencies periodically change
their regulatory requirements. We believe that we substantially
comply with requirements of these regulatory bodies, but we
cannot predict with certainty how all of their requirements will
be applied, or if we will be able to comply with all of their
requirements in the future.
Accreditation. Through one of our subsidiaries, we
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acquired Mildred Elley in November 1998. As a result of the
change in ownership of Mildred Elley, the Mildred Elley schools
are required, under applicable regulation, to apply to the
accrediting agency, the U.S. Department of Education, and the
applicable state departments of education for approval to operate
under its new owners. We were notified that, on February 8,
1999, the U.S. Department of Education approved the transfer of
ownership of Mildred Elley from its former stockholders to us.
Government Funding. Students attending Mildred Elley
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schools finance their education through a combination of
individual resources and government sponsored financial aid in
the form of loans and grants. Touchstone estimates that over 70%
of students currently enrolled at the Mildred Elley schools
receive some form of government-sponsored assistance. Currently,
Mildred Elley students may receive tuition funds under Federal
Pell grant programs and New York State grant programs, as well
from loans funded by Mildred Elley itself.
The Federal government provides a substantial part of
its support for post-secondary education in the form of grants
and loans to students attending an institution certified as
eligible by the U.S. Department of Education. The Higher
Education Act of 1965, as amended (the "Higher Education Act"),
and the regulations promulgated by the U.S. Department of
Education pursuant to the Higher Education Act subject the
Mildred Elley schools to significant regulatory scrutiny on the
basis of numerous standards that schools must satisfy in order to
participate in the various Federal student financial assistance
programs under Title IV of the Higher Education Act. Included
among these standards are the following:
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. the institution must maintain a rate of default by
its students on federally guaranteed or funded
student loans that is below a certain rate;
. the proportion of an institution's revenue that
may be derived from Title IV programs is limited;
. the institution must adhere to certain financial
responsibility and administrative capability
standards;
. the institution must adhere to certain change in
ownership restrictions; and
. the institution must achieve certain standards in
program completion and placement.
An institution may lose its eligibility to participate
in some or all Federal student financial aid programs, if the
rates at which the institution's students default on their
Federal student loans exceed specified percentages. Due to prior
default rates on student loans, Mildred Elley students do not
currently qualify for loans under Title IV. We currently
anticipate that in the spring or fall of 2000, the Mildred Elley
schools will be requalified for the Title IV program. We cannot
assure you that the Mildred Elley schools will requalify for the
Title IV program at that or any other time. To the extent that
the Mildred Elley schools qualify for the Federal student loan
programs, the schools will be more attractive to potential
students and will not have to provide funding for tuition loans.
If the Mildred Elley schools are unable to qualify for student
loan programs or if the Federal or state grant programs are
limited or withdrawn, Mildred Elley will have to provide its own
funding for tuition loans. We are not currently aware of any
facts indicating that such programs may be cut, but we cannot
assure you that the loan programs will be available to the
Mildred Elley schools indefinitely.
The U.S. Congress regularly reviews and revises the
laws governing federal student financial aid programs. The U.S.
Congress also must determine the federal funding level for each
of these programs every year. Any action by the U.S. Congress
that significantly reduces funding for federal student financial
aid programs or the ability of our institutes or students to
participate in these programs could have a material adverse
effect on our financial condition or results of operations.
Legislative action may also increase our administrative costs and
burden and require us to adjust our practices in order for our
institutes to comply fully with the legislative requirements,
which could have a material adverse effect on our financial
condition or results of operations.
Each of our institutes must be authorized by the
applicable state education authority or authorities to operate
and grant degrees or diplomas to its students. State
authorization and accreditation by an accrediting commission
recognized by the U.S. Department of Education are also required
in order for an institution to be eligible to participate in
Federal student financial aid programs. Loss of state
authorization by any of our institutes would force us to close
that institute.
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COMPETITION. Our success in the industries in which we
operate will be based on the following criteria:
. scientific and technological superiority;
. service;
. product support;
. the availability of patent and copyright
protection;
. access to adequate capital;
. the ability to successfully develop and market
products and processes;
. access to superior faculty and the ability to
. develop and offer desirable course programs; and
. the ability to obtain government approvals.
Each of our industries has intense competition. Both domestic
and foreign companies may be deemed dominant competitors. We
cannot assure you that the features of our products and/or our
ability to provide quality services will permit us to compete
successfully in our designated marketplaces.
ASSESSMENT. Our principal competition in assessment
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comes from established profit and non-profit companies in the
testing business and testing departments within certain states
and school districts. Many of these are considerably larger and
have greater financial and human resources and marketing
capabilities than we do. Education publishers who include
reading comprehension tests with their instructional materials
and companies that distribute reading motivation programs may
also compete with us.
INSTRUCTIONAL MATERIALS. The elementary school market
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for the consumable books published by Modern Learning Press is
both huge and highly competitive, with every major publisher and
numerous smaller publishers providing material. Our disadvantage
is that our marketing resources are significantly smaller than
those of the major publishers. One advantage is that, with our
smaller corporate structure, decisions can be made rapidly so
that new products can be available in a fraction of the time
required by the major publishers. Another competitive advantage
is that our products have a much lower selling price than other
consumable books. We cannot assure you that our advantages will
continue to outweigh our disadvantages.
EDUCATIONAL DELIVERY. The post-secondary education
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market is highly competitive. We compete for students and
faculty with public and private two-year and four-year colleges
as well as other proprietary schools. Our available student pool
is from a limited geographic area. Many of the colleges and
other proprietary post-secondary schools in such areas have
greater resources than are currently available to us. Some of
these schools offer programs similar to ours and some offer
programs not currently available at our schools. We cannot
assure you that our schools will be able to compete successfully
in these markets, despite the quality of its faculty, education
programs and job placement or that competitive pressures will not
have a material adverse affect on us.
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YEAR 2000 COMPLIANCE. The "Year 2000 problem" arose
because many information technology systems, as well as other
systems containing embedded technology, such as micro-controllers
and micro-chip processors, use only the last two digits to refer
to a year. As a result, these systems do not properly recognize a
year that begins with "20" instead of "19." If not corrected,
this limitation may cause these systems to experience problems
processing information with dates after December 31, 1999. These
problems may cause the systems to fail or create erroneous
results. In Fiscal 1998, we developed and implemented a program
to resolve the potential impact of the Year 2000 problem on the
ability of our computer systems to accurately process information
that may be date-sensitive.
As to third-party relationships, we believe that most
of these parties intend to be Year 2000 compliant by January 1,
2000; however, we cannot assure you that this will be the case.
If third parties are not able to address this issue in a timely
manner, it could result in a material financial risk to us.
DEPENDENCE ON KEY EMPLOYEES. Our business and
performance will be largely dependent upon the active
participation of our executive officers. The loss or
unavailability to us of any of such individuals could have a
material adverse effect on our business prospects and potential
earning capacity. If necessary, we have several stock option
plans designed to attract additional qualified individuals to
employment or association with us.
POTENTIAL ADVERSE EFFECT ON SHARES ELIGIBLE FOR FUTURE
SALE. Immediately after this offering and after adjusting for
the one-for-four reverse stock split which occurred on March 4,
1999, we will have issued and outstanding approximately 2,141,806
shares of our Common Stock. The shares of our Common Stock
included in this offering will be freely tradeable, except for
shares held by our "affiliates," as that term is defined in Rule
144 under the Securities Act of 1933, as amended (the "Act"). If
the Selling Stockholders sell all or substantially all of the
Common Stock covered by this Prospectus at approximately the same
time, the market price of our Common Stock could drop.
ANTI-TAKEOVER PROVISIONS. Our Certificate of
Incorporation authorizes our Board of Directors to issue
preferred stock with terms set by our Board, without stockholder
approval. This provision could make it more difficult for a
third party to acquire control of us without the approval of our
Board of Directors.
In many cases, stockholders receive a premium for their
shares in a change in control. This provision may make it
difficult for stockholders to take certain actions and will make
it somewhat less likely that a change in control will occur or
that you will receive a premium for your shares if a change in
control does occur.
ADDITIONAL FINANCING. While we have generated
sufficient funds for our operations, we may require additional
financing for further expansion and acquisitions. If additional
financing is required, we cannot assure you that such financing
will be available, or that it can be obtained on terms
satisfactory to us.
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SHARES AVAILABLE FOR RESALE. As of March 25, 1999,
approximately 306,292 shares of our issued and outstanding Common
Stock (after giving effect to the one-for-four reverse stock split
which occurred on March 4, 1999), which were originally issued as
"restricted securities" as that term is defined under Rule 144
promulgated under the Act have been outstanding for more than one
year and could be publicly sold in accordance with Rule 144, 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 percent (1%) of our
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 Touchstone and who
has satisfied a two-year holding period without any quantity
limitation and whether or not there is adequate current public
information available. You 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 Touchstone's
securities in any market that may develop for such shares.
POSSIBLE ISSUANCE OF ADDITIONAL SHARES. Our Board of
Directors has the power to issue any or all of our additional
Common Stock and preferred stock without stockholder approval.
The Board of Directors has no present intention to issue such
shares to acquire business interests or other types of property
in the future, but could opt to do so in the future. You should
be aware that any such issuance may result in a reduction of the
book value or market price, if any, of the outstanding shares of
Common Stock. If we issue additional shares, such issuance will
reduce your proportionate ownership and voting power. Further,
any new issuance of shares may result in a change in control of
Touchstone.
The ability of the Board of Directors to issue
additional shares without further stockholder action might serve
as an anti-takeover device, regardless of your desire 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
Touchstone.
RISKS ASSOCIATED WITH EXPANSION. We cannot assure you
that suitable expansion or acquisition opportunities will be
identified or that any new or acquired institutions or products
can be operated profitably or successfully integrated into our
operations. Growth through expansion or acquisition also could
involve other risks, including:
. the diversion of management's attention from
normal operating activities;
. our inability to find appropriate personnel to
manage our expanding operations; and
. the possibility that the acquired businesses will
be subject to unanticipated business or regulatory
uncertainties or liabilities.
Our failure to manage our expansion and acquisition program
effectively could have a material adverse effect on us.
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BROKER-DEALER SALES OF TOUCHSTONE'S COMMON STOCK. Our
securities may be covered by an SEC 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 each purchaser's
written agreement to the transaction prior to the sale.
Consequently, the rule may affect the ability of broker-dealers
to sell our securities and also may affect your ability to sell
your shares in the secondary market.
COPYRIGHTS. The United States Copyright Office has
issued several copyrights to us and our subsidiaries relating to
test booklets, reports, manuals and publications. We cannot
assure you that the copyrights issued to us are enforceable or
that we will derive any competitive advantage from them. While
the copyrights are deemed important to us, they are not
considered essential to our success. The issuance of the
copyrights may be insufficient to prevent competitors from
designing around the copyrighted aspects. In addition, we cannot
assure you that our product will not infringe on copyrights owned
by others, licenses to which may not be available to us.
Moreover, we cannot assure you that the validity of the
copyrights in the future will be sustained if judicially tested.
RAPID POLICY AND TECHNOLOGICAL CHANGES. The
educational assessment field has been characterized in recent
years by significant and rapid policy and technological changes.
Our ability to operate profitably in the future will depend in
part upon our ability to develop and maintain a technically
competent research staff and our ability to adapt to changes in
the field. We anticipate that we will have to make changes and
modifications in the future to keep pace with changes in the
field. We cannot assure you that competitors will not develop
technology which will render our products unmarketable or
obsolete.
LIMITATION ON LIABILITY OF DIRECTORS. As permitted by
the General Corporation Law of the State of Delaware, our
Certificate of Incorporation provides that a director of
Touchstone will not be personally liable to Touchstone or its
stockholders for monetary damages resulting from breaches of his
or her fiduciary duty as a director, including breaches which
constitute gross negligence, or for expenses, liabilities and
losses actually and reasonably incurred by him or her in
connection with other actual or threatened claims, actions, suits
or proceedings by reason of the fact that he or she is or was a
director of Touchstone. As a result, the right of Touchstone 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 the Federal
securities laws.
REQUIREMENT OF CONTINUING REGISTRATION. We must have a
current and effective registration statement on file with the SEC
in order for a Selling Stockholder to be able to exercise its
warrants and sell the underlying shares of Common Stock. Various
state securities laws relating to qualification of securities for
sale in such states may also be applicable. Necessarily, we
cannot assure you that we will, at all times during the life of
the warrants, be able
-13-
<PAGE>
to secure or maintain such registration or
qualification; and in the event we are unable to do so, the
warrants will not be exercisable and will be valueless.
BUSINESS
OVERVIEW
Touchstone serves the education market with assessment
and instructional products and, as of November 1998, in the post-
secondary proprietary school market. Prior to new executive
management in 1994, Touchstone's primary business was reading
assessment through the publishing and sale of its proprietary
tests and related assessment tools. Since 1994, Touchstone's
current management has implemented a strategy to broaden
Touchstone's services in the education market. In Touchstone's
1997 and 1998 fiscal years and through the beginning of fiscal
1999, Touchstone completed four acquisitions in three core
segments of the education market: assessment, instruction and
delivery. Touchstone's revenues increased from $2.5 million in
1996 to $6.3 million in 1998 and, on a pro forma basis, to over
--- -----
$11.0 million with the acquisition of the Mildred Elley post-
secondary proprietary schools in November 1998.
PRODUCTS AND SERVICES
ASSESSMENT. Touchstone designs, develops, calibrates,
publishes, markets, and sells educational reading assessment
tests to elementary and secondary schools, colleges, and
universities throughout the United States and Canada.
Touchstone's reading comprehension tests are based on its
internally developed assessment methodology called Degrees of
Reading Power(R) ("DRP"). The DRP testing program is published in
three distinct versions: Primary, Standard, and Advanced. DRP
measures an individual student's reading ability in a non-culturally
biased manner and allows a school, district or other
entity to track an individual's reading development over time.
Touchstone also offers the following assessment
products or services:
. TextSense(TM) Summary Writing -- an instruction and
-----------------------------
assessment program, which uses instruction and assessment in
summary writing to promote better reading, better writing, and
better thinking about text;
. The Maculaitis Test -- a comprehensive English language
-------------------
assessment and evaluation program, intended for use in English as
a Second Language, Bilingual Education and Limited English
Proficiency programs;
. scanning, scoring and reporting services for DRP tests; and
. computer software products that are sold as
instructional aids or analytical tools for reading development.
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<PAGE>
Beck Evaluation and Testing Associates, Inc. ("BETA"),
a subsidiary of Touchstone acquired in January 1997, provides
consulting services to states, schools and textbook publishers.
Since January 1997, BETA has concentrated on increasing its test
assessment and design services to states.
INSTRUCTION. Through Modern Learning Press, Inc.
("MLP"), a subsidiary of Touchstone organized in May 1997,
Touchstone designs, publishes and distributes affordable
"consumable" student workbooks for grades K-4, and creates and
publishes books and pamphlets for elementary school teachers and
parents. The elementary instructional workbook series currently
offered by MLP ranges from the teaching of phonics, penmanship,
ESL, and reading comprehension to vocabulary development. In
conjunction with Yale University's Gesell Institute, MLP has also
published the Gesell child development scales, which management
believes are considered the best predictor of a young child's
readiness to start kindergarten.
EDUCATIONAL DELIVERY. In late 1997, Touchstone decided
that the post-secondary proprietary school market was an area in
which it wanted to compete due to attractive characteristics
including a large growing market, countercyclical growth trends
and attractive levels of profitability. In November 1998,
Touchstone, through one of its subsidiaries, purchased
substantially all of the assets of Mildred Elley Schools, Inc.
("Mildred Elley"), as the platform for Touchstone's entrance into
the post-secondary school market. Mildred Elley is a two-year,
New York State degree-granting institution and has been in
operation for over 80 years. Mildred Elley's principal campus is
located in Latham, New York, with an additional branch in
Pittsfield, Massachusetts. The Mildred Elley schools offer
programs in business, paralegal, travel and health fields, and
are well-respected in the communities they serve.
USE OF PROCEEDS
Touchstone will not realize any proceeds from the sale
of the Shares by the Selling Stockholders. Touchstone will
realize proceeds only from the exercise of warrants held by the
Selling Stockholders, which proceeds, if all such warrants are
exercised, would aggregate $117,250. Touchstone is preparing
this Prospectus only to assist the Selling Stockholders and will
use the net proceeds from the exercise of such warrants for
working capital purposes.
THE SELLING STOCKHOLDERS
The Selling Stockholders are using this Prospectus to
offer a maximum of 87,500 shares (the "Shares"), which consist of
a total of 25,000 issued shares (the "Issued Shares") and
warrants (the "Warrants") to acquire an additional 62,500 shares.
The Selling Stockholders are Theodore P. Allocca ("Allocca"),
Theodore P. Allocca, Jr. ("Theodore"), Steven Kevorkian
("Kevorkian") and Barry M. Goldstein ("Goldstein").
The Selling Stockholders acquired the Shares pursuant
to consulting agreements that each of the Selling Stockholders
entered into with Touchstone in August 1997. Pursuant to a
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<PAGE>
consulting agreement, dated as of August 19, 1997 (the
"Comprehensive Agreement"), among Comprehensive Capital, Allocca,
Theodore and Kevorkian (together, the "Comprehensive Group") and
Touchstone, the Comprehensive Group received Issued Shares and
the Warrants (the "Comprehensive Warrants") entitling each holder
to acquire Shares in the following amounts:
Shares underlying
Name Issued Shares Comprehensive Warrants
-------------------------------------------------------------------
Allocca 3,750 9,375
-------------------------------------------------------------------
Theodore 3,750 9,375
-------------------------------------------------------------------
Kevorkian 5,000 12,500
-------------------------------------------------------------------
Pursuant to a consulting agreement, dated as of August 19, 1997
(the "Goldstein Agreement"), between Goldstein and Touchstone,
Goldstein received 12,500 Issued Shares and Warrants (the
"Goldstein Warrants") entitling Goldstein to acquire 31,250 Shares.
The following table sets forth certain information with
respect to the beneficial ownership of Common Stock as of the
date of this Prospectus by the Selling Stockholders, and as
adjusted to give effect to the sale by the Selling Stockholders
of the Shares offered hereby:
<TABLE>
<CAPTION>
Beneficial Ownership Prior to Beneficial Ownership After
Offerings Offerings(1)
----------------------------- Shares Being --------------------------
Name Shares Percentage(2) Offered(3) Shares Percentage(2)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Theodore P. Allocca 13,125(4) 0.6% 13,125 0 --
- --------------------------------------------------------------------------------------------------
Theodore P. Allocca, Jr. 13,125(5) 0.6% 13,125 0 --
- --------------------------------------------------------------------------------------------------
Steven Kevorkian 17,500(6) 0.8% 17,500 0 --
- --------------------------------------------------------------------------------------------------
Barry M. Goldstein 43,750(7) 2.0% 43,750 0 --
- --------------------------------------------------------------------------------------------------
<FN>
(1) Assumes that all of the Shares are sold.
(2) Based on 2,141,806 shares of Common Stock issued and outstanding as of
March 4, 1999 (after giving effect to the one-for-four reverse stock split
effected on such date).
(3) Assumes that all of the Warrants are exercised as of the date of this
Prospectus.
(4) Includes (i) 3,750 Issued Shares and (ii) 9,375 Shares that Allocca
currently has the right to acquire upon the exercise of his Comprehensive
Warrants.
(5) Includes (i) 3,750 Issued Shares and (ii) 9,375 Shares that Theodore
currently has the right to acquire upon the exercise of his Comprehensive
Warrants.
(6) Includes (i) 5,000 Issued Shares and (ii) 12,500 Shares that Kevorkian
currently has the right to acquire upon the exercise of his Comprehensive
Warrants.
(7) Includes (i) 12,500 Issued Shares and (ii) 31,250 Shares that
Goldstein currently has the right to acquire upon the exercise of the
Goldstein Warrants.
</FN>
</TABLE>
The Comprehensive Agreement and the Goldstein
Agreement were each initially for a one-year term, commencing in
August 1997, and each is subject to automatic yearly
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<PAGE>
renewals if notice of termination is not provided by one of the parties to
the agreement at least 30 days prior to the expiration of the
then applicable term. Either agreement may be terminated by one
of its parties at any time upon thirty days' prior written notice
to the other party to that agreement. To date, neither agreement
has been so terminated.
Pursuant to the Comprehensive Agreement, the
Comprehensive Group has agreed to, among other things, (i) assist
Touchstone in finding strategic partners and/or financing
entities to assist Touchstone in its projects, (ii) make itself
available for financial public relations and marketing consulting
and (iii) arrange introductions to various broker/dealers who may
be interested in knowing more about Touchstone, including its
goals and aspirations. Pursuant to the Goldstein Agreement,
Goldstein has agreed to, among other things, (i) assist
Touchstone in finding strategic partners and/or financing
entities to assist Touchstone in its projects, (ii) make himself
available for financial public relations and marketing consulting
and (iii) arrange introductions to various broker/dealers who may
be interested in knowing more about Touchstone, including its
goals and aspirations. The Comprehensive Group may act as market
makers in Touchstone's stock. None of the Comprehensive Group or
Goldstein has the authority to bind Touchstone to any contracts
or commitments
The Comprehensive Warrants and Goldstein Warrants are
exercisable at any time and from time to time through August 19,
2002, at an exercise price of $1.88 per share (which was the
closing price of Touchstone's Common Stock on the date of the
Comprehensive Agreement and the Goldstein Agreement). The number
of shares issuable pursuant to the Warrants is subject to
adjustment in the event of a stock dividend, stock split,
combination, reclassification or similar event.
PLAN OF DISTRIBUTION
The Selling Stockholders have informed Touchstone that
they expect to sell the Shares primarily through brokers'
transactions over The Nasdaq Small Capitalization Market (the
"Nasdaq") at prices then attainable, less ordinary brokers'
commissions and dealers' discounts, as applicable.
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 any of the
Selling Stockholders or the Brokers may be deemed to be
underwriting commissions. To the best of Touchstone'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 the
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 Touchstone
that any Selling Stockholder is an underwriter for purposes of
the Act of any of the Shares offered pursuant to this Prospectus.
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<PAGE>
SELECTED HISTORICAL FINANCIAL INFORMATION
The selected historical financial information presented
below for and as of the end of each of the three fiscal years in
the period ended October 31, 1998, is derived from the
Consolidated Financial Statements of Touchstone, which financial
statements have been audited by Lazar Levine & Felix LLP,
independent certified public accountants. The Consolidated
Financial Statements as of October 31, 1998 and 1997, and
for each of the three years in the period ended October 31, 1998
and the report of Lazar Levine & Felix LLP thereon are included
in Touchstone's Annual Report on Form 10-KSB for the fiscal year
ended October 31, 1998, incorporated herein by reference. The
selected historical financial information presented below as at
January 31, 1999 and 1998 and for the three months ended January
31, 1999 and 1998, 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, 1999, 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, 1999 are not
necessarily indicative of results that can be expected for the
full year.
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<PAGE>
<TABLE>
<CAPTION>
Year Ended October 31, Quarter Ended January 31,
---------------------- -------------------------
1998(1) 1997(1) 1996(1) 1999(1) 1998(1)
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Operating revenues $6,317,114 $4,587,633 $2,519,908 $2,356,127 $1,297,744
Net sales 6,317,114 4,587,633 2,519,908 2,356,127 1,297,744
Gross profit 4,382,010 3,008,884 1,808,344 1,389,551 934,148
Income (loss)
from operations 366,514 (2,129,158) 108,430 (189,666) 9,340
Income (loss) before income taxes 160,207 (2,193,780) 211,257 (322,398) (43,018)
Net income (loss) 131,202 (1,363,811) 192,048 (200,357) (33,047)
Earnings (loss) per share .06 (.66) .10 (.09) (.02)
Balance Sheet Data:
Current assets $7,106,418 $3,078,853 $4,458,538 $6,114,052 $2,743,232
Total assets 14,074,640 9,592,885 8,975,542 16,725,373 9,276,925
Long-term obligations 6,267,198 2,528,968 728,250 7,600,947 2,449,337
Total liabilities 7,548,800 3,363,333 1,591,807 10,348,809 3,015,448
Working capital 5,824,816 2,244,488 4,116,202 3,366,190 2,177,121
Stockholders' equity 6,525,840 6,229,552 7,383,735 6,376,564 6,261,477
______________________________
<FN>
(1) All amounts have been adjusted to give effect to the one-for-four
reverse stock split effected by Touchstone on March 4, 1999.
</FN>
</TABLE>
LEGAL OPINIONS
The validity of the shares of the Common Stock offered
hereby will be passed upon for Touchstone by Salans Hertzfeld
Heilbronn Christy & Viener, New York, New York. Steven R. Berger,
Esq., a partner in the firm of Salans Hertzfeld Heilbronn Christy &
Viener participating in the work on this matter, is a director of
Touchstone. Since Mr. Berger's appointment as a director,
Touchstone has granted to him, pursuant to Touchstone's Directors
Stock Option Plan, options to acquire an aggregate of 2,500 shares
of Touchstone's Common Stock.
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<PAGE>
EXPERTS
The consolidated financial statements and schedules of
Touchstone appearing in Touchstone's Annual Report (Form 10-KSB)
for the fiscal year ended October 31, 1998, have been audited by
Lazar Levine & Felix 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.
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