U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended October 31, 1998
[ ] Transition report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ________ to ________
Commission file number 0-20303
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TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
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(Name of small business issuer in its charter)
Delaware 13-2846796
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4 Hardscrabble Heights, P.O. Box 382, Brewster, NY 10509
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(Address of principal executive offices) (Zip Code)
(914) 277-8100
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(Issuer's telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act: None.
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Securities registered under Section 12(g) of the Exchange Act:
Name of Each Exchange
Title of Each Class on Which Registered
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Common Stock, $.0001 par value NASDAQ
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Check whether the issuer: (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for past 90
days.
Yes X No
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure
will be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of
this Form 10-KSB or any amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year: $6,317,114
for the fiscal year ended October 31, 1998.
State the aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price at which
the common equity was sold, or the average bid and asked price of such
common equity, as of a specified date within the past 60 days: $4,038,147
as of January 12, 1999. The aggregate market value was based upon the
closing price for the Common Stock, par value $.0001 per share, as quoted
by the NASDAQ for such date.
(ISSUERS INVOLVED IN BANKRUPTCY PROCEEDING
DURING THE PAST FIVE YEARS)
Check whether the issuer has filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Exchange
Act after the distribution of securities under a plan confirmed
by a court.
Yes No
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
State the number of shares outstanding of each of the
issuer's classes of common equity, as of the latest practicable
date: As of December 31, 1998, 8,567,222 shares of Common Stock,
par value $.0001 per share.
DOCUMENTS INCORPORATED BY REFERENCE
If the following documents are incorporated by reference,
briefly describe them and identify the part of the Form 10-KSB
(e.g., Part I, Part II, etc.) into which the document is
incorporated: (1) any annual report to security holders; (2) any
proxy or information statement; and (3) any prospectus filed
pursuant to Rule 424(b) or (c) of the Securities Act of 1933
("Securities Act"). None.
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Transitional Small Business Disclosure Format (check one):
Yes No X
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
OVERVIEW
Touchstone Applied Science Associates, Inc. (the
"Company" or "TASA") 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, the Company's primary business was reading
assessment through the publishing and sale of its proprietary
tests and related assessment tools. Since 1994, the Company's
current management has implemented a strategy to broaden the
Company's services in the education market. In the Company's
1997 and 1998 fiscal years and through the beginning of fiscal
1999, the Company completed four acquisitions in three core
segments of the education market: assessment, instruction and
delivery. TASA revenues increased from $2.5 million in 1996 to
$6.3 million in 1998, and on a pro forma basis, to over $11.0
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million with the acquisition of the Mildred Elley post-secondary
proprietary schools in November 1998.
The need to develop fundamental language arts skills
has long been recognized as essential to a student's progress and
success throughout school and life. The Company's instructional
and assessment products relate directly to the teaching and
measurement of progress of language arts skills. The Company's
language arts instructional products for grades K-4 provide
students with consumable workbook series designed to strengthen
skills. The Company's other products for the K-4 instructional
market include consumable workbooks for the development of other
important skills, e.g., penmanship and the teaching of English,
particularly English as a Second Language ("ESL"). The Company's
Degrees of Reading Power(R) ("DRP") test and related products for
the assessment of reading comprehension allow a school, district
or other entity to assess an individual's reading ability. These
tests provide the unique benefit of allowing an individual's
reading development to be tracked over time and are often used to
audit a school's success in the teaching of reading. The third
market served, educational delivery, positions the Company to
participate in the significant growth occurring in post-secondary
education. The Company recently acquired the Mildred Elley
School, Inc. ("Mildred Elley"), a New York State accredited,
degree-granting school that provides post-secondary students with
a broad-based curriculum in business, health, travel, and
paralegal training. Mildred Elley's principal campus is located
in Latham, New York, with an additional branch in Pittsfield,
Massachusetts.
The Company was incorporated in the State of New York
in 1976 and, in 1991, changed its corporate domicile to Delaware.
It became a public company in 1992. TASA's corporate
headquarters are located at 4 Hardscrabble Heights, P.O. Box 382,
Brewster, New York 10509. The Company's telephone number is
(914) 277-8100 and its facsimile number is (914) 277-3548. The
Company maintains a website at www.tasa.com. As used in this
Report, the terms "Company" and "TASA" refer to Touchstone Applied
Science Associates, Inc. and its subsidiaries, unless the context
otherwise indicates.
Except for historical information, the material
contained in this Description of Business is forward-looking.
For the purposes of the safe harbor protection for forward-looking
statements provided by the Private Securities Litigation
Reform Act of 1995, readers are urged to review the list of
certain important factors set forth in "Cautionary Statement for
Purposes of the "Safe Harbor" Provisions of the Private
Securities Litigation Reform Act of 1995" below, which may cause
actual results to differ materially from those described.
ASSESSMENT PRODUCTS AND RELATED SERVICES
TASA 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. The Company's reading comprehension
tests are based on its internally developed assessment
methodology called DRP. The DRP testing program is published in
three distinct versions: Primary, Standard, and Advanced. The
Company's products measure an individual student's reading
ability in a non-culturally biased manner and allow tracking of
an individual's reading development over time.
DRP TESTS. Management believes that DRP tests are
widely recognized as being advanced state-of-the-art in
educational assessment. Based on descriptions contained in Tests
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in Print published by the Buros Institute of Mental Measurements
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(which endeavors to cover all tests published in the United
States), it is management's belief that:
. DRP tests are 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; and 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.
Consequently, the DRP tests are especially useful in
accountability assessments of a school's teaching performance and
in measuring an individual's reading level. As a result,
management believes that DRP tests are widely recognized as being
state of the art in educational assessment.
DRP tests measure how well students understand the
meaning of whole text. These tests determine, as much as is
possible in a testing situation, how well a student reads under
real-life conditions, both 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 the
main idea and author purpose). Advanced DRP tests were developed
to extend further 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.
DRP tests consist of nonfiction paragraphs and/or
passages on a variety of topics, each 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. Each passage
undergoes a two-year process of development and calibration and
has an estimated useful life of 11 years; a passage is introduced
initially in a "secure" form of test after which it is available
in "shelf" form in the Company's test catalogs and then in
practice tests. Management believes that approximately four
million DRP tests, for which the Company is the sole source
proprietor and publisher, were administered in 1998 in states,
school districts, and college and university testing programs.
The Company invested approximately $66,600, $214,000
and $226,000 in the fiscal years ended October 31, 1998 ("Fiscal
1998"), 1997 ("Fiscal 1997") and 1996 ("Fiscal 1996")
respectively, to develop new DRP test passages for its Test
Passage Bank. Management anticipates the amount spent annually to
develop and calibrate new DRP test passages will continue to
decline (see "Types of DRP Tests-Contract Income").
TYPES OF DRP TESTS. Specially prepared "secure" forms
of the Company's DRP tests are licensed for one-time or limited
use by states (reported as "Contract Income") while other "shelf"
forms listed in the Company's catalogs are licensed for an
indefinite period of time to school districts throughout the
United States and Canada (reported as "Catalog Income"). 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 as a secure test. The Company provides secure
tests annually for administration in certain grades by the states
of Connecticut, New York, and Virginia.
Contract Income. DRP tests are one component of the
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Connecticut Mastery Testing Program in grades 4, 6 and 8. In New
York State, DRP tests constitute the reading component of the
Regents Competency Testing program (RCT) and Pupil Evaluation
Program (PEP). Students who entered high school in New York
before the 1997 school year must obtain a certain score on the
RCT to be awarded a local high school diploma. In Virginia, DRP
tests have been part of the Literacy Passport Testing Program in
grade 6. In each of these instances, DRP tests serve as an
indicator of whether valued educational outcomes have been
achieved (referred to as "accountability assessments").
Several changes in the Company's state contract
business occurred in Fiscal 1998. During the third quarter of
Fiscal 1998, Virginia notified the Company that its Literacy
Passport Test program, which includes DRP tests, is being phased
out over the next 6 years. New York also notified the Company
that its RCT and PEP testing programs, which include DRP tests,
are being phased out. As a result, Virginia contract revenues
during the fourth quarter of Fiscal 1998 were, and New York
contract revenues for the first quarter of the fiscal year ending
October 31, 1999 ("Fiscal 1999") will be, less than revenues for
the comparable periods in prior years. The actual dollar amounts
of Virginia and New York contract revenues for Fiscal 1999 are
uncertain at this time. Connecticut, however, notified the
Company that its Mastery Testing Program will continue to include
DRP tests for the next five years, and a multiple-year contract
has been executed.
Generally, statewide programs are a highly competitive
market, and many of the Company's competitors that market more
"traditional" tests have substantially larger budgets for state
level sales, marketing, and lobbying. Management has instituted
several programs to increase exposure for the DRP test, including
presentations at professional conferences and representation by
independent educational consultants. Management expects that
these approaches should provide increased opportunities for
contract sales.
As a result of the Company's efforts to diversify and
to increase internal growth, contract income as a percentage of
total revenues has been steadily declining over the past few
years. Out of total revenues, contract income was 49% in the
fiscal year ended October 31, 1994 ("Fiscal 1994"); 41% in the
fiscal year ended October 31, 1995 ("Fiscal 1995"); 35% in Fiscal
1996; 17% in Fiscal 1997; and 11% in Fiscal 1998. Management
anticipates that contract income will account for less than 7% of
total revenues in Fiscal 1999. Management anticipates that the
decline in the actual dollar amount of contract income in Fiscal
1999 will be more than offset by a continued increase in DRP
catalog sales, internal growth of two of the Company's wholly-
owned subsidiaries, Beck Evaluation and Testing Associates, Inc.
("BETA") and Modern Learning Press, Inc. ("MLP"), and the
inclusion of revenues in Fiscal 1999 (versus none in Fiscal 1998)
of the Mildred Elley schools. The Company is now more
diversified and much less dependent on any single contractual
customer.
Catalog Income. DRP tests have been adopted by a wide
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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 play an
important part. DRP tests are used in education to determine
eligibility for graduation, to allocate resources to districts,
to document school accountability, to set and maintain promotion
standards, to place students into adult basic education and GED
(General Equivalency Diploma) programs of study and to evaluate
student progress in adult reading programs.
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 State 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.
Revenues from catalog sales of DRP tests have increased
significantly in each of the past several years. In Fiscal 1998,
catalog sales were $2,740,506, an increase of $698,463, or 34.2%,
over catalog sales in Fiscal 1997, which were $2,042,043.
Management attributes these increases to the recognition of DRP
tests as state of the art as well as the addition of independent
sales representatives in key geographical regions of the country.
OTHER ASSESSMENT PRODUCTS AND RELATED SERVICES
TextSense(TM) SUMMARY WRITING. In Fiscal 1997, the Company
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launched its new TextSense(TM) SUMMARY WRITING program ("TextSense").
The unique characteristics of summary writing have led to its
acceptance as an educational outcome, a status that is reflected
in its prominence as a benchmark task in the Language Arts
standards of a number of states. TextSense uses instruction and
assessment in summary writing to promote better reading, better
writing, and better thinking about text. The TextSense SUMMARY
WRITING program complements DRP technology and, with its emphasis
on both instruction and assessment in summary writing, adds
another dimension to the Company's educational assessment product
offerings. The revenues derived in Fiscal 1998 from TextSense
were not material. While the Company currently intends to devote
increased resources to marketing TextSense, there can be no
assurance that TextSense will become a significant contributor to
the Company's revenues.
THE MACULAITIS TEST. In early 1997, TASA acquired the
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Maculaitis Assessment of Competencies test (the "Maculaitis
Test"), which is a comprehensive English language assessment and
evaluation program. It is intended for use in ESL, Bilingual
Education and Limited English Proficiency ("LEP") programs. The
Company has completed a series of revisions aimed at improving
the overall ease of use and marketability of the test.
Management believes that these revisions have given the
Maculaitis Test wider appeal. However, the Company plans to make
more substantive revisions that management believes are necessary
to further enhance the test's marketability.
The Maculaitis Test is currently mandated for use in
the State of New Jersey, which uses the scores on the test to set
entry criteria and graduation requirements. Current sales of the
Maculaitis Test are primarily concentrated in New Jersey,
although some sales are attributable to a number of other states.
The Company believes that the adoption of the Maculaitis Test by
the State of New Jersey can be leveraged to promote more
widespread acceptance within states with large ESL populations.
Moreover, BETA was awarded an initial contract by the State of
Texas to design a LEP test annually. Management believes that
both the Maculaitis Test and the BETA contract will place the
Company in a unique position that should strengthen its future
growth in the LEP/ESL assessment field.
TEST SCORING AND RELATED REPORTING SERVICES. The
Company provides scanning, scoring, and reporting services for
DRP tests 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. Company-copyrighted conversion
tables are used to convert the total number of right answers into
a DRP score that indicates how well a student can comprehend text
of a given difficulty (readability). These DRP scores can be
interpreted normatively (i.e., in terms of national percentile
norms that indicate a student's percentile rank in relation to
students nationally in his or her grade) using the Company's
proprietary data. All District, School and Class Level Reports
of DRP test results are copyrighted by the Company, as are
various Parent and Individual Reports that may be ordered by
school systems for inclusion in permanent records. Third-party
firms, as well as state agencies that provide scanning and
scoring services to schools, may also be licensed to score the
Company's tests.
SOFTWARE PRODUCTS. The Company designs and markets
computer software products that are sold as instructional aids or
analytical tools for reading development. Among the products are
MicRA-->DRP II, which allows the user to estimate the DRP
difficulty rating of instructional materials, and DRP-->EZ
Converter(R), which permits those who score DRP tests by hand to
easily convert raw scores to criterion-referenced DRP scores and
DRP norms.
In 1996, the Company introduced DRP-->BOOKLINK(R) and
Browzer-->BOOKLINK(R), which allow teachers to find appropriate
books for each student based upon interest categories and reading
ability. Browzer-->BOOKLINK was the winner of a 1997 Educational
Press Award.
BETA
BETA provides consulting services to states, schools
and textbook publishers. Since its acquisition by TASA in
January 1997, BETA has concentrated on increasing its test
assessment and design services to states.
During Fiscal 1998, BETA successfully increased its
test design and psychometric services to now include six state
customers: Delaware, Michigan, Minnesota, Rhode Island, Texas,
and Virginia. For its clients, BETA sets initial test standards
and then designs, writes, edits, validates, and evaluates tests to
meet specific testing goals. In its latest contract, a five-year
subcontract from its bid with National Computer Systems ("NCS")
for the Texas Education Agency, BETA will develop English reading
proficiency tests annually for the LEP students in grades 3 through
high school. Currently, TASA can offer LEP assessment tests either
from its catalog with the Maculaitis Test or by a custom-designed
test from BETA. Increasing demand for LEP tests comes from the
growing emphasis on ensuring that all students educated in the
United States have proficiency in English.
BETA's custom assessment services to states are
provided either directly or indirectly, typically through two of
the largest commercial contractors in the contract/customized
assessment markets, NCS and Harcourt Brace. The business
strategy of BETA is to provide these specialized services for the
major state contracts as a subcontractor, primarily for
assessment or psychometric services and actual test design and
development. The prime contractor provides for all the printing,
logistics, warehousing, scoring and reporting services necessary
to complete state contracts.
The Company reports income from BETA's operations
as Consulting income.
INSTRUCTIONAL PRODUCTS
Through MLP, the Company 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. The affordable pricing of the consumable
series positions MLP to take advantage of the growing pressure
for cost-effective purchasing by school districts. Thus, MLP's
growing line of affordable "consumable" workbooks or learning
books for students in grades K-4 allows schools to purchase high-
quality workbooks at a significantly decreased acquisition cost
per pupil.
MLP was organized by TASA in May 1997 to acquire
substantially all of the operating assets of Programs for
Education, Inc. The market served by MLP consists of an
estimated 16 million total students in grades K-4, establishing
an approximate market size of $30-$35 million for each workbook
series. Moreover, teachers generally make the purchase decision
in these grades as opposed to schools boards or agencies, which
characterize the purchasing decisions in higher grades. To
complement its workbook series, MLP also creates and publishes a
collection of books and pamphlets for elementary school teachers
and parents. In conjunction with Yale University's Gesell
Institute, MLP has also published a line of books of the Gesell
child development scales for many years that management believes
are considered the best predictor of a young child's readiness to
start kindergarten.
MLP offers a large library of books and pamphlets that
help elementary schools achieve their teacher and parent
information objectives. MLP's expanding series of titles for
teachers provide affordable quality books on professional
subjects written by recognized educational experts. Its pamphlet
series, generally purchased by schools for distribution to
parents, provides guidance to parents on topical issues.
Management believes that growth opportunities exist for
MLP in the elementary school market. Many states, as well as the
Federal government, are currently discussing expansion and
changes in elementary education, including additional new
programs to increase funding. These changes will provide new and
expanded opportunities for the development of new workbook and
professional education book series. Management believes that MLP
is well-positioned to benefit from the changes expected to occur
in elementary education.
MLP reaches its target market, primarily teachers, by
direct mail, consisting of both catalogs as well as timely
promotional and informational pieces. Management believes that
MLP can continue to increase the effectiveness of its direct mail
program. Because of the highly leveraged cost structure of MLP's
products, a small increment of market penetration could
significantly increase profitability.
The Company reports MLP's revenues as Catalog Sales - MLP.
EDUCATIONAL DELIVERY
In early Fiscal 1998, the Company 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, the Company, through MESI Acquisition
Corp. ("MESI"), a wholly-owned subsidiary of TASA Educational
Services Corporation ("TESC"), which is a wholly-owned subsidiary
of the Company, purchased substantially all of the assets of
Mildred Elley, as the platform for the Company'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. Because the
acquisition of Mildred Elley occurred after the end of Fiscal
1998, no revenues from Mildred Elley are included in the
Company's financial statements for Fiscal 1998.
MARKETING
The Company markets its assessment 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 catalogs are made primarily through
direct mail campaigns to elementary school, secondary school and
college markets. The Company also exhibits its products at
educational trade shows and advertises 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.
(d) Sales of custom-designed testing and consulting
are accomplished via bidding processes and attendance at
professional meetings.
The Company sells its assessment 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 products on a net 30-day or other contractual
terms. The Company does not offer extended credit terms to its
customers. Historically, bad debts have not been material.
The Company markets its instructional products almost
exclusively through direct mail programs. It is currently
testing the concept of selling such products through its
independent sales representatives. At the present time, however,
the Company is unable to quantify the results of such approach.
With the acquisition of post-secondary schools, the
Company will, for the first time, market to the ultimate consumer
of such services. Currently, Mildred Elley advertises through
the print media, television and radio, and the Company
anticipates that it will continue to use such media in the
future.
COMPETITION
Success in the educational 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.
ASSESSMENT. The Company is subject to competition from
various sources. 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.
Competition may also come from education publishers who include
reading comprehension tests with their instructional materials
and companies that distribute reading motivation programs.
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; Harcourt Brace Educational
Measurement, San Antonio, Texas; and The Riverside Publishing
Company, Chicago, Illinois. As large, well-established
publishers of educational tests and related products and
services, these firms are considered strong competitors of the
Company.
There are a number of non-profit organizations that
develop, publish and distribute educational tests. For example,
the American College Testing Program (ACT), Iowa City, Iowa;
American Council on Education (ACE), Washington, DC; and
Educational Testing Service (ETS), Princeton, New Jersey. In
addition, there are various organizations that sponsor
educational tests even though they do not have the technical
capability to produce tests. For example, The College Board, New
York, New York, sponsors the Scholastic Assessment Test (SAT)
which is developed for The College Board by ETS. All of these
non-profit organizations have, or have access to, the capability
to develop, publish and distribute tests to schools. Currently,
ACT, The College Board, and ETS publish one or more educational
tests for the school market.
There are a number of for-profit and non-profit
organizations that provide test design, production and consulting
services to states under contract. For example, Advanced Systems
in Measurement and Evaluation, Inc., Dover, New Hampshire;
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 organizations
compete indirectly with the Company's assessment division. In
terms of size alone, these firms have greater marketing
capability and resources than does the Company.
The Maculaitis Test exists in a competitive market;
however, several of the non-profit and for-profit testing
companies do not have a product that is in direct competition
with the test. The major source of direct competition is a set
of products published by CTB/McGraw-Hill known as the Language
Assessment System series (the LAS-O, the LAS-R and the LAS-W),
and the Language Assessment Battery (the LAB) which is a test
that was developed by the New York City Board of Education. Each
of these test series is designed to assess a student's current
level of knowledge of the English language and is administered
in English. A number of other test series produced by other for-
profit publishers, such as Harcourt Brace and Riverside, are
designed exclusively for the Spanish language market and are
administered primarily in Spanish.
INSTRUCTIONAL MATERIALS. The elementary school market
for the consumable books published by MLP is both huge and highly
competitive, with every major publisher and numerous smaller
publishers providing material. MLP's disadvantage is that its
marketing resources are significantly smaller than those of the
major publishers. MLP's advantage is that, with its 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. MLP's other competitive advantage is a
much lower selling price than other consumable books. MLP has
developed a unique position through direct mail sale.
EDUCATIONAL DELIVERY. The post-secondary education
market is highly competitive. The Mildred Elley schools compete
for students and faculty with public and private two-year and
four-year colleges as well as other proprietary schools. The
available student pool for the Mildred Elley schools is from a
limited geographic area. Many of the colleges and other
proprietary post-secondary schools in such area have greater
resources than are currently available to the Mildred Elley
schools. Some of these schools offer programs similar to those
of the Mildred Elley schools and some offer programs not
currently available at the Mildred Elley schools. While there
can be no assurances, the Company believes that the Mildred Elley
schools will be able to compete successfully in these markets
because of the quality of its faculty, education programs and job
placement.
EMPLOYEES
As of October 31, 1998, the Company employed 32 full-
time employees and 10 part-time employees or independent
consultants, of whom 7 are engaged in research and/or test
development, 14 are in operations, 6 are in executive capacities
and 15 are in marketing. With the acquisition of the Mildred
Elley schools in November 1998, the Company now has an additional
54 full-time employees and 46 part-time employees.
GOVERNMENT REGULATIONS
ASSESSMENT AND INSTRUCTIONAL MATERIALS. The degree of
government regulations to be imposed upon the Company in the
assessment and instructional materials fields 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. It is
management's belief 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.
Management believes it may be necessary to obtain other
governmental approvals for its products. 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.
EDUCATIONAL DELIVERY. The post-secondary proprietary
school industry is highly regulated with respect to accreditation
and government funding issues. The Company acquired Mildred
Elley through MESI, a wholly-owned subsidiary of TESC, 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 (the "DOE"), and the applicable state
departments of education for approval to operate under its new
owners. Such applications are currently pending and, while such
applications are pending, the regulations allow the Mildred Elley
schools to continue operating. The Company anticipates a
response from these agencies by the spring of 1999. The Company
expects, but there can be no assurances, that the Mildred Elley
schools will receive the necessary approvals to continue
operating.
Students attending Mildred Elley schools finance their
education through a combination of individual resources and
government sponsored financial aid in the form of loans and
grants. The Company estimates that over 70% of students
currently enrolled at the Mildred Elley schools receive some form
of government-sponsored assistance. Currently, students may
receive tuition funds under Federal loan and New York State grant
programs, as well from loans funded by Mildred Elley.
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 DOE. The Higher Education Act of 1965, as
amended (the "HEA"), and the regulations promulgated by the DOE
thereunder 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 HEA. Included among these standards are the following: (i)
the institution must maintain a rate of default by its students
on federally guaranteed or funded student loans that is below a
certain rate; (ii) the proportion of an institution's revenue
that may be derived from Title IV programs is limited; (iii) the
institution must adhere to certain financial responsibility and
administrative capability standards; (iv) the institution must
adhere to certain change in ownership restrictions; and (v) the
institution must achieve certain standards in program completion
and placement.
Due to prior default rates on student loans, Mildred
Elley students do not currently qualify for loans under Title IV,
though the Company currently anticipates that in the spring or
fall of 2000, the Mildred Elley schools will be requalified for
the Title IV program. There can be no assurance that the Mildred
Elley schools will requalify for the Title IV program at that or
any other time. To the extent that 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. The
Company is not currently aware of any facts indicating that
such programs may be cut, but there can be no assurances that the
loan programs will be available to the Mildred Elley schools
indefinitely.
PATENTS, COPYRIGHTS, TRADEMARKS, TRADE SECRETS AND ROYALTIES
As of October 31, 1998, the United States Copyright
Office has issued 66 copyrights to TASA for shelf-secure test
booklets, annually secure test booklets, reports and manuals and
12 copyrights to MLP for its various publications. The Company
regularly asserts copyrights to all of its test and instructional
materials.
The following are registered trademarks and/or service
marks of the Company: TASA, the TASA logo, Booklore, Browzer,
Browzer-->BOOKLINK, DLP, DRP, DRP-->BOOKLINK, DRP-->EZ Converter,
DRP Program, DWM, Degrees of Literacy Power, Degrees of Reading
Power, Degrees of Word Meaning, MicRA-->DRP, Traveling Classroom
Library, TCL, TextSense, BookMatch (pending), BookMatch designs
(pending), DRP Linking Text to Ability design (pending), TASA
Literacy (pending), The Measures of a Literate World (pending),
and The Readability Standard (pending). Additionally, Change-A-
Print Frame is a registered trademark of MLP.
Trade secrets are maintained by licenses for software
and certain proprietary data. In addition, all employees execute
nondisclosure agreements as a condition of employment.
In connection with the purchase by MLP of substantially
all the operating assets of Programs for Education, Inc. and
pursuant to a Royalty Agreement between MLP and Bernard Shapiro,
the founder of Programs for Education, Inc., MLP agreed to pay to
Mr. Shapiro a royalty on sales of certain titles for a term of
seven years following the closing of the acquisition in an amount
equal to a minimum of $80,000 annually, with a maximum of
$120,000 in the first year, which increases each year to a
maximum of $240,000 in the seventh year.
When MESI acquired substantially all of the assets of
Mildred Elley, it also acquired the names of Mildred Elley, including
"Mildred Elley School, Inc.", "Mildred Elley Business School" and all
variations and derivatives thereof.
ITEM 2. DESCRIPTION OF PROPERTY
The Company owns a 30,000 square foot building in
Brewster, New York. The building was constructed in 1987, with
the second phase completed in 1991. In Fiscal 1997, the Company
retired the first and second mortgages on the property and
remortgaged the facility with MSB Bank. See "Management's
Discussion and Analysis or Plan of Operation".
MLP rents its editorial offices in Honesdale,
Pennsylvania, and has its service and order fulfillment center in
Rosemont, New Jersey, each on a month-to-month basis.
Collectively, MLP rents approximately 5,000 square feet of space.
Mildred Elley's principal campus is located in Latham,
New York (near Albany), with an additional branch in Pittsfield,
Massachusetts. Each campus contains teaching facilities,
administrative offices and admissions offices. Mildred Elley
leases all of its facilities. The leases have remaining terms
ranging from 1 to 10 years. The Company monitors facility
capability in light of current utilization and projected
enrollment growth. The Company believes that the facilities
occupied by the Mildred Elley schools now can accommodate
expected near-term growth.
The Company expends its resources for capital
improvements as necessary.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) The Company's common stock, par value $.0001
per share (the "Common Stock") is traded in the NASDAQ small-
capitalization over-the-counter market ("Nasdaq") under the
symbol TASA. As quoted in the Monthly Statistical Reports of
the National Association of Securities Dealers, Inc., the
approximate high and low closing prices for each fiscal
quarter in the two fiscal years ended October 31, 1997 and
October 31, 1998 were as follows:
Common Stock Prices
-------------------
Fiscal Quarter: High Low
1st Qtr 97 1.00 0.375
2nd Qtr 97 1.00 0.438
3rd Qtr 97 0.75 0.344
4th Qtr 97 1.00 0.281
1st Qtr 98 1.34 0.625
2nd Qtr 98 1.75 0.625
3rd Qtr 98 1.34 0.781
4th Qtr 98 1.00 0.56
During the first quarter of Fiscal 1999 (through
January 12, 1999), the Company's Common Stock had a high price of
$0.875 and a low of $0.438. The Company has filed preliminary proxy
materials seeking stockholder approval for a 1 for 4 reverse stock
split, which proposal will be submitted to stockholders at its next
annual meeting in March 1999.
These quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commission and may not represent
actual transactions.
As of January 15, 1999, there were 84 holders of record
of the Company's Common Stock. This number of holders of record
does not include beneficial owners of the Company's Common Stock,
whose shares are held in the names of various security holders,
dealers and clearing agencies. The Company believes that the
number of beneficial owners of its Common Stock held by others or
in nominee names exceeds approximately 1,500 in number. The
Company has not paid any cash dividends, and does not anticipate
doing so in the immediate future as it intends to invest any
earnings in the development of the Company's business.
The Company financed the acquisition of Mildred Elley
through the issuance, in October 1998, of debentures, with warrants
attached, pursuant to a Securities Purchase Agreement (the
"Securities Purchase Agreement") with Cahill, Warnock Strategic
Partners Fund, L.P. and Strategic Associates, L.P. (collectively,
the "Cahill, Warnock Entities"). Pursuant to the Securities
Purchase Agreement, the Company: (i) issued and sold to the
Cahill, Warnock Entities 8% Debentures due 2003 (the
"Debentures"), dated October 28, 1998 (the "Purchase Closing
Date"), in the aggregate principal amount of $4,000,000, (ii)
issued and sold to the Cahill, Warnock Entities, as additional
consideration for purchasing the Debentures, warrants (the
"Warrants"), dated the Purchase Closing Date, to acquire
2,760,918 shares of the Company's Common Stock, which, on the
Purchase Closing Date, constituted 20% of the Company's issued
and outstanding common stock on a fully diluted basis, after
giving effect to the transactions contemplated in the Securities
Purchase Agreement and (iii) authorized the issuance and sale in
the future to the Cahill, Warnock Entities of additional shares
of the Company's Common Stock upon the Company's exercise of a
put option, the principal terms of which are summarized in the
next paragraph.
Of the Warrants issued, 80% are immediately exercisable,
and 20% will become exercisable 18 months after the Purchase Closing
Date if the Company has not repaid the Debentures in full by such
date or upon the occurrence of an Event of Default (as defined in
the Securities Purchase Agreement). The exercise price of the
Warrants is $0.35 per share of Common Stock, subject to certain
antidilution adjustments set forth in the Warrants. The Securities
Purchase Agreement provides that for a period of one hundred
thirty-five (135) days after the first anniversary date of the
Purchase Closing Date, the Company can sell (put) to the Cahill,
Warnock Entities $2,000,000 of its Common Stock at a price per
share equal to the greater of $1 or a 20% discount from the
preceding 30-day average closing price of the Common Stock as
reported on Nasdaq. Requirements for the Company to exercise this
put include achieving the Fiscal 1999 projection set forth in the
operating budget delivered to the Cahill, Warnock Entities by the
Company within 30 days of the closing of the acquisition of Mildred
Elley.
The Company relied on the exemption from registration
provided by Section 4(2) of the Securities Act of 1933, as
amended (the "Securities Act"), in effecting the transactions
underlying the Securities Purchase Agreement, as the Company
believes each of the Cahill, Warnock Entities to be sophisticated
investors and there was no general solicitation or advertising.
Pursuant to a Registration Rights Agreement executed simultaneously
with the Securities Purchase Agreement (the "Registration Rights
Agreement") between the Company and the Cahill, Warnock Entities,
the Company has agreed to register with the Securities and
Exchange Commission (the "SEC") the shares of Common Stock
underlying the Warrants.
Pursuant to an Investor Rights Agreement executed
simultaneously with the Securities Purchase Agreement (the
"Investor Rights Agreement") between the Company and the Cahill,
Warnock Entities, the Company has agreed that so long as the
Cahill, Warnock Entities own at least 50% of the Warrants (or if
the Warrants have been exercised, the shares issuable pursuant
thereto), the Cahill, Warnock Entities shall have the right to
nominate two directors to the Board of Directors of the Company.
David L. Warnock and Joseph A. Fernandez are the current
directors who were nominated by the Cahill, Warnock Entities.
Pursuant to the Investor Rights Agreement, the directors and
executive officers have agreed, at each meeting of stockholders
for the purpose of electing directors, to cast their eligible
votes in favor of the nominees of the Cahill, Warnock Entities.
In addition, for a period of 29 months from the Purchase Closing
Date, at each meeting of stockholders for the purpose of electing
directors, the Cahill, Warnock Entities have agreed to cast all
of their eligible votes in favor of the directors nominated by
the Company.
As of August 19, 1997, the Company entered into
consulting agreements with (i) Comprehensive Capital Corporation,
Theodore P. Allocca, Theodore Allocca and Steven Kevorkian
(collectively, the "Comprehensive Group"), and (ii) Barry M.
Goldstein ("Goldstein"). Pursuant to such consulting agreements,
the Comprehensive Group and Goldstein each agreed to perform
financial consulting and investor relations services for the
Company for a term of one year in exchange for 50,000 shares of
the Company's Common Stock and warrants to purchase up to 125,000
shares of Common Stock at a purchase price equal to the fair
market value of the Common Stock on August 19, 1997, or $0.469,
which warrants (the "August 1997 Warrants") will remain
exercisable for a period of five years. The Company intends to
register the shares of Common Stock, and the shares of Common
Stock underlying the August 1997 Warrants, with the SEC.
The Company relied on the exemption from registration
provided by Section 4(2) of the Securities Act, in effecting these
transactions, as the Company believes each of the Comprehensive
Group and Goldstein to be sophisticated investors and there was
no general solicitation or advertising.
On November 27, 1998, in accordance with the Securities
Purchase Agreement, the Company redeemed all of the outstanding
shares of its Series A Preferred Stock for a nominal aggregate
redemption price. Until the shares were redeemed, there were
1,500 shares of Series A Preferred Stock outstanding. Each share
of Series A Preferred Stock had been entitled to cast 3,000 votes
per share on any matter brought before the stockholders of the
Company. No shares of Series A Preferred Stock are currently
outstanding.
(b) Not applicable.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Except for historical information, the material
contained in this Management's Discussion and Analysis or Plan of
Operation is forward-looking. For the purposes of the safe
harbor protection for forward-looking statements provided by the
Private Securities Litigation Reform Act of 1995, readers are
urged to review the list of certain important factors set forth
in "Cautionary Statement for Purposes of the "Safe Harbor"
Provisions of the Private Securities Litigation Reform Act of
1995" below, which may cause actual results to differ materially
from those described.
COMPANY BACKGROUND
For over twenty years, TASA has served the rapidly
expanding education market, primarily through the publishing
and sale of its highly regarded proprietary reading tests. Since
1994, new management has implemented a strategy to broaden the
Company's services in the education market. As a result, the
Company has completed four acquisitions since the beginning of
Fiscal 1997 and now serves three educational markets: (1)
educational assessment and evaluation, (2) educational
instruction, and (3) educational delivery. TASA revenues in
Fiscal 1996 were $2.5 million and have increased by acquisition
and internal growth to $6.3 million in Fiscal 1998, and on a
pro forma basis to over $11.0 million with the acquisition of
- ---------
Mildred Elley in November 1998.
Until Fiscal 1997, the Company's revenues derived from
the publishing and distribution of its proprietary line of
reading tests. In Fiscal 1997, the Company acquired BETA. In
that same fiscal year, the Company established MLP, which
purchased substantially all of the assets of Programs for
Education, Inc., the Company's initial entrance into educational
instruction. For this market, MLP designs, publishes and
distributes four affordable "consumable" student workbook series
targeting the 15 million students in grades K-4, as well as
creates and publishes books and pamphlets for elementary school
teachers and parents. Also in Fiscal 1997, the Company purchased
the Maculaitis Test series. In Fiscal 1998, the Company formed
TESC, a subsidiary charged with operating and acquiring post-
secondary schools for education delivery, which, through MESI,
completed its first acquisition in November 1998 of the 750-student
Mildred Elley schools.
The following table sets forth the components of the
Company's revenues, and their annual percentage change, for
Fiscal 1998, 1997 and 1996:
TASA Revenues Breakdown (in thousands of dollars) and % of
Year-To-Year Change
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
Fiscal Year 1996-98 1998 1997 1996
-----------------------------------------------------------------------
% % % %
Change $ Change $ Change $ Change
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
DRP Test Sales - Total 35% 3,414.2 20% 2,838.9 13% 2,519.9 9%
Contract Sales -23% 673.7 -15% 796.9 -9% 875.6 -8%
Catalog Sales 67% 2,740.5 34% 2,042.0 24% 1,644.3 21%
BETA Consulting N/A 709.0 147%/(1) 287.4/(1) N/A N/A N/A
MLP Catalog Sales N/A 2,193.9 50%/(2) 1,461.4/(2) N/A N/A N/A
-----------------------------------------------------------------------
Total Revenues 151% 6,317.1 38% 4,587.6 82% 2,519.9 9%
<FN>
(1) BETA results in Fiscal 1997 were for the ten months since its acquisition.
(2) MLP results in Fiscal 1997 were for the five months since its acquisition.
</FN>
</TABLE>
The following are selected ratios as a percent of
revenues based on the Company's financial statements:
Fiscal Year
------------------------------------------------------------
1998 1997 1996
----------------------------
Revenues 100% 100% 100%
Gross Profit Margins 69% 66% 72%
Operating Expenses
Selling Expenses 25% 25% 28%
General & Administrative 41% 35% 37%
Bad Debt Expense ---- 9% ----
Bad Debt Recovery (3%) ---- ----
Impairment of Goodwill ---- 44% ----
Product Development ---- ---- 2%
----------------------------
Income (Loss) from Operations 6% (47%) 4%
Net Interest Inc. (Exp.) (3%) ( 1%) 4%
----------------------------
Pre Tax Income (Loss) 3% (48%) 8%
Net Income 2% (30%) 8%
============================
FISCAL 1998 AS COMPARED TO FISCAL 1997
REVENUES. For Fiscal 1998, revenues were $6,317,114,
---------
increasing 38%, or $1,729,481, over $4,587,633 for Fiscal 1997.
Of the $1,729,481 increase, 33%, or $575,312, is attributable to
a 20% net internal growth of the Company's traditional DRP test
business. The balance of the year's increase, $1,154,169, is
attributable to revenue increases of the two businesses acquired
during Fiscal 1997, BETA and MLP. MLP accounted for $732,502, or
63%, of the non-DRP Fiscal 1998 revenue increase while BETA
accounted for $421,667, or 37%, of such Fiscal 1998 non-DRP
revenue gain. Since Fiscal 1996, the Company's revenues have
increased $3,797,206, or 151%, of which internal growth accounted
for approximately 24% of this increase and acquisitions effected
in Fiscal 1997 accounted for the remaining 76%.
The Company's traditional DRP reading assessment
business is accounted for as Contract income and Catalog sales.
Overall, total DRP test sales were up in Fiscal 1998 due to the
success enjoyed by the largest segment, Catalog sales. The
Company's Contract sales to states (New York, Virginia, and
Connecticut) of specially prepared "secure" forms of the
Company's DRP tests and licensed for one-time or limited use by
states have decreased during the past several years. Contract
sales in Fiscal 1998 of $673,707 were down 15% from Fiscal 1997
and this decrease reflects changes in the Company's contract
business. Virginia notified the Company that its Literacy
Passport Test program, which includes DRP tests, is being phased
out over the next 6 years while New York notified the Company
that its RCT and PEP testing programs, which include DRP tests,
are being phased out. As a result, Virginia contract revenues
during the fourth quarter of Fiscal 1998 were less and New York
contract revenues for the first quarter of Fiscal 1999 should
be less than in the prior years. The actual dollar amount of
Virginia and New York contract revenues for Fiscal 1999 is
uncertain at this time. Connecticut, however, notified the
Company that its Mastery Testing Program will continue to
include DRP tests for the next five years, and a multiple-year
contract has been executed.
The Company's largest overall sales component, Catalog
sales of its DRP tests, continues to enjoy annual increases in
sales at increasing annual rates. In Fiscal 1998, Catalog sales
were up 34% over Fiscal 1997, which was up from the increases of
24% and 21% respectively for Fiscal 1997 and 1996. Management
attributes these increasing sales gains to recently established
direct sales representatives in the U.S. and to increased
recognition by schools of the uniqueness and value of the DRP
test.
Sales of MLP in Fiscal 1998 increased 50%, or $732,502,
to $2,193,879 over $1,461,377 reported for Fiscal 1997. MLP
results in Fiscal 1997 were for the five months since its
acquisition. On a full year-to-year basis, management believes
the increase is actually approximately 10%. In Fiscal 1998,
several new "consumable" workbook series were introduced and
these new series should provide MLP with an increased base of
sales for Fiscal 1999.
BETA sales increased 147%, or $421,667, to $709,022 in
Fiscal 1998 from $287,355 in Fiscal 1997. The increase reflects
primarily awards to BETA during Fiscal 1998 of larger
subcontracts for state test design from the large test
publishers. BETA's year-end backlog of contract work is up
substantially over the prior year and should provide a base for
its growth in Fiscal 1999.
COST OF GOODS SOLD. Cost of goods sold in Fiscal 1998
-------------------
increased 23% from Fiscal 1997 ($1,935,104 in Fiscal 1998
versus $1,578,749 in Fiscal 1997). Cost of goods sold
represented 31% of revenues in Fiscal 1998 versus 34% of revenues
in Fiscal 1997.
GROSS PROFIT. A 38% increase in revenues, particularly
-------------
in the Company's higher gross margin businesses, DRP and MLP,
resulted in gross profit margins increasing to 69% in Fiscal 1998
from 66% in Fiscal 1997. Another factor in the Company's
increased gross profit margins is that a portion of cost of sales,
approximately $367,000 in Fiscal 1998, represents amortization of
the Company's DRP Test Passage Bank, and is not sales volume
dependent.
The improvement in the Company's gross profit to
$4,382,010 in Fiscal 1998, representing a $1,373,126 increase, or
46%, over gross profit of $3,008,884 in Fiscal 1997, is also
attributable to rigorous budgeting and cost control programs
instituted by the Company's management several years ago.
Additional royalty costs, a factor in the decline of Fiscal 1997
gross profit margins, reached their annual contractual maximum levels
during Fiscal 1998. This allowed for increased sales volumes that
were not subject to these royalties. The additional royalty payments
will be present for another six years as a portion of the consideration
paid for the acquisition of Programs for Education, Inc. by MLP.
SELLING EXPENSES. Selling expenses in Fiscal 1998
-----------------
increased 41%, or $467,858, to $1,596,462 from $1,128,604 in
Fiscal 1997. As a percentage of revenues, selling expenses
remained constant at 25% for both fiscal years. A significant
positive accomplishment in Fiscal 1998's performance was that a
full year of MLP selling costs were offset by MLP sales
increases, as compared to Fiscal 1997 when a majority of the MLP
annual selling costs had already been incurred prior to its
acquisition by the Company.
GENERAL AND ADMINISTRATIVE. The Company's general and
---------------------------
administrative expenses in Fiscal 1998 increased $1,017,270, or
64%, to $2,619,034 from $1,601,764. As a percent of revenues,
general and administrative expenses, including amortization and
depreciation, rose in Fiscal 1998 to 41% from 35% in Fiscal 1997.
A substantial portion of Fiscal 1998's increase reflected costs
associated with positioning the Company for the growth to come
from its post secondary schools acquisition program, as well as
the fact that in Fiscal 1997 the Company acquired MLP on June 1,
1997 and thus gained 70% of MLP's revenues, but only 42% of MLP's
general and administrative expenses for Fiscal 1997.
BAD DEBT EXPENSE AND RECOVERY. The Company did not have
------------------------------
any bad debt expenses in Fiscal 1998. Bad debt expenses in
Fiscal 1997 were due to the one-time write-off of a note
receivable. Prior to Fiscal 1995, the Company (under previous
management) lent $400,000 to HGI, Inc. (formerly The Harriman
Group, Inc.) on an unsecured, subordinated note. During Fiscal
1997, HGI, Inc. was declared insolvent and management wrote off
the note receivable. The Company instituted legal action for
recovery, which was ultimately successful. During the second
quarter of Fiscal 1998, management concluded a settlement of the
$400,000 note receivable. Settlement terms required payment of
$200,000, which was paid to the Company in October 1998.
IMPAIRMENT OF GOODWILL. In Fiscal 1997, the Company
-----------------------
took a one-time $2,002,674 charge for impairment of the goodwill
arising from the purchase by MLP of substantially all the
operating assets of Programs for Education, Inc. The remaining
approximately $500,000 of goodwill from the acquisition is being
amortized over fifteen years. There was no impairment charge in
Fiscal 1998.
TOTAL OPERATING EXPENSES. In Fiscal 1998, total
-------------------------
operating expenses decreased $1,122,546, or 22%, to $4,015,496
from $5,138,042. The decrease is attributable to the absence in
Fiscal 1998 of the non-cash charges incurred in Fiscal 1997 (bad
debt and impairment of goodwill) and the income in Fiscal 1998
from the bad debt recovery.
INCOME (LOSS) FROM OPERATIONS. Income from operations in
------------------------------
Fiscal 1998 was $366,514 as compared to a loss in Fiscal 1997 of
($2,129,158).
EBITDA. Earnings before interest, taxes, depreciation
-------
and amortization (EBITDA) rose 21%, or $178,478, in Fiscal 1998
to $1,017,383 from $838,905 in Fiscal 1997. In Fiscal 1998,
EBITDA was 16% of revenues as opposed to 18% in Fiscal 1997.
OTHER INCOME (EXPENSE). In Fiscal 1998, the Company
------------------------
had a gain of $2,689 on disposal of assets as contrasted with a
loss of ($30,539) in Fiscal 1997. Net interest expense (interest
income less interest expense) for Fiscal 1998 was $208,996, an
increase of $174,913 over the net interest expense of $34,083,
for Fiscal 1997. Management believes that the Company's net
interest expense will increase in Fiscal 1999 due to increased
borrowings for its post secondary schools acquisition program.
However, management expects in Fiscal 1999 that the increase of
earnings before interest and taxes (EBIT) from acquired post-
secondary schools will exceed the incremental borrowing costs for
these acquisitions.
INCOME (LOSS) BEFORE TAXES. Income before taxes in
---------------------------
Fiscal 1998 increased to $160,207 from a loss of ($2,193,780) in
Fiscal 1997.
NET INCOME (LOSS) AND EARNINGS (LOSS) PER SHARE.
------------------------------------------------
Income after taxes was $131,202, or 2.1% of revenues, in Fiscal
1998 as compared to an after tax loss of ($1,363,811), or negative
29.7% of revenues, in Fiscal 1997. In Fiscal 1998, the Company
provided for a $29,005 tax obligation as opposed to Fiscal 1997
when its pre-tax loss was reduced by a tax benefit of $829,969.
The Company reported earnings per share in Fiscal 1998
of $0.02 based on weighted average shares outstanding of
8,508,202. In Fiscal 1997, based on weighted average shares of
8,213,089, its loss per share was ($0.17).
FISCAL 1997 AS COMPARED TO FISCAL 1996
REVENUES. In Fiscal 1997, revenues of $4,587,633
---------
increased 82%, or $2,067,725, over revenues of $2,519,908 in
Fiscal 1996. Of the $2,067,725 increase, 15%, or $318,993, was
attributable to a 13% net internal growth of the Company's
traditional DRP test business. The balance of $1,748,732, or
85%, of the revenue increase resulted from the inclusion of the
two businesses acquired during Fiscal 1997, BETA and MLP, since
their respective acquisition dates. MLP accounted for $1,461,377
for five months, or 84% of the Fiscal 1997 revenue increase
attributable to new business and BETA accounted for $287,355, or
16%, of such Fiscal 1997 revenue gain.
COST OF GOODS SOLD. Cost of goods sold in Fiscal 1997
-------------------
increased 122% from Fiscal 1996 ($1,578,749 in Fiscal 1997 versus
$711,564 in Fiscal 1996). Cost of goods sold represented 34% of
revenues in Fiscal 1997 versus 28% of revenues in Fiscal 1996.
This increase was due to the change in product mix from
acquisitions made over the course of Fiscal 1997.
GROSS PROFIT. The Company's gross profit margins
-------------
decreased in Fiscal 1997 as compared to Fiscal 1996, due to the
inclusion of two acquisitions that have lower margins than TASA's
DRP and other core business. BETA had a 25% gross profit margin
and MLP had a 70% gross profit margin, while TASA's core business
(without BETA and MLP) had a gross profit margin of 74% (EBITDA
format), in Fiscal 1997. As a result, gross profit margins for
Fiscal 1997, excluding amortization of the Test Passage Bank
(EBITDA format), declined to 72% from 81% in Fiscal 1996.
Additional royalty costs, a factor in the decline of the Fiscal
1997 gross profit margins, will be present for seven years as a
portion of the consideration paid for the acquisition of Programs
for Education, Inc. See "Management's Discussion and Analysis or
Plan of Operations --Liquidity and Capital Resources", below. On
a reported basis (non-EBITDA), the Company includes amortization
of the Test Passage Bank in its reported cost of sales and, thus,
the Company's reported gross profit margins are lower.
Management believes that as its DRP test and MLP sales continue
to grow, gross profit margins should continue at least at current
levels.
SELLING EXPENSES. Selling expenses for Fiscal 1997
-----------------
decreased to 25% of revenues as compared to 28% of revenues in
Fiscal 1996 ($1,128,604 in Fiscal 1997 versus $703,214 in Fiscal
1996). A substantial portion of this decline was due to the fact
that Fiscal 1997 sales and marketing costs at MLP, which are
seasonal, were incurred substantially preceding the date of the
acquisition of the assets of Programs for Education, Inc. by MLP.
GENERAL AND ADMINISTRATIVE EXPENSES. General and
------------------------------------
administrative expenses were 35% of revenues, or $1,601,764, in
Fiscal 1997 compared to 37% in Fiscal 1996. Increases were due
to the acquisition of BETA and MLP in Fiscal 1997.
BAD DEBT EXPENSE. Bad debt expense rose substantially
-----------------
in Fiscal 1997 due to the one-time write-off of a note
receivable. Prior to Fiscal 1995, the Company (under previous
management) lent $400,000 to HGI, Inc. (formerly The Harriman
Group, Inc.) on an unsecured, subordinated note. During Fiscal
1997, HGI, Inc. was declared insolvent and management wrote-off
the note receivable, which equaled 9% of revenues. See " --
Fiscal 1998 as compared to Fiscal 1997 - Bad Debt Expense and
Recovery" above. In Fiscal 1996, there was no bad debt
expense.
PRODUCT DEVELOPMENT EXPENSES. In Fiscal 1996, the
-----------------------------
Company expended 2% of its revenues ($60,238) for product
development expenses related to BookMatch. In late Fiscal 1996,
the product achieved feasibility. Therefore, in accordance with
generally accepted accounting principles, the Company began
capitalizing costs associated with the product until it was
launched in December 1997. There are no product development
expenses in Fiscal 1997.
EBITDA. Earnings before interest, taxes, depreciation
-------
and amortization in Fiscal 1997 increased 68% to $838,905 from
$498,197 in Fiscal 1996.
IMPAIRMENT OF GOODWILL. In Fiscal 1997, the Company
-----------------------
took a one-time $2,002,674 charge for impairment of the goodwill
arising from the purchase by MLP of substantially all the assets
of Programs for Education, Inc. This one-time charge equaled 44%
of the Company's revenues for Fiscal 1997. The remaining
$500,000 of goodwill from the acquisition is being amortized over
fifteen years. There was no impairment of goodwill in Fiscal
1996.
TOTAL OPERATING EXPENSES. Total operating expenses for
-------------------------
Fiscal 1997 exclusive of bad debts and impairment of goodwill was
$2,730,368, or 60% of revenues, as compared to $1,699,914, or 67%
of revenues, in Fiscal 1996.
INTEREST EXPENSE. The Company had net interest expense
-----------------
(interest income less interest expense) in Fiscal 1997 of $34,083
or 1% of revenues. This compared to net interest income of
$102,827 in Fiscal 1996 equaling 4% of revenues.
NET INCOME (LOSS) AND EARNINGS (LOSS) PER SHARE. Before
------------------------------------------------
taxes, the losses in Fiscal 1997 equaled a negative (48%) of revenues
($2,193,780), including the write-downs of goodwill and bad debt
expense, which aggregated 53% of revenues in Fiscal 1997. Pre-tax
income was 8% in Fiscal 1996 ($211,257 in Fiscal 1996). The
Company claimed a tax benefit of $829,969 for Fiscal 1997 as
compared to a tax expense of $19,209 for Fiscal 1996. Resulting
net income (loss) for Fiscal 1997 was ($1,363,811) as compared to
a profit of $192,048 in Fiscal 1996.
The Company reported a loss per share in Fiscal 1997 of
($.17) based on weighted average shares outstanding of
8,213,089. For Fiscal 1996, based upon weighted average shares
outstanding of 7,524,539, the Company earned $.03 per share.
LIQUIDITY AND WORKING CAPITAL
WORKING CAPITAL. During Fiscal 1998, the Company
----------------
continued to increase the total capital employed in the business,
as well as to improve its working capital position. At fiscal
year-end, working capital was $5,824,816, up from $2,244,488 at
the beginning of Fiscal 1998. Its current ratio at Fiscal 1998
year-end was 5.5 to 1. Against this liquidity, the Company
agreed to acquire the Mildred Elley schools, which required a
$2,000,000 payment from working capital. Reserving for the
payment obligation, fiscal year-end working capital would be
$3,824,816 with a current ratio of 4.0 to 1. The acquisition
closed in November 1998.
CASH FLOW FROM OPERATING ACTIVITIES. In Fiscal 1998,
------------------------------------
cash flow from operating activities increased 40% or $255,456 to
$896,759 from $641,303 in Fiscal 1997. Non-cash adjustments in
Fiscal 1998 included depreciation and amortization of $650,869
versus $560,389 in Fiscal 1997, and deferred taxes of $54,426 as
opposed to $856,943 in Fiscal 1997. Other non-cash adjustments
in Fiscal 1997 were $2,407,674 for impairment of goodwill and
bad debt expense.
CASH FLOWS FROM INVESTING ACTIVITIES. In Fiscal 1998,
-------------------------------------
the Company's expenditures of cash for investment activities,
excluding the purchase and sale of marketable securities totaled
$816,033 as opposed to $3,080,059 in Fiscal 1997. The Company
decreased its expenditures for its Test Passage Bank by $217,911
in Fiscal 1998 to $230,838 from $448,749 in Fiscal 1997. It also
reduced its software development expenditures in Fiscal 1998 by
$161,047 to $68,045 versus $229,092 in Fiscal 1997. It did not
expend cash in Fiscal 1998 for acquisitions as opposed to
spending $2,300,764 in Fiscal 1997. The major spending item
increase in Fiscal 1998 was $353,406 for deferred acquisition costs.
CASH FLOWS FROM FINANCING ACTIVITIES. In Fiscal 1998,
-------------------------------------
the Company generated net cash of $3,207,840 from financing
activities as opposed to $1,356,250 in Fiscal 1997. Sources of
financing in Fiscal 1998 included $99,654 from exercise of
warrants and stock options and proceeds of $4,000,000 from the
issuance of long term debt. In Fiscal 1997, proceeds from
issuance of long term debt and loan payable totaled $2,331,446.
In Fiscal 1998, cash of $314,953 was used for repayment of long
term debt while $930,563 was used for repayment of long term
debt in Fiscal 1997.
In October 1998, the Company completed the sale of the
Debentures to the Cahill, Warnock Entities. The Cahill, Warnock
Entities also acquired the Warrants to acquire 2,760,918 shares of
the Company's Common Stock, which constituted 20% of the Company's
shares of Common Stock outstanding on a fully diluted basis on the
Purchase Closing Date. The Debentures contain certain restrictive
clauses, including a requirement that the proceeds be used for the
Company's acquisition program of post-secondary schools, and Mildred
Elley in particular. Additionally, the Securities Purchase Agreement
provides that for a period of one hundred thirty-five (135) days
after the first anniversary date of the Purchase Closing Date, the
Company can sell (put) to the Cahill, Warnock Entities $2,000,000 of
its Common Stock at a price per share equal to the greater of $1 or
a 20% discount from the preceding 30-day average closing price
of the Common Stock as reported on Nasdaq. Requirements for the
Company to exercise this put include achieving the Fiscal 1999
projection set forth in the operating budget delivered to the
Cahill, Warnock Entities by the Company within 30 days of the
closing of the acquisition of Mildred Elley. The Company also
agreed to cause election to its Board of Directors of two nominees
of the Cahill, Warnock Entities so long as the Cahill, Warnock
Entities own at least 50% of the Warrants or the shares issuable
thereunder.
In November 1998, the Company, through MESI, a wholly-
owned subsidiary of TESC, which is a wholly-owned subsidiary of
the Company, purchased substantially all of the assets of Mildred
Elley (the "Assets"). The purchase price for the Assets was
$3,000,000, paid as follows: (i) $2,000,000 in cash at the
closing and (ii) $1,000,000 by a five-year promissory note of
MESI, payable in equal quarterly installments of principal and
interest and bearing interest at a rate equal to 8.5% per annum.
In addition, MESI assumed certain liabilities of the seller
related to the acquired business.
YEAR 2000 MATTERS
In Fiscal 1998, the Company developed and implemented a
program to resolve the potential impact of the year 2000 on the
ability of the Company's computerized information systems to
accurately process information that may be date-sensitive.
Accordingly, the Company believes that its financial and
information systems are now Year 2000 compliant. As to third-
party relationships, the Company believes that most of these
parties intend to be Year 2000 compliant by January 1, 2000;
however, there can be no assurance that this will be the case.
The costs incurred during Fiscal 1998 were not material and the
Company believes that any further costs to be incurred will also
not be material. Any of the Company's programs that recognize a
date using "00" as other than the year 2000 could result in errors
or system failures. The Company utilizes a number of computer
programs across its entire operation. However, if the Company
and third parties upon which it relies are unable to address this
issue in a timely manner, it could result in a material financial
risk to the Company.
SELECTED FINANCIAL DATA
The following tables summarize certain financial data
for the Company for Fiscal 1998, 1997, and 1996, respectively.
See "Financial Statements" in Item 7 below.
Fiscal Year Ended October 31,
----------------------------------------------
1998 1997 1996
---- ---- ----
INCOME STATEMENT DATA:
Operating revenues $ 6,317,114 $4,587,633 $2,519,908
Net sales 6,317,114 4,587,633 2,519,908
Gross profit 4,382,010 3,008,884 1,808,344
Income (loss) from operations 366,514 (2,129,158) 108,430
Income (loss) before income taxes 160,207 (2,193,780) 211,257
Net income (loss) 131,202 (1,363,811) 192,048
Earnings (loss) per share .02 (.17) .03
BALANCE SHEETS:
Current assets $ 7,106,418 $3,078,853 $4,458,538
Total assets 14,074,640 9,592,885 8,975,542
Long-term obligations 6,267,198 2,528,968 1,249,471
Total liabilities 7,548,800 3,363,333 1,591,807
Working capital 5,824,816 2,244,488 4,116,202
Stockholders' equity 6,525,840 6,229,552 7,383,735
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS
OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements contained in this Report contain
"forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. These are statements
that do not relate strictly to historical or current facts. Such
forward-looking statements involve known and unknown risks and
uncertainties. The Company's actual actions or results may
differ materially from those discussed in the forward-looking
statements. These risk factors include, without limitation:
. 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;
. The ability of the Company to compete successfully with
the other providers of standardized tests (see "Description
of Business--Competition", above);
. The ability of the Company to accommodate any changes in
government regulation which may impact the marketability of
its tests (see "Description of Business--Government Regulation",
above);
. 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;
. The ability of the Company to secure additional financing
as and when necessary;
. The ability of the Company to retain the services of its
key management, and to attract new members of the management
team;
. The ability of the Company to effect and retain appropriate
patent, copyright and trademark protection of its products;
. The ability of the Company to meet the continued listing
requirements of Nasdaq;
. 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.
The Company undertakes no obligation to release
publicly any revisions to the forward-looking statements or to
reflect events or circumstances after the date of this Report.
ITEM 7. FINANCIAL STATEMENTS
Financial information required by this item appears in
the pages marked F-1 through F-31 at the end of this Report and
are incorporated herein by reference as if fully set forth
herein.
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Independent Auditors' Report F-2
Consolidated Financial Statements:
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-5
Consolidated Statement of Changes in Stockholders' Equity F-6
Consolidated Statements of Cash Flows F-7
Notes to Consolidated Financial Statements F-9
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
As of December 31, 1998, the directors and executive
officers of the Company were as follows:
Name Age Position
---- --- --------
Walter B. Barbe 72 Director; and President, MLP
Michael D. Beck 52 Director; Vice President; and
President, Chief Executive Officer, BETA
Steven R. Berger 43 Director
Joseph A. Fernandez 63 Director
Stephen H. Ivens 57 Director*; Vice President,
DRP Services
Andrew L. Simon 56 Chairman of the Board of Directors;
President; Chief Executive Officer;
and Chief Financial Officer
Linda G. Straley 42 Director; Vice President,
Operations; and Secretary
David L. Warnock 40 Director
[FN]
___________
* Dr. Ivens will not be seeking re-election as a director
at the 1999 Annual Meeting of Stockholders, but will continue to
serve the Company in his capacity as an executive officer.
</FN>
Each director shall hold office until the earlier of
the next annual meeting of the Company's stockholders or his or
her resignation and until a successor is selected and qualified.
WALTER B. BARBE was elected as a Director of the
Company on May 30, 1997 and has been President and Publisher of
MLP, the Company's wholly-owned subsidiary, since May 1, 1997.
Dr. Barbe is also a Director of MLP. From 1990 until he joined
MLP, Dr. Barbe was a Vice President of Universal Publishing.
Prior to 1990, Dr. Barbe was the Editor-in-Chief of Highlights
----------
for Children, a children's magazine publication. Additionally,
- ------------
Dr. Barbe was a professor and chairman of the Department of
Special Education at Kent State University and has lectured
extensively on various topics. Dr. Barbe received a B.S., an
M.A. and a Ph.D. from Northwestern University and is a licensed
psychologist, a publisher and a college professor.
MICHAEL D. BECK was elected as a Director of the
Company on March 28, 1997 and has been Vice President of the
Company since January 2, 1997. Mr. Beck is also a Director of
BETA. Since 1983, Mr. Beck has been President of BETA, which
provides consulting and contractual services to school districts,
state education departments and test and textbook publishers. 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.
See "Certain Relationships and Related Transactions" in Item 12,
below. Mr. Beck has also provided consulting services on matters
of educational research and assessment for various military,
governmental and commercial organizations. Mr. Beck received an
A.B. from John Carroll University and an M.A. from Fordham
University.
STEVEN R. BERGER was elected as a Director of the
Company on March 29, 1996 and he also serves on the Company's
Compensation Committee and Audit Committee. Mr. Berger has been
a partner in the law firm of Salans Hertzfeld Heilbronn Christy &
Viener (formerly Christy & Viener) in New York City since January
1989. Mr. Berger received an A.B. and a J.D. from Harvard
University. Salans Hertzfeld Heilbronn Christy & Viener has
acted as special securities counsel to the Company since January
1995.
JOSEPH A. FERNANDEZ was elected as a Director of the
Company on December 15, 1998 and, since that date, he has also
served on the Company's Compensation Committee. Dr. Fernandez is
President of Joseph A. Fernandez & Associates, Inc., an education
consulting firm. From June 1993 until June 1996, Dr. Fernandez
served as President and Chief Executive Officer of School
Improvement Services, Inc., an organization in Winter Park,
Florida which provides consulting services related to school
improvement at the state, district or school level. From June
1993 until July 1994, Dr. Fernandez also served as the President
of the Council of Great City Schools, a Washington, D.C. based
organization representing fifty of the largest urban school
districts in the United States. Prior to assuming such positions
in 1993, Dr. Fernandez served as Chancellor of the New York City
Public Schools from 1990 to 1993 and as Superintendent of the
Dade County Public Schools in Miami, Florida from 1987 to 1990.
Dr. Fernandez also serves on the Board of Directors of Children's
Comprehensive Services, Inc. Dr. Fernandez holds a B.A. from the
University of Miami, a M.A. in Education from Florida Atlantic
University and an Ed.D. from Nova University.
STEPHEN H. IVENS was elected as a Director of the
Company on March 31, 1995, and has been Vice President, DRP
Services since June 1997. Prior to serving as Vice President,
DRP Services, Mr. Ivens was Vice President of Research and
Development from June 1994 and, prior to that, was Executive
Director of DRP Services of the Company from August 1989. Mr.
Ivens received a B.S. in Mathematics and M.S. in Guidance from
Illinois State University and a Ph.D. in Educational Research
from Florida State University. From 1970 to 1989 he was an
Executive Director at the College Entrance Examination Board.
ANDREW L. SIMON was elected as Director and as
President and Chief Financial Officer of the Company on March 31,
1995. Mr. Simon is also a Director of MLP and is a Director and
Secretary of BETA. He served as Interim President of TASA from
June 1994 through March 31, 1995. He was a founder of the
Company and previously served as a Director from 1976 to 1991 and
has acted as a financial consultant to the Company since its
inception in 1976. From 1983 to 1986, he was a Vice
President/Marketing Division Head in the Private Clients Group at
Bankers Trust Company. He was a Vice President at Citibank, NA,
where he held a number of senior marketing and sales positions,
from 1980 to 1983. Prior to 1980, Mr. Simon served as Marketing
Director for several consumer package goods companies including
Norcliff-Thayer and Lederle Laboratories. He holds an M.B.A.
from Columbia University and a B.A. from Washington University.
Mr. Simon is a trustee of the Harvey School and previously served
as a director of the City of Poughkeepsie Partnership.
LINDA G. STRALEY was elected as a Director of the
Company and has been Vice President of Operations since June
1994. From June 1994 through March 31, 1995, she was Chairman of
the Board of Directors. She has been Secretary since August 1992
and, from 1984 to 1994, she served as director of DRP Services
for the Company. Ms. Straley received a B.A. in Education from
Bethany College and an M.S. in Educational Psychology and
Statistics from the State University of New York.
DAVID L. WARNOCK was elected as a Director of the
Company on October 28, 1998 and, since that date, he has also
served on the Company's Audit Committee. Mr. Warnock is a
founding partner of Cahill, Warnock & Company, LLC, an asset
management firm established in 1995 to invest in small public
companies. From 1983 to 1995, Mr. Warnock was with T. Rowe Price
Associates in senior management positions, including President of
the corporate general partner of T. Rowe Price Strategic Partners
I and T. Rowe Price Strategic Partners II, and as the Executive
Vice President of T. Rowe Price New Horizons fund. Mr. Warnock
also serves on the Boards of Directors of ALLIANCE National Inc.,
Children's Comprehensive Services, Inc., Concorde Career
Colleges, Inc., Environmental Safeguards, Inc., and SRB
Corporation. Mr. Warnock received a B.A. in History from the
University of Delaware and a Masters in Finance from the
University of Wisconsin.
ITEM 10. EXECUTIVE COMPENSATION
The following table shows compensation for services
rendered to the Company during Fiscal 1998, 1997 and 1996,
respectively, by the Chief Executive Officer, the Vice President,
DRP Services and the President of BETA. Each executive officer
serves under the authority of the Board of Directors. No other
executive officer of the Company received cash compensation that
exceeded $100,000 during Fiscal 1998. Therefore, pursuant to
Item 402 of Regulation S-B, only compensation for each of the
Chief Executive Officer, the Vice President, DRP Services and the
President of BETA is shown in the Summary Compensation Table
below.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
---------------------------------------------------------------
Awards Payouts
--------------------------
Securities All Other
Other Annual Restricted Underlying LTIP Compen-
Name and Principal Compensation Stock Options/SARs(1) Payouts sation
Position Year Salary($) Bonus($) ($) Award(s)($) (#) ($) ($)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Andrew L. Simon, 1998 $180,000 0 $41,663(3) 0 78,500/0 0 0
President, Chief Executive 1997 135,000 0 39.025(3) 0 239,000(2)/0 0 0
Officer and Chief Financial 1996 109,568 0 33,707(3) 0 82,500/0 0 0
Officer
Stephen H. Ivens, Vice 1998 $112,000 0 $35,362(4) 0 25,000/0 0 0
President, DRP Services 1997 112,000 0 35,210(4) 0 102,500(2)/0 0 0
1996 107,068 0 34,163(4) 0 52,500/0 0 0
Michael D. Beck, Vice 1998 $110,000 0 $32,864(5) 0 55,000/0 0 0
President, TASA; 1997 83,333 0 24,622(5) 0 125,000(6)/0 0 0
President and Chief 1996 0 0 0 0 0 0 0
Executive Officer, BETA
<FN>
- ---------------
(1) To date, the Company has issued no SARs.
(2) Granted in connection with the rejuvenation of certain
options held by all employees of the Company, pursuant to which
certain severely out-of-the-money options were canceled and new
options to purchase an equal number of shares were granted, each
with a new expiration date and a new exercise price equal to the
fair market value of the Company's Common Stock on March 28,
1997.
(3) Includes: contributions of $24,000, $20,250 and $16,435 to
the Company's qualified 401(k) Profit Sharing Plan (the
"401(k)"), in Fiscal 1998, 1997, 1996, respectively; and $8,250
annually for a company car.
(4) Includes: contributions of $16,800, $16,800 and $16,060 to
the Company's 401(k) in Fiscal 1998, 1997, 1996, respectively;
and $7,250, $6,100 and $7,250 for a company car, in Fiscal 1998,
1997, 1996, respectively.
(5) Includes: a contribution of $17,250 and $12,500 to the
Company's 401(k) in Fiscal 1998 and 1997, respectively; and
$7,176 and $4,460 for a company car in Fiscal 1998 and 1997,
respectively.
(6) Granted as part of the purchase price for the acquisition
of BETA by the Company.
</FN>
</TABLE>
EMPLOYMENT CONTRACTS
On March 1, 1996, the Company entered into an
employment agreement with each of Andrew L. Simon, Linda G.
Straley and Stephen H. Ivens, pursuant to which the Company
agreed to employ Mr. Simon, Ms. Straley and Mr. Ivens, and each
of Mr. Simon, Ms. Straley and Mr. Ivens agreed to remain, as the
Company's President and Chief Executive Officer, Vice President,
Operations and Vice President, DRP Services, respectively, for a
term of three years, subject to automatic yearly extensions and
certain rights of termination as provided in each such agreement.
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 a vice president of TASA and President and Chief Executive
Officer of BETA, for a term of three years, subject to automatic
yearly extensions and certain rights of termination as provided
in such agreement.
In the employment agreements with each of Messrs.
Simon, Ivens and Beck and Ms. Straley, the Company has agreed to
provide for certain benefits and protections for such executive
officers in connection with a change of control of the Company.
Such agreements provide that upon the occurrence of a change of
control (as defined in each agreement), such executive's
employment agreement would continue until the earlier of three
years from the date of such change of control or the date all of
the Company's obligations under the employment agreement are
satisfied. In addition, in the event of a change of control,
each executive officer would be awarded for each fiscal year
during the employment term, an annual bonus in cash at least
equal to the average annual bonus payable to such executive in
respect of two of the last three fiscal years immediately
preceding the date of the change of control in which bonuses paid
were higher. In addition, Mr. Beck's employment agreement
provides that, in the event of a change of control, he would be
entitled to receive a bonus equal to the average annual bonus
payable to Mr. Beck from the Company in respect of two of the
last three fiscal years immediately preceding the date of any
change of control in which the bonuses paid were higher.
As of May 1, 1997, MLP entered into an employment
agreement with Walter B. Barbe, pursuant to which MLP agreed to
employ Dr. Barbe, and Dr. Barbe agreed to remain, as MLP's
President and Publisher for a term of one year, subject to
automatic yearly extensions and certain rights of termination as
provided in each such agreement. Pursuant to its terms, Dr.
Barbe's employment contract was automatically extended through
May 1, 1999.
In November 1998, the Company, through MESI, acquired
substantially all of the assets of Mildred Elley. MESI entered
into an employment agreement with Faith Takes, pursuant to which,
Ms. Takes agreed to remain as the President and Chief Executive
Officer of MESI and to become the Executive Vice President of
TESC, a wholly-owned subsidiary of the Company and the parent
company of MESI. Ms. Takes' employment agreement has a term of
three years, subject to automatic yearly extensions and certain
rights of termination as provided in such agreement.
Each employment agreement contains a non-competition
clause for two years following termination of the executive's
employment.
Generally, each employee of the Company has agreed to
the assignment to the Company of the employee's rights to any
inventions relating to the Company's business or interest which
were conceived both prior to and during the period of employment
and, except under certain specified conditions, the Company's
employees are prohibited from competing for one year with the
Company in areas in which he or she was employed.
STOCK INCENTIVE PLAN
The Board of Directors of the Company adopted the 1991
Stock Option Incentive Plan (the "Option Plan") on August 25,
1991 in order to attract and retain qualified personnel, which
Option Plan was approved by the stockholders on August 25, 1991.
The Board of Directors adopted the Amended and Restated 1991
Stock Option Incentive Plan (the "Amended Option Plan") in
February 1996, which Amended Option Plan amended and restated the
Option Plan and was approved by the stockholders of the Company
on March 29, 1996. Under the Amended Option Plan, options to
purchase up to 2,500,000 shares of Common Stock may be granted to
employees, officers, directors and consultants of the Company.
The Amended Option Plan is administered by the Compensation
Committee of the Board of Directors (the "Committee"). Subject to
the terms of the Amended Option Plan, the Committee is authorized
to select optionees and determine the number of shares covered by
each option and certain of its other terms. The exercise price
of stock options granted under the Amended Option Plan may not be
less than the fair market value of the Company's Common Stock on
the date of the grant. In general, options become exercisable
after the first anniversary of the date of grant. The period
within which any stock option may be exercised cannot exceed ten
years from the date of grant. Options held by a terminated
employee expire three months after termination except in the
event of death, disability or termination for cause. No one
participant may receive, in any one fiscal year, awards under the
Amended Option Plan which would entitle the Participant to
receive more than 200,000 shares.
In Fiscal 1996, the Company granted a total of 233,000
options under the Amended Option Plan; in Fiscal 1997, the
Company granted a total of 1,018,250 options under the Amended
Option Plan, of which 715,750 options were granted in connection
with the rejuvenation of options previously granted; and in
Fiscal 1998, the Company granted a total of 363,500 options under
the Amended Option Plan. In Fiscal 1996, 637,678 options under
the Amended Option Plan were canceled or forfeited; in Fiscal
1997, 715,750 options under the Amended Option Plan were
canceled; and in Fiscal 1998, 116,900 options under the Amended
Option Plan were canceled. As of December 31, 1998, there were
2,220,550 options in the aggregate outstanding under the Amended
Option Plan.
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Individual Grants
- ----------------------------------------------------------------------------------------------------------------
Number of Securities Percent of Total Exercise or
Underlying Options/SARs(1) Options/SARs Granted to Base Price
Name Granted (#) Employees in Fiscal Year(3) ($/Sh) Expiration Date
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Andrew L. Simon, President, 78,500(2) 16.4% $1.063 March 26, 2008
Chief Executive Officer and
Chief Financial Officer
- ----------------------------------------------------------------------------------------------------------------
Stephen H. Ivens, Vice 25,000(2) 5.2% $1.063 March 26, 2008
President, DRP Services
- ----------------------------------------------------------------------------------------------------------------
Michael D. Beck, Vice 55,000(2) 11.5% $1.063 March 26, 2008
President, TASA;
President and Chief
Executive Officer, BETA
- ----------------------------------------------------------------------------------------------------------------
<FN>
(1) To date, the Company has issued no SARs.
(2) These options become exercisable on March 28, 1999.
(3) Includes all options granted to employees and directors
under the Amended Option Plan, the Directors Stock Option Plan
and the Consultants Stock Incentive Plan in Fiscal 1998.
</FN>
</TABLE>
<TABLE>
<CAPTION>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
Number of Value of
Securities Underlying Unexercised
Unexercised In-the-Money
Options/SARs(1) Options/SARs(1)
at FY-End (#) at FY-End ($)
---------------------------------------
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise (#) Realized ($) Unexercisable Unexercisable
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Andrew L. Simon, President, Chief 0 0 321,500/78,500 0/0(2)
Executive Officer and
Chief Financial Officer
- -----------------------------------------------------------------------------------------------------------
Stephen H. Ivens, Vice 0 0 155,000/25,000 0/0(2)
President, DRP Services
- -----------------------------------------------------------------------------------------------------------
Michael D. Beck, Vice President, 0 0 125,000/55,000 23,500/0(2)
TASA; President and Chief
Executive Officer, BETA
- -----------------------------------------------------------------------------------------------------------
<FN>
(1) To date, the Company has issued no SARs.
(2) Based on the closing price of the Company's Common Stock on
NASDAQ on October 30, 1998, or $0.719.
</FN>
</TABLE>
DIRECTORS COMPENSATION
The Board of Directors of the Company adopted the
Directors Plan in February 1996 in order to aid the Company in
attracting, retaining and motivating independent directors, which
Directors Plan was approved by the stockholders of the Company on
March 29, 1996. Under the Directors Plan, non-qualified stock
options to purchase up to 100,000 shares of Common Stock may be
granted to non-employee directors of the Company, which options
are granted automatically at the times and in the manner stated
in the Directors Plan.
Subject to the terms of the Directors Plan, each non-
employee director receives 5,000 options on the day he (she)
first is elected to the Board of Directors, and 2,500 options on
the date of each annual meeting of the stockholders of the
Company, provided he (she) is re-elected to the Board of
Directors. The exercise price of stock options granted under the
Directors Plan is the fair market value of the Company's Common
Stock on the date of grant. The options become exercisable after
the first anniversary of the date of grant and the term of the
option cannot exceed ten years. On March 29, 1996, the Company
granted 10,000 options; on March 28, 1997, the Company granted
5,000 options; on March 27, 1998, the Company granted 5,000
options; and on October 28, 1998, the Company granted 5,000
options.
Directors receive no compensation, other than the
options pursuant to the Directors Plan, for services in such
capacity.
OTHER PLANS
CONSULTANTS STOCK INCENTIVE PLAN. In March 1997, the
Board of Directors of the Company adopted the Consultants Plan,
pursuant to which options to purchase up to 200,000 shares of
Common Stock may be granted to consultants to the Company. The
Consultants Plan is administered by the Board of Directors of the
Company. Subject to the terms of the Consultants Plan, the Board
is authorized to select optionees and determine the number of
shares covered by each option and certain of its other terms. In
general, the exercise price of stock options granted under the
Consultants Plan is the fair market value of the Company's Common
Stock on the date of the grant, however, the Board has the
discretion to use another method of valuation if it determines
that such other valuation is warranted. In general, options
become exercisable six months from the date of grant, although
the Board has discretion to set either longer or shorter vesting
periods. The period within which any stock option may be
exercised cannot exceed ten years from the date of grant. If a
consultant's association with the Company is terminated prior to
the end of its agreed term, all unexercised, deferred and unpaid
awards shall be canceled immediately, except in the event of the
Consultant's death or disability. In Fiscal 1998, 110,000
options were granted under the Consultants Plan.
PROFIT SHARING PLAN. The Company has a qualified 401(k)
Profit Sharing Plan. The 401(k) Plan allows employees to
contribute up to 15 percent (15%) of income through Company
contributions and a salary reduction mechanism. Company
contributions to the 401(k) Plan are optional and accrue at the
discretion of the Board of Directors. For Fiscal 1998, Fiscal
1997, and Fiscal 1996, the Company made a contribution to profit
sharing equal to five percent (5%) of each eligible employee's
compensation, thereby limiting each eligible employee to
contribute up to ten percent (10%) of compensation.
Net assets for the 401(k) Plan, as estimated by the
Massachusetts Mutual Life Insurance Company which maintains such
plan's records, were $1,656,023 at October 31, 1998.
MONEY PURCHASE PENSION PLAN. In October 1991, the
Company adopted a Money Purchase Pension Plan, which has been
qualified by the Internal Revenue Service. Under this Plan, the
Company makes an annual contribution to the Plan equal to ten
percent (10%) of each eligible employee's compensation.
Net assets for the Money Purchase Pension Plan, as
estimated by the Massachusetts Mutual Life Insurance Company
which maintains such plan's records, were $741,928 at October 31,
1998.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934
requires the Company's directors, executive officers and persons
who own beneficially more than ten percent of the Company's
outstanding common stock to file with the SEC initial reports of
beneficial ownership and reports of changes in beneficial
ownership of common stock and other securities of the Company on
Forms 3, 4 and 5, and to furnish the Company with copies of all
such forms they file. Based on a review of copies of such
reports received by the Company, all of the Company's directors
and officers timely filed all reports required with respect to
Fiscal 1998.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information
regarding the beneficial ownership of the Company's Common Stock,
as of December 31, 1998, by (i) each person who is known by the
Company to own beneficially more than 5% of the Company's
outstanding Common Stock; (ii) each of the Company's officers and
directors; and (iii) all officers and directors as a group.
As of December 31, 1998, there were 8,567,222 shares of
Common Stock outstanding. Each share of Common Stock is entitled
to one vote per share.
All of the shares of Common Stock owned by Messrs.
Simon and Ivens and Ms. Straley, other than shares deemed to be
owned beneficially by such officers because they may be acquired
through the exercise of currently exercisable stock options, are
held in a voting trust (the "Voting Trust"), pursuant to a Voting
Trust Agreement, dated as of August 19, 1992, as amended. Until
his death, Bertram L. Koslin had been sole Voting Trustee.
Julius Ostreicher, the attorney for the Estate of Bertram L.
Koslin, Andrew L. Simon, the Chairman of the Board of Directors
and the President of the Company, and Eileen West, a former
director of the Company, have been appointed as successor Voting
Trustees. For purposes of the table set forth below, each of
such officers are listed as beneficially owning the shares of
Common Stock listed opposite his or her name, even though the
Voting Trust has the sole rights to vote such shares. Because the
Voting Trust has the sole and exclusive power to exercise all
voting rights with respect to the shares of Common Stock
deposited in the Voting Trust, the Voting Trust has sole voting
and dispositive power with respect to 1,225,169 shares of Common
Stock. Accordingly, the Voting Trust has the power to exercise
1,225,169 votes, or 14.3% of all eligible votes.
<PAGE>
Shares of Percent of
Name and Address of Common Stock Common Stock
Beneficial Owners and Beneficially Beneficially
Directors and Officers Owned Owned
- -------------------------------------------------------------------------------
5% Beneficial Owners:
- --------------------
Cahill, Warnock Strategic Partners Fund, L.P. 2,092,776(1,2) 19.6%
c/o Cahill, Warnock & Co., LLC
1 South Street, Suite 2150
Baltimore, MD 21202
- -------------------------------------------------------------------------------
Voting Trust, u/a dated August 19, 1992, 1,225,169 14.3%
as amended, Julius Ostreicher,
Andrew L. Simon and Eileen West,
Voting Trustees
c/o Touchstone Applied Science Associates, Inc.,
4 Hardscrabble Heights, Brewster, NY 10509
- -------------------------------------------------------------------------------
Estate of Bertram L. Koslin 440,670 5.1%
c/o Ostreicher & Ennis
225 Mamaroneck Avenue
White Plains, NY 10605
- -------------------------------------------------------------------------------
Eileen West 21,500(3) 0.3%
56 Harrison Street
New Rochelle, NY 10801
- -------------------------------------------------------------------------------
Officers and Directors:
- -----------------------
Walter B. Barbe 135,000(4) 1.6%
910 Church Street
Honesdale, PA 18431
- -------------------------------------------------------------------------------
Michael D. Beck 284,500(5) 3.2%
4 Hardscrabble Heights
Brewster, NY 10509
- -------------------------------------------------------------------------------
Steven R. Berger 7,500(6) --(7)
620 Fifth Avenue
New York, NY 100020
- -------------------------------------------------------------------------------
Joseph A. Fernandez 3,602(8) --(7)
4392 Live Oak Boulevard
Palm Harbor, FL 34685
- -------------------------------------------------------------------------------
Stephen H. Ivens 304,976(9) 3.5%
4 Hardscrabble Heights
Brewster, NY 10509
- -------------------------------------------------------------------------------
Andrew L. Simon 649,952(10) 7.3%
4 Hardscrabble Heights
Brewster, NY 10509
- -------------------------------------------------------------------------------
Linda G. Straley 337,977(11) 3.9%
4 Hardscrabble Heights
Brewster, NY 10509
- -------------------------------------------------------------------------------
David L. Warnock 2,208,734(12) 20.5%
1 South Street, Suite 2150
Baltimore, Maryland 21202
- -------------------------------------------------------------------------------
Officers and Directors as a Group (8 persons) 5,359,796(13) 45.9%
- ---------------------------------------------
- -------------------------------------------------------------------------------
[FN]
1 Cahill, Warnock Strategic Partners Fund, L.P. (the
"Fund") has the right to acquire such shares pursuant to a
currently exercisable warrant (the "Fund Warrant").
Excludes (i) 523,194 shares with respect to which the Fund's
right to purchase, granted pursuant to the Fund Warrant, is
not currently exercisable and (ii) 144,948 shares which are
the subject of a separate warrant (the "Strategic Warrant";
together with the Fund Warrant, the "Warrants") granted to
Strategic Associates, L.P. ("Strategic Associates";
together, with the Fund, the "Cahill, Warnock Entities"), an
affiliate of the Fund, but as to which the Fund disclaims
beneficial ownership. Pursuant to the Investor Rights
Agreement (the "Investor Rights Agreement") between the
Company and the Cahill, Warnock Entities, the Company has
agreed that so long as the Cahill, Warnock Entities own at
least 50% of the Warrants (or if the Warrants have been
exercised, the shares issuable pursuant thereto), the
Cahill, Warnock Entities have the right to nominate two
directors to the Board of Directors of the Company. David
L. Warnock and Joseph A. Fernandez are the two current
directors who were nominated by the Cahill, Warnock
Entities. Pursuant to the Investor Rights Agreement, the
directors and executive officers of the Company have agreed,
at each meeting of stockholders for the purpose of electing
directors, to cast their eligible votes in favor of the
nominees of the Cahill, Warnock Entities. In addition, for
a period of 29 months from the Purchase Closing Date, at each
meeting of stockholders for the purpose of electing directors,
the Cahill, Warnock Entities have agreed to cast all of their
eligible votes in favor of the directors nominated by the
Company.
2 Edward L. Cahill is a general partner of Cahill,
Warnock Strategic Partners, L.P. ("Cahill, Warnock
Partners"), the Fund's sole general partner. David L.
Warnock is also a general partner of Cahill, Warnock
Partners and is a director of the Company (see footnote 12
to this table). Messrs. Cahill and Warnock are also the
sole members of Cahill, Warnock & Company, LLC, which is the
sole general partner of Strategic Associates, which holds
the Strategic Warrant.
3 Includes 21,500 shares which Ms. West has the right
to acquire upon the exercise of currently exercisable stock
options; excludes the shares of Common Stock held in the
Voting Trust for the benefit of all members thereof, which
Voting Trust is listed separately as a 5% stockholder in
this Table. Ms. West is one of three Voting Trustees of the
Voting Trust.
4 Includes 125,000 shares which Dr. Barbe has the
right to acquire upon the exercise of currently exercisable
stock options; excludes 117,000 shares which are the subject
of options granted to Dr. Barbe which are not currently
exercisable.
5 Includes (i) 47,000 shares which are owned jointly
with Mr. Beck's wife, (ii) 37,500 shares owned by Mr. Beck's
minor daughter, and (iii) 125,000 shares which Mr. Beck has
the right to acquire upon the exercise of currently
exercisable stock options; excludes (i) 165,000 shares which
are the subject of options granted to Mr. Beck which are not
currently exercisable and (ii) 37,500 shares owned by Mr.
Beck's wife, as to which Mr. Beck disclaims beneficial
ownership.
6 Includes 7,500 shares which Mr. Berger has the right
to acquire upon the exercise of currently exercisable stock
options; excludes 2,500 shares which are the subject of
options granted to Mr. Berger which are not currently
exercisable.
7 Less than 0.1%.
8 Excludes 5,000 shares which are the subject of
options granted to Dr. Fernandez which are not currently
exercisable.
9 Includes 155,000 shares which Dr. Ivens has the
right to acquire upon the exercise of currently exercisable
stock options; excludes 137,000 shares which are the subject
of options granted to Dr. Ivens which are not currently
exercisable.
10 Includes 321,500 shares which Mr. Simon has the
right to acquire upon the exercise of currently exercisable
stock options, which options are not included in the Voting
Trust; excludes (i) 258,500 shares which are the subject of
options granted to Mr. Simon which are not currently
exercisable, (ii) 1,500 shares of Common Stock owned by the
retirement account of Mr. Simon's wife, as to which Mr.
Simon disclaims beneficial ownership, and (iii) the shares
of Common Stock held in the Voting Trust for the benefit of
all of the members thereof, which Voting Trust is listed
separately as a 5% stockholder in this table. Mr. Simon is
one of three Voting Trustees of the Voting Trust.
11 Includes 155,200 shares which Ms. Straley has the
right to acquire upon the exercise of currently exercisable
stock options; excludes 82,600 shares which are the subject
of options granted to Ms. Straley which are not currently
exercisable.
12 Includes (i) 2,092,776 shares which the Fund has
the right to acquire pursuant to the Fund Warrant and (ii)
115,958 shares which Strategic Associates, has the right to
acquire pursuant to the Strategic Warrant (see footnotes 1
and 2 to this table). Excludes (i) 5,000 shares which are
the subject of options granted to Mr. Warnock which are not
currently exercisable, (ii) 523,194 shares with respect to
which the Fund's right to purchase, granted pursuant to the
Fund Warrant, is not currently exercisable and (iii) 28,990
shares with respect to which Strategic Associates' right to
purchase, granted pursuant to the Strategic Warrant, is not
currently exercisable.
13 Includes shares held in the Voting Trust for the
benefit of the Estate of Bertram L. Koslin, Eileen West and
certain employees of the Company. Andrew L. Simon, Chairman
of the Board of Directors and President of the Company, is
one of three Voting Trustees of the Voting Trust. Includes
an aggregate of 3,097,934 currently exercisable options and
warrants which are held or deemed held by officers and
directors of the Company, but are not included in the Voting
Trust. Excludes an aggregate of 1,324,784 options and
warrants which are held or deemed held by officers and
directors of the Company which are not currently exercisable
and are not included in the Voting Trust.
</FN>
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company is authorized to issue 5,000,000 shares,
par value $.0001 per share, of preferred stock. The stock may be
issued by the Board of Directors of the Company in one or more
series and with such preferences, conversion or other rights,
voting powers and other provisions as may be fixed by the Board
of Directors in the resolution authorizing its issuance without
any further action of the stockholders.
In November 1998, the Company, through MESI, acquired
substantially all of the assets of Mildred Elley. The Company
financed the acquisition through the issuance of the Debentures,
with the Warrants attached, pursuant to the Securities Purchase
Agreement with the Cahill, Warnock Entities. Pursuant to the
Securities Purchase Agreement, the Company: (i) issued and
sold to the Cahill, Warnock Entities the Debentures in the
aggregate principal amount of $4,000,000, (ii) issued and
sold to the Cahill, Warnock Entities, as additional consideration
for purchasing the Debentures, the Warrants to acquire 2,760,918
shares of the Company's Common Stock, which, on the Purchase
Closing Date, constituted 20% of the Company's issued and
outstanding common stock on a fully diluted basis, after giving
effect to the transactions contemplated in the Securities Purchase
Agreement and (iii) authorized the issuance and sale in the future
to the Cahill, Warnock Entities of additional shares of the
Company's Common Stock upon the Company's exercise of a put option,
the terms and conditions of which are set forth in the Securities
Purchase Agreement. Of the Warrants issued, 80% are immediately
exercisable, and 20% will become exercisable 18 months after the
issuance thereof if the Company shall not have repaid the Debentures
in full by such date. Pursuant to the Registration Rights Agreement
between the Company and the Cahill, Warnock Entities, the Company
has agreed to register the shares of Common Stock underlying the
Warrants with the SEC.
Pursuant to the Investor Rights Agreement between the
Company and the Cahill, Warnock Entities, the Company has agreed
that so long as the Cahill, Warnock Entities own at least 50% of
the Warrants (or if the Warrants have been exercised, the shares
issuable pursuant thereto), the Cahill, Warnock Entities shall
have the right to nominate two directors to the Board of
Directors of the Company. David L. Warnock and Joseph A.
Fernandez are the current directors who were nominated by the
Cahill, Warnock Entities. Pursuant to the Investor Rights
Agreement, the directors and executive officers have agreed, at
each meeting of stockholders for the purpose of electing
directors, to cast their eligible votes in favor of the nominees
of the Cahill, Warnock Entities. In addition, for a period of 29
months from the Purchase Closing Date, at each meeting of stockholders
for the purpose of electing directors, the Cahill, Warnock Entities
have agreed to cast all of their eligible votes in favor of the
directors nominated by the Company.
As of January 2, 1997, the Company purchased all of the
outstanding capital stock of 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 (the "Notes"), bearing interest at the
rate of 8.25% and maturing on January 2, 1999, and (iii) 150,000
shares of the Company's Common Stock. The Notes were paid in
December 1998. Michael D. Beck, Vice President and Director of
the Company and President and Chief Executive Officer of BETA,
Connie Beck, Mr. Beck's wife, and Amanda Beck, Mr. Beck's minor
daughter, were the shareholders of BETA at the time of its acquisition.
Pursuant to the Stock Purchase Agreement, Mr. Beck has the option to
repurchase all of the outstanding capital stock of BETA from the
Company for a period of six years from the Agreement Date, provided
that Mr. Beck may not exercise the option prior to the third anniversary
of the Agreement Date unless his employment with the Company and
BETA is not renewed at the expiration of the initial three-year
term or has been terminated for "cause" or "disability" or he
leaves after a change of control for "good reason" (as
contemplated by his employment agreement). The option exercise
price is subject to a formula and varies based upon the reason
for, and timing of, exercise.
In November 1998, the Company, through MESI, purchased
substantially all of the assets of Mildred Elley. Simultaneous
with the closing of such purchase, MESI entered into an
employment agreement with Faith Takes, pursuant to which Ms.
Takes agreed to remain as the President and Chief Executive
Officer of MESI and to become the Executive Vice President of
TESC, a wholly-owned subsidiary of the Company and the parent
company of MESI (see "Management's Discussion and Analysis or
Plan of Operation--Liquidity and Working Capital" for the terms
of this purchase).
One of the Company's directors, Steven R. Berger, is a
partner in Salans Hertzfeld Heilbronn Christy & Viener (formerly
Christy & Viener), which acts as special securities counsel to
the Company. The Company paid legal fees of $143,375, $124,864,
and $112,458 to Christy & Viener for Fiscal 1998, 1997 and 1996,
respectively.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following Exhibits are filed as part of this Report:
3.1 Certificate of Incorporation, dated August
22, 1991 filed with the Secretary of State of the State of
Delaware (incorporated herein by reference to the exhibit
contained in the Company's Registration Statement on Form SB-2
under the Securities Act of 1933, as amended, filed with the
Securities and Exchange Commission on July 7, 1993)
3.2 Certificate of Merger dated August 26, 1992,
filed with the Secretary of State of the State of Delaware
(incorporated herein by reference to the exhibit contained in
the Company's Registration Statement on Form SB-2 under the
Securities Act of 1933, as amended, filed with the Securities
and Exchange Commission on July 7, 1993)
3.3 Certificate of Designations for Series A
Preferred Stock of the Company (incorporated herein by
reference to the exhibit contained in the Company's
Registration Statement on Form SB-2 under the Securities Act
of 1933, as amended, filed with the Securities and Exchange
Commission on July 7, 1993)
3.4 Amended and Restated By-Laws (incorporated
by reference to the exhibit contained in the Company's
Registration Statement on Form S-3 (File No. 333-27659) under
the Securities Act of 1933, as amended, filed with the
Securities and Exchange Commission on May 22, 1997)
4.1 Specimen Certificate evidencing shares of
Common Stock (incorporated herein by reference to the exhibit
contained in the Company's Registration Statement on Form SB-2
under the Securities Act of 1933, as amended, filed with the
Securities and Exchange Commission on July 7, 1993)
4.2 Form of Warrant (incorporated by reference
to the exhibit contained in the Company's Registration
Statement on Form S-3 (File No. 333-27659) under the
Securities Act of 1933, as amended, filed with the Securities
and Exchange Commission on May 22, 1997)
4.3 Investor Rights Agreement, dated as of
September 4, 1998, by and among the Company, Cahill Warnock
Strategic Partners Fund, L.P., Strategic Associates, L.P., and
the Individual Shareholders Named Therein (incorporated by
reference to the exhibit contained in the Company's Current
Report on Form 8-K, which was filed with the Securities and
Exchange Commission on November 23, 1998 (the "November 1998
8-K"))
4.4 Registration Rights Agreement, dated as of September 4, 1998,
by and among the Company, Cahill, Warnock Strategic Partners
Fund, L.P., and Strategic Associates, L.P. (incorporated
by reference to the exhibit contained in the November 1998 8-K)
4.5 Form of 8% Subordinated Debenture (incorporated by reference
to the exhibit contained in the November 1998 8-K)
4.6 Form of Warrant (incorporated by reference to the exhibit
contained in the November 1998 8-K)
9.1 Voting Trust Agreement, dated August 19,
1992 (incorporated herein by reference to the exhibit
contained in Amendment No. 1 to the Company's Registration
Statement on Form SB-2 under the Securities Act of 1933, as
amended, filed with the Securities and Exchange Commission on
March 16, 1994)
9.2 Amendment of Voting Trust Agreement and
Appointment of Successor Trustee, dated March 30, 1995
(incorporated herein by reference to the exhibit contained in
Amendment No. 1 to the Company's Registration Statement on
Form SB-2 under the Securities Act of 1933, as amended, filed
with the Securities and Exchange Commission on March 16, 1994)
10.1 Lease Agreement between the Town of
Southeast Industrial Development Agency/Industrial Development
Reserve Bonds and the Company; Mortgage and Security
Agreement between the Company and the Town of Southeast
Industrial Development Agency to Barclays Bank of New York,
N.A., now The Bank of New York, as mortgagee; Note between the
Company and Barclays Bank of New York, N.A., now The Bank of
New York; Lease Guarantee Agreement from the Company as
guarantor and Barclays Bank of New York, N.A., now The Bank of
New York, as Trustee; Amendment to Lease between the Town of
Southeast Industrial Development Agency and the Company
(incorporated herein by reference to the exhibit contained in
the Company's Registration Statement on Form SB-2 under the
Securities Act of 1933, as amended, filed with the Securities
and Exchange Commission on July 7, 1993)
10.2 Extension and Modification Agreement, dated
as of October 31, 1996, between the Company and the Town of
Southeast Industrial Development Agency, and the Bank of New
York (incorporated herein by reference to the exhibit
contained in the Company's Annual Report on Form 10-KSB for
the fiscal year ended October 31, 1996)
10.3 Agreements between the Company and the
Commissioner of Education of the State of New York and Chief
Executive Officer of the Board of Regents of the University of
the State of New York (incorporated herein by reference to the
exhibit contained in the Company's Registration Statement on
Form SB-2 under the Securities Act of 1933, as amended, filed
with the Securities and Exchange Commission on July 7, 1993)
10.4 Agreement between the Company and the State
of Connecticut and a Purchase Order between the Company and
the Commonwealth of Virginia (incorporated herein by reference
to the exhibit contained in the Company's Registration
Statement on Form SB-2 under the Securities Act of 1933, as
amended, filed with the Securities and Exchange Commission on
July 7, 1993)
10.5 401(k) Plan (incorporated herein by
reference to the exhibit contained in the Company's
Registration Statement on Form SB-2 under the Securities Act
of 1933, as amended, filed with the Securities and Exchange
Commission on July 7, 1993)
10.6 Notice of Grant Award (incorporated herein
by reference to the exhibit contained in the Company's
Registration Statement on Form SB-2 under the Securities Act
of 1933, as amended, filed with the Securities and Exchange
Commission on July 7, 1993)
10.7 Patent Assignment by Bertram Koslin to the
Company (incorporated herein by reference to the exhibit
contained in the Company's Registration Statement on Form SB-2
(File No. 33-65766) under the Securities Act of 1933, as
amended, filed with the Securities and Exchange Commission on
July 7, 1993)
10.8 Amended and Restated 1991 Stock Option
Incentive Plan (incorporated herein by reference to the
exhibit contained in the Company's Quarterly Report on Form
10-QSB for the fiscal quarter ended April 30, 1996)
10.9 Directors Stock Option Plan (incorporated
herein by reference to the exhibit contained in the Company's
Quarterly Report on Form 10-QSB for the fiscal quarter ended
April 30, 1996)
10.10 Employment Agreement with Andrew L. Simon
(incorporated herein by reference to the exhibit contained in
the Company's Quarterly Report on Form 10-QSB for the fiscal
quarter ended April 30, 1996)
10.11 Employment Agreement with Linda G. Straley
(incorporated herein by reference to the exhibit contained in
the Company's Quarterly Report on Form 10-QSB for the fiscal
quarter ended April 30, 1996)
10.12 Employment Agreement with Stephen H. Ivens
(incorporated herein by reference to the exhibit contained in
the Company's Quarterly Report on Form 10-QSB for the fiscal
quarter ended April 30, 1996)
10.13 Stock Purchase Agreement, dated as of
January 2, 1997, between Beck Evaluation & Testing Associates,
Inc., Connie K. Beck, Michael D. Beck, Amanda P. Beck and the
Company, together with all schedules and exhibits thereto
(incorporated by reference to the exhibit contained in the
Company's Quarterly Report on Form 10-QSB for the fiscal
quarter ended January 31, 1997)
10.14 Employment Agreement, dated as of January
2, 1997, between the Company and Michael D. Beck (incorporated
by reference to the exhibit contained in the Company's
Quarterly Report on Form 10-QSB for the fiscal quarter ended
January 31, 1997)
10.15 Assignment, Assumption and Sale Agreement,
dated as of December 30, 1996, between Steck-Vaughn Company
and the Company (incorporated by reference to the exhibit
contained in the Company's Quarterly Report on Form 10-QSB for
the fiscal quarter ended January 31, 1997)
10.16 Agreement, dated as of March 6, 1997,
between Jericho State Capital Corp. of Florida and the Company
(incorporated by reference to the exhibit contained in the
Company's Quarterly Report on Form 10-QSB for the fiscal
quarter ended April 30, 1997)
10.17 Consultants Stock Incentive Plan
(incorporated by reference to the exhibit contained in the
Company's Quarterly Report on Form 10-QSB for the fiscal
quarter ended April 30, 1997)
10.18 Asset Purchase Agreement, dated as of May
30, 1997, by and between Programs for Education, Inc., Bernard
B. Shapiro, Modern Learning Press, Inc. and the Company
(incorporated by reference to the exhibit contained in the
Company's Current Report on Form 8-K, which was filed with the
Securities and Exchange Commission on June 16, 1997)
10.19 Secured Promissory Note, dated May 30,
1997, of Modern Learning Press, Inc. (incorporated by
reference to the exhibit contained in the Company's Current
Report on Form 8-K, which was filed with the Securities and
Exchange Commission on June 16, 1997)
10.20 Security Agreement, dated May 30, 1997,
by and between Programs for Education, Inc., Bernard B.
Shapiro and Modern Learning Press, Inc. (incorporated by
reference to the exhibit contained in the Company's Current
Report on Form 8-K, which was filed with the Securities and
Exchange Commission on June 16, 1997)
10.21 Stock Pledge Agreement with Escrow
Provisions, dated May 30, 1997, by and among the Company,
Programs for Education, Inc. and Pluese, Lihotz, Incollingo &
Leone (incorporated by reference to the exhibit contained in
the Company's Current Report on Form 8-K, which was filed with
the Securities and Exchange Commission on June 16, 1997)
10.22 Guaranty Agreement, dated May 30, 1997, by
the Company in favor of Programs for Education, Inc. and
Bernard B. Shapiro (incorporated by reference to the exhibit
contained in the Company's Current Report on Form 8-K, which
was filed with the Securities and Exchange Commission on June
16, 1997)
10.23 Royalty Agreement, dated May 30, 1997, by
and between Modern Learning Press, Inc. and Bernard B. Shapiro
(incorporated by reference to the exhibit contained in the
Company's Current Report on Form 8-K, which was filed with the
Securities and Exchange Commission on June 16, 1997)
10.24 Employment Agreement, dated as of May 1,
1997, between Modern Learning Press, Inc. and Walter B. Barbe
(incorporated by reference to the exhibit contained in the
Company's Annual Report on Form 10-KSB for the fiscal year
ended October 31, 1997)
10.25 Mortgage Modification and Extension
Agreement, dated as of August 28, 1997, between MSB Bank and
the Company (incorporated by reference to the exhibit
contained in the 1997 10-KSB)
10.26 Amended and Restated Mortgage Note, dated
August 28, 1997, of the Company in favor of MSB Bank
(incorporated by reference to the exhibit contained in the
1997 10-KSB)
10.27 Term Loan Agreement, dated August 28,
1997, between the Company and MSB Bank (incorporated by
reference to the exhibit contained in the 1997 10-KSB)
10.28 Note, dated August 28, 1997, of the
Company in favor of MSB Bank (incorporated by reference to the
exhibit contained in the 1997 10-KSB)
10.29 Security Agreement between the Company and
MSB Bank (incorporated by reference to the exhibit contained
in the 1997 10-KSB)
10.30 Environmental Guaranty, dated August 28,
1997, of the Company (incorporated by reference to the exhibit
contained in the 1997 10-KSB)
10.31 Agreement, dated as of August 19, 1997,
among Comprehensive Capital, Theodore P. Allocca, Theodore
Allocca, Steven Kevorkian, and the Company (incorporated by
reference to the exhibit contained in the 1997 10-KSB)
10.32 Agreement, dated as of August 19, 1997,
between Barry M. Goldstein and the Company (incorporated by
reference to the exhibit contained in the 1997 10-KSB)
10.33 Asset Purchase Agreement, dated as of
November 2, 1998, between Mildred Elley School, Inc. and MESI
Acquisition Corp. (incorporated by reference to the exhibit
contained in the Current Report on 8-K, which was filed with
the Securities and Exchange Commission on November 23, 1998
(the "November 1998 8-K").
10.34 Promissory Note of MESI Acquisition Corp. (incorporated by
reference to the exhibit contained in the November 1998 8-K)
10.35 Guaranty of TASA with respect to Promissory Note of MESI
Acquisition Corp. (incorporated by reference to the exhibit
contained in the November 1998 8-K)
10.36 Employment Agreement, dated as of November 2, 1998, by and
among Mildred Elley School, Inc. and Faith Takes (incorporated
by reference to the exhibit contained in the November 1998 8-K)
10.37 Securities Purchase Agreement, dated as of September 4, 1998,
by and among the Company, Cahill Warnock Strategic Partners
Fund, L.P., and Strategic Associates, L.P. (incorporated by
reference to the exhibit contained in the November 1998 8-K)
11 Computation of Earnings Per Share (filed herewith)
21 Subsidiaries of the Registrant (filed herewith)
23 Consent of Lazar, Levine & Felix LLP (filed herewith)
27 Financial Data Schedule (filed herewith; electronic filing only)
(b) Reports on Form 8-K
(i) Current Report on Form 8-K, filed November 23, 1998
(ii) Current Report on Form 8-K, filed December 22, 1998
<PAGE> F-1
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
PAGE
----
INDEPENDENT AUDITORS' REPORT F - 2
CONSOLIDATED BALANCE SHEETS F - 3
CONSOLIDATED STATEMENTS OF OPERATIONS F - 5
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY F - 6
CONSOLIDATED STATEMENTS OF CASH FLOWS F - 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F - 9
<PAGE> F-2
INDEPENDENT AUDITORS' REPORT
----------------------------
To The Board of Directors
Touchstone Applied Science Associates, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of
Touchstone Applied Science Associates, Inc. and Subsidiaries as of
October 31, 1998 and 1997, and the related consolidated statements of
operations, changes in stockholders' equity and cash flows for the
three years ended October 31, 1998. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Touchstone Applied Science Associates, Inc. and Subsidiaries as of
October 31, 1998 and 1997 and the results of its operations and its
cash flows for the three years ended October 31, 1998 in conformity
with generally accepted accounting principles.
Lazar, Levine & Felix LLP
Certified Public Accountants
New York, New York
November 30, 1998
F - 2
<PAGE> F-3
<TABLE>
<CAPTION>
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
AND SUBSIDIARIES
Page 1 of 2
CONSOLIDATED BALANCE SHEETS
October 31,
1 9 9 8 1 9 9 7
------- -------
<S> <C> <C>
ASSETS
------
Current assets:
Cash and temporary investments $ 4,980,230 $1,156,664
Marketable securities 186,376 377,560
Accounts receivable 1,287,264 803,021
Inventories 478,869 360,227
Prepaid expenses and other current assets 173,679 381,381
----------- ----------
Total current assets 7,106,418 3,078,853
Property, plant and equipment - net of
accumulated depreciation of $1,179,297
and $1,029,417, respectively
(Notes 3, 6 and 7) 1,753,811 1,739,947
Other assets:
Deferred acquisition costs (Note 16) 353,406 --
Test passage bank, net of accumulated amortization
of $1,474,302 and $1,175,235, respectively (Note 4) 2,675,624 2,743,853
Software development costs, net of accumulated
amortization of $88,702 and $30,517, respectively 350,790 340,930
Goodwill, net of accumulated amortization of $122,993
and $65,511, respectively 739,264 796,746
Noncompete agreements, net of accumulated amortization
of $101,095 and $29,762, respectively (Note 2) 398,905 470,238
Loan origination costs (Note 8) 231,307 --
Deferred income taxes (Note 11) 390,148 335,722
Other assets 74,967 86,596
----------- ----------
Total assets $14,074,640 $9,592,885
=========== ==========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
F - 3
<PAGE> F-4
<TABLE>
<CAPTION>
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
AND SUBSIDIARIES
Page 2 of 2
CONSOLIDATED BALANCE SHEETS
October 31,
1 9 9 8 1 9 9 7
------- -------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of long-term debt (Notes 6 and 7) $ 261,034 $ 314,217
Accounts payable and accrued expenses 1,020,568 520,148
----------- -----------
Total current liabilities 1,281,602 834,365
Long-term debt:
Subordinated debt (Note 8) 4,000,000 --
Long-term debt less current portion (Notes 6 and 7) 2,267,198 2,528,968
----------- -----------
Total liabilities 7,548,800 3,363,333
----------- -----------
Commitments and contingencies (Notes 2, 6, 7,
8, 12, 13, 15 and 16)
Stockholders' equity (Note 10):
Preferred stock, $.0001 par value, 5,000,000
authorized, 1,500 issued and outstanding -- --
Common stock, $.0001 par value, 20,000,000
authorized, 8,567,222 and 8,389,322 shares
issued and outstanding, respectively 857 839
Additional paid-in capital 5,051,836 4,365,875
Deferred interest (588,075) --
Stock subscription receivable (14,350) (14,350)
Unrealized holding gain 5,924 8,601
Unearned compensatory stock (37,187) (107,046)
Retained earnings 2,106,835 1,975,633
----------- -----------
Total stockholders' equity 6,525,840 6,229,552
----------- -----------
Total liabilities & stockholders' equity $14,074,640 $9,592,885
=========== ===========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
F - 4
<PAGE> F-5
<TABLE>
<CAPTION>
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended October 31,
1 9 9 8 1 9 9 7 1 9 9 6
------- ------- -------
<S> <C> <C> <C>
Contract income $ 673,707 $ 796,858 $ 875,608
Catalog sales 2,740,506 2,042,043 1,644,300
Consulting income 709,022 287,355 --
Catalog sales -- MLP 2,193,879 1,461,377 --
---------- ----------- -----------
Total net revenue (Note 13) 6,317,114 4,587,633 2,519,908
Cost of goods sold 1,935,104 1,578,749 711,564
---------- ----------- -----------
Gross profit 4,382,010 3,008,884 1,808,344
---------- ----------- -----------
Operating expenses:
Selling expenses 1,596,462 1,128,604 703,214
General and administrative expenses 2,619,034 1,601,764 936,462
Bad debt expense (Note 5) -- 405,000 --
Bad debt recovery (Note 5) (200,000) -- --
Software product development -- -- 60,238
Impairment of goodwill -- 2,002,674 --
---------- ----------- -----------
Total operating expenses 4,015,496 5,138,042 1,699,914
---------- ----------- -----------
Income (loss) from operations 366,514 (2,129,158) 108,430
Other income (expense):
Gain (loss) on sale of assets 2,689 (30,539) --
Interest expense (253,829) (145,748) (64,154)
Investment income 44,833 111,665 166,981
---------- ----------- -----------
Income (loss) before income taxes 160,207 (2,193,780) 211,257
Income taxes (benefit) (Note 11) 29,005 (829,969) 19,209
---------- ----------- -----------
Net income (loss) $ 131,202 $(1,363,811) $ 192,048
========== =========== ===========
Weighted average shares outstanding
Basic 8,508,202 8,213,089 7,524,539
Diluted 8,721,035 8,213,089 7,640,867
Earnings (loss) per share
Basic $ .02 $ (.17) $ .03
Diluted $ .02 $ (.17) $ .03
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
F - 5
<PAGE> F-6
<TABLE>
<CAPTION>
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Additional Stock Unrealized Unearned
Preferred Stock Common Stock Paid-in Deferred Subscriptions Holding Compensatory Retained
Shares Amount Shares Amount Capital Interest Receivable Loss Stock Earnings
------ ------ ------ ------ ------- -------- ---------- ----- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
November 1,
1995 1,500 $ -- 6,899,400 $690 $3,609,978 $ -- $ -- $(40,824) $ -- $3,147,396
Proceeds from
exercise of
options -- -- 865,922 87 310,459 -- (14,350) -- -- --
Proceeds from
exercise of
warrants -- -- 24,000 2 51,998 -- -- -- -- --
Financial
advisory
services -- -- -- -- 105,500 -- -- -- -- --
Net unrealized
gain in
marketable
securities -- -- -- -- -- -- -- 20,751 -- --
Net income -- -- -- -- -- -- -- -- -- 192,048
---- ---- --------- ---- --------- ---- ---- ------- ---- ---------
Balance at
October 31,
1996 1,500 -- 7,789,322 779 4,077,935 -- (14,350) (20,073) -- 3,339,444
Purchase of
subsidiary -
Beta -- -- 150,000 15 79,635 -- -- -- -- --
Proceeds from
exercise of
warrants -- -- 150,000 15 67,710 -- -- -- -- --
Stock issued
for services -- -- 300,000 30 140,595 -- -- -- (107,046) --
Net unrealized
gain in
marketable
securities -- -- -- -- -- -- -- 28,674 -- --
Net loss -- -- -- -- -- -- -- -- -- (1,363,811)
---- ---- --------- ---- --------- ---- ---- ------- ---- ---------
Balance at
October 31,
1997 1,500 -- 8,389,322 839 4,365,875 -- (14,350) 8,601 (107,046) 1,975,633
Proceeds from
exercise of
options -- -- 77,900 8 52,771 -- -- -- -- --
Proceeds from
exercise of
warrants -- -- 100,000 10 45,115 -- -- -- -- --
Deferred
interest on
debt
securities -- -- -- -- 588,075 (588,075) -- -- -- --
Net unrealized
gain on
marketable
securities -- -- -- -- -- -- -- (2,677) -- --
Financial
advisory
services -- -- -- -- -- -- -- -- 69,859 --
Net income -- -- -- -- -- -- -- -- -- 131,202
---- ---- --------- ---- --------- ---- ---- ------- ---- ---------
Balance at
October 31,
1998 1,500 $ -- 8,567,222 $857 $5,051,836 $(588,075) $(14,350) $ 5,924 $(37,187) $2,106,835
===== ===== ========= ==== ========== ========= ======== ======= ======== ==========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
F - 6
<PAGE> F-7
<TABLE>
<CAPTION>
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Page 1 of 2
Year Ended October 31,
1 9 9 8 1 9 9 7 1 9 9 6
------- ------- -------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 131,202 $(1,363,811) $ 192,048
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 650,869 560,389 389,767
Deferred income taxes (54,426) (856,943) (80,941)
Financial advisory services 69,859 33,580 105,500
Impairment of goodwill -- 2,002,674 --
Bad debt expense -- 405,000 --
Gain (loss) on sale of assets (2,689) 30,539 1,009
Changes in operating assets and liabilities:
Accounts receivable (484,243) (129,486) (215,883)
Inventories (118,642) 7,824 (89,785)
Prepaid expenses 207,704 11,360 90,915
Other assets (3,293) (16,031) --
Accounts payable and accrued expenses 500,418 (43,792) 35,758
-------- -------- --------
NET CASH FLOWS FROM OPERATING ACTIVITIES 896,759 641,303 428,388
-------- -------- --------
INVESTING ACTIVITIES
Test passage bank (230,838) (448,749) (361,225)
Software development costs (68,045) (229,092) (142,356)
Purchase of marketable debt securities -- (3,797) (111,164)
Proceeds from sale of marketable securities 535,000 1,193,148 170,000
Proceeds from sale of assets -- 15,300 --
Acquisition of subsidiaries -- (2,270,864) --
Deferred acquisition costs (353,406) -- --
Acquisition of test rights -- (29,900) --
Acquisition of fixed assets (163,744) (116,754) (73,448)
-------- -------- --------
NET CASH FLOWS FROM INVESTING ACTIVITIES (281,033) (1,890,708) (518,193)
-------- --------- --------
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
F - 7
<PAGE> F-8
<TABLE>
<CAPTION>
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Page 2 of 2
Year Ended October 31,
1 9 9 8 1 9 9 7 1 9 9 6
------- ------- -------
<S> <C> <C> <C>
FINANCING ACTIVITIES
Mortgage costs -- (44,633) --
Loan origination costs (231,307) -- --
Deferred offering costs (1,750) -- (151,343)
Proceeds from exercise of warrants 46,875 -- 52,000
Proceeds from exercise of options 52,779 -- 684,162
Net proceeds from loan payable (343,804) 531,446 --
Proceeds from long-term debt 4,000,000 1,800,000 --
Repayment of long-term debt (314,953) (930,563) (62,500)
--------- --------- -------
NET CASH FLOWS FROM FINANCING ACTIVITIES 3,207,840 1,356,250 522,319
--------- --------- -------
NET CHANGE IN CASH AND TEMPORARY INVESTMENTS 3,823,566 106,845 432,514
CASH AND TEMPORARY INVESTMENTS
AT BEGINNING OF PERIOD 1,156,664 1,049,819 617,305
--------- --------- -------
CASH AND TEMPORARY INVESTMENTS
AT END OF PERIOD $4,980,230 $1,156,664 $1,049,819
========== ========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 260,114 $ 144,262 $ 67,858
========== ========== ==========
Income taxes paid $ 60,502 $ 137,612 $ 30,690
========== ========== ==========
Stock issued for prepaid consulting costs $ -- $ 140,625 $ --
========== ========== ==========
Deferred interest on issuance of warrant $ 588,075 $ -- $ --
========== ========== ==========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
F - 8
<PAGE> F-9
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------------
Organization
- ------------
Touchstone Applied Science Associates, Inc. (the "Company"), was
originally incorporated in the State of New York in 1976. In August
1991, the Company changed its corporate domicile to Delaware by
merger into a Delaware corporation created exclusively for that
purpose. The Company develops, publishes and distributes a
proprietary line of reading tests specifically to meet clients'
measurement specifications to elementary and secondary schools,
colleges and universities throughout the United States. In January
1997, the Company purchased the outstanding capital stock of Beck
Evaluation & Testing Associates, Inc. ("BETA"), a company which
designs tests and evaluates assessment needs for schools, school
districts and test and textbook publishers throughout the United
States (Note B). In May 1997, the Company formed a wholly-owned
subsidiary, Modern Learning Press, Inc. ("MLP"), which purchased
certain assets of Programs for Education, Inc., a company which
designs, publishes and distributes "consumable" student workbooks
for grades K-4 and creates and publishes books and pamphlets for
elementary school teachers and parents throughout the United States
(Note 2). In July 1998, the Company formed a wholly-owned
subsidiary, TASA Educational Services Corporation ("TES"), which
will manage the Company's school business. In November 1998, TES
formed a wholly-owned subsidiary, MESI Acquisition Corp. ("MESI"),
which purchased the operating assets of Mildred Elley School, Inc.
(Note 16).
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, BETA, MLP and TES. All
material intercompany transactions have been eliminated in
consolidation.
Goodwill
- --------
Included in the purchase of the Company's subsidiaries was goodwill
totaling $374,067 for BETA and $2,490,864 for MLP. This goodwill is
being amortized over a period of six years for BETA and fifteen
years for MLP. In July 1997, the Company deemed goodwill purchased
in the MLP transaction totaling $2,002,674 to be impaired based upon
the provisions of SFAS No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of".
Accordingly, goodwill was reduced to fair value. The Company will
continue to evaluate goodwill for potential impairment. In 1998,
the Company changed its estimate of the useful life of the goodwill
from the BETA purchase to 15 years. The effect of the change in
estimate was to increase the net income for the year ended October
31, 1998 by $22,088.
F - 9
<PAGE> F-10
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
- ---------------------------------------------------------
Temporary Investments
- ---------------------
The Company considers all highly liquid debt instruments
purchased with a maturity of three months or less to be temporary
investments or cash. These investments consist primarily of money
market mutual funds which make monthly tax-free dividend payments.
Inventories
- -----------
Inventories, which based on the nature of the Company's operations
consist solely of finished goods, are stated at the lower of cost
(first-in, first-out method) or market.
Marketable Securities
- ---------------------
The Company utilizes Financial Accounting Standards Board (FASB)
Statement of Financial Accounting Standards (SFAS) Number 115,
"Accounting for Certain Investments in Debt, and Equity Securities"
to account for marketable securities. Under this standard, certain
investments in debt and equity securities will be reported at fair
value. The Company's marketable securities, which consist primarily
of investment grade bonds, are being reported as available for sale
securities. The market value of these securities at October 31, 1998
and 1997 is as follows:
October 31,
1 9 9 8 1 9 9 7
------- -------
Aggregate cost $ 368,094 $ 900,405
Gross unrealized gain 5,924 8,601
Gross unrealized loss -- --
Loans collateralized by securities (187,642) (531,446)
--------- ---------
$ 186,376 $ 377,560
========= =========
All of these securities mature within one through five years.
Cost of the securities used in the computation of realized
gains and losses is determined using the specific identification
method. During 1997, bonds with an aggregate face value of
$1,199,623 matured or were sold. Losses totaling $6,475 were
realized on these securities. During 1998, bonds with an aggregate
face value of $535,000 matured. Gains totaling $2,689 were realized
on these securities.
F - 10
<PAGE> F-11
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1- ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
- --------------------------------------------------------
Marketable Securities (Continued)
- ---------------------
In May 1997, the Company borrowed $989,716 by margining its investment
account. Borrowings on this account, which totaled $187,642 at October
31, 1998, incurred interest at the rate of 7-5/8% per annum and were
collateralized by the bonds held in the brokerage account.
Property, Plant and Equipment
- -----------------------------
Property, plant and equipment are stated at cost. The Company provides
for depreciation generally on an accelerated method (double-declining
balance) for personal property purchased after 1988 and on the
straight-line method for real property and personal property purchased
prior to 1989, by charges to income at rates based upon estimated
recovery periods as follows:
Building 31-1/2 years
Building improvements 15 to 31-1/2 years
Furniture and computer equipment 5 to 7 years
Automobiles 5 years
Income Taxes
- ------------
The Company has elected to file a consolidated federal income tax
return with its subsidiaries. The Company's deferred income taxes arise
principally from the differences in the recording of expenses relating
to the test passage bank (See Notes 4 and 11), and differences relating
to the reporting of goodwill by one of the Company's subsidiaries.
Income taxes are reported based upon Statement of Financial Accounting
Standards (SFAS) Number 109, "Accounting for Income Taxes".
Software Development
- --------------------
The Company accounts for costs associated with the development of
software products pursuant to SFAS Number 86, "Accounting for the Costs
of Computer Software to be Sold, Leased or Otherwise Marketed".
Pursuant to these rules for product development, the work performed
prior to the determination of technological feasibility, is treated as
research and development costs and is expensed as incurred. From the
point a project obtains technological feasibility until it is ready for
sale, the payroll and payroll related charges and any direct material
costs are capitalized. Capitalization of computer software costs is
discontinued when the product is available to be sold.
F - 11
<PAGE> F-12
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
- ---------------------------------------------------------
Deferred Acquisition Cost
- -------------------------
Deferred acquisition cost consists of expenses incurred related to
the purchase of Mildred Elley School, Inc. (Note 16) which will be
included in the purchase price and amortized over a thirty year
period.
Amortization
- ------------
Loan origination costs and mortgage costs (see Note 6) are amortized
using the straight-line method over the term of the indebtedness.
Other capitalized costs are amortized using the straight-line method
over a period of five (5) years for software development, seven (7)
years for non-compete agreements and eleven (11) years for the test
passage bank. Amortization expense totaled $507,387, $416,907 and
$245,907 for the years ended October 31, 1998, 1997 and 1996,
respectively.
Reserve for Bad Debts
- ---------------------
The Company, due to its customer base, has experienced virtually no
trade bad debts. As a result, no reserve has been provided for.
(See also Note 5)
Concentration of Credit Risk
- ----------------------------
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and
accounts receivable. The Company maintains substantially all its
cash balances in a limited number of financial institutions. The
balances are insured by the Federal Deposit Insurance Corporation up
to $100,000. At October 31, 1998 and 1997, the Company's uninsured
cash balances totaled $4,492,880 and $848,314, respectively. The
Company performs periodic reviews of the relative credit rating of
its banks to lower its risk. The Company believes that concentration
with regards to accounts receivable is limited due to its large
customer base.
F - 12
<PAGE> F-13
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
- ---------------------------------------------------------
Revenue Recognition
- -------------------
Catalog and contract sales are recognized when product is shipped
from the Company's warehouse. Consulting income is recognized as
consulting services are rendered.
There is a right of return on test booklets, answer sheets and
certain software products. Upon return within a specified period, a
credit is issued, with certain chargeoffs, or the item is replaced,
if a software product. In the past, the Company's returns have been
insignificant. As a result, no reserve has been provided for.
Estimates
- ---------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that effect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Fair Value
- ----------
The Company has a number of financial instruments, none of which is
held for trading purposes. The Company estimates that the fair
value of all financial instruments at October 31, 1998 and 1997,
does not differ materially from the aggregate carrying values of
these financial instruments recorded in the accompanying balance
sheets. The estimated fair value amounts have been determined by
the Company using available market information and appropriate
valuation methodologies. Considerable judgment is necessarily
required in interpreting market data to develop the estimates of
fair value, and, accordingly, the estimates are not necessarily
indicative of the amounts that the Company could realize in a
current market exchange.
Earnings (loss) per Share
- -------------------------
Earnings (loss) per share for the years ended October 31, 1998, 1997
and 1996 were computed by dividing net income by the weighted
average number of common and common equivalent shares outstanding
and also is adjusted for the assumed conversion of shares issuable
upon exercise of options and warrants. The Company had a net loss
for the year ended October 31, 1997 and, accordingly, common stock
equivalents are excluded as the effect would be anti-dilutive.
F - 13
<PAGE> F-14
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
- ---------------------------------------------------------
Earnings (loss) per Share (Continued)
- -------------------------
Effective November 1, 1997, the Company adopted Financial Accounting
Standards Board Statement of Financial Accounting Standards Number
128, "Earnings Per Share". Under this standard, the method for
calculation of earnings per share was changed and requires the
presentation of "basic" and "diluted" earnings per share. Prior
period earnings per share have been restated to conform with these
provisions.
Advertising and Marketing
- -------------------------
Advertising and marketing costs are expensed as incurred and
aggregated $644,471, $374,788 and $291,875 for the years ended
October 31, 1998, 1997 and 1996, respectively.
Recently Issued Accounting Standards
- ------------------------------------
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards Number 130 "Reporting Comprehensive
Income" which is effective for years beginning after December 15,
1997. This standard requires disclosures regarding comprehensive
income, the change in an entity's equity during a period from
transactions and events other than those resulting from investments
by and distributions to owners. The Company will adopt this standard
for the fiscal year ended October 31, 1999 and does not believe that
adoption would have reflected a material change in amounts reported
for the current year.
The Financial Accounting Standards Board has also issued Statement of
Financial Standards Number 131 "Disclosures about Segments of an
Enterprise, and Related Information" which is effective for years
beginning after December 15, 1997. This standard requires
disclosures regarding an entities operating segments, products and
services, major customers and geographic areas in which they operate.
The Company intends to adopt this standard for the year ended
October 31, 1999.
Year 2000 Computer Readiness
- ----------------------------
The Year 2000 ("Y2K") issue is the result of computer programs using
a two-digit format, as opposed to four digits, to indicate the year.
Such computer systems may be unable to interpret dates beyond the
year 1999, which could cause a system failure or other computer
errors, leading to disruptions in operations. In 1998, the Company
developed and implemented a program for Y2K information systems
compliance. Accordingly, the Company believes that its financial and
information systems are now Y2K compliant. As to third-party
relationships, the Company believes that most of these parties intend
to be Y2K compliant by January 1, 2000. The costs incurred during
fiscal year ended October 31, 1998 were not material and the Company
believes that any further costs to be incurred will also not be
material.
F - 14
<PAGE> F-15
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 -- BUSINESS ACQUISITIONS
- -------------------------------
Beck Evaluation and Testing Associates, Inc.
- --------------------------------------------
In January 1997, the Company acquired all the outstanding capital
stock of Beck Evaluation & Testing Associates, Inc., ("BETA"). The
purchase price consisted of $130,000 paid in cash, $150,000 payable in
promissory notes, bearing interest at the rate of 8 1/4% per annum and
maturing on January 2, 1999 and 150,000 shares of the Company's common
stock. Additionally, the former stockholder and officer of BETA has
the option to repurchase all of the outstanding capital stock of BETA
from the Company for a period of six years, but may not exercise the
option in the first three years unless certain conditions relating to
his termination of employment are met. The acquisition is being
accounted for using the purchase method of accounting and,
accordingly, the Company's financial statements include the operations
of BETA from the date of acquisition.
Modern Learning Press, Inc.
- ---------------------------
In May 1997, a newly-formed wholly-owned subsidiary of the Company,
Modern Learning Press, Inc. ("MLP") purchased certain assets of
Programs for Education, Inc. In addition to assuming certain
liabilities, MLP purchased the assets for $3,200,000. The purchase
price paid by MLP consisted of $2,200,000 in cash and a secured
promissory note for $1,000,000 bearing interest at a rate of one
percent (1%) above prime rate but in no event less than nine percent
(9%) per annum and payable in equal quarterly installments over a five
year period. The promissory note is secured by certain titles
transferred to MLP and is guaranteed by the Company. Among other
provisions, the purchase includes a noncompete agreement with the
previous owner prohibiting him or any party related to him from
competing with the Company for a period of seven (7) years. Included
in the purchase price were consulting fees to the former owner for a
period of one year. In addition, the Company was required to pay a
deferred bonus totaling approximately $254,000 to the previous owner
payable on or before September 30, 1997 and has agreed to pay this
former owner royalties on sales of certain of MLP's products, for a
term of seven (7) years following the closing of the acquisition in an
amount equal to a minimum of $80,000 annually, with a maximum of
$120,000 in the first year, with increases each year to a maximum of
$240,000 in the seventh year. The acquisition is being accounted for
using the purchase method of accounting.
F - 15
<PAGE> F-16
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 -- BUSINESS ACQUISITIONS (Continued)
- -------------------------------
Pro forma Information
- ---------------------
The following unaudited pro forma consolidated income statement data
---------
presents the consolidated results of operations of the Company had the
transactions involving BETA and MLP occurred at the beginning of the
years presented:
Year Ended October 31,
1 9 9 8 1 9 9 7 1 9 9 6
------- ------- -------
Net sales $6,317,114 $5,485,058 $4,380,337
Net income 131,202 (1,341,716) 175,311
Basic earnings per share .02 (.16) .02
Diluted earnings per share .02 (.16) .02
The above pro forma information does not purport to be indicative of
---------
what would have occurred had the acquisitions been made as of such date
or of the results which may occur in the future.
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT
- --------------------------------------
Property, plant and equipment are summarized as follows:
October 31,
1 9 9 8 1 9 9 7
------- -------
Land $ 161,367 $ 161,367
Building 1,807,591 1,807,591
Building improvements 306,844 260,638
Furniture and computer equipment 523,849 406,311
Automobiles 133,457 133,457
--------- ---------
2,933,108 2,769,364
Less: accumulated depreciation 1,179,297 1,029,417
--------- ---------
$1,753,811 $1,739,947
========== ==========
Depreciation expense for the years ended October 31, 1998, 1997 and 1996
was $149,880, $143,482 and $143,860, respectively.
F - 16
<PAGE> F-17
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - TEST PASSAGE BANK
- --------------------------
The creation and production of test passages to become part of the Test
Passage Bank is the production of an asset which is used in the
creation of all forms of the Company's tests. This asset is
principally comprised of payroll and payroll related costs incurred in
the writing and calibration of test passages. The process of writing
and calibrating a test passage takes approximately two years and all
costs associated with this process are capitalized. Beginning with
year three, these costs are amortized over the test passage's useful
life, which is estimated to be eleven years.
NOTE 5 - LOAN RECEIVABLE
- ------------------------
On September 25, 1992, the Company, through a subordinated, unsecured
demand loan agreement, loaned $300,000 to The Harriman Group, Inc.
("HGI"), a market maker in the Company's stock. The note bears interest
at a rate of eight percent (8%) per annum, payable annually, and was
originally due on November 1, 2002.
On November 30, 1992, the Company made an additional subordinated,
unsecured demand loan of $100,000 to HGI. This note also bears
interest at a rate of eight percent (8%) per annum, payable annually,
and was originally due on December 1, 2002.
On February 1, 1994, the Company consolidated the two outstanding
subordinated, unsecured demand loans outstanding to HGI. The new note
bears interest at a rate of ten percent (10%) per annum, payable
annually, and was originally due on February 1, 2002. Additionally, if
certain conditions were met, the Company had the right to accelerate
the due date.
On November 5, 1996, the Company notified HGI of its intention to
accelerate the outstanding obligations in accordance with the above
agreements. Pursuant to this notification, the entire principal
balance plus accrued interest to date of payment was due by May 5,
1997.
In May 1997, HGI defaulted on its loan to the Company. As a result of
an involuntary bankruptcy proceeding against HGI, the Company
determined the remaining principal and accrued interest totaling
$405,000 was uncollectible and, accordingly, was written off as a bad
debt.
F - 17
<PAGE> F-18
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - LOAN RECEIVABLE (Continued)
- ------------------------
In March 1998, the Company entered into an agreement with HGI, Inc.
(formerly The Harriman Group Inc.) ("HGI") and one of its officers.
The agreement provide for the settlement of the note receivable plus
accrued interest from HGI with a face amount of $400,000, for an
aggregate of $200,000 which was to be paid prior to October 15, 1998.
Payment pursuant to the agreement was guaranteed by an irrevocable
letter of credit. The Company has reported the amount collectible
pursuant to this agreement and related collateral as a bad debt
recovery. The balance, pursuant to the agreement was received in
August 1998.
NOTE 6 - MORTGAGE PAYABLE
- -------------------------
On August 1, 1986, the Town of Southeast Industrial Development Agency
issued revenue bonds to finance construction of a facility, which the
Company leases from the Agency. Minimum lease payments sufficient to
cover the Agency's debt service and other expenses must be made by the
Company over the fifteen-year term, which includes a final payment in
2001 of $350,000. The bond indenture incurs interest at ninety-two
percent (92%) of the Bank's prime rate (7.45% at October 31, 1996) and
contains covenants requiring the Company to maintain specified levels
of working capital and tangible net worth. The lease agreement
contains a one dollar ($1) purchase option at the end of the lease
term. The bond is secured by the lease and is guaranteed by the
Company and its principal stockholders.
On May 15, 1991, the Company secured an additional mortgage for
$400,000 from the Bank of New York, to finance the 17,000 square foot
addition to its facilities. The mortgage incurs interest at the rate
of three-fourths of one percent (.75%) over the Bank's prime rate
(9.00% at October 31, 1996). A $250,000 balloon payment was due in
1996. On June 1, 1996, the Company refinanced the mortgage for an
additional five years, maturing on June 1, 2001 at the same rate of
interest.
In August 1997, the Company remortgaged its facilities for $1,800,000.
Borrowings on the new mortgage incur interest at the rate of 8 1/8%
per annum. The mortgage is to be repaid through monthly payments with
the balance of the mortgage due in 2007. Proceeds from the mortgage
were used to retire the first and second mortgages held by the Bank of
New York and certain short-term debt associated with the acquisition of
MLP (Note 2). In addition, there is a provision for a $300,000 working
capital line of credit. Borrowings under the line of credit incur
interest at the rate of one-half of one percent (1/2%) over prime.
F - 18
<PAGE> F-19
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - LONG-TERM DEBT
- -----------------------
Long-term debt consists of the following:
<TABLE>
<CAPTION>
Interest Due October 31,
Description Rate Date 1 9 9 8 1 9 9 7
- ----------- ---- ---- ------- -------
<S> <C> <C> <C> <C>
Mortgage payable to bank in
monthly installments of $15,196
including interest (Note 6) 8 1/8% 2007 $1,758,115 $1,796,585
Note payable to former stockholders
of BETA in quarterly installments of
$20,532 including interest (Note 2) 8 1/4% 1999 20,117 96,600
Note payable to shareholder of Programs
for Education, Inc. in quarterly
installments of $50,000
plus interest (Note 2) 9% 2002 750,000 950,000
--------- ---------
2,528,232 2,843,185
Less: current maturities 261,034 314,217
--------- ---------
Non-current portion $2,267,198 $2,528,968
========== ==========
Long-term debt matures as follows:
Year Ending October 31:
1999 $ 261,034
2000 244,368
2001 248,110
2002 202,168
2003 56,568
Later years 1,515,984
----------
Principal payments remaining $2,528,232
==========
</TABLE>
F - 19
<PAGE> F-20
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - SUBORDINATED DEBENTURE AGREEMENT
- -----------------------------------------
In October 1998, the Company entered into an agreement whereby it
obtained a loan from Cahill Warnock Strategic Partners Fund L.P. and
Strategic Associates, L.P. for an aggregate of $4,000,000. This note
is subordinate to certain senior indebtedness consisting of a mortage
payable aggregating $1,758,115 at October 31, 1998 and margin loans,
collateralized by brokerage accounts aggregating $187,642 at October
31, 1998. Interest pursuant to the agreement is incurred at the
annual rate of eight percent (8%) and is payable quarterly. The
loan, which is due in October 2003, contains provisions for the
prepayment of the loan's principal. Among other provisions, the
Company has agreed to use the proceeds from the debenture to acquire
Mildred Elley School, Inc. (Note 16) and toward the purchase of
comparable educational institutions which are approved by the lender.
Additionally, the agreement contains provisions for the issuance of
warrants, allowing the lender to acquire 2,760,918 shares of the
Company's common stock at $.35 per share which are exercisable for a
period of 5 years from a designated initial date. At October 31,
1998, warrants for the purchase of 2,208,734 shares of the Company's
Common Stock are exercisable. The value of the warrants totaling
$588,075 has been reflected as a deferred interest charge which is
being amortized over the life of the agreement. The agreement calls
for certain restrictive covenants, which the Company is in compliance
with at October 31, 1998.
NOTE 9 - RETIREMENT PLANS
- -------------------------
The Company has a qualified 401(k) Profit Sharing Plan for all
employees who are eighteen years of age and have completed either six
months or one thousand hours of employment. The Plan allows total
contributions of up to fifteen percent (15%) of the eligible
employee's salary through Company contributions and a salary
reduction mechanism. Company contributions to the Plan are optional
and accrue at the discretion of the Board of Directors. For the
years ended October 31, 1998, 1997 and 1996, the Company made a
contribution to the profit sharing plan equal to five percent (5%) of
each eligible employee's compensation thereby limiting each eligible
employee to contribute up to ten percent (10%) of compensation.
Net assets for the Profit Sharing Plan, as estimated by the
Massachusetts Mutual Life Insurance Company which maintains the
plan's records, are $1,656,023 at October 31, 1998.
In October 1991, the Company adopted a Money Purchase Pension Plan
for all employees who are eighteen years of age and have completed
either six months or one thousand hours employment, which plan has
been qualified by the Internal Revenue Service. Under this Plan,
which was first effective for the year ended October 31, 1991, the
Company makes an annual contribution to the Plan equal to ten percent
(10%) of each eligible employee's compensation.
F - 20
<PAGE> F-21
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - RETIREMENT PLANS (Continued)
- -------------------------
Net assets for the Money Purchase Pension Plan, as estimated by the
Massachusetts Mutual Life Insurance Company which maintains the plan's
records, are $741,928 at October 31, 1998.
Pension and profit sharing costs were $233,181, $190,680, and $149,290
for the years ended October 31, 1998, 1997 and 1996, respectively.
NOTE 10 - STOCKHOLDERS' EQUITY
- ------------------------------
Preferred Stock
- ---------------
The Company is authorized to issue 5,000,000 shares of $.0001 par
value preferred stock. The stock may be issued by the Board of
Directors of the Company in one or more series and with such
preferences, conversion or other rights, voting powers and other
provisions as may be fixed by the Board of Directors in the resolution
authorizing their issuance without any further action of the
stockholders.
On November 16, 1992, the Company issued 1,500 shares of $.0001 par
value convertible preferred shares to a voting trust, controlled by
management, dated August 1992. The shares are entitled to 1,000 votes
per share (3,000 votes per share after giving effect to the 3 for 1
stock split on September 22, 1993). The holders of the shares are
also entitled to a non-cumulative dividend of $.01 per share. In
September 1994, the Company exchanged the 1,500 outstanding $.0001 par
value convertible preferred shares for 1,500 shares of $.0001 par
value preferred shares. The new preferred shares possess all the
rights of the original issue but for the conversion privilege.
Pursuant to the Debenture Agreement (Note 8), the 1,500 shares of the
Series A preferred stock were redeemed in November 1998.
The Company has designated 1,500 of its 5,000,000 authorized preferred
shares as $.0001 par value Series A preferred stock. The remaining
4,998,500 authorized preferred shares have not been designated.
F - 21
<PAGE> F-22
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - STOCKHOLDERS' EQUITY (Continued)
- ------------------------------
Stock Option Incentive Plan
- ---------------------------
The Company has adopted an Amended and Restated 1991 Stock Option
Incentive Plan (the "Plan") whereby options to purchase up to an
aggregate of 2,500,000 shares of common stock, may be granted to
officers, key employees, directors, and consultants of the Company.
Subject to the terms of the Plan, the Board of Directors is
authorized to select optionees and determine the number of shares
covered by each option, its exercise price and certain of its other
terms. No one participant may receive an award in excess of 200,000
shares in any one fiscal year. All options are 100% vested after 12
months. The exercise price of an option granted under the Plan may
not be less than the fair market value of the Company's common stock
on the date of the grant.
Stock option incentive plan activity is summarized as follows:
Option Price
Shares Per Share
------ ---------
Options outstanding November 30, 1996 1,052,750 $ .75 - $2.75
Granted 1,018,250 $ .53 - $ .72
Canceled (715,750) $1.42 - $2.75
Exercised -- --
---------
Options outstanding October 31, 1997 1,355,250 $ .53 - $2.75
Granted 363,500 $1.063
Canceled (116,900) $ .719 - $1.53125
Exercised (77,900) $ .625 - $ .72
---------
Options outstanding October 31, 1998 1,523,950
=========
Options exercisable October 31, 1998 1,160,450
=========
F - 22
<PAGE> F-23
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - STOCKHOLDERS' EQUITY (Continued)
- ------------------------------
Directors Stock Option Plan
- ---------------------------
In 1996, the Company adopted a Directors Stock Option Plan whereby
options may be granted to purchase up to an aggregate of 100,000 shares
of the Company's common stock to directors of the Company who are not
officers or employees of the Company or otherwise eligible to receive
awards under the Amended and Restated 1991 Stock Option Incentive Plan.
Pursuant to the plan, eligible directors would receive an option to
purchase 5,000 shares of the Company's common stock on the date the
director first becomes eligible. The eligible director would
subsequently receive an option to purchase 2,500 shares of the
Company's common stock on the date of each succeeding annual meeting of
the stockholders, unless the director's term ends on that date. Each
option granted is exercisable at the fair market value of the Company's
common stock on the date granted, and may be exercised for a nine-year
period commencing one year from the date of the grant.
Directors stock option plan activity is summarized as follows:
Option Price
Shares Per Share
------ ---------
Options outstanding - November 1, 1996 10,000 $2.1875
Granted 5,000 $ .719
Canceled --
Exercised --
-------
Options outstanding - October 31, 1997 15,000 $ .719 - $2.1875
Granted 10,000 $ .719 - $1.063
Canceled --
Exercised --
-------
Options outstanding - October 31, 1998 25,000 $ .719 - $2.1875
=======
Options exercisable - October 31, 1998 15,000
=======
F - 23
<PAGE> F-24
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - STOCKHOLDERS' EQUITY (Continued)
- ------------------------------
Consultants Stock Incentive Plan
- --------------------------------
The Company has adopted a Consultants Stock Incentive Plan whereby
options to purchase up to 200,000 shares of the Company's common
stock may be granted to consultants or advisors of the Company.
Subject to the terms of the Plan, a committee of the Board of
Directors is authorized to select participants and determine the
number of shares covered by each option, its exercise price and other
terms. The exercise price, however, may not be less than the fair
market value of the Company's common stock on the date of the grant.
In March 1997, the Company entered into a consulting agreement with
a director of the Company. In exchange for certain consulting
services, the Company granted options to this director, under the
Plan to purchase 30,000 shares of the Company's common stock. The
options are exercisable at $.44 per share. In August 1998, the
Company granted additional options to the director to purchase
100,000 shares of the Company's common stock at an exercise price of
$.82 per share.
In July 1997, the Company entered into a consulting agreement and in
exchange for certain consulting services, the Company granted
options, under the plan to purchase 10,000 shares of the Company's
common stock. The options are exercisable at $.438 per share.
In November 1997 and February 1998, the Company granted 5,000 options
to a consultant pursuant to its Consultants Stock Incentive Plan.
The options are exercisable at $.813 and $.781 per share.
Stock Based Compensation
- ------------------------
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-
Based Compensation". The Company currently accounts for its stock-
based compensation plans using the accounting prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees". As the Company is not required to adopt the
fair value based recognition provisions prescribed under SFAS No.
123, it has elected only to comply with the disclosure requirements
set forth in the statement which includes disclosing pro forma net
---------
income and earnings per share as if the fair value based method of
accounting had been applied. The pro forma net income (loss) and
---------
earnings (loss) per share for the years ended October 31, 1998, 1997
and 1996 would have been $(136,889) and $(.02), $(1,590,055) and
$(.19) and $54,413 and $.01, respectively had the new method been
applied.
F - 24
<PAGE> F-25
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - STOCKHOLDERS' EQUITY (Continued)
- ------------------------------
The fair value of each option grant was estimated on the date of the
grant using the Black-Scholes option-pricing model with the following
weighted average assumptions for 1998, 1997 and 1996, respectively:
expected volatility of 80%, 73% and 83%, respectively; risk free
interest rate of 6.75%; and expected lives of 5 to 10 years.
The effects of applying SFAS 123 in the above pro forma disclosures
---------
are not indicative of future amounts as they do not include the
effects of awards granted prior to 1996. Additionally, future
amounts are likely to be affected by the number of grants awarded
since additional awards are generally expected to be made at varying
amounts.
Option Agreement
- ----------------
On September 25, 1992, the Company issued an Option Certificate for
250,000 options to The Harriman Group, Inc. ("HGI"), a market maker
in the Company's stock, for $2,500, that allows them to purchase
250,000 shares of the Company's restricted common stock (750,000
shares after giving effect to the 3 for 1 stock split on September
22, 1993) at $2.14 per share ($.71 per share after giving effect to
the 3 for 1 stock split on September 22, 1993), the fair market value
of restricted shares on the date of the certificate.
In November 1995, HGI exercised 600,000 options. In October 1996,
HGI exercised the remaining options.
Public Offering
- ---------------
On June 12, 1992, the Company completed its initial public stock
offering under the Securities Act of 1933, as amended. Included in
the offering were 300,000 detachable Class B Redeemable Common Stock
Purchase Warrant ("B Warrant"). Each Class B Warrant entitled the
holder to purchase one (1) share of Common Stock (3 shares after
giving effect to the 3 for 1 stock split September 22, 1993) for a
period of thirty-six months from the effective date of the offering
at a price of $8.00. In March 1996, 8,000 B Warrants were exercised
into 24,000 shares of common stock. The remaining 292,000 B Warrants
expired in March 1996.
F - 25
<PAGE> F-26
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - STOCKHOLDERS' EQUITY (Continued)
- ------------------------------
Unearned Compensatory Stock
- ---------------------------
In December 1996, the Company entered into a written consulting
agreement with a financial consulting firm. The consultant is to
receive 100,000 shares of the Company's common stock in exchange for
consulting services. The cost of these services has been valued at
$46,875, the market value for such shares on the date of issuance and
will be expensed over a period of five years.
In February 1997, the Company entered into a written consulting
agreement with a financial consulting firm. The consultant is to
receive 100,000 shares of the Company's common stock and a warrant to
purchase 250,000 shares of the Company's common stock for $0.469 per
share for a period of five years, in exchange for consulting services.
The cost of these services has been valued at $46,875, the market
value for the 100,000 shares on the date of issuance and will be
expensed over a period of two years. In December 1997, options to
purchase 100,000 shares of the Company's common stock were exercised.
In March 1997, the Company entered into a written consulting agreement
with a financial consulting firm. The consultant is to receive a
warrant to purchase 250,000 shares of the Company's common stock in
exchange for consulting services. The warrants are exercisable for
$.50 per share for a period of five years.
In August 1997, the Company entered into written consulting agreements
with two financial consulting firms. The consultants are to each
receive 50,000 shares of the Company's common stock and a warrant to
purchase 125,000 shares of the Company's common stock for $0.469 per
share for a period of five years, in exchange for consulting services.
The cost of these services for each consultant has been valued at
$23,438, the market value for such shares on the date of issuance and
will be expensed over a period of one year.
Due to the fact that the compensation for these shares has not yet
been earned, this amount is being reflected as a reduction to
stockholders' equity in 1997.
F - 26
<PAGE> F-27
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - INCOME TAXES
- -----------------------
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amount of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes using the enacted tax rates in effect in the years in which
the differences are expected to reverse. Deferred income tax
liabilities and assets are comprised as follows:
October 31,
1 9 9 8 1 9 9 7
------- -------
Deferred tax asset:
Goodwill $ 737,336 $ 790,460
Deferred tax liability:
Test passage bank (347,188) (454,738)
--------- ----------
Net deferred tax asset $ 390,148 $ 335,722
========= ==========
The Company believes it is more likely than not that this net deferred
tax asset will be realized in future periods and, accordingly, no
valuation allowance has been recorded.
The Company's income tax expense consists of the following:
<TABLE>
<CAPTION>
October 31,
1 9 9 8 1 9 9 7 1 9 9 6
------- ------- -------
<S> <C> <C> <C>
Current:
Federal $ 36,353 $ 22,834 $ 74,345
State 47,078 4,140 25,805
--------- --------- ---------
$ 83,431 $ 26,974 $ 100,150
--------- --------- ---------
Deferred:
Federal $ (33,396) $(651,166) $ (57,059)
State (21,030) (205,777) (23,882)
--------- --------- ---------
$ (54,426) $(856,943) $ (80,941)
--------- --------- ---------
Provision (benefit) for income taxes $ 29,005 $(829,969) $ 19,209
========= ========= =========
</TABLE>
F - 27
<PAGE> F-28
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - INCOME TAXES (Continued)
- ----------------------
A reconciliation of the difference between the expected income tax
rate using the statutory federal tax rate and the Company's effective
rate is as follows:
Year Ended October 31,
1 9 9 8 1 9 9 7 1 9 9 6
------- ------- -------
U.S. Federal income tax statutory rate 34% (34)% 34%
State income tax, net of Federal income
tax benefit 7 (7) 7
Other - including tax free income, Goodwill
and net operating losses (23) 3 (32)
--- --- ---
Effective tax rate 18% (38)% 9%
=== === ===
NOTE 12 - EMPLOYMENT AGREEMENTS
- -------------------------------
In March 1996, the Company entered into employment agreements with
three of its key employees. The agreements are for a three-year term
aggregating approximately $300,000 per year in base salary and are
automatically extended each year unless the Company notifies the
employee, in writing at least 60 days prior to the anniversary date,
that the agreement will not be extended.
Each agreement calls for a base salary plus eligibility in the
Company's benefit plans and key man insurance. Additionally, the
employee may be entitled to bonuses at the discretion of the
Company's Board of Directors. In the event there is a change in
control of the Company, the employees' employment agreements are in
effect for a three year term commencing on the date of change of
control. In addition, they would be entitled to a bonus at least
equal to the average annual bonus payable with respect to two of the
last three fiscal years immediately preceding the date of change of
control. Among other provisions, the agreements include a non-compete
clause for a two-year period following termination of employment.
F - 28
<PAGE> F-29
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - EMPLOYMENT AGREEMENTS (Continued)
- -------------------------------
As part of the acquisition of BETA (Note 2), the Company entered into
an employment agreement with a former stockholder and officer of
BETA. The agreement names this former officer as a Vice President of
the Company and the President and Chief Executive officer of BETA.
In addition to other terms and conditions, the agreement is for a
three-year period, renewing annually unless terminated in writing,
and provides for compensation of $100,000 per year plus a bonus based
upon meeting certain sales goals. The Company also granted an option
pursuant to the Company's Amended & Restated 1991 Stock Option
Incentive Plan, to an officer of BETA to purchase 125,000 shares of
the Company's common stock at $.531 per share, the fair market value
of the Company's common stock on the date of the grant. The option
may be exercised for a four-year period commencing one year from the
date of the grant.
As of May 1, 1997, MLP entered into an employment agreement with a
key employee, pursuant to which the employee agreed to remain as
MLP's president and publisher for a term of one-year at an annual
base salary of $72,000, subject to automatic yearly extensions and
certain rights of termination.
NOTE 13 - MAJOR CUSTOMERS
- -------------------------
Revenues to single customers that exceed 10% of total revenues were
as follows:
Year Ended October 31,
1 9 9 8 1 9 9 7 1 9 9 6
------- ------- -------
Customer A $ -- $ -- $479,530
Customer B -- -- --
F - 29
<PAGE> F-30
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - IRS EXAMINATION
- -------------------------
The Internal Revenue Service conducted an examination of the
Company's corporation income tax returns for the year ended October
31, 1995. The examination resulted in no change to the Company's
corporation income tax returns filed for that year.
NOTE 15 - LEASE COMMITMENTS
- ---------------------------
Two of the Company's subsidiaries lease office and warehouse space
under non-cancelable operating leases. The following is a schedule
of future minimum rental payments required at October 31, 1998:
Year Ending October 31,
1999 $ 6,900
2000 6,900
2001 2,300
2002 --
2003 --
2004 and after --
-------
$16,100
=======
Net rental expense totaled $29,144, $14,684 and $ -0- for the
years ended October 31, 1998, 1997 and 1996, respectively.
NOTE 16 - SUBSEQUENT EVENTS
- ---------------------------
Acquisition of Mildred Elley
- ----------------------------
On November 2, 1998, a newly formed wholly owned subsidiary of TES,
MESI Acquisition Corp. ("MESI") purchased all of the operating
assets of Mildred Elley School, Inc. ("Elley"). In addition to
assuming certain liabilities, MESI purchased the assets for
$3,000,000. The purchase price paid by MESI consisted of
$2,000,000 in cash and a promissory note for $1,000,000 bearing
interest at a rate of eight and one-half percent (8.5%) per annum.
Principal and interest payments are payable at the beginning of
each quarter commencing on February 1, 1999 until maturity on
January 1, 2004.
F - 30
<PAGE> F-31
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - SUBSEQUENT EVENTS (Continued)
- ---------------------------
Acquisition of Mildred Elley (Continued)
- ----------------------------
As a result of the acquisition, TES assumed the obligations relating
to employment agreements with the former majority shareholder of
Elley and three key employees. The agreement names the former
majority shareholder as the President and Chief Executive Officer of
MESI as well as the Executive Vice President of TES. The three other
employment agreements are for the Director of Financial Aid, Vice
President of Sales and Marketing and Controller of MESI. In addition
to other terms and conditions, the agreements are for a three-year
period for the President and Vice President of Sales and Marketing
and a one-year period for the other two. All the employment
agreements renew annually unless terminated in writing. The
compensation package for each agreement is as follows:
President and CEO - Base salary of $150,000 plus an annual
bonus of six percent of earnings of MESI before interest and
taxes in excess of ten percent of the purchase price of Elley.
Director of Financial Aid - Base salary of $75,000.
Vice President of Sales and Marketing - Base salary of
$100,000 plus a signing bonus of $6,000.
Controller of MESI - Base salary of $50,000.
The Company granted options pursuant to the Company's Amended &
Restated 1991 Stock Option Incentive Plan to each of the employees
above to purchase 150,000, 5,000, 5,000 and 5,000 respectively of the
Company's common stock at $0.8125 per share, the fair market value of
the Company's common stock on the date of grant. The option may be
exercised for a five-year period commencing one year from the date of
grant.
Issuance of Stock Options
- -------------------------
In November 1998, the Company granted options pursuant to the
Company's Amended & Restated 1991 Stock Option Incentive Plan to 5
employees to purchase an aggregate of 531,600 shares of the Company's
common stock at $.72 per share.
F - 31
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the
Exchange Act, the registrant caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
January 20, 1999 By: /s/ ANDREW L. SIMON
----------------------------------------
Andrew L. Simon
President, Chief Executive Officer and
Chief Financial Officer (principal executive
officer and principal financial officer)
In accordance with the Exchange Act, this report has
been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ ANDREW L. SIMON Director and Chairman
- -------------------
Andrew L. Simon of the Board January 20, 1999
/s/ WALTER B. BARBE Director January 20, 1999
- -------------------
Walter B. Barbe
/s/ MICHAEL D. BECK Director January 20, 1999
- -------------------
Michael D. Beck
/s/ STEVEN R. BERGER Director January 20, 1999
- --------------------
Steven R. Berger
/s/ JOSEPH A. FERNANDEZ Director January 20, 1999
- -----------------------
Joseph A. Fernandez
/s/ STEPHEN H. IVENS Director January 20, 1999
- --------------------
Stephen H. Ivens
/s/ LINDA G. STRALEY Director January 20, 1999
- --------------------
Linda G. Straley
/s/ DAVID L. WARNOCK Director January 20, 1999
- --------------------
David L. Warnock
<TABLE>
<CAPTION>
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
AND SUBSIDIARIES
EXHIBIT 11
----------
COMPUTATION OF EARNINGS PER COMMON SHARE
----------------------------------------
1 9 9 8 1 9 9 7 1 9 9 6
------- ------- -------
<S> <C> <C> <C>
Basic earnings:
Net income (loss) $ 131,202 $(1,363,811) $ 192,048
---------- ----------- ----------
Shares:
Weighted common shares outstanding 8,508,202 8,213,089 7,524,539
---------- ----------- ----------
Basic earnings (loss) per share $ .02 $ (.17) $ .03
========== =========== ==========
Diluted earnings:
Net income (loss) $ 131,202 $(1,363,811) $ 192,048
---------- ----------- ----------
Shares:
Weighted common shares outstanding 8,508,202 8,213,089 7,524,539
Employee stock options 51,569 -- 116,328
Warrants 15,523 -- --
Investment Banker options 128,261 -- --
Consultants stock options 17,480 -- --
Directors stock options -- -- --
Underwriter options -- -- --
---------- ----------- ---------
Total weighted shares outstanding 8,721,035 8,213,089 7,640,867
---------- ----------- ---------
Diluted earnings (loss)
per common share $ .02 $ (.17) $ .03
========== =========== ==========
</TABLE>
Exhibit 21
----------
LIST OF SUBSIDIARIES OF
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC. ("TASA")
Name of Subsidiary Jurisdiction of Shareholder Name Under Which Subsidiary
Incorporation does Business
Beck Evaluation & New York TASA Beck Evaluation & Testing
Testing Associates, Associates; BETA
Inc.
MESI Acquisition New York TESC MESI Acquisition Corp.;
Corp. Mildred Elley; Mildred
Elley School, Inc.
Modern Learning Delaware TASA Modern Learning Press
Press, Inc.
TASA Educational Delaware TASA TASA Educational Services
Services Corporation Corporation
("TESC")
Exhibit 23
----------
CONSENT OF LAZAR, LEVINE & FELIX LLP
We consent to the incorporation by reference of our
report dated November 30, 1998 with respect to the consolidated
financial statements and notes thereto of Touchstone Applied
Science Associates, Inc. included in its Annual Report (Form
10-KSB) for the fiscal year ended October 31, 1998 filed with the
Securities and Exchange Commission into (i) the Company's
Registration Statement on Form S-3 (SEC File No. 333-27659) and
(ii) the Company's Registration Statement on Form S-8 (SEC File
No. 333-424).
LAZAR, LEVINE & FELIX LLP
New York, New York
January __, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted
from the consolidated balance sheet and statements of operations
filed as part of the report on form 10KSB for the year ended
October 31, 1998 and is qualified in its entirety by reference
to such report on form 10KSB.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-END> OCT-31-1998
<CASH> 4,980,230
<SECURITIES> 186,376
<RECEIVABLES> 1,287,264
<ALLOWANCES> 0
<INVENTORY> 478,869
<CURRENT-ASSETS> 7,106,418
<PP&E> 2,933,108
<DEPRECIATION> 1,179,297
<TOTAL-ASSETS> 14,074,640
<CURRENT-LIABILITIES> 1,281,602
<BONDS> 6,267,198
0
0
<COMMON> 857
<OTHER-SE> 6,524,983
<TOTAL-LIABILITY-AND-EQUITY> 14,074,640
<SALES> 6,317,114
<TOTAL-REVENUES> 6,364,636
<CGS> 1,935,104
<TOTAL-COSTS> 4,015,496
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 253,829
<INCOME-PRETAX> 160,207
<INCOME-TAX> 29,005
<INCOME-CONTINUING> 131,202
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 131,202
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
