U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB/A-1
(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, 1999
[ ] 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)
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:
Title of Each Class
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Common Stock, $.0001 par value
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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 the past 90 days.
Yes X No
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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: $12,316,246
for the fiscal year ended October 31, 1999.
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:
$3,333,750.00 as of January 18, 2000. 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
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(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
State the number of shares outstanding of each of the
issuer's classes of common equity, as of the latest practicable
date: As of January 15, 2000, 2,141,801 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
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<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
fiscal years ended October 31, 1997 and 1998 ("Fiscal 1997" and
"Fiscal 1998", respectively) and through the beginning of the
fiscal year ended October 31, 1999 ("Fiscal 1999"), the Company
completed three acquisitions in three core segments of the
education market: assessment, instruction and educational
delivery. The net effect of the Company's acquisition strategy
is that TASA's revenues increased from $2.5 million in the fiscal
year ended October 31,1996 ("Fiscal 1996"), the last fiscal year
prior to the acquisitions, to over $12.3 million in Fiscal 1999.
The need to develop fundamental literacy skills has
long been recognized as essential to a student's progress and
success throughout school and life. The Company's proprietary
instructional and assessment products relate directly to the
teaching and measurement of progress of literacy 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 grades
K-4 instructional market include consumable workbooks for the
development of other important skills, such as penmanship and the
teaching of English, particularly English as a Second Language
("ESL"). The Company's Degrees of Reading Power(R) ("DRP") tests
and related products enable a school, district or other entity to
assess an individual's reading comprehension ability. These
tests allow 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. Additionally, the Company owns a custom-
testing division, which responds to requests from school systems
and publishers to create client-designed assessment programs.
The third market served, educational delivery,
positions the Company to participate in the significant growth
occurring in post-secondary education. The Company, through its
indirect wholly owned subsidiary MESI Acquisition Corp. ("MESI"),
recently acquired substantially all of the assets of the Mildred
Elley Schools, 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 proprietary Degrees of Reading Power (DRP)
assessment methodology. DRP tests are published in three
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 were the first commercial standardized tests
whose results can be directly interpreted with respect
to the written 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 direct measures of fundamental reading
comprehension, defined as how well students can process text as
it is being read. Advanced DRP tests extend this definition of
reading comprehension. Advanced DRP test items require students
to engage higher level cognitive processes needed to think about,
analyze 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.
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
1999 in states, school districts, and college and university
testing programs.
TYPES OF DRP TESTS. Specially prepared "secure" forms
of the Company's DRP tests are licensed for one-time or limited
use by states while other "shelf" forms listed in the Company's
catalogs are licensed for an indefinite period of time to schools
and districts throughout the United States and Canada. 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.
THE MACULAITIS TEST. In Fiscal 1997, TASA acquired the
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. In
Fiscal 1998, the Company 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. Currently, the Company is making
more substantive revisions that management believes are necessary
to further enhance the test's marketability.
The Maculaitis Test is currently authorized for use in
the State of New Jersey. Current sales of the Maculaitis Test
are primarily concentrated in New Jersey, although some sales are
attributable to a number of other states. Beck Evaluation &
Testing Associates, Inc., the Company's custom test division
("BETA"), is currently in the third year of a contract with the
State of Texas to design a test to be used by all state LEP
students in grades 3-8. Management believes that both the
Maculaitis Test and the BETA contract will place the Company in a
unique position, increasing its potential for future growth in
the LEP/ESL assessment field.
SIGNPOSTS(TP) EARLY LITERACY ASSESSMENT SYSTEM. In the
spring of 2000, management expects that the Company will
introduce its new SIGNPOSTS(TP) Early Literacy Assessment System
("SIGNPOSTS"). SIGNPOSTS is a comprehensive system designed to
provide a unique set of assessments and integrated instructional
activities for students in grades K-3. SIGNPOSTS spans a range
of literacy strands--reading, writing, listening, and speaking--
and includes a pre-DRP reading test and measurement scale for
emergent readers. Management believes that the pre-DRP test's
downward extension of the existing Primary DRP test will help
both the SIGNPOSTS and DRP programs in future adoptions.
TEXTSENSE(TM) SUMMARY WRITING. In Fiscal 1997, the Company
launched its new TEXTSENSE(TM) Summary Writing program ("TEXTSENSE").
A number of states have set as a benchmark for language arts
competency the ability to summarize accurately a selected portion
of text. 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 1999 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.
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 machine-read by scanner-computer systems and
interpreted by Company-proprietary scoring and reporting
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 also 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 assessment. 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 enable teachers to find appropriate
books for each student based upon interest categories and reading
ability.
The Company reports revenues from proprietary test
products as Assessment Income.
CUSTOM TEST PRODUCTS AND RELATED SERVICES
BETA provides consulting services to states, schools
and textbook publishers. BETA's business is approximately equally
divided between work for states and work for publishers. Since
its acquisition by TASA in January 1997, BETA has concentrated on
increasing its test assessment and design services to states.
This effort has been successful, and BETA now provides its test
design and psychometric services to several state customers:
Delaware, Indiana, Michigan, Minnesota, Texas, and Virginia.
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, National Computer Systems (NCS) and Harcourt.
Generally, 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.
In Fiscal 1999, BETA gained significant non-state
assessment business from agreements with publishers, such as
Scott Foresman, Macmillan/McGraw-Hill, and the Core Knowledge
Foundation.
The Company reports revenues from BETA's operations as
Assessment Income.
INSTRUCTIONAL PRODUCTS
Through Modern Learning Press, Inc. ("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 school boards or agencies, which
control 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.
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.
Additionally, in the Spring of 2000, management expects that MLP
will introduce new, consumable SIGNPOSTS instructional materials
which can be integrated, optionally, with the SIGNPOSTS Early
Literacy Assessment System under development by TASA's assessment
division.
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, either of which would have to
include additional funding for any new programs. 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.
In the past, MLP reached its target market, primarily
teachers, by direct mailing of its catalogs as well as timely
promotional and informational pieces. Management believes that
MLP can continue to increase the effectiveness of its direct mail
program. However, in the fall of 1999, MLP began to augment
sales by acquiring independent distributors to carry its line of
supplemental materials. At fiscal year-end, MLP had independent
distributors who collectively represented approximately 50% of
the United States.
The Company reports MLP's revenues as Instructional
Products.
EDUCATIONAL DELIVERY
In early Fiscal 1998, as part of its strategic plan,
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, 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.
The Mildred Elley schools offer programs in business,
paralegal, travel, and health fields. Each program is designed so
that the student masters important skills and acquires knowledge
that will become critical to a lifelong learning plan and
economic success. The goal is for students to succeed in their
programs and obtain secure jobs in their field.
The two locations have a total enrollment of 638
students. The current enrollment consists of adult students with
a median age of 29. Many of these students have been dislocated
workers and other individuals having various levels of education
who need additional skills in order to maintain or improve their
current employment situation. Average household income of
Mildred Elley's students is $16,000 to $20,000. The student body
is 80% female and 20% male.
All of the programs are offered at both campuses. The
following table shows Mildred Elley enrollment by program by
location for the 1999 fall term:
Total
Albany Pittsfield Enrollment
Accounting Systems Specialist . . . . 38 16 54
Administrative Assistant . . . . . . 62 47 109
Advanced Paralegal . . . . . . . . . 29 0 29
Business Management . . . . . . . . . 46 0 46
Clinical Medical Assistant . . . . . 60 0 60
Medical Assistant . . . . . . . . . . 28 27 55
Medical Office Assistant . . . . . . 36 0 36
Office Technologies . . . . . . . . . 31 27 58
Paralegal . . . . . . . . . . . . . . 82 19 101
Software Specialist . . . . . . . . . 72 6 78
Travel/Tourism. . . . . . . . . . . . 12 0 12
Total: 496 142 638
Revenues from the post-secondary proprietary school
division were $5.3 million in Fiscal 1999 and are reported as
Educational Delivery revenues.
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.
In the past, the Company marketed its instructional
products almost exclusively through direct mail programs. In late
Fiscal 1999, it began assessing the viability of selling such
products through its independent sales representatives.
Preliminary results to date are encouraging, although not
conclusive.
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 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 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
lower selling price than that generally applicable to other
consumable books with which MLP's products compete. MLP has
developed a unique position through direct mail sales.
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, 1999, the Company employed a total of
154 employees, 92 on a full-time basis, and 62 on a part-time
basis. Of the 154 employees, 11 are engaged in research and/or
test development, 22 are in operations, 6 are in executive
capacities, 15 are in marketing in its assessment and
instructional divisions, and 100 are in the educational delivery
division.
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 were required, under applicable
regulation, to apply to the accrediting agency, the U.S.
Department of Education (the "DOE"), and the applicable state
department of education for approval to operate under its new
owners. The accrediting agency and the DOE approved the change
of ownership during Fiscal 1999. The state agency generally takes
24 to 36 months. The Company anticipates a New York state agency
reaccreditation review in the spring of 2000 which management
expects will ultimately lead to the reaccreditation of Mildred
Elley. No assurances can be given, however, that the New York
state agency will grant the reaccreditation of Mildred Elley. If
the reaccreditation is not granted, the Company will have to
re-evaluate its degree granting capabilities.
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 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 default rates on student loans prior to the
Company's acquisition of Mildred Elley, Mildred Elley students do
not currently qualify for loans under Title IV, though management
currently anticipates that in 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; however,
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
The Company regularly asserts copyrights to all of its
assessment and instructional materials.
The following are registered trademarks and/or service
marks of the Company: TASA, the TASA logo, DRP Program The
Readability Standard, Browzer-->BOOKLINK, DRP, DRP-->BOOKLINK,
DRP-->EZ Converter, DRP Linking Text to Ability, Booklore,
BookMatch, DWM, Degrees of Reading Power, Degrees of Word
Meaning, MicRA-->DRP, TextSense (pending), TASA Literacy
(pending), Signposts (pending), We've Done the Research for
You (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 Fiscal
1997 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. For Fiscal 1999,
the Company paid Mr. Shapiro a total of $157,943 in royalties.
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, now Hudson United Bank.
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.
Effective February 2000, BETA will rent a small office
facility of 500 square feet in Austin, Texas, which also affords
good proximity to the Texas Education Agency. The Company made
the decision to open the office in Texas because of the volume of
business in that state.
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
In January 2000, a former employee of Mildred Elley
commenced an action against the Company, MESI and an executive
officer of MESI in the Supreme Court of the State of New York in
the County of Albany. The complaint alleges claims of wrongful
termination of employment and seeks damages as compensation.
The Company believes that the allegations are without merit
and is vigorously defending the action. The Company maintains
directors and officers liability insurance which, subject to a
policy deductible, insures the defendant officer, but not the
Company, against such claims.
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, 1998 and October 31, 1999 were as
follows:
Common Stock Prices
-------------------
Fiscal Quarter: High Low
1st Qtr 98 5.36 2.50
2nd Qtr 98 7.00 2.50
3rd Qtr 98 5.36 3.124
4th Qtr 98 4.00 2.24
1st Qtr 99 3.376 1.752
2nd Qtr 99 2.624 1.375
3rd Qtr 99 2.00 1.50
4th Qtr 99 1.625 1.00
As of the close of business on March 4, 1999, the
Company effected a one-for-four reverse stock split (the "Stock
Split") of the Company's Common Stock. All stock prices and all
share amounts quoted in this Report have been adjusted to give
effect to the Stock Split.
During the first quarter of Fiscal 2000 (through
January 19, 2000), the Company's Common Stock had a high price of
$2.125 and a low of $1.00.
These quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commission and may not represent
actual transactions.
As of December 31, 1999, there were 71 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 1,300 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.
On November 27, 1998, pursuant to a prior transaction
with each of Cahill, Warnock Strategic Partners Fund, L.P. and
Strategic Associates, L.P. (collectively, the "Cahill, Warnock
Entities") (see "Certain Relationships and Related Transactions"
in Item 12, below), 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 $12.3 million in Fiscal 1999.
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 revenues in each of
the assessment, instruction and educational delivery divisions,
and its annual percentage change, for Fiscal 1999, 1998 and 1997:
TASA Revenues Breakdown (in thousands of dollars) and % of
Year-To-Year Change
<TABLE>
<CAPTION>
Fiscal Year Ended October 31,
---------------------------------------------------------------
1997-99 1999 1998 1997
------- ---- ---- ----
% % % %
Change $ Change $ Change $ Change
------ --- ------ --- ------ --- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Assessment Product
Revenues . . . . . . . . 47% $4,591.5 11% $4,123.2 32% $3,126.3(1) 12%
Instructional Revenues. . 66% $2,427.6 11% $2,193.9 50% $1,461.4(2) N/A
Educational Delivery
Revenues . . . . . . . . N/A $5,297.1 N/A N/A N/A N/A N/A
Total Revenues . . . . . 168% $12,316.3 95% $6,317.1 38% $4,587.6 82%
<FN>
(1) Includes BETA results, which, in Fiscal 1997, were for the
ten months since its acquisition.
(2) Includes MLP results, which, in Fiscal 1997, were for the
five months since its acquisition.
</FN>
</TABLE>
The following are selected ratios as a percentage of
revenues based on the Company's financial statements:
Fiscal Year Ended October 31,
-----------------------------
1999 1998 1997
----------------------------
Revenues . . . . . . . . . 100% 100% 100%
Gross Profit Margins. . 64% 69% 66%
Operating Expenses:
Selling Expenses. . . . 20% 25% 25%
General & Administrative . . 36% 41% 35%
Loan Loss Expense. . . . . . ---- ---- 9%
Loan Loss Recovery . . . . . ---- (3%) ----
Impairment of Goodwill . . . ---- ---- 44%
Product Development. . . . . ---- ---- ----
----------------------------
Income from Operations. . . . . 8% 6% (47%)
Income (Loss) from Operations
Net Interest Inc. (Exp.). . . 6% (3%) (1%)
----------------------------
Pre Tax Income (Loss). . . . . . 2% 3% (48%)
Net Income (Loss). . . . . . . . 1% 2% (30%)
============================
FISCAL 1999 AS COMPARED TO FISCAL 1998
REVENUES. For Fiscal 1999, revenues were $12,316,246,
--------
increasing 95%, or $5,999,132 over $6,317,114 for Fiscal 1998.
Of the $5,999,132 increase, $702,005 or 12% is attributable to
internal growth of the Company's assessment and instructional
divisions. The balance of the increase is due to the acquisition
of Mildred Elley in November 1998 and the educational delivery
division.
Revenues for the Company's assessment products
increased $468,307 or 11% to $4,591,542 in the current
year versus $4,123,235 in the prior year. The Company's
proprietary test division which publishes the DRP product
decreased 6% for the year. This decrease in revenues was
attributable to the declining volume of sales in New York State
due to the shifting from the PEP/DRP reading test in the third
and sixth grades to an alternative test for the fourth and eighth
grades. As a result, certain schools elected not to purchase our
DRP shelf test for alternative grades. The second reason for the
decrease in catalog sales was the halving of orders from Texas
for the purchase of materials for their early childhood program.
The Company, however, anticipated this decline as the industry
traditionally experiences a decline when schools reorder in the
second year of any program.
BETA, which is the Company's custom testing division,
continues to grow as planned. BETA began the year with a number
of multiple-year contracts and signed two more such contracts in
1999. Approximately 45% of the business for Fiscal 1999
represents multiple-year contracts. The net effect of the new
contracts is that BETA's business grew to $1,395,463 in Fiscal
1999, or 97%, from $709,022 in Fiscal 1998.
Instructional revenues, through MLP, increased 11% for
Fiscal 1999. In late Fiscal 1999, the Company shifted to a new
sales organization, namely, independent representatives who are
currently selling supplemental materials on behalf of MLP.
The educational delivery division contributed
$5,297,127 to the Company's revenue stream, constituting 43% of
the Company's revenue for the year. There is no comparable year-to-
year period as the acquisition of Mildred Elley occurred on
November 2, 1998.
COST OF GOODS SOLD. Cost of goods sold increased to
------------------
$4,469,746 in Fiscal 1999, or 131%, compared to $1,935,104 in
Fiscal 1998. Cost of goods sold now represents 36% of revenues
versus 31% in Fiscal 1998. Cost of goods sold as a percentage
increased due to significant volume increases in our lower
margin businesses (BETA and Mildred Elley).
GROSS PROFIT. An increase of 95% in gross revenues for
------------
the Company as a whole fueled a 79% increase in the Company's
gross profit, or from $4,382,010 in Fiscal 1998 to $7,846,500 in
Fiscal 1999. Because of the aforementioned increase in cost of
goods sold, however, gross profit as a percentage of sales decreased
from 69% to 64%.
SELLING EXPENSES. Selling expenses in Fiscal 1999
----------------
increased by 57% to $2,505,934 from $1,596,462 in Fiscal 1998.
As a percentage of revenues, selling expenses were 20% in Fiscal
1999 versus 25% in Fiscal 1998. This decrease in percentage is
attributable to the fact that the percentage marketing expense
for each of the custom test and the educational delivery
divisions is lower than that for the Company's proprietary
testing and instructional division.
GENERAL AND ADMINISTRATIVE. The Company's general and
--------------------------
administrative expenses increased by 68% to $4,387,253 in Fiscal
1999 from $2,619,034 in Fiscal 1998. As a percentage of sales,
general and administrative expenses decreased from 41% to 36%.
This decrease is the effect of greater efficiencies created by
revenue gains.
INCOME FROM OPERATIONS. Income from operations for
----------------------
Fiscal 1999 increased by 160%, to $953,313 in Fiscal 1999 from
$366,514 in Fiscal 1998.
EBITDA. Earnings before interest, taxes, depreciation,
------
and amortization were $1,922,811 in Fiscal 1999 versus $1,017,383
in Fiscal 1998, representing a 89% increase. This increase is
attributable to the increase in revenues, which more than offsets
the increase in general and administrative expenses and cost of
goods sold associated with the Company's increased revenue base.
EBITDA was 16% of revenues for both Fiscal 1999 and Fiscal 1998.
OTHER INCOME (EXPENSE). Other income (expense)
----------------------
increased to ($695,360) for Fiscal 1999 versus ($206,307) in
Fiscal 1998. The increase in other income (expense) was primarily
due to increased interest expense incurred in the funding of Mildred
Elley. As management expected, however, this increase was offset
by the increase in earnings before interest and taxes (EBIT) from
the educational delivery division.
INCOME BEFORE TAXES. The Company generated pre-tax
-------------------
income of $257,953 in Fiscal 1999 versus $160,207 in Fiscal 1998,
representing a 61% improvement. This increase is the result of
increased revenue gains.
NET INCOME AND EARNINGS PER SHARE. Net after-tax
---------------------------------
earnings were $180,757 for Fiscal 1999 versus $131,202 for Fiscal
1998, representing approximately a 38% increase for Fiscal 1999.
Earnings per share were $0.08 versus $0.06 in the prior year
(after giving effect to the reverse stock split in March 1999).
FISCAL 1998 AS COMPARED TO FISCAL 1997
REVENUES. For Fiscal 1998, revenues were $6,317,114,
--------
increasing $1,729,481, or 38%, over $4,587,633 for Fiscal
1997. Of the $1,729,481 increase, $575,312, or 33%, is
attributable to internal growth of the Company's traditional
proprietary testing/assessment business. The balance of the
year's increase, $1,154,169, is attributable to revenue
increases of the two businesses acquired in Fiscal 1997,
BETA (custom testing/assessment) and MLP (instructional).
COST OF GOODS SOLD. Cost of goods sold in Fiscal 1998
------------------
increased 23% from Fiscal 1997, or $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--the proprietary
testing and instructional division--resulted in gross profit
margins increasing to 69% in Fiscal 1998 from 66% in Fiscal 1997.
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 (for the instructional division), 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.
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 instructional selling costs were offset by
instructional sales increases, as compared to Fiscal 1997 when a
majority of the instructional annual selling costs had already
been incurred prior to the acquisition of the business 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 percentage 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 the instructional division's
revenues, but only 42% of the instructional division's general
and administrative expenses for Fiscal 1997.
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). Other income (expense) increased
----------------------
to ($206,307) in Fiscal 1998 versus a ($64,622) loss in Fiscal 1997.
The increase in other income (expense) was primarily due to increased
interest expense in connection with the acquisition of MLP.
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 in Fiscal 1998 as compared
to an after-tax loss of ($1,363,811) 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.
After giving effect to the one-for-four reverse stock
split effected by the Company in March 1999, the Company reported
earnings per share in Fiscal 1998 of $0.06 based on weighted
average shares outstanding of 2,127,051. In Fiscal 1997, based
on weighted average shares outstanding of 2,053,272, the Company's
loss per share was ($0.66).
LIQUIDITY AND WORKING CAPITAL
WORKING CAPITAL. During Fiscal 1999, the Company
---------------
continued to utilize working capital in order to further grow its
business. At fiscal year end, working capital was $3,079,573,
down from $5,824,816 at the beginning of Fiscal 1999. The
$2,745,243 decline was primarily due to the acquisition of
Mildred Elley in November 1998. The ratio of current assets to
current liabilities was 2.3 to 1.0 at the end of Fiscal 1999.
CASH FLOW FROM OPERATING ACTIVITIES. In Fiscal 1999,
-----------------------------------
cash flow from operating activities decreased by $951,274 to
($54,515) from $896,759 in Fiscal 1998. The major factors
contributing to this cash outflow were an increase in tuition
receivables of ($638,318) as Mildred Elley must extend its students
loans for tuition until the schools are reinstated into the
Federal Loan Program, and the pay down of accounts payable and
accrued expenses of ($859,237).
CASH FLOWS FROM INVESTING ACTIVITIES. In Fiscal 1999,
------------------------------------
the Company's cash expenditures for investing activities totaled
($2,881,635) versus ($281,033) in Fiscal 1998. The major
expenditures contributing to the Fiscal 1999 total were
($1,939,648) for the acquisition of the Mildred Elley Schools,
($482,799) in costs for the Company's Test Passage Bank and test
development, and ($334,773) for the purchase of fixed assets.
CASH FLOWS FROM FINANCING ACTIVITIES. In Fiscal 1999,
------------------------------------
the Company had a net cash outflow from financing activities of
($903,187) versus a net cash inflow of $3,207,840 in Fiscal 1998.
The Fiscal 1999 cash outflow was primarily attributable to the
repayment of long-term debt which amounted to ($911,747).
SUBSEQUENT EVENTS - PROSPECTIVE ACQUISITION OF DUBOIS BUSINESS COLLEGE
Subsequent to the balance sheet data, the Company, through its
wholly-owned subsidiary, TESC, signed a letter of intent to acquire
all of the outstanding common stock of the DuBois Business College
("DBC"), a Pennsylvania-based, two-year degree granting business
college, and substantially all of the assets and certain liabilities
of Kenawell Technologies, LLC ("KTL"), a limited liability company
which holds several of the real properties of DBC, for $3,200,000.
The Company intends to finance the transaction through the issuance
of approximately $2,000,000 in bank debt and a promissory note to the
seller of approximately $1,200,000. The transaction, which the
Company intends to complete during its second quarter of Fiscal 2000,
will be accounted for using the purchase method of accounting.
YEAR 2000 MATTERS
Many computer systems experience problems handling
dates beyond the year 1999. Therefore, some computer hardware
and software will need to be modified prior to the year 2000 in
order to remain functional. The Company had undertaken a Year
2000 project to address the Company's readiness and exposure to
Year 2000 issues. The Company assessed its exposure to Year 2000
issues in terms of its products, internally used operating
systems, software, and other technology, and third party vendors
and suppliers. To date, the Company has not experienced any
material Year 2000 problems, although there can be no assurances
that such problems will not arise as the Company and its vendors
and suppliers operate their respective businesses in the early
part of 2000. The Company will continue to monitor its systems
and those of its vendors and suppliers.
While the Company believes that it has substantially
identified and resolved all potential Year 2000 problems with any
of the products that it develops and markets, it is not possible
to determine with complete certainty that all Year 2000 problems
affecting the Company's products have been identified or
corrected because these products interact with other third party
vendor systems not under the Company's control. It should be
noted that the operation of office and facilities equipment, such
as fax machines, photocopiers, telephone systems, security
systems, elevators, and other common devices may be affected by
the Year 2000 problem.
The Company has identified major suppliers and other
third party vendors integral to the operations of the Company's
business. The Company initiated communications with those
suppliers and third party vendors to assess their readiness to
handle Year 2000 problems. However, the Company has no control
over and cannot predict the corrective actions of these third
party vendors and suppliers. The Company intends to arrange, to
the extent available, alternate supplier arrangements in the
event that it considers a third party vender to have material
Year 2000 issues. While the Company expects that it will be able
to resolve any significant Year 2000 problems related to third
party products and services, there can be no assurance that it
will be successful in resolving any such problems. Any failure
of these third party vendors and suppliers to resolve Year 2000
problems with their systems in a timely manner could have a
material adverse effect on the Company's business, financial
condition, and results of operations.
The discussions of the Company's efforts relating to
Year 2000 compliance are forward-looking statements. The
Company's ability to achieve Year 2000 compliance and the
associated level of incremental costs could be adversely affected
by, among other things, the availability and cost of programming
and testing resources, vendors' ability to modify proprietary
software and other unanticipated problems. The failure to
correct a material Year 2000 problem could result in an
interruption of certain normal business activities or operations.
Such failures could materially affect the Company's results of
operations, liquidity and financial condition. Because of the
general uncertainty inherent in the Year 2000 problem, the
Company is unable at this time to determine those consequences.
SELECTED FINANCIAL DATA
The following tables summarize certain financial data
for the Company for Fiscal 1999, 1998, and 1997, respectively.
See "Financial Statements" in Item 7 below.
Fiscal Year Ended October 31,
------------------------------------------
1999 1998 1997
------------------------------------------
INCOME STATEMENT DATA:
Operating revenues . . . . . . . . . $12,316,246 $6,317,114 $4,587,633
Net sales. . . . . . . . . . . . . . 12,316,246 6,317,114 4,587,633
Gross profit . . . . . . . . . . . . 7,846,500 4,382,010 3,008,884
Income (loss) from operations. . . . 953,313 366,514 (2,129,158)
Income (loss) before income taxes. . 257,953 160,207 (2,193,780)
Net income (loss). . . . . . . . . . 180,757 131,202 (1,363,811)
Earnings (loss) per share. . . . . . .08 .06 (.66)
BALANCE SHEETS:
Current assets . . . . . . . . . $ 5,479,456 $7,106,418 $3,078,853
Total assets . . . . . . . . . . 16,384,417 14,074,640 9,592,885
Long-term obligations. . . . . . 7,134,674 6,267,198 2,528,968
Total liabilities. . . . . . . . 9,534,557 7,548,800 3,363,333
Working capital. . . . . . . . . 3,079,573 5,824,816 2,244,488
Stockholders' equity . . . . . . 6,849,860 6,525,840 6,229,552
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.
<PAGE>
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.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Independent Auditors' Report F-2
Consolidated Financial Statements:
Consolidated Balance Sheets F-3
Consolidated Statements of Operations and Comprehensive
Income 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 January 15, 1999, the directors and executive
officers of the Company were as follows:
Name Age Position
---- --- --------
Walter B. Barbe 73 Director; and President and
Publisher, MLP
Michael D. Beck 53 Director; Vice President, TASA;
and President, Chief Executive
Officer, BETA
Steven R. Berger 44 Director
Peter A. Duhamel 54 Chief Operating Officer, TASA
and MLP; Vice President, TASA
Joseph A. Fernandez 64 Director
Andrew L. Simon 57 Chairman of the Board of
Directors; President and Chief
Executive Officer, TASA
Denise M. Stefano 36 Chief Financial Officer
Linda G. Straley 43 Director; Vice President,
Operations, and Secretary, TASA
Faith Takes 45 Executive Vice President, TESC;
President and Chief Executive
Officer, MESI
David L. Warnock 41 Director
________________
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 in May 1997 and has been President and Publisher of MLP,
the Company's wholly-owned subsidiary, since May 1997. Dr. Barbe
is also a Director of MLP and TESC. 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 in March 1997 and has been Vice President of the Company
since January 1997. Mr. Beck is also a Director and President
and Chief Executive Officer of BETA and is a Director of MLP.
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 in March 1996 and he also serves on each of the Company's
Compensation and Audit Committees. 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.
PETER DUHAMEL joined the Company as the Chief Operating
Officer of TASA and MLP and a Vice President of the Company in
January 2000. Before joining the Company, Mr. Duhamel was the
National Sales Manager for Prentice Hall Regents/Cambridge in
Upper Saddle River, New Jersey, from July 1997 until December
1999, and as such was responsible for the sales of all Cambridge
and Prentice Hall Regents products to the kindergarten through
the adult/academic and GED markets through all lines of
distribution. From January 1991 until June 1997, Mr. Duhamel was
the General Manager of Sales and Marketing for the Troll School
and Library in Mahwah, New Jersey, during which time Mr. Duhamel
was responsible for the sales and marketing of Troll School and
Library products to the educational market place. Mr. Duhamel
received a B.S. from Western New England College.
JOSEPH A. FERNANDEZ was elected as a Director of the
Company in December 1998 and, since that date, he has also served
on each of the Company's Audit and Compensation Committees. Dr.
Fernandez is also a director of BETA and TESC. 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.
ANDREW L. SIMON was elected as Director and as
President and Chief Financial Officer of the Company in March
1995. Mr. Simon is also a Director of MLP, a Director and
President and Treasurer of TESC, a Director and Treasurer of MESI
and a Director and Secretary of BETA. He served as Interim
President of TASA from June 1994 through March 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.
DENISE M. STEFANO has been Chief Financial Officer of
the Company since May 1999. Prior to joining the Company, Ms.
Stefano was the corporate controller at Empire Office, Inc. in
New York, New York, from April 1998 until May 1999, and the
assistant controller from March 1990 until June 1995. During her
tenure at Empire Office, Inc., Ms. Stefano was responsible for
all corporate accounting and financial activities of the company.
In the interim, from June 1995 until April 1998, Ms. Stefano was
a Senior Auditor and Business Advisor with Arthur Andersen &
Company, LLP in New York, New York, where Ms. Stefano planned and
organized audit activities and performed external audits. Ms.
Stefano received a Bachelor of Business Administration in
Accounting from Iona College and is currently pursuing an MBA
degree in finance at Iona College. Ms. Stefano is a certified
public accountant in New York State.
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 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 is also a Director of MESI and a
Director and Secretary of TESC. 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.
FAITH TAKES has been the Executive Vice President of
TASA Educational Services Corp. and President and Chief Executive
Officer of MESI since November 1998. Ms. Takes is also a
Director of each of TESC and MESI. From 1985 until she joined
the Company, Ms. Takes was President, Chief Executive Officer and
owner of the Mildred Elley Schools, Inc., during which time Ms.
Takes ran every aspect of the Mildred Elley Schools. During this
time, Ms. Takes also had management contracts with the
Kelley/Kensington Business Institutes, Worldwide Educational
Services, Inc., Central City Business Institute and Drake
Business Institutes. Ms. Takes is past president of the New York
State Registered Business School Association. Ms. Takes received
her B.S. from the State University of New York at Albany.
DAVID L. WARNOCK was elected as a Director of the
Company in October 1998 and, since that time, he has also served
on each of the Company's Audit and Compensation Committees. Mr.
Warnock is also a Director of TESC. 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 Children's
Comprehensive Services, Inc., Concorde Career Colleges, Inc.,
Environmental Safeguards, Inc., and The School Company. 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 1999, 1998 and 1997,
respectively, by the Chief Executive Officer, the President of
BETA, the Vice President, DRP Services, and the Executive Vice
President of TESC. Each executive officer serves under the
authority of the Board of Directors. No other executive officer
of the Company received cash compensation that exceeded $100,000
during Fiscal 1998. Therefore, pursuant to Item 402 of
Regulation S-B, only compensation for each of the Chief Executive
Officer, the President of BETA, the Vice President, DRP Services,
and the Executive Vice President of TESC is shown in the Summary
Compensation Table below.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
------------------------------------------------------------------
Awards Payouts
--------------------------
Securities All Other
Other Annual Restricted Underlying LTIP Compen-
Name and Principal Compensation Stock Options/SARs(1) Payouts sation
Position Year Salary($) Bonus($) ($) Award(s)($) (#) ($) ($)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Andrew L. Simon, 1999 $200,000 0 $35,473(3) 0 21,875/0 0 0
President, Chief Executive 1998 $180,000 0 $41.663(3) 0 19,625/0 0 0
Officer 1997 $135,000 0 $39,025(3) 0 59,750(2)/0 0 0
- ----------------------------------------------------------------------------------------------------------------------
Michael D. Beck, Vice 1999 $120,000 $26,811 $32,864(4) 0 13,750/0 0 0
President, TASA; 1998 $110,000 $5,000 $32,864(4) 0 13,750/0 0 0
President and Chief 1997 $ 83,333 0 $24,622(4) 0 31,250(6)/0 0 0
Executive Officer, BETA
- ----------------------------------------------------------------------------------------------------------------------
Stephen H. Ivens, Vice 1999 $116,500 0 $30,212(5) 0 6,250/0 0 0
President, DRP Services* 1998 $112,000 0 $35,362(5) 0 6,250/0 0 0
1997 $112,000 0 $35,210(5) 0 25,625(2)/0 0 0
- ----------------------------------------------------------------------------------------------------------------------
Faith Takes, Executive 1999 $150,000 $33,990 $10,700(7) 0 37,500/0 0 0
Vice President, TESC; 1998 0 0 0 0 0/0 0 0
President and Chief 1997 0 0 0 0 0/0 0 0
Executive Officer, MESI
- ----------------------------------------------------------------------------------------------------------------------
<FN>
* As of November 1, 1999, Dr. Ivens retired as a full-time
employee of the Company, but is continuing to perform
services for the Company on a part-time, at-will basis.
(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: a contribution of $16,000 to the Company's
Money Purchase Pension Plan (the "Pension Plan") in
Fiscal 1999; contributions of $24,000, and $20,250 to
the Company's qualified 401(k) Profit Sharing Plan (the
"401(k)") and Pension Plan in Fiscal 1998, and 1997,
respectively; and $10,167, $8,250 and $8,250 for a
company car in Fiscal 1999, 1998, and 1997 respectively.
(4) Includes: a contribution of $12,000 to the Company's
Pension Plan in Fiscal 1999; contributions of $17,250
and $12,500 to the Company's 401(k) and Pension Plan in
Fiscal 1998 and 1997, respectively; and $7,176, $7,176
and $4,460 for a company car in Fiscal 1999, 1998 and
1997, respectively.
(5) Includes: a contribution of $11,650 to the Company's
Pension Plan in Fiscal 1999; contributions of $16,800
and $16,800 to the Company's 401(k) and Pension Plan in
Fiscal 1998 and 1997, respectively; and $7,250, $7,250,
and $6,100 for a company car, in Fiscal 1999, 1998, and
1997, respectively.
(6) Granted as part of the purchase price for the
acquisition of BETA by the Company.
(7) Includes: $7,200 for a company car in Fiscal 1999.
</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.
During Fiscal 1999, Mr. Ivens gave notice of voluntary
termination of his employment agreement, in accordance with the
terms thereof, and, accordingly, his employment agreement
terminated on October 31, 1999. Consequently, as of November 1,
1999, Mr. Ivens has retired as a full-time employee of the
Company, but he is continuing to perform services for the Company
on a part-time, at-will basis.
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, 2000. The employment agreement contains a non-competition
clause for two years following termination of the executive's
employment.
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. The
employment agreement contains a non-competition clause for two
years following termination of the executive's employment.
On March 26, 1999, the Company entered into an
employment agreement with Denise M. Stefano, pursuant to which,
effective as of May 3, 1999, the Company agreed to employ Ms.
Stefano, and Ms. Stefano agreed to remain, as the Chief Financial
Officer of TASA, for a term of one year, subject to automatic
yearly extensions and certain rights of termination as provided
in such agreement. The agreement contains a non-competition
clause for one year following termination of the executive's
employment.
On December 1, 1999, the Company entered into an
employment agreement with Peter Duhamel, pursuant to which,
effective as of January 10, 2000, the Company agreed to employ
Mr. Duhamel, and Mr. Duhamel agreed to remain, as the Chief
Operating Officer of TASA and MLP and as a Vice President of
TASA, for a term of one year. After the expiration of six months
of the initial term, the Company can determine whether to extend
the term for an additional one-year period from the date of the
extension. Thereafter, provided the Company elects to extend the
term of the agreement as provided in the preceding sentence, the
agreement is subject to automatic yearly extensions and certain
rights of termination as provided in such agreement. The
agreement contains a non-competition clause for one year
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 625,000 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 50,000 shares.
In Fiscal 1997, the Company granted a total of
254,562.5 options under the Amended Option Plan, of which
178,937.5 options were granted in connection with the
rejuvenation of options previously granted; in Fiscal 1998, the
Company granted a total of 90,875 options under the Amended
Option Plan; and in Fiscal 1999, the Company granted a total of
125,625 options under the Amended Option Plan. In Fiscal 1997,
178,937.5 options under the Amended Option Plan were canceled; in
Fiscal 1998, 29,225 options under the Amended Option Plan were
canceled; and in Fiscal 1999, 12,750 options under the Amended
Option Plan were canceled. As of December 31, 1999, there were
461,112.5 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(4) ($/Sh) Expiration Date
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Andrew L. Simon, President, 21,875(2) 17.2% $2.88 November 2, 2008
Chief Executive Officer
- ----------------------------------------------------------------------------------------------------------------
Michael D. Beck, Vice 13,375(2) 10.5% $2.88 November 2, 2008
President, TASA;
President and Chief
Executive Officer, BETA
- ----------------------------------------------------------------------------------------------------------------
Stephen H. Ivens, Vice 6,250(2) 4.9% $2.88 November 2, 2008
President, DRP Services
- ----------------------------------------------------------------------------------------------------------------
Faith Takes, Executive 37,500(3) 29.4% $2.88 November 8, 2008
Vice President, TESC;
President and Chief
Executive Officer, MESI
- ----------------------------------------------------------------------------------------------------------------
<FN>
(1) To date, the Company has issued no SARs.
(2) These options became exercisable on November 4, 1999.
(3) These options became exercisable on November 9, 1999.
(4) Includes all options granted to employees and directors
under the Amended Option Plan, the Directors Stock Option
Plan and the Consultants Stock Incentive Plan in Fiscal 1999.
</FN>
</TABLE>
<TABLE>
<CAPTION>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
Number of Value of
Securities Underlying Unexercised
Unexercised In-the-Money
Options/SARs(1) Options/SARs(1)
at FY-End (#) at FY-End ($)
---------------------------------------
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise (#) Realized ($) Unexercisable Unexercisable
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Andrew L. Simon, President, Chief 0 0 121,875/0 0/0(2)
Executive Officer and
- -----------------------------------------------------------------------------------------------------------
Michael D. Beck, Vice President, 0 0 58,750/0 0/0(2)
TASA; President and Chief
Executive Officer, BETA
- -----------------------------------------------------------------------------------------------------------
Stephen H. Ivens, Vice 0 0 51,250/0 0/0(2)
President, DRP Services
- -----------------------------------------------------------------------------------------------------------
Faith Takes, Executive 0 0 37,500/0 0/0(2)
Vice President, TESC;
President and Chief
Executive Officer, MESI
- -----------------------------------------------------------------------------------------------------------
<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 29, 1999, or $1.25.
</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 25,000 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 1,250 options on the day he (she) first is
elected to the Board of Directors, and 625 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.
On December 15, 1999, the Board of Directors of the Company
approved an increase in the number of shares to be granted to
directors to 5,000 shares upon election to the board and
2,500 shares upon each re-election, which amendment is subject
to the approval of the stockholders of the Company. 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 28, 1997, the Company granted
1,250 options; on March 27, 1998, the Company granted 1,250
options; on October 28, 1998, the Company granted 1,250 options;
on December 15, 1998, the Company granted 1,250 options; and on
March 4, 1999, the Company granted 1,875 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 50,000 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 1997, 12,500 options
were granted under the Consultants Plan; in Fiscal 1998, 27,500
options were granted under the Consultants Plan; in Fiscal 1999,
no options were granted under the Consultants Plan, and 35,000
options were canceled or forfeited.
PROFIT SHARING PLAN. The Company has a qualified 401(k)
Profit Sharing Plan. The 401(k) Plan allows eligible 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 and Fiscal
1997, 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. In Fiscal 1999, the Board of
Directors of the Company elected not to make its customary
contribution of five percent (5%) of each eligible employee's
compensation in order to retain such amount for working capital;
accordingly, each eligible employee is permitted to contribute up
to fifteen percent (15%) 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 $1,684,666 and $1,656,023 at October 31, 1999
and 1998, respectively.
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 $964,539 and $741,928
at October 31, 1999 and 1998, respectively.
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 1999.
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 January 15, 2000, 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 January 15, 2000, there were 2,141,801 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 273,593.5 shares of Common
Stock. Accordingly, the Voting Trust has the power to exercise
273,593.5 votes, or 12.8% 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. 523,194(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, 273,593.5 12.8%
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 110,167.5 5.1%
c/o Ostreicher & Ennis
225 Mamaroneck Avenue
White Plains, NY 10605
- -------------------------------------------------------------------------------
Eileen West 5,375(3) 0.3%
56 Harrison Street
New Rochelle, NY 10801
- -------------------------------------------------------------------------------
Officers and Directors:
- -----------------------
Walter B. Barbe 66,250(4) 3.0%
910 Church Street
Honesdale, PA 18431
- -------------------------------------------------------------------------------
Michael D. Beck 113,875(5) 5.6%
4 Hardscrabble Heights
Brewster, NY 10509
- -------------------------------------------------------------------------------
Steven R. Berger 3,125(6) 0.2%
620 Fifth Avenue
New York, NY 10020
- -------------------------------------------------------------------------------
Peter Duhamel 0(7) 0.0%
4 Hardscrabble Heights
Brewster, NY 10509
- -------------------------------------------------------------------------------
Joseph A. Fernandez 2,775.5(8) 0.1%
4392 Live Oak Boulevard
Palm Harbor, FL 34685
- -------------------------------------------------------------------------------
Andrew L. Simon 202,113(9) 8.9%
4 Hardscrabble Heights
Brewster, NY 10509
- -------------------------------------------------------------------------------
Denise M. Stefano 0(10) 0.0%
4 Hardscrabble Heights
Brewster, NY 10509
- -------------------------------------------------------------------------------
Linda G. Straley 96,944.25(11) 4.4%
4 Hardscrabble Heights
Brewster, NY 10509
- -------------------------------------------------------------------------------
Faith Takes 37,500(12) 1.7%
4 Hardscrabble Heights
Brewster, NY 10509
- -------------------------------------------------------------------------------
David L. Warnock 554,058.5(13) 20.6%
1 South Street, Suite 2150
Baltimore, Maryland 21202
- -------------------------------------------------------------------------------
Officers and Directors as a Group (10 persons) 1,350,234.75(14) 44.6%
- -------------------------------------------------------------------------------
[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) 130,798.5 shares with respect to which the
Fund's right to purchase, granted pursuant to the Fund
Warrant, is not currently exercisable and (ii) 36,237 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 14 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 5,375 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 56,250 shares which Dr. Barbe has the right to
acquire upon the exercise of currently exercisable stock
options.
5 Includes (i) 27,000 shares which are owned jointly with Mr.
Beck's wife, (ii) 9,375 shares owned by Mr. Beck's daughter,
and (iii) 58,750 shares which Mr. Beck has the right to
acquire upon the exercise of currently exercisable stock
options; excludes 9,375 shares owned by Mr. Beck's wife, as
to which Mr. Beck disclaims beneficial ownership.
6 Includes 3,125 shares which Mr. Berger has the right to
acquire upon the exercise of currently exercisable stock
options or stock options which become exercisable within 60
days.
7 Excludes 40,000 shares which are the subject of options
granted to Mr. Duhamel which are not currently exercisable.
8 Includes 1,875 shares which Mr. Fernandez has the right to
acquire upon the exercise of currently exercisable stock
options or stock options which become exercisable within 60
days.
9 Includes 121,875 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) 375 shares of Common Stock owned by the
retirement account of Mr. Simon's wife, as to which Mr.
Simon disclaims beneficial ownership, and (ii) 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.
10 Excludes 15,000 which are the subject of options granted to
Ms. Stefano which are not currently exercisable.
11 Includes 51,250 shares which Ms. Straley has the right to
acquire upon the exercise of currently exercisable stock
options.
12 Includes 37,500 shares which Ms. Takes has the right to
acquire upon the exercise of currently exercisable stock
options.
13 Includes (i) 1,875 shares which Mr. Warnock has the right to
acquire upon the exercise of currently exercisable stock
options or stock options which become exercisable within 60
days; (ii) 523,194 shares which the Fund has the right to
acquire pursuant to the Fund Warrant; and (iii) 28,989.5
shares which Strategic Associates, has the right to acquire
pursuant to the Strategic Warrant (see footnotes 1 and 2 to
this table). Excludes (i) 130,798.5 shares with respect to
which the Fund's right to purchase, granted pursuant to the
Fund Warrant, is not currently exercisable and (ii) 7,247.5
shares with respect to which Strategic Associates' right to
purchase, granted pursuant to the Strategic Warrant, is not
currently exercisable.
14 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 884,683.5 shares which are the subject of
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 193,046 shares which are the subject of 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 a Securities Purchase
Agreement (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 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, the Warrants to acquire an aggregate
of 690,229.5 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 Purchase Closing Date if the Company shall not
have 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 upon
issuance was $1.40 per share of Common Stock, subject to certain
antidilution adjustments set forth in the Warrants. On December
3, 1999, in exchange for the Cahill, Warnock Entities' consent,
among other things, to subordinate the Debentures to certain
financing the Company is seeking to obtain in connection with the
implementation of the Company's strategic plan and pursuant to a
Consent, Agreement and Amendment, dated as of December 3, 1999,
among the Company and the Cahill, Warnock Entities, the Board of
Directors of the Company approved a repricing of the Warrants to
an exercise price of $1.125 per share of Common Stock, subject to
the same antidilution adjustments referred to above. 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
Securities and Exchange Commission.
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 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 for an aggregate
purchase price of $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
Mildred Elley related to the acquired business (the "Assumed
Liabilities"). The aggregate amount of the Assumed Liabilities
is approximately $1,000,000. 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.
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 $217,093, $143,375
and $124,864 to Salans Hertzfeld Heilbronn Christy & Viener for
Fiscal 1999, 1998 and 1997, 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 Quarterly Report on Form 10-QSB for
the fiscal quarter ended January 31, 1999)
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 Certificate of Amendment of Certificate of
Incorporation dated March 4, 1999, filed with
the Secretary of State of the State of Delaware
(incorporated herein by reference to the exhibit
contained in the Company's Quarterly Report
on Form 10-QSB for the fiscal quarter ended
January 31, 1999)
3.5 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 S-3 (File No.
333-75377) under the Securities Act of 1933,
as amended, filed with the Securities and
Exchange Commission on March 31, 1999)
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 issued in connection with the
Securities Purchase Agreement by and between 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)
4.7 Form of Warrant issued in connection with (i) the
Agreement, dated as of August 19, 1997, among
Comprehensive Capital, Theodore P. Allocca, and
Theodore Allocca and Steven Kevorkian and the
Company and (ii) the Agreement, dated as of
August 19, 1997, between the Company and Barry
M. Goldstein (incorporated herein by reference to
the exhibit contained in the Company's Registration
Statemenet on Form S-3 (File No. 333-75377) under
the Securities Act of 1933, as amended, filed with
the Securities and Exchange Commission on March
31, 1999)
4.8 Amendment No. 1 to the Securities Purchase Agreement,
dated as of March 8, 1999, among the Company, Cahill,
Warnock Strategic Partners Fund, L.P. and Strategic
Associates, L.P. (filed herewith)
4.9 Consent, Agreement and Amendment, dated as of
December 3, 1999, by and among the Company,
Cahill, Warnock Strategic Partners Fund, L.P.
and Strategic Associates, L.P. (filed herewith)
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 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)
10.4 401(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)
10.5 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)
10.6 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)
10.7 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)
10.8 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)
10.9 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)
10.10 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)
10.11 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)
10.12 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)
10.13 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)
10.14 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)
10.15 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)
10.16 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 refernce 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)
10.17 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)
10.18 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)
10.19 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)
10.20 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)
10.21 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)
10.22 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
(the "1997 10-KSB"))
10.23 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)
10.24 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)
10.25 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)
10.26 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 Security Agreement between the Company and MSB
Bank (incorporated by reference to the exhibit
contained in the 1997 10-KSB)
10.28 Environmental Guaranty, dated August 28, 1997,
of the Company (incorporated by reference to
the exhibit contained in the 1997 10-KSB)
10.29 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)
10.30 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)
10.31 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 November 1998 8-K)
10.32 Promissory Note of MESI Acquisition Corp.
(incorporated by reference to the exhibit
contained in the November 1998 8-K)
10.33 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)
10.34 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)
10.35 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)
10.36 Employment Agreement, dated March 26, 1999,
by and among the Company and Denise Stefano
(incorporated by reference to the exhibit
contained in the Company's Quarterly Report
on Form 10-QSB for the fiscal quarter ended
April 30, 1999)
10.37 Employment Agreement, dated December 1, 1999,
by and among the Company and Peter Duhamel
(filed herewith)
11 Computation of Earnings Per Share (filed
herewith)
21 Subsidiaries of the Registrant (incorporated
by reference to the exhibit contained in the
Company's Annual Report on Form 10-KSB for
the fiscal year ended October 31, 1998)
23 Consent of Lazar, Levine & Felix LLP (filed
herewith)
27 Financial Data Schedule (filed herewith;
electronic filing only)
(b) Reports on Form 8-K
None.
<PAGE> F-1
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
PAGE
----
INDEPENDENT AUDITORS' REPORT F - 2
CONSOLIDATED BALANCE SHEETS F - 3
CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME 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, 1999 and 1998, and the related consolidated statements
of operations and comprehensive income, changes in stockholders'
equity and cash flows for the three fiscal years ended October 31, 1999.
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, 1999 and 1998 and the results of its
operations and its cash flows for the three fiscal years ended October
31, 1999 in conformity with generally accepted accounting principles.
Lazar, Levine & Felix LLP
Certified Public Accountants
New York, New York
December 16, 1999
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 9 1 9 9 8
------- -------
<S> <C> <C>
ASSETS
------
Current assets:
Cash and temporary investments $ 1,140,893 $ 4,980,230
Marketable securities 175,000 186,376
Accounts receivable 1,312,148 1,287,264
Tuition receivable, net of allowance for doubtful
accounts of $213,817 (Note 7) 2,176,960 --
Inventories 472,341 478,869
Prepaid expenses and other current assets 202,114 173,679
----------- -----------
Total current assets 5,479,456 7,106,418
Property, plant and equipment - net of
accumulated depreciation of $1,387,170 and
$1,179,297, respectively (Notes 4, 8, 9, and 10) 2,072,581 1,753,811
Other assets:
Deferred acquisition costs 157,493 353,406
Non-current tuition receivable, net of allowance for
doubtful accounts of $71,273 (Note 7) 309,274 --
Notes receivable (Note 3) 159,327 --
Test passage bank and test development, net of
accumulated amortization of $1,838,694 and
$1,474,302, respectively (Note 5) 2,823,931 2,675,624
Software development costs, net of accumulated
amortization of $178,744 and $88,702, respectively 313,172 350,790
Goodwill, net of accumulated amortization of $280,527
and $122,993, respectively 3,953,238 739,264
Non-compete agreements, net of accumulated
amortization of $172,124 and $101,095,
respectively (Note 2) 327,876 398,905
Loan origination costs (Note 11) 200,263 231,307
Deferred income taxes (Note 14) 415,400 390,148
Other assets 172,406 74,967
----------- -----------
Total assets $16,384,417 $14,074,640
=========== ===========
<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 9 1 9 9 8
------- -------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Line of credit (Note 7) $ 400,000 $ --
Current maturities of long-term debt (Notes 8 and 9) 503,799 261,034
Current maturities of capitalized lease
obligations (Note 10) 14,002 --
Accounts payable and accrued expenses 1,482,082 1,020,568
----------- -----------
Total current liabilities 2,399,883 1,281,602
Long-term debt:
Subordinated debt (Note 11) 4,000,000 4,000,000
Long-term debt, net of current portion (Notes 8 and 9) 3,103,470 2,267,198
Long-term capitalized lease obligations, net of
current portion (Note 10) 31,204 --
----------- -----------
Total liabilities 9,534,557 7,548,800
----------- -----------
Commitments and contingencies (Notes 2, 9, 11, 12, 15, 17 and 18)
Stockholders' equity (Note 13):
Preferred stock, $.0001 par value, 5,000,000 shares
authorized, 0 and 1,500 shares
issued and outstanding, respectively -- --
Common stock, $.0001 par value, 20,000,000 shares
authorized, 2,141,801 shares
issued and outstanding 214 214
Additional paid-in capital 5,052,479 5,052,479
Deferred interest (470,460) (588,075)
Stock subscription receivable -- (14,350)
Unearned compensatory stock (19,965) (37,187)
Accumulated other comprehensive income -- 5,924
Retained earnings 2,287,592 2,106,835
----------- -----------
Total stockholders' equity 6,849,860 6,525,840
----------- -----------
Total liabilities & stockholders' equity $16,384,417 $14,074,640
=========== ===========
<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
AND COMPREHENSIVE INCOME
Fiscal Years Ended October 31,
1 9 9 9 1 9 9 8 1 9 9 7
------- ------- -------
<S> <C> <C> <C>
Assessment revenues $ 4,591,542 $4,123,235 $3,126,256
Educational delivery revenues 5,297,127 -- --
Instructional revenues 2,427,577 2,193,879 1,461,377
----------- ---------- ----------
Total net revenue (Note 16) 12,316,246 6,317,114 4,587,633
Cost of goods sold 4,469,746 1,935,104 1,578,749
----------- ---------- ----------
Gross profit 7,846,500 4,382,010 3,008,884
----------- ---------- ----------
Operating expenses:
Selling expenses 2,505,934 1,596,462 1,128,604
General and administrative expenses 4,387,253 2,619,034 1,601,764
Loan loss expense (Note 6) -- -- 405,000
Loan loss recovery (Note 6) -- (200,000) --
Impairment of goodwill -- -- 2,002,674
----------- ---------- ----------
Total operating expenses 6,893,187 4,015,496 5,138,042
----------- ---------- ----------
Income (loss) from operations 953,313 366,514 (2,129,158)
Other income (expense):
Gain (loss) on sale of assets (10,723) 2,689 (30,539)
Other income 5,883 -- --
Interest expense (818,710) (253,829) (145,748)
Investment income 128,190 44,833 111,665
----------- ---------- ----------
Income (loss) before income taxes 257,953 160,207 (2,193,780)
Income taxes (benefit) (Note 14) 77,196 29,005 (829,969)
----------- ---------- ----------
Net income (loss) 180,757 131,202 (1,363,811)
Other comprehensive income (loss), net of tax:
Unrealized holding gain (loss) on securities
arising during the period (5,924) (2,677) 28,674
----------- ---------- ----------
Total comprehensive income (loss) $ 174,833 $ 128,525 $(1,335,137)
=========== ========== ===========
Weighted average shares outstanding
Basic 2,141,801 2,127,051 2,053,272
Diluted 2,345,449 2,180,259 2,053,272
Earnings (loss) per share
Basic $ .08 $ .06 $ (.66)
Diluted $ .08 $ .06 $ (.66)
<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
Accumulated
Additional Stock Unearned Other
Preferred Stock Common Stock Paid-in Deferred Subscriptions Compensatory Comprhensive Retained
Shares Amount Shares Amount Capital Interest Receivable Stock Incom Earnings
------ ------ ------ ------ ------- -------- ---------- ----- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
November 1,
1996, as
previously
reported 1,500 $-- 7,789,322 $779 $4,077,935 $ -- $(14,350) $ -- $(20,073) $3,339,444
One-for-four
stock split
effected on
March 4,
1999 -- -- (5,841,996) (585) 585 -- -- -- -- --
----- --- ----------- ----- ---------- -------- -------- ------ --------- ----------
Balance at
November 1,
1996, as
adjusted 1,500 -- 1,947,326 194 4,078,520 -- (14,350) -- (20,073) 3,339,444
Purchase of
subsidiary
- Beta -- -- 37,500 4 79,646 -- -- -- -- --
Proceeds from
exercise of
warrants -- -- 37,500 4 67,721 -- -- -- -- --
Stock issued
for services -- -- 75,000 7 140,618 -- -- (107,046) -- --
Net unrealized
gain in
marketable
securities -- -- -- -- -- -- -- -- 28,674 --
Net loss -- -- -- -- -- -- -- -- -- (1,363,811)
----- ----- --------- --- --------- -------- ------- -------- ------ ----------
Balance at
October 31,
1997 1,500 -- 2,097,326 209 4,366,505 -- (14,350) (107,046) 8,601 1,975,633
Proceeds from
exercise of
options -- -- 19,475 2 52,777 -- -- -- -- --
Proceeds from
exercise of
warrants -- -- 25,000 3 45,122 -- -- -- -- --
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 -- 2,141,801 214 5,052,479 (588,075) (14,350) (37,187) 5,924 2,106,835
Redemption of
preferred
shares (1,500) -- -- -- -- -- -- -- -- --
Receipt of
stock
subscriptions -- -- -- -- -- -- 14,350 -- -- --
Financial
advisory
services -- -- -- -- -- -- -- 17,222 -- --
Interest
expense -- -- -- -- -- 117,615 -- -- -- --
Net unrealized
gain in
marketable
securities -- -- -- -- -- -- -- -- (5,924) --
Net income -- -- -- -- -- -- -- -- -- 180,757
----- ----- --------- --- --------- -------- ------- -------- ------ ---------
Balance at
October 31,
1999 -- $ -- 2,141,801 $214 $5,052,479 $(470,460) $ -- $(19,965) $ -- $ 2,287,592
===== ===== ========= === ========= ========= ======== ======== ======== ===========
<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
Fiscal Years Ended October 31,
1 9 9 9 1 9 9 8 1 9 9 7
------- ------- -------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 180,757 $ 131,202 $(1,363,811)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 969,498 650,869 560,389
Deferred interest 117,615 -- --
Deferred income taxes (25,251) (54,426) (856,943)
Financial advisory services 17,222 69,859 33,580
Impairment of goodwill -- -- 2,002,674
Loan loss expense -- -- 405,000
Bad debt expense 192,594 -- --
Gain (loss) on sale of assets 12,231 (2,689) 30,539
Changes in operating assets and liabilities:
Accounts receivable (24,884) (484,243) (129,486)
Tuition receivable (638,318) -- --
Inventories 6,528 (118,642) 7,824
Prepaid expenses (16,671) 207,704 11,360
Other assets 13,401 (3,293) (16,031)
Accounts payable and accrued expenses (859,237) 500,418 (43,792)
---------- --------- -----------
NET CASH FLOWS FROM OPERATING ACTIVITIES (54,515) 896,759 641,303
---------- --------- -----------
INVESTING ACTIVITIES
Test passage bank and test development (482,799) (230,838) (448,749)
Software development costs (52,424) (68,045) (229,092)
Prepublication costs (122,698) -- --
Purchase of marketable securities (175,000) -- (3,797)
Proceeds from sale of marketable securities 370,000 535,000 1,193,148
Proceeds from sale of assets 13,200 -- 15,300
Acquisition of subsidiaries (1,939,648) -- (2,270,864)
Deferred acquisition costs (157,493) (353,406) --
Acquisition of test rights -- -- (29,900)
Acquisition of fixed assets (334,773) (163,744) (116,754)
---------- --------- -----------
NET CASH FLOWS FROM INVESTING ACTIVITIES (2,881,635) (281,033) (1,890,708)
---------- --------- -----------
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
F - 7
<PAGE> F-8
<TABLE>
<CAPTION>
TOUCHSTONE APPLIED SCIENCE ASSOCIATE
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Page 2 of 2
Fiscal Years Ended October 31,
1 9 9 9 1 9 9 8 1 9 9 7
------- ------- -------
<S> <C> <C> <C>
FINANCING ACTIVITIES
Mortgage costs -- -- (44,633)
Loan origination costs -- (231,307) --
Deferred offering costs -- (1,750) --
Proceeds from exercise of warrants -- 46,875 --
Proceeds from exercise of options -- 52,779 --
Stock subscription received 14,350 -- --
Repayment of capitalized lease obligations (5,790) -- --
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 (911,747) (314,953) (930,563)
---------- --------- ----------
NET CASH FLOWS FROM FINANCING ACTIVITIES (903,187) 3,207,840 1,356,250
---------- --------- ----------
NET CHANGE IN CASH AND TEMPORARY INVESTMENTS (3,839,337) 3,823,566 106,845
CASH AND TEMPORARY INVESTMENTS
AT BEGINNING OF PERIOD 4,980,230 1,156,664 1,049,819
---------- --------- ----------
CASH AND TEMPORARY INVESTMENTS
AT END OF PERIOD $1,140,893 $4,980,230 $1,156,664
========== ========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 741,673 $ 260,114 $ 144,262
========== ========== ==========
Income taxes $ 70,786 $ 60,502 $ 137,612
========== ========== ==========
Non-cash investing and financing activities:
Stock issued for prepaid consulting costs $ -- $ -- $ 140,625
========== ========== ==========
Deferred interest on issuance of warrant $ -- $ 588,075 $ --
========== ========== ==========
Assets acquired under capitalized lease obligations $ 32,571 $ -- $ --
========== ========== ==========
SUMMARY OF ACQUIRED SUBSIDIARIES:
Assets acquired consisting primarily of goodwill $6,916,234 $ -- $3,812,616
Liabilities assumed 3,562,828 -- 326,077
---------- ---------- ----------
Net purchase price $3,353,406 $ -- $3,486,539
========== ========== ==========
<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 2). 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 ("TESC"), which
was established to manage the Company's educational delivery
business. In November 1998, TESC formed a wholly-owned subsidiary,
MESI Acquisition Corp. ("MESI"), which purchased substantially all
of the operating assets of the Mildred Elley Schools, Inc.
("Elley") (Note 2).
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of the
Company and its wholly- owned subsidiaries, BETA, MLP, TESC and its
wholly-owned subsidiary MESI. 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, $2,490,864 for MLP and $3,371,598 for
Elley. This goodwill is being amortized over a period of fifteen
years for BETA and MLP and thirty years for Elley. In July 1997, the
Company deemed goodwill purchased in the MLP transaction totaling
$2,002,674 to be impaired based upon the provisions of Statement of
Financial Accounting Standards (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.
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)
- ---------------------------------------------------------
Cash and Temporary Investments
- ------------------------------
Cash and temporary investments include all cash balances on hand and
short-term, highly liquid investments with original maturities of
three months or less. 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 Statement of Financial Accounting Standards
(SFAS) No. 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 are
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, 1999 and 1998 is as follows:
October 31,
1 9 9 9 1 9 9 8
------- -------
Aggregate cost $ 175,000 $ 368,094
Gross unrealized gain -- 5,924
Gross unrealized loss -- --
Loans collateralized by securities -- (187,642)
--------- ---------
$ 175,000 $ 186,376
========= =========
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 the fiscal years ended October 31, 1999, 1998 and 1997,
respectively, bonds with an aggregate face value of $370,000,
$535,000 and $1,193,148 matured, resulting in a realized gain (loss)
on these securities of $1,906, $2,689 and $(6,475), respectively.
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. The borrowings were repaid during Fiscal 1999.
Accounts Receivable
- -------------------
The Company, due to its customer base, has experienced virtually no
trade bad debts. As a result, no reserve has been provided for.
Tuition Receivable
- ------------------
MESI will provide alternate financing arrangements for those students
who do not qualify for Federal and state financial aid to cover their
tuition. Since student contracts acquired, as part of the Elley
acquisition, as well as self-funded students who entered school
during the current fiscal year, have varying repayment terms which
extend beyond the next twelve-month period, these receivables have
been classified as current and non-current.
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 and on the straight-line
method for real property, 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
Leasehold improvements 39 years
Furniture, fixtures and equipment 5 to 7 years
Automobiles 3 to 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 and test development (Note 5), and
differences relating to the reporting of goodwill by the Company's
subsidiaries. Income taxes are reported based upon Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes".
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)
- ---------------------------------------------------------
Software Development
- --------------------
The Company accounts for costs associated with the development of
software products to be sold pursuant to Statement of Financial
Accounting Standards (SFAS) No. 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.
The American Institute for Certified Public Accountants has issued
Statement of Position (SOP) No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use", which the
Company adopted during the current fiscal year. Pursuant to this
statement, costs incurred during the preliminary stage of a project
to design computer software for internal use are expensed as incurred.
Once such a project enters its development stage, the payroll and
payroll related charges and any direct material costs are capitalized.
Capitalization of these computer software development costs is
discontinued when the project enters its post-implementation/operation
stage.
Deferred Acquisition Costs
- --------------------------
Deferred acquisition costs in Fiscal 1998 consisted of expenses
incurred related to the purchase of Elley (Note 2) which were
subsequently included in the Elley purchase price and are being
amortized over a thirty-year period. Deferred acquisition costs in
Fiscal 1999 consist of expenses incurred related to potential
acquisitions and will be included in the purchase price of the
respective acquired entity and amortized over a fifteen- to thirty-
year period.
Amortization
- ------------
Loan origination costs and mortgage costs (Note 11) 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, seven to eleven (7 - 11) years for
test passage bank and test development costs, and fifteen to thirty
(15 -30) years for goodwill. Amortization expense totaled $729,219,
$507,387 and $416,907 for the fiscal years ended October 31, 1999,
1998 and 1997, respectively.
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)
- ---------------------------------------------------------
Reverse Stock Split
- -------------------
All common shares and per share amounts have been adjusted to give
retroactive effect to a one-for-four reverse stock split effected on
March 4, 1999.
Concentration of Credit Risk
- ----------------------------
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and
accounts/tuition receivable. The Company maintains substantially
all of 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, 1999 and 1998, the Company's uninsured
cash balances totaled $541,721 and $4,492,880, 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.
As part of the acquisition of Elley, the Company acquired unsecured
student loans which are being reflected at net realizable value. The
Company also initiated student loans during the current fiscal year.
The risk of loss to the Company is the balance owed by the student at
the time of default. The Company plans to monitor these loans as closely
as possible to mitigate the potential risk.
Revenue Recognition
- -------------------
Revenues from the Company's sales of its proprietary tests and other
assessment-related products, as well as its instructional materials,
are recognized when product is shipped from the Company's warehouse.
Assessment consulting revenues are recognized when the consulting
services are rendered. Tuition revenues from the Company's
educational delivery division are recognized at the point in time in
which the Company has no exposure to future tuition refunds
associated with the respective academic semester.
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, in the case of
software products, the item is replaced. In the past, the Company's
returns have been insignificant. As a result, no reserve has been
provided for.
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)
- ---------------------------------------------------------
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and make 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, 1999 and 1998 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 each of the fiscal years ended October
31, 1999, 1998 and 1997 were computed by dividing net income by the
weighted average number of common and common equivalent shares
outstanding and also was adjusted for the assumed conversion of
shares issuable upon the exercise of options and warrants. The
Company had a net loss for the fiscal year ended October 31, 1997 and,
accordingly, common stock equivalents are excluded as the effect
would be anti-dilutive.
Effective November 1, 1997, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 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 this standard.
Marketing and Promotional Costs
- -------------------------------
Marketing and promotional costs are expensed as incurred and
aggregated $1,012,491, $644,471 and $374,788 for the fiscal years
ended October 31, 1999, 1998 and 1997, respectively.
F - 14
<PAGE> F-15
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
- ---------------------------------------------------------
Regulatory Compliance
- ---------------------
As an educational institution, MESI is subject to licensure from
various accrediting and state authorities and other regulatory
requirements of the United States Department of Education. As of
October 31, 1999, MESI was in compliance with all such requirements.
Recently Issued Accounting Standards
- ------------------------------------
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards (SFAS) No. 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 adopted this
standard during the current fiscal year and for the fiscal year
periods subsequent hereto. Other comprehensive income (loss) totaled
$(5,924), $(2,677) and $28,674 for the fiscal years ended October 31,
1999, 1998 and 1997, respectively.
The Financial Accounting Standards Board has also issued Statement of
Financial Accounting Standards (SFAS) No. 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 entity's operating segments,
products and service, major customers and geographic areas in which
they operate. The Company has adopted this standard during the
current fiscal year and for the fiscal year periods subsequent hereto
and has made the appropriate disclosures within the consolidated
footnotes herein (Note 16).
NOTE 2 - BUSINESS ACQUISITIONS
- ------------------------------
Beck Evaluation & Testing Associates, Inc.
- ------------------------------------------
In January 1997, the Company acquired all the outstanding capital
stock of 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.
F - 15
<PAGE> F-16
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - BUSINESS ACQUISITIONS (continued)
- ------------------------------
Modern Learning Press, Inc.
- ---------------------------
In May 1997, a newly-formed wholly-owned subsidiary of the Company,
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 (8 1/4% at of October
31, 1999) 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 non-compete 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 and, accordingly, the Company's
financial statements include the operations of MLP from the date of
acquisition.
Mildred Elley
- -------------
On November 2, 1998, a newly-formed wholly-owned subsidiary of TESC,
MESI, purchased substantially all of the operating assets of Elley.
In addition to assuming certain liabilities, MESI purchased the assets
for $3,000,000. The allocation of the assets purchased was revised
during the current fiscal year. 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 1/2%) per
annum. Principal and interest payments are payable at the beginning of
each quarter commencing on February 1, 1999 until maturity on February
1, 2004. The acquisition is being accounted for using the purchase
method of accounting and, accordingly, the Company's financial
statements include the operations of MESI from the date of
acquisition.
As a result of the acquisition, TESC assumed the obligations relating
to employment agreements with the former majority shareholder of Elley
and certain key employees. Additionally, the Company granted options
pursuant to the Company's Amended and Restated 1991 Stock Option
Incentive Plan to each of such employees to purchase an aggregate of
41,250 shares of the Company's common stock at $2.88 per share, the
fair market value of the Company's common stock on the date of grant.
The options may be exercised over a nine-year period commencing one
year from the date of grant.
F - 16
<PAGE> F-17
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, MLP and MESI occurred at the beginning of
the fiscal years presented:
Fiscal Years Ended October 31,
1 9 9 9 1 9 9 8 1 9 9 7
------- ------- -------
Net sales $12,316,246 $11,420,114 $10,489,871
Net income (loss) 180,757 10,867 (1,062,051)
Basic earnings per share .08 -- (.52)
Diluted earnings per share .08 -- (.52)
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 - NOTES RECEIVABLE
- -------------------------
Notes receivable includes (1) a $150,000 note with interest at a rate
of 6.17% per annum secured by a mortgage on certain of the obligor's
real property, with principal due on December 31, 2003 and (2) a
$9,327 note with an annual interest rate of 8.75% requiring monthly
payments of $516 consisting of principal and interest, commencing
February 1, 2001.
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
- --------------------------------------
Property, plant and equipment are summarized as follows:
October 31,
1 9 9 9 1 9 9 8
------- -------
Land $ 161,367 $ 161,367
Building 1,807,591 1,807,591
Building improvements 512,983 306,844
Leasehold improvements 59,876 --
Furniture, fixtures and equipment 827,927 523,849
Automobiles 90,007 133,457
---------- ----------
3,459,751 2,933,108
Less: accumulated depreciation 1,387,170 1,179,297
---------- ----------
$2,072,581 $1,753,811
========== ==========
F - 17
<PAGE> F-18
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT (Continued)
- --------------------------------------
Depreciation expense for the fiscal years ended October 31, 1999,
1998 and 1997 was $240,279, $149,880 and $143,482, respectively.
Included in furniture, fixtures and equipment is $48,137 of equipment
under capital leases.
NOTE 5 - TEST PASSAGE BANK AND TEST DEVELOPMENT
- -----------------------------------------------
The test passage bank is principally comprised of payroll and payroll-
related costs expended in the development of test passages which are
used in the creation of the Company's tests. The process of writing
and calibrating a test passage takes approximately two years, and all
costs associated with the process are capitalized during this period.
Amortization of these costs begins once the development period has
elapsed, which in most cases, represents the point in time at which
the new test passage is placed into the test passage bank and becomes
available to be utilized within the Company's existing tests, or the
point in time at which a newly developed test becomes available for
sale. Costs capitalized in connection with the development of passages
used in the Company's Degrees of Reading Power ("DRP") tests have been
estimated to have a useful life of eleven years and, accordingly, are
being amortized over an eleven-year period. Costs capitalized in
connection with the development of passages used in all other of the
Company's tests have been estimated to have a useful life of seven
years and, accordingly, are being amortized over a seven-year period.
NOTE 6 - LOAN LOSS EXPENSE/RECOVERY
- -----------------------------------
On February 1, 1994, the Company consolidated two outstanding
subordinated, unsecured demand loans outstanding from the Harriman
Group, Inc. ("HGI"). The notes bore interest at a rate of ten
percent (10%) per annum, were payable annually, and were 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 terms of
the above loans. Pursuant to this notification, the entire principal
balance plus accrued interest to the date of payment was due by May 5,
1997.
In May 1997, HGI defaulted on its loan to the Company. Consequently,
the Company determined that the remaining principal and accrued interest
totaling $405,000 was uncollectible and, accordingly, this amount was
written off as a loan loss as of October 31, 1997.
In March 1998, the Company entered into an agreement with HGI, Inc.
(formerly The Harriman Group, Inc.) and one of its officers. The
agreement provided for the settlement of the note receivable plus
accrued interest, for an aggregate of $200,000, and was guaranteed
by an irrevocable letter of credit. Payment, pursuant to the
agreement, was received in August 1998 and was reflected as a loan
loss recovery as of October 31, 1998.
F - 18
<PAGE> F-19
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - LINE OF CREDIT
- -----------------------
As of October 31, 1999, MESI owed $200,000 to a bank, which is the
maximum available under a particular line of credit promissory note.
This note bears interest at a rate of 1.0% above the prime lending
rate and is due on December 31, 1999. The note is collateralized by
a second lien on all of MESI's corporate assets as well as the
guarantees of both TESC and TASA. Subsequent to October 31, 1999,
the bank agreed to extend this line of credit through March 31,
2000.
As of October 31, 1999, MESI also owed $200,000 which is the maximum
available from another line of credit promissory note with the same
bank. This note bears interest at a rate of 1.0% above the prime
lending rate, is due on December 31, 1999, and is collateralized by
a first lien on tuition receivables as well as the guarantees of
both TESC and TASA. Subsequent to October 31, 1999, the bank agreed
to extend this line of credit through March 31, 2000.
NOTE 8 - MORTGAGE PAYABLE
- -------------------------
On August 1, 1986, the Town of Southeast Industrial Development Agency
issued revenue bonds to finance the construction of a facility in
Brewster, New York, which the Company was leasing from the Agency.
Minimum lease payments sufficient to cover the Agency's debt service
and other expenses were to be made by the Company over a fifteen-year
term, which included a final payment in Fiscal 2001 of $350,000.
The bond indenture incurred interest at ninety-two percent (92%) of the
Bank's prime rate and contained covenants requiring the Company to
maintain specified levels of working capital and tangible net worth.
The lease agreement contained a one dollar ($1) purchase option
exercisable at the end of the lease term. The bond was secured by
the lease and was 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 a 17,000 square foot
addition to the above facilities. The mortgage incurred interest at
the rate of three-fourths of one percent (.75%) over the Bank's prime
rate. A $250,000 balloon payment was due in Fiscal 1996. On June 1,
1996, the Company refinanced the mortgage for an additional five years,
to mature on June 1, 2001 at the same rate of interest.
In August 1997, the Company remortgaged its facilities for $1,800,000
with Middletown Savings Bank (now Hudson United Bank). Borrowings on
the new mortgage incur interest at the rate of 8 1/8% per annum. The
mortgage is to be repaid through equal monthly installments with a
balloon payment due in Fiscal 2007 (Note 9). Proceeds from this
remortgaging, were used to retire all prior mortgages held
on the facilities and certain short-term debt associated with the
acquisition of MLP (Note 2).
F - 19
<PAGE> F-20
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - LONG-TERM DEBT
- -----------------------
Long-term debt consists of the following:
<TABLE>
<CAPTION>
Interest Due October 31,
Description Rate Date 1 9 9 9 1 9 9 8
- ----------- ---- ---- ------- -------
<S> <C> <C> <C> <C>
Mortgage payable to bank in equal
monthly installments of $15,196
including interest (Note 8) 8 1/8% 2007 $1,722,323 $1,758,115
Note payable to former stockholders
of BETA in equal quarterly installments
of $20,532 including interest (Note 2) 8 1/4% 1999 -- 20,117
Note payable to stockholder of Programs
for Education, Inc. in equal quarterly
installments of $50,000 plus interest Prime + 1%
(Note 2) (but no less
than 9%) 2002 550,000 750,000
Note payable to former stockholders
of Elley in equal quarterly
installments of $61,987 including
interest (Note 2) 8 1/2% 2004 832,371 --
Note payable to bank for working
capital requirements in equal
monthly principal payments
of $3,512 plus interest Prime + 2% 2008 367,527 --
Notes payable for equipment
financing in equal monthly
installments of $2,273 and
$1,500 including interest Prime + 1% 2003 135,048 --
--------- ---------
3,607,269 2,528,232
Less: current maturities 503,799 261,034
--------- ---------
Non-current portion $3,103,470 $2,267,198
========== ==========
</TABLE>
Long-term debt matures as follows:
Fiscal year ending October 31:
2000 $ 503,799
2001 527,024
2002 479,094
2003 380,028
2004 104,317
Thereafter 1,613,007
----------
Principal payments remaining $3,607,269
==========
F - 20
<PAGE> F-21
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - CAPITALIZED LEASE OBLIGATIONS
- ---------------------------------------
The Company is obligated under capitalized leases for certain computer
and telephone equipment.
Future minimum lease payments under these capitalized lease
obligations, including interest, as of October 31, 1999 are as follows:
Fiscal year ending October 31:
2000 $19,164
2001 19,164
2002 16,368
-------
54,696
Less: imputed interest 9,490
-------
Present value of future minimum lease payments 45,206
Less: current maturities 14,002
-------
$31,204
=======
These leases have interest rates ranging from 11.9% to 14.6%.
NOTE 11 - SUBORDINATED DEBENTURE AGREEMENT
- ------------------------------------------
In October 1998, the Company issued debentures to Cahill Warnock
Strategic Partners Fund, L.P. ("CWSPF") and Strategic Associates,
L.P. ("SA") for an aggregate of $4,000,000 pursuant to a Securities
Purchase Agreement entered into among the parties in September 1998.
These debentures are subordinate to certain senior indebtedness,
which as of October 31, 1999, consisted primarily of a mortgage
payable aggregating $1,722,323. Interest pursuant to the debentures
is incurred at an annual rate of eight percent (8%) and is payable
quarterly. The debentures, which are due in October 2003, contain
provisions for the prepayment. Among other provisions, the Company
agreed to use the proceeds from the debentures to acquire Elley (Note
2) and other comparable educational institutions which are approved
by CWSPF and SA. Additionally, the agreement contains provisions for
the issuance of warrants, allowing CWSPF and SA to acquire an
aggregate of 690,230 shares of the Company's common stock at $1.40
per share. These warrants are exercisable for a five-year period from
designated initial dates as set forth in the debenture agreement.
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,
with which the Company was in compliance at October 31, 1999.
Subsequent to October 31, 1999, in consideration of CWSPF and SA's
authorization to subordinate their debentures to other potential
indebtedness to be incurred by the Company, the warrants were
repriced to $1.125 per share.
F - 21
<PAGE> F-22
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - RETIREMENT PLANS
- --------------------------
The Company has a qualified 401(k) Profit Sharing Plan under which
eligible employees who are eighteen years of age and have completed
either six months or one thousand hours of employment become
participants. 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 fiscal years ended October 31,
1999, 1998 and 1997, the Company made contributions to the profit
sharing plan equal to 0%, 5%, and 5% of each employee's compensation,
respectively, thereby limiting each eligible employee to contribute
up to 15%, 10%, and 10%, respectively.
Net assets for the Profit Sharing Plan, as estimated by the
Massachusetts Mutual Life Insurance Company which maintains the
plan's records, were $1,684,666 and $1,656,023 at October 31, 1999
and October 31, 1998, respectively.
In October 1991, the Company adopted a Money Purchase Pension Plan
under which eligible employees who are eighteen years of age and have
completed either six months or one thousand hours of employment
become participants. Under this Plan, which was first effective for
the fiscal year ended October 31, 1991 and which has been qualified
by the Internal Revenue Service, the Company makes a mandatory annual
contribution equal to ten percent (10%) of each eligible employee's
compensation.
Net assets for the Money Purchase Pension Plan, as estimated by the
Massachusetts Mutual Life Insurance Company which maintains the plan's
records, were $964,539 and $741,928 at October 31, 1999 and October
31, 1998.
For the fiscal years ended October 31, 1999, 1998 and 1997, pension
and profit sharing costs aggregated $174,733, $233,181 and $190,680,
respectively.
NOTE 13 - 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 were entitled to 1,000
votes per share (3,000 votes per share after giving effect to the
three-for-one stock split effected on September 22, 1993). The
holders of the shares were 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
possessed all the rights of the original issue but for the conversion
privilege. Pursuant to the Subordinated Debenture Agreement (Note
11), the 1,500 shares of the outstanding preferred stock were redeemed
in November 1998.
F - 22
<PAGE> F-23
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - STOCKHOLDERS' EQUITY (Continued)
- ------------------------------
Amended and Restated 1991 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 625,000 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 50,000 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 1, 1997 338,813 $2.12 - $11.00
Granted 90,875 $4.252
Canceled (29,225) $2.876 - $6.13
Exercised (19,475) $2.50 - $2.88
-------
Options outstanding - October 31, 1998 380,988 $2.12 - $11.00
Granted 125,625 $1.438 - $3.25
Canceled (45,500) $2.876 - $4.252
Exercised -- --
-------
Options outstanding - October 31, 1999 461,113 $1.438 - $11.00
=======
Options exercisable - October 31, 1999 336,738
=======
F - 23
<PAGE> F-24
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - 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 25,000 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 1,250 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 625 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, 1997 3,750 $2.876 - $8.75
Granted 2,500 $2.876 - $4.252
Canceled -- --
Exercised -- --
------
Options outstanding - October 31, 1998 6,250 $2.876 - $8.75
Granted 3,125 $2.00 - $2.252
Canceled (2,500) $2.876 - $8.75
Exercised -- --
------
Options outstanding - October 31, 1999 6,875 $2.00 - $7.85
======
Options exercisable - October 31, 1999 3,750
======
F - 24
<PAGE> F-25
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - STOCKHOLDERS' EQUITY (Continued)
- ------------------------------
Consultants Stock Incentive Plan
- --------------------------------
The Company has adopted a Consultants Stock Incentive Plan whereby
options to purchase up to 50,000 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.
Consultants stock incentive plan activity is summarized as follows:
Option Price
Shares Per Share
------ ---------
Options outstanding - November 1, 1997 11,250 $1.752 - $1.76
Granted 27,500 $3.124 - $3.28
Canceled -- --
Exercised -- --
-------
Options outstanding - October 31, 1998 38,750 $1.752 - $3.28
Granted -- --
Canceled (35,000) $1.752 - $3.28
Exercised -- --
-------
Options outstanding - October 31, 1999 3,750 $1.752 - $1.76
=======
Options exercisable - October 31, 1999 3,750
=======
Stock Based Compensation
- ------------------------
In October 1995, the FASB issued Statement of Financial Accounting
Standard (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 fiscal years ended
October 31, 1999, 1998 and 1997 would have been $(26,008), and $(.01),
$(136,889) and $(.06), $(1,590,055) and $(.77), respectively, had the
new method been applied.
F - 25
<PAGE> F-26
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - 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 the fiscal years ended October 1999,
1998 and 1997, respectively: expected volatility of 70%, 80% and 73%,
respectively; risk free interest rate of 6 3/4%; 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 Fiscal 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.
Compensatory Stock
- ------------------
In December 1996, the Company entered into a written consulting
agreement with a financial consulting firm. Pursuant to that
agreement, the consultant received 25,000 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 is being expensed over a period of five
years, the term of the agreement.
In February 1997, the Company entered into a written consulting
agreement with a financial consulting firm. Pursuant to that
agreement, the consultant received 25,000 shares of the Company's
common stock and a warrant to purchase 62,500 shares of the Company's
common stock for $1.876 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 25,000 shares on the date
of issuance and has been fully expensed as of October 31, 1999. In
December 1997, warrants to purchase 25,000 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. Pursuant to that agreement, the
consultant received a warrant to purchase 62,500 shares of the
Company's common stock in exchange for consulting services. The
warrants are exercisable for $2.00 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 were to each
receive 12,500 shares of the Company's common stock and a warrant to
purchase 31,250 shares of the Company's common stock for $1.876 per
share for a period of five years, in exchange for consulting services.
The cost of these services for each consultant was valued at $23,438,
the market value for such shares on the date of issuance, and was
expensed over a period of one year.
The amount of unearned compensation related to these shares is being
reflected as a reduction to stockholders' equity.
F - 26
<PAGE> F-27
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - 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 9 1 9 9 8
------- -------
Deferred tax asset:
Goodwill $ 684,045 $ 737,336
Deferred tax liability:
Test passage bank and
test development (268,645) (347,188)
--------- ---------
Net deferred tax asset $ 415,400 $ 390,148
========= =========
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>
Fiscal Years Ended October 31,
1 9 9 9 1 9 9 8 1 9 9 7
------- ------- -------
<S> <C> <C> <C>
Current:
Federal $ 88,259 $ 36,353 $ 22,834
State 14,188 47,078 4,140
-------- -------- ---------
102,447 83,431 26,974
-------- -------- ---------
Deferred:
Federal (17,355) (33,396) (651,166)
State (7,896) (21,030) (205,777)
-------- -------- ---------
(25,251) (54,426) (856,943)
-------- -------- ---------
Provision (benefit) for income taxes $ 77,196 $ 29,005 $(829,969)
======== ======== =========
</TABLE>
F - 27
<PAGE> F-28
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - 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:
Fiscal Years Ended October 31,
1 9 9 9 1 9 9 8 1 9 9 7
------- ------- -------
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 (11) (23) 3
--- --- ---
Effective tax rate 30% 18% (38)%
==== ==== =====
NOTE 15 - EMPLOYMENT AGREEMENTS
- -------------------------------
The Company has employment agreements with several of its key
employees. The agreements are for varying terms ranging from one to
three years and are automatically extended each year unless the
Company notifies the employee, in writing, ranging from at least 60
to 180 days prior to the anniversary date, that the agreement will
not be extended.
Each agreement provides for a base salary, which may be adjusted
annually at the discretion of the Company's Board of Directors, and
also provides for eligibility in the Company's benefits plans,
incentive bonuses which are payable based upon the attainment of
certain profitability goals, and key man life insurance. Among
other provisions, the agreements include a non-compete clause for
varying periods not exceeding three years following termination of
employment.
The aggregate commitment for future salaries as of October 31, 1999,
excluding bonuses, was as follows:
Fiscal year ending October 31:
2000 $ 849,300
2001 581,900
2002 268,967
----------
$1,700,167
==========
F - 28
<PAGE> F-29
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - SEGMENT INFORMATION
- -----------------------------
<TABLE>
<CAPTION>
Assessment Delivery Instructional Total
---------- -------- ------------- -----
<S> <C> <C> <C> <C>
Fiscal Year Ended October 31, 1999:
Revenues $4,591,542 $5,297,127 $2,427,577 $12,316,246
Interest and dividend income 18,653 104,823 4,714 128,190
Interest expense 155,938 604,653 58,119 818,710
Depreciation and amortization 652,547 198,437 118,514 969,498
Income before income taxes (332,720) 373,258 217,415 257,953
Total segment assets 7,391,695 6,448,113 2,544,609 16,384,417
Expenditures for segment assets 777,176 81,391 134,127 992,694
Fiscal Year Ended October 31, 1998:
Revenues $4,123,235 $ -- $2,193,879 $ 6,317,114
Interest and dividend income 34,401 2,222 8,210 44,833
Interest expense 173,437 -- 80,392 253,829
Depreciation and amortization 419,818 -- 231,051 650,869
Income before income taxes 45,983 2,198 112,026 160,207
Total segment assets 7,378,923 4,002,298 2,693,419 14,074,640
Expenditures for segment assets 445,880 -- 16,747 462,627
Fiscal Year Ended October 31, 1997:
Revenues $3,126,256 $ -- $1,461,377 $ 4,587,633
Interest and dividend income 108,596 -- 3,069 111,665
Interest expense 107,510 -- 38,238 145,748
Depreciation and amortization 513,095 -- 47,294 560,389
Income before income taxes (526,444) -- (1,667,336) (2,193,780)
Total segment assets 6,900,496 -- 2,692,389 9,592,885
Expenditures for segment assets 815,483 -- 9,012 824,495
</TABLE>
Included in the assessment segment reporting are corporate overhead
expenses of approximately $690,000, $798,000 and $575,000 for the
fiscal years ended October 31, 1999, 1998 and 1997, respectively.
The Company's operations are primarily conducted in the United
States. Information about the Company's operations in different
geographic areas for the fiscal years ended October 31, 1999, 1998
and 1997, is not considered material to the financial statements.
F - 29
<PAGE> F-30
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - 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 commitments as of October 31, 1999:
Year Ending October 31,
2000 $ 411,847
2002 393,332
2002 372,922
2003 372,922
2004 375,429
----------
Thereafter $3,175,826
==========
Net rental expense totaled $125,723, $29,144 and $14,684 for the
fiscal years ended October 31, 1999, 1998 and 1997, respectively.
In addition, the Company has entered into various operating leases
for equipment and automobiles which require monthly payments
aggregating $7,549. The last of these leases expires during Fiscal
2002.
NOTE 18 - SUBSEQUENT EVENTS
- ---------------------------
Prospective Acquisition - DuBois Business College
- -------------------------------------------------
Subsequent to the balance sheet data, the Company, through its
wholly-owned subsidiary, TESC, signed a letter of intent to acquire
all of the outstanding common stock of the DuBois Business College
("DBC"), a Pennsylvania-based, two-year degree granting business
college, and substantially all of the assets and certain liabilities
of Kenawell Technologies, LLC ("KTL"), a limited liability company
which holds several of the real properties of DBC, for $3,200,000.
The Company intends to finance the transaction through the issuance
of approximately $2,000,000 in bank debt and a promissory note to
the seller of approximately $1,200,000. The transaction, which the
Company intends to complete during its second quarter of Fiscal 2000,
will be accounted for using the purchase method of accounting.
F - 30
<PAGE> F-31
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 - SUBSEQUENT EVENTS (Continued)
- ---------------------------
Employment Agreement - Chief Operating Officer
- ----------------------------------------------
On December 1, 1999, the Company entered into an employment
agreement with a key executive pursuant to which the executive
agreed to accept employment with the Company as its Chief Operating
Officer. The agreement is for a one-year term and provides for
automatic extensions each year unless the Company provides written
notification at least 180 days prior to the anniversary date, that
the agreement will not be extended.
The agreement provides for a base annual salary of $150,000, which
may be adjusted annually at the discretion of the Company's Board of
Directors, and also provides for eligibility in the Company's
benefits plans, an incentive bonus based on the attainment of
certain profitability goals, and key man life insurance. Among other
provisions, the agreement includes a non-compete clause for a one-
year period following termination of employment.
Issuance of Stock Options
- -------------------------
In January 2000, the Company issued options to its Chief Operating
Officer to purchase 40,000 shares of its common stock pursuant to
the Company's Amended and Restated 1991 Stock Option Incentive Plan
at an exercise price of $2.125 per share, representing market value
at the date of grant.
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.
February 16, 2000 By: /s/ ANDREW L. SIMON
----------------------------------------
Andrew L. Simon
President and Chief Executive
Officer (principal executive officer)
February 16, 2000 By: /s/ DENISE M. STEFANO
----------------------------------------
Denise M. Stefano
Chief Financial Officer (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
- -------------------------
Andrew L. Simon Chairman of the Board February 16, 2000
/s/ WALTER B. BARBE Director February 16, 2000
- -------------------------
Walter B. Barbe
/s/ MICHAEL D. BECK Director February 16, 2000
- -------------------------
Michael D. Beck
/s/ STEVEN R. BERGER Director February 16, 2000
- -------------------------
Steven R. Berger
/s/ JOSEPH A. FERNANDEZ Director February 16, 2000
- -------------------------
Joseph A. Fernandez
/s/ LINDA G. STRALEY Director February 16, 2000
- -------------------------
Linda G. Straley
/s/ DAVID L. WARNOCK Director February 16, 2000
- -------------------------
David L. Warnock
Exhibit 4.8
-----------
AMENDMENT NO. 1
TO
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
SECURITIES PURCHASE AGREEMENT
AMENDMENT NO. 1, dated as of March 8, 1999 (the
"Amendment"), to the SECURITIES PURCHASE AGREEMENT, dated as of
September 4, 1998 (the "Original Agreement"), is entered into by
and among TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC., a Delaware
corporation (the "Company"), CAHILL, WARNOCK STRATEGIC PARTNERS
-------
FUND, L.P., a limited partnership organized under the laws of the
State of Delaware, and STRATEGIC ASSOCIATES, L.P., a limited
partnership organized under the laws of the State of Delaware
(each a "Purchaser" and collectively the "Purchasers").
--------- ----------
W I T N E S S E T H:
WHEREAS, pursuant to the Original Agreement,
Company issued and sold, and the Purchasers purchased from the
Company, severally and in the amounts set forth in the Original
Agreement, debentures and warrants of the Company and, upon
exercise of the Company Put Option (as defined in the Original
Agreement), shares of the Company's common stock, par value
$.0001 per share;
WHEREAS, pursuant to its Marketplace Rules, The
Nasdaq Stock Market has requested that the parties make certain
amendments to the Original Agreement;
NOW, THEREFORE, in consideration of the foregoing
and of the mutual covenants and agreements set forth herein, the
parties hereto agree as follows:
1. Definitions. Except as otherwise defined
-----------
herein, all capitalized terms used herein shall have the same
respective meanings as in the Original Agreement.
2. Amendment to Section 2.2. Section 2.2(b) of
------------------------
the Original Agreement is hereby amended by inserting a new
clause (iv) as follows:
"(iv) Notwithstanding the foregoing and any
provisions of the Warrants to the contrary, the
Purchasers hereby agree that they will not exercise
Warrants to purchase an aggregate number of shares of
Common Stock in excess of 19.9% of the Company's
outstanding shares on October 28, 1998 (i.e.., 19.9% of
8,567,222 shares = 1,704,877 shares) until a majority
of the stockholders of the Company attending a duly
called and held meeting of the stockholders shall have
approved such exercise of Warrants in excess of 19.9%
of the Company's outstanding shares on October 28,
1998."
3. Amendment to Section 8. Section 8 of the
----------------------
Original Agreement is hereby amended by inserting a new Section
8.10 as follows:
"8.10 Stockholders Meeting. The Company shall
--------------------
submit to its stockholders for approval at the next
annual meeting of the stockholders of the Company, or
if earlier, the next special meeting of the
stockholders of the Company, a resolution approving the
sale to the Purchasers of Common Stock of the Company
constituting in excess of 19.9% of the outstanding
Common Stock of the Company on October 28, 1998 and
approving the Company's exercise of the Company Put
Option."
4. Amendment to Section 9.1. Section 9.1 of the
------------------------
Original Agreement is herby amended by inserting the following at
the end thereof:
"Notwithstanding the foregoing, the Company will not
exercise the Company Put Option until a majority of the
stockholders of the Company attending a duly called and
held meeting of the stockholders shall have approved
such exercise of the Company Put Option."
5. No Other Amendments. Except as modified by
-------------------
this Amendment, the Original Agreement shall continue in full
force and effect.
6. Choice of Law. This Amendment shall be
-------------
governed by, and construed in accordance with, the laws of the
State of New York, without regard to principles of conflict of
laws.
7. Counterparts. This Amendment may be executed
------------
in any number of counterparts and by different parties hereto in
separate counterparts, with the same effect as if all parties had
signed the same document. All such counterparts shall be deemed
an original, shall be construed together and shall constitute one
and the same instrument.
IN WITNESS WHEREOF, the Company and the Purchasers
have caused this Agreement to be executed effective as of the
date first above written.
THE COMPANY:
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
By: /s/ ANDREW L. SIMON
----------------------------------------
Name: Andrew L. Simon
Title: President and Chief Executive Officer
PURCHASERS:
CAHILL, WARNOCK STRATEGIC PARTNERS FUND, L.P.
By: CAHILL WARNOCK STRATEGIC PARTNERS, L.P., its
General Partner
By: /s/ DAVID L. WARNOCK
-----------------------------------------
Name: David L. Warnock
Title: a General Partner
STRATEGIC ASSOCIATES, L.P.
By: CAHILL, WARNOCK & COMPANY, LLC, its
General Partner
By: /s/ DAVID L. WARNOCK
-----------------------------------------
Name: David L. Warnock
Title: Managing Member
Exhibit 4.9
-----------
CONSENT, AGREEMENT AND AMENDMENT
CONSENT, AGREEMENT AND AMENDMENT, dated as of December
3, 1999, by and among TOUCHSTONE APPLIED SCIENCE ASSOCIATES,
INC., a Delaware corporation (the "Company"), CAHILL, WARNOCK
STRATEGIC PARTNERS FUND, L.P., a limited partnership organized
under the laws of the State of Delaware, and STRATEGIC
ASSOCIATES, L.P., a limited partnership organized under the
laws of the State of Delaware (each, a "Purchaser", and
collectively, the "Purchasers").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Company and the Purchasers entered into
that certain Securities Purchase Agreement, dated as of
September 4, 1998 (the "Agreement"), pursuant to which the
Purchasers purchased from the Company, and the Company issued
and sold to the Purchasers, the debentures and warrants
described therein;
WHEREAS, the Company, the Purchasers and certain
individual shareholders of the Company entered into that
certain Investor Rights Agreement, dated as of September 4,
1998 (the "Investor Rights Agreement"), pursuant to which the
parties thereto agreed to certain restrictions with respect to
their ownership of shares of the Company's Common Stock and
the operation of the Company's business;
WHEREAS, in connection with acquisitions proposed to be
undertaken by the Company and disclosed to the Purchasers, the
Company has requested certain consents of the Purchasers
pursuant to the Agreement and the Investor Rights Agreement,
and the Purchasers have agreed to give such consents, on the
terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the foregoing and
of the mutual covenants and agreements set forth herein, the
parties hereto agree as follows:
1. Definitions. Capitalized terms used herein and
-----------
not otherwise defined herein, shall have the same respective
meanings as in the Agreement.
2. Proposed Transactions. The Company has disclosed
---------------------
to the Purchasers the following transactions (the "Proposed
Transactions"), and the Purchasers hereby acknowledge and agree
that the Company has disclosed to the Purchasers and discussed
with them the Proposed Transactions as follows:
a. the Company (or a wholly-owned subsidiary of the
Company) proposes to acquire the Dubois Schools;
b. the Company may be required to incur indebtedness
in connection with the foregoing acquisition; and
c. the Company will obtain a line of credit in the
amount of $750,000 from Hudson United Bank or equivalent
institution (the "Line of Credit").
3. Consent and Agreement. In consideration of the
---------------------
agreements of the Company contained in this Consent and
Agreement, the Purchasers hereby consent and agree:
a. to the Company's negotiation and closing of the
Proposed Transactions;
b. that the consummation of the Proposed Transactions
will not constitute a default by the Company under
Section 5.6 of the Investor Rights Agreement or under
Sections 8.9(b), 8.9(c) or 10.1 of the Agreement;
c. that, in connection with the Proposed
Transactions, (i) the financing to be obtained by the
Company in connection with the acquisition of the
Dubois Schools and the Line of Credit shall constitute
"Senior Indebtedness" (as such term is defined in the
Debentures), and the Debentures shall be expressly
subordinate to, and junior in right of payment to,
the prior payment in full of all principal of and
interest on all Senior Indebtedness (including the
aforementioned indebtedness and line of credit),
and (ii) the Company and its subsidiaries may, if
required by the financial institutions providing the
financing for the Proposed Transactions or in
connection with the Line of Credit, grant security
interests in the receivables of the Company or its
subsidiaries; and
d. that the calculation of the Company's compliance
with the One Million Dollar Debt Basket pursuant to
Section 10.1(i) of the Agreement shall not include (i)
any indebtedness, whether secured or unsecured, assumed
by the Company or its subsidiaries in connection with
the Proposed Transactions, (ii) indebtedness of the
acquired companies in the Proposed Transactions
existing on the date of the closing of the Proposed
Transactions, (iii) indebtedness incurred by the
Company or its subsidiaries in order to consummate the
Proposed Transactions, or (iv) the Line of Credit.
4. Agreements of the Company. In consideration of
-------------------------
the foregoing, the Company hereby agrees as follows:
a. the Exercise Price of the Warrants shall be
reduced from $1.40 per share (the existing Exercise
Price post-reverse stock split in March 1999) to $1.125
per share (the closing price of the Company's Common
Stock on the date hereof), and the term "Exercise
Price" as used in the Agreement, shall hereinafter be
amended to mean $1.125 per share;
b. the Company shall issue an amendment to each of
the Warrants amending Section 1 of each such Warrant to
substitute $1.125 as the Exercise Price of the
Warrants; and
c. the Company shall issue an amendment to each of
the Debentures amending (i) Section 1(c) of each such
Debenture to substitute $1.125 as the Exercise Price
for the Warrants; and (ii) Section 12(b) of each such
Debenture to amend the definition of "Senior
Indebtedness" as contemplated by Section 3(c) hereof.
5. No Other Amendments. Except as set forth in this
-------------------
Consent, Amendment and Agreement or as contemplated
hereby, the provisions of the Agreement, the Investor
Rights Agreement, the Warrants and the Debentures shall
continue in full force and effect and unmodified as of
the date hereof.
6. Governing Law. This Consent, Amendment and
-------------
Agreement shall be governed by and construed in
accordance with the laws of the State of New York.
7. Counterparts. This Consent, Amendment and
------------
Agreement may be executed in two or more counterparts,
each of which shall constitute an original and all of
which, taken together, shall constitute one and the
same instrument.
IN WITNESS WHEREOF, this Consent, Amendment and
Agreement has been executed as of the date first written
above.
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
By /s/ ANDREW L. SIMON
---------------------------------------
Andrew L. Simon
President
CAHILL, WARNOCK STRATEGIC PARTNERS FUND, L.P.
By CAHILL WARNOCK STRATEGIC PARTNERS, L.P.
General Partner
By /s/ DAVID L. WARNOCK
---------------------------------------
STRATEGIC ASSOCIATES, L.P.
By CAHILL, WARNOCK & COMPANY, LLC, its
General Partner
By /s/ DAVID L. WARNOCK
---------------------------------------
Exhibit 10.37
-------------
EMPLOYMENT AGREEMENT
AGREEMENT dated the 1st day of December, 1999 by and between
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC., a Delaware
corporation with its principal place of business at 4
Hardscrabble Heights, Brewster, New York 10509 ("TASA" or the
"Corporation") and PETER DUHAMEL, an individual residing at 3
Joseph Way, Branford, CT 06404 ("Employee").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Corporation recognizes that the current
business environment makes it difficult to attract and retain
highly qualified employees unless a certain degree of security
can be offered to such individuals against personnel changes;
and
WHEREAS, the Corporation desires to assure fair treatment of
such qualified employees and thereby increasing their
willingness to remain with the Corporation; and
WHEREAS, The Board of Directors (the "Board") of the
Corporation believes it is essential to provide Employee with
such degree of security and secure the services of Employee
for the Corporation, and, in order to accomplish these
objectives, the Board has caused the Corporation to enter into
this Agreement.
NOW, THEREFORE, in consideration of the premises and of the
mutual agreements set forth herein, the parties hereto,
intending to be legally bound, agree as follows:
1. Employment and Term. Subject to the terms and
-------------------
conditions of this Agreement, the Corporation agrees to employ
Employee, and Employee hereby accepts employment by the
Corporation, for a term beginning as of January 1, 2000 (the
"Effective Date") and, except as provided in the next two
sentences, ending on the first anniversary of the Effective
Date. At the end of the first six month period of the Term,
and not later than thirty (30) days thereafter, the
Corporation shall advise Employee as to its determination to
extend the Term another twelve months from such sixth month
anniversary date. If such extension is granted, the Term
shall end on a date eighteen (18) months after the Effective
Date (the "Extended Term"). Thereafter, commencing on the
expiration date of the Extended Term, and on each annual
anniversary of such date (such date and each annual
anniversary thereof is hereafter referred to as the "Renewal
Date"), the term of this Agreement shall be automatically
extended so as to terminate one year from such Renewal Date,
unless at least 180 days prior to the Renewal Date either the
Corporation or Employee shall give written notice to the other
that the term of the Agreement shall not be so extended.
Notwithstanding anything to the contrary contained in this
Paragraph, the effectiveness of this Agreement is strictly
contingent upon a background investigation of Employee,
including references, criminal history and verification of
data provided, which shall be satisfactory to the Corporation
in all respects as it shall, in its sole discretion,
determine. Employee shall provide such information and
consents as shall be requested in connection with this
background investigation.
2. Certain Definitions.
-------------------
(a) A reference herein to a section of the Internal
Revenue Code of 1986, as amended (the "Code") or a subdivision
thereof shall be construed to incorporate reference to any
section or subdivision of the Code enacted as a successor
thereto, any applicable proposed, temporary or final
regulations promulgated pursuant to such sections and any
applicable interpretation thereof by the Internal Revenue
Service.
(b) A reference herein to a section of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), or any
rule or regulation promulgated thereunder shall be construed
to incorporate reference to any section of the Exchange Act or
any rule or regulation enacted or promulgated as a successor
thereto.
(c) "Subsidiary(ies)" means a company 50% or more of
the voting securities of which are owned by the Corporation or
a subsidiary of the Corporation and includes, among others,
Modern Learning Press Corporation ("MLP").
(d) "Employee Benefit Plan" means any written plan
providing benefits for employees of the Corporation or any
Subsidiary.
3. Duties. During the Employment Term, Employee shall
------
serve in a capacity as Chief Operating Officer -- TASA/MLP and
Vice President of the Corporation, or in such other related
capacity or capacities as may be determined by the Board.
Employee shall perform such services as are customary for the
Chief Operating Officer of a corporation the principal
business of which is test assessment, and its subsidiary, MLP,
which primarily publishes educational materials, including,
but not limited to operational analysis, presentation and
reporting, and operational management, administration and
product development, and such other services as may be
required or requested by the Board or the President in
connection with the operation of the Corporation and MLP.
Employee shall report directly to the President of the
Corporation and shall be headquartered at Brewster, New York,
or any office or location of the Corporation as the Board or
the President shall request. During the Employment Term, and
excluding any periods of vacation and sick leave, Employee
agrees to devote full time, best efforts to the business and
affairs of the Corporation to discharge the responsibilities
assigned to Employee hereunder, and to perform faithfully and
efficiently such responsibilities. During the Employment
Term it shall not be a violation of this Agreement for
Employee to (A) serve on corporate, civic or charitable boards
or committees, (B) deliver lectures, fulfill speaking
engagements or teach at educational institutions, and (C)
manage personal investments, so long as Employee's duties in
connection therewith do not unreasonably interfere with
Employee's duties under this Agreement. Activities of
Employee consistent with this Section 3 shall not permit the
Corporation to terminate Employee's employment for "Cause", as
defined below.
4. Compensation.
------------
(a) BASE SALARY. During the Employment Term, the
Corporation shall pay to Employee, in equal installments no
less frequently than monthly (or at such other intervals as
are in effect from time to time for other officers of the
Corporation), an annual base salary (the "Base Salary") of One
Hundred Fifty ($150,000.00) Dollars.
(b) BONUS. In addition to Base Salary, Executive
shall be awarded, for each fiscal year of the Corporation
ending during the Employment Term, beginning with the first
fiscal year of the Corporation during this Agreement, an
annual bonus ("Annual Bonus") in cash equal to four (4%)
percent of earnings of the Corporation before interest and
taxes ("EBIT") in excess of (10%) percent capital charge of
the purchase price of any product/entity acquired by either
the Corporation or MLP (inclusive of all forms of allocation
of such price). For example, with respect to the forecast for
1999, the Bonus would have been $20,000. Based upon the
preliminary budget for 2000, the Bonus would be $27,000.
Bonus shall be calculated pro rata, based upon the actual
number of complete months that Employee is employed in the
applicable fiscal year of the Corporation.
(c) INCENTIVE, SAVINGS, WELFARE BENEFIT PLANS AND
RETIREMENT PLANS. In addition to Base Salary, Employee shall
be eligible to participate in or benefit from, such medical
insurance, life insurance, disability insurance, pension,
bonus, profit-sharing, stock option, stock purchase and any
other fringe benefit plans, practices, programs or policies
provided by the Corporation to Employee in accordance with the
terms of such plans, practices, programs and policies, as
amended from time to time.
(d) KEY MAN INSURANCE. Employee agrees that the
Corporation may obtain key man life insurance with respect to
Employee, and in connection therewith, agrees to submit to all
reasonable and customary examinations by the provider of such
life insurance.
(e) EXPENSES. Employee shall be entitled to
reimbursement for all normal and reasonable travel,
entertainment and other expenses necessarily incurred by him
in the performance of his duties hereunder in accordance with
the policies, practices and procedures of the Corporation as
amended from time to time. The Corporation shall lease a
vehicle for the use of Employee during the Employment Term
comparable to those leased for employees of similar capacity
with the Corporation.
(e) DISABILITY. Except as hereinafter provided, the
Corporation shall pay Employee for any period, up to a maximum
of three months, during the Employment Term in which he is
unable fully to perform his duties because of physical or
mental disability or incapacity, an amount equal to the Base
Salary due him for such period pursuant to Section 4(a), less
the aggregate amount of all income disability benefits which
for such period he may receive by reason of (i) any group
health insurance plan, or disability insurance plan paid for
by the Corporation, in each case which is intended to function
as a salary replacement plan, (ii) any applicable compulsory
state disability law, (iii) the Federal Social Security Act,
(iv) any applicable workmen's compensation law or similar law
and (v) any plan towards which the Corporation or any
subsidiary or affiliate of the Corporation (including any
predecessor of any thereof) has contributed or for which it
has made payroll deductions, such as group accident or health
policies, other than those which reimburse for actual medical
expenses.
(f) VACATION. During the Employment Term, Employee
shall be entitled to paid vacation in accordance with the
plans, practices, policies and programs of the Corporation as
amended from time to time.
5. Stock Options.
-------------
(a) As part of the consideration to be paid to
Employee for his services hereunder, Employee shall be
eligible to participate in any stock incentive plan adopted by
the Corporation (the "Plan") for which an executive level
employee may participate.
(b) The Corporation hereby agrees that it shall cause
to be filed with the Securities and Exchange Commission a
registration statement on Form S-8 (or equivalent form as may
be in effect at such time) with respect to all options
theretofore granted to Employee under the Plan. The
Corporation covenants that it will keep such registration
statement current until Employee is no longer employed by the
Corporation. The Corporation hereby agrees that, for so long
as either the Corporation does not have an effective
registration statement on Form S-8 or the Corporation has an
effective registration statement on Form S-8 but Employee is
restricted in his ability to resell shares acquired pursuant
to the exercise of options because of the provisions of
General Instruction C.2(b) to Form S-8, Employee shall have
"piggyback" registration rights with respect to the options
granted to Employee under the Plan and the shares underlying
such options.
(c) As an incentive to enter into this Agreement, the
Corporation, immediately upon the Effective Date of this
Agreement, shall deliver to Employee a Stock Option Agreement
pursuant to its Amended and Restated 1991 Stock Option
Incentive Plan, granting to Employee ten (10) year options for
40,000 shares of the common stock of the Corporation at fair
market value as of the Effective Date, exercisable one year
after the anniversary of the date of the grant.
6. Rights of Termination.
---------------------
(a) CAUSE. During the Employment Term, the
Corporation shall have the right, at any time effective upon
notice to Employee, to terminate Employee's employment for
"Cause" (as hereinafter defined). For purposes of this
Agreement, "Cause" shall mean (i) an act or acts of personal
dishonesty engaged in by Employee, (ii) violations by
Employee of Employee's obligations under Section 3 of this
Agreement which are not remedied within thirty (30) days after
receipt of written notice from the Corporation; (iii)
commission by Employee of a felony or any act of embezzlement
or misappropriation of funds, (iv) material breach of any
representation or warranty hereunder or fraud or negligence in
the performance of his duties hereunder, and (v) an inability
in the reasonable opinion of the President of the Corporation,
to work cohesively with other key personnel if not remedied to
the reasonable satisfaction of the President within thirty
(30) days after written notice from the Corporation.
(b) DISABILITY; DEATH. In the event that Employee,
due to physical or mental disability or incapacity, is unable
to substantially perform his duties hereunder for a period of
three or more successive months, the Corporation or Employee
shall have the right to terminate this Agreement and
Employee's employment hereunder upon 30 days' prior written
notice and termination shall be effective on the 30th day
after receipt of such notice by the Employee (the "Disability
effective date"). In the event that Employee is able to and
recommences rendering services and substantially performing
his duties hereunder within such 30-day notice period,
Employee shall be reinstated and such notice shall be without
further force or effect. If Employee dies during the Term,
this Agreement shall terminate immediately upon his death.
(c) NOTICE OF TERMINATION. Any termination of
Employee's employment by the Corporation or by Employee shall
be communicated by Notice of Termination to the other party
hereto given in accordance with Section 16 of this Agreement.
(d) DATE OF TERMINATION. "Date of Termination" means
the date of receipt of the Notice of Termination or any later
date specified therein, as the case may be; provided, however,
that if Employee's employment is terminated by reason of death
or Disability, the Date of Termination shall be the date of
death of Employee or the Disability effective date, as the
case may be.
7. Effects of Termination. In the event that Employee's
----------------------
employment is terminated pursuant to Section 6 hereof,
Employee's employment hereunder shall terminate without
further obligations to Employee, other than those obligations
accrued or earned and vested (if applicable) by Employee
through the Date of Termination, including for this purpose
all "Accrued Obligations", defined as those obligations
accrued or earned and vested (if applicable) by Employee as of
the Date of Termination, including, for this purpose (i)
Employee's pro rata Base Salary accrued but unpaid as of the
Date of Termination, (ii) any compensation previously deferred
by Employee (together with any accrued earning thereon) and
not yet paid by the Corporation and any accrued vacation pay
not yet paid by the Company and (iii) if applicable, all
amounts payable to the estate or designated beneficiaries of
Employee under any pension, savings, life insurance or other
plans, practices, policies and programs of the Corporation,
and/or all other amounts payable pursuant to Section 4 hereof.
In addition:
(i) the Corporation shall pay to Employee all
Accrued Obligations such that the Accrued Obligations
specified in Section 4 hereof, shall be paid to Employee in a
lump sum in cash within 30 days of the Date of Termination,
and the other Accrued Obligations shall be paid in accordance
with Employee's specific elections pursuant to, and otherwise
in accordance with the terms of, any plan, practice, policy or
program providing benefits forming a part of the Accrued
Obligations;
(ii) all then non-exercisable options shall
immediately and automatically terminate, and
(iii) any registration rights theretofore
granted which have not been invoked with respect to shares of
Common Stock of the Corporation either acquired by Employee
pursuant to the exercise of stock options or underlying vested
options shall immediately and automatically terminate.
8. Confidentiality.
---------------
(a) Employee understands and acknowledges that as a
result of Employee's employment with the Corporation, and
involvement with the business of the Corporation he is or
shall necessarily become informed of, and have access to,
confidential information of the Corporation including, without
limitation, inventions, patents, patent applications, trade
secrets, technical information, know-how, plans,
specifications, financial information and business strategy,
marketing plans and information, pricing information, identity
of customers and prospective customers and identity of
suppliers, and that such information, even though it may have
been or may be developed or otherwise acquired by Employee, is
the exclusive property of the Corporation to be held by
Employee in trust and solely for the Corporation's benefit.
Employee shall not at any time, either during or subsequent to
his employment hereunder, reveal, report, publish, transfer or
otherwise disclose to any person, corporation or other entity,
or use, any of the Corporation's confidential information,
without the written consent of the Board, except for use on
behalf of the Corporation in connection with the Corporation's
business, and except for such information which legally and
legitimately is or becomes of general public knowledge from
authorized sources other than Employee.
(b) Upon the termination of his employment with the
Corporation for any reason, Employee shall promptly deliver to
the Corporation all drawings, manuals, letters, notes,
notebooks, reports and copies thereof and all other materials,
including, without limitation, those of a secret or
confidential nature, relating to the Corporation's business
which are in Employee's possession or control.
(c) For purposes of this Section 8 and Section 9, the
term "Corporation" includes the Corporation and any other
predecessor corporation, and affiliates (including, without
limitation, distributors, licensees, franchisees, Subsidiaries
and joint ventures).
(d) Employee represents and warrants to the Corporation
that the execution and delivery of this Agreement shall not
conflict with, or violate the terms of, or constitute a breach
of any other agreement or document to which he is a party,
including, but not limited to any employment, consulting,
non-competition, restrictive covenant or other form of
confidentiality agreement.
9. Non-Competition. Employee agrees that, for a period
---------------
commencing on the date hereof and ending one year after the
termination of his employment with the Corporation for any
reason, he shall not, anywhere in the United States (or for
such lesser area or such lesser period as may be determined by
a court of competent jurisdiction to be a reasonable
limitation on the competitive activity of Employee) directly
or indirectly:
(a) solicit or attempt to solicit business of any
customers of the Corporation (including prospective
customers solicited by the Corporation during the
term of his employment) for products or services the
same or similar to those offered, sold, produced or
under development by the Corporation during the term
of his employment therewith or dealt in by Employee
during his employment with the Corporation;
(b) solicit or attempt to solicit for any business
endeavor any employee of the Corporation;
(c) interfere with any business relationship
between the Corporation and any other person or
entity;
(d) use the name of the Corporation or a name
similar thereto; or
(e) render any services as an officer, director,
employee, partner, consultant or otherwise to, or
have any interest as a stockholder, partner, lender
or otherwise in, any entity which is engaged in
activities which, if performed by Employee would
violate this Section 9.
10. Remedies and Survival. Because the Corporation does
---------------------
not have an adequate remedy at law to protect its interest in
its trade secrets, privileged, proprietary or confidential
information and similar commercial assets, or its business
from Employee's competition, the Corporation and each of its
Subsidiaries shall be entitled to injunctive relief, in
addition to such other remedies and relief that would, in the
event of a breach of the provisions of Sections 8 or 9, be
available to the Corporation and each of its Subsidiaries.
The provisions of Sections 8 and 9 and this Section 10 shall
survive any termination of Employee's employment with the
Corporation or MLP for any reason whatsoever.
11. Set-off. The payments and performance by the
-------
Corporation as provided for in this Agreement shall be subject
to any set-off, counterclaim, recoupment, defense or other
claim, right or action which the Corporation may have against
Employee.
12. Non-exclusivity of Rights. Except as specifically
-------------------------
provided in this Agreement, it is intended that Employee's
present and future participation in any benefit, bonus,
incentive or other plans, practices, policies or programs
provided by the Corporation and for which Employee or
Employee's family may otherwise qualify and be eligible be
limited or unavailable. Nothing contained in this Agreement,
however, shall limit or otherwise affect such rights as
Employee may have under any stock option agreements with the
Corporation. Amounts which are vested benefits or which
Employee is otherwise entitled to receive at or subsequent to
the Date of Termination shall be payable in accordance with
the plan, practice, policy or program of the Corporation under
which Employee has such entitlement, if any.
13. Entire Agreement. This Agreement sets forth the
----------------
entire understanding of the parties hereto with respect to its
subject matter, merges and supersedes any prior or
contemporaneous agreements or understandings with respect to
its subject matter, and shall not be modified or terminated
except by another agreement in writing executed by the
Corporation and Employee. Failure of a party to enforce one
or more of the provisions of this Agreement or to require at
any time performance of any of the obligations hereof shall
not be construed to be a waiver of such provisions by such
party nor to in any way affect the validity of this Agreement
or such party's right thereafter to enforce any provision of
this Agreement, nor to preclude such party from taking any
other action at any time which it would legally be entitled to
take.
14. Severability. If any provision of this Agreement is
------------
held to be invalid or unenforceable by any court or tribunal
of competent jurisdiction, the remainder of this Agreement
shall not be affected by such judgement and such provision
shall be carried out as nearly as possible according to its
original terms and intent to eliminate such invalidity or
unenforceability.
15. Successors and Assigns. This Agreement is personal
----------------------
to Employee and without the prior written consent of the
Corporation shall not be assignable by Employee. This
Agreement shall inure to the benefit of and be enforceable by
Employee's legal representatives or Successors in Interest.
This Agreement shall inure to the benefit of and be binding
upon the Corporation and its successors and assigns. As used
in the Agreement, "Corporation" shall mean the Corporation as
hereinbefore defined and any successor to its business and/or
assets as aforesaid which assumes and agrees to perform this
Agreement by operation of law or otherwise.
16. Communications and Notices. All notices and other
--------------------------
communications under this Agreement shall be in writing and
shall be deemed to have been duly given three (3) business
days after they are mailed in any United States post office
enclosed in a registered or certified postage-paid envelope
and addressed as set forth at the beginning of this Agreement,
or to such other address as any party may specify by notice to
the other parties, or delivered by Federal Express or a
similar overnight courier to such address with evidence of
delivery; provided, however, that any notice of change of
address shall be effective only upon receipt.
17. Construction; Counterparts. The headings contained
--------------------------
in this Agreement are for convenience only and shall in no way
restrict or otherwise affect the construction of the
provisions hereof. References in this Agreement to Sections
are to the sections of this Agreement. This Agreement may be
executed in multiple counterparts, each of which shall be an
original and all of which together shall constitute one and
the same instrument.
18. Validity. The invalidity or unenforceability of any
--------
provision of this Agreement shall not affect the validity or
enforceability of any other provision of this Agreement.
Employee's failure to insist upon strict compliance with any
provision hereof shall not be deemed to be a waiver of such
provision. This Agreement contains the entire understanding
of the Corporation and Employee with respect to the subject
matter hereof but does not supersede or override the
provisions of any stock option, employee benefit or other
plan, program, policy or practice in which Employee is a
participant or under which Employee is a beneficiary.
19. Governing Law. This Agreement shall be governed by
-------------
and construed under the laws of the State of New York.
IN WITNESS WHEREOF, the undersigned parties have executed
and delivered this Agreement as of the date first above
written.
TOUCHSTONE APPLIED SCIENCE
ASSOCIATES, INC.
By: /s/ ANDREW L. SIMON
----------------------------
Name: Andrew L. Simon
Title: President
EMPLOYEE:
/s/ PETER DUHAMEL
----------------------------
Peter Duhamel
<TABLE>
<CAPTION>
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
AND SUBSIDIARIES
EXHIBIT II
----------
COMPUTATION OF EARNINGS PER COMMON SHARE
----------------------------------------
1 9 9 9 1 9 9 8 1 9 9 7
------- ------- -------
<S> <C> <C> <C>
Basic earnings:
Net income (loss) $ 180,757 $ 131,202 $(1,363,811)
---------- ------------ -----------
Shares:
Weighted common shares outstanding 2,141,801 2,127,051 2,053,272
---------- ------------ -----------
Basic earnings (loss) per share $ .08 $ .06 $ (.66)
---------- ------------ -----------
Diluted earnings:
Net income (loss) $ 180,757 $ 131,202 $(1,363,811)
---------- ------------ -----------
Shares:
Weighted common shares outstanding 2,141,801 2,127,051 2,053,272
Employee stock options 4,004 12,892 --
Warrants 199,249 35,946 --
Consultants stock options 395 4,370 --
Directors stock options -- -- --
Underwriter options -- -- --
---------- ------------ -----------
Total weighted shares outstanding 2,345,449 2,180,259 2,053,272
---------- ------------ -----------
Diluted earnings (loss)
per common share $ .08 $ .06 $ (.66)
---------- ------------ -----------
</TABLE>
Exhibit 23
----------
CONSENT OF LAZAR, LEVINE & FELIX LLP
We consent to the incorporation by reference of
our report dated December 16, 1999 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, 1999 filed with the Securities and Exchange Commission
into (i) the Company's Registration Statement on Form S-3 (SEC
File No. 333-27659), (ii) the Company's Registration Statement
on Form S-8 (SEC File No. 333-424), and (iii) the Company's
Registration Statement on Form S-3 (SEC File No. 333-75377).
LAZAR, LEVINE & FELIX LLP
New York, New York
January 31, 2000
<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, 1999 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-31-1999
<PERIOD-END> OCT-31-1999
<CASH> 1,140,893
<SECURITIES> 175,000
<RECEIVABLES> 3,702,925
<ALLOWANCES> 213,817
<INVENTORY> 472,341
<CURRENT-ASSETS> 5,479,456
<PP&E> 3,459,751
<DEPRECIATION> 1,387,170
<TOTAL-ASSETS> 16,384,417
<CURRENT-LIABILITIES> 2,399,883
<BONDS> 7,134,674
0
0
<COMMON> 214
<OTHER-SE> 6,849,646
<TOTAL-LIABILITY-AND-EQUITY> 16,384,417
<SALES> 12,316,246
<TOTAL-REVENUES> 12,316,246
<CGS> 4,469,746
<TOTAL-COSTS> 6,893,187
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 818,710
<INCOME-PRETAX> 257,953
<INCOME-TAX> 77,196
<INCOME-CONTINUING> 180,757
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 180,757
<EPS-BASIC> .08
<EPS-DILUTED> .08
</TABLE>
