U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended July 31, 1997
[ ] Transition report pursuant to Section 13 or 15(d) of the
Exchange Act
For the transition period from to
---------------- ------------
Commission file number 0-20303
---------------------------------------------
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Delaware 13-2846796
----------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. Box 382, Fields Lane, Brewster, New York 10509
----------------------------------------------------------------
(Address of principal executive offices)
(914) 277-8100
----------------------------------------------------------------
(Issuer's telephone number)
----------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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
------------ -----------
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant 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 court.
Yes No
------------- ------------
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date: As
--
of September 8, 1997: 8,139,322 shares of Common Stock, par value
- -----------------------------------------------------------------
$.0001 per share.
- -----------------
Transitional Small Business Disclosure Format (check one):
Yes No X
-------------- -------------
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
The consolidated financial statements for the Company's
fiscal quarter ended July 31, 1997 are attached to this Report,
commencing at page F-1.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION.
Until January 1997, the Company's revenues were derived
solely from the sale of its Degrees of Reading Power tests and
Degrees of Word Meaning tests, the sales of ancillary materials,
and test scoring and reporting services. Tests are sold pursuant
to specific contracts with state and local governments and through
catalog sales. With the acquisition of both Beck Evaluation &
Testing Associates, Inc. ("BETA") by the Company as of January 2,
1997 and Programs for Education, Inc. by the Company's subsidiary
Modern Learning Press, Inc. ("MLP") as of May 30, 1997, revenues
are now also derived from custom consulting services and the
publication of curriculum and instructional materials. Each of
BETA and MLP is a wholly-owned subsidiary of the Company.
RESULTS OF OPERATIONS
REVENUES. For the three-month period ended July 31,
1997, the Company's total net revenues increased 161.2% versus
the comparable 1996 period ($1,472,765 in 1997 versus $563,839 in
1996). Of this $908,926 increase, $80,013 is attributable to the
Company's assessment business, $59,119 is attributable to BETA,
and $769,794 is attributable to MLP.
For the nine-month period ended July 31, 1997, the
Company's total net revenues increased 65.8% versus the
comparable 1996 period ($3,064,932 in 1997 versus $1,848,925 in
1996). Of this $1,216,007 increase, $239,204 is attributable to
the Company's assessment business, $207,009 is attributable to
BETA, and $769,794 is attributable to MLP.
For the three-month period ended July 31, 1997,
contract income for tests decreased 29.5% versus the comparable
1996 period ($34,088 in 1997 versus $48,361 in 1996). For the
nine-month period ended July 31, 1997, contract income was
essentially flat versus the comparable year ago period ($573,242
in 1997 versus $575,841 in 1996). Contract income now represents
18.7% of revenues for the nine-month period versus 31.2% in the
comparable 1996 period. With the acquisition of BETA and MLP and
the increase in catalog sales for the Company's core products,
the Company has become less dependent upon any one major customer
for its income.
For the three-month period ended July 31, 1997, income
from catalog shelf tests and associated products increased 18.3%
versus the comparable 1996 period ($609,764 in 1997 versus
$515,478 in 1996). For the nine-month period ended July 31,
1997, catalog sales increased 19.0% versus the comparable 1996
period ($1,514,887 in 1997 versus $1,273,084 in 1996).
Management believes that this significant increase in catalog
sales is attributable to the continued emphasis by the Company on
marketing and sales in this area.
For the three-month period ended July 31, 1997,
consulting revenues from BETA were $59,119. For the nine-month
period ended July 31, 1997, consulting revenues from BETA were
$207,009. There were no such revenues in the comparable 1996
period.
For the three-month and nine-month periods ended July
31, 1997, revenues from MLP were $769,794. There were no such
revenues in the comparable 1996 periods.
COSTS AND EXPENSES. For the three-month period ended
July 31, 1997, cost of goods sold increased by 147.9% versus the
comparable 1996 period ($412,874 in 1997 versus $166,524 in
1996). Cost of goods sold is now 28.0% of third quarter revenues
versus 29.5% in the comparable 1996 period. For the nine-month
period ended July 31, 1997, cost of goods increased 84.2% versus
the comparable 1996 period ($977,110 in 1997 versus $530,485 in
1996). For the nine-month period, cost of goods sold is now
31.9% of nine-month revenues versus 28.7% in the comparable 1996
period. Management believes that the change in product mix and
seasonal nature of sales of the Company's core products are
responsible for the changing percentages as year-to-year revenue
streams are not comparable.
For the three-month period ended July 31, 1997, selling
expenses increased by 30.1% versus the comparable 1996 period
($232,262 in 1997 versus $178,587 in 1996). For the nine-month
period ended July 31, 1997, selling expenses increased by 29.9%
versus the comparable 1996 period ($647,241 in 1997 versus $498,407
in 1996). This increase is due to selling activities associated with
MLP as well as the addition of three educational consultants in the
fourth quarter of fiscal 1996.
For the three-month period ended July 31, 1997, general
and administrative expenses increased by 127.0% versus the
comparable 1996 period ($528,943 in 1997 versus $232,971 in
1996). For the nine-month period ended July 31, 1997, general
and administrative expenses increased 66.6% versus the comparable
1996 period ($1,060,691 in 1997 versus $636,695 in 1996). The
significant portion of this increase relates to costs associated
with the Company's acquisition of BETA and Programs for
Education, Inc.
In fiscal 1996, the Company had product development
costs relating to a consumer product that was under development.
In late 1996, the product achieved feasibility. Therefore, in
accordance with generally accepted accounting principles, the
Company is now capitalizing the costs associated with the product
prior to its introduction into the marketplace. Accordingly,
there is no comparable 1997 expenditure.
For the three-month period ended July 31, 1997,
interest expense increased 130.7% versus the comparable 1996
period ($37,020 in 1997 versus $16,048 in 1996). For the nine-month
period ended July 31, 1997, interest expense increased
55.1% versus the comparable 1996 period ($73,079 in 1997 versus
$47,108 in 1996). This increase is attributable to the financing
of both the BETA and Programs for Education, Inc. acquisitions.
For the three-month period ended July 31, 1997, investment income
decreased 54.4% versus the comparable 1996 period ($20,062 in
1997 versus $43,978 in 1996). For the nine-month period ended
July 31, 1997, investment income decreased 24.8% versus the
comparable 1996 period ($94,697 in 1997 versus $125,878 in 1996).
This decline is primarily due to the reallocation of resources
that were invested in the acquisition of BETA and Programs for
Education, Inc.
NET INCOME AND EARNINGS PER SHARE. For the three-month
period ended July 31, 1997, the Company had income from operations,
exclusive of a partial write-off of purchased goodwill and bad debt
expense, of $298,686 versus a ($42,481) loss in the comparable 1996
period. For the nine-month period ended July 31, 1997, the Company
had income from operations, exclusive of a partial write-off of
purchased goodwill and bad debt expense, of $379,890 versus $133,920
in the comparable 1996 period. For the three-month period ended July 31,
1997, net after-tax loss was ($1,660,969) versus a ($673) loss for the
comparable 1996 period. For the nine-month period ended July 31,
1997, net after-tax loss was ($1,569,790) versus net income of
$159,438 in the comparable 1996 period. These decreases are
attributable to the write-off of purchased goodwill associated
with the acquisitions of BETA and Programs for Education, Inc.,
as required under generally accepted accounting principles, and
the establishment of a reserve for the full loss of the NASD-approved
Harriman loan, which is now past due, both of which
occurred in the fiscal quarter ended July 31, 1997. The write-off
of goodwill and the creation of a bad debt reserve were non-recurring
items, and management believes that the results of
operations for the Company's businesses are stronger than they
were for comparable periods last year.
For the three-month period ended July 31, 1997,
earnings (loss) per share were ($0.20) versus $0.0 for the
comparable 1996 period. For the nine-month period ended July 31,
1997, earnings (loss) per share were ($0.20) versus $0.02 in the
comparable 1996 period.
LIQUIDITY AND CAPITAL RESOURCES
Working capital, which consists principally of cash,
cash equivalents, marketable securities, accounts receivable and
inventories, was $1,386,980 on July 31, 1997 versus $4,116,202 on
October 31, 1996. The decrease in working capital is primarily
attributable to cash expenditures made in connection with the
acquisitions of BETA and Programs for Education, Inc.
For the nine-month period ended July 31, 1997, net cash
flows from operating activities were $670,436 versus $516,025 in
the comparable 1996 period. Additionally, for the nine-month
period ended July 31, 1997, the Company invested $352,092 to
increase the size of its Test Passage Bank (versus $253,804 in
the comparable 1996 period), $77,309 in property, plant and
equipment (versus $45,477 in the comparable 1996 period),
$170,846 readying its new DRP-->BookLink software product and
BookMatch product for market (versus $94,239 in the comparable 1996
period), $29,900 to purchase the Maculaitis Test Series (versus
no comparable expenditures in the comparable 1996 period) and
$2,247,945 to purchase BETA and Programs for Education, Inc.
(versus no comparable expenditures in the comparable 1996
period).
For the nine-month period ended July 31, 1997, the
Company had a net cash inflow from financing activities of
$667,564, as compared to a net cash inflow from financing
activities of $413,439 for the comparable 1996 period. The net
cash inflow for these activities was primarily due to build-up of
debt to pay for the acquisitions of BETA, the Maculaitis Test
Series, and Programs for Education, Inc.
In November 1996, the Company refinanced its second
mortgage for the addition to its facility which was completed in
1991. Both the first and second mortgages are due in 2001. On
July 15, 1997, the Company signed a letter of intent with
Middletown Savings Bank to remortgage its facilities in the
amount of $1,800,000. These transactions were closed on August
28, 1997. Proceeds from this transaction were used to retire its
first and second mortgages with the Bank of New York and retire
certain short-term debt associated with the acquisition of
Programs for Education, Inc. The Company has certain debt
obligations in connection with the acquisition of BETA and
Programs for Education, Inc. which management believes can be
financed from the cash flow from operations. The Company has no
other material commitments for capital or other capital
expenditures and is not party to any arrangement that would
adversely impact the Company's liquidity.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS
OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Statements made in this Quarterly Report on Form 10-QSB,
including, without limitation, descriptions of the Company's
targets or goals and management's views concerning the Company's
pending and proposed projects, prospects and future financial
performance contained in this discussion and analysis and
elsewhere, constitute forward-looking statements made pursuant to
the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995 and involve known and unknown risks and
uncertainties which may cause the Company's actual results in
future periods to differ materially from forecasts. These risks
include, among others: risks and uncertainties relating to
government regulation in the educational testing area; increased
competition; the ability of the Company to accommodate changes in
policy and technology; as well as risks generally associated with
educational testing. Many of such factors are beyond the
Company's ability to control or predict. Readers are cautioned
not to put undue reliance on forward-looking statements. The
Company disclaims any intent or obligation to update publicly
these forward-looking statements, whether as a result of new
information, future events or otherwise.
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
(a) None.
(b) None.
(c) None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 11 -- Computation of Earnings per Common Share
Exhibit 27 -- Financial Data Schedule (electronic filing only)
(b) Reports on Form 8-K
Current Report on Form 8-K, filed June 16, 1997
(reporting the acquisition by Modern Learning
Press, Inc., the Company's wholly-owned
subsidiary, of all of the assets of Programs for
Education, Inc.).
<PAGE>
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE FISCAL QUARTER ENDED JULY 31, 1997
Consolidated Balance Sheets F-1
Consolidated Statements of Income F-3
Consolidated Statements of Cash Flows F-4
Notes to Consolidated Financial Statements F-6
<PAGE> F-1
<TABLE>
<CAPTION>
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
AND SUBSIDIARIES
Page 1 of 2
CONSOLIDATED BALANCE SHEETS
July 31, October 31,
1 9 9 7 1 9 9 6
------- -------
<S> <C> <C>
ASSETS
------
Current assets:
Cash and temporary investments $ 462,875 $1,049,819
Marketable securities 1,156,765 2,076,158
Accounts receivable 931,082 567,374
Inventories 332,020 242,081
Loan receivable -- 400,000
Prepaid expenses and other current assets 364,680 123,106
----------- ----------
Total current assets 3,247,422 4,458,538
Property, plant and equipment - net of
accumulated depreciation of $995,388 and
$909,607, respectively 1,764,518 1,795,195
Other assets:
Test passage bank, net of accumulated
amortization of $1,108,190 and $907,053,
respectively 2,714,242 2,563,286
Software development costs, net of
accumulated amortization of $24,245
and $5,427, respectively 288,956 136,928
Goodwill, net of accumulated amortization
of $41,789 820,468 --
Noncompete agreements, net of accumulated
amortization of $11,905 488,095 --
Other assets 58,700 21,595
---------- ----------
Total assets $9,382,401 $8,975,542
========== ==========
<FN>
See notes to consolidated financial statements.
</FN>
F-1
</TABLE>
<PAGE> F-2
<TABLE>
<CAPTION>
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
AND SUBSIDIARIES
Page 2 of 2
CONSOLIDATED BALANCE SHEETS
July 31, October 31,
1 9 9 7 1 9 9 6
------- -------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of long-term debt $ 370,438 $ 95,500
Loan payable 780,995 --
Accounts payable and accrued expenses 709,009 246,270
Corporation taxes payable -- 566
----------- -----------
Total current liabilities 1,860,442 342,336
Long-term debt:
Long-term debt less current portion 1,504,456 728,250
Deferred income taxes 5,440 521,221
----------- -----------
Total liabilities 3,370,338 1,591,807
----------- -----------
Stockholders' equity:
Preferred stock, $.0001 par value, 5,000,000
authorized, 1,500 issued and outstanding -- --
Common stock, $.0001 par value, 20,000,000
authorized, 8,139,322 and 7,789,322 shares
issued and outstanding 814 779
Additional paid-in capital 4,251,299 4,077,935
Stock subscription receivable (14,350) (14,350)
Unrealized holding gain (loss) 4,646 (20,073)
Retained earnings 1,769,654 3,339,444
----------- -----------
Total stockholders' equity 6,012,063 7,383,735
----------- -----------
Total liabilities & stockholders' equity $9,382,401 $8,975,542
=========== ===========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
F-2
<PAGE> F-3
<TABLE>
<CAPTION>
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Nine Months Ended Three Months Ended
July 31, July 31,
1 9 9 7 1 9 9 6 1 9 9 7 1 9 9 6
------- ------- ------- -------
<S> <C> <C> <C> <C>
Contract income $ 573,242 $ 575,841 $ 34,088 $ 48,361
Catalog sales 1,514,887 1,273,084 609,764 515,478
Consulting income 207,009 -- 59,119 --
Catalog sales - MLP 769,794 -- 769,794 --
----------- ----------- ------------ -----------
Total net revenue 3,064,932 1,848,925 1,472,765 563,839
Cost of goods sold 977,110 530,485 412,874 166,524
----------- ----------- ------------ -----------
Gross profit 2,087,822 1,318,440 1,059,891 397,315
----------- ----------- ------------ -----------
Operating expenses:
Selling expenses 647,241 498,407 232,262 178,587
General and administrative expenses 1,060,691 636,695 528,943 232,971
Bad debt expense 405,000 -- 405,000 --
Impairment of goodwill 1,979,755 -- 1,979,755 --
Product development -- 49,418 -- 28,238
----------- ----------- ------------ -----------
Total operating expenses 4,092,687 1,184,520 3,145,960 439,796
----------- ----------- ------------ -----------
Income (loss) from operations (2,004,865) 133,920 (2,086,069) (42,481)
Other income (expense):
Interest expense (73,079) (47,108) (37,020) (16,048)
Investment income 94,697 125,878 20,062 43,978
Loss on sale of assets (15,083) -- -- --
----------- ----------- ------------ -----------
Income (loss) before income taxes (1,998,330) 212,690 (2,103,027) (14,551)
Income taxes (benefit) (428,540) 53,252 (442,058) (13,878)
----------- ----------- ------------ -----------
Net income (loss) $(1,569,790) $ 159,438 $(1,660,969) $ (673)
=========== =========== ============ ===========
Weighted average shares outstanding
Primary 8,047,410 7,868,555 8,139,322 7,868,555
Fully diluted 8,047,410 7,868,555 8,139,322 7,868,555
Earnings per share
Primary $ (.20) $ .02 $ (.20) $ --
Fully diluted $ (.20) $ .02 $ (.20) $ --
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
F-3
<PAGE> F-4
<TABLE>
<CAPTION>
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
July 31,
1 9 9 7 1 9 9 6
------- -------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $(1,569,790) $ 159,438
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 380,946 286,913
Deferred income taxes (515,781) (60,706)
Financial advisory services 15,611 79,125
Loss on sale of assets 12,289 --
Impairment of Goodwill 1,979,755 --
Bad debt expense 400,000 --
Changes in operating assets and liabilities:
Accounts receivable (257,548) 3,596
Inventories 36,031 (36,601)
Other current assets 38,477 119,222
Accounts payable 150,446 (34,962)
----------- -----------
NET CASH FLOWS FROM OPERATING ACTIVITIES 670,436 516,025
----------- -----------
INVESTING ACTIVITIES
Acquisition of property, plant and equipment (77,309) (45,477)
Test passage bank (352,092) (253,804)
Software development costs (170,846) (94,239)
Purchase of marketable debt securities (3,797) (108,633)
Proceeds from the sale of marketable securities 946,945 --
Proceeds from the sale of assets 10,000 --
Acquisition of subsidiaries (2,247,945) --
Acquisition of test (29,900) --
----------- -----------
NET CASH FLOWS FROM INVESTING ACTIVITIES (1,924,944) (502,153)
----------- -----------
FINANCING ACTIVITIES
Principal payments on industrial revenue
bond obligation (98,856) (51,250)
Deferred offering costs -- (164,478)
Proceeds from exercise of options -- 577,167
Proceeds from exercise of warrants -- 52,000
Net proceeds from loan payable 780,995 --
Mortgage costs (13,374) --
Organizational expenses of subsidiary (1,201) --
----------- -----------
NET CASH FLOWS FROM FINANCING ACTIVITIES 667,564 413,439
----------- -----------
<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 CASH FLOWS
(UNAUDITED)
Nine Months Ended
July 31,
1 9 9 7 1 9 9 6
------- -------
<S> <C> <C>
NET CHANGE IN CASH AND TEMPORARY
INVESTMENTS $ (586,944) $ 427,311
CASH AND TEMPORARY INVESTMENTS
AT BEGINNING OF PERIOD 1,049,819 617,305
----------- -----------
CASH AND TEMPORARY INVESTMENTS
AT END OF PERIOD $ 462,875 $1,044,616
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 47,914 $ 47,636
=========== ===========
Income taxes paid $ 99,337 $ 29,000
=========== ===========
Stock issued for prepaid consulting costs $ 99,750 $ --
=========== ===========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
F-5
<PAGE> F-6
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------------
In the opinion of management, the accompanying financial statements of
Touchstone Applied Science Associates, Inc. contain all adjustments necessary
to present fairly the Company's financial position as of July 31, 1997 and
October 31, 1996 and the results of operations for the nine and three months
ended July 31, 1997 and 1996 and cash flows for the nine months ended July 31,
1997 and 1996.
The results of operations for the nine and three months ended July 31, 1997
and 1996 are not necessarily indicative of the results to be expected for the
full year.
Except as follows, the accounting policies followed by the Company are set
forth in Note A to the Company's financial statements included in its Annual
Report on Form 10-KSB for the fiscal year ended October 31, 1996 (as amended
by amendment number 1 on Form 10-KSB/A-1).
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, Beck Evaluation & Testing Associates, Inc.
("BETA") and Modern Learning Press, Inc. ("MLP"). All material intercompany
transactions have been eliminated in consolidation.
Goodwill
- --------
Included in the purchase of the Company's subsidiaries is goodwill totaling
$374,067 for BETA and $2,467,945 for MLP. This goodwill is being amortized
over a period of six years. In July 1997, the Company deemed goodwill
purchased in the MLP transaction totaling $1,979,755 to be impaired. The
Company will continue to evaluate goodwill for potential impairment.
F-6
<PAGE> F-7
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B - ACQUISITION OF ASSETS
- ------------------------------
In May 1997, a newly formed wholly owned subsidiary of the Company (the
"Subsidiary") purchased certain assets of Programs for Education, Inc.
In addition to assuming certain liabilities, the Subsidiary purchased the
assets for $3,200,000. The purchase price paid by the Subsidiary consisted
of $2,200,000 in cash and a secured promissory note for $1,000,000 bearing
interest at a rate of 9% per annum and payable in equal quarterly installments
over a five year period. The promissory note is guaranteed by the Company.
Among other provisions, the purchase includes a noncompete agreement with the
previous owner. Additionally, MLP was required to pay at the closing
consulting fees for a period of one year and is required to pay a bonus
totaling approximately $253,825 and royalties to the previous owner.
NOTE C - LOAN RECEIVABLE
- ------------------------
In May 1997, the Harriman Group, Inc. ("HGI") defaulted on its loan to the
Company. Upon review of the financial condition of HGI in June 1997, the
Company determined the remaining principal and accrued interest totaling
$405,000 was uncollectible.
NOTE D - LOAN PAYABLE
- ---------------------
In May 1997, the Company borrowed $989,716 by margining its investment
account. Borrowings on this account, which totaled $780,995 at July 31,
1997, incurred interest at the rate of 7 5/8% and was collateralized by the
bonds held in the brokerage account.
NOTE E - NOTE PAYABLE TO BANK
- -----------------------------
In August 1997, the Company remortgaged its facilities for $1,800,000.
Borrowings on the mortgage incur interest at the rate of 8 1/8% per annum.
The mortgage is to be repaid through monthly payments with the balance of the
mortgage due in 2007. Proceeds from the mortgage, were used to retire the
first and second mortgages held by the Bank of New York and certain short-
term debt (Note D ) associated with the acquisition of MLP. In addition,
there is a provision for a $300,000 working capital line of credit.
Borrowings under the line of credit incur interest at the rate of 1/2% over
prime.
F - 7
<PAGE> F-8
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE F - EARNINGS PER SHARE
- ---------------------------
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128 - Earnings Per Share which changes the method for calculating earnings
per share. SFAS No. 128 requires presentation of "basic" and "diluted"
earnings per share, as opposed to "primary" and "fully diluted" earnings
per share and is effective for periods ending after December 15, 1997.
Early adoption is not permitted. Management does not believe that earnings
per share reported in accordance with SFAS No. 128 will materially differ
from earnings per share as currently reported.
F - 8
<PAGE>
SIGNATURE
In accordance with the requirements of the Securities
Exchange Act of 1934, the registrant has caused this report to be
signed on its behalf by the undersigned, thereunto duly
authorized.
TOUCHSTONE APPLIED SCIENCE ASSOCIATES,
INC.
By /s/ ANDREW L. SIMON
-----------------------------------
Andrew L. Simon
President, Chief Executive Officer
and Treasurer
(principal financial officer)
Date: September 11, 1997
<TABLE>
<CAPTION>
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
AND SUBSIDIARIES
EXHIBIT 11
----------
COMPUTATION OF EARNINGS PER COMMON SHARE
Nine Months Ended Three Months Ended
July 31, July 31,
1 9 9 7 1 9 9 6 1 9 9 7 1 9 9 6
------- ------- ------- -------
<S> <C> <C> <C> <C>
Primary earnings:
Net income (loss) $(1,569,790) $ 159,438 $(1,660,969) $ (673)
Shares:
Weighted common shares outstanding 8,047,410 7,604,322 8,139,322 7,604,322
Harriman options -- 101,774 -- --
Warrants to consultants -- -- -- --
Employee stock options -- 157,229 -- --
Consultant stock options -- -- -- --
B warrants -- -- -- --
Underwriter options -- 5,230 -- --
----------- ----------- ----------- ----------
Total weighted shares outstanding 8,047,410 7,868,555 8,139,322 7,604,322
----------- ----------- ----------- ----------
Primary earnings per common share $ (.20) $ .02 $ (.20) $ --
=========== =========== =========== ==========
Fully diluted earnings:
Net income (loss) $(1,569,790) $ 159,438 $(1,660,969) $ (673)
Shares:
Weighted common shares outstanding 8,047,410 7,604,322 8,139,322 7,604,322
Harriman options -- 101,774 -- --
Warrants to consultants -- -- -- --
Employee stock options -- 157,229 -- --
Consultant stock options -- -- -- --
B warrants -- -- -- --
Underwriter options -- 5,230 -- --
---------- ---------- ----------- ----------
Total weighted shares outstanding 8,047,410 7,868,555 8,139,322 7,604,322
---------- ---------- ----------- ----------
Fully diluted earnings per common share $ (.20) $ .02 $ (.20) $ --
========== ========== =========== ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted
from the consolidated balance sheet and statements of income
filed as part of the report on form 10QSB and is qualified in
its entirety by reference to such report on form 10QSB.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-END> JUL-31-1997
<CASH> 462,875
<SECURITIES> 1,156,765
<RECEIVABLES> 931,082
<ALLOWANCES> 0
<INVENTORY> 332,020
<CURRENT-ASSETS> 3,247,422
<PP&E> 2,759,906
<DEPRECIATION> 995,388
<TOTAL-ASSETS> 9,382,401
<CURRENT-LIABILITIES> 1,860,442
<BONDS> 0
0
0
<COMMON> 814
<OTHER-SE> 6,011,249
<TOTAL-LIABILITY-AND-EQUITY> 9,382,401
<SALES> 3,064,932
<TOTAL-REVENUES> 3,159,629
<CGS> 977,110
<TOTAL-COSTS> 4,092,687
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 73,079
<INCOME-PRETAX> (1,998,330)
<INCOME-TAX> (428,540)
<INCOME-CONTINUING> (1,569,790)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,569,790)
<EPS-PRIMARY> (.20)
<EPS-DILUTED> (.20)
</TABLE>
