<PAGE>
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, 1998
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, 4 Hardscrabble Heights, Brewster, New York 10509
- -----------------------------------------------------------------------
(Address of principal executive offices)
(914) 277-8100
- -----------------------------------------------------------------------
(Issuer's telephone number, including area code)
(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, 1998: 8,567,222 shares of Common Stock, par value
- -----------------------------------------------------------------
$0.0001 per share.
- ------------------
Transitional Small Business Disclosure Format (check one):
Yes No X
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<PAGE>
PART 1
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The financial statements for the Company's fiscal
quarter ended July 31, 1998 are attached to this Report,
commencing at page F-1.
ITEM 2. 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" contained in the Company's Annual Report on Form 10-KSB for
the fiscal year ended October 31, 1997 ("Fiscal 1997"), which may
cause actual results to differ materially from those described.
COMPANY BACKGROUND
TASA provides assessment and instructional products and
services to the educational markets. Its customers include
individual states, schools, colleges, and universities, as well
as parents and individual teachers primarily in grades K-4. For
the assessment markets, the Company develops, publishes and
distributes a highly regarded, proprietary line of reading tests,
and custom designs tests specifically to meet clients'
measurement specifications. In conjunction with Yale University's
Gesell Institute, it also publishes a line of books on the Gesell
child development scales, a predictor of a young child's
readiness to start kindergarten. For the instructional markets,
a TASA subsidiary 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.
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 the Company
maintains its corporate website at www.tasa.com. The terms
"Company" and "TASA" refer to Touchstone Applied Science
Associates, Inc. and its subsidiaries, unless the context
otherwise indicates. TASA's subsidiaries are Modern Learning
Press, Inc., a Delaware corporation ("MLP"), and, Beck Evaluation
& Testing Associates, Inc., a New York corporation ("BETA").
The Company's primary assessment products are reading
comprehension tests based on its internally developed proprietary
assessment methodology called the Degrees of Reading Power
("DRP"). It publishes and sells its DRP tests to over 3,500
elementary and secondary schools, colleges and universities
throughout the United States and Canada. Based on its
proprietary DRP methodology, 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. In 1997, management estimates that over 4 million DRP
tests were administered in the United States and Canada in either
the test's secure form or in "shelf" form from the Company's
catalogs.
Before Fiscal 1997, substantially all of the Company's
revenues were derived from assessment products, primarily from
the publishing and sale of DRP test products and the provision of
related services, such as test scoring. In January 1997, the
Company purchased all of the outstanding capital stock of BETA,
which extended its assessment products into custom designed tests
for states and textbook publishers. TASA's instructional
products were acquired in May 1997, when a TASA subsidiary, MLP,
purchased substantially all of the operating assets of Programs
for Education, Inc. In addition, during Fiscal 1997, the Company
extended its assessment activities by purchasing the Maculaitis
test, a test designed to evaluate English proficiency for limited
English proficiency ("LEP") students. TASA has also developed
and introduced computerized and Internet-based products and
services, such as DRP BOOKLINK, which are available to schools
and subscribers on floppy disk.
RESULTS OF OPERATIONS
The following table sets forth, for the periods
indicated, certain financial data as a percentage of total
revenues. The percentages presented are prepared on an EBITDA (1)
format.
<TABLE>
<CAPTION>
RESULTS OF OPERATIONS FOR THE THIRD FISCAL QUARTER
All of the following amounts are percentages.
Nine Months Three Months
Ended July 31 Ended July 31
EBITDA(1) Format 1998 1997 1998 1997
<S> <C> <C> <C> <C>
Revenues 100% 100% 100% 100%
Costs of Goods Sold 26% 27% 27% 28%
Gross Profit 74% 73% 73% 72%
Operating Expenses:
Selling expenses 26% 21% 21% 16%
General and administrative 33% 30% 27% 31%
Operating Income (EBITDA) 15% 22% 25% 25%
Depreciation-amortization 15% 12% 10% 10%
Impairment of Goodwill -- -65% -- -134%
Bad Debt (Expense) Recovery 5% -13% -- 27%
Net Interest Expense (Income) -3% 1% -3% -1%
EBT(2) 2% -68% 13% -148%
Net income 0% -53% 10% -116%
<FN>
- ---------------
(1) Earnings before interest, taxes, and depreciation and
amortization
(2) Earnings (loss) before taxes
</FN>
</TABLE>
THREE MONTHS ENDED JULY 31, 1998
REVENUES. Revenues of $1,993,844 for the third quarter
ended July 31, 1998 (the "Current Quarter") represented an
increase of 35% or $521,079, over the prior year's third quarter
(the "Comparable Quarter") sales of $1,472,765. The following is
a discussion of the four components of the Company's revenues:
Contract sales, reflecting sales of secure DRP tests to
the States of New York, Connecticut and Virginia, were
essentially flat in the Current Quarter ($30,017) vs. the
Comparable Quarter ($34,088). During the Current Quarter,
Virginia notified the Company that its Literacy Passport Test
program, which includes DRP tests, is being phased out over the
next 6 years. New York also notified the Company that its RCT
and PEP testing programs, which include DRP tests, are being
phased out. As a result, Virginia contract revenues during the
fourth quarter of Fiscal 1998 and New York contract revenues for
the first quarter of Fiscal 1999 will be less than in the prior
years. The actual dollar amount of Virginia and New York
contract revenues for Fiscal 1999 is uncertain at this time. On
the positive side, Connecticut notified the Company that its
Mastery Testing Program will continue to include DRP tests for
the next five years, and a multiple year contract has been
executed. Contract income as a percentage of total revenues has
been steadily declining over the past few years (49% in Fiscal
1994; 41% in Fiscal 1995; 35% in Fiscal 1996; 17% in Fiscal
1997), and Management anticipates that contract income will
represent less than 11% of total revenues for Fiscal 1998.
Although the Company expects to see a decline in the actual
dollar amount of contract income in both Fiscal 1998 and Fiscal
1999, the offsetting increase in catalog sales and revenues from
the BETA and MLP acquisitions make the Company more diversified
and much less dependent on any single contractual customer.
Catalog sales, representing the sale of DRP tests,
Maculaitis tests, and TextSense increased 14% to $697,833 from
$609,764 in the Comparable Quarter last year. Management's sales
and marketing programs have resulted in increased numbers of new
catalog customers over the past three years which continue to
account for these volume increases. For each of the first three
quarters of the year, the Company continues to acquire new
customers at a rate comparable to prior years.
The revenues of BETA, the Company's education
consulting subsidiary, increased 254% to $209,305 in the Current
Quarter as compared to revenues of $59,119 in the Comparable
Quarter. Sales from services performed under these contracts
will vary by fiscal quarter depending on timing of required
contract services.
MLP had sales of $1,056,689 for the Current Quarter.
This was a 37% increase over the Comparable Quarter sales of
$769,794. The Current Quarter generally accounts for
approximately 40% of MLP's anticipated annual sales. Management
has implemented a strategic growth plan for MLP which includes
the introduction of new titles, the broadening of MLP's product
line for schools, parents and teachers, and a sales program
focused on expanding MLP's client base from among TASA clients as
well as new outside clients. Management believes there is only a
5% overlap between MLP's current customer base and TASA's 3,500
educational institutions client base.
COST OF GOODS SOLD AND GROSS PROFIT. Cost of goods
sold, excluding amortization of the Company's Test Passage Bank,
decreased in the Current Quarter to 27% of sales as compared to
28% in the Comparable Quarter. In the Current Quarter, after
cost of goods sold of $546,997, the Company's gross profit was
73% of revenues or $1,446,847. This compares favorably to the
Comparable Quarter, when gross profit after cost of goods sold of
$410,838 constituted 72% of revenues or $1,061,927. The increase
in gross profit in the Current Quarter is attributable to
increased revenues coupled with a slightly higher margin for
products and services.
SELLING EXPENSES. Selling expenses for the Current
Quarter increased 79% over the Comparable Quarter to $415,087 or
21% of revenues. This compares with $232,262 or 16% of revenues
in the Comparable Quarter. The increase in marketing
expenditures reflects a full quarter for Modern Learning Press.
We acquired MLP in June 1997 and did not have a marketing program
in place until the 4th quarter.
GENERAL AND ADMINISTRATIVE EXPENSES. General and
administrative expenses for the Current Quarter, excluding
depreciation and amortization, increased as a result of the
acquisition of MLP and the necessary expansion of the Company's
corporate infrastructure. Excluding depreciation and
amortization, the Company's general and administrative expenses
for the Current Quarter increased $66,236 to 27% of revenues or
$529,661. This compares favorably to general and administrative
expenses in the Comparable Quarter of $463,425, or 31% of
revenues. With increased revenues, we are beginning to accrue
the benefits of critical mass, and thus G&A as a percentage of
sales is decreasing.
OPERATING PROFIT ("EBITDA"). The Company's earnings
before interest, taxes, depreciation and amortization (EBITDA)
for the Current Quarter were $502,099 or 25% of revenues, as
compared to $366,240 or 25% of revenues in the Comparable
Quarter.
DEPRECIATION AND AMORTIZATION. Depreciation and
amortization expenses in the Current Quarter increased 14% to
$161,253 from $141,328 in the Comparable Quarter. The increase
is attributable to the one year consulting contract relating to
the purchase of MLP.
NET INTEREST EXPENSE (INCOME). The Company's two major
acquisitions completed in Fiscal 1997 were in part financed by
interest bearing notes issued to the sellers. Therefore, total
interest expense in the Current Quarter rose to $51,207 from
$16,958 in the Comparable Quarter. Management expects that the
Company will continue to have a net interest expense for the next
several fiscal years.
EARNINGS (LOSS) BEFORE TAXES ("EBT"). The Company had
a profit before taxes of $252,819 for the Current Quarter, as
compared to a loss of ($2,176,801) in the Comparable Quarter.
NET INCOME. The Company had an after-tax profit of
$202,321 as compared to a ($1,704,655) loss in the Comparable
Quarter.
NINE MONTHS ENDED JULY 31, 1998
REVENUES. Revenues of $4,408,781 for the nine months
ended July 31, 1998 (the "Current Period") represented an
increase of 44% or $1,343,849 over the prior year's first nine
months (the "Comparable Period") sales of $3,064,932. The
following is a discussion of the four components of the Company's
revenues.
Contract sales increased 7% in the Current Period to
$612,622 from $573,242 in the Comparable Period. Catalog sales
increased 15% to $1,735,606 from $1,514,887 in the Comparable
Period. The revenues of BETA increased 121% to $456,978 in the
Current Period as compared to revenues of $207,009 in the
Comparable Period. MLP had sales of $1,603,575 for the Current
Period vs. $770,000 in the Comparable Period. However, it should
be noted that the acquisition of MLP did not take place until the
end of May 1997.
COST OF GOODS SOLD AND GROSS PROFIT. Cost of goods
sold, excluding amortization of the Company's Test Passage Bank,
remained approximately constant in the Current Period at 26% of
revenues, as compared to 27% in the Comparable Period. In the
Current Period, after cost of goods sold of $1,165,297 the
Company's gross profit was 74% of revenues or $3,256,484. This
compares to the Comparable Period when gross profit after cost of
goods sold of $825,116 constituted 73% of revenues or $2,239,816.
The increase in gross profit in the Current Period is primarily
attributable to increased revenues for products and services.
SELLING EXPENSES. Selling expenses for the Current
Period increased 75% to $1,135,084, equaling 26% of revenues.
This compares to $647,241 or 21% of revenues in the Comparable
Period. This is because in the Current Period, the Company had a
full nine-month marketing plan for MLP.
GENERAL AND ADMINISTRATION EXPENSES. General and
administrative expenses for the Current Period, excluding
depreciation and amortization, increased as a result of the
acquisition of MLP, and the necessary expansion of the Company's
corporate infrastructure and periodic services. Excluding
depreciation and amortization, the Company's general and
administrative expenses for the Current Period increased
$773,362, or 61%, to $1,460,424, or 33% of revenues. This
compares to general and administrative expenses in the Comparable
Period of $905,513, or 30% of revenues. Approximately $393,892,
or 51%, of this increase is from the inclusion of MLP.
BAD DEBT RECOVERY. The Company's previous management
made a $400,000 loan to HGI, Inc. (formerly The Harriman Group,
Inc.), which declared bankruptcy during Fiscal 1997.
Consequently, the Company wrote off the $400,000 note receivable
in Fiscal 1997. During the Second Quarter, management concluded
a settlement of the note receivable with HGI. Settlement terms
require payment of $200,000 on or before October 8, 1998, which
payment is guaranteed by an irrevocable letter of credit.
OPERATING PROFIT ("EBITDA"). The Company's earnings
before interest, taxes, depreciation and amortization (EBITDA)
for the Current Period were $660,976, or 13% of revenues, as
compared to $687,062, or 2% of revenues, in the Comparable
Period.
DEPRECIATION AND AMORTIZATION. Depreciation and
amortization expenses in the Current Period increased 68% to
$640,221 from $380,946 in the Comparable Period. A significant
portion of the Current Period's increase of $259,275 was
attributable to the acquisition of the assets of MLP.
NET INTEREST EXPENSE (INCOME). The Company's two major
acquisitions completed in Fiscal 1997 were in part financed by
interest bearing notes issued to the sellers. Therefore, total
interest expense in the Current Period rose to $152,217 from
($2,168) in the Comparable Period.
EARNINGS (LOSS) BEFORE TAXES ("EBT"). The Company had
a profit before taxes of $68,338 for the Current Period, as
compared to EBT loss of ($2,072,104) in the Comparable Period.
NET INCOME. The Company had a profit of $8,910 in the
current period vs. a ($1,623,476) loss in the Comparable Period.
LIQUIDITY AND CAPITAL RESOURCES FOR THE NINE MONTHS ENDED JULY 31, 1998
OPERATING ACTIVITIES. The Company continues to
generate substantial cash from operations as measured by EBITDA.
For the Current Period, EBITDA was $660,976, a decrease of 4% as
compared to $687,062 (before expenses of impairment of goodwill
and bad debt) in the Comparable Period.
In the Current Period, management continued its program
to control tightly the Company's operating assets, including
accounts receivable and inventory. However, operating assets and
liabilities in the Current Period used $354,330 of cash versus
generating cash of $11,092 in the Comparable Period. In total,
operations generated cash of $61,929 during the Current Period as
compared to cash generated of $670,436 in the Comparable Period.
INVESTING ACTIVITIES. During the Current Period, the
Company invested cash of $612,824 in capital expenditures and
other assets, including for its proprietary Test Passage Bank and
in additional software development. The Company's net use of
cash for investing in the Current Period was $78,824. This
compares with a net investment of $1,924,944 in the Comparable
Period, which included $2,878,092 spent for capital expenditures
including the acquisitions of MLP, BETA and the Maculaitis Test.
In the Comparable Period, the Company had net sales of marketable
securities of $943,148. During the Current Period, the Company
made expenditures of $172,819 for the Company's proprietary Test
Passage Bank (vs. $352,082 in the Comparable Period), while
software expenditures decreased to $74,765 from $170,846 in the
Comparable Period. Capital expenditures for fixed assets
increased to $114,119 vs. $77,309. Additionally, $238,532 was
used in the Current Period for deferred acquisition costs.
FINANCING ACTIVITIES. The Company used a total of
$494,572 of cash for financing activities during the Current
Period versus generating cash of $667,564 in the Comparable
Period. In the Current Period, the Company received $97,905 from
the exercise of outstanding warrants, and made expenditures of
$233,549 to reduce long-term debt, and $358,528 to reduce a loan
payable. This compares with $98,856 used in the Comparable
Period for debt reduction and cash received of $780,995 from net
proceeds of a loan.
NET CASH CHANGE. As a result of the Company's
operating, investing, and financing activities for the first nine
months in 1998, the Company's cash and temporary investment
balances were decreased by $510,467 to $646,000. The Company's
working capital at July 31, 1998 was $2,088,124, with a current
ratio of 3.4 to 1. This compares to working capital at the end
of Fiscal 1997 of $2,244,000 and a current ratio of 3.7 to 1.
Management believes that its existing debt obligations can be met
from the cash flow from operations.
YEAR 2000 MATTERS. The Company is working to resolve the
potential impact of the year 2000 on the ability of the Company's
computerized information systems to accurately process information that
may be date-sensititve. Any of the Company's programs that recognize
a date using "00" as the year 1900 rather than the year 2000 could
result in errors or system failures. The Company utilizes a number
of commputer programs across its entire operation. The Company has not
completed its assessment, but currently believes that costs of
addressing this issue will not have a material adverse impact on the
Company's financial position. However, if the Company and third
parties upon which it relies are unable to address this issue in a
timely manner, it could result in a material financial risk to the
Company. In order to assure that this does not occur, the Company
plans to devote all resources required to resolve any significant
year 2000 issues in a timely manner.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
On September 14, the Company entered into a letter of
intent to purchase all of the issued and outstanding capital stock
of Mildred Elley Business Schools for an aggregate purchase price
equal to approximatey $3,000,000. The acquisition is currently
scheduled for closing on or about October 31, 1998 and is subject
to the execution of definitive documentation and the satisfaction of
conditions precedent. The Company also announced the termination of
the letter of intent to acquire Drake Business Schools, based on its
conclusion that the risks and opportunities of that acquisition
were not consistent with the criteria of the Company's strategic
plan.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 11 -- Computation of Earnings per Common Share
Exhibit 27 -- Financial Data Schedule
(b) Reports on Form 8-K
Current Report on Form 8-K, dated April 9, 1998.
<PAGE>
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE FISCAL QUARTER ENDED JULY 31, 1998
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 8 1 9 9 7
------- -------
<S> <C> <C>
ASSETS
------
Current assets:
Cash and temporary investments $ 646,197 $1,156,664
Marketable securities 186,473 377,560
Note receivable 200,000 --
Accounts receivable 1,268,867 803,021
Inventories 362,614 360,227
Prepaid expenses and other current assets 299,268 381,381
---------- ----------
Total current assets 2,963,419 3,078,853
Property, plant and equipment - net of
accumulated depreciation of $1,136,948
and $1,029,417, respectively 1,746,535 1,739,947
Other assets:
Test passage bank, net of accumulated
amortization of $1,399,534 and $1,175,235
respectively 2,692,433 2,743,853
Software development costs, net of
accumulated amortization of $82,531 and
$30,517, respectively 363,681 340,930
Goodwill, net of accumulated amortization of
$136,677 and $65,511 725,580 796,746
Noncompete agreements, net of accumulated
amortization of $83,105 and $29,672 416,895 470,238
Deferred income taxes 368,594 335,722
Other assets 322,682 86,596
---------- ----------
Total assets $9,599,819 $9,592,885
========== ==========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
F - 1
<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 8 1 9 9 7
------- -------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of long-term debt $ 279,924 $ 314,217
Accounts payable and accrued expenses 595,371 520,148
---------- ----------
Total current liabilities 875,295 834,365
Long-term debt less current portion 2,329,712 2,528,968
---------- ----------
Total liabilities 3,205,007 3,363,333
---------- ----------
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, 8,567,222 and 8,389,322 shares
issued and outstanding, respectively 857 839
Additional paid-in capital 4,463,762 4,365,875
Stock subscription receivable (14,350) (14,350)
Unrealized holding gain 7,327 8,601
Unearned compensatory stock (47,327) (107,046)
Retained earnings 1,984,543 1,975,633
---------- ----------
Total stockholders' equity 6,394,812 6,229,552
---------- ----------
Total liabilities & stockholders' equity $9,599,819 $9,592,885
========== ==========
<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
Nine Months Ended Three Months Ended
July 31, July 31,
1 9 9 8 1 9 9 7 1 9 9 8 1 9 9 7
------- ------- ------- -------
<S> <C> <C> <C> <C>
Contract income $ 612,622 $ 573,242 $ 30,017 $ 34,088
Catalog sales 1,735,606 1,514,887 697,833 609,764
Consulting income 456,978 207,009 209,305 59,119
Catalog sales - MLP 1,603,575 769,794 1,056,689 769,794
----------- ----------- ---------- ----------
Total net revenue 4,408,781 3,064,932 1,993,844 1,472,765
Cost of goods sold 1,436,086 1,050,884 647,295 486,648
----------- ----------- ---------- ----------
Gross profit 2,972,695 2,014,048 1,346,549 986,117
----------- ----------- ---------- ----------
Operating expenses:
Selling expenses 1,135,084 647,241 415,087 232,262
General and administrative expenses 1,816,856 1,060,691 627,436 528,943
Bad debt expense -- 405,000 -- 405,000
Impairment of goodwill -- 1,979,755 -- 1,979,755
Bad debt recovery (200,000) -- -- --
----------- ----------- ---------- ----------
Total operating expenses 2,751,940 4,092,687 1,042,523 3,145,960
----------- ----------- ---------- ----------
Income (loss) from operations 220,755 (2,078,639) 304,026 (2,159,843)
Other income (expense):
Interest expense (186,175) (73,079) (57,396) (37,020)
Investment income 33,758 94,697 6,189 20,062
Loss on sale of assets -- (15,083) -- --
----------- ----------- ---------- ----------
Income (loss) before income taxes 68,338 (2,072,104) 252,819 (2,176,801)
Income taxes (benefit) 59,428 (458,628) 50,498 (472,146)
----------- ----------- ---------- ----------
Net income (loss) $ 8,910 $(1,613,476) $ 202,321 $(1,704,655)
=========== =========== ========== ==========
Weighted average shares outstanding
Basic 8,488,239 8,047,410 8,527,844 8,139,322
Diluted 8,646,767 8,047,410 8,686,372 8,139,322
Earnings per share
Basic $ -- $ (.20) $ .02 $ (.21)
Diluted $ -- $ (.20) $ .02 $ (.21)
<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
Nine Months Ended
July 31,
1 9 9 8 1 9 9 7
------- -------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 8,910 $(1,613,476)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 640,221 380,946
Deferred income taxes (32,872) (515,781)
Bad debt recovery (200,000) --
Financial advisory services -- 15,611
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 (465,846) (257,548)
Inventories (2,387) 36,031
Other current assets 38,680 8,389
Accounts payable 75,223 224,220
---------- ----------
NET CASH FLOWS FROM OPERATING ACTIVITIES 61,929 670,436
---------- ----------
INVESTING ACTIVITIES
Acquisition of property, plant and equipment (114,119) (77,309)
Test passage bank (172,879) (352,092)
Software development costs (74,765) (170,846)
Pre-publication costs (12,529) --
Purchase of marketable debt securities -- (3,797)
Proceeds from the sale of marketable securities 535,000 946,945
Proceeds from the sale of assets -- 10,000
Acquisition of subsidiaries -- (2,247,945)
Acquisition of test -- (29,900)
Deferred acquisition costs (238,532) --
---------- ----------
NET CASH FLOWS FROM INVESTING ACTIVITIES (77,824) (1,924,944)
---------- ----------
FINANCING ACTIVITIES
Principal payments on industrial revenue
bond obligation -- (98,856)
Repayment of long-term debt (233,549) --
Proceeds from exercise of warrants 97,905 --
Net proceeds from loan payable (358,928) 780,995
Mortgage costs -- (13,374)
Organizational expenses of subsidiary -- (1,201)
---------- ----------
NET CASH FLOWS FROM FINANCING ACTIVITIES (494,572) 667,564
---------- ----------
<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
Nine Months Ended
July 31,
1 9 9 8 1 9 9 7
------- -------
<S> <C> <C>
NET CHANGE IN CASH AND TEMPORARY
INVESTMENTS $ (510,467) $ (586,944)
CASH AND TEMPORARY INVESTMENTS
AT BEGINNING OF PERIOD 1,156,664 1,049,819
---------- ----------
CASH AND TEMPORARY INVESTMENTS
AT END OF PERIOD $ 646,197 $ 462,875
========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 195,505 $ 47,914
========== ==========
Income taxes paid $ 45,711 $ 99,337
========== ==========
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 consolidated
financial statements of Touchstone Applied Science Associates,
Inc. contain all adjustments necessary to present fairly the
Company's consolidated financial position as of July 31, 1998 and
October 31, 1997 and the consolidated results of operations for
the nine and three months ended July 31, 1998 and 1997 and
consolidated cash flows for the nine months ended July 31, 1998
and 1997.
The consolidated results of operations for the nine and three
months ended July 31, 1998 and 1997 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 consolidated financial
statements included in its Annual Report on Form 10-KSB for the
year ended October 31, 1997.
Earnings per Share
- ------------------
Effective November 1, 1997, the Company adopted Financial
Accounting Standards Board Statement of Financial Accounting
Standards Number 128, "Earnings Per Share". Under this standard,
the method for calculation of earnings per share was changed and
requires the presentation of "basic" and "diluted" earnings per
share. Prior period earnings per share have been restated to
conform with these provisions.
F - 6
<PAGE> F-7
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B - EMPLOYEE STOCK OPTIONS
- -------------------------------
In June 1998, two employees exercised options to purchase 77,900
shares at an aggregate exercise price of $52,778.99.
NOTE C - PENDING ACQUISITIONS
- -----------------------------
On September 14, the Company entered into a letter of intent
to purchase all of the issued and outstanding capital stock
of Mildred Elley Business Schools for an aggregate purchase price
equal to approximatey $3,000,000. The acquisition is currently
scheduled for closing on or about October 31, 1998 and is subject
to the execution of definitive documentation and the satisfaction of
conditions precedent.
On March 26, 1998, the Company entered into a letter of intent to
purchase all of the issued and outstanding capital stock of each
of Drake Training Services Corporation and Drake Business Schools
Corporation for an aggregate purchase price equal to approximately
$2,500,000. Upon completion of its due diligence, the Company
decided to terminate the letter of intent with Drake.
NOTE D - IRS EXAMINATION
- ------------------------
The Internal Revenue Service is reviewing the Company's
corporation income tax returns for the year ended October 31,
1995. At this time it is impossible to predict the outcome of the
examination.
NOTE E - RECENTLY ISSUED ACCOUNTING STANDARD
- --------------------------------------------
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards Number 130 "Reporting Comprehensive
Income". 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. Had the new
standard been adopted effective November 1, 1997, comprehensive
income for the nine months ended July 31, 1998 and 1997 would have
been $7,636 and $(1,588,757), respectively.
NOTE F - NEW SUBSIDIARY
- -----------------------
In July 1998, the Company formed a new wholly-owned subsidiary,
TASA Educational Services Corporation. This subsidiary is
currently inactive.
F - 7
<PAGE>
SIGNATURE
In accordance with the requirements of the Securities
Exchange Act of 1934, the registrant has duly 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
Date: September 14, 1998
<TABLE>
<CAPTION>
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
SUBSIDIARIES
EXHIBIT II
COMPUTATION OF EARNINGS PER COMMON SHARE
----------------------------------------
Nine Months Ended Three Months Ended
July 31, July 31,
1 9 9 8 1 9 9 7 1 9 9 8 1 9 9 7
------- ------- ------- -------
<S> <C> <C> <C> <C>
Basic earnings:
Net income (loss) $ 8,910 $(1,613,476) $ 202,321 $(1,704,655)
Shares:
Weighted common shares outstanding 8,488,239 8,047,410 8,527,844 8,139,322
Warrants to consultants -- -- -- --
Employee stock options -- -- -- --
Consultant stock options -- -- -- --
Underwriter options -- -- -- --
----------- ----------- ---------- ----------
Total weighted shares outstanding 8,488,239 8,047,410 8,527,844 8,139,322
----------- ----------- ---------- ----------
Basic earnings per common share $ -- $ (.20) $ .02 $ (.21)
=========== =========== ========== ==========
Diluted earnings:
Net income (loss) $ 8,910 $(1,613,476) $ 202,321 $(1,704,655)
Shares:
Weighted common shares outstanding 8,488,239 8,047,410 8,527,844 8,139,322
Warrants to consultants 147,728 -- 147,728 --
Employee stock options -- -- -- --
Consultant stock options 10,800 -- 10,800 --
Underwriter options -- -- -- --
----------- ----------- ---------- ----------
Total weighted shares outstanding 8,646,767 8,047,410 8,686,372 8,139,322
----------- ----------- ---------- ----------
Diluted earnings per common share $ -- $ (.20) $ .02 $ (.21)
=========== =========== ========== ==========
</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-31-1998
<PERIOD-END> JUL-31-1998
<CASH> 646,197
<SECURITIES> 186,473
<RECEIVABLES> 1,268,867
<ALLOWANCES> 0
<INVENTORY> 362,614
<CURRENT-ASSETS> 2,963,419
<PP&E> 2,883,483
<DEPRECIATION> 1,136,948
<TOTAL-ASSETS> 9,599,819
<CURRENT-LIABILITIES> 875,295
<BONDS> 2,329,712
0
0
<COMMON> 857
<OTHER-SE> 6,393,955
<TOTAL-LIABILITY-AND-EQUITY> 9,599,819
<SALES> 4,408,781
<TOTAL-REVENUES> 4,442,539
<CGS> 1,436,086
<TOTAL-COSTS> 2,751,940
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 186,175
<INCOME-PRETAX> 68,338
<INCOME-TAX> 59,428
<INCOME-CONTINUING> 8,910
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,910
<EPS-PRIMARY> 0.0
<EPS-DILUTED> 0.0
</TABLE>
