<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 April 30, 1998
Transition report pursuant to Section 13 or 15(d) of the
Exchange Act
For the transition period from to
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Commission file number 0-20303
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TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
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(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
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(Address of principal executive offices)
(914) 277-8100
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(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
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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
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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 June 8, 1998: 8,527,222 shares of Common Stock, par value
- ------------------------------------------------------------
$0.0001 per share.
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Transitional Small Business Disclosure Format (check one):
Yes No X
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<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The financial statements for the Company's fiscal
quarter ended April 30, 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, In March 1998, TASA announced execution of
a letter of intent to acquire its initial educational delivery
capability - The Drake Business Schools. The acquisition is
anticipated to close by July 1, 1998, or as soon thereafter as
practicable.
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(R)
("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 SECOND FISCAL QUARTER
All of the following amounts are percentages.
Six Months Three Months
Ended April 30 Ended April 30
EBITDA(1) Format 1998 1997 1998 1997
<S> <C> <C> <C> <C>
Revenues 100% 100% 100% 100%
Costs of Goods Sold 25% 26% 29% 35%
Gross Profit 75% 74% 71% 65%
Operating Expenses:
Selling expenses 30% 26% 36% 31%
General and administrative 39% 28% 41% 36%
Operating income (EBITDA) 15% 20% 12% -3%
Depreciation-amortization 18% 15% 21% 17%
Net Interest Expense (Income) -4% 2% -4% 2%
EBT(2) -8% 7% -13% -18%
Net income -8% 6% -14% -9%
<FN>
- ------------------
(1) Earnings before interest, taxes, and depreciation and
amortization
(2) Earnings (loss) before taxes
</FN>
</TABLE>
The discussion below is presented on an EBITDA basis
with respect to both dollar amounts and percentages.
THREE MONTHS ENDED APRIL 30, 1998
REVENUES. Revenues of $1,117,000 for the second
quarter ended April 30, 1998 (the "Current Quarter") represented
an increase of 71%, or $462,000, over the prior year's second
quarter (the "Comparable Quarter") sales of $654,000. This
increase reflected both the Company's internal growth as well as
sales included this year from one acquisition completed
subsequent to the Comparable Quarter. Of this year's sales
increase of $462,000, approximately $144,000, or 31%, of the gain
resulted from a 22% internal growth during the quarter. The
balance of the increase in revenues, or approximately $318,000,
resulted from the acquisition of MLP completed in May 1997. 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, increased 19%
in the Current Quarter to $87,000 from approximately $73,000 in
the Comparable Quarter. With the continuing growth of catalog
sales and the acquisition of MLP and BETA, contract sales as a
percentage of total revenues has been significantly reduced as
compared to prior years and prior quarters during those years.
Catalog sales, representing the sale of DRP tests, DRP
computerized tests, and TextSense increased 22% to
approximately $587,000 from approximately $482,000 in the
Comparable Quarter last year. Management's sales and marketing
programs have resulted in substantially increased numbers of new
catalog customers over the past three years, which continue to
account for these volume increases.
The revenues of BETA, the Company's educational
consulting subsidiary, increased 25% to $124,000 in the Current
Quarter as compared to revenues of $99,000 in the Comparable
Quarter. During the Current Quarter, BETA received its sixth multi-
year state contract or subcontract for custom designed testing
services at the state level. At April 30, 1998, BETA's backlog
of contract work had increased substantially as compared to the
Comparable Quarter and the end of Fiscal 1997. Sales from
services performed under these contracts will vary by fiscal
quarter depending on timing of required contract services.
MLP, the assets of which were acquired by the Company
in May 1997, had sales of $318,000 for the Current Quarter.
There were no sales for MLP in the Comparable Quarter last year.
Based on management's analysis, over 70% of MLP's annual sales
have historically occurred during the periods comprising TASA's
third and fourth fiscal quarters. The Current Quarter generally
accounts for less than 15% 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 29% of sales as compared to
35% in the Comparable Quarter. In the Current Quarter, after
cost of goods sold of $326,000, the Company's gross profit was 71%
of revenues or $791,000. This compares favorably to the
Comparable Quarter, when gross profit after cost of goods sold of
$228,000 constituted 65% of revenues or $426,000, The increase in
gross profit in the Current Quarter is attributable to increased
revenues coupled with higher margin products and services.
SELLING EXPENSES. Selling expenses for the Current
Quarter increased 93% over the Comparable Quarter to $397,000 or
36% of revenues. This compares with $206,000 or 31% of revenues
in the Comparable Quarter. The $139,000 selling expenses of MLP
in the Current Quarter accounted for 73% of the Current Quarter
increase of $191,000. As it had not yet commenced operations,
MLP was not included in last year's Comparable Quarter. The
remaining increase in selling expenses was due to increased
selling expenses in support of DRP test sales. Because of the
seasonality of the business, the Company "forward-spends" in
anticipation of offsetting revenues in the second half of the
Company's fiscal year.
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 $219,000 or 92% to 41% of revenues or $457,000.
This compares to general and administrative expenses in the
Comparable Quarter of $239,000, or 36% of revenues. Over 54% of
this increase, or $118,000, is due to the inclusion of MLP.
Management believes that, based on the Company's overall revenue
patterns and the relatively even distribution of general and
administrative expenses throughout the fiscal year, the
percentage of revenues utilized for general and administrative
expenses should decline in the latter quarters of the Company's
fiscal year
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. Conse-
quently, the Company wrote off the $400,000 note receivable in
Fiscal 1997. During the 1998 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 depreciation, amortization, interest and taxes (EBITDA)
for the Current Quarter were $136,000, or 12% of revenues, as
compared to a loss of ($18,000), or -3% of revenues, in the
Comparable Quarter.
DEPRECIATION AND AMORTIZATION. Depreciation and
amortization expenses in the Current Quarter increased 100% to
$229,000 from $114,000 in the Comparable Quarter. Of the Current
Quarter's $115,000 increase, $75,000 was due to the amortization
of acquisition costs attributable to MLP. In the May 1997
acquisition of assets of Programs for Education Inc., $200,000 of
the purchase price was a one-year prepaid consulting contract
amortizing $50,000 per quarter, and terminating in May 1998. Of
the Current Quarter's depreciation and amortization,
approximately $99,000 is categorized in cost of goods sold
representing amortization of TASA's Test Passage Bank, while the
remainder is reported as general and administrative expenses.
EARNINGS BEFORE INTEREST AND TAXES ("EBIT"). The
Company's loss before interest and taxes decreased in the Current
Quarter to ($92,000), as compared to a loss of ($132,000) in the
Comparable Quarter. This earnings increase is directly
attributable to the factors discussed above.
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 $66,000 from
$19,000 in the Comparable Quarter. Concurrently, management has
continued to invest the Company's cash liquidity into the
Company's business from which it expects to derive higher returns
than previously earned in cash and equivalent investments.
Consequently, reduced interest income of $16,000 was reported in
the Current Quarter as compared to $35,000 in the Comparable
Quarter. This has resulted in a net interest expense for the
Current Quarter of $49,000 as compared to net interest earnings
of $16,000 in the Comparable Quarter, a difference of $65,000.
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 loss before taxes of $141,000 for the Current Quarter, as
compared to a loss of $120,000 in the Comparable Quarter.
INCOME TAX PROVISION (CREDITS). Because of the timing
differences between the Company's financial and tax accounting,
the Current Quarter had a tax provision of $19,000 as compared to a
tax credit of $59,000 in the Comparable Quarter. The tax
provisions were computed at statutory tax rates.
SIX MONTHS ENDED APRIL 30, 1998
REVENUES. Revenues of $2,415,000 for the six months
ended April 30, 1998 (the "Current Period") represented an
increase of 52%, or $823,000, over the prior year's first six
months (the "Comparable Period") sales of $1,592,000. This
increase reflected both the Company's internal growth as well as
revenues included in the Current Period from one acquisition completed
subsequent to the Comparable Quarter. Of the Current Period's
revenue increase of $823,000, approximately $276,000, or 34%, of
the gain resulted from a 17% internal growth during the Current
Period. The balance of the increase in revenues, or
approximately $547,000, resulted from the acquisition of MLP
completed in May 1997. The following is a discussion or the four
components of the Company's revenues.
Contract sales increased 8% in the Current Period to
$583,000 from approximately $539,000 in the Comparable Period.
Catalog sales increased 15% to approximately $1,038,000 from
approximately $905,000 in the Comparable Period. The revenues of
BETA increased 67% to $248,000 in the Current Period as compared
to revenues of $148,000 in the Comparable Period. MLP had sales
of $547,000 for the Current Period. There were no sales for MLP
in the Comparable Period, The Current Period generally accounts
for less than 25% of MLP's anticipated annual sales.
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 25% of
revenues, as compared to 26% in the Comparable Period. In the
Current Period, after cost of goods sold of $605,000, the
Company's gross profit was 75% of revenues or $1,810,000. This
compares to the Comparable Period when gross profit after cost of
goods sold of $415,000 constituted 74% of revenues or $1,178,000.
The increase in gross profit in the Current Period is
attributable to increased revenues coupled with higher margin
products and services.
SELLING EXPENSES. Selling expenses for the Current
Period increased 74% to $720,000, equaling 30% of revenues. This
compares to $415,000 or 26% of revenues in the Comparable Period.
The Current Period's 74% or $305,000 increase over the Comparable
Period, is substantially due to inclusion of the $233,000 selling
expenses of MLP. MLP was not included in the Comparable Period.
GENERAL AND ADMINISTRATIVE 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 $486,000,
or 109%, to $931,000, or 39% of revenues. This compares to general
and administrative expenses in the Comparable Period of $445,000,
or 28% of revenues. Approximately $248,000, 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. Conse-
quently, the Company wrote off the $400,000 note receivable in
Fiscal 1997. During the Current 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 depreciation, amortization, interest and taxes (EBITDA)
for the Current Period were $358,000, or 15% of revenues, as
compared to $318,000, or 20% of revenues, in the Comparable
Period.
DEPRECIATION AND AMORTIZATION. Depreciation and
amortization expenses in the Current Period increased 87% to
$442,000 from $237,000 in the Comparable Period. Of the Current
Period's $206,000 increase, $152,000 was due to the amortization
of acquisition costs attributable to the acquisition of the
assets of Programs for Education, Inc. while $31,000 was
attributable to the amortization of acquisition goodwill of BETA.
Of the Current Period's depreciation and amortization,
approximately $183,000 is categorized in cost of goods sold,
representing amortization of TASA's Test Passage Bank, while the
remainder is reported as general and administrative expenses.
EARNINGS BEFORE INTEREST AND TAXES ("EBIT"). The
Company's earnings (loss) before interest and taxes decreased in
the Current Period to ($184,000), as compared to a profit of
$105,000 in the Comparable Period. This change is directly
attributable to the factors discussed above,
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 $129,000 from
$36,000 in the Comparable Period, Concurrently, management has
continued to invest the Company's cash liquidity into the
Company's business from which it expects to derive higher returns
than previously earned in cash and equivalent investments.
Consequently, reduced interest income of $28,000 was reported in
the Current Period as compared to $75,000 in the Comparable
Period. This has resulted in a net interest expense for the
Current Period of $101,000 as compared to net interest earnings
of $39,000 in the Comparable Period. 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 loss before taxes of ($184,000) for the Current Period, as
compared to EBT of $105,000 in the Comparable Period.
INCOME TAX PROVISION (CREDITS). Because of the timing
differences between the Company's financial and tax accounting,
the Current Period had a tax provision of $9,000 as compared to
$14,000 in the Comparable Period. The tax provisions were
computed at statutory tax rates.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES. The Company continues to
generate substantial cash from operations as measured by EBITDA.
In the first half of Fiscal 1998, EBITDA was $358,000 as compared
to $318,000 in the Comparable Period. Substantially all of the
$206,000 increase of depreciation and amortization charged to earnings
in the Current Period over the Comparable Period derives specifically
from the acquisition of MLP and BETA. As previously noted, the
$100,000 amortization charge of the consulting agreement executed
in connection with the acquisition by MLP of Programs for
Education, Inc. which was prepaid at the closing of the
acquisition ends in May 1998.
In the Current Period, management continued its program
to control tightly the Company's operating assets, including
accounts receivable and inventory. However, in the Current
Period, operating assets used $313,000 of cash versus generating
$95,000 of cash in the Comparable Period. In total, operations
used total cash of $286,000 during the Current Period as compared
to cash generated of $389,000 in the Comparable Period,
INVESTING ACTIVITIES. During the Current Period, the
Company invested cash of $278,000 in capital expenditures.
including its proprietary Test Passage Bank and additional
software development. This compares with $395,000 in the
Comparable Period. Specifically, in the Current
Period, expenditures of $108,000 were made in the Company's
proprietary Test Passage Bank (versus $238,000 in the Comparable
Period), while software expenditures decreased to $69,000 from
$107,000 in Comparable Period. Capital expenditures for
fixed assets increased slightly to $88,000 from $52,000 in
the Comparable Period. Additionally, in the Current Period,
$105,000 was used for deferred acquisition costs, while in the
Comparable Period $174,000 was spent to acquire BETA and the
Maculaitis test. Total expenditures in the Current Period,
excluding transactions in marketable securities, totaled $383,000
versus $559,000 in the Comparable Period.
FINANCING ACTIVITIES. The Company used a total of
$574,000 in cash for financing activities during the Current
Period versus $65,000 in the Comparable Period. This results
from the Company's receipt of $45,000 from the exercise of
outstanding warrants and the expenditure of $619,000 to reduce
long-term debt. This compares with approximately $65,000 used in
the Comparable Period primarily for debt reduction.
NET CASH CHANGE. As a result of the Company's
operating, investing, and financing activities for the Current
Period, the Company's cash and temporary investment balances were
reduced by $783,000 to $374,000. The Company carried an
additional $380,000 of marketable securities at April 30, 1998.
The Company's working capital at April 30, 1998 was $1,932,000,
with a current ratio of 4 to 1. This compares to working capital
at the end of Fiscal 1997 of $2,244,000 with a then current ratio
of 3.7 to 1. Management believes that its existing debt
obligations can be financed from the cash flow from operations.
SUBSEQUENT EVENTS
CURRENT ACQUISITION FINANCING. In March 1998, the
Company announced execution of a letter of intent to acquire all
of the outstanding capital stock of Drake Business Schools
Corporation and Drake Training Services Corporation for cash of
$2,500,000 (the "Drake Acquisition"). The Company is currently
in negotiations with lending and investment sources to finance
the Drake Acquisition. Additionally, the Company has announced
that it intends to pursue a program of acquiring additional post
secondary schools. Although the Company anticipates that the
schools to be acquired will have earnings and a positive EBITDA,
the schedule, rate and amount of capital available for its post
secondary school acquisition program will be determined partially
by the anticipated funding, as well as the earnings and cash
flows of the schools acquired and the terms of the acquisitions.
The Company has no other material commitments for capital or
other expenditures and is not party to any arrangement that would
adversely impact the Company's liquidity.
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
The Company held its annual meeting of stockholders on
March 27, 1998. At the meeting, the stockholders took
the following actions:
(i) The proposal to elect Walter B. Barbe as a director of
the Company was approved by a vote of 12,414,232 votes
in favor of his election, with 44,900 votes against and
no abstentions and broker non-votes, representing a
vote of 95.6% of the votes cast in favor of the
election of Mr. Barbe.
(ii) The proposal to elect Michael D. Beck as a director of
the Company was approved by a vote of 12,414,232 votes
in favor of his election, with 44,900 votes against and
no abstentions and broker non-votes, representing a
vote of 95.6% of the votes cast in favor of the
election of Mr. Beck.
(iii) The proposal to elect Steven R. Berger as a
director of the Company was approved by a vote of
12,414,232 votes in favor of his election, with
44,900 votes against and no abstentions and broker
non-votes, representing a vote of 95.6% of the
votes cast in favor of the election of Mr. Berger.
(iv) The proposal to elect Stephen H. Ivens as a director of
the Company was approved by a vote of 12,414,232 votes
in favor of his election, with 44,900 votes against and
no abstentions and broker non-votes, representing a
vote of 95.6% of the votes cast in favor of the
election of Mr. Ivens.
(v) The proposal to elect Michael Milone as a director of
the Company was approved by a vote of 12,414,232 votes
in favor of his election, with 44,900 votes against and
no abstentions and broker non-votes, representing a
vote of 95.6% of the votes cast in favor of the
election of Mr. Milone.
(vi) The proposal to elect Andrew L. Simon as a director of
the Company was approved by a vote of 12,414,232 votes
in favor of his election, with 44,900 votes against and
no abstentions and broker non-votes, representing a
vote of 95.6% of the votes cast in favor of the
election of Mr. Simon.
(vii) The proposal to elect Linda G. Straley as a
director of the Company was approved by a vote of
12,414,232 votes in favor of her election, with
44,900 votes against and no abstentions and broker
non-votes, representing a vote of 95.6% of the
votes cast in favor of the election of Ms.
Straley.
(viii) The proposal to ratify the appointment of Lazar,
Levine & Felix LLP as the independent auditors of
the Company was adopted by a vote of 12,424,582
votes in favor of the proposal, with 22,350 votes
against, 12,200 votes abstaining and no broker
non-votes, representing a vote of 95.7% of the
votes cast in favor of the proposal, with 20,150
votes against, 30,900 votes abstaining and no
broker non-votes.
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
(b) Reports on Form 8-K
Current Report on Form 8-K, filed on April 9, 1998
(relating to the pending acquisition of Drake
Training Services Corporation and Drake Business
Schools Corporation).
<PAGE>
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE FISCAL QUARTER ENDED APRIL 30, 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
April 30, October 31,
1 9 9 8 1 9 9 7
------- -------
<S> <C> <C>
ASSETS
------
Current assets:
Cash and temporary investments $ 373,725 $1,156,664
Marketable securities 380,027 377,560
Note receivable (Note E) 200,000 --
Accounts receivable 725,883 803,021
Inventories 404,889 360,227
Prepaid expenses and other current assets 486,372 381,381
---------- ----------
Total current assets 2,570,896 3,078,853
Property, plant and equipment - net of
accumulated depreciation of $1,100,119
and $1,029,417, respectively 1,757,026 1,739,947
Other assets:
Test passage bank, net of accumulated
amortization of $1,324,768 and $1,175,235
respectively 2,702,735 2,743,853
Software development costs, net of
accumulated amortization of $59,492 and
$30,517, respectively 381,362 340,930
Goodwill, net of accumulated amortization of
$112,955 and $65,511 749,302 796,746
Noncompete agreements, net of accumulated
amortization of $65,476 and $29,672 434,524 470,238
Deferred income taxes 357,664 335,722
Other assets 194,856 86,596
---------- ----------
Total assets $9,148,365 $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
April 30, 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 $ 298,573 $ 314,217
Accounts payable and accrued expenses 340,305 520,148
---------- ----------
Total current liabilities 638,878 834,365
Long-term debt less current portion 2,389,630 2,528,968
---------- ----------
Total liabilities 3,028,508 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, 8,489,322 and 8,389,322 shares
issued and outstanding, respectively 849 839
Additional paid-in capital 4,410,990 4,365,875
Stock subscription receivable (14,350) (14,350)
Unrealized holding gain 7,379 8,601
Unearned compensatory stock (67,233) (107,046)
Retained earnings 1,782,222 1,975,633
---------- ----------
Total stockholders' equity 6,119,857 6,229,552
---------- ----------
Total liabilities & stockholders' equity $9,148,365 $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
Six Months Ended Three Months Ended
April 30, April 30,
1 9 9 8 1 9 9 7 1 9 9 8 1 9 9 7
------- ------- ------- -------
<S> <C> <C> <C> <C>
Contract income $ 582,605 $ 539,154 $ 87,233 $ 73,106
Catalog sales 1,037,773 905,123 587,149 482,097
Consulting income 247,673 147,890 124,354 99,453
Catalog sales -- MLP 546,886 -- 318,457 --
---------- ---------- ---------- ----------
Total net revenue 2,414,937 1,592,167 1,117,193 654,656
Cost of goods sold 788,791 564,236 425,195 304,124
---------- ---------- ---------- ----------
Gross profit 1,626,146 1,027,931 691,998 350,532
---------- ---------- ---------- ----------
Operating expenses:
Selling expenses 719,997 414,979 397,170 205,747
General and administrative expenses 1,189,420 531,748 587,439 276,896
Bad debt recovery (Note E) (200,000) -- (200,000) --
---------- ---------- ---------- ----------
Total operating expenses 1,709,417 946,727 784,609 482,643
---------- ---------- ---------- ----------
Income (loss) from operations (83,271) 81,204 (92,611) (132,111)
Other income (expense):
Interest expense (128,779) (36,059) (65,557) (18,812)
Loss on sale of assets -- (15,083) -- (3,383)
Investment income 27,569 74,635 16,705 34,580
---------- ---------- ---------- ----------
Income (loss) before income taxes (184,481) 104,697 (141,463) (119,726)
Income taxes (benefit) 8,930 13,520 18,902 (59,461)
---------- ---------- ---------- ----------
Net income (loss) $ (193,411) $ 91,177 $ (160,365) $ (60,265)
========== ========== ========== ==========
Weighted average shares outstanding
Basic 8,468,211 8,000,433 8,489,322 8,113,186
Diluted 8,468,211 8,072,618 8,489,322 8,113,186
Earnings per share
Basic $ (.02) $ .01 $ (.02) $ (.01)
Diluted $ (.02) $ .01 $ (.02) $ (.01)
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
F - 3
<PAGE> F-4
<TABLE>
<CAPTION>
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
AND SUBSIDIARIES
Page 1 of 2
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
April 30,
1 9 9 8 1 9 9 7
------- -------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $(193,411) $ 91,177
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 442,152 236,618
Deferred income taxes (21,942) (47,379)
Bad debt recovery (200,000) --
Financial advisory services -- 2,344
Loss on sale of auto -- 11,700
Changes in operating assets and liabilities:
Accounts receivable 77,136 216,308
Inventories (44,662) 25,826
Other current assets (165,405) (44,851)
Accounts payable (179,842) (102,759)
--------- ----------
NET CASH FLOWS FROM OPERATING ACTIVITIES (285,974) 388,984
--------- ----------
INVESTING ACTIVITIES
Acquisition of property, plant and equipment (87,781) (52,191)
Test passage bank (108,415) (238,261)
Software development costs (69,407) (106,837)
Pre-publication costs (12,385) --
Purchase of marketable securities -- (3,797)
Proceeds from sale of marketable securities 460,000 646,080
Proceeds from sale of auto -- 10,000
Acquisition of subsidiary -- (143,975)
Acquisition of test -- (29,900)
Deferred acquisition costs (105,431) --
--------- ----------
NET CASH FLOWS FROM INVESTING ACTIVITIES 76,581 81,119
--------- ----------
<FN>
See notes to consolidated financial statements.
</FN>
F - 4
<PAGE> F-5
</TABLE>
<TABLE>
<CAPTION>
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
AND SUBSIDIARIES
Page 2 of 2
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
April 30,
1 9 9 8 1 9 9 7
------- -------
<S> <C> <C>
FINANCING ACTIVITIES
Principal payments on industrial revenue
bond obligation $ -- $ (42,014)
Repayment of long-term debt (154,982) --
Proceeds from exercise of warrants 45,125 --
Principal payments on long-term debt (463,689) (17,438)
Mortgage costs -- (4,374)
Organizational expenses of subsidiary -- (1,200)
---------- ----------
NET CASH FLOWS FROM FINANCING ACTIVITIES (573,546) (65,026)
---------- ----------
NET CHANGE IN CASH AND TEMPORARY INVESTMENTS (782,939) 405,077
Cash and temporary investments at
beginning of period 1,156,664 1,049,819
---------- ----------
CASH AND TEMPORARY INVESTMENTS AT END OF PERIOD $ 373,725 $1,454,896
========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 163,139 $ 32,092
========== ==========
Income taxes paid $ 41,200 $ 55,167
========== ==========
Stock issued for prepaid consulting
costs (Note B) $ -- $ 93,750
========== ==========
SUMMARY OF ACQUIRED SUBSIDIARY:
Assets acquired consisting primarily of Goodwill $ -- $ 374,067
Liabilities assumed, including cash payment to
prior shareholders -- (294,417)
---------- ----------
Fair value of common stock issued $ -- $ 79,650
========== ==========
<FN>
See notes to consolidated financial statements.
</FN>
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 April 30, 1998 and October 31, 1997 and the
consolidated results of operations for the six and three months ended April
30, 1998 and 1997 and consolidated cash flows for the six months ended
April 30, 1998 and 1997.
The consolidated results of operations for the six and three months ended
April 30, 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 -- STOCKHOLDERS' EQUITY
- ------------------------------
Consultants' Stock Options
- --------------------------
In February 1998, the Company granted 5,000 options to a consultant
pursuant to its Consultants Stock Incentive Plan. The options are
exercisable at $.781 per share.
Directors' Stock Options
- ------------------------
In March 1998, the Company granted an aggregate of 5,000 options to two
nonemployee directors pursuant to its Directors Stock Option Plan. The
options are exercisable at $1.063 per share.
Employee Stock Options
- ----------------------
In March 1998, the Company granted an aggregate of 353,500 options to six
of its officers pursuant to its Amended and Restated 1991 Stock Option
Incentive Plan. The options are exercisable at $1.063 per share.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation". The Company currently accounts for its stock-based
compensation plans using the accounting prescribed by Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees". As the
Company is not required to adopt the fair value based recognition
provisions prescribed under SFAS No. 123, it has elected only to comply
with the disclosure requirements set forth in the statement which includes
disclosing pro forma net income and earnings per share as if the fair value
based method of accounting had been applied. The pro forma net loss and
loss per share for the six months ended April 30, 1998 and 1997 would have
been $(377,146) and $(.04) and $(115,704) and $(.01), respectively, had the
new method been applied.
The fair value of each option grant was estimated on the date of the grant
using the Black-Scholes option-pricing model with the following weighted
average assumptions for 1998 and 1997, respectively: expected volatility
of approximately 80% and 78%, respectively; risk free interest rate of
6.75%; and expected lives of 5 to 10 years.
F - 7
<PAGE> F-8
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B -- STOCKHOLDERS' EQUITY (Continued)
- ------------------------------------------
Employee Stock Options (continued)
- ----------------------------------
The effects of applying SFAS 123 in the above pro forma disclosures are not
indicative of future amounts as they do not include the effects of awards
granted prior to 1996. Additionally, future amounts are likely to be
affected by the number of grants awarded since additional awards are
generally expected to be made at varying amounts.
Proposed Stock Repurchase
- -------------------------
In April 1998, the Board of Directors authorized the Company to repurchase
up to $250,000 worth of the Company's issued and outstanding common shares
and warrants on the open market subject to the rules and regulations of the
Securities and Exchange Commission. As of the date of this report, no such
purchases have been made.
NOTE C -- PENDING ACQUISITION
- -----------------------------
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. The
acquisition is currently scheduled for closing on or about July 1, 1998 and
is subject to the execution of definitive documentation and the
satisfaction of conditions precedent.
NOTE D -- IRS EXAMINATION
- -------------------------
The Company has been notified that the Internal Revenue Service intends to
review its corporation income tax returns for the year ended October 31,
1995.
F - 8
<PAGE> F-9
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE E -- NOTE RECEIVABLE
- -------------------------
In March 1998, the Company entered into an agreement with HGI, Inc.
(formerly The Harriman Group Inc.) ("HGI") and one of its officers. The
agreement provides for the settlement of the note receivable plus accrued
interest from HGI with a face amount of $400,000, for an aggregate of
$200,000 which is to be paid prior to October 15, 1998. Payment pursuant
to the agreement is guaranteed by an irrevocable letter of credit. The
Company reflected the entire note balance as a bad debt during the year
ended October 31, 1997 as a result of an involuntary bankruptcy proceeding
against HGI. The Company has reported the amount collectible pursuant to
this agreement and related collateral as a bad debt recovery.
NOTE F -- 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 six months ended April 30, 1998 and 1997 would have been
$(192,191) and $111,627, respectively.
F - 9
<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
By /s/ JOHN M. DUTTON
-----------------------------------
John M. Dutton
Chief Financial Officer
Date: June __, 1998
</TABLE>
<TABLE>
<CAPTION>
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
AND SUBSIDIARIES
EXHIBIT II
COMPUTATION OF EARNINGS PER COMMON SHARE
----------------------------------------
Six Months Ended Three Months Ended
April 30, April 30,
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) $ (193,411) $ 91,777 $ (160,365) $ (60,265)
Shares:
Weighted common shares outstanding 8,468,211 8,000,433 8,489,322 8,113,186
Harriman options -- -- -- --
Warrants to consultants -- -- -- --
Employee stock options -- -- -- --
Consultant stock options -- -- -- --
B warrants -- -- -- --
Underwriter options -- -- -- --
---------- ---------- ---------- ----------
Total weighted shares outstanding 8,468,211 8,000,433 8,489,322 8,113,186
---------- ---------- ---------- ----------
Primary earnings per common share $ (.02) $ .01 $ (.02) $ (.01)
========== ========== ========== ==========
Diluted earnings:
Net income (loss) $ (193,411) $ 91,177 $ (160,365) $ (60,265)
Shares:
Weighted common shares outstanding 8,468,211 8,000,433 8,489,322 8,113,186
Harriman options -- -- -- --
Warrants to consultants -- 61,320 -- --
Employee stock options -- 4,774 -- --
Consultant stock options -- 6,091 -- --
B warrants -- -- -- --
Underwriter options -- -- -- --
---------- ---------- ---------- ----------
Total weighted shares outstanding 8,468,211 8,072,618 8,489,322 8,113,186
---------- ---------- ---------- ----------
Diluted earnings per common share $ (.02) $ .01 $ (.02) $ (.01)
========== ========== ========== ==========
</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 Quarterly Report on Form 10-QSB for the
quarter ended April 30, 1998 and is qualified in its
entirety by reference to such report on Form 10-QSB.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-END> APR-30-1998
<CASH> 373,725
<SECURITIES> 380,027
<RECEIVABLES> 925,883
<ALLOWANCES> 0
<INVENTORY> 404,889
<CURRENT-ASSETS> 2,570,896
<PP&E> 2,857,145
<DEPRECIATION> 1,100,119
<TOTAL-ASSETS> 9,148,365
<CURRENT-LIABILITIES> 638,878
<BONDS> 2,389,630
0
0
<COMMON> 849
<OTHER-SE> 6,119,008
<TOTAL-LIABILITY-AND-EQUITY> 9,148,365
<SALES> 2,414,937
<TOTAL-REVENUES> 2,442,506
<CGS> 788,791
<TOTAL-COSTS> 1,709,417
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 128,779
<INCOME-PRETAX> (184,481)
<INCOME-TAX> 8,930
<INCOME-CONTINUING> (193,411)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (193,411)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
</TABLE>
