U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A-1
(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 January 14, 1998: 8,489,322 shares of Common Stock, par value
- -----------------------------------------------------------------
$.0001 per share.
- -----------------
Transitional Small Business Disclosure Format (check one):
Yes_________ No X
---
The Registrant hereby amends and restates Part I in its
entirety and Part II, Item 6 of its Quarterly Report for the
fiscal quarter ended July 31, 1997 as follows:
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
The consolidated financial statements for the Company's
fiscal quarter ended July 31, 1997, as amended and restated, 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.
Management's Discussion and Analysis or Plan of
Operation, as originally set forth in the Company's Quarterly
Report on Form 10-QSB for the fiscal quarter ended July 31, 1997,
is hereby amended and restated as follows to reflect the
inclusion of a $73,774 item in cost of goods sold for MLP, which
item was mistakenly omitted in the process of applying of the
Company's accounting and bookkeeping system to the procedures
previously utilized by Programs for Education, Inc. prior to its
acquisition by MLP. Such item, as now properly included, has
resulted in an increase in cost of goods sold and an increase in
the loss for operations for the quarter by such amount.
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 192.2% versus the
comparable 1996 period ($486,648 in 1997 versus $166,524 in
1996). Cost of goods sold is now 33.0% 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 98.1% versus
the comparable 1996 period ($1,050,884 in 1997 versus $530,485 in
1996). For the nine-month period, cost of goods sold is now
34.3% 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 $224,912 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 $306,116 versus $133,920 for the comparable 1996
period. For the three-month period ended July 31, 1997, net
after-tax loss was ($1,705,455) versus a ($673) loss for the
comparable 1996 period. For the nine-month period ended July 31,
1997, net after-tax loss was ($1,613,476) 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 ($0.21) versus $0.00 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 $1,343,294 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 11 -- Amended Computation of Earnings per Common Share
Exhibit 27 -- Amended 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,
AS AMENDED AND RESTATED
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 394,768 123,106
------- -------
Total current assets 3,277,510 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 $9,412,489 $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 782,783 246,270
Corporation taxes payable -- 566
------- -------
Total current liabilities 1,934,216 342,336
Long-term debt:
Long-term debt less current portion 1,504,456 728,250
Deferred income taxes 5,440 521,221
Total liabilities 3,444,112 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 1,725,968 3,339,444
--------- ---------
Total stockholders' equity 5,968,377 7,383,735
--------- ---------
Total liabilities & stockholders' equity $9,412,489 $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 1,050,884 530,485 486,648 166,524
---------- --------- --------- ---------
Gross profit 2,014,048 1,318,440 986,117 397,315
---------- --------- --------- ---------
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 (2,078,639) 133,920 (2,159,843) (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 (2,072,104) 212,690 (2,176,801) (14,551)
Income taxes (benefit) (458,628) 53,252 472,146) (13,878)
---------- --------- --------- --------
Net income (loss) $(1,613,476) $ 159,438 $(1,704,655) $ (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 $ (.21) $ --
Fully 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
(UNAUDITED)
Nine Months Ended
July 31,
1 9 9 7 1 9 9 6
------- -------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $(1,613,476) $ 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 8,389 119,222
Accounts payable 224,220 (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: January 26, 1998
<TABLE>
<CAPTION>
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
AND SUBSIDIARIES
EXHIBIT II
----------
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) $(1,613,476) $ 159,438 $(1,704,655) $ (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 $ (.21) $ --
========== ========== ========= =========
Fully diluted earnings:
Net income (loss) $(1,613,476) $ 159,438 $(1,704,655) $ (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 $ (.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-31-1997
<PERIOD-END> JUL-31-1997
<CASH> 462,875
<SECURITIES> 1,156,765
<RECEIVABLES> 931,082
<ALLOWANCES> 0
<INVENTORY> 332,020
<CURRENT-ASSETS> 3,277,510
<PP&E> 2,759,906
<DEPRECIATION> 995,388
<TOTAL-ASSETS> 9,412,489
<CURRENT-LIABILITIES> 1,934,216
<BONDS> 0
0
0
<COMMON> 814
<OTHER-SE> 5,967,563
<TOTAL-LIABILITY-AND-EQUITY> 9,412,489
<SALES> 3,064,932
<TOTAL-REVENUES> 3,159,629
<CGS> 1,050,884
<TOTAL-COSTS> 4,092,687
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 73,079
<INCOME-PRETAX> (2,072,104)
<INCOME-TAX> (458,628)
<INCOME-CONTINUING> (1,613,476)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,613,476)
<EPS-PRIMARY> (.20)
<EPS-DILUTED> (.20)
</TABLE>
