U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended January 31, 1999
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
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
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(Address of principal executive offices)
(914) 277-8100
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(Issuer's telephone number, including area code)
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(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 March 3, 1999: 8,567,222 shares of Common Stock, par
----------------------------------------------------------
value $0.0001 per share (approximately 2,136,805 shares after
- -------------------------------------------------------------
giving effect to the one-for-four reverse stock split which was
- ---------------------------------------------------------------
effected on March 4, 1999).
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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 January 31, 1999 are attached to this Report,
commencing at page F-1.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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, 1998 ("Fiscal 1998"), which may
cause actual results to differ materially from those described.
BACKGROUND
For over 20 years, TASA served the education market
with essentially one type of assessment product. Beginning in
1997 and through November 1998, by a series of acquisitions, the
Company has expanded into, and now serves, three segments of the
educational market: (1) the educational assessment and evaluation
market with our standardized assessment products, including the
Degrees of Reading Power (DRP) tests, and through Beck Evaluation
and Testing Associates, Inc. ("BETA"), the Company's custom test
design division; (2) the instructional market through Modern
Learning Press, Inc. ("MLP"); and (3) the educational delivery
market through our post-secondary proprietary school division,
which is now known as TASA Educational Services Corp. ("TES").
In an effort to report the revenues in each of these areas in a
more meaningful manner, revenues will be reported for these three
categories and prior periods will be recharacterized into these
segments for comparative purposes.
RESULTS OF OPERATIONS
The following table compares the revenues for each of
the assessment division, the instructional division and the
educational delivery division for the first quarter ended January
31, 1999 versus the first quarter ended January 31, 1998.
RESULTS OF OPERATIONS FOR THE FIRST FISCAL QUARTER
1999 1998 % Change
---- ---- --------
(in thousands of dollars)
Assessment Products Revenues 1,043.6 1,069.3 -2.4
Instructional Revenues 201.9 228.4 -11.6
Educational Delivery Revenues 1,110.6 -- N/A
------- ------- -----
Total Revenues 2,356.1 1,297.7 +81.6
The following are selected ratios as a percentage of
revenues on the Company's financial statements:
January 31, January 31,
1999 1998
----------- -----------
Revenues 100% 100%
---- ----
Gross Profit Margin 59 72
Operating Expense:
Selling Expense 23 25
General & Administrative 44 46
Income (Loss) from Operations (8) 1
Other Income (Expense) (6) (4)
Pre-Tax Loss (14) (3)
Net Loss (9) (3)
REVENUES. For the three-month period ended January
--------
31, 1999 (the "Current Quarter"), revenues were $2,356,127,
representing an 82% increase, or $1,058,383, over $1,297,744 for
the three-month period ended January 31, 1998 (the "Comparable
Quarter"). The overall increase was due to the acquisition of
the Mildred Elley post-secondary proprietary schools in November
1998. Revenues for assessment products and services decreased
2.4%, or $25,680, from $1,069,315 in the Comparable Quarter to
$1,043,635 during the Current Quarter. This decrease was due to
the decision of New York State to eliminate the third and sixth
grade PEP testing program. Such decline in New York State
contract income had been previously identified by the Company at
the end of last year. As this contract was part of last year's
revenue, it has a negative effect on the Company's year-to-year
comparisons. However, on the positive side, in the Current
Quarter, BETA's business and the Company's catalog sales have
increased a total of 13% as compared to the Comparable Quarter.
Instructional revenues in the Current Quarter
decreased 11.6% versus the Comparable Quarter (from $228,429 to
$201,901). In late 1998, management made the decision to shift
its marketing focus and direct sales representation as well as to
engage in cooperative marketing efforts. These programs are now
being put into place and management believes that the results
will be seen in the third and fourth fiscal quarters,
traditionally peak sales periods for MLP.
Revenues from our newly acquired school division were
$1,110,591 for the Current Quarter. As this is a new area of the
educational market for the Company, there is no applicable
comparison to the Comparable Quarter.
COST OF GOODS SOLD. Cost of goods sold in the
------------------
Current Quarter increased 166%, or $602,980, from $363,596 in the
Comparable Quarter to $966,576 in the Current Quarter. Because
the percentage increase in revenues for the Current Quarter is
less than the percentage increase in cost of goods sold, this
indicates that cost of goods sold as a percentage of revenues
increased from 28% in the Comparable Quarter to 41% in the
Current Quarter. This can be explained by a significant change
in product and service mix. Specifically, with the elimination
of the New York State contract, coupled with the significant
increase in BETA revenues, the cost to deliver the assessment
products and services increased from 29% to 45% of assessment
revenues. We expect the cost of goods sold as a percentage of
revenues to decrease during the latter part of the year as we
move into our heavy volume periods for both catalog assessment
and instructional product sales.
GROSS PROFIT. In the Current Quarter, gross profit
------------
increased by 49%, or $455,403, from $934,148 in the Comparable
Quarter to $1,389,551. The increase in gross profit is
attributable to increases in revenues. Even though gross profit
increased, gross profit margins decreased from 72% in the
Comparable Quarter to 59%, because of the change in the product
mix with varying profit margins comprising the Company's
revenues.
SELLING EXPENSES. Selling expenses for the Current
----------------
Quarter increased by 69%, or $222,532, from $322,827 in the
Comparable Quarter to $545,359 in the Current Quarter. However
for the Current Quarter, selling expenses were 23% of revenues
versus 25% for the Comparable Quarter. This decline of selling
expenses as a percentage of revenues is due to increased revenues
for BETA and our educational delivery division, both of which
entail lower marketing expenditures than the assessment division.
GENERAL AND ADMINISTRATIVE EXPENSES. The Company's
-----------------------------------
general and administrative expenses increased 72%, or $431,877,
from $601,981 in the Comparable Quarter to $1,033,858 in the
Current Quarter. However, general and administrative expenses
are now 44% of revenues versus 46% in the Comparable Quarter.
Management believes that this percentage will decrease further
during the fiscal year as the Company moves into its higher sales
volume periods.
INCOME (LOSS) FROM OPERATIONS. Loss from operations
-----------------------------
for the Current Quarter was ($189,666) as opposed to income from
operations of $9,340 in the Comparable Quarter. The most
significant factor in this decline is the loss of the revenues
from the New York State contract in a quarter which is
traditionally low for catalog sales.
EBITDA. Earnings before interest, taxes,
------
depreciation, and amortization was $104,850 for the Current
Quarter versus $222,314 in the Comparable Quarter.
OTHER INCOME (EXPENSE). Other expense increased to
----------------------
$132,732 in the Current Quarter from $52,358 in the Comparable
Quarter. The increase in expenses are directly attributable to
the interest expense incurred with the acquisition of Mildred
Elley.
LOSS BEFORE INCOME TAXES. The Company had a loss of
------------------------
($322,398) for the Current Quarter versus a loss of ($43,018) for
the Comparable Quarter.
NET LOSS AND EARNINGS PER SHARE. Loss after taxes
-------------------------------
was ($200,357) for the Current Quarter versus a loss of ($33,047)
for the Comparable Quarter. Loss per share was ($.02) based on
weighted average shares outstanding of 8,567,222 (the number of
shares of Common Stock outstanding prior to the effectiveness of
the reverse stock split on March 4, 1999). In the Comparable
Quarter, the loss per share was ($.00) based upon 8,447,564
shares outstanding. After giving effect to the one-for-four
reverse stock split effected by the Company on March 4, 1999, the
loss per share would have been ($.09) based on weighted average
shares outstanding of 2,141,806 in the Current Quarter, and
($.02) based on weighted average shares outstanding of 2,111,891
in the Comparable Quarter.
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL. Working capital for the Current
---------------
Quarter was $3,366,190, down from $5,824,816 at the beginning of
the fiscal year. The $2.5 million decrease was due to the
acquisition of the Mildred Elley schools in November 1998. The
ratio of current assets to current liabilities was 2.23 to 1.0 at
the end of the Current Quarter.
CASH FLOW FROM OPERATING ACTIVITIES. For the Current
-----------------------------------
Quarter, the Company had a negative cash flow from operations of
$1,100,550 versus $51,747 in the Comparable Quarter. The factors
contributing to this negative flow were the paydown of prepaid
expenses ($290,712) relating to the Mildred Elley acquisition;
accounts payable and accrued expenses ($793,009) and tuition
receivable ($595,466), as Mildred Elley must extend its students
loans for tuition until the schools are reinstated into the
Federal Loan Program. Further, Pell Grant money for tuition was
received in late February following the change of ownership
approval by the U.S. Department of Education in that month.
CASH FLOW FROM INVESTING ACTIVITIES. For the Current
-----------------------------------
Quarter, the Company had a net cash outflow of $2,120,224, which
is primarily attributable to the acquisition of the Mildred Elley
schools as opposed to a net cash outflow of $171,665 in the
Comparable Quarter.
CASH FLOW FROM FINANCING ACTIVITIES. For the Current
-----------------------------------
Quarter, the Company had a net cash outflow of $286,540 versus
$25,185 in the Comparable Quarter. The outflow was essentially
attributable to the paydown of certain debt ($100,000) relating
to the Mildred Elley acquisition as well as the servicing of
long-term debt associated with the MLP and Mildred Elley
acquisitions.
YEAR 2000 MATTERS. In Fiscal 1998, the Company
-----------------
developed and implemented a program 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-sensitive. Accordingly, the
Company believes that its financial and information systems
are now Year 2000 compliant. As to third-party relationships,
the Company believes that most of these parties intend to be
Year 2000 compliant by January 1, 2000; however, there can be
no assurance that this will be the case. The costs incurred
during Fiscal 1998 were not material and the Company believes
that any further costs to be incurred will also not be material.
Any of the Company's programs that recognize a date using "00"
as other than the year 2000 could result in errors or system
failures. The Company utilizes a number of computer programs
across its entire operation. 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.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
On March 4, 1999, the Company's stockholders approved
an amendment to the Company's Certificate of Incorporation
effecting a one-for-four reverse stock split of the Company's
common stock, par value $.0001 per share. See Item 4 below.
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 4, 1999. 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 7,619,885 votes in
favor of his election, with 99,418 votes against and no
abstentions and broker non-votes, representing a vote of
98.7% of the votes present cast in favor of the election
of Dr. Barbe.
(ii) The proposal to elect Michael D. Beck as a director of
the Company was approved by a vote of 7,619,885 votes in
favor of his election, with 99,418 votes against and no
abstentions and broker non-votes, representing a vote of
98.7% of the votes present 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 7,619,885 votes in
favor of his election, with 99,418 votes against and no
abstentions and broker non-votes, representing a vote of
98.7% of the votes present cast in favor of the election
of Mr. Berger.
(iv) The proposal to elect Joseph A. Fernandez as a director
of the Company was approved by a vote of 7,619,885 votes in
favor of his election, with 99,418 votes against and no
abstentions and broker non-votes, representing a vote of
98.7% of the votes present cast in favor of the election
of Dr. Fernandez.
(v) The proposal to elect Andrew L. Simon as a director of
the Company was approved by a vote of 7,619,885 votes in
favor of his election, with 99,418 votes against and no
abstentions and broker non-votes, representing a vote of
98.7% of the votes present cast in favor of the election
of Mr. Simon.
(vi) The proposal to elect Linda G. Straley as a director of
the Company was approved by a vote of 7,619,885 votes in
favor of her election, with 99,418 votes against and no
abstentions and broker non-votes, representing a vote of
98.7% of the votes present cast in favor of the election
of Ms. Straley.
(vii) The proposal to elect David L. Warnock as a director
of the Company was approved by a vote of 7,619,885 votes in
favor of his election, with 99,418 votes against and no
abstentions and broker non-votes, representing a vote of
98.7% of the votes present cast in favor of the election
of Mr. Warnock.
(viii) The proposal to amend the Company's Certificate of
Incorporation to effect a one-for-four reverse stock split was
approved by a vote of 6,887,461 votes in favor of the proposal,
with 799,742 votes against and 32,100 abstentions and broker
non-votes, representing a vote of 80.4% of the issued and
outstanding shares of the Company eligible to vote cast in
favor of the proposal.
(ix) The proposal to ratify the appointment of Lazar, Levine
& Felix LLP as the independent auditors of the Company was
adopted by a vote of 7,641,240 votes in favor of the proposal,
with 32,218 votes against, 45,845 votes abstaining and no broker
non-votes, representing a vote of 99.0% of the votes present cast
in favor of the proposal.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 3.1 -- Certificate of Incorporation of the
Company
Exhibit 3.2 -- Certificate of Amendment of Certificate
of Incorporation, filed March 4, 1999
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 with the
Securities and Exchange Commission on November 23,
1998 (and the Amendment to that Current Report
filed with the SEC on January 21, 1999) (reporting
the acquisition by the Company's subsidiary of
substantially all the assets of Mildred Elley
Schools, Inc.);
Current Report on Form 8-K filed with the
Securities and Exchange Commission on December 22, 1998
(reporting the redemption of the Series A Preferred
Stock, par value $.0001 per share by the Company)
<PAGE>
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE FISCAL QUARTER ENDED JANUARY 31, 1999
Consolidated Balance Sheets F-1
Consolidated Statements of Operations and Comprehensive Income F-3
Consolidated Statements of Cash Flows F-4
Notes to Consolidated Financial Statements F-6
<PAGE>
<PAGE> F - 1
<TABLE>
<CAPTION>
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
AND SUBSIDIARIES
Page 1 of 2
CONSOLIDATED BALANCE SHEETS
January 31, October 31,
1 9 9 9 1 9 9 8
------- -------
<S> <C> <C>
ASSETS
------
Current assets:
Cash and temporary investments $ 1,472,916 $ 4,980,230
Marketable securities 188,471 186,376
Accounts receivable 1,024,895 1,287,264
Tuition and accounts receivable, net
of allowance 2,503,069 --
Inventories 453,524 478,869
Prepaid expenses and other current assets 471,177 173,679
----------- -----------
Total current assets 6,114,052 7,106,418
Property, plant and equipment - net of
accumulated depreciation of $1,213,529
and $1,179,297, respectively 2,068,875 1,753,811
Other assets:
Deferred acquisition costs -- 353,406
Tuition and accounts receivable - net of
current portion and allowance 557,907 --
Notes and interest receivable 159,327 --
Test passage bank, net of accumulated
amortization of $1,558,272 and $1,474,302
respectively 2,673,465 2,675,624
Software development costs, net of
accumulated amortization of $110,857 and
$88,702, respectively 328,635 350,790
Goodwill, net of accumulated amortization of
$161,091 and $122,993 3,658,881 739,264
Noncompete agreements, net of accumulated
amortization of $119,085 and $101,095 380,915 398,905
Deferred income taxes 470,575 390,148
Other assets 312,741 306,274
---------- ----------
Total assets $16,725,373 $14,074,640
=========== ===========
<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
January 31, October 31,
1 9 9 9 1 9 9 8
------- -------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Note payable to bank $ 400,000 $ --
Current portion of long-term debt 450,918 261,034
Accounts payable and accrued expenses 1,056,012 1,020,568
Deferred revenue 840,932 --
----------- -----------
Total current liabilities 2,747,862 1,281,602
Long-term debt:
Subordinated debt 4,000,000 4,000,000
Long-term debt less current portion 3,600,947 2,267,198
----------- ----------
Total liabilities 10,348,809 7,548,800
----------- ----------
Stockholders' equity: (Note 4)
Preferred stock, $.0001 par value, 5,000,000
authorized, none and 1,500 issued and
outstanding, respectively -- --
Common stock, $.0001 par value, 20,000,000
authorized, 2,141,806 shares issued
and outstanding 214 214
Additional paid-in capital 5,052,479 5,052,479
Deferred interest (558,671) (588,075)
Stock subscription receivable -- (14,350)
Unearned compensatory stock (28,999) (37,187)
Retained earnings 1,906,478 2,106,835
Accumulated other comprehensive income 5,063 5,924
----------- -----------
Total stockholders' equity 6,376,564 6,525,840
----------- -----------
Total liabilities & stockholders' equity $16,725,373 $14,074,640
=========== ===========
<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 OPERATIONS AND COMPREHENSIVE INCOME
Three Months Ended
January 31,
1 9 9 9 1 9 9 8
------- -------
<S> <C> <C>
Assessment products revenues $ 1,043,635 $ 1,069,315
Educational delivery revenues 1,110,591 --
Instructional revenues 201,901 228,429
----------- -----------
Total net revenues 2,356,127 1,297,744
Cost of goods sold 966,576 363,596
----------- -----------
Gross profit 1,389,551 934,148
----------- -----------
Operating expenses:
Selling expenses 545,359 322,827
General and administrative expenses 1,033,858 601,981
----------- -----------
Total operating expenses 1,579,217 924,808
----------- -----------
(Loss) income from operations (189,666) 9,340
Other income (expense):
Interest expense (215,974) (63,222)
Loss on sale of assets (14,137) --
Other income 56,569 --
Investment income 40,810 10,864
----------- -----------
Loss before income taxes (322,398) (43,018)
Income tax benefit (122,041) (9,971)
----------- -----------
Net loss (200,357) (33,047)
Other comprehensive loss, net of tax
unrealized holding loss on securities
arising during the period (861) (59)
----------- -----------
Total comprehensive loss $ (201,218) $ (33,106)
=========== ===========
Weighted average shares outstanding (Note 4)
Basic 2,141,806 2,111,891
Diluted 2,141,806 2,111,891
Earnings per share
Basic $ (.09) $ (.02)
Diluted $ (.09) $ (.02)
<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
Three Months Ended
January 31,
1 9 9 9 1 9 9 8
------- -------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (200,357) $ (33,047)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 252,084 212,976
Deferred income taxes (80,427) (10,971)
Financial advisory services 8,188 19,906
Deferred interest 29,404 --
Loss on sale of auto 14,137 --
Changes in operating assets and liabilities:
Accounts receivable 248,570 187,526
Inventory 25,345 24,146
Prepaid expenses (290,712) (181,676)
Other assets (46,431) --
Tuition receivable (595,466) --
Deferred revenue 328,124 --
Accounts payable and accrued expenses (793,009) (270,607)
---------- -----------
NET CASH FLOWS FROM OPERATING ACTIVITIES (1,100,550) (51,747)
---------- -----------
INVESTING ACTIVITIES
Test passage bank (81,811) (63,972)
Software development costs -- (58,980)
Acquisition of fixed assets (173,009) (48,713)
Proceeds from sale of auto 13,200 --
Acquisition of subsidiary (1,878,604) --
---------- -----------
NET CASH FLOWS FROM INVESTING ACTIVITIES (2,120,224) (171,665)
---------- -----------
FINANCING ACTIVITIES
Net borrowings on note payable to bank (150,000) --
Net proceeds from exercise of warrants -- 45,125
Net borrowings on loan payable (2,956) 6,971
Stock subscriptions received 14,350 --
Repayment of long-term debt (147,934) (77,281)
---------- -----------
NET CASH FLOWS FROM FINANCING ACTIVITIES (286,540) (25,185)
---------- -----------
NET CHANGE IN CASH AND TEMPORARY INVESTMENTS (3,507,314) (248,597)
CASH AND TEMPORARY INVESTMENTS
AT BEGINNING OF PERIOD 4,980,230 1,156,664
---------- -----------
CASH AND TEMPORARY INVESTMENTS AT END OF PERIOD $1,472,916 $ 908,067
========== ===========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
F - 4
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<TABLE>
<CAPTION>
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
AND SUBSIDIARIES
Page 2 of 2
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
January 31,
1 9 9 9 1 9 9 8
------- -------
<S> <C> <C>
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 216,570 $ 70,172
========== ========
Income taxes paid $ 31,379 $ 41,200
========== ========
SUMMARY OF ACQUIRED SUBSIDIARY:
Assets acquired consisting primarily
of Goodwill $6,916,234 $ --
Liabilities assumed 3,562,828 --
---------- --------
Net purchase price $3,353,406 $ --
========== ========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
F - 5
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------------
In the opinion of management, the accompanying consolidated
financial statements of Touchstone Applied Science Associates,
Inc. ("TASA") contain all adjustments necessary to present
fairly the Company's consolidated financial position as of
January 31, 1999 and October 31, 1998 and the consolidated
results of operations and comprehensive income for the three
months ended January 31, 1999 and 1998 and consolidated cash
flows for the three months ended January 31, 1999 and 1998.
The consolidated results of operations for the three months ended
January 31, 1999 and 1998 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 1 to the Company's consolidated
financial statements included in its Annual Report on Form 10-KSB
for the fiscal year ended October 31, 1998.
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of the
Company and its directly and indirectly wholly-owned
subsidiaries, Beck Evaluation & Testing Associates, Inc., Modern
Learning Press, Inc. ("MLP"), TASA Educational Services Corp.
("TES") and MESI Acquisition Corp. ("MESI"). All material
intercompany transactions have been eliminated in consolidation.
Goodwill
- --------
Included in the MESI purchase (Note 2) is goodwill totaling
$2,957,715. The goodwill is being amortized over a 30 year
period.
Concentration of Credit Risk
- ----------------------------
As part of its acquisition of Mildred Elley School, Inc.
("Elley") the Company acquired unsecured student loans which
are being reflected at net realizable value. The risk of loss to
the Company is the balance owed by the student at the time of any
default. The Company plans to monitor these loans as closely as
possible to mitigate the potential risk.
F - 6
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
- ---------------------------------------------------------
Tuition and Accounts Receivable
- -------------------------------
MESI provides alternate financing arrangements for those students
who do not qualify for federal and state financial aid to cover
their tuition. Since student contracts acquired as part of the
Elley acquisition have varying repayment terms which extend
beyond the next 12 month period, these receivables have been
classified as current and non-current with the portion to be
collected beyond the next 12 month period being the non-current
portion.
Deferred Revenue
- ----------------
The Company recognizes tuition revenue ratably over the academic
semester. Deferred revenue represents that portion of the
tuition which has not been earned as of January 31, 1999.
NOTE 2 - ACQUISITION OF MILDRED ELLEY
- -------------------------------------
In November 1998, a newly-formed wholly-owned subsidiary of TES,
MESI purchased all of the operating assets of Elley. MESI
purchased the assets for $3,000,000 plus assuming certain
liabilities. The purchase price paid by MESI consisted of
$2,000,000 in cash and a promissory note for $1,000,000 bearing
interest at a rate of eight and one-half percent (8.5%) per annum.
Principal and interest payments are payable at the beginning of
each quarter commencing on February 1, 1999 until maturity on
January 1, 2004.
F - 7
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - ACQUISITION OF MILDRED ELLEY (Continued)
- -------------------------------------
As a result of the acquisition, TES assumed the obligations
relating to employment agreements with the former majority
shareholder of Elley and three key employees. The agreement names
the former majority shareholder as the President and Chief
Executive Officer of MESI as well as the Executive Vice President
of TES. The three other employment agreements are for the Director
of Financial Aid, Vice President of Sales and Marketing and
Controller of MESI. In addition to other terms and conditions, the
agreements are for a three-year period for the President and Vice
President of Sales and Marketing and a one-year period for the
Director of Financial Aid and Controller. The term of each of the
employment agreements is automatically extended an additional year
on its anniversary date unless terminated in writing.
The Company granted options to each of the employees named above
pursuant to the Company's Amended & Restated 1991 Stock Option
Incentive Plan to purchase 150,000, 5,000, 5,000 and 5,000 shares
(37,500, 1,250, 1,250 and 1,250 shares after giving effect to the
one-for-four reverse stock split - see note 4), respectively, of
the Company's common stock at $0.8125 ($3.25 after giving effect
to the one-for-four reverse stock split) per share, the fair market
value of the Company's common stock on the date of grant. Each
option may be exercised for a nine-year period commencing one year
from the date of grant.
NOTE 3 - ISSUANCE OF STOCK OPTIONS
- ----------------------------------
In November 1998, the Company granted options pursuant to the
Company's Amended & Restated 1991 Stock Option Incentive Plan to
five employees to purchase an aggregate of 277,500 shares (69,375
shares after giving effect to the one-for-four reverse stock split)
of the Company's common stock at $0.72 ($2.88 after giving effect
to the one-for-four reverse stock split) per share.
NOTE 4 - REVERSE STOCK SPLIT
- ----------------------------
On March 4, 1999, the Company effected a one-for-four reverse
split. The effect of the split is being presented retroactively
for all periods presented.
F - 8
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 Chief Financial Officer
Date: March 17, 1999
Exhibit 3.1
-----------
CERTIFICATE OF INCORPORATION OF
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
under the General Corporation Law of the State of Delaware
THE UNDERSIGNED, for the purpose of forming a corporation
pursuant to the General Corporation Law of the State of Delaware,
does hereby certify and set forth:
[1] The name of the Corporation is:
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
[2] The address of its registered office within the State
of Delaware and the name of its registered agent at such address is
as follows:
Incorporating Services, Ltd.
15 East North Street
Dover, Delaware 19901
County of Kent
[3] The nature of the business or purposes to be conducted
or promoted is to engage in any lawful act or activity for which
corporations may be organized under the General Corporation Law of
the State of Delaware.
The powers, rights and privileges provided in this
certificate are not to be deemed to be in limitation of similar,
other or additional powers, rights and privileges granted or
permitted to a corporation by the General Corporation Law, it being
intended that this Corporation shall have all the rights, powers
and privileges granted or permitted to a corporation by such
statute.
[4] The aggregate number of shares which the Corporation
shall have the authority to issue is twenty million [20,000,000]
shares, common stock, each having $ .0001 par value, and five
million [5,000,000] shares preferred stock, each having $ .0001 par
value.
Preferred shares shall have all rights, designations and
preferences as may be set forth by the Board of Directors.
[5] The name and mailing address of each Incorporator is
as follows:
NAME ADDRESS
---- -------
Jerry Joseph 7120 N.W. 44th Court
Lauderhill, Florida 33319
[6] In furtherance, and not in limitation of the powers
conferred by statute, the Board of Directors is expressly
authorized to make, alter, or repeal the By-Laws of the
Corporation.
[7] Elections of the Directors need not be by written
ballot unless the By-Laws of the Corporation shall so provide.
Meetings of the stockholders may be held within or without the
State of Delaware, as the By-Laws may provide. The books of the
Corporation may be kept [subject to any provision contained in the
statutes] outside the State of Delaware at such place or places as
may be designated, from time to time, by the Board of Directors, or
in the By-Laws of the Corporation.
[8] The Corporation reserves the right to amend, alter,
change or repeal any provision contained in this Certificate of
Incorporation, in the manner now or hereafter prescribed by
statute, and all rights conferred upon stockholders herein are
granted subject to this reservation.
[9] The Corporation expressly elects not to be governed by
Section 203 of the General Corporation Law of the State of
Delaware.
[10] The Corporation, to the fullest extent permitted
under the General Corporation Law of the State of Delaware, as the
same may be amended and supplemented, shall indemnify any and all
persons whom it shall have power to indemnify from and against any
and all of the expenses, liabilities or other matters referred to
in, or covered by, said General Corporation Law. The
indemnification provided for herein shall not be deemed exclusive
of any other rights to which those indemnified may be entitled
under any by-law, agreement, vote of stockholders or directors, or
otherwise, both as to action in his official capacity and as to
action in any other capacity while holding such office. The
indemnification provided for herein shall continue as to a person
who has ceased to be a director, officer, employee or agent of the
corporation, and shall inure to the benefit of the heirs, executors
and administrators of such person.
The personal liability of any Director of the
Corporation, to the Corporation itself, or to its Shareholders, for
damages for any breach of duty in such capacity is hereby
eliminated; except that such personal liability shall not be
eliminated if a judgment or other final adjudication adverse to
such Director establishes that his acts or omissions were in bad
faith, or involved intentional misconduct, or a knowing violation
of law, or that he personally gained, in fact, a financial profit
or other advantage to which he was not legally entitled, or that
his acts violated any relevant Section of the General Corporation
Law.
I, THE UNDERSIGNED, being the Sole Incorporator, herein
before named, do make, file and record this certificate, hereby
certifying that this is my act and deed and that the facts herein
stated are true, and accordingly do hereunto set my hand this 21st
day of August, 1991.
/s/ JERRY JOSEPH
--------------------------------
Jerry Joseph, Sole Incorporator
7120 N.W. 44th Court
Lauderhill, Florida 33319
Exhibit 3.2
-----------
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
--------------------------------
Pursuant to Section 242 of the
General Corporation Law of the State of Delaware
--------------------------------
The undersigned, the President of Touchstone Applied
Science Associates, Inc., a Delaware corporation (the
"Corporation"), does hereby certify as follows:
1. The name of the Corporation is Touchstone
Applied Science Associates, Inc.
2. Article [4] of the Certificate of Incorporation
is hereby amended by adding at the end thereof, the following:
"Simultaneously with the effective date of this
Certificate of Amendment (the "Effective Date"), all issued and
outstanding shares of Common Stock ("Existing Common Stock")
shall be and hereby are automatically combined and reclassified
as follows: each four shares of Existing Common Stock shall be
combined and reclassified (the "Reverse Split") as one share of
issued and outstanding Common Stock ("New Common Stock"),
provided, that there shall be no fractional shares of New Common
Stock. In the case of any holder of fewer than four (4) shares
of Existing Common Stock or of any holder of any number of shares
of Existing Common Stock which, when divided by four (4), does
not result in a whole number (a "Fractional Share Holder"), such
Fractional Share Holder shall receive in lieu of a fractional
share of New Common Stock a cash payment from the Corporation
determined by multiplying such fractional share interest by four
times the arithmetic mean average closing bid price per share of
Existing Common Stock on the Nasdaq SmallCap Market for the five
trading days immediately preceding the effective date of this
Amendment, such payment to be made upon such other terms and
conditions as the officers of the Corporation, in their judgment,
determine to be advisable and in the best interests of the
Corporation.
The Corporation shall, through its transfer agent,
provide certificates representing New Common Stock to holders of
Existing Common Stock in exchange for certificates representing
Existing Common Stock. From and after the Effective Date,
certificates representing shares of Existing Common Stock are
hereby canceled and shall represent only the right of the holders
thereof to receive New Common Stock.
From and after the Effective Date, the term "New
Common Stock" as used in this Article [4] shall mean Common Stock
as provided in this Certificate of Incorporation. The par value
of the Common Stock shall remain as otherwise provided in Article
[4] of this Certificate of Incorporation."
3. The foregoing Amendment was duly approved and
adopted in accordance with the provisions of Section 242 of the
General Corporation Law of the State of Delaware and the By-laws
of the Corporation at a meeting of the Board of Directors of the
Corporation on December 15, 1998, at which a quorum was present
and acting throughout. The Board of Directors declared the
advisability of the Amendment and directed that the Amendment be
submitted to the stockholders of the Corporation for approval.
4. At the Annual Meeting of Stockholders of the
Corporation held on March 4, 1999, duly called and held in
accordance with the provisions of Section 222 of the General
Corporation Law of the State of Delaware, a majority of the
shares of the outstanding Common Stock entitled to vote thereon
were voted in favor of the Amendment in accordance with Section
242 of the General Corporation Law of the State of Delaware.
5. This Amendment shall be effective on the date
this Certificate of Amendment is filed and accepted by the
Secretary of State of the State of Delaware.
The undersigned, being the President of the
Corporation, for the purpose of amending its Certificate of
Incorporation pursuant to the General Corporation Law of the
State of Delaware, acknowledges that it is his act and deed and
that the facts stated herein are true, and has signed this
instrument on March 4, 1999.
TOUCHSTONE APPLIED SCIENCE
ASSOCIATES, INC.
By: /s/ ANDREW L. SIMON
-------------------------------------
Andrew L. Simon, Chairman,
President and Chief Executive Officer
ATTEST:
/s/ LINDA G. STRALEY
- ----------------------------
Linda G. Straley
Vice President and Secretary
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
AND SUBSIDIARIES
EXHIBIT 11
COMPUTATION OF EARNINGS PER COMMON SHARE
----------------------------------------
Three Months Ended
January 31,
1 9 9 9 1 9 9 8
------- -------
[S] [C] [C]
Basic earnings:
Net loss $ (200,357) $ (33,047)
---------- ----------
Shares:
Weighted common shares outstanding 2,141,806 2,111,891
Warrants to consultants -- --
Employee stock options -- --
Consultant stock options -- --
---------- ----------
Total weighted shares outstanding 2,141,806 2,111,891
---------- ----------
Basic earnings per common share $ (.09) $ (.02)
========== ==========
Diluted earnings:
Net loss $ (200,357) $ (33,047)
---------- ----------
Shares:
Weighted common shares outstanding 2,141,806 2,111,891
Warrants to consultants -- --
Employee stock options -- --
Consultant stock options -- --
---------- ----------
Total weighted shares outstanding 2,141,806 2,111,891
---------- ----------
Diluted earnings per common share $ (.09) $ (.02)
========== ==========
<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 January 31, 1999 and is qualified in its
entirety by reference to such report on Form 10-QSB.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-END> JAN-31-1999
<CASH> 1,472,916
<SECURITIES> 188,471
<RECEIVABLES> 3,527,964
<ALLOWANCES> 0
<INVENTORY> 453,524
<CURRENT-ASSETS> 6,114,052
<PP&E> 3,282,404
<DEPRECIATION> 1,213,529
<TOTAL-ASSETS> 16,725,373
<CURRENT-LIABILITIES> 2,747,862
<BONDS> 7,600,947
0
0
<COMMON> 214
<OTHER-SE> 6,376,350
<TOTAL-LIABILITY-AND-EQUITY> 16,725,373
<SALES> 2,356,127
<TOTAL-REVENUES> 2,453,506
<CGS> 966,576
<TOTAL-COSTS> 1,579,217
<OTHER-EXPENSES> 14,137
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 215,974
<INCOME-PRETAX> (322,398)
<INCOME-TAX> (122,041)
<INCOME-CONTINUING> (200,357)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (200,357)
<EPS-PRIMARY> (.09)
<EPS-DILUTED> (.09)
</TABLE>
