U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended July 31, 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
- -------------------------------------------------------------------------
(Issuer's telephone number, including area code)
- -------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer: (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the
past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
------------ -----------
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Exchange
Act after the distribution of securities under a plan confirmed
by court.
Yes No
------------ ------------
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the
issuer's classes of common equity, as of the latest practicable
date: As of September 10, 1999: 2,141,801 shares of Common
----------------------------------------------------
Stock, par value $0.0001 per share
- ----------------------------------
Transitional Small Business Disclosure Format (check one):
Yes No X
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<PAGE>
PART 1
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The financial statements for the Company's fiscal
quarter ended July 31, 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 educational market
with essentially one type of assessment product. Beginning in
1997 and through November 1998, through 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 the Company's post-secondary
proprietary school division, which is now known as TASA
Educational Services Corp. ("TESC"), a subsidiary of the Company
which operates as a holding company for the school division, and
which operates the Mildred Elley Schools through MESI Acquisition
Corp. ("MESI"). In an effort to report the revenues in each of
these areas in a more meaningful manner, the Company is reporting
revenues in these three discrete categories and prior periods
have been 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 nine-month period ended
July 31, 1999 versus the nine-month period ended July 31, 1998
and for the third quarter ended July 31, 1999 versus the third
quarter ended July 31, 1998.
<TABLE>
<CAPTION>
RESULTS OF OPERATIONS FOR THE THIRD FISCAL QUARTER
AND FOR THE NINE-MONTH PERIOD ENDED JULY 31, 1999
Nine Months Three Months
Ended July 31, % Ended July 31, %
1999 1998 Change 1999 1998 Change
---- ---- ------ ---- ---- ------
(in thousands (in thousands
of dollars) of dollars)
<S> <C> <C> <C> <C> <C> <C>
Assessment Products Revenues $3,370.6 $2,805.2 +20.1 $1,292.8 $ 937.2 +37.9
Instructional Revenues 1,711.0 1,603.6 +6.7 1,137.5 1,056.7 +7.6
Educational Delivery Revenues 3,477.9 -- N/A 929.3 -- N/A
-------- -------- ----- -------- -------- -----
Total Revenues $8,559.5 $4,408.8 +94.1 $3,359.6 $1,993.9 +68.5
</TABLE>
The following are selected ratios as a percentage of
revenues on the Company's financial statements:
Nine Months Three Months
Ended July 31, Ended July 31,
1999 1998 1999 1998
---- ---- ---- ----
(in percentages)
Revenues 100% 100% 100% 100%
Gross Profit Margin 62 67 63 67
Operating Expense:
Selling Expense 20 26 20 21
General & Administrative 39 41 34 31
Bad Debt Recovery 0 (5) 0 0
Income from Operations 3 5 9 15
Other Income (Expense) (5) (3) (4) (2)
Pre-Tax Income (Loss) (2) 2 5 13
Net Income (Loss) (1) 0 3 10
FOR THE THREE MONTHS ENDED JULY 31, 1999
REVENUES. For the three-month period ended July 31,
--------
1999 (the "Current Quarter"), revenues were $3,359,553,
representing a 69% increase, or $1,365,709, over $1,993,844 for
the three-month period ended July 31, 1998 (the "Comparable
Quarter"). This increase resulted from the acquisition of the
Mildred Elley Schools in November 1998 as well as increases in
revenues in the Company's assessment and instructional divisions
during the Current Quarter.
Revenues for assessment products and services increased
38%, or $355,623, to $1,292,778 in the Current Quarter from
$937,155 in the Comparable Quarter. Of this increase, the
Company's proprietary test division featuring DRP products
reflected a revenue increase of 11% while the custom test design
division, BETA, increased its revenues by 148%. During the
Current Quarter, the Company announced that it had signed two
contracts, through BETA, amounting to approximately $500,000 in
revenue which will be fulfilled during the fourth quarter of the
current fiscal year and throughout the Company's fiscal year
ended October 31, 2000.
Instructional revenues increased 8% in the Current
Quarter from the Comparable Quarter (or $1,137,462 in the Current
Quarter versus $1,056,689 in the Comparable Quarter). In late
1998, management made the decision to alter the way in which the
Company distributes its instructional products and materials.
Accordingly, during the Current Quarter, the Company entered into
contracts with 11 separate distribution organizations,
representing 18 states, in order to further market the Company's
instructional products. Additionally, the Company will begin to
market its instructional products and publications through major
book sellers and wholesalers. As a result, management believes
that the instructional division will continue to contribute
increased revenues and profitability for the Company.
The educational delivery division contributed $929,313
to the Company's Current Quarter revenues, which represented 68%
of the Current Quarter revenue increase over the Comparable
Quarter. There were no revenues for this division in the
Comparable Quarter.
COST OF GOODS SOLD. Cost of goods sold in the Current
------------------
Quarter increased 95%, or $613,409, from $647,295 in the
Comparable Quarter to $1,260,704 in the Current Quarter. Cost of
goods sold as a percentage of revenues increased from 32% in the
Comparable Quarter to 37% in the Current Quarter. This increase
resulted primarily from the increase in BETA revenues which are
typically associated with higher direct costs.
GROSS PROFIT. In the Current Quarter, gross profit
------------
increased by 56%, or $752,300 from $1,346,549 in the Comparable
Quarter to $2,098,849 in the Current Quarter. The increase in
gross profit is attributable to an increase in revenues resulting
primarily from the acquisition of the Mildred Elley Schools.
Although gross profit dollars increased, the gross profit margin
percentage decreased from 67% in the Comparable Quarter to 63% in
the Current Quarter as a result of the increased costs to deliver
assessment products and services during the Current Quarter.
SELLING EXPENSES. Selling expenses for the Current
----------------
Quarter increased by 59%, or $243,468, from $415,087 in the
Comparable Quarter to $658,555 in the Current Quarter. This
increase is attributable to the acquisition of the Mildred Elley
Schools and the increased marketing costs associated with the
assessment and instructional divisions. However, selling
expenses as a percentage of sales remained fairly constant (with
a minimal decrease of approximately 1%).
GENERAL AND ADMINISTRATIVE EXPENSES. The Company's
-----------------------------------
general and administrative expenses increased 80%, or $504,985,
from $627,436 in the Comparable Quarter to $1,132,421 in the
Current Quarter. General and administrative expenses as a
percentage of sales also increased from 31% in the Comparable
Quarter to 34% in the Current Quarter. These increases can be
attributable to the acquisition of the Mildred Elley Schools.
Management believes that this percentage will decrease throughout
the balance of the current fiscal year as the Company remains
in its peak sales period.
INCOME FROM OPERATIONS. Income from operations for the
----------------------
Current Quarter was $307,873 versus $304,026 in the Comparable
Quarter. This minimal change in income from operations can be
attributable to the increase in general and administrative
expenses associated with the acquisition of the Mildred Elley
Schools, coupled with a quarter which is traditionally a low
volume sales period for the educational delivery division.
EBITDA. Earnings before interest, taxes, depreciation,
------
and amortization increased $40,406 to $524,501 in the Current
Quarter from $502,095 in the Comparable Quarter. As a percentage
of sales, EBITDA decreased to 16% in the Current Quarter versus
25% in the Comparable Quarter. This percentage decrease is the
result of an increase in general and administrative expenses
associated with the Mildred Elley acquisition, coupled with a
quarter which is traditionally a low volume sales period for the
educational delivery division.
OTHER INCOME (EXPENSE). Other income (expense)
----------------------
increased to ($156,490) in the Current Quarter from ($51,207) in
the Comparable Quarter. This increase in expense was primarily
attributable to additional interest expense incurred in funding
the Mildred Elley Schools acquisition.
INCOME BEFORE INCOME TAXES. The Company had income
--------------------------
before income taxes of $151,383 for the Current Quarter versus
$252,819 for the Comparable Quarter. The decrease in income
before income taxes is largely attributable to additional
interest expense incurred in funding the Mildred Elley Schools
acquisition, coupled with a quarter which is traditionally a low
volume sales period for the educational delivery division.
NET INCOME AND EARNINGS PER SHARE. Net income after
---------------------------------
taxes was $100,731 for the Current Quarter versus net income of
$202,321 for the Comparable Quarter. Earnings per share were
$0.05 based on weighted average shares outstanding of 2,141,801.
After giving effect to the Company's one-for-four reverse stock
split which was effected on March 4, 1999, the Comparable Quarter
earnings per share were $0.09 based upon 2,131,961 shares
outstanding.
FOR THE NINE MONTHS ENDED JULY 31, 1999
REVENUES. For the nine-month period ended July 31,
--------
1999 (the "Current Period") revenues were $8,559,485,
representing a 94% increase, or $4,150,704, over $4,408,781 for
the nine-month period ended July 31, 1998 (the "Comparable
Period"). The overall increase was due to the acquisition of the
Mildred Elley Schools in November 1998 as well as increases in
the revenues of the Company's assessment and instructional
divisions during the period.
Revenues for assessment products and services increased
20%, or $565,437, from $2,805,206 in the Comparable Period to
$3,370,643 during the Current Period. Revenues from the
Company's proprietary test division, featuring DRP products, rose
6% while the custom test design division, BETA, posted a revenue
increase of 134%.
Instructional revenues increased approximately 7% in
the Current Period, totaling $1,710,944, which is $107,419 over
the Comparable Period's revenues of $1,603,575.
Revenues from the Company's educational delivery
division were $3,477,848 for the Current Period, which
represented approximately 84% of the Current Period revenue
increase over the Comparable Period. There were no revenues for
this division in the Comparable Period.
COST OF GOODS SOLD. Cost of goods sold in the Current
------------------
Period increased by 125%, or $1,796,596, from $1,436,086 in the
Comparable Period to $3,232,682 in the Current Period. Cost of
goods sold as a percentage of revenues increased to 38% in the
Current Period from 33% in the Comparable Period. This increase
was the result of the increased costs required to deliver
assessment products and services further resulting from the
increase in BETA revenues, and the costs associated with
generating revenues from the educational delivery division.
GROSS PROFIT. For the Current Period, gross profit
------------
increased by 79%, or $2,354,108, from $2,972,695 in the
Comparable Period, to $5,326,803. The increase in gross profit
is attributable to an increase in revenues resulting primarily
from the Mildred Elley Schools acquisition. The gross profit
margin decreased in the Current Period to 62% versus 67% in the
Comparable Period as a result of the Company's change in product
mix particularly within the assessment division and the lower
profit margin associated with the educational delivery business.
SELLING EXPENSES. Selling expenses for the Current
----------------
Period increased by 55%, or $629,186, from $1,135,084 in the
Comparable Period to $1,764,270 in the Current Period. However,
for the Current Period, selling expenses were 20% of revenues
versus 26% for the Comparable Period. This decline of selling
expenses as a percentage of revenues is a function of the
increase in BETA revenues and the revenue increase in the
Company's educational delivery division, both of which require
lower marketing expenditures than the proprietary test or
instructional divisions.
GENERAL AND ADMINISTRATIVE. The Company's general and
--------------------------
administrative expenses increased 83%, or $1,499,420, from
$1,816,856 in the Comparable Period to $3,316,276 in the Current
Period. However, general and administrative expenses as a
percentage of sales fell to 39% in the Current Period from 41% in
the Comparable Period as a result of revenue increases
contributed primarily through the Company's custom test design
division, BETA, and the Company's educational delivery division.
Management believes that the Company will see a further decrease
in this percentage during the fourth quarter of the current
fiscal year as the Company remains in its peak sales period.
BAD DEBT RECOVERY. In the Comparable Period, the
-----------------
Company recovered $200,000 from a settlement of a $400,000 loan
made by previous management. There was no bad debt recovery in
the Current Period.
INCOME FROM OPERATIONS. Income from operations
----------------------
increased $25,502 from $220,755 in the Comparable Period to
$246,257 in the Current Period. However, due to the non-recurring
bad debt recovery of $200,000 which was recognized in
the Comparable Period, there was a real increase in income from
operations of $225,502. Such increase was primarily attributable
to increased revenues in both the Company's educational delivery
and custom test design divisions.
EBITDA. Earnings before interest, taxes, depreciation,
------
and amortization increased $80,973 to $941,949 in the Current
Period from $860,976 in the Comparable Period. However, due to
the non-recurring bad debt recovery of $200,000, which was
recognized in income from operations for the Comparable Period,
there was a real increase in EBITDA for the Current Period of
$280,973. This increase is primarily attributable to the
additional earnings contributed through the Mildred Elley Schools
acquisition and the Company's custom test design division. As a
percentage of sales, EBITDA decreased to 11% in the Current
Period versus 19% in the Comparable Period. This percentage
decrease is largely attributable to an increase in general and
administrative expenses associated with the Mildred Elley Schools
acquisition.
OTHER INCOME (EXPENSE). Other income (expense)
----------------------
increased to ($434,593) in the Current Period versus ($152,417)
in the Comparable Period. The increase in expenses was primarily
attributable to additional interest expense incurred in funding
the Mildred Elley Schools acquisition.
INCOME (LOSS) BEFORE INCOME TAXES. The Company had a
---------------------------------
loss before income taxes of ($188,336) for the Current Period
versus income before income taxes of $68,338 in the Comparable
Period. Again, this increase is primarily attributable to the
increase in interest expense incurred as a result of the
acquisition of the Mildred Elley Schools.
NET INCOME (LOSS) AND EARNINGS (LOSS) PER SHARE. Net
-----------------------------------------------
loss after taxes was ($108,973) for the Current Period versus net
income after taxes of $8,910 for the Comparable Period. Due to
the non-recurring bad debt recovery of $200,000 which occurred in
the Comparable Period, there was a real decrease in the Company's
loss after taxes for the Current Period of ($82,117). Loss per
share was ($0.05) based on weighted average shares outstanding of
2,141,801. After giving effect to the Company's one-for-four
reverse stock split which occurred on March 4, 1999, the
Comparable Period earnings per share were $0.00 based upon
2,122,060 shares outstanding.
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL. Working capital at the end of the
---------------
Current Period was $3,525,384, down from $5,824,816 at the
beginning of the fiscal year. The $2.3 million decline is
primarily due to the acquisition of the Mildred Elley Schools in
November 1998. The ratio of current assets to current
liabilities was 2.32 to 1.0 at the end of the Current Period.
CASH FLOW FROM OPERATING ACTIVITIES. For the Current
-----------------------------------
Period, the Company had a negative cash flow from operations of
($825,694) versus a positive cash flow from operations of $61,929
in the Comparable Period. The factors contributing to this
negative flow were an increase in accounts receivable of
($395,642) resulting from increased sales volume in the latter
half of the Current Quarter, an increase in tuition receivables
of ($586,047), as the Mildred Elley Schools must extend its
students loans for tuition until the schools are reinstated into
the Federal loan program, and the paydown of accounts payable of
($449,854).
CASH FLOW FROM INVESTING ACTIVITIES. For the Current
-----------------------------------
Period, the Company had a net cash outflow from investing
activities of ($2,403,500) versus a net cash outflow of ($77,824)
in the Comparable Period, which is primarily attributable to the
acquisition of the Mildred Elley Schools during the current
fiscal year.
CASH FLOW FROM FINANCING ACTIVITIES. For the Current
-----------------------------------
Period, the Company had a net cash outflow from financing
activities of ($787,448) versus ($494,572) in the Comparable
Period. The outflow was essentially attributable to the paydown
of certain debt ($337,642) relating to the Mildred Elley Schools
acquisition and a margin loan commitment related to marketable
securities as well as the servicing of long-term debt ($428,891)
associated with the MLP and Mildred Elley Schools 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
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 11 -- Computation of Earnings per Common Share
Exhibit 27 -- Financial Data Schedule
(b) Reports on Form 8-K
None.
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE FISCAL QUARTER ENDED JULY 31, 1999
Consolidated Balance Sheets F-1
Consolidated Results of Operations and Comprehensive 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 9 1 9 9 8
------- -------
<S> <C> <C>
ASSETS
------
Current assets:
Cash and temporary investments $ 963,588 $ 4,980,230
Marketable securities 100,297 186,376
Accounts receivable 1,682,906 1,287,264
Tuition receivable, net of allowance 2,669,324 --
Inventories 439,075 478,869
Prepaid expenses and other current assets 348,334 173,679
----------- -----------
Total current assets 6,203,524 7,106,418
Property, plant and equipment, net of
accumulated depreciation of $1,330,616
and $1,179,297, respectively 2,082,159 1,753,811
Other assets:
Deferred acquisition costs 51,736 353,406
Tuition receivable, net of current
portion and allowance 382,233 --
Notes and interest receivable 159,327 --
Test passage bank, net of accumulated
amortization of $1,726,213 and
$1,474,302, respectively 2,757,053 2,675,624
Software development costs, net of
accumulated amortization of $155,066
and $88,702, respectively 301,070 350,790
Goodwill, net of accumulated amortization of
$241,690 and $122,993, respectively 3,612,729 739,264
Noncompete agreements, net of accumulated
amortization of $154,666 and $101,095,
respectively 345,334 398,905
Deferred income taxes 439,303 390,148
Other assets 325,494 306,274
--------- ---------
Total assets $16,659,962 $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
July 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 319,434 261,034
Deferred revenue 559,539 --
Accounts payable and accrued expenses 1,399,167 1,020,568
----------- -----------
Total current liabilities 2,678,140 1,281,602
Long-term debt:
Subordinated debt 4,000,000 4,000,000
Long-term debt less current portion 3,451,474 2,267,198
----------- -----------
Total liabilities 10,129,614 7,548,800
----------- -----------
Stockholders' equity:
Preferred stock, $.0001 par value, 5,000,000
shares authorized, none and 1,500 shares
issued and outstanding, respectively -- --
Common stock, $.0001 par value, 20,000,000
shares authorized, 2,141,801 shares issued
and outstanding 214 214
Additional paid-in capital 5,052,479 5,052,479
Deferred interest (500,106) (588,075)
Stock subscription receivable -- (14,350)
Unearned compensatory stock (22,304) (37,187)
Retained earnings 1,997,862 2,106,835
Accumulated other comprehensive income 2,203 5,924
----------- -----------
Total stockholders' equity 6,530,348 6,525,840
----------- -----------
Total liabilities & stockholders' equity $16,659,962 $14,074,640
=========== ===========
<FN>
See notes to consolidated financial statements.
</FN>
<TABLE
F - 2
<PAGE> F-3
</TABLE>
<TABLE>
<CAPTION>
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
Nine Months Ended Three Months Ended
July 31, July 31,
1 9 9 9 1 9 9 8 1 9 9 9 1 9 9 8
------- ------- ------- -------
<S> <C> <C> <C> <C>
Assessment revenues $3,370,643 $2,805,206 $1,292,778 $ 937,155
Educational delivery revenues 3,477,848 -- 929,313 --
Instructional revenues 1,710,994 1,603,575 1,137,462 1,056,689
---------- ---------- ---------- ----------
Total net revenue 8,559,485 4,408,781 3,359,553 1,993,844
Cost of goods sold 3,232,682 1,436,086 1,260,704 647,295
---------- ---------- ---------- ----------
Gross profit 5,326,803 2,972,695 2,098,849 1,346,549
---------- ---------- ---------- ----------
Operating expenses:
Selling expenses 1,764,270 1,135,084 658,555 415,087
General and administrative
expenses 3,316,276 1,816,856 1,132,421 627,436
Bad debt recovery -- (200,000) -- --
---------- ---------- ---------- ----------
Total operating expenses 5,080,546 2,751,940 1,790,976 1,042,523
---------- ---------- ---------- -----------
Income from operations 246,257 220,755 307,873 304,026
Other income (expense):
Interest expense (615,181) (186,175) (200,118) (57,396)
Investment income 106,672 33,758 30,775 6,189
Other income 88,053 -- 12,853 --
Loss on sale of assets (14,137) -- -- --
---------- ---------- ---------- -----------
Income (loss) before income taxes (188,336) 68,338 151,383 252,819
Income taxes (benefit) (79,363) 59,428 50,652 50,498
---------- ---------- ---------- -----------
Net income (loss) (108,973) 8,910 100,731 202,321
Other comprehensive loss, net of tax:
Unrealized holding loss
on securities arising during
the period (3,721) (1,274) (1,414) (52)
---------- ---------- ---------- -----------
Total comprehensive income (loss) $ (112,694) $ 7,636 $ 99,317 $ 202,269
---------- ---------- ---------- -----------
Weighted average shares outstanding
Basic 2,141,801 2,122,060 2,141,801 2,131,961
Diluted 2,141,801 2,161,692 2,402,730 2,171,593
Earnings (loss) per share
Basic $ (.05) $ -- $ .05 $ .09
Diluted $ (.05) $ -- $ .04 $ .09
<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
Page 1 of 2
Nine Months Ended
July 31,
1 9 9 9 1 9 9 8
------- -------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (108,973) $ 8,910
Adjustments to reconcile net income (loss) to net
cash flows from operating activities:
Depreciation and amortization 695,962 640,221
Deferred income taxes (49,155) (32,872)
Bad debt recovery -- (200,000)
Financial advisory services 14,883 --
Loss on sale of assets 14,137 --
Changes in operating assets and liabilities:
Accounts receivable (395,642) (465,846)
Inventories 39,794 (2,387)
Other assets (47,530) 38,680
Tuition receivable (586,047) --
Deferred revenue 46,731 --
Accounts payable (449,854) 75,223
---------- ---------
NET CASH FLOWS FROM OPERATING ACTIVITIES (825,694) 61,929
---------- ---------
INVESTING ACTIVITIES
Acquisition of property, plant and equipment (303,380) (114,119)
Test passage bank (333,340) (172,879)
Software development costs (16,644) (74,765)
Pre-publication costs -- (12,529)
Proceeds from the sale of marketable securities 270,000 535,000
Proceeds from the sale of assets 13,200 --
Acquisition of subsidiaries (1,964,792) --
Acquisition of test (16,808) --
Deferred acquisition costs (51,736) (238,532)
----------- ---------
NET CASH FLOWS FROM INVESTING ACTIVITIES (2,403,500) (77,824)
----------- ---------
FINANCING ACTIVITIES
Repayment of long-term debt (428,891) (233,549)
Proceeds from exercise of warrants -- 97,905
Net repayments from loan payable (337,642) (358,928)
Payment of mortgage costs (35,265) --
Stock subscriptions received 14,350 --
----------- ---------
NET CASH FLOWS FROM FINANCING ACTIVITIES (787,448) (494,572)
----------- ---------
<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
Page 2 of 2
Nine Months Ended
July 31,
1 9 9 9 1 9 9 8
------- -------
<S> <C> <C>
NET CHANGE IN CASH AND TEMPORARY
INVESTMENTS $(4,016,642) $ (510,467)
CASH AND TEMPORARY INVESTMENTS
AT BEGINNING OF PERIOD 4,980,230 1,156,664
----------- ----------
CASH AND TEMPORARY INVESTMENTS
AT END OF PERIOD $ 963,588 $ 646,197
----------- ----------
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 537,538 $ 195,505
----------- ----------
Income taxes paid $ 32,350 $ 45,711
----------- ----------
SUMMARY OF ACQUIRED SUBSIDIARY:
Assets acquired consisting primarily
of Goodwill $ 6,950,721 $ --
Liabilities assumed 3,562,828 --
----------- ----------
NET PURCHASE PRICE $ 3,387,893 $ --
=========== ==========
</TABLE>
F - 5
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1999
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------------
In the opinion of management, the accompanying consolidated
financial statements of Touchstone Applied Science Associates,
Inc. ("TASA") and subsidiaries contain all adjustments
necessary to present fairly the Company's consolidated financial
position as of July 31, 1999 and October 31, 1998, the
consolidated results of operations and comprehensive income for
the nine and three month periods ended July 31, 1999 and 1998 and
consolidated cash flows for the nine month periods ended July 31,
1999 and 1998.
The consolidated results of operations and comprehensive income
for the nine and three month periods ended July 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.
("BETA"), Modern Learning Press, Inc. ("MLP"), TASA
Educational Services Corp. ("TESC") and MESI Acquisition Corp.
("MESI"). All material intercompany balances and transactions
have been eliminated in consolidation.
Goodwill
- --------
Goodwill is being amortized over a 15 to 30-year period.
Concentration of Credit Risk
- ----------------------------
As part of the acquisition of The Mildred Elley Schools, Inc.
("Elley") by MESI, 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
JULY 31, 1999
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
- ---------------------------------------------------------
Tuition 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.
Revenue Recognition
- -------------------
The Company recognizes tuition revenue at the point in which the
Company has no exposure to future tuition refunds associated with
the respective academic semester.
Reclassifications
- -----------------
Certain prior year information has been reclassified to conform to
the current year's reporting presentation.
F - 7
SIGNATURES
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 and Chief Executive Officer
By: /s/ DENISE M. STEFANO
---------------------------------------
Denise M. Stefano
Chief Financial Officer
Date: September 14, 1999
<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 9 1 9 9 8 1 9 9 9 1 9 9 8
------- ------- ------- -------
<S> <C> <C> <C> <C>
Basic earnings:
Net income (loss) $ (108,973) $ 8,910 $ 100,731 $ 202,321
Shares:
Weighted common shares
outstanding 2,141,801 2,122,060 2,141,801 2,131,961
Warrants to consultants -- -- -- --
Warrants to lender -- -- -- --
Employee and director
stock options -- -- -- --
Consultant stock options -- -- -- --
Underwriter options -- -- -- --
---------- ---------- ---------- ----------
Total weighted shares
outstanding 2,141,801 2,122,060 2,141,801 2,131,961
---------- ---------- ---------- ----------
Basic earnings per
common share $ (.05) $ -- $ .05 $ .09
========== ========== ========== ==========
Diluted earnings:
Net income (loss) $ (108,973) $ 8,910 $ 100,731 $ 202,321
Shares:
Weighted common shares
outstanding 2,141,801 2,122,060 2,141,801 2,131,961
Warrants to consultants -- 36,932 9,683 36,932
Warrants to lender -- -- 243,376 --
Employee and director
stock options -- -- 5,767 --
Consultant stock options -- 2,700 2,103 2,700
Underwriter options -- -- -- --
Total weighted shares
outstanding 2,141,801 2,161,692 2,402,730 2,171,593
Diluted earnings per
common share $ (.05) $ -- $ .04 $ .09
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted
from the consolidated balance sheet and statements of operations
filed as part of the Quarterly Report on Form 10-QSB for the
quarter ended July 31, 1999 and is qualified in its
entirety by reference to such report on Form 10-QSB.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-END> JUL-31-1999
<CASH> 963,588
<SECURITIES> 100,297
<RECEIVABLES> 4,352,230
<ALLOWANCES> 0
<INVENTORY> 439,075
<CURRENT-ASSETS> 6,203,524
<PP&E> 3,412,775
<DEPRECIATION> 1,330,616
<TOTAL-ASSETS> 16,659,962
<CURRENT-LIABILITIES> 2,678,140
<BONDS> 7,451,474
0
0
<COMMON> 214
<OTHER-SE> 6,530,134
<TOTAL-LIABILITY-AND-EQUITY> 16,659,962
<SALES> 8,559,485
<TOTAL-REVENUES> 8,754,210
<CGS> 3,232,682
<TOTAL-COSTS> 5,080,546
<OTHER-EXPENSES> 14,137
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 615,181
<INCOME-PRETAX> (188,336)
<INCOME-TAX> (79,363)
<INCOME-CONTINUING> (108,973)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (108,973)
<EPS-BASIC> (.05)
<EPS-DILUTED> (.05)
</TABLE>
