SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K/A-1
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): November 9, 1998
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
---------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
Delaware 0-20303 13-2846796
- ---------------------------- ------------- ------------------
(State or Other Jurisdiction (Commission (I.R.S. Employer
of Incorporation) File Number) Identification No.)
P.O. Box 382, 4 Hardscrabble Heights, Brewster, New York 10509
- -------------------------------------------------------- --------
(Address of Principal Executive Offices) Zip Code
Registrant's telephone number, including area code: (914) 277-8100
--------------
-----------------------------------------------------------
Former name or former address, if changed since last report
<PAGE>
On November 23, 1998, Touchstone Applied Science
Associates, Inc. (the "Company") filed a Current Report on
Form 8-K (the "Initial Report") with the Securities and
Exchange Commission, which reported the purchase by the
Company through MESI Acquisition Corp., a wholly-owned
subsidiary of TASA Educational Services Corporation, which is
a wholly-owned subsidiary of the Company, of substantially all
of the assets of Mildred Elley School, Inc. as of November 2,
1998 (the "Acquisition"). This Amendment hereby amends and
supplements Item 7 to the Initial Report to include the
financial statements and pro forma financial information
contained herein, which the Company is required to report
pursuant to Items 7(a) and (b) of Form 8-K in connection with
the Acquisition.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
---------
(a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED.
Independent Auditors' Report F - 1
Balance Sheet F - 2
Statement of Income and Shareholders'
Undistributed Income F - 3
Statement of Cash Flow F - 4
Notes to Financial Statements F - 5
Independent Auditors' Report on Supplementary
Information F - 11
Supplementary Information F - 12
(b) PRO FORMA FINANCIAL INFORMATION.
---------
Introduction to Pro Forma
---------
Financial Statements (Unaudited) F - 14
Pro Forma Balance Sheet (Unaudited) F - 15
---------
Pro Forma Statement of Operations for the
---------
Year Ended October 31, 1998 (Unaudited) F - 16
Notes to Pro Forma Financial
---------
Statements as of October 31, 1998 (Unaudited) F - 17
(c) EXHIBITS
Exhibit 4.1 Investor Rights Agreement, dated as
of September 4, 1998, by and among the
Company, Cahill, Warnock Strategic Partners
Fund, L.P., Strategic Associates, L.P.,
and the Individual Shareholders Named
Therein (incorporated by reference to
Exhibit 4.1 to the Initial Report)
Exhibit 4.2 Registration Rights Agreement
(incorporated by reference to Exhibit 4.2
to the Initial Report)
Exhibit 4.3 Form of 8% Subordinated Debenture
(incorporated by reference to Exhibit 4.3
to the Initial Report)
Exhibit 4.4 Form of Warrant (incorporated by
reference to Exhibit 4.4 to the Initial
Report)
Exhibit 10.1 Asset Purchase Agreement, dated as
of November 2, 1998, between Mildred Elley
School, Inc. and MESI Acquisition Corp.
(incorporated by reference to Exhibit 10.1
to the Initial Report)
Exhibit 10.2 Promissory Note of MESI Acquisition
Corp. (incorporated by reference to
Exhibit 10.2 to the Initial Report)
Exhibit 10.3 Guaranty of TASA with respect to
Promissory Note of MESI Acquisition Corp.
(incorporated by reference to Exhibit 10.3
to the Initial Report)
Exhibit 10.4 Employment Agreement, dated as of
November 2, 1998, between Mildred Elley
School, Inc. and Faith Takes (incorporated
by reference to Exhibit 10.4 to the
Initial Report)
Exhibit 10.5 Securities Purchase Agreement,
dated as of September 4, 1998, by
and among the Company, Cahill,
Warnock Strategic Partners Fund, L.P., and
Strategic Associates, L.P. (incorporated
by reference to Exhibit 10.5 to the
Initial Report)
<PAGE> F - 1
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Board of Directors and Shareholders
Mildred Elley School, Inc.
Latham, New York
We have audited the accompanying balance sheet of Mildred
Elley School, Inc. (a Subchapter "S" Corporation) as of
November 2, 1998, and the related statements of income and
shareholders' undistributed income and cash flow for the ten
months then ended. These financial statements are the
responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally
accepted auditing standards and Government Auditing Standards,
-----------------------------
issued by the Comptroller General of the United States. Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and
significant estimates made by management, as well as
evaluating the overall financial statement presentation. We
believe our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to
above present fairly, in all material respects, the financial
position of Mildred Elley School, Inc., as of November 2,
1998, and the results of its income and cash flow for the ten
months then ended, in conformity with generally accepted
accounting principles.
In accordance with Government Auditing Standards, we have
-----------------------------
also issued a report dated December 18, 1998, on our
consideration of the Mildred Elley School, Inc., internal
control structure and a report dated December 18, 1998, on its
compliance with laws and regulation.
/s/ LCS&Z Glickman Lutz, LLP
Latham, New York
December 18, 1998
F - 1
<PAGE> F - 2
MILDRED ELLEY SCHOOL, INC.
--------------------------
(A Subchapter "S" Corporation)
BALANCE SHEET
-------------
NOVEMBER 2, 1998
----------------
ASSETS
------
CURRENT ASSETS:
Cash (Note 1) $ 121,396
Tuition and accounts receivable (less estimated doubtful
accounts of $65,619) (Note 4) 2,029,812
Prepaid expenses 6,786
----------
Total current assets $2,157,994
NONCURRENT TUITION AND ACCOUNTS RECEIVABLE (less estimated
doubtful accounts of $30,175) (Note 4) 435,698
NOTES RECEIVABLE (Note 5) 163,646
PROPERTY AND EQUIPMENT (Notes 1 and 6) 227,694
INTANGIBLE ASSETS - NET (Note 7) 17,046
DEPOSITS 8,182
----------
TOTAL ASSETS $3,010,260
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Line of credit (Note 8) $ 550,000
Current maturities of long-term debt (Note 9) 81,769
Current maturities of capitalized lease obligations (Note 10) 3,820
Accounts payable 423,056
Financing advances payable 67,719
Deferred revenue 512,808
Accrued expenses and other liabilities 257,678
----------
Total current liabilities $1,896,850
NOTE PAYABLE - SHAREHOLDER (Note 11) 86,635
LONG-TERM DEBT (Note 9) 484,738
LONG-TERM CAPITALIZED LEASE OBLIGATIONS (Note 10) 14,605
----------
Total liabilities $2,482,828
----------
COMMITMENTS AND CONTINGENCIES (Note 12)
SHAREHOLDERS' EQUITY:
Capital stock - authorized 200 shares, issued
and outstanding, 178 shares,
no par value $ 34,000
Shareholders' undistributed income 493,432
---------
Total shareholders' equity $ 527,432
---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $3,010,260
==========
[FN]
See notes to financial statements.
</FN>
F - 2
<PAGE> F - 3
MILDRED ELLEY SCHOOL, INC.
--------------------------
(A Subchapter "S" Corporation)
STATEMENT OF INCOME AND SHAREHOLDERS' UNDISTRIBUTED INCOME
----------------------------------------------------------
TEN MONTHS ENDED NOVEMBER 2, 1998
---------------------------------
REVENUE $3,824,870
COST OF REVENUE 307,900
----------
GROSS PROFIT $3,516,970
OPERATING EXPENSES 3,369,940
----------
INCOME FROM OPERATIONS $ 147,030
OTHER INCOME (EXPENSES):
Other Income 194,970
Loss on abandonment of leased facilities (226,017)
Write off of intangible assets (80,726)
----------
INCOME BEFORE INCOME TAXES $ 35,257
INCOME TAXES 3,358
----------
NET INCOME $ 31,899
SHAREHOLDERS' UNDISTRIBUTED INCOME - BEGINNING 609,092
DISTRIBUTIONS TO SHAREHOLDERS 147,559
----------
SHAREHOLDERS' UNDISTRIBUTED INCOME - END $ 493,432
==========
[FN]
See notes to financial statements.
</FN>
F - 3
<PAGE> F - 4
MILDRED ELLEY SCHOOL, INC.
--------------------------
(A Subchapter "S" Corporation)
STATEMENT OF CASH FLOW
----------------------
TEN MONTHS ENDED NOVEMBER 2, 1998
---------------------------------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 31,899
Adjustments to reconcile net income to net cash applied
to operating activities:
Depreciation and amortization 95,555
Loss on abandonment of leased facilities and intangible assets 306,743
Income from forgiveness of indebtedness (25,514)
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable (834,551)
Inventories 23,783
Prepaid expenses 21,038
Increase (decrease) in:
Accounts payable (236,273)
Deferred revenue 512,808
Accrued expenses and other liabilities (59,712)
----------
Net cash applied to operating activities ($164,224)
----------
CASH FLOW FROM INVESTING ACTIVITIES:
Deposits refunded $ 6,432
Purchase of property and equipment (72,401)
Reduction of notes receivable 1,080
----------
Net cash applied to investing activities $ (64,889)
----------
CASH FLOW FROM FINANCING ACTIVITIES:
Additional borrowings on line of credit $350,000
Repayment of long-term debt (69,996)
Distributions to shareholders (147,559)
Capitalized lease obligations repaid (7,248)
Additional notes payable - shareholder 68,670
Advances on financing arrangements 67,719
----------
Net cash provided by financing activities $ 261,586
----------
NET INCREASE IN CASH $ 32,473
CASH - BEGINNING 88,923
----------
CASH - END $121,396
==========
SUPPLEMENTAL DISCLOSURES OF CASH INFORMATION:
Cash paid during the period:
Interest $ 75,661
Income taxes 781
[FN]
See notes to financial statements.
</FN>
F - 4
<PAGE> F - 5
MILDRED ELLEY SCHOOL, INC.
--------------------------
(A Subchapter "S" Corporation)
NOTES TO FINANCIAL STATEMENTS
-----------------------------
NOVEMBER 2, 1998
----------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
(A) Business Activities And Change Of Ownership
-------------------------------------------
The Company is a privately held proprietary business school
which offers executive, secretarial, word processing, paralegal and
other general business programs. It has locations in Albany, New
York, and Pittsfield, Massachusetts.
These financial statements reflect the balance sheet of the
Company and the results of its income and cash flow through
November 2, 1998, prior to the Company entering into an asset
purchase agreement with MESI Acquisition Corp., a wholly owned
subsidiary of Tasa Educational Services Corporation.
(B) Management's Use Of Estimates
-----------------------------
The preparation of financial statements in conformity with
generally accepted accounting principles, requires the use of
estimates based on management's knowledge and experience. Due to
the prospective nature, actual results could differ from those
estimates.
(C) Cash
----
For purposes of the statement of cash flow, the Company
considers all highly liquid debt instruments purchased with a
maturity of 3 months or less to be cash.
(D) Revenue Recognition
-------------------
Tuition is included in income as it is earned and consists of
amounts received from students and certain Federal Student
Financial Aid Programs.
(E) Property And Equipment
----------------------
Property and equipment are recorded at cost. Renewals and
betterments of property are accounted for as additions to asset
accounts. Repairs and maintenance charges are expensed as
incurred. Depreciation is provided using a combination of
straight-line and accelerated methods for financial reporting and
income tax purposes.
(F) Income Taxes
------------
Effective January 12, 1985, the Company elected to be treated
as a Subchapter "S" Corporation under the Internal Revenue Code and
the New York State Corporation Tax Law. Under these elections, the
income, generally, is taxed directly to the shareholders. In
addition, New York State has enacted a tax on corporations when
income exceeds specified levels.
F - 5
<PAGE> F - 6
MILDRED ELLEY SCHOOL, INC.
--------------------------
(A Subchapter "S" Corporation)
NOTES TO FINANCIAL STATEMENTS
-----------------------------
NOVEMBER 2, 1998
----------------
(G) Concentration Of Credit Risk
----------------------------
The Company grants unsecured credit to its students. The risk
of loss is the balance owed at the time of default.
(2) STUDENT GRANTS AND GUARANTEED LOAN PROGRAMS
-------------------------------------------
The Company's participation in the U. S. Department of
Education's student grants and guaranteed loan programs is subject
to the compliance with revised regulations. Effective July 1,
1998, the new regulations require the computation of a composite
score resulting from the Company's primary reserve, equity and net
income ratios which demonstrate the Company's financial
responsibility. At November 2, 1998, the Company's composite score
exceeds the base requirement of 1.5.
(3) 85/15 COMPLIANCE
----------------
In accordance with U.S. Department of Education requirements
under Section 481(b)(6) of the Higher Education Act of 1965, as
amended and regulatory requirements as defined in the Dear
Colleague letter, no more than 85% of the Company's total revenue
may be derived for the IV HEA program funds. For the ten months
ended November 2, 1998, approximately $1,356,000 was from Title IV
funding, resulting in 43%, which adheres to the federal
regulations.
(4) TUITION AND ACCOUNTS RECEIVABLE
-------------------------------
The Company provides alternate financing arrangements for its
students and utilizes the services of a third party contractor to
collect a portion of them. These receivables have not been
assigned or factored and remain the responsibility of the Company
to collect. Upon receipt of payment, the contractor remits the
payment, net of any service charges, to the Company. Since student
contracts have varying repayment terms which extend beyond the next
12-month period, these receivables have been classified as current
and noncurrent with the portion to be collected beyond the next 12-
month period being the noncurrent portion.
(5) NOTES RECEIVABLE
----------------
Notes receivable includes a $210,000 purchase money promissory
note secured by the mortgage of the obligor's real property located
at 227 Quail Street, Albany, New York, with an interest rate of
6.17%. This note requires monthly interest payments commencing
January 1, 1996. The principal balance is due at maturity December
31, 2003. During 1998, the Company had agreed to the basic terms
of an offer to accept $150,000 as full satisfaction of the purchase
money promissory note. As a result, the Company has established an
additional allowance of $60,000 reducing its notes receivable.
Also included is a $9,327 note with an interest rate of 8.75%.
This note requires a monthly payment of $516 consisting of
principal and interest commencing February 1, 2001.
F - 6
<PAGE> F - 7
MILDRED ELLEY SCHOOL, INC.
--------------------------
(A Subchapter "S" Corporation)
NOTES TO FINANCIAL STATEMENTS
-----------------------------
NOVEMBER 2, 1998
----------------
(6) PROPERTY AND EQUIPMENT
----------------------
A schedule of property and equipment is as follows:
Furniture and fixtures $189,629
Equipment 585,128
Vehicle 47,710
Leasehold improvements 54,798
--------
Total $877,265
Less accumulated depreciation 649,571
--------
PROPERTY AND EQUIPMENT $227,694
========
Depreciation expense was $83,495 for the ten months ended
November 2, 1998.
Included in furniture, fixtures and equipment is $60,479 of
equipment under capital leases. In addition, there was accumulated
depreciation of $42,826 on these assets.
(7) INTANGIBLE ASSETS - NET
-----------------------
A schedule of intangible assets is as follows:
Mortgage costs $ 1,015
Debt acquisition costs 27,392
--------
Total $ 28,407
Less accumulated amortization 11,361
--------
INTANGIBLE ASSETS - NET $ 17,046
========
Debt acquisition costs are being amortized over the term of
the debt instrument entered into by the Company which was a 15-year
period. Amortization expense on these assets and those written off
was $12,060 for the ten months ended November 2, 1998.
(8) LINE OF CREDIT
--------------
As of November 2, 1998, the Company had borrowed $200,000
which is the maximum available from a line of credit promissory
note. This note bears interest at a rate of 1.0% above the prime
rate and is due December 31, 1998. It is collateralized by a
second lien on the Company's corporate assets and personally
guaranteed by the Company's majority shareholder.
F - 7
<PAGE> F - 8
MILDRED ELLEY SCHOOL, INC.
--------------------------
(A Subchapter "S" Corporation)
NOTES TO FINANCIAL STATEMENTS
-----------------------------
NOVEMBER 2, 1998
----------------
As of November 2, 1998, the Company had borrowed $200,000
which is the maximum available from a line of credit promissory
note. This note bears interest at a rate of 1.0% above the prime
rate, is due April 13, 1999, and is collateralized by a first lien
on accounts receivable of the Company and personally guaranteed by
the Company's majority shareholder.
The Company is obligated to a bank on a note in the amount of
$150,000. This note bears interest at a rate of 9.5% and contains
a personal guarantee of the Company's majority shareholder. This
note matures January 1, 1999.
(9) LONG-TERM DEBT
--------------
Long-term debt consists of the following:
Note payable to bank in monthly principal installments of
$3,512 plus interest at 3/4% over prime. This note is
collateralized by accounts receivable, furniture, fixtures,
equipment, inventories, contract rights, intangibles and
the common stock held by the majority shareholder in the
Company. In addition, this note is secured by the mortgage
which the Company holds as a result of the sale of the Quail
Street building. It also contains an 85% guarantee by the
U.S. Small Business Administration and is personally
guaranteed by the Company's majority shareholder. $400,249
Note payable to bank in monthly principal installments of
$2,273 plus interest at 1% over prime. This note is
collateralized by all computers and computer equipment
owned and hereafter acquired 74,920
Note payable to bank in monthly principle installments of
$1,500 plus interest at 1% over prime. This note is
collateralized by all computers and equipment owned and
hereafter acquired 91,338
--------
Total $566,507
Less current maturities 81,769
--------
LONG-TERM DEBT $484,738
========
The loan agreements contain restrictive covenants to which the
Company must comply. At November 2, 1998, there were no violations
of its loan agreements since the Company has received a waiver for
violations of the aforementioned covenants.
F - 8
<PAGE> F - 9
MILDRED ELLEY SCHOOL, INC.
--------------------------
(A Subchapter "S" Corporation)
NOTES TO FINANCIAL STATEMENTS
-----------------------------
NOVEMBER 2, 1998
----------------
Maturities of long-term debt as of November 2, 1998, are as
follows:
1999 $ 81,769
2000 83,857
2001 85,608
2002 64,262
2003 60,144
Thereafter 190,867
-------
TOTAL $566,507
========
Interest expense on all debt and capital leases was $87,825
for the ten months ended November 2, 1998.
(10) CAPITALIZED LEASE OBLIGATIONS
-----------------------------
The Company is obligated under capitalized leases for computer
and telephone equipment.
Future minimum lease payments under these capitalized lease
obligations, including interest, as of November 2, 1998, are as
follows:
1999 $ 8,154
2000 5,512
2001 5,512
2002 3,082
--------
Total $ 22,260
Less imputed interest 3,835
--------
Present value of future minimum lease payments $ 18,425
Less current maturities 3,820
--------
LONG-TERM CAPITALIZED LEASE OBLIGATIONS $ 14,605
========
(11) NOTE PAYABLE - SHAREHOLDER
--------------------------
Note payable - shareholder represents amounts due to the
President of the Company. The note bears interest at 5.68% as of
November 2, 1998. No terms of repayment have been established.
F - 9
<PAGE> F - 10
MILDRED ELLEY SCHOOL, INC.
--------------------------
(A Subchapter "S" Corporation)
NOTES TO FINANCIAL STATEMENTS
-----------------------------
NOVEMBER 2, 1998
----------------
(12) COMMITMENTS AND CONTINGENCIES
-----------------------------
The Company is obligated under noncancelable operating leases
for its facilities in New York and Massachusetts, expiring in
various years through 2005.
A schedule of the Company's rental commitments as of November
2, 1998, is as follows:
1999 $ 350,179
2000 352,879
2001 351,887
2002 345,911
2003 345,911
Thereafter 1,506,101
----------
TOTAL $3,252,868
==========
In addition, the Company has entered into various operating
lease agreements for automobiles which require monthly payments of
$982 through June 2000.
F - 10
<PAGE> F - 11
INDEPENDENT AUDITORS' REPORT ON SUPPLEMENTARY INFORMATION
---------------------------------------------------------
To the Board of Directors and Shareholders
Mildred Elley School, Inc.
Latham, New York
Our audit of the financial statements included in the
preceding section of this report was directed to obtain
reasonable assurance about whether the financial statements
are free of material misstatement. Supplementary information
presented in the following section has been subjected to
certain audit procedures applied in connection with our audit
of the financial statements. This information, while not
considered necessary for the fair presentation of the
financial position, results of its income and cash flow of the
Company, is, in our opinion, fairly stated in all material
respects when considered in relation to the financial
statements.
/s/ LCS&Z Glickman Lutz, LLP
Latham, New York
December 18, 1998
F - 11
<PAGE> F - 12
MILDRED ELLEY SCHOOL, INC.
--------------------------
(A Subchapter "S" Corporation)
SUPPLEMENTARY INFORMATION
-------------------------
TEN MONTHS ENDED NOVEMBER 2, 1998
---------------------------------
SCHEDULE OF REVENUE
- -------------------
Tuition $3,329,755
Textbook sales 323,174
Student activity fees 23,919
Registration fees 37,725
Computer lab fees 80,513
Miscellaneous income 29,784
----------
TOTAL REVENUE $3,824,870
==========
SCHEDULE OF COST OF REVENUE
- ---------------------------
Textbook purchases $ 252,433
Transportation 17,243
Educational supplies 18,485
Student activities 8,417
Graduation 11,322
----------
COST OF REVENUE $ 307,900
==========
[FN]
See independent auditors' report on supplementary information.
</FN>
F - 12
<PAGE> F - 13
MILDRED ELLEY SCHOOL, INC.
--------------------------
(A Subchapter "S" Corporation)
SUPPLEMENTARY INFORMATION
-------------------------
TEN MONTHS ENDED NOVEMBER 2, 1998
---------------------------------
SCHEDULE OF OPERATING EXPENSES
- ------------------------------
Salaries $1,733,874
Advertising/promotions 271,543
Rent 192,086
Payroll taxes 160,879
Interest expense 87,825
Depreciation 83,495
Repairs and maintenance 64,294
Professional fees 92,998
Institutional match expenses 13,937
Bad debt expense 224,778
Employee benefits 72,131
Insurance 27,288
Licenses/dues/fees 40,214
Office supplies 54,806
Telephone 63,687
Travel and entertainment 38,590
Postage and shipping 13,008
Printing 4,491
Utilities 28,425
Bank charges 8,335
Collection expense 4,479
Amortization 12,060
Miscellaneous expense 4,513
Computer expense 5,442
Payroll service fees 4,117
Temporary help 29,951
Other taxes 1,702
Auto lease 10,601
Conferences and conventions 2,836
Contributions 1,408
Penalties 4,221
Equipment rental 11,926
----------
TOTAL OPERATING EXPENSES $3,369,940
==========
[FN]
See independent auditors' report on supplementary information.
</FN>
F - 13
<PAGE> F - 14
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC. AND SUBSIDIARIES
------------------------------------------------------------
INTRODUCTION TO PRO FORMA FINANCIAL STATEMENTS
----------------------------------------------
(UNAUDITED)
The following unaudited pro forma financial statements have been
---------
prepared based upon certain pro forma adjustments to the historical
---------
financial statements of Touchstone Applied Science Associates, Inc.
("TASA") and Subsidiaries (collectively called the "Company"). The pro
---
forma financial statements should be read in conjunction with the notes
- -----
thereto and the historical financial statements of the Company.
The accompanying pro forma balance sheet has been presented as if the
---------
acquisition described below occurred at the Company's year end balance
sheet date, October 31, 1998. The accompanying pro forma statement of
---------
operations has been prepared as if the acquisition occurred at the
beginning of the year ended October 31, 1998. These pro forma
---------
financial statements do not purport to be indicative of the results
which would actually have been obtained had the pro forma transactions
---------
been completed as of the beginning of the year ended October 31, 1998.
The pro forma transaction (see Notes to pro forma financial statements)
--------- ---------
is as follows:
- the purchase of all the net assets subject to substantially
all the liabilities of Mildred Elley School Inc. for
$3,000,000 ($2,000,000 in cash and a $1,000,000
promissory note) through a newly formed subsidiary
of the Company, MESI Acquisition Corp.
F - 14
<PAGE> F - 15
<TABLE>
<CAPTION>
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC. AND SUBSIDIARIES
------------------------------------------------------------
PRO FORMA BALANCE SHEET
-----------------------
OCTOBER 31, 1998
----------------
(Unaudited)
- ASSETS -
- Historical - Pro Forma
-------------------------------
TASA Mildred Elley Adjustments Pro Forma
-------------------------
and Subsidiaries School, Inc. Debit Credit Consolidated
---------------- ------------- ----- ------ ------------
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash $ 4,980,230 $ 121,396 $2,000,000(2) $ 3,101,626
Marketable securities 186,376 - 186,376
Accounts receivable 1,287,264 2,029,812 3,317,076
Inventories 478,869 - 478,869
Other current assets 173,679 6,786 180,465
----------- ---------- -----------
TOTAL CURRENT ASSETS 7,106,418 2,157,994 7,264,412
----------- ---------- -----------
INVESTMENT IN SUBSIDIARY - - $3,353,406(1) 3,353,406(5)
FIXED ASSETS - NET 1,753,811 227,694 1,981,505
GOODWILL - NET 739,264 2,472,568(2) 3,645,238
353,406(3)
80,000(4)
TEST PASSAGE BANK - NET 2,675,624 2,675,624
OTHER INTANGIBLES - NET 1,334,408 17,046 353,406(3) 998,048
OTHER ASSETS:
Non-current accounts receivable 435,698 435,698
Notes receivable 163,646 163,646
Other assets 465,115 8,182 473,297
----------- ---------- -----------
$14,074,640 $3,010,260 $17,637,468
=========== ========== ===========
- LIABILITIES AND SHAREHOLDERS'EQUITY -
CURRENT LIABILITIES:
Line of credit payable $ - $ 550,000 $ 550,000
Current portion of long-term debt 261,034 85,589 $164,020(2) 510,643
Accounts payable and accrued expenses 1,020,568 680,734 80,000(4) 1,781,302
Deferred revenues - 512,808 512,808
Other current liabilities - 67,719 67,719
----------- ---------- -----------
TOTAL CURRENT LIABILITIES 1,281,602 1,896,850 3,422,472
----------- ---------- -----------
SUBORDINATED DEBT 4,000,000 - 4,000,000
----------- ---------- -----------
NOTE PAYABLE - OFFICER 86,635 86,635
---------- -----------
LONG-TERM DEBT - NET OF CURRENT PORTION 2,267,198 499,343 835,980(2) 3,602,521
----------- ---------- -----------
SHAREHOLDERS' EQUITY:
Common stock 857 34,000 34,000(2) 857
Additional paid-in capital 5,051,836 - 3,353,406(5) 3,353,406(1) 5,051,836
Deferred interest (588,075) - (588,075)
Stock subscription receivable (14,350) - (14,350)
Unrealized holding gain 5,924 - 5,924
Unearned compensatory stock (37,187) - (37,187)
Retained earnings 2,106,835 493,432 493,432(2) 2,106,835
----------- ---------- -----------
6,525,840 527,432 6,525,840
----------- ---------- -----------
$14,074,640 $3,010,260 $17,637,468
=========== ========== ===========
<FN>
See notes to pro forma consolidated financial statements.
</FN>
</TABLE>
F - 15
<PAGE> F - 16
<TABLE>
<CAPTION>
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC. AND SUBSIDIARIES
------------------------------------------------------------
PRO FORMA STATEMENT OF OPERATIONS
---------------------------------
FOR THE YEAR ENDED OCTOBER 31, 1998
-----------------------------------
(UNAUDITED)
- Historical - Pro Forma
-------------------------------
TASA Mildred Elley Adjustments Pro Forma
-------------------------
and Subsidiaries School, Inc. Debit Credit Consolidated
---------------- ------------- ----- ------ ------------
<S> <C> <C> <C> <C> <C>
NET REVENUE $6,317,114 $5,103,000 $11,420,114
COST OF GOODS SOLD 1,935,104 408,240 2,343,344
---------- ---------- -----------
GROSS PROFIT 4,382,010 4,694,760 9,076,770
OPERATING EXPENSES 4,015,496 4,031,370 $ 46,261(6) 8,189,993
---------- ---------- -----------
96,866(9)
INCOME FROM OPERATIONS 366,514 663,390 886,777
OTHER EXPENSES (INCOME) 206,307 199,598 117,615(7) $50,000(11) 873,520
---------- ---------- -----------
320,000(8)
80,000(10)
INCOME BEFORE PROVISION 160,207 463,792 13,257
Provision for income taxes (benefit) 29,005 185,500 2,390
---------- ---------- -----------
NET INCOME $ 131,202 $ 278,292 $ 10,867
========== ========== ===========
EARNINGS (LOSS) PER SHARE:
Basic $ -
===========
Diluted $ -
===========
<FN>
See notes to pro forma consolidated financial statements.
</FN>
</TABLE>
F - 16
<PAGE> F - 17
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC. AND SUBSIDIARIES
------------------------------------------------------------
NOTES TO PRO FORMA FINANCIAL STATEMENTS
---------------------------------------
AS OF OCTOBER 31, 1998
----------------------
(UNAUDITED)
NOTE 1 Reflects that in order to complete the acquisition of
the net assets of Mildred Elley School, Inc. ("Elley"),
Touchstone Applied Science Associates, Inc. ("TASA")
formed a new subsidiary MESI Acquisition Corp. ("MESI")
and capitalized MESI with $3,353,406.
NOTE 2 Reflects the purchase of the net assets of Elley for
$3,000,000 ($2,000,000 in cash and a $1,000,000 promissory
note). The $1,000,000 promissory note is payable over 5
years at 8 1/2% per annum. Accordingly $164,020 has been
shown as the current portion of this debt and $835,980 as
the long-term portion.
The aggregate purchase price of $3,000,000 exceeds the net
assets acquired ($527,432) by $2,472,568. This excess of
purchase price over net assets acquired has been reflected
as goodwill.
NOTE 3 To reflect costs, aggregating $353,406, associated with
the acquisition which have been reclassified from other
intangibles to goodwill since they are considered to be
additional purchase price (see Note 2 above).
NOTE 4 To reflect $80,000 to be paid to the former
shareholders of Elley to provide for the "S" corporation
flow thru taxes associated with the purchase transaction.
The Company considers this amount to be excess purchase
price and therefore goodwill (see Note 2).
NOTE 5 Elimination of investment in subsidiary (MESI) for
purposes of consolidation.
NOTE 6 To reflect the amortization of the loan origination
costs related to $4,000,000 of subordinated debt on the
books of the Company, which was used for the acquisition,
as if the debt had been incurred at the beginning of the
fiscal year ended October 31, 1998. Costs of $231,305 are
being amortized over a five year period, the repayment
period of the debt.
NOTE 7 To reflect the expensing of deferred interest charges
which arose in connection with warrants associated with
the $4,000,000 of subordinated debt, as if the transaction
occurred at the beginning of the fiscal year ended October
31, 1998. These costs are being expensed over a five year
period (see Note 6).
F - 17
<PAGE> F - 18
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC. AND SUBSIDIARIES
------------------------------------------------------------
NOTES TO PRO FORMA FINANCIAL STATEMENTS
---------------------------------------
AS OF OCTOBER 31, 1998
----------------------
(UNAUDITED)
NOTE 8 To reflect interest expense associated with the
$4,000,000 subordinated debt at 8% per annum for the full
fiscal year ended October 31, 1998.
NOTE 9 To reflect the amortization of goodwill arising from
the acquisition, over a 30 year period (see Notes 2, 3 and 4).
NOTE 10 To reflect interest expense associated with the
$1,000,000 acquisition promissory note referred to in Note 2.
NOTE 11 To reflect interest income on the $1,000,000 unused
portion of the $4,000,000 subordinated debt. The interest
income is reflected at 5% per annum for the full fiscal
year ended October 31, 1998.
F - 18
<PAGE>
SIGNATURE
Pursuant to 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
Date: January 21, 1999
