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FORM 10-QSB/A-1
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended April 30, 2000
[ ] 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
------------------------------------------------------------------------------
(Address of principal executive offices)
(914) 277-8100
------------------------------------------------------------------------------
(Issuer's telephone number)
------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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 June 8, 2000: 2,559,453 shares of Common Stock, par value
------------------------------------------------------------
$0.0001 per share.
------------------
Transitional Small Business Disclosure Format (check one):
Yes No X
-------- ----------
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The financial statements for the Company's fiscal
quarter ended April 30, 2000 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, 1999, as amended ("Fiscal
1999"), which may cause actual results to differ materially from
those described.
BACKGROUND
For over 20 years, TASA has served the rapidly
expanding educational market, primarily through the publishing
and sale of its highly-regarded proprietary reading tests. Since
1994, management has implemented a strategy to broaden the
Company's services within the education marketplace. As a
result, the Company has completed four acquisitions since 1997,
and now serves three education markets: (1) educational
assessment and evaluation, (2) educational instruction, and (3)
educational delivery.
Prior to 1997, the Company's revenues were derived from
the publishing and distribution of its proprietary line of
reading tests. In the fiscal year ending October 31, 1997
("Fiscal 1997"), the Company acquired Beck Evaluation and Testing
Associates, Inc. ("BETA"), which operates as the Company's custom
test design division. In the same fiscal year, the Company
organized Modern Learning Press, Inc. ("MLP"), which purchased
substantially all of the assets of Programs for Education, Inc.,
and marked the Company's entrance into the instructional
marketplace. MLP designs, publishes and distributes four
affordable "consumable" student workbook series that target
grades K-4, and creates and publishes books and pamphlets for
elementary school teachers and parents. Also in Fiscal 1997, the
Company purchased the Maculaitis Assessment of Competencies test
(the "Maculaitis Test"), which is a comprehensive language
assessment and evaluation program for English as a second
language. In its fiscal year ended October 31, 1998 ("Fiscal
1998"), the Company organized a subsidiary, TASA Educational
Services Corp. ("TESC"), to operate and acquire post-secondary
schools. TESC completed its first acquisition in the educational
delivery field in November 1998 through its acquisition in
November 1998 of the 750-student Mildred Elley Schools.
Accordingly, in an effort to report revenues in a more
meaningful manner, the Company has segregated revenues into three
discrete segments: (1) assessment products revenues, (2) instructional
revenues and (3) educational delivery revenues. All prior
periods have been recharacterized into these three 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 six-month period ended
April 30, 2000 versus the six-month period ended April 30, 1999,
and for the second quarter ended April 30, 2000 versus the second
quarter ended April 30, 1999.
<TABLE>
<CAPTION>
RESULTS OF OPERATIONS FOR THE SECOND FISCAL QUARTER
AND FOR THE SIX-MONTH PERIOD ENDED APRIL 30, 2000
Six Months Three Months
Ended April 30, Ended April 30,
--------------- ---------------
% %
- -
2000 1999 Change 2000 1999 Change
---- ---- ------ ---- ---- ------
(in thousands (in thousands
of dollars) of dollars)
<S> <C> <C> <C> <C> <C> <C>
Assessment Products Revenues $1,862.9 $2,077.9 -10.3 $1,146.5 $1,034.3 +10.9
Instructional Revenues 671.5 573.5 +17.1 409.6 371.6 +10.2
Educational Delivery Revenues 2,385.2 2,548.5 -6.4 1,798.1 1,437.9 +25.1
Total Revenues $4,919.6 $5,199.9 -5.4 $3,354.2 $2,843.8 +17.9
</TABLE>
The following are selected ratios as a percentage of
revenues on the Company's financial statements:
Six Months Three Months
Ended April 30, Ended April 30,
--------------- ---------------
2000 1999 2000 1999
---- ---- ---- ----
(in percentages) (in percentages)
Revenues 100% 100% 100% 100%
---- ---- ---- ----
Gross Profit Margin 57 62 63 65
Operating Expense:
Selling Expense 23 21 17 20
General & Administrative 53 42 43 40
Income (Loss) from Operations (18) (1) 3 5
Other (Expense) (8) (5) (6) (5)
Pre-Tax (Loss) (26) (7) (3) (1)
Net (Loss) (17) (4) (2) (0)
FOR THE THREE MONTHS ENDED APRIL 30, 2000 VERSUS APRIL 30, 1999
REVENUES. For the three-month period ended April 30,
--------
2000 (the "Current Quarter"), revenues were $3,354,221,
representing a 18% increase, or $510,416, over $2,843,805 for the
three-month period ended April 30, 1999 (the "Comparable
Quarter").
Revenues for assessment products and services increased
11%, or $112,224, to $1,146,454 in the Current Quarter from
$1,034,230 in the Comparable Quarter. Of this increase, the
Company's proprietary test division featuring DRP products
reflected a revenue decrease of 43% as a result of declining
volume of sales in New York State due to the phase out of the
PEP/DRP test previously administered in the third and sixth
grades. The custom test design division, BETA, increased its
revenues by 54% in the same period. This growth is consistent
with the Company's strategic planning. Management believes
significant future growth will be realized through the custom test
design division. During the quarter, the Company announced that
it had secured a five-year million-dollar contract from Minnesota
to provide reading, writing and mathematics assessment items in
Grades 3, 5, and 8. BETA currently has more than $3 million of
contracted future business.
Instructional revenues increased 10% in the Current
Quarter from the Comparable Quarter (or $409,630 in the Current
Quarter versus $371,631 in the Comparable Quarter). This increase
is a result of the Company's reorganization, increased marketing
efforts and a new independent sales organization, which management
believes will contribute to increased future growth of the
instructional division.
The educational delivery division increased 25% in the
Current Quarter versus the Comparable Quarter, (or $1,798,137 in
the Current Quarter versus $1,437,944 in the Comparable Quarter).
This increase can be attributed to two factors: additional deferred
revenue of approximately $162,000 recognized during the Current Quarter
resulting from the Company's recent modification of its revenue
recognition policy as it relates to the educational delivery
revenues; and greater student census.
COST OF GOODS SOLD. Cost of goods sold in the Current
------------------
Quarter increased 23%, or $235,126, from $1,005,402 in the
Comparable Quarter to $1,240,528 in the Current Quarter. Cost of
goods sold as a percentage of revenues increased from 35% to 37%
due to a change in product mix, primarily within the assessment
division. The Company's proprietary products, which typically
carry lower costs, decreased in volume while its custom test design
services, which typically carry higher costs, increased significantly.
GROSS PROFIT. In the Current Quarter, gross profit
------------
increased by 15%, or $275,290, from $1,838,403 in the Comparable
Quarter to $2,113,693 in the Current Quarter. The increase in
gross profit is attributable to an increase in revenues resulting
in the Quarter. The gross profit margin percentage decreased
marginally in the Current Quarter to approximately 63% from 65%
in the Comparable Quarter.
SELLING EXPENSES. Selling expenses for the Current
----------------
Quarter were essentially flat with a minimal increase of $14,213,
from $560,356 in the Comparable Quarter to $574,569 in the
Current Quarter. However, for the Current Quarter, selling
expenses were 17% of revenues versus 20% for the Comparable
Quarter.
GENERAL AND ADMINISTRATIVE EXPENSES. The Company's
-----------------------------------
general and administrative expenses increased 26%, or $293,964,
from $1,149,997 in the Comparable Quarter to $1,443,961 in the
Current Quarter. General and administrative expenses were 43% of
revenues in the Current Quarter versus 40% in the Comparable
Quarter. This dollar and percent increase was primarily
attributable to management's decision to continue to build the
Company's infrastructure at both the corporate and operating
divisional levels.
INCOME FROM OPERATIONS. Income from operations for the
----------------------
Current Quarter was $95,163 versus $128,050 in the Comparable
Quarter. The $32,887 decline was primarily due to increased general
and administrative expenses.
EBITDA. Earnings before interest, taxes, depreciation,
------
and amortization increased $42,063 to $379,363 in the Current
Quarter from $337,300 in the Comparable Quarter. As a percentage
of sales, EBITDA decreased marginally to 11% in the Current
Quarter versus 12% in the Comparable Quarter. The overall
increase in EBITDA dollars can be attributable to the increase in
revenues during the Current Quarter.
OTHER (EXPENSE). Other (expense) increased to
---------------
($194,661) in the Current Quarter from ($145,371) in the
Comparable Quarter. This increase was primarily attributable to
a decline in income earned on temporary investments and
marketable securities.
(LOSS) BEFORE INCOME TAXES. The Company had a loss
--------------------------
before income taxes of ($99,498) for the Current Quarter versus a
loss of ($17,321) for the Comparable Quarter. This loss is
primarily attributable to the increase in general and administrative
expenses.
NET (LOSS) AND (LOSS) PER SHARE. Net loss after taxes
-------------------------------
was ($73,506) for the Current Quarter versus a loss of ($9,347)
for the Comparable Quarter. Loss per share was ($.03) based on
weighted average shares outstanding of 2,493,759. The Comparable
Quarter loss per share was ($.00) based upon 2,141,801 shares
outstanding.
FOR THE SIX MONTHS ENDED APRIL 30, 2000 VERSUS APRIL 30, 1999
REVENUES. For the six-month period ended April 30,
--------
2000 (the "Current Period") revenues were $4,919,588,
representing a 5% decrease, or $280,344 versus $5,199,932 for the
six-month period ended April 30, 1999 (the "Comparable Period").
The overall decrease was due to declines in both the Company's
assessment and education delivery divisions.
Revenues for assessment products and services decreased
10%, or $214,973, from $2,077,865 in the Comparable Period to
$1,862,892 during the Current Period. Revenues from the
Company's proprietary test division, featuring DRP products, fell
29% due to the expected elimination of the New York State Grades
3 and 6 PEP tests as well as a change in timing for the delivery
of the New York State Regents Competency Tests. This decrease
was offset by growth in the Company's custom test design
division, BETA, which posted a revenue increase of 42%.
Instructional revenues increased 17% in the Current
Period, totaling $671,452, which is $97,920 over the Comparable
Period's revenues of $573,532. This increase is the result of the
Company's reorganization, increased marketing efforts, and a new
independent sales organization, which management believes will
contribute to increased future growth of the instructional
division.
Revenues from the Company's educational delivery
division decreased 6% or $163,291, to $2,385,244 from $2,548,535
in the Comparable Period. This decrease can be attributed to the
Company's modification of its revenue recognition policy as it
relates to the educational delivery revenues and less than
satisfactory recruiting and retention of students during the
first quarter of the Current fiscal year.
COST OF GOODS SOLD. Cost of goods sold in the Current
------------------
Period increased by 7%, or $135,291, from $1,971,978 in the
Comparable Period to $2,107,269 in the Current Period. Cost of
goods sold as a percentage of revenues increased to 43% in the
Current Period from 38% 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
------------
decreased by 13%, or $415,635, from $3,227,954 in the Comparable
Period, to $2,812,319. The decrease in gross profit is primarily
attributable to a decline in revenues. The gross profit margin
decreased in the Current Period to 57% versus 62% in the
Comparable Period as a result of the Company's change in product
mix particularly within the assessment division.
SELLING EXPENSE. Selling expenses for the Current
---------------
Period increased by 2%, or $21,620, from $1,105,715 in the
Comparable Period to $1,127,335 in the Current Period. As a
percentage of revenues, selling expenses were 23% for the Current
Period versus 21% of revenues for the Comparable Period.
GENERAL AND ADMINISTRATIVE. The Company's general and
--------------------------
administrative expenses increased 19%, or $404,669, from
$2,183,855 in the Comparable Period to $2,588,524 in the Current
Period. General and administrative expenses as a percentage of
revenues are now 53% in the Current Period versus 42% in the
Comparable Period. Again, the dollar and percentage increases
are due to management's decision to continue to build the
infrastructure of the organization.
(LOSS) FROM OPERATIONS. Loss from operations for the
----------------------
Current Period was ($903,540) versus a loss from operations of
($61,616) in the Comparable Period. This increased loss was
principally due to the fact that the Company now generates almost
two thirds of its revenues in the second half of its fiscal year
and has significant fixed costs that fall evenly throughout
the year.
EBITDA. Earnings (loss) before interest, taxes, depreciation,
------
and amortization decreased ($781,151) to ($381,433) in the
Current Period from $399,718 in the Comparable Period. As a
percentage of sales, EBITDA decreased to (8%) in the Current
Period versus 8% in the Current Period versus 8% in the
Comparable Period. This percentage decrease is essentially
attributable to the decrease in revenues from both the Company's
assessment and educational delivery divisions coupled with a
lower gross profit margin resulting from a change in product mix
within the assessment division.
OTHER (EXPENSE). Other (expense) increased to
---------------
($374,741) in the Current Period versus ($278,103) in the
Comparable Period. The increase is primarily attributable to a
decline in income earned on temporary investments and marketable
securities.
(LOSS) BEFORE INCOME TAXES. The Company had a loss
--------------------------
before taxes of ($1,278,281) for the Current Period versus a loss
before taxes of ($339,719) in the Comparable Period, which was
primarily due to increased overhead and cost of goods sold.
NET (LOSS) AND (LOSS) PER SHARE. Net loss after taxes
-------------------------------
was ($829,379) for the Current Period versus a loss of ($209,704)
for the Comparable Period. Loss per share was ($.36) based on
weighted average shares outstanding of 2,314,866. The Comparable
Period loss per share was ($.10) based upon 2,141,801 shares
outstanding.
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL. Working capital at the end of the
---------------
Current Period was $1,798,064, down from $3,079,573 at the
beginning of the current fiscal year. The $1,281,509 decline is
primarily due to an increase in borrowings on the Company's bank
line of credit and a significantly lower EBITDA. These two
factors reduced cash and temporary investments during the Current
Period. The ratio of current assets to current liabilities was
1.6 to 1.0 at the end of the Current Period. Approximately 4% of
the Company's current assets at the end of the Current Period
consisted of cash and short-term investments, while accounts and
tuition receivables, inventories and prepaid expenses comprised
the balance.
CASH FLOW FROM OPERATING ACTIVITIES. For the Current
-----------------------------------
Period, the Company had a negative cash flow from operations of
($1,251,991) versus a negative cash flow from operations of
($922,273) in the Comparable Period. The primary factor
contributing to this negative flow was the net loss of ($829,379)
incurred during the Current Period.
CASH FLOW FROM INVESTING ACTIVITIES. For the Current
-----------------------------------
Period, the Company had a net cash outflow from investing
activities of ($162,954) versus a net cash outflow of
($2,436,733) in the Comparable Period. The net cash outflow is
primarily the result of investments made in test development
($243,762) during the Current Period, while for the Comparable
Period the outflow was related to the acquisition of a subsidiary.
CASH FLOW FROM FINANCING ACTIVITIES. For the Current
-----------------------------------
Period, the Company had a net cash inflow from financing
activities of $451,647 versus a net cash outflow of ($490,678) in
the Comparable Period. The inflow was essentially attributable to
the additional borrowings made on the Company's bank line of
credit of $525,000 during the Current Period.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of stockholders on
March 31, 2000. At the meeting, the stockholders took the
following actions:
(i) The proposal to elect Andrew L. Simon as a director of
the Company was approved by a vote of 2,368,792 votes
in favor of his election, with 38,362 votes against and
no abstentions and broker non-votes, representing a
vote of 98% of the votes present cast in favor of the
election of Mr. Simon.
(ii) The proposal to elect Linda G. Straley as a director of
the Company was approved by a vote of 2,368,792 votes
in favor of her election, with 38,362 votes against and
no abstentions and broker non-votes, representing a
vote of 98% of the votes present cast in favor of the
election of Ms. Straley.
(iii) The proposal to elect Michael D. Beck as a
director of the Company was approved by a vote of
2,368,792 votes in favor of his election, with
38,362 votes against and no abstentions and broker
non-votes, representing a vote of 98% of the votes
present cast in favor of the election of Mr. Beck.
(iv) The proposal to elect Steven R. Berger as a director of
the Company was approved by a vote of 2,368,792 votes
in favor of his election, with 38,362 votes against and
no abstentions and broker non-votes, representing a
vote of 98% of the votes present cast in favor of the
election of Mr. Berger.
(v) The proposal to elect Joseph A. Fernandez as a director
of the Company was approved by a vote of 2,368,792
votes in favor of his election, with 38,362 votes
against and no abstentions and broker non-votes,
representing a vote of 98% of the votes present cast in
favor of the election of Dr. Fernandez.
(vi) The proposal to elect David L. Warnock as a director of
the Company was approved by a vote of 2,368,792 votes
in favor of his election, with 38,362 votes against and
no abstentions and broker non-votes, representing a
vote of 98% of the votes present cast in favor of the
election of Mr. Warnock.
(vii) The proposal to approve the Company's 2000 Stock
Incentive Plan was approved by a vote of
1,016,262 votes in favor of the proposal, with
88,823 votes against and 1,900 abstentions and
1,300,169 broker non-votes, representing a vote of
92% of the issued and outstanding shares of the
Company eligible to vote cast in favor of the
proposal.
(viii) The proposal to approve the Company's Amended and
Restated Directors Stock Option Plan was approved
by a vote of 1,009,737 votes in favor of the
proposal, with 92,798 votes against and 4,450
abstentions and 1,300,169 broker non-votes,
representing a vote of 91% of the issued and
outstanding shares of the Company eligible to vote
cast in favor of the proposal.
(ix) The proposal to issue shares of Common Stock in excess
of 19.99% of outstanding shares, if required in
connection with the exercise of certain Warrants to
purchase Common Stock (held by Cahill, Warnock
Strategic Partners Fund, L.P.) was approved by a vote
of 1,001,474 in favor of the proposal, with 99,486
votes against, 6,025 votes abstaining and 1,300,169
broker non-votes, representing a vote of 90% of the
votes present cast in favor of the proposal.
(x) The proposal to ratify the appointment of Lazar, Levine
& Felix LLP as the independent auditors of the Company
was adopted by a vote of 2,363,242 votes in favor of
the proposal, with 37,187 votes against, 6,725 votes
abstaining and no broker non-votes, representing a vote
of 98% 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 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 APRIL 30, 2000
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> F-1
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
AND SUBSIDIARIES
Page 1 of 2
CONSOLIDATED BALANCE SHEETS
April 30, October 31,
2 0 0 0 1 9 9 9
------- -------
(Unaudited)
ASSETS
------
Current assets:
Cash and temporary investments $ 177,595 $ 1,140,893
Marketable securities -- 175,000
Accounts receivable, net of allowance for
doubtful accounts of $42,500 and $0,
respectively 1,106,484 1,312,148
Tuition receivable, net of allowance for
doubtful accounts of $318,085 and $213,817,
respectively 2,601,311 2,176,960
Inventories 603,712 472,341
Prepaid expenses and other current assets 385,647 202,114
----------- -----------
Total current assets 4,874,749 5,479,456
Property, plant and equipment - net of
accumulated depreciation of $1,515,705 and
$1,387,170, respectively 2,038,238 2,072,581
Other assets:
Non-current tuition receivable, net of
allowance for doubtful accounts of
$106,028 and $71,273, respectively 305,928 309,274
Test passage bank and test development, net of
accumulated amortization of $2,020,555 and
$1,838,694, respectively 2,885,832 2,823,931
Goodwill, net of accumulated amortization of
$365,647 and $280,527, respectively 3,905,385 3,953,238
Deferred income taxes 865,302 415,400
Other assets 1,339,627 1,330,537
----------- -----------
Total assets $16,215,061 $16,384,417
=========== ===========
[FN]
See notes to consolidated financial statements.
</FN>
F - 1
<PAGE> F-2
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
AND SUBSIDIARIES
Page 2 of 2
CONSOLIDATED BALANCE SHEETS
April 30, October 31,
2 0 0 0 1 9 9 9
------- -------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Lines of credit $ 925,000 $ 400,000
Current maturities of long-term debt 509,623 503,799
Current maturities of capitalized lease
obligations 14,929 14,002
Accounts payable and accrued expenses 1,593,383 1,482,082
Deferred revenue 33,750 --
----------- -----------
Total current liabilities 3,076,685 2,399,883
Long-term debt:
Subordinated debt 3,530,141 4,000,000
Long-term debt, net of current portion 3,031,131 3,103,470
Long-term capitalized lease obligations,
net of current portion 23,439 31,204
----------- -----------
Total liabilities 9,661,396 9,534,557
----------- -----------
Commitments and Contingencies
Stockholders' equity:
Preferred stock, $.0001 par value, 5,000,000
shares authorized, 0 shares issued and
outstanding -- --
Common stock, $.0001 par value, 20,000,000 shares
authorized, 2,559,458 and 2,141,806 shares
issued and outstanding, respectively 256 214
Additional paid-in capital 5,522,296 5,052,479
Deferred interest (411,814) (470,460)
Unearned compensatory stock (15,286) (19,965)
Retained earnings 1,458,213 2,287,592
----------- -----------
Total stockholders' equity 6,553,665 6,849,860
----------- -----------
Total liabilities & stockholders' equity $16,215,061 $16,384,417
=========== ===========
[FN]
See notes to consolidated financial statements.
</FN>
F - 2
<PAGE> F-3
<TABLE>
<CAPTION>
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
Six Months Ended Three Months Ended
April 30, April 30,
(Unaudited) (Unaudited)
2 0 0 0 1 9 9 9 2 0 0 0 1 9 9 9
------- ------- ------- -------
<S> <C> <C> <C> <C>
Assessment products revenues $1,862,892 $2,077,865 $1,146,454 $1,034,230
Educational delivery revenues 2,385,244 2,548,535 1,798,137 1,437,944
Instructional revenues 671,452 573,532 409,630 371,631
---------- ---------- ---------- ----------
Total net revenue 4,919,588 5,199,932 3,354,221 2,843,805
Cost of goods sold 2,107,269 1,971,978 1,240,528 1,005,402
---------- ---------- ---------- ----------
Gross profit 2,812,319 3,227,954 2,113,693 1,838,403
---------- ---------- ---------- ----------
Operating expenses:
Selling expenses 1,127,335 1,105,715 574,569 560,356
General and administrative
expenses 2,588,524 2,183,855 1,443,961 1,149,997
---------- ---------- ---------- ----------
Total operating expenses 3,715,859 3,289,570 2,018,530 1,710,353
---------- ---------- ---------- ----------
(Loss) income from operations (903,540) (61,616) 95,163 128,050
Other income (expense):
Interest expense (407,701) (415,063) (209,236) (199,089)
Loss on sale of assets -- (14,137) -- --
Other income -- 75,200 -- 18,631
Investment income 32,960 75,897 14,575 35,087
---------- ---------- ---------- ----------
Loss before income taxes (1,278,281) (339,719) (99,498) (17,321)
Income tax benefit (448,902) (130,015) (25,992) (7,974)
---------- ---------- ---------- ----------
Net loss (829,379) (209,704) (73,506) (9,347)
Other comprehensive loss, net of tax:
Unrealized holding loss on securities
arising during the period -- (2,307) -- (1,446)
---------- ---------- ---------- ----------
Total comprehensive loss $ (829,379) $ (212,011) $ (73,506) $ (10,793)
========== ========== ========== ==========
Weighted average shares outstanding
Basic 2,314,866 2,141,801 2,493,759 2,141,801
Diluted 2,314,866 2,141,801 2,493,759 2,141,801
Loss per share
Basic $ (.36) $ (.10) $ (.03) $ --
Diluted $ (.36) $ (.10) $ (.03) $ --
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
F - 3
<PAGE> F-4
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
AND SUBSIDIARIES
Page 1 of 2
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
April 30,
(Unaudited)
2 0 0 0 1 9 9 9
------- -------
OPERATING ACTIVITIES
Net loss $ (829,379) $ (209,704)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 522,107 461,334
Deferred interest 58,646 58,324
Deferred income taxes (449,902) (88,401)
Financial advisory services 4,679 12,544
Bad debt expense 181,523 101,941
Loss on sale of auto -- 14,137
Changes in operating assets and liabilities:
Accounts receivable 163,164 349,797
Inventories (131,371) (11,197)
Other assets (356,481) (227,583)
Tuition receivable (560,028) (368,910)
Deferred revenue 33,750 (512,808)
Accounts payable 111,301 (501,747)
---------- -----------
NET CASH FLOWS USED BY OPERATING ACTIVITIES (1,251,991) (922,273)
---------- -----------
INVESTING ACTIVITIES
Acquisition of property, plant and equipment (94,192) (278,179)
Test passage bank and test development (243,762) (241,449)
Proceeds from sale of marketable securities 175,000 --
Proceeds from sale of auto -- 13,200
Acquisition of subsidiary -- (1,930,305)
---------- -----------
NET CASH FLOWS USED BY INVESTING ACTIVITIES (162,954) (2,436,733)
---------- -----------
[FN]
See notes to consolidated financial statements.
</FN>
F - 4
<PAGE> F-5
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
AND SUBSIDIARIES
Page 2 of 2
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
April 30,
(Unaudited)
2 0 0 0 1 9 9 9
------- -------
FINANCING ACTIVITIES
Net borrowings on loan payable $ -- $ (2,108)
Net borrowings on line of credit 525,000 (150,000)
Net repayment of long-term debt (73,353) (352,920)
Stock subscriptions received -- 14,350
---------- -----------
NET CASH FLOWS FROM FINANCING ACTIVITIES 451,647 (490,678)
---------- -----------
NET CHANGE IN CASH AND TEMPORARY INVESTMENTS (963,298) (3,849,684)
Cash and temporary investments
at beginning of period 1,140,893 4,980,230
---------- -----------
CASH AND TEMPORARY INVESTMENTS AT END OF PERIOD $ 177,595 $ 1,130,546
========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 407,701 $ 416,445
========== ===========
Income taxes paid $ 1,000 $ 31,379
========== ===========
Stock issued in repayment of subordinated note $ 469,859 $ --
========== ===========
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>
F - 5
<PAGE> F-6
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") and its subsidiaries contain all adjustments
necessary to present fairly the Company's consolidated financial
position as of April 30, 2000 and October 31, 1999 and the
consolidated results of operations and comprehensive income
for the six and three months ended April 30, 2000 and 1999
and consolidated cash flows for the six months ended
April 30, 2000 and 1999.
The consolidated results of operations for the six and three
months ended April 30, 2000 and 1999 are not necessarily
indicative of the results to be expected for the full year.
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, 1999.
NOTE 2 - TERMINATED ACQUISITION - DuBOIS BUSINESS COLLEGE
----------------------------------------------------------
Effective March 29, 2000, the Company has terminated its letter
of intent to acquire all of the outstanding common stock of the
DuBois Business College and substantially all of the assets and
certain liabilities of Kenawell Technologies, LLC.
NOTE 3 - EMPLOYMENT AGREEMENT - CHIEF FINANCIAL OFFICER
-------------------------------------------------------
On February 7, 2000, the Company entered into a new employment
agreement with its Chief Financial Officer. The new agreement
is for a three-year term and provides for automatic extensions
each year thereafter unless the Company provides written
notification at least 180 days prior to the anniversary date,
that the agreement will not be extended.
The agreement provides for a base annual salary of $110,000,
which may be adjusted annually at the discretion of the Company's
Board of Directors, and also provides for eligibility in the
Company's benefits plans and key man life insurance. Among
other provisions, the agreement includes a non-compete clause
for a one-year period following termination of employment.
F - 6
<PAGE> F-7
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - WARRANT REPRICING AND EXERCISE
---------------------------------------
During the first quarter of the current fiscal year, Cahill
Warnock Strategic Partners Fund, L.P. ("CWSPF") and Strategic
Associates, L.P. ("SA") agreed to subordinate their debentures to
other potential indebtedness to be incurred by the Company in
exchange for the repricing of their warrants to $1.125 per share,
the market value of the Company's common stock on that date. In
February 2000, CWSPF and SA exercised an aggregate of 417,652
warrants for $469,859. The proceeds from the exercise were used
to reduce the principal balance of the subordinated debentures.
NOTE 5 - ISSUANCE OF STOCK OPTIONS
----------------------------------
In February 2000, the Company issued options to employees to
purchase an aggregate 73,275 shares of its common stock pursuant
to the Company's Amended and Restated 1991 Stock Option Incentive
Plan at an exercise price of $1.688 per share, representing the
market value at the date of grant.
In April 2000, the Company granted options to directors, pursuant
to the Company's Directors Option Plan, to purchase an aggregate
of 7,500 shares each at an exercise price of $3.188 per share,
representing the market value at the date of grant.
NOTE 6 - LINE OF CREDIT
-----------------------
In March 2000, the Company obtained an additional line of credit
totaling $750,000 from a bank. Borrowings under the line of credit
accrue interest at the bank's prime rate plus one percent and the
line expires on April 1, 2001. The line is collateralized by the
Company's accounts receivable (excluding those receivables
associated with the Company's wholly-owned subsidiary TASA
Educational Services Corp. and its related subsidiaries) and
inventory and includes provisions for compliance with certain
financial covenants. Borrowings under this new line aggregated
$525,000 as of April 30, 2000.
NOTE 7 - REVERSE STOCK SPLIT
----------------------------
On March 4, 1999, the Company effected a one-for-four reverse
stock split. The effect of the split is being presented
retroactively for all periods presented.
F - 7
<PAGE> F-8
TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - SEGMENT INFORMATION
-----------------------------
<TABLE>
<CAPTION>
Assessment Delivery Instructional Total
---------- -------- ------------- -----
<S> <C> <C> <C> <C>
Six Months Ended April 30, 2000 (Unaudited):
Revenues $1,862,892 $2,385,244 $ 671,452 $ 4,919,588
Loss before income taxes (888,971) (190,180) (199,130) (1,278,281)
Total segment assets 7,080,258 6,759,758 2,375,045 16,215,061
Six Months Ended April 30, 1999 (Unaudited):
Revenues $2,077,865 $2,548,535 $ 573,532 $ 5,199,932
Loss before income taxes (487,261) 367,558 (220,016) (339,719)
Total segment assets 6,932,533 6,886,144 2,174,523 15,993,200
</TABLE>
Included in the assessment segment reporting are corporate
overhead expenses of approximately $362,000 and $346,000 for the
six months ended April 30, 2000 and 1999, respectively.
The Company's operations are primarily conducted in the United
States. Information about the Company's operations in different
geographic areas for the six month periods ended April 30, 2000
and 1999, is not considered material to the financial statements.
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 and Chief Executive Officer
By: /s/ DENISE M. STEFANO
Denise M. Stefano
Chief Financial Officer
Date: June 29, 2000
